PAGENO="0001" ENERGY STATISTICS HEARINGS BEFORE THE SUBCOMMITTEE ON PRIORITIES AND ECONOMY IN GOVERNMENT OF THB JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES NINETY-THIRD CONGRESS FIRST AND SECOND SESSIONS JANUARY 14 AND 21, 1974 Printed for the use of the Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE 37-143 0 WASHINGTON 1974 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402 - Price $3.85 Stock Number 5270-02575 PAGENO="0002" JOINT ECONOMIC COMMITTEE HOUSE OF REPRESENTATIVES RICHARD BOLLING, Missouri HENRY S. REUSS, Wisconsin MARTHA W. GRIFFITHS, Michigan WILLIAM S. MOORHEAD, Pennsylvania HUGH L. CAREY, New York WILLIAM B. WIDNALL, New Jersey BARBER B. CONABLE, Ja., New York CLARENCE J. BROWN, Ohio BEN B. BLACKBURN, Georgia WILLIAM A. Cox JERRY J. JASINOWSKI L. DOUGLAS LEE SENATE JOHN SPARKMAN, Alabama J. W. FULBRIGHT, Arkansas ABRAHAM RIBICOFF, Connecticut HUBERT H. HUMPHREY, Minnesota LLOYD M. BENTSEN, Ja., Texas JACOB K. JAVITS, New York CHARLES H. PERCY, Illinois JAMES B. PEARSON, Kansas RICHARD S. SCHWEIKER, Pennsylvania LUCY A. FALCONE JoHN R. KARLIK MINORITY SARAH JACKSON RICHARD F. KAUFMAN COURTENAY M. SLATER LESLIE J. BANDER GEoRoR D. KRUMBHAAB, Jr. (Counsel) WALTER B. LAESsIG (Counsel) SUBCOMMITTEE ON PRIORITIES AND ECONOMY IN GOVERNMENT WILLIAM PROXMIRE, Wisconsin, Chairman SENATE JOHN SPARKMAN, Alabama J. W. FULBRIGHT, Arkansas HUBERT H. HUMPHREY, Minnesota CHARLES H. PERCY, Illinois JAMES B. PEARSON, Kansas RICHARD S. SCHWEIKER, Pennsylvania HOUSE OF REPRESENTATIVES WRIGHT PATMAN, Texas MARTHA W. GRIFFITHS, Michigan WILLIAM S. MOORHEAD, Pennsylvania HUGH L. CAREY, New York BARBER B. CONABLE, JR., New York CLARENCE J. BROWN, Ohio BEN B. BLACKBURN, Georgia (Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.) WRIGHT PATMAN, Texas, Chairman WILLIAM PROXMIRE, Wisconsin, Vice Chairmsei JOHN R. STARK, Ea'ecuti~ve Director LOUGHLIN F. McHUGH, Senior Economist ECONOMISTS (II) PAGENO="0003" CONTENTS WITNESSES AND STATEMENTS MONDAY, JANUARY 14, 1974 Proxmire, Hon. William, chairman of the Subcommittee on Priorities and Page Economy in Government: Opening statement 1 Simon, Hon. William E., Deputy Secretary of the Treasury and Adminis- trator, Federal Energy Office, accompanied by John Sawhill, Deputy Administrator; William Walker, General Counsel; Gerald Parsky, Executive Assistant; Eric Zausner, Assistant Administrator for Data Analysis; and Charles Owens, Price Regulation 4 Nader, Ralph, consumer advocate 121 AFTERNOON SESSION Freeman, David, Ford Foundation energy policy project 184 Darmstadter, Joel, Resources for the Future 186 Allvine, Fred, energy consultant 188 MONDAY, JANUARY 21, 1974 Proxmire, Hon. William, chairman of the Subcommittee on Priorities and Economy in Government: Opening statement 209 Nelson, Hon. Gaylord, a U.S. Senator from the State of Wisconsin, accom- panied by Raymond D. Watts, counsel, Select Committee on Small Business 210 Rigg, Hon. John B., Deputy Assistant Secretary, Department of the In- terior, accompanied by V. E. McKelvey, Director, U.S. Geological Survey; John D. Morgan, Jr., Acting Director, Bureau of Mines; Bill Elliott, Division of Fossil Fuels, Bureau of Mines; and Robert Rioux, Conservation Division, U.S. Geological Survey 236 Shiskin, Hon. Julius, Commissioner, Bureau of Labor Statistics, Depart- ment of Labor, accompanied by Janet Norwood, Deputy Commissioner for Data Analysis; and Margaret Stotz, Chief, Wholesale Price Division 245 Hodges, John E., director of statistics, American Petroleum Institute - - - 253 SUBMISSIONS FOR THE RECORD MONDAY, JANUARY 14, 1974 Carey, Hon. Hugh L.: Report on- "Mandatory Oil Import Control Program, Its Impact on the Domestic Minerals Industry and National Security," together with dissenting and separate views, Committee on Interior and Insular Affairs, House of Representatives, committee print No. 11,90th Congress, second session, dated August 1968 11 "The Oil Import Question," together with dissenting and separate views, Subcommittee on Mines and Mining, Committee on Interior and Insular Affairs, House of Representatives, com- mittee print No. 1, 91st Congress, second session, dated August 1970 52 (III) PAGENO="0004" Iv Nader, Ralph: Page Report entitled "Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the United States and Canada and United States Productive Capacity as of December 31, 1972," extract of pages 4-25, 82, and 83, by the American Petroleum Institute, dated May 1973 131 Study entitled "Analysis of Salient Issues Regarding the Estimation of Proved Oil and Gas Reserve Figures," extract of pages II, 5-57, 71, 72, and 76-80, by Energy Research, Inc., dated November 13, 1973 Article entitled "Too Much Energy," from the Economist of London, reprinted in the Washington Star-News, January 13, 1974 177 Simon, Hon. William E., et al.: Response to Chairman Proxmire's request to document for the record exactly how the Federal Energy Office is going to be able to confirm the justification for the price increases beyond the present $5.25 a barrel for oil 107 AFTERNOON SESSION Darmstadter, Joel: Response to Chairman Proxmire's request to comment, for the record, upon Mr. Simon's testimony before the subcommittee 205 MONDAY, JANUARY 21, 1974 Hodges, John E.: Prepared statement with exhibits 256 Nelson, Hon. Gaylord, et al.: Editorials: "Knowledge and Power," from the New York Times, January 17, 1974 214 "Getting the Energy Facts," from the Washington Star-News, January 17, 1974 214 Statement on S. 2782, a bill to establish a National Energy Information System, at the time of its introduction by Senator Nelson (for himself and Senator Jackson), from the Congressional Record, December 6, 1973, pages S22002-22014 215 Article entitled "North Sea Oil: More Than We Know," by Bernard D. Nossiter, from the Washington Post, December 2, 1973 224 Response to additional written questions posed by Chairman Proxmire 234 Rigg, Hon. John B., et al.: Prepared statement 239 Response to Chairman Proxmire's request to check on how many days of gasoline supply the United States has in gasoline stocks 318 Response to Chairman Proxmire's request to supply for the record what energy data collection and analysis funds were requested that were denied by the Department of Interior or 0MB before the budget went to Congress 342 Response to Chairman Proxmire's request to supply for the record what competence is needed and what funding is required to meet the Federal Government's energy resource factfinding and analytic capability 343 Response to Chairman Proxmire's request to supply for the record the report entitled "Mining and Minerals Policy, 1973," second annual report of the Secretary of the Interior under the Mining and Minerals Policy Act of 1970, dated June 1973 345 Response to Chairman Proxmire's request to supply for the record the present approach and procedure used by the Department of the Interior in requring, presenting, and assessing geological and geo- physical data on the extent and quality of offshore resources and reserves in undeveloped areas 432 PAGENO="0005" V Rigg, Hon. John B., et al-Continued Page Reponse to Chairman Proxmire's request to supply for the record the necessary ingredients to conduct a study to provide for a government exploratory system that would independently acquire and process geophysical data on the Outer Continental Shelf to the extent neces- sary to bring the Government to a position equivalent to that of private industry 438 Response to Chairman Proxmire's request to supply for the record the figures on coal leases on Federal lands 441 Response to Chairman Proxmire's question regarding the Federal Government having a capability equivalent to private industry for determining the extent of coal resources and reserves in the public domain Shiskin, Hon. Julius, et al.: Prepared statement 248 Response in the context of the colloquy and interrogation by Chairman Proxmire regarding mandatory reporting 428 Response to Chairman Proxmire's question of how many full-time or part-time people does the BLS have working on the petroleum price index *429 PAGENO="0006" PAGENO="0007" ENERGY STATISTICS MONDAY, JANUARY 14, 1974 CONGRESS OF THE UNITED STATES, S1JBCOMMIrrEE ON PRIORITIES AND ECONOMY IN GOVERNMENT OF THE JOINT ECONOMIC COMMIrrEE, Washington, D.C. The subcommittee met, pursuant to notice, at 10:30 a.m., in room 1202, Dirksen Senate Office Building, Hon. William Proxmire (chair- man of the subcommittee) presiding. Present: Senators Proxmire and Javits; and Representatives Carey and Conable. Also present: Loughlin F. McHugh, senior economist; William A. Cox, Lucy A. Falcone, Sarah Jackson, Jerry J. Jasinowski, John B. Karlik. Richard F. Kaufman, L. T)ouglas Lee. and Courtenay M. Slater, professional staff members; Michael J. Runde, administra- tive assistant; Leslie J. Bander, minority economist; George D. Krumbhaar, Jr., minority counsel; and Walter B. Laessig, minority counsel. OPENING STATEMENT OF CHAIRMAN PROXMIRE Chairman PROXMIRE. The subcommittee will come to order. Mr. Simon, there is a great skepticism in the country. A shockingly large proportion of people, perhaps most of our people, doubt the exist- ence of the energy crisis. They believe it is a Government-oil indus- try-sponsored put-on to raise prices and increase profits at the expense of consumers. Others say the oil shortage is real but it is being manipulated by the oil industry and Government to increase oil industry profits and the shifts and changes from day-to-day in statements from the Government adds to the turmoil. The first objective of these hearings, therefore, is to establish the facts and to get from those who make public policy the basis for their facts, the question of who provides them, how reliable they are, and what means the Government and the public have of verifying their accuracy. When I say that there is considerable question, I am sure you have been swamped by mail, too, but this is just typical of one Senator's office. We have had 3.843 letters in the last 3 weeks on the energy shortage and I am sure Senator Javits. coming from a bigger State, has had even more than that. Senator JAVITS. I would say we have nearer 20,000, 25,000. (1) PAGENO="0008" Chairman PROXMIRE. We want the facts on production, reserves, inventories, and consumption. We want the facts for both the im- mediate short-run problems and about the long-run issues. And we want the facts not only about supply and production but we want them about costs and prices. The full audit that you have pledged of refineries may give us some of the answers, I suspect not all the answers, and perhaps only a small part of it. Furthermore, at the present time. there seems to be little or no concern on the part of the Government itself as ot whether or not the huge, unprecedented, and inflationary rise in fuel costs are related in any direct way to costs. The immense increase in oil industry profits past and prospective makes a devastating prima facie case that these huge price increases are not cost justified. What effect does the rise in the price of fuel and gasoline have on inflation in this country? We are told that we must reduce fuel consumption by about 20 percent. Presently the basic public policy, in addition to minor conservation efforts, appears to be to allow the price to rise sufficiently to reduce consumption by that amount. But many economists tell us that to achieve that goal through the price mechanism alone, the price of gasoline will have to go up by 100 percent. What effect will that kind of increase have on inflation? And how many jobs are at stake? How high will unemployment go? How much additional Government spending will be required to pay for the increase in unemployment benefits, the rise in welfare costs? There is public outrage about. this crisis. The average American family has been paying through the nose, first for inflation, second for massive increases in food prices, and now for skyrocketing in- creases for the gas to drive, their cars and the fuel to heat their home. While the actual real income of the American weekly wage earner dropped this last year, oil company profits rose by 63 percent, ac- cording to the Business WTeek survey. The outrage at. what has happened has led some people to call for the nationalization of the oil industry. Others call for putting the industry under public utilit.y regulation. Personally. I do not believe that. either step would be wise public policy. But the oil and gas industry and those. in the executive branch of t.he Government should realize that the. least we can expect from the energy industry are the facts. There must. be full disclosure. This is not. a private matter. This is a national crisis. Men and women are losing their jobs. Prices are going up at a fantastic rate. In these. circumstances there is no way the American people. are going to stand for a vital industry telling t.hem t.hat the basic facts are proprietary or secret information while t.hey are paying through the nose for the consequences. Today our first witness is the head of the Federal Energy Office, the man who has been called the Energy Cza.r of the country. The people of the country have 1)een impressed with Mr. Simon's vigor~ his willingness. unique at. this time, to talk to the press and the American people. and his obvious intelligence and ability. I think all of us should also be aware-I have said this in a previous corn- mittee. meeting. but I want to say it again, that I do not think any- body who has come to Government in recent years has made the kind PAGENO="0009" 3 of sacrifice that Mr. Simon has made. He is a man who gave up an enormously remumerative job to take this service and do this tre- mendous amount of work under great pressure. I think all of us owe him a great deal of thanks for what he is doing for his country. You are asking many of the same questions, not all but many of the questions I have raised. Mr. Simon, we welcome you here. Congressman Conable. Representative CONABLE. Thank you, Mr. Chairman. I would like to say a word. Mr. Simon, I would like to echo what the chairman has said about your services personally. I think many of us are most grateful for your willingness to take on this very difficult responsibility under extremely difficult circumstances. I am sure you are having to absorb a great deal of data and in fact generate a great deal of data in a very short time because of the pressure of public concern on this issue. Those of us who know you have considerable confidence in your ability to handle the job and we are grateful that you are willing to do it. Chairman PROXMIRE. Senator Javits. Senator JAVITS. Mr. Chairman, I just wish to announce that I am here this morning because, one, I would like to associate myself with everything said by the chairman and the. ranking member, Mr. Conable, about the issue and about the Administrator himself. Secondly, I am here because. my State and my ow-n home city, New York City, seem to be suffering unduly in this crisis, especially noting the fact that the New York City region. with almost 10 per- cent of the population, consumes less energy than any comparable area in the United States for the various reasons, including mass transit, et cetera. Under those circumstances, it seems especially hard on our people that they seem to be suffering the most in terms of gasoline lines, shortages, and extremely high prices for what they do get. I have notified Mr. Simon in advance that I shall be asking these ques- tions as to why New- York is taking it on the chin so heavily in this matter and what is to be done about it. I wish to add at once that Oregon and Arizona are currently in the same position but with very much smaller populations and very much less pressure on them because of weather. Of the three, ours is the most severe problem. Mr. Chairman. I also would like to state that I think it is most constructive that the Chair has called these hearings at t.his time notwithstanding the recess because I think that many uncoordinated efforts are going forward, and it is essential that the facts be gathered into a coordinated pattern and I believe that in the process of legislative oversight, w-e can both ride hard on those who are taking advantage of the emergency. and w-e can also help the Ad- ministrator to have a coordinated picture in terms of State activity and private activity which is the ultimate desire as far as we are concerned. Thank von. Mr. Chairman. Chairman PROXMIRE. Mr. Simon. please proceed. PAGENO="0010" 4 STATEMENT OF HON. WILLIAM E. SIMON, DEPUTY SECRETARY OF THE TREASURY AND ADMINISTRATOR, FEDERAL E1~EROY OFFICE, ACCOMPANIED BY JOHN SAWHILL, DEPUTY ADMINIS- TRATOR; WILLIAM WALKER, GENERAL COUNSEL; GERALD PARSKY, EXECUTIVE ASSISTANT; ERIC ZAUSNER, ASSISTANT ADMINISTRATOR FOR DATA ANALYSIS; AND CHARLES OWENS, PRICE REGULATION Mr. SIMoN. Thank you, Mr. Chairman. I note your kind remarks. I would like to echo what Senator Javits just said. I think the important thing that we can do-I congratulate you, Mr. Chairman, for calling these hearings because no one wants to get the facts before t.he American people about this energy problem more than I. I understand the great problem of credibility in the institution of Government today. This is a very complex subject and one which through dialog generated through these hearings, as the facts begin to surface, many of the misstatements, wrong impressions that people have, will be placed before the people in an orderly fashion and I look forward to participating in this dialog and will spend whatever time it takes, and my associates will do the same, to make sure that we attempt to get these facts before the people. There is a tremendous misimpression that. we are attempting to manage. this shortage through the price mechanism when indeed, we really have very little control over the prices of imports which have skyrocketed, close to 400 percent in the past year. I will deal with that during the question and answer period, I am sure, in an attempt to deal with the specifics of the components of this industry and our petroleum consumption in this country and how the price of a gallon of gasoline, if you will, relates to the amount of oil that we bring in from abroad. I would like to thank you for the opportunity to appear before you today to discuss our energy data requirements. The Arab em- bargo will reduce our petroleum supplies almost 14 percent below expected demand. Some have questioned the accuracy of these esti- mates. I welcome the opportunity to address the credibility of our estimates, the sources of the data which we use in making them, and our plans to improve our energy information capabilities. While many doubt the accuracy of the data being provided by industry, there is no doubt in my mind that we do indeed have a serious shortage. Consumption this year is expected to be signifi- cantly above last year-a continuation of historic trends. Domestic production. on the other hand, has leveled off and commenced to decline. The result has been ever-increasing levels of imports and a growing dependence on Arab crude oil and products refined in third countries from Middle East oil. In October. a 100 percent U.S. embargo was announced and while the estimated impact varies de- pending on assumptions. the existence of a shortage simply cannot be denied. In developing our estimates of the embargo. a worst but still realistic situation was used. Responsible national energy policy can PAGENO="0011" 5 only be developed by planning for the worst. I would like to be surprised by more favorable events, but we cannot afford to have programs developed which are not adequate as the situation pro- gresses. To a certain extent, the plain logic of a shortage has been con- fused by seemingly contradictory facts-primarily our very favor- able inventory position at yearend. However, this is due to unusually warm weather through the winter to date, the effect of conservation by the American people, and leakage of the Arab embargo. The result has been increased inventories. There is also one more im- portant factor. We must remember that as Chairman of the Oil Policy Committee, in early and late winter we changed the manda- tory oil import program and its effect was to create massive new numbers of importers in this country, new storage facilities that have never been reported in this country, and all of this has created greater inventories than normal. As of December 20, the American Petroleum Institute reported we have only slightly over 30 days' supply of the major petroleum products. The shortage caused by a fully effective embargo will quickly reduce these to dangerously low levels unless we act quickly to reduce demand and equitably allocate the available supplies. A comprehensive domestic and international data system is clearly needed and the FEO is now analyzing the best ways to structure and implement such a system. Such a system is of little use now in this time of petroleum shortage and, therefore. I would prefer to focus on our most crucial information needs now and how we intend to meet them. CURRENT INFORMATION SOURCES Let me say right at the outset that there has never been in exist- ence an adequate energy data system. One was never needed or really ever desired until recently. Today and in the years ahead we need better data on everything from reserves to refinery operations to inventories. Nevertheless, we are in an emergency situation and we cannot wait~ for new systems before making many of the decisions which have to be made. We must and are using and modifying the systems we now have until new and better ones can be developed. Almost without exception I feel we need more accurate, timely, and comprehensive data, data that we can check, verify, and cross-check. We intend to get such data, but must rely on the existing data at least for the next several weeks. Our current data system includes production of crude oil and closely related products. imports of both crude oil and refined products, refinery operations. and shipments of petroleum products by refineries. It also encompasses the transportation systems linking the oil fields, the refineries, and the bulk terminals. Finally, petro- leum stocks or inventories held by terminal operators. refiners, and pipeline companies are also reported. Data on the domestic petroleum supply system are gathered by the Bureau of Mines-BOM-and by the American Petroleum In- PAGENO="0012" 6 stitute-API. The Bureau of Mines data are gathered primarily through a monthly report by refining companies, supplemented by monthly data gat.hered from terminal operators. Additional infor- mation on crude oil production is obtained from State agencies, and additional information on imports, primarily imports of refined products. is obtained through Census Bureau reports based on infor- mation gathered by the Bureau of Customs. The Bureau of Mines reporting system is voluntary, but there is a very high degree of cooperation by the petroleum companies, and the response rate is in fact higher than that achieved in many supposedly mandatory in- formation reporting systems. The API has a much less detailed reporting system than the Bureau of Mines, but it receives and publishes data on a weekly basis. For example. API collects refinery information from about 60 percent of t.he refiners which account for over 90 percent of domestic operations. These data include refinery crude runs, produc- tion and yields of all major refined products, and inventories of crude oils and finished products. Detailed information on imports are also compiled by the API. We have already completed preliminary cross-checks of these reporting systems and have found them to be reasonably accurate and quite consistent over long periods of time, although on a week- to-week or month-to-month basis differences of up to several hun- dred thousand barrels per day can and indeed do occur. For ex- ample. during the first 10 months of 1973 API reports differed from the data published by the Bureau of Mines by less than one-half of 1 percent. While these cross-checks indicate that the data appear sufficiently accurate for management. decisions, there are still significant defi- ciencies in these. systems. Let me briefly summarize the problems. First, industry coverage by the API for the weekly statistics is not complete. Smaller refiners and importers are not included and the statistical techniques used to extrapolate the sample to industry totals may not be completely adequate in these times of shortage and rapid change. The second major problem deals with secondary stocks-those petroleum inventories not held by refineries and major terminal operators-and consumption. Particularly in times of shortage, in- formation on all inventories and actual use rates are important, but our reporting systems are just inadequate. Information on reserves is also inadequate. While not critical in dealing with the embargo, accurate reserve data is needed if we are to develop sound public policy. In contrast to the primary supply ssvtem. where both the Bureau of Mines and the API provide comprehensive although not com- pletely adequate data. information about secondary stocks and con- sumption can he obtained only 1w considering a number of sources, but even the combination of all these data sources does not provide complete information. However, selected data are available. The PAGENO="0013" 7 Federal Power Commission compiles data on the use of all fuels, including petroleum, for the generation of electricity. The Civil Aeronautics Board collects data on the use of aviation fuels by certified carriers. The Bureau of Census collects data on fuels and electric energy consumed in manufacturing industries once every five years of manufacture, and estimates are provided in inter- vening years. From all of these data sources one can build only an incomplete picture. There are two additional deficiencies in most of our current energy data: Lack of regional and seasonal differences in consumption. To make our allocation programs work properly, we must know where and when the different petroleum products are needed. Current needs must be determined in large part by reference to past consumption levels and trends, but data on past consumption patterns are not available by States and by month. Further breakdowns of consump- tion by industry or other users are not available. These kinds of data are not available primarily because they were never before needed for operation of programs typically within range of U.S. Govern- ment policies. But they are needed now. Our final point must be made. All of our current sources of data are voluntary and for many of the programs we now must operate this is simply not enough. We. now clearly need mandatory reporting systems and mechanisms to check and enforce their proper operation. NEW REPORTING SYSTEMS We have already instituted a number of new systems to collect better energy data data and to improve our management. capabilities. We have instituted immediate daily reporting of tanker arrivals by the Bureau of Customs, so that petroleum imports data can be available and processed with a lag of only about 1 week instead of the month or two required for complete Census Bureau processing of all Customs imports data, including petroleum. This will provide a further check on imports as presently reported by the API. The Navy has agreed to provide a. forecast, using its worldwide capability for tracking ocean shipping. of tanker arrivals in the United States for up to 4 weeks in the future. We are establishing a system for obtaining, on a sample basis. measures of actual consumption of home heating oil, adjusted for the weather. Data have been coming from New England for a month, through the. cooperation of the New England Fuels Institute, its member dealers, and their computer service bureaus. Broader coverage will be achieved as additional companies or associations are brought into this program. We have been working with the FPC to establish a rapid report- ing and forecasting system for the consumption and stocks of all fuels, including petroleum. used to generate electricity. I will be visiting the Texas Railroad Commission shortly and also other State regulatory agencies to see what can he done to get PAGENO="0014" 8 more accurate and timely information on reserves, capped wells, and maximum recovery rates. These systems represent just a start in the overall mandatory reporting systems we are now developing. Most important, perhaps, is an integrated mandatory reporting system for petroleum products. I have directed that such a system be developed and implemented for all refiners. It has three essential parts. First, reports of expected refinery operations during the coming quarter and reports of ex- pected inventories and shipments to each State for the coming months will be required. This information will provide the back- bone for planning and operating our allocation programs. Second, we are now developing a weekly reporting system for all refiners, major bulk terminal operators and pipeline companies to give FEO production. yields, and stocks information directly from industry. This system will obviate our need to rely on API aggre- gated data. Finally, monthly reports, certified by company officials of refiners, pipeline companies and bulk terminal operators will be required. FEO audit teams, assisted by the IRS, will make continuous field checks of the information contained in these forms. We expect that every major refiner will be audited at least partially four times each year. The forms, computer systems and implementing regulations are now being developed and the complete system will be operational in about G weeks. This system will provide the detailed, verifiable information we must have to operate. The system will be further expanded to include secondary stocks as soon as possible. I am advised that we have sufficient legal authority under both the Economic Stabilization Act and the Emergency Petroleum Al- location Act to require these reports be filed and enforce legal sanctions if they are not. None of these systems will provide all of the information we need during this present crisis. There will continue, to be important facts or questions that only targeted spot checks can confirm. Reports of price gouging. hoarding or the possibilities of ships offshore await- ing higher prices are all certainly cases in point. We have already dealt with problems like this. We used over 1,000 IRS agents late last year to sweep the 48 States looking for price gouging. The Coast Guard used its District Commanders and major port personnel to make physical checks on unusual tanker activities. Let me assure this committee that we intend to maintain sufficient flexibility and manpower resources to continue these activities as needed to cope with this shortage. NEW LEGISLATION ON ENERGY REPORTING While I feel we have sufficient authority to mandate the petroleum data we now need. I still feel that specific mandatory reporting legislation is required. First, tailored sanctions and enforcement provisions may be. more appropriate than those in our current PAGENO="0015" 9 authorities. Second, expansion of mandatory reporting to other energy sources, such as coal and uranium, is a necessity in the months ahead and may not be practical under our existing authorities. We are now developing the information needed to propose specific mandatory reporting legislation. Such legislation will go beyond information on petroleum inventories, imports and refinery opera- tions. The more complex problem of reserves and nonpetroleum products will be included. PITBLIC DISCLOSURE A central issue, and one which I personally consider important, is the extent to which the information which is reported to us ought to be made available to others. I personally feel that the public has a right to complete and accurate information on the energy situation. This policy should give way only where limitations are imposed by statute and where important public policy considerations dictate otherwise. For example, there will undoubtedly be national security con- straints upon the release of certain information about military fuel supply levels. Further, competitive considerations will dictate con- fidentiality in cases where disclosure of future production or ship- ment plans could be used for anticompetitive or predatory purposes. We will be conferring with the Justice Department and Federal Trade Commission on the antitrust risks involved in disclosure, on a company-by-company basis, of certain sensitive commercial infor- mation. But I would expect these limitations to be relatively narrow and that most of the information would be more widely available. Certainly, I am persuaded that both the Government and the public are entitled to much more information about the petroleum industry than is now available. We intend to see that it is gathered and made available. To this end, we will be presenting proposals recognizing three categories of information disclosure. The first will be that information generally available to the public: second is that infor- mation which should be available only to other Government bodies with a legitimate interest in and need for the material: and, third, that information which ought properly to be limited to FEO in the carrying out of its responsibilities. I believe these proposals will mitigate concerns about excessive confidentiality, and will greatly broaden public acceptance of the information which the Government collects and publishes on this subject.. SUMMARY Let me close by assuring this committee that the Federal Energy Office fully intends to get all the information needed to do our job and fairly present the facts to the American people. We have already made substantial progress in our energy data systems. Under the authorities we now have, we will implement mandatory report- PAGENO="0016" 10 ing requirements for the petroleum industry. And, under authorities which we are now evaluating, and would hope to work closely with Congress in finally formulating. to develop the broad-based energy information systems needed not oniy to deal with our current problems but with the challenge in the decade ahead. Mv associates. John Sawhill. my Deputy, and other senior mem- bers of the Federal Energy Office will be delighted to respond to any questions. Mr. Chairman. Thank you. Chairman PROXMIRE. Thank you, Mr. Simon. Mr. Simon. I understand Congressman Carey has to leave. He has to catch an 11 o'clock plane but he would like to say a word before he goes. Representative CAREY. Thank you. Mr. Chairman. I want to wel- come my fellow New Yorker, Mr. Simon, here today and and com- mend him for the candid and devoted way in which he pursued t.his complex problem. I had said to him privately the other day even when we were calling on him for help in New York City I felt he had amassed the complexities of the problem so well and began to move toward decisive, action, he might well jeopardize his future but I know he is prepared to take that risk. I just want to state. that your testimony is exactly on line with what I want to produce for the. people in my responsible position. I had 15 years' experience in this industry. I know it is so corn- puterized. so filled with data supply, that good will in the industry should have no trouble complying with whatever you exact from them or seek to exact from them in the way of information. Just. one personal observation. I do hope you will expand your proposal to also find out from the multinational oil companies the full extent of their deposits. developed reserves and potential re- serves in overseas holdings. Unless we have that picture. we really do not have the full prospectus on where the oil may come from and keep in mind that. all of those reserves, all of those Government holdings. were produced under American tax benefits with American tax incentives. I hope you will pursue that data as well. We cannot have the whole picture unless we get. the overseas data which is in the possession of seven or eight major oil companies. I must leave at 10 :30 to catch a plane for New York City to attend a fuel emergency meeting. I wish to submit for the record copies of committee print No. 11. 90th Congress, second session, Committ.ee on Interior and Insular Affairs, dated August 1968. reflecting the dissenting views of myself and others calling for an end to the oil import. program. and com- mittee print No. 1, 91st Congress. second session, Subcommittee on Mines and Minin~ of the Committee on Interior and Insular Affairs, dated August 1970. with similar dissenting views. Chairman PROXMTRE. Without objection, so ordered. [The committee prints follow:] PAGENO="0017" 11 90th Congress ~ COMMITTEE PRINT NO. 11 2d Session REPORT ON MANDATORY OIL IMPORT CONTROL PROGRAM, ITS IMPACT ON THE DOMESTIC MINERALS INDUSTRY AND NATIONAL SECURITY (TOGETHER WITH DISSENTING AND SEPARATE VIEWS) COMMITTEE ON INTERIOR AND INSULAR AFFAIRS OF THE HOUSE OF REPRESENTATIVES AUGUST 1968 Printed for the use of the Committee on Interior and Insular A~airs U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 1965 PAGENO="0018" 12 COMMITTEE ON INTERIOR AND INSULAR AFFAIRS HoosE OF RNFHESE'iT.STJVES WAYNE N AS I'INALL, Colorado, flairsasa JAM US A. I! ALEY, Florida El) El )M) Gd I `°`)N, Ok!aioioa WALTEL * II URNO, Nerala R) Gd A. TAYlOR, North C;i~olii;a HA WI.!) T. JOhNSON, Calif Ha 11)';!! 1.. )`Ah'E'i', Nuo York \hilfLl~~ K. l'itAl,L,Ariz,p, I'll Il. 1.1!' o: l:'I"~N, Caltfor:;t; J) H N `i TI'NNEY, )Thsli!ornfa T)H `MAP H hUfFY, \\;n.Iiinr'n, Els'IlALH `it IIITE, Teaas R'JIIEII'F tv KAS'l'ENyiEIEL, W'iaronain JAM ES ) I. O'IIALA, Aticlira; WIl,l.f\M F. R'YAN, Nov York l'ATSY T. Al INK, Ilawail JAAIES KEi'l, v:,5~ \`irgioia LLOYJJ Al Fl~: 155, `it ashinglon ABRAhAM KAZEN. JR., Texas SANTIA' 0 FOLANCO-ABREU, Resident Cornariiss;o:;er, Fnerto Rico WALTER S. BARING hUG II L. CAREY P1IILLIP BURTON THOMAS S. FOLEY JAMES 0. O'HARA JAMES KEE ABRAHAM RAZEN, JR. JOhN P. SAYLOR, Pennsylvania, This/icr _Vissrity _MeUi~ier E. Y. BERRY, Sooth IJakola CRAIG HOSM ElI, California J) )E SRI'RTTZ, Kane's LAURENCE J. BURTON, UIah L)o;ERC C. B. MORTON, Mart land \VENIJEI.L WYATT, Oregon Ii EOR' i E \`. hANSEN, I)Ialio El) REINECKE, Cahilornia ThEODORE R. KUI'FEII AlAN, Nra York JOhN NYU, boa S.\,AI STEI(iER, Arizona hlO\VARII `iv. l'Oi.LOCK, Alaska JAMES A. McCLURE, Idaho LAURENCE J. BURTON E. Y. JsERRY CRADJ IIOSMER JOE 5FF RITZ ED REINECKE JAMES A .Me CLURE WILLIAM L .Sna re_n, Ca,;.' o/).z `if as .tuii;i i'' a,;'? Alise'qle NoTE-The chairman, lion. Wave N. Aaj~oiall, and the ranking mitiorify member, Hon. John P. Saylor, are ex officio nseinl.ers of each snhcon;nnttee. SWNEY L. McFARLAND, Prafcss)c cal `lull Jfirrcf'ar T, RIrHA RD W'ITM FR, Can nail MINES AND MINING ED EDMONDSON, Cl,air'nns (II) PAGENO="0019" 13 MANDATORY OIL IMPORT PROGRAM Ix TROD UC TI ON Tue Subcommittee eu ~\ lines 011(1 ~\ Iiiiing of the House Committee on Interior and Insular Affairs held ext elisive heariii~~ oi the manda- tory oil import program, ~is that ~)I'0gral1l relates to tile domestic petrolei~ni iitdiisti' , on May I t, 14. a id 16, 196S. Represented at the hearings were oil major se~meti Is of the i letrolelilli illdlIstrv. including both nidepei 1(lent and IllajOr operat ( ~ and prt dlleers, refiners, the coal itidust rv, research groups. (( )flsl 11 ~~er and user groups 011(1 organi- Zatiolls, the pet I'O('ile1fli(~~ll ili(i (1st IV. \ [embers of Congress. and representatives from States a 11(1 1 eriit ries, including the State of Hawaii, tile ( `oiiuinonwealtii of Piiert o Rico, aiid the Virgin Ishuids. The Departinetit of the Interior, as the administrator of the progioun, also testified. The ileariligs were imlten(le(i t (1 provide a forum by which the Government's miiaiidiìtory oil iInl)ort program 011(1 the policies winch guide its udmnnustrat ion (( 011(1 be reviewed amid clarified. As a result of recent developments III the lidITliFiisIl'titiOii of the maiidatorv oil lmllj )o1t prt (gra iii, a 1(1 tue (lee j) ( ncerii expresse(l to tile subcomninitt cc by almost all segmeit ts of the (ii niestic peti'oletlni industry, it is the feeling of tile subcommittee that there is an urgent need for a revie\v of the policies, regulations, pi'ocedui'es 1111(1 the day-to-day operations of this pr igma m. When the Inami(ia tory oil i iii ~ rt program was initiated in 1959 and shortly thereafter, there was ho (loubt. about the program's major purpose. to insure tile liatloinil security of this Nation by safeguarding and maintaining a vig 1' us and healt liv domestic petro- lenin industry. Three President~ (1 this ~\a ton be~inniiig with President Eisenhower and colil ilillilig with Pre~ident Kennedy and President Johnson, together ivithl intiuimera})le special task forces, commissions, and study gm'ut I~ 115 well as several congi'essioiial committees, have a~l been a! ne mind 011 tile otflective of the man- datory oil import program. Its one 011(1 only rca- Ii 1(1' being is to insure the national security of this Notion by 1-e(iuleilia tins couimitrv's dependence on foreign imports by assuring a st i- rig and vigorous domestic petroleum industry. ( ~Hie specific st atu i tes that provide tile basis for this program and which emphasize t lie national security aspect of tile program are citS(l li l)1t~e5 ~ to 12 inclusive.) Receti tly. however, a 11(1 )0 i-I UI liii ilv siii cc I 965. t lie mand at orv oil import progralli has utndem-gone - u~idei-able admiusi rative (aaliges. What \V05 011cc a ~.iiaple. straig!itfoiual'd prolillimhI. based n~oii the need to monitoin 0 stioia~ (lol11(~ti( petroleiiiii iiiduistiv for 1i~itioIi1ll security reasons, has heaonie 1 ((unhIex. adrnuii~tr~ttive \~ ildeiness clouded by rules and preeduire~ t hat few hiil(le!stauid 011(1 which ai'e PAGENO="0020" 14 constantly undergoing change. Exceptions and deviations from long- established rules and procedures have become increasingly common. These departures from established policy include such matters as allocations for petrochemicals. allocations because of "tight" supply situations, allocations because of economic hardship, establishment of foreign trade zones, proposals for auctioning off or selling import allocations by competitive bidding, and increased import allocation as a reward or incentive to produce low-sulphur residual fuel oil. All of thes~e a(tions and l)r~oi)Osals. as well as others, were taken under a progralil \vhlchi owes its very existence to safeguarding the U.S. national sectiritv by the preservation of the domestic petroleum industry. If a meaningful program is to be contiiiued, it is imperative that a clear an iii defl miii e policy he established under which the domestic petrolenni iudtnstrv and all other interested parties are fully informed a~ to tile ftiture of the program. If national security is of paramount consideration, and tins sul)commit tee firmly believes that it is, totietlier with the l)reservatiOll of the domestic petroleum industry, then iio further excej)tion should be granted. If, on the other hand, the program has outlived its usefulness or if considerations other than national security are to be given equal or greater weight, whether these be situations of hardship, price, or temporary shortage, then the new criteria should also be clearly spelled out and defined in order that all may follow the neivi established policy. Before proceeding further it appears appropriate to point out that the subcommittee is not unmindful of the role of the consumer and his desire to obtain products at the lowest possible price. This desire, while temporarily beneficial, is not, however, always consistent with national security nor with long-term benefits. Unquestionably, domestic consumers are utilizing an ever-increasing amount of pe- trcleum products for traflsportation, fuel, heating, and other uses necessary to maintain a high standard of living. In the event of a national emergency, it is essential that there be adequate supplies at reasonable cost, both now and in the future. The lower cost of imported oil is highly attractive, but clearly an excessive reliance upon imports and a short*run advantage may not be to this Nation's best long term benefit. Imports coul(l be cut off in an emergency. One has but to look to last year's Mi(ldle East crisis for a recent example of the sudden unavailability of foreign oil supplies. If this Nation had been without adequate sources of petroleum, and an industry capable of quickly increasing domestic production, the situation could have been ex- tremely critical for us and for our European neighbors. Additionally, this vulnerability could easily, and quite likely would result in a much higher cost or even to the complete unavailability of oil to consumers. It, therefore, appears that the best interests of domestic consumers, as well as the national security, can he best served by a reasonable balance between domestic and foreign stlpj)hes. The interest of this subcommittee in the mandatory oil import program comes about as a result of the House Committee on Interior and Insular Affairs' overall responsibility for tile stability and well- being of the domestic mining industry generally, of which petroleum, natural gas, coal, and other energy fuels, are a most important part. Consequently, to the extent that the mandatory oil import program has an impact U~Ofl the domestic petroleum and coal industries and 2 PAGENO="0021" 15 their ability to produce energy fuels in time of war or peace, the House Committee on Interior and Insular Affairs, and this subcom- mittee, have an interest in the policies, procedures, and operations of the program. It appears appropriate to point out that the following report deals chiefly with the oil import problems as they relate to the domestic petroleum industry in districts I-TV. This is not to say that the committee is not aware of the very serious problems that exist in district V. However, this district, which consists of Alaska, Arizona, California, Hawaii, Nevada, Oregon, and Washington, has condi- tions and problems that are unique to tins particular geographic area and are not generally found in the other four districts. These problems, notwithstanding the fact they are not covered as ex- tensively in the report as those in districts I-TV are nevertheless significant and deserve careful consideration. The committee wishes to emphasize that consideration should be given to the problems and conditions unique to this district. The committee also wishes to take this opportunity to indicate that it is fully aware of the many complex problems and the many varied interests confronting the administrators of the mandatory oil import program. While the following report is sometimes critical of many aspects of the program and its admiiiistration, the committee wishes to state that this criticism in no way reflects upon the integrity or ability of those associated with the administration of the program. In particular, the committee wishes to commend those individuals in the Department of the Interior associated with the program and to recognize fully the integrity and ability they have exercised in carrying out their difficult. responsibilities. BACKGROuND LEADING TO THE ESTABLISHMENT OF THE MANDATORY OIL IMPORT PROGRAM IN 1959 Few major national policies have received more study and con- sideration over the past 19 years than has the matter of petroleum imports and their impact on the domestic petroleuni-producing indus- try and national security. During the initial years of this period there emerged, as a direct result of the thorough and exhaustive consideration by the legislative and executive branches of time Federal Government, a firm national policy on petroleum imports. In the interest of imational security this policy calls for the maintenance of a propeI~ balance between petrole- um imports and domestic petroleum production in order to insure a dynamic amid vigorous domestic petroleum-producing industrv-an industry which at all times would be capable of producing the petro- leum needed to successfully prosecute wars, stave off and deter war threats, help other friendly nations with their petroleum needs in time of crisis, and to supply at reasonal)le prices the petroleum products so necessary for an ever-expanding national economy. This basic national policy on petroleum imports did not just happen. Rather it evolved as a result of careful consideration by all branches of the Federal Government with time cooperation and assistance of the petroleum industry. As far back as January 13, 1949, the National Petroleum Council, established under the auspices of the Federal Government as the 3 PAGENO="0022" 16 official oil industry advisory body to the Federal Government, out- lined a set of fundamental principles as essential to a national oil policy. These principles, which were formulated by the Council at the request of the Secretary of the Interior, were adopted unanimously by the Council. The very first of these fundamental principles was as follows: * * * The national security and welfare require a healthy domestic oil industry. Continuing supply to meet our national oil needs depends primarily on availability from domestic sources. Due con- sideration should be given to the development of foreign oil resources, but. the paraniount objective should be to maintain conditions best suited to a healthy domestic industry which is essential to national security and welfare. Earlier, during World War II, the Petroleum Industry War Council had recommended to the Government certain policies which were reflective of the oil industry's peacetime and wartime experience with oil imports. This oil industry council was created under the Petroleum Administration for War, to act as an advisory body to the Govern- ment on I)roblems affecting the oil industry. rfhis industry Council was requested to submit to the Petroleum Administrator, for the use of the Government, a statement of sug- gested policies for the Federal Governmeiit and the industry. At the conclusion of the war, and at the last session of this agency, on October 24, 1945, the following resolution was adopted by that Council: Whereas during the emergency just ended, in order to meet accelerated war rec1uiremeiits, this Nation found it necessary to import abnormal quantities of crude oil and refiuied products from foreign sources; and Whereas the future of the domestic petroleum industry in this country depends on the maintenance of sufficient reserves and the productivity of its many fields, thereby enabling the industry to meet all the requirements incident to an expandmg domestic economy; and Whereas the continued importation of large quantities of crude oil and products at prices below the cost of production of this country would have a depressing effect on exploration, development and production in the domestic industry; now, therefore, he it Resolied, by the Petroleum Indastry War Conncil, assembled on this the p4th (lay of October, 1945, in Washington., D.C., `I hat it does declare that in the public interest and that in the interest of inaintainilig national security it should be the policy of this Nation to so restrict amounts of imported oil so that such quantities will not disturb or depress the pro- clueing end of the domestic petroleuni industry, and only such amounts of oil should be imported into this country as is absolutely necessary to augment. our domestic production when it is produced under conditions consonant with good conservation practices. Thus, it can be seen that at the end of World War II t.he Petroleum Industry War Council, as a national advisory body to the Petroleum 4 PAGENO="0023" 17 Administrator, concluded that. petroleum imports should not be permitted to enter the country in amounts sufficient to weaken the domestic petroleum producing industry and thus threaten our Na- tion's security. Soon aft.er~ World War II Congress began to investigate and give extensive consideration to the status of the domestic petroleum industry and how imported foreign oil affected this industry. On January 31, 1947, the. Special Committee Investigating Pe- troleum Resources, set up by the Senate, in Senate Report No. 9, 79th Congress, concluded as follows: In the final analysis, the reserves within our own borders are more likely than not to constitute the citadel of our defense. It follows that nothing should be clone to weaken the productive cal)acitv of domestic reserves, and that every possible step should be taken both to increase these reserves and continuously to develop them to such a degree as would occasion no regret in the event of war. * * * * * This Nation now faces two alternatives: Either- 1. To await with hope the discovery of sufficient petroleum within our boundaries that the military requirements of the future will occasion no concern, and in the meantime to depend upon foreign oil and trust that war will iiot cut off our imports; Or- 2. To take steps to guarantee a domestic petroleum supply adequate for all eventualities by illeaiis of: (a) Incentives to ProTl)ote the search for new deposits of petroleum within the boundaries of the United States all(1 in the continental shelf; and (b) The continuation of the presemit pi~ogi~im looking to the manufacture of synthetic liquid fuels to supl)le- ineiit our domestic crude supply. All the facts before us impel the choice of the second ~dternative. In the 1950's Congress continued to concerii itself with the domestic petroleuni industry and the matter of imports of foreigii oil. In developing a national petroleum imports policy, Congress had the beiiefit of studies and coiiclusions of the executive branch, such as: The conclusions of the Defense Production Administration, estab- lished as a result of the Korean conflict, in Jamiary 1953, stated the results of its studies regarding defense matters in a report entitled ``Background for Defense, Expanding Our Industrial Might,'' as follows: The machines of peace and war run on petroleum. A program to expand American industry substantially and keel) it operat.mg at top capacity requires constantly increasing quantities for fuel, for lubricants, and for niaiuv chemicals made from petroleum-evervthing from toluiemie for TNT to wax for packagings. Greater industrial activity arid peak 5 PAGENO="0024" 18 levels of employment demand more and more gasoline for airplanes. automobiles, trucks, tractors, and buses, and more diesel fuel for locomotives. The defense program will by 1953 boost our petroleum needs to some 8,200,000 barrels a day as contrasted with 6.800,000 barrels a day used in 1950-a better than 20-percent increase. If we are to meet the needs, we shall have to drill more wells each year than ever before in our history. We shall have to expand the refineries where crude oil is made into gasoline and fuel oil and the other finished petroleum products. We shall have to enlarge our transportation facilities to move the (rude petroleum to the refineries and the finished products to consumers. In May of 1953, the Secretary of the Interior McKay, in appearing before the House Ways and Means Committee, stated as follows: I recognize the importance of domestic petroleum produc- tion to national defense and the contribution it makes to the national economy and that of the oil-producing States. I also realize that the petroleum industry is unique in that discovery and development of new reserves constitute a major and vital activity of the industry. Oil and gas produced must he replaced by a vigorous and progressive search for new reserves or the Nation's ability to produce petroleum would rapidly deteriorate. I recognize how important it is that the strength of the domestic industry be maintained. To maintain this strength requires an economic climate that promotes the competition,. progress, and technological development that has brought the industry to its present high degree of capability. The domestic industry today is undergoing a period of readjust- ment. The rate of ~ro\vth in demand has leveled off after the rapid gains which followed the Korean outbreak. At the same time the expansion of supply has brought about a more normal reserve capacity. Demand is now dropping seasonally at the close of a \v~rm winter. Domestic production has been reduced iii recent months, and there should be ~ corresponding crit in ~mports. There is evidence that already the industry is effecting such adjustments. [Emphasis supplied.] However, imports of oil did not decrease, as was hoped, but con- tinued to increase. In view of this continuing increase the President became concerned and took action. On July 30, 1954, the President established an Advisory Committee on Energy ~ut)I)lies and Resources Policy. The Director of the Office of Defense Mobilization was designated as Chairman and the heads of the following agencies served as members: Departments of State, Treasury, Defense, Justice, the Interior, and Commerce and Labor. The White House directive respecting the Committee's assignment included the following specific statements: At the direction of the President the Committee will undertake a study to evaluate all factors pertaining to the continued development of energy supplies and resources fuels in the United States, with the aim of strengthening the 6 PAGENO="0025" 19 national defense, providing orderly industrial growth, and assuring supplies for our exp~indiiig iiaiional ecunoinv and for any future emergency. The Committee will review factors affecting' the require- ments and s1lp~)lies of the major sources of energy including coal (anthracite, bitu~ninous and lignite, as well as coke, coke tars, and synthetic liquid fuels) petroleum and natural gas. Lpon conclusion of its work the President's Advisory Committee on Energy ~ulI)1)lies and Resources Policy recoiniiiended CIItJDE OIL IMPORTS AND IIESIDUAL FUEL OIL IMPORTS An expanding domest ~c ml hal i~t rv, )l is a Le;il I liv oil industry in friendly countries wiui'Ii help to suumiv the L.S. market, constitute basically iii a ri a lit eleuiieuits ni t lie kind ci industrial strength Iviuicil en tributes itiost to a strong national defense. Other energy industries. espechtllv coal, must also maintain a level of oj~era lion \ylIi(hl will make l)OSSi- ble rapid expansion in out 1)111 shiou uld I hat become llecessuirv. In this complex picture both (lamest ic f)r~(lu('l ion and imports have important j)arts to play; neither ~loiihl be sacrificed to the other. Since \\orlcl War II importation of crude oil and residual fuel oil into the T~Tnited St ates has increased substantially, with the result that today these oils supply a significant part of the U.S. market for fuels. The Cornniittee believes that if the imports of crude and residual oils should exceed significant iv the respective 1)10- portions that these imports of oils bore to the production of domestic crude oil in 1954, the doniest a fuels sit nation could be so impaired as to endanger the orderly industrial growth which assures the niilitarv and civilian supplies and reserves that are necessary to tile uiatioii~il defense. There would he an inadequate incentive for exploration an(l the discovery of new sources of sup ply. Iii view of the foregoing, the cumniit tee concludes that in tile interest of national defense iuiiports s}ioulcl l)e kept in the balance recommended above. ft is highly desirable that this be done by voluntary, individual act ion of those who are importing or those who beconie importers of crude or residual oil. The committee believes that every effort should be made and will be made to avoid tile necessity of govern- men tuil intervention. Tile commit tee recommends, however, that if in the future the imports of crude oil and resi(Iulal fuel oils exceed sig- nificantly tile respective proportions that such imported oils bore to domestic production of crude oil iii 1954, appropriate action should be taken. The conmiittee recommends further that the desirable proportionate relationships between imports and doniestic production he reviewed from time to time in the light of industrial expansion and changing economic and national defense requirements. 7 PAGENO="0026" 20 This report was released on February 26, 1955. As a result of this study the oil importing companies were requested to voluntarily re- strict imports of petroleum into the United States on an individual company basis in conformity with the report of the President's Ad- visory Committee on Energy Supplies and Resources Policy. Meanwhile this whole matter of petroleum imports was being de- bated in Congress. As a result Congress wrote section 7 into the Trade Agreements Extension Act of 1955 (69 Stat. 162). This section, known as the national security amendment reads as follows: In order to further the policy and purpose of this section, whenever the Director of the Office of Defense Mobiliza- tion has reason to believe that any article is being imported into the United States iii such quantities as to threaten to impair the national security. he shall so advise the President, and if the President agrees that there is reason for such belief, the President shall cause an immediate investigation to be made to determine the facts. If, on the basis of such investigation, and the report to him of the findings and recommeiidations made in connection therewith, the Presi- dent finds that the article is being imported into the United States in such quantities as to threaten to impair the national security, he shall take such action as he deems necessary to adjust the imports of sin-li article to a level that will not threaten to impair the national security. In adopting the National Security Amendment, the Senate Finance Committee ~I~ept. 232, S4th Cong., first sess.) stated: (9) The committee had before it. several proposals dealing with specific commodities, namely petroleum, fluorspar, lead, and zinc. In lieu of specific action on each of these the committee adopted all amendment which specifies that the Director of the Office of Defense ~Iobiization shall report to the President when he has reason to believe that imports of a commodity are entering the United States in such quantities as to threaten to impair the national security; that the President shall cause an immediate investigation to be made if he feels there is reason for such belief; and that the President, if he finds a threat to the national security exists, shall take whatever action is necessary to adjust imports to a level that will not threaten to impair the national security. The committee believes that this amendment will provide a means for assistance to the various national defense indus- tries which would have been affected by the individual amendments presented. The White House issued on February 26, 1955, a report based on a study by the President's Advisory Committee on Energy Supplies and Resources Policy which indicates the importance of a strong domestic petroleum industry. Congress has thus provided the necessary tools for the President to use in case the growing tide of petroleum imports did not subside. Imports of petroleum had been increasing during the years 1949 to 1955 and continued to increase during 1955. As a consequence of the 8 PAGENO="0027" 21 increased level of imports during 1955 and the first half of 1956, as well as the projected increase in the level of imports scheduled for the last half of 1956, the in(lepen(leTit Petroleum Association of America (IPAA) filed a petition on Aut~'iist 7, 1956, requesting action under section 7, the National ~eciiritv Aniendment., of the Trade Agreements Extension Act of 1955 (69 Stat. 162). Pursuant thereto, the Director of Defense Mobilization held public hearings beginning on October 22, 1956. Early in December 1956, due to the changed conditions growing out of the Suez crisis, the Director of l)efense ~\1obilization suspended action on the case. Flowever, on April 23, 1957, upon furt tier review of the oil import situation and l)rojected increases ill oil iiIij)()its, I lie Director d 0DM "ad vised the Presideti t pursuant to sect ion 7 of the ~ Airieeinents Extension Act of 1955, that he hutd reason to l)elieve tli~tt crude oil is being imported in! ~) the United St~ tes in such qitatitities as to threaten to impair the natiotir 1 seci tritv.'' The growing threat to the don testic l)etrolellln industry as cited by congressional, industrial, and adininist rative studies, as well as the 0DM certification, led In the e~tablishii ileut t by the Presi(lent of the United States on ~Juiiie 26, 1957, of a Special Cabinet Coriuuuuittee to Investigate Cru(le Oil Imports. `l1hiis couuimittee was init.de up of: Sinclair Weeks, Secret arv of (ouniuterce, Cliairiuaii John Foster Dulles, Secretary of State Donald A. Qutarles, for Secretary of De- fense; George ~\[. Humphrey, Secretary of the Treasury; Fred A. Seaton, Secretar of the Interior, and .James Mitchell, ~eci'etarv of Labor. The report of t his Special Ca biu tet (l anmit tee To Investigate (`rude Oil Imports, iii l)~wt states In summutarv, unless a reasonable litnita tion of Pet molemun iml)orts is brought about, your C( wuitit tee believes that (a) Oil imports will flow iii to this coiin try in ever- mounting qulaultities, entirely dis~)rop( Ilto nate to time qi taut ities needed to si ip jdeui lent doummest ic S111)1 dv (b) There will be a resulta lit (lisc nuigeineimt f and decrease in, domestic product ion. (c) rut will he a iii arked decline in doniest ic cx- ploratiomi and development. (d) In the event of a serious emergency, this Nation will find itself years away from attaining the level of petroleum production miecessarv to itmeet our national security needs. * * * * * Your commit tee {thme Special (`~ìi imiet C 1 iflhlti cc to In- vestigate Crude Oil Inuports] rec gitizes t hat there ale itu- l)ortalut foreign policy aspects t the prohiemmi of limilitimig petroleum inIl)orts. The oil reserves a 11(1 J)rodulctiolm (a pacities of other free i tat ions, as well as our own, are iO~( ml alit to omu national security. A nliml)er of (1 iii tries ilmevil a h~h~ (lel)elmd in varying degree upon access to our dontestic iit~iiket for their petroleum exports amid it must be recognized that it is also in the interest of our national ~ecuirity that our allies and friends have healthy and expanding economies. It is 9 PAGENO="0028" 22 believed, however, that taking all factors into consideration, ~iir national security requires the maintenance of some rea- sonable balance between imports and domestic production at this time. In light of the foregoing considerations, our recommendations are framed with the objective of limiting imports in order to maintain such a balance and yet to allow other nations to Particil)ate in the growth of our domestic demand to a degree consistent with our national security. It is our conviction that as a Yation we must pursue a careful, consi(Iered course that will permit reasonable imports imito our cumuttry and still stimulate a dynamic and vigorous exploratory and development effort ni this country. This Special Cabimiet Committee stibmnitted its report to the Presi- dent : and on July 29. 1957 President Eisenhower, in a memorandum for the Secretary of the Interior and tile Director of the Office of Defense ~\ [obilizatnim, declared I have approved the recomlflefl(IatioflS of the ``Special Committee To Investigate Crude Oil Imports" as set forth in the attached report. I direct you to put these recommen- dations into effect as rapi(lly as possible. Presidential approval of the Special Cabinet Committee's report thus estai)lished what became known as the ``Voluntary Oil Import Pro~m'am." This program was put into effect on July 1, 1957. This voluntary pro~iram continued in operation until March 10, 1959. at which time the President established the mandatory oil im- port program. In contrast to the voluntary program which covered only (`rude oil imports, the mandatory oil import program covered imports of crude oil and its products and derivatives. Ti man(latorv pro ram was established after the Director of the Office of Civil and Defense Mobilization on February 27, 1959, "advised the President that imports of crude oil and its products and derivatives were threatening to impair the national security." On February 27, 1959, the Director of the Office of Civil and Defense \Iobilization, in his memorandum foi' the President, quoted the Secretary of Commerce as follows: It is my considered opinion that the present rate of imports of crude au and its derivatives and products is a major con- tributing factor to the decline in drilling operations both for exploration and development in the search for new oil re- serves * * * Continuation of this trend will inevitably result in a lowering of our am'ailable reserves. [Emphasis supplied.] In the same reportS the Director said: The consequences would continue to upset a reasonable balance between imports and domestic production, with dele- terious effect upon adequate exploration and the development of addüional reserves which can only be generated by a healthy domestic pro~l ictior industry. [Emphasis added.] Thus, the President issued Proclamation No. 3279, dated March 10, 1959. which placed in effect the mandatory oil import program to be administered by the Department 0f the Interior. 10 PAGENO="0029" 23 When he established the mandatory oil import program, the Pres- ident issued the following stat ement: I have today issued a proclamation adjusting and regu- lating imports of crude oil and its principal products into the United States. * * * * * * The new program is designed to insure a stable, healthy industry in the United States capable of exploring for and developing new hemisphere reserves to replace those being depleted. The basis of the new program, like that for the voluntary program, is the certified requirements of our national security which make it necessary that we preserve to the greatest extent possible a vigorous, healthy petroleum industry iii the United States. THE PROGRAM SINCE 1959 The mandatory oil import program was estal)hishcd by Presidential Proclamation No. 3279, issued March 10, 1959, under authority of sec- tion 2 of the Trade Agreements Act of July 1, 1954 as amended (72 Stat. 678). The proclamation, as amended, has been continued iIIi(ler authority of section 232 of the Trade Expansion Act. of 1962 (76 Stat. 877). The overriding significance of national security is (learlv brought out in House Report 1761 of the Committee on Was and Means iii report- ing on H.R. 12591, 85th (~`omi~'mess, which was subseciuentlv enacted as the Trade Agreements Extension Act. of 195$ (72 Stat. 678). The following comments are coritaimied iii that report: THE NATIONAL SECFRITY AMEN DMENT Section 2 of t.he 1954 Extension Act provide(l that no trade agreement reduction ni dii ty shall be made if it would threaten domestic product ion needed for proj e(ted national defense requirements. Seelion 7 of the Trade Agreements Extension Act of 1955 amell(ledl this section by adding a new subsection providing a. procedure for imlvestigat ion and action by the President if he agrees with the Direct or of the Office of Defense Mobilizatioii that any article is being imported in such quantities as to threaten to impair the mia tional se- curitv. T!ie 1955 aniendmnent pm~ovided that, if the Presidem it found such to be the case, he take such action as lie deeni.~ necessary to adjust imports to a level that would hot threaten to impair the national security. These provisions were the subject of voluminous testi- monv to the conunittee and of extende(.l conimittee con- sideration. Most of the witnesses who addressed themselves to section 7 of the 1955 act were of the ol)iIliomi that. the provision should be amended in such a way as to speed up investigations and determinations under the section, and to clarify and make more specific the standardis applicable to its administration. The committee has carefully considered the points of view expressed and has concluded that an question as to the adequacy of section 7 is resolved by the amendments to that section which the committee has made. 11 PAGENO="0030" 24 Your committee [the Commit tee on Ways and Means] was ~1Ii(led by the view that the national security amendment is not an alternative to the meaiis afforded by the escape (louse for providing industries which believe themselves iiijiired. a second court in which to seek relief. Its purpose is a different one--- to provide those best able to judge national security needs. namely. the President and the Director of the Office of Defense Mobilization, acting with the advice Of such ~abinet officers as the ~e(retaries of Defense, Com- merce, and State. a way of taking whatever action is needed to avoid a threat t the national security through imports. ~eriolis inj urv to a particular industry, which is the prillcij)al consideration in the escaj)e-clause procedure, may also be a consideration bearing on the national security position in particular cases. l)llt the avoidaitce or remedy of injury to industries is not the object per se. There are other differences between the two procedures, such as that the one here under consideration applies to oil iniports whether or not the subject of trade agreement concessions. Again, in the choice of reme- (lies the President is not limited iii national security cases to actions which he might take under the authority delegated to him in the tra(le-agreemelits legislation. fiowever, it should be po~ntd out that th action.~ he inat~ take under the authorily of the national security amendment are l~m?te(l to actions to adjust imports. In emergencies and for such time as necessary, the Pix,~olent may also take an?, action acailable to him imnder any of /~ ~ other powers. ~o'r committee consi~lered it paramount to emphas~ze howH'er. that any action, large or smail,for a short or long time. can be taken on 1?! ~f warranted by national secvrity con- sielerations. The interest to be safeguarded is the security of the ~Vation. not the output or profitability of any plant or industry except as these may be essential to national security. Subsequently, in House Report 1818, accom~)aflyiflg H.R. 11970, S7th Congress, enacted October 11, 1962, as the Trade Expansion Act of 1962 (76 Stat. 877), the Committee on Ways and Means commented as follows: SECTION 232. SAFEGUARDING NATIONAL SECURITY Except for conforming changes, section 232 is identical to, and continues in effect, the provisions of section 2 of the Trade Agreeniemits Act approved July 1, 1954, as amended by section ~ of the Trade Agreements Extension Act of 1958. Section 232(a) provides that no action is to be taken pursti- ant to the bill or section 350 of the T tiff Act of 1930 to de- ureose or eliminate the duty or to decrease any other import restriction on uny art i('le if the President determines that the reduction (i' eliiuiiuat ion \vould I hireaten to impair the natiuli{il security. Section 232(b~ 1)I'o~i(les that upon request, application, or notice from specified sources the Director of the Office of Emergency Planning (OEP) itiust undertake an investi- gation to deterinimie whether t lie article is being imported 12 PAGENO="0031" 25 into the United States in such quantities or under such circumstances as to threaten to impair the national security. If he so finds, he is required to so advise the President, who is required to take such action as he deems necessary to ad- just imports unless he determines that the article is not being imported in such quantities or under 511(11 circumstances as to threaten to impair the national security. Section 232(c) enumerates various factors to which the President and the Director of the OEP are to give considera- tion in carrying out their functions. Section 232(d) requires a report to be made and published on each final disposition of any request for investigation under section 232(b). It also requires the Director of the OEP to publish procedural regulations governing the exercise of the authority vested in him by section 232(b). The House Committee on Interior and Insular Affairs wishes to point out the deep and continuing concern of other committees of Congress in the mandatory oil import program. In that respect, and without further extensive elaboration, attention is directed to the following: 1. Hearing held by the Select Committee on Small Business, House of Representatives, pursuant to House Resolution 46, 87th Congress, and House Report 2567. 2. Hearings held by the Select Committee on Small Business, U.S. Senate, 88th Congress, second session, entitled "Oil Import Alloca- tions" and to the 14th and 15th annual reports of that committee. 3. Hearings before the Committee on Finance, U.S. Senate, 90th Congress, entitled "Import Quotas Legislation." With respect to the last-named hearings, those before the Committee on Finance, U.S. Senate, Secretary of the Interior Stewart L. Udall, on October 18, 1967, testified with respect to oil imports as follows: I would like to state here my firm view that, in the present world petroleum situation, oil imports should be controlled in the interests of our national security. I think there has always been a strong case for this and there is today. This is the paramount, the only reason why such imports are controlled. In no sense does this position alter my views with respect to opposing trade barriers generally. But in the case of oil, our security would be jeopardized unless we have a strong, healthy, domestic oil industry, capable of `fleeting the demands of any conceivable emergency. One only has to look at the Middle East and what happened there a few months ago; Israel had to win or lose a war in a matter of days because of the fact that the mobility of their maclimes rested on very limited supplies of petroleum and I just use this to underscore what I mean. This we could not do if low-cost oil from petroleum- exporting countries were to flood this country, with conse- quent damage to our own energy-p reducing industries. The relationship between our national security and ade- quate supplies of oil is clear. On this score, it suffices to point out that oil is practically the sole source of energy for tran~portation-both civilian and military, and we are a highly mobile Nation. 13 PAGENO="0032" 26 Adequate domestic supplies depend upon exploration and discoveries and these activities will not be carried on in the absence of an adequate market for domestic production. It was with these circuinstances in mind that in 1957 the President's Special Committee T o Investigate Crude Oil Im- ports reported to President Eisenhower that taking all factors into consideration our national security requires the main- tenance of some reasonable balance between imports and domestic production at this time, and as a result of that, the President took action that ended in 1959 in the mandatory program under Presidential proclamation. The report to Pres- ident Eisenhower is as follows: (The pertinent portions of the report prepared by the President's Special Committee To Investigate Crude Oil Imports and referred to by Secretary Udall have beeii previously cited and appear on pages 9-10 of this report. Secretary Udall again emphasized the national security role of import quotas in testimony before the House Com- mittee on Ways and Means, June 4, 196S.) IMPORT CONTROLS AND THE NATIONAL SEC~JRITY A basic question for consideration as a result of the testimony and statements given to this subcommittee is whether the same need exists today for control of imports of crude and unfinished oils as prevailed at the time that mandatory controls were adopted in 1959. It is note- worthy that none of the testimony offered during 3 days of hearings advocated discontinuance of import controls, although some parties would have exceptions made for special categories. ESSENTIAL ROLE OF PETROLEUM The role of petroleum in the life and industry of the Nation continues to be an essential one. In 1967, oil provided about 43 percent of all U.S. primary energy needs. Twenty years ago oil furnished 37 percent of energy requirements. In another 20 years, 1987, petroleum will supply an estimate(l 37 percent of all primary energy. In terms of volume of product consumed, 1967 demamid was 12,277,000 barrels per day, which is 125 percent above that of 1947; and 1987 demand is expected to be 2 1.407,000 barrels per day, an increase of 74 percent above the present. Overall U.S. consumption of petroleum exceeded 4 billion barrels iii 1967 which is apj)roximately double the 1950 annual consumption. Natural gas consumption for 1967 exceeded 18 trillion cubic feet, about double the 1954 use. By 1980 it is projected that petroleum consumption will increase by approximately 2~ billion barrels to a total of 6'~ billion barrels per year. At the same time consumption of natural gas is projected to increase by about 9 trillion cubic. feet to give an annual consumption of 26 trillion cubic feet annually by 19S0. `These projections mean that by 1980 this country's petroleum consumption will be nearly three times that of 1950, twice that of 1956, and 50 J)ercelit greater than in 1967. On the same basis by 1980 natural gas use will triple over that of 1953, double over that of 1958, and will be 50 percent greater than 1967. If these projections are 14 PAGENO="0033" 27 correct, and there is every reason to believe they are conservative, the United States will use almost as nmch oil and gas in the next 13 years as it consumed in all previous history. Best present estimates are that by 1980 this country must find between 75 and ~0 billion barrels of oil. It can be readily seen that the vital functions of our country rely heavily upon oil. As a primary source of energy, oil provides about 99 percent of our transportation requirements and 43 percent of our heating needs. Adec1uate amounts of oil cannot be stockpiled, as can some other minerals, and any interruptions of our source of supply, even for a few days or weeks would paralyze the commercial and in- dustrial life of this Nation. EMERGENCY ROLE OF PETROLEUM DEMONSTRATED IN 1967 The importance of having excess producing capacity available was demonstrated recently by the ability of the domestic oil industry to respond to requirements at home and abroad following the short Middle East war in June 1967. In the first full month (July 1967) following the disruption in crude supI)ly for the free world, the U.S. oil industry increased its production of crude oil by 8 percent, or 750,000 barrels daily, over May, the last normal month. At the same time, total imports in July were off compared to May by 590,000 barrels daily, or 23 percent. Simultaneously, the industry was able to increase its exports of crude from virtually nothing in May to 274,000 barrels per day in July. These substantial increases in domestic production and exports \vere sustained as long as required. This was an example of the manner in which su(lden demands can be forced upon the domestic industry. DOMINANT POSITION OF FOREIGN OIL The overwhelming availability of low-cost foreign oil will continue to threaten the domestic industry for time foreseeable future. At the present time, the United States and Canada together have reserves equal to about 13 years of production at current rates of demand, while the rest of the free world has 50 years of reserves on the same basis. Today, 87 percent of estimated free uvorid recoverable reserves are located outside the United States and Canada. Foreign oil can be produced at per barrel costs that are a fraction of tIme cost of finding and producing oil in this country. Average p~ well production in the Middle East is over 5,000 barrels per day compared to average per well production in the United States of only 14 barrels per day. Considering only these relationships, there is little doubt that our own industry must continue to be protected to some degree if it is to remain viable. EXPLORATORY EFFORTS AND RESULTS IN TERMS OF RESERVES We can find other indications of the need to continue controls by examimuing statistics relative to exploratory effort and our Nation's oil reserves. For exploratory effort, there are several indicators, all of which are trending downward seriously, as time following table indicates: 15 PAGENO="0034" 28 Measures of exploratory activity [1967 decline versus 19~T-59 base period, percent] Geophysical activity 1 -38.4 Active rotary rigs -47. 1 Exploratory wells -35. 1 Total wells -35.8 `1966; data for 1967 unavailable. Of even more serious l)OI~teflt is the outlook for known petroleum reserves, the inagiiitude of \vhicll is directly related to exploratory activity. New crude oil reserves found and developed have not kept pace with increasing demand and 1)rOduCtiOfl, as reflected in the crude oil reserve ratio. This ratio, which expresses the relationship of developed reserves to current demand for crude oil, has declined from approximately 13 years in 1959 to a little under 10 years by 1967. This is a reduction of 23 percent since adoption of mandatory import coiitrols, without which even greater decreases in the ratio would be expected. If we project our present finding and exploration rate into 1980, the crude oil reserve ratio could conceivably be as low as 6 or 7 to 1. Simply to keep pace with the increasing demand over the next 15 years, the domestic industry must find and develop 50 percem~t more oil than it did during the past 15 years. The volume of crude oil reserves found and developed during the past 7 years has averaged only 2.6 billion barrels per year in contrast to the average of 4.5 billion barrels estimated by the Department of the Interior as needed to meet future dein~ind and maintain a satisfactory ratio of reserves to production. rile concern of this committee is that the United States will be unable to adequately meet this challenge. Consumption of oil is steadily increasing; discovery rates are declining and in recent years new discoveries have not kept abreast of increased production. During the last 10 years, 4 billion barrels more oil was used than in the previous period, but during this same time 4 billion barrels less oil was dis- covered than in the previous 10-year period. Thus, crude oil discovered during the last 10 years exceeded production by less than 1.1 billion barrels. By contrast during the period 1948-57 new discoveries ex- ceeded production by S.S billion barrels. We are in fact presently living on reserves built tip years ago. During the last 5 years the production-discovery ratio is even more unfavorable. Although slightly more oil was found in the last 5 years than in the previous 5-year period, the production increased by about 1.5 billion barrels. Con- sequently, in the last 5 years production actually exceeded discoveries by 12.5 million barrels. During the previous 5-year period discoveries exceeded production by 1 .1 billion barrels. This trend is alarming and must eventually be reversed. Even more alarming is the fact that proven crude reserves in the United States at the end of 1967 were estimated at 31.4 billion barrels. This is down from a high of 31.7 billion barrels iii 1961 and only slightly higher than 30 billion barrels estimated in 1955 when production was at a much lower level. The oil import program raises serious implications for yet another important sector of the domestic fuels economy-coal--and for the Nation's future security as it relates to residual fuel oil. 16 PAGENO="0035" 29 Residual fuel oil to be used as fuel was included in the original proclamation issued by the President establishing the mandatory oil import control program in 1959. Since then, the proclamation as it relates to residual fuel oil has been repeatedly amended until now only a facade of control has been retained; in reality, imports are virtually unlimited under the "open end" system currently prevailing. In 1959, imported residual fuel oil accounted for only 51 percent of the total heavy fuel oil consumed in district I, that portion of the United States located on the Atlantic seaboard. At the present time, imported residual oil accounts for about 82 percent of total consumption in the area. This growing dependence upon imported fuel in one of the most vital areas of the Nation is cause for concern. It is cause for concern not only because it makes fuel consumers hostage to political and economic developments in foreign nations over which we can exercise only minimum control, but it emphasizes what appears to be a growing trend to turn over the entire fuel market in the area to foreign sources of supply. The almost total reliance by district I fuel consumers on imported residual oil is also cause for concern because adequate provision has not been made, by major utilities and large industrial users, for quickly converting plants to use an alternate fuel, such as coal, in time of emergency. Such convertibility is now a requirement in some countries and if adopted here it could reduce the reliance of a vital area on the uncertainty of an imported fuel. It is recognized, however, that at this time and under existing conditions this area must continue to rely heavily upon imported residual oil. Total imports of residual fuel oil have increased from 172 million barrels in 1959, when the control program was first established on a mandatory basis, to 345 million barrels in 1967. This latter figure represents foreign fuel in an amount equivalent to more than S2 mil- lion tons of domestic coal, an amount which is 15 percent of current annual production. When total oil imports are considered-both crude and residual oil-the implications for the Nation assume alarming proportions. EXCEPTIONS TO THE PROGRAM AND SPECIAL TREATMENT SITuATIONS Any restrictive Government program such as import controls which dispenses economic benefit to the participants must be accomplished in the most equitable manner possible: otherwise the integrity of the program is jeopardized, certain participants are severely penalized, and the general effectiveness of the prourarn is reduced. From the testimony presente(l to this committee. it appears that the administration of the import program has not met these goals. THE ORIGINAL PROGRAM The original control plan contained features that might have been eliminated quickly hut instead were continued. One feature that has drawn considerable criticism by much of the oil industry over the years has been the historic guarantee feature, which favors certain 17 PAGENO="0036" 30 established importers. Such historic guarantees were probably justi- fied at the outset because they permitted companies to recover their overseas investments which were made with the expectation of being able to import crude oil products into the United States without limit. The provision was also meant to avoid severe disruption to established supply patterns. The Presidential proclamation governing the program provides for a gradual phasing out of the historic guar- antee feature, yet today major historical importers receive allocations as great as 12.3 percent of refinery runs, while the average award for the sliding scale group of refiners is only 6.4 percent. It would appear that after 9 years, the continued need for this feature should be reexamined and the phasing-out process accelerated. Another unusual provision of the program is the mechanism termed a sliding scale. which governs all refiners except those with historic protection. The sliding scale makes proportionately smaller import allocations as the volume of a refiner's input increases. Thus, the smaller refiners receive a proportionately larger import allocation than do the larger refiners. When the program was initiated, the smallest refiners in districts I-TV could import 12 percent of their refinery throughput, while refiners with inputs of over 300,000 barrels per day could import only 4 percent of that portion of their total runs. In the intervening years the sliding scale has been changed, and the difference between import allocations of different classes of refiners has increased substantially. This year refiners in districts I-TV with runs less than 10,000 barrels per day are permittad to import about 19 per- cent of their input, while refiners at the other end of the scale can import only 3.5 to 4 percent of their input. Another unusual feature arose early in the history of the program when a change in the regulations to exempt overland imports from Canada resulted in several northern tier refiners in Michigan, Wis- cousin, and Minnesota being able to receive imported Canadian oil without restriction while still enjoying their historic allocations. This particular feature resulted in a substantial economic advantage to these few refiners. There have been many complaints against retention of this advantage, and although the special historic allocations are being J)hased out more rapidly than the regular historic quotas this feature is still retained although lately a change in the regulations provides a feature whereby the extent of the phaseout for these remaining northern tier refiners will be lessened. EXCEPTIONS GRANTED SINCE 1965 From 1959 until late in 1965, the administration of the program was concerned primarily with various means of dividing the total amount of imports among oil companies which were participants in the control plan. Late in 1965, however, and in each subsequent year, there has been injected into the program a series of provisions which appear to he unrelated to the national security objective of import controls and which, incidentally, have resulted in special treatment situations which are of concern to this committee. The more significant ones are listed below: 18 PAGENO="0037" 31 1. Awards to Puerto Rico and Virgin Island refiners On December 10, 1965, by Presidential Proclamation 3693, provi- sion was made for a new form of allocation. The Proclamation stipu- lated that the Secretary of the Interior may make "allocations of imports of crude oil and unfinished oils into Puerto Rico to persons as feedstocks for facilities which will be established or for the operation of facilities which are established and which in the judgment of the Secretary will promote substantial expansion of elfll)loyment in Puerto Rico through industrial development * * ~*" By this provision, a new criterion was injected as a basis for action on oil imports for purposes that are not clearly related to national security. Under this new provision, two facilities in Puerto Rico have been approved. These involve the importation of 110,000 barrels daily of feedstocks to the Island, with further permission to ship 54,300 barrels daily of gasoline, jet fuel, and other products to the United States without restriction. On November 9, 1967, by Presidential Proclamation 3820, the Secretary of the Interior was granted authority to allow up to 15,000 barrels daily of finished products to be shipped to the United States from a new refinery constructed in the Virgin Islands. The award was for a 10-year period. A further grant occurred on December 15, 1967, when the Secre- tary of the Interior J)ermitted a Puerto Rican refiner to move an additional 10,000 barrels daily of finished products to the east coast of the United States. On the same date time Secretary also approved an application that \s~1l permit for 10 years the importation into Puerto Rico of up to 45.000 barrels daily of crude oil for use as petrochemical feedstock. The net result of these allocations to island operations is that three historical refiners can bring approximately I 77.00() barrels ~lmulv of crude and uuifinished oils into Puerto Rico and slip) $~.000 barrels per day of finished products to the U.S. mainland. time latter volume being considered outside the 12.2-percent limit on U.S. imports. In addition, new awards for petrochemical facilities iii Puerto Rico provide for 185,000 barrels daily of crude that may be brought into Puerto Rico as feedstock. From this input, 64,000 barrels daily of finished products may be shipped to mainland markets. In addition 15.000 barrels per da may be brought in from a new refinery in the Vir~m Islafl(ls. When all authorized facilities are oJ)erating. the total volume of crude and unfinished oils moving to Puerto Rico miiv reach 362,000 or more barrels per clay. For comparison, this eqiulls 60 percent of all imports of crude and unfinished oils allotted to both sliding scale and historical refiners in districts I-TV in the first half of 1968. The 79,000 barrels daily of finished products that eventually will move to the mainland will be considered as part of the total imports allowed into the United States, which means that it~ will be deducted from the total of all iml)orts which otherwise would he divided among other refiners. This volume is in addition to aj)proxirnately 38,000 barrels a day of finished products that historically have been shipped from Puerto Rico to the United States as an uncon- trolled item of imports, outside the 12.2-percent limit. All of the special awards described above were for the stated purpose of either improving employment opportunities, in the case of Puerto 19 PAGENO="0038" 32 Rico, or upgrading the quality of employment in the case of the Virgin Islands, where unemployment is not a factor. Despite these meritorious goals. the fact remains that the connection, if any, with the national security objectives of the oil import program has not been clearly established. In this respect, these sJ)ecial awards represent a use of the import control pian not contemplated by the authorizing legislation and contrary to the legislative history relating to the program. 2. Allocations for petrochemical companies in trod ?Jced Prior to 1966, allocations to import crude oil and unfinished oils were made only to refiners who processed the oil or exchanged their allocations for domestic crude oil. By Presidential Proclamation 3693 dated December 10. 1965, the program was amended to grant alloca- tions to petrochemical plants, including those operated by chemical Co rnp a flies. This new provision to include petrochemical companies in the import program was made on the basis that having access to foreign feed- stocks would enable them to be more competitive in foreign markets, thereby increasing their exports from the United States which, in turn, would he the meaiis of improving the Nation's balance of trade. Petrochemical companies were awarded 30,000 barrels per day of the total controlled imports in districts I-TV, plus a small amount in district V. In each successive allocation period since then the set- aside for petrochemical use has heemi increased, to its present figure of 79.000 daily barrels for the second half of 1968. Sliding scale refiners have been reduced with each successive increase, since the allotted volume for petrocheimcal companies is provided for within the 12.2-percent limit ation. In the case of allocations for petrochemical coinpalues. we again have time situation of a Gover~unent effort to improve the world\vide competitive ability of an industry and to improve the Nation's balance of I)~ym1~em~ts, b( ~ h by mitea us of the oil nnl)ort prograni. These two ob~ect ives certainly ,re extremely worthwhile, vet they are accom- plished through the ii~e of a. Goveriunent program that was designed for an emit irelv different I)uI~I)use-nat1onal security. .3. Foieiqn trade zoins The use of foreign trade zones by oil refiners and petrochemical maiiufaeturers has been a controversial subject since the control pro- granT began. Two major chemical companies have now been granted foreign trade zones by the }oreign Trade Zones Board, and the Sec- retarv of the Interior huts been delegated authority by the President to control movement of foreign oil into such trade zones. From testimony presented, it appears to the committee that foreign trade zones, as they relate to the mamidatorv oil import program and time well-being of the domestic petroleum industry, would not be harmful so long as they are ose(l to encourage U.S. fxports and are not used as a means of circum- rent n g the ba sic import pro gra in 4. Fuel oil exemptions Residual fuel oil, a low-priced byproduct of crude refining, has been handled separately since controls were instituted. Domestic supply has declined as U.S. refiners progressively up-graded crude oil to yield 20 PAGENO="0039" 33 more of the lighter and more valuable products. Eventually, residual marketers were given virtually unlimited access to foreign residual so that by 1966 imports of residual fuel were 84.4 percent of the total supply. This was au inevitable situation because of the refinery economics involved. In recent months, however, there has been increased pressure from various groups for relaxation of controls of No. 2 heating oils. This situation is unlike that of residual fuel, for economics will permit refiners to turn out all volumes required to meet demand for No. 2 fuel oil. Testimony received by this committee has been to the effect that there has never been an actual shortage of domestic heating oils although there has been what was termed as a tight market situation. Unlike residual fuel oil, distillate heating oil is neither a byproduct nor is it unprofitable. Because of this, domestic refiners have always tried to gear supply to domestic demand. There is no reason to assume they are either unable or will not continue to do so. Presidential Proclamation 3794 dated July 17, 1967 changed the definition of residual fuel oil which had been in effect since 1959. The effect of the change was to define No. 4 fuel oil, which previously was a product controlled within the 12.2 percent quota, as residual and, therefore, outside the quota. Thus, again the 12.2 percent quota was modified by an amount estimated at 25,000 barrels daily. In another action early in 1968, the Oil Import Appeals Board granted 7,000 barrels daily of finished product quota to 12 fuel oil dealers. An additional 7,000 barrels daily was allocated July 8, 1968, to the Appeals Board. No finding of an actual shortage was made at that time. While the volume involved is not great, the significant fact is that many other fuel oil dealers hereafter could well expect similar treatment. Tli would further reduce the volume of miports available for distribution to oil refiners.1 ADHERENCE TO 12.2-PEIu'EN'r L1~rITATTON `The Secretary of the liii cr11 IF lots rei pop ted lv j)( outed (lilt that cOl1~ blued ini~ orts have beep IICI(l t (( tile I )reselll. ucla ti( ~nsIiio of 12.2 l)em'(exlt of (lomesi ic prodll('t ion since this lot 10 WUS liltro(Ittced iii 1962. Alt nough this is true, it overlooks t lie fa('t t hot tottil iniports. both coti'iruilecl and uIllcolllrohled, have Sleil(hilV (`l'ej)l u1nvard so that in 1 Since May 1968 there have been seven publications in the Federal Resister, changing or modifying existing resulations or proposing new regulations relating to the u:uidatory oil import program. These are as follows: May 23, 1968-Allocation of Imports: Low Sulfur Residual Fuel Oil, Districts t-IV (proposed rule,naking). June 4, P68-Allocation to Petrochemical Plants (amendment 7). June 14, lUtis-Allocation of Imports: Low Sulfur Residual Fuel Oil, Dbtricts [-IV (extended to July 15, 191)-I. June 12, 1968-Tinports into Puerto Rico of Crude Oil and Unflniohnt Oils ):naxiinuin level of imports). July 2. 1968-Allocation of Imports: Crude Oil and UnflnOhed Oils (aniendnient 9. July 11, 1968-Allocation of imports: Crude Oil and Unfinished Oils INtended to July P7, 1968). July 12. 1968-Allocation of tinporto: Low Sulfur Reddnal Fuel Oil, Districts i-tv 5extended to Aug. 5, 1168). In addition to the above publications in the Federal Register the following announcements were made by the Department pertaining to the program: July 29, 1968-Oil Import Totals for May 1968. July ~4, 1968-Petrochemical Oil Import Allocations for Last Half (1968). July 9, 1968-Oil Import Allocations to Refiners for last 6 months 1968. July 8. 1968-Oil Import Totals for April 1968. June 10, 1968-Oil Import Totals for March 1968. May 20, 1968-Refinery and Plant Inputs. May 6, 1968-Oil Import Totals for February 1968. 21 PAGENO="0040" 34 1966 they were slightly more than 26 percent of domestic production. The fia~ires for 1966 ate as follows: Barrels Average daily demand 11,850,000 Average daily crude production 9,579,000 Average daily imports 2,305, 000 For comparison. imports were 21.2 percent of domestic I)rocluction in 1960. Residual fuel oil represents much of the total of uncontrolled ilnporte. hut other factors contribute such as excess shipments from Canada. portions of product shipments from Puerto Rico, portions of bonded jet fuel, and some of the carryover of unused 1967 alloca- tiotis. Hums, not\vitllstanding the controlled import plan and the 12.2 ceiling, the situation is simjilv that total oil imports into the TJnited states 11O\V exceed 26 percent of domestic 1)rodllction. The exeeptiorms to the program granted since 1965 and which fall both withiti and out side the 12.2 limitation are summarized below: 1. Quotas ~vithiiri the 12.2-percent ceiling granted to (a) petro- chemical production: h~ Puerto Rican and Virgin Island projects; (c distributors of No. 2 fuel oil; and (d) a carryover of 1967 allo- cations not used. These total 141000 barrels daily in 1968. 2. Canadian average of 60,000 barrels daily over and above the 12.2 ceiling. :3. Exemptions of 176,000 barrels daily in excess of the 12.2 ceiling, including bonded jet fuel and part of the 1967 carryover. These exceptions to tile program have increased from 100,000 barrels daily :3 years ago to 377,000 barrels daily at the present. r~ lie program is 110W subject to pressures for various allotments that would fall both within and outside the 12.2-percent limit. Each special treatment sets precedent that invites further special treatment. The Presidential proclamation already has been amended to authorize the ~ecretarv of the Interior to further increase imports outside the 12.2- lercell t ceiling. One estimate contained in testimony at the hearing placed the potential for increased imj)orts because of new features of the program at 300,000 barrels daily. `fhese may be summarized as 1 ollows 1. Bonus imports for exports: Barrels daIly (a~ Petrochertiicalexporte 50, 000 (~) Oil exports 50, 000 2. Asphalt imports 100,000 3. Bonus imports for producing low sulfur residual 1100, 000 Total 300, 000 1 Revis"l estimates are placed at 300,000 barrels daily. The squeeze to which the program is being subjected can be il- lustrated by the fact that in the first half of 1960 total imports, exclu- sive of residual fuel, into districts I-TV were 847,000 barrels daily. In the first half of 1968, comparable imports are estimated at 1.1 million barrels daily, an increase of nearly 30 percent. During the same 1)eriod. however. crude and unfinished oil imports allocated to refiners in districts I-TV declined from 719,000 barrels daily to 592,000 barrels daily-a drop of iS percent. Principal reasons for the decreased allocations to refiners were the substantial increase in shipments from Canada, the addition of chemi- cal companies to the import control program, and the large awards 22 PAGENO="0041" 35 made to individual companies located in Puerto Rico and the Virgin Islands. Unless drastic changes occur in the direction in which the import program is headed, it was demonstrated that by 1972 there will not be adequate imports to allot to oil refiners and still take care of the many special situations. If this occurs, the reason for the estab- lishment of the program, that is the assurance of a strong domestic petroleum industry in the interest of national security, will have been completely eliminated. COMMITTEE FINDINGS The following points summarize the findings of the Subcommittee on Mines and Mining with regard to the present status of the manda- tory oil import program, its effect upon the domestic petroleum industry, and its effectiveness in the enhancemeiit of our Nation's security: 1. The need for control of foreign crude and unfinished oils in order to assure a healthy U.S. petroleum industry is as great today, from the standpoint of national security, as when the plan was conceived originally. The steady decline in the industry's exploratory effort over recent years and demonstrable inadequacy of known petroleum reserves accumulated have rather alarming implications from the standpoint, of the Nation's security in times of emergency. 2. While the voluntary and mandatory oil import. program has been helpful, its stated objective of preserving a "vigorous and healthy domestic petroleum industry for purposes of national security" has not been achieved. U.S. exploration and development has been declining for the past 10 or 11 years and even more alarming are the indications that. unless steps are soon taken t.o reverse this trend it will continue at an accelerating rate. Instead of finding more than 4.5 billion barrels per year, which the Department of the Interior indicates are needed to meet future demands and maintain a stable reserve-production ratio, only 2.6 billion barrels per year have been found and developed during the past 7 years. 3. There is substantial evidence that the import program is weakened by the injection into the program of special treatment provisions, particularly since 1965. The profusion of these special treatment provisions threatens to undermine the ~)I~og~~am by destroy- ing confidence in its administration and by creating special situations which permit imports both within and without the controlled levels. 4. The program is plagued by instability and frequent changes which create uncertainty and lack of a sense of direction. This makes it extremely difficult for segments of the industry to arrange their long-term expansion programs or to develop long-range plans. 5. The import. program legally has only one basis for its existence; i.e., to protect. the Nation's security by promoting a strong domestic oil industry capable of dealing with unforeseen emergencies. We find that the program is being used for many alien purposes. Many of these are undeniably worthwhile, yet all of them should be accom- plished by means other t.han the oil import program. These include such activities as (a) economic aid to insular possessions and terri- tories; (b) improvement in the Nation's exports; (c) enhancement of the competitive capabilities of the petrochemical industry; and (d) abatement of air pollution. 23 PAGENO="0042" 36 6. The program is beset by procedural irregularities in its admin- istration. Some actions have been taken by the Secretary and the Oil Import Appeals Board without benefit of adequate notice or public hearings. 7. Declining exploration activity and declining crude reserves are endangering the health and well-being of the domestic petroleum industry and seriously endanger the national security of this Nation. S. The import program is becoming increasingly complex and is burdened with confusing definitions and regulations so that partici- pants are never sure as to how certain regulations should be inter- preted or how they might be affected by future actions. These am- biguous definitions have resulted in conflicting decisions for like situations. 9. The relationship that controlled imports bear to domestic production-12.2 percent-has been adhered to as far as controlled imports are concerned but weakened by the exceptions permitted outside the 12.2-percent limit. Thus, the effectiveness of the entire program is weakened. The exceptions tend to be increasing at a rapid rate. In addition. total imports of oil into the United States exceeded 26 percent of domestic production for the year 1966. In many respects this is a more significant figure than the 12.2-percent limitation. COMMITTEE REco~1ExDATIoNs 1. The mandatory oil import program must not be weakened by use for purposes unrelated to the preservation of national security, regardless of the merits of the alien objectives. This includes piojects such as improvement of the economic conditions in any particular geograplnc area. improvement of competitive conditions for any industry, alleviation of air pollution, economic hardships, or any other iinrelat ed piuj )oses. 2. All inequities in the program should be removed so that the Government is administering a plan that is equitable and fair for all who are governed by it. Features that should be carefully reviewed include the extent of the sliding scale method of allocation, the historic guarantee feature, special provisions for northern tier refiners, allocaiioiis to refiners located in insular possessions, allocations to customers of the petroleuni industry and other allocations for purposes not basic to national security. 3. Ihe ~)rogram should be simplified to the greatest extent possible to elin~inate the plesent chaotic condition which causes serious inefficiencies in the planning and operations of the entire petroletim industry. 4. Rules of procedure should he stre'wtheped audI observed so as ~o eliminate clecisiomis made without benefit of adequate notice and public hearings. Amendments amid changes to the regulations should be made in a f nml. uniform ma muier : the granting of relief by the Oil Import Appeais Board 5110111(1 be done iii accordance with established p'~- cedures of the Administrative Procedures Act. .5. Canadian sources of crude oil should continue to be considered within the scope of our natiomial security planmung and therefore should receive special treatmeiit. However, participation of Canadian crude oil imi our growing U.S. market must not be disproportionately greater 24 PAGENO="0043" 37 than the growth enjoyed by domestic producers. In the past, informal methods of managing such control have been arranged by the Depart- ment of the Interior and the Canadian Government. Such a method of control may well be continued but must be improved to prevent Canadian imports from consistently exceeding estimates. 6. It is the view of the committee that any program authorized under the national security provisions of the Trade Agreements Ex- tension Act should be administered strictly in accordance with the purposes of that act and not extended to unrelated matters, notwith- standing the merit of such other programs.' `Representative Kupferman, except for the air pollution aspect, took no part in the com- mittee discussion. 25 PAGENO="0044" 38 DISSENTING VIEWS ON THE MANDATORY OIL IMPORT PROGRAM INTRODUCTION The undersigned members of the House Committee on Interior and Insular Affairs register their dissent from the report on the mandatory oil import program issued by the Committee on Interior and Insular Affairs and submit the following dissenting views on the subject. Our basic reason for rejecting the committee report is that while the report reflects a(curatelv the views, interests, and aspirations of the southwestern oil producing and refining States, it does not take due cognizance of the wider impact of the oil import control program on all Americans, not just those who produce or refine oil. While the committee report makes frequent reference to the national security aspect of the oil import control program, it seems to equate the interests of our national security with the economic welfare of the southwestern oil producing States. We believe that national security has a broader horizon-geographically, economically, and politically- than is indicated in the committee rej)ort and that the oil import control program must l)e weighed in the spectrum of its total impact. The committee report also fails to differentiate clearly in its analysis of the regulations governing the oil import control prograni between regulations which redistribute the existing volume of oil imports, and regulations which caiise a~ change in the existing volume of imports. In our opinion the difference is essential, since the majority of the re~ulations criticized in the report fall in the first category and there.- fore do not affect the ratio of foreign crude oil to domestic crude oil consumed in this country. Similarly, the report tries to fortify its contention that excessive regulations, exemptions, and exceptions have seriously weakened the program by treating adopted regulations and proposed regulations in the same vein, Yet, the record shows that the OIA has proposed many more regulations than it has enacted. The report also ignores many of the factors other than imports which affect U.S. oil supply and demand, such as the interrelation between oil and other forms of energy, both new and old. Furthermore, by implying that virtually all negative trends observed in the U.S. oil industry are traceable to oil imports and to the regulations govern- ing them the report creates the erroneous impression that whatever ails the domestic oil industry could be cured by a stricter application of import controls. Fiiia.llv, although the hearings on which the committee's report is based covered the entire United States, the majority specifically restricts its comments to the regions east of the Rocky Mountains, thereby pointedly ignoring the mass of testimony received which dealt with the oil import program on the west coast and in Hawaii. (26) PAGENO="0045" 39 Following is a more detailed analysis of some of the points stated above, with specific reference, where applicable, to pertinent sections in the committee report. THE NATIONAL SECURITY ISSUE The signatories of these minority views are in agreement with the majority of the committee on the continuing need for an effective oil import control program for the United States. The uncontrolled importation of crude oil and those of its derivatives which are pro- duced in sufficient quantities in the United States would seriously weaken the domestic crude and refining industry and make this country unduly dependent on foreign supplies for one of its most essential commodities. This principle, which has been endorsed and enforced by three administrations, is basically sound, in our opinion. However, the Presidential proclamation on which the oil import control program is based, also recognizes the possible impact of the import restrictions on domestic crude oil and oil product prices. The proclamation states: In the event prices of crude oil or its products or deriva- tives shall be increased after the effective date of this proc- lamation, such surveillance shall include a determination as to whether such increase or increases are necessary to accomplish the national security objectives of the act of July 1, 1954, as amended, and of this proclamation. This is a clear reflection of the coiicern of three U.S. Presidents with the effect of oil imports restrictions on domestic crude oil and products prices. Yet, in the committee report this concern is dis- missed with the following single, vague reference: The subcommittee is not unmindful of the role of the con- sumer and his desire to obtain products at the lowest possible price. This desire, while temporarily beneficial is not, how- ever, always consistent with national security benefits. While we agree with the committee's conclusion "that the best interests of domestic consumers, as well as the national security can be best served by a reasonable balance between domestic and foreign supplies," we believe the extremely high cost of the oil import control program to U.S. consumer-$3 to $4 billion annually, equal to $15 to $20 for every person living in this country-is a matter of concern to the undersigned aiid should be a matter of concern in the committee report. We believe inflationary price increases, unrelated to cost, of essential commodities such as oil, could be just as serious a threat to our national security, in the wider sense of the term, as undue de- pendence on low cost but politically and strategically unstable over- seas supply sources. \~re believe, therefore, that in the absence of a sj)ecific overriding reason, any action on the part of Govei'ninent or industry which would further increase the cost of the U.S. oil import program would not be in the public interest nor in the interests of our national security. FUTURE DOMESTIC OIL SUPPLIES The committee report expresses concern "that the U.S. will be unable to meet the challenge" of future oil demand and maintenance 27 PAGENO="0046" 40 of a satisfactory ratio of reserves to production, in view of the decline in discovery rates and in the ratio of reserves to production in the face of a steadily growing demand. "This trend is alarming and must eventually be reversed," says the report, clearly implying that the oil import program should be used toward achieving this objective. In other words, the committee report would appear to want still tighter import restrictions with consequent higher costs to consumers in order to encourage the search for domestic oil. We do not agree with this view. If, despite a strict import control program in existence since 1959, the rate of domestic oil discoveries should be unable to keep up with the growth in domestic oil demand, an enlightened resource conservation policy may eventually require a carefully con- trolled increase in the ratio of oil imports to domestic production in order to husband our economically recoverable domestic reserves. However, unlike the committee report, the undersigned are not fearful that in the absence of substantially increased incentives (in the form of tighter import restrictions) our oil discovery rate will lag further and further behind our growing demand for oil. The recent vast discoveries of oil in Alaska, the potential for oil shale develop- ment, the obvious possibilities in the Texas gulf offshore area (for which the oil industry recently paid a total of $600 million in bonuses for the right of drilling concessions) and the reported potentials of other U.S. offshore areas currently under investigation by the indus- try, are all indications that our domestic reserves may be able to meet our domestic oil requirements in the foreseeable future without a change in the existing ratio of imports to domestic production. If this should not be the case, we would recommend an increase rather than a decrease in the ratio of oil imports to domestic production. THE 12.2-PERCENT R.kTIo The committee report asserts that despite the maintenance o controlled imports at a level of 12.2 percent to domestic production in districts I-TV since the inception of the program, total U.S. oil imports in 1966 equalled 26 percent of domestic production, compared to 21.2 percent in 1960. According to the committee report, increases in residual fuel oil imports were the principal reason for the growth in the import ratio; but other factors also played a part in it. The pertinent statistics show that residual fuel oil imports into district I rose by 459,000 barrels daily between 1960 and 1966. If imports of this product are deducted from total U.S. oil imports, the ratio of imports to total U.S. domestic production rose from 14.8 to 16.2 percent between 1960 and 1966. Thus, if we leave out residual fuel oil, the total ratio of imports to domestic production in the United States (districts I-V) has changed only very slightly in the 6-year period under analysis. Inasmuch as domestic residual fuel oil production has been declining since the end of World War IT, for economic reasons entirely uncon- nected with U.S. oil imports, and now supplies only about 10 percent of total east coast demand for this product, the increase in residual fuel oil imports has no effect whatever on the market for domestic crude oil. Hence, the maintenance of a healthy domestic oil-producing industry-the official aim of the import restrictions-is not jeopard- ized by the level of residual fuel oil iml)OrtS. It is therefore incorrect 28 PAGENO="0047" 41 to include these imj)orts in any measurement of the impact of oil imports on the domestic oil-producing industry, as is done in the committee report. For the importation of residual fuel oil into the U.S. east coast has not displaced-directly or indirectly-any domes- tic crude oil. If the committee report intended by means of ratios to measure the overall dependence of U.S. consumers on foreign oil supplies, the in- clusion of residual fuel oil in the total import figure would be legitimate. However, in that case the import data should be related to domestic demand-and not to production-since the question to be determined is what share of our total oil demand is supplied from less reliable foreign sources. Furthermore, if such a measurement is to have any meaningful relation to the question of national security, imports from Canada must be excluded from the total figure, since these imports are shipped into the United States by overland pipeline and must be considered as secure, politically and strategically as domestic supplies. This fact has been reflected in our oil import policy since 1959 and has been acknowledged in the subcommittee's report. If we then relate total non-Canadian oil imports into the United States to total U.S. oil demand to measure the risk of relying on foreign supplies less reliable than domestic supplies, we obtain a ratio of 17.2 percent for 1960 and 18.2 percent for 1966. These ratios are con- siderably smaller than those quoted in the committee report and also show a much smaller increase for the years under study. Thus, whether one wishes to measure the impact of oil imports on domestic production or the risk of relying on imports, the 12.2- and 26-percent ratios used in the committee report are conceptually mis- leading and exaggerated. Furthermore, in contrasting the government's 12.2-percent ratio with the committee's 26-percent ratio, the committee report fails to point out that the 12.2-percent figure applies only to districts I-TV while the committee's 26-percent figure applies to the United States as a whole. The report misleads the reader into assuming the two ratios are comparable by stating that the limitation of controlled imports to "12.2 percent of domestic production since the program was introduced * * * overlooks the fact that total imports, both controlled and uncontrolled * * * in 1966 were slightly more than 26 percent of domestic production." The overlooking in this instance was done by the committee which ignored the entirely different bases and concepts of the two ratios in order to make its point. The misleading contention is repeated in paragraph 9 of the committee's findings which holds that the 26- percent ratio "is in many respects a more significant figure than the 12.2-percent limitation." The fact is that, except for residual fuel oil imports which, as ex- plained above, do not displace domestic oii, the ratio of total oil imports (within and outside the 12.2-percent limit) into districts I-TV were equal to 12.8 percent of production in districts T-IV in 1966. Thus with all the exceptions and exemptions objected to by the committee, the pertinent ratio of oil imports to domestic production has remained virtually unchanged since the mceI)tion of the program. Regarding the argument implied in the committee's report that the residual fuel oil imports should be included in the import ratio, we would only like to point out that Senate bill S. 2332 (sponsored by 29 PAGENO="0048" 42 Senator Long of Louisiana) which had the wholehearted support of virtually all independent domestic crude oil producers, specifically excluded residual fuel oil from its proposed statutory limit of imports to 12.2 percent of domestic production in districts I-TV. We would emphasize that no restrictions whatever are now put on importation of residual oil into the U.S. east coast, and none should be. Furthermore. in view of rising concern over the problem of air pollution caused by sulfur emission from burning of most fossil fuels, the substitution of low-sulfur fuel oil for the high-sulfur variety should be encouraged. CARnYOVER ALLOCATIONS The committee report lists "carryover of the 1967 allocations not used" among "the exceptions to the program granted since 1965." The inclusion of these carryovers in the list of exceptions "both within and outside the 12.2-percent limitations" without explanation can only reflect the committee's apparent desire to criticize every feature of the import program regardless of its true purpose and merit. The carryover of unused import licenses from 1967 is of course not a regular exception to the program but reflects a special nonrecurrent situation created by the Middle East crisis which, incidentally, greatly benefitted U.S. domestic oil producers. T he import. allocations in districts I-TV for 1967 had been set at a total of 1,060,000 barrels daily, which was equal to 12.2 percent of the estimated production of 8,724,000 barrels daily in districts I-TV. Because of the dislocation caused by the Middle East crisis, imports in 1967 amounted to only 900,000 barrels daily while production rose to 9,083,000 barrels daily. rfhus in 1967, imports into districts I-TV equalled less than 10 percent of production, instead of the permissible 12.2 percent. In order to protect importers who were unable to use their allocations in 1967 against losses, the Government established a 2-year carryover program. The carryover program will still leave total import allocations for the 3-year period 1967-69 below the 12.2-percent ratio so that domestic producers during that period will have a larger share of the U.S. oil market than they would have had if importers had actually imported an oil volume equal to 12.2 percent of production in 1967 in districts I-TV. Nor does the carry- over program grant any additional or new allocations to some importers at the expense of others. The carryover program was an imaginative scheme developed by the OTA to cope with an unusual and unforesee- able situation. To list it among the examples of the "special treatment situations which are of concern to this committee" is an indication of the tendentiousness of the committee report. PUERTO Rico AND THE VIRGIN ISLANDS In dealing with the application of the oil import control program to Puerto Rico and the Virgin Islands, the committee report accu- rately reflects the criticisms voiced by several segments of the U.S. oil industry against the granting of mainland import licenses to new refiners located in those areas. However, it all but ignores the explana- tions given by officials of the Interior Department before the committee for granting the import licenses. 30 PAGENO="0049" 43 The creation of a large-scale petrochemical and petroleum refining industry in these U.S. offshore areas was of great importance to the economy. The request to permit the establishment of such plants (which would probably have been uneconomical without access to the U.S. rnaiiiland market for a share of the products made in those plants) came not from l)rivate industry but from the governments of these territories. Had the Secretary of the Interior rejected their request this would not only have significantly retarded the economic growth of the areas but it might also have been viewed as a (liscrimilmtory act on the l)a~~t of the U.S. Government. The potential national security implications of both the economic and the political consequences of a flat denial of the applications are obvious, particularly in the case of Puerto Rico which represents the U.S. "showcase" in Latin America. It is unfortunate that the committee did not address itself to these aspects of the Puerto Rican oil import issue, which are certainly not unrelated to our national security. }urt1~ermore, in (liscussing oil imports from Puerto Rico into the U.S. mainland the committee report refers to "uncontrolled items of iml)orts.' This is misleading since all imports from Puerto Rico, whether within or outside the 12.2 percent limitation, are strictly controlled by the OIA and cannot increase under existing regulations. Finally, regarding the awarding of import licenses to refiners in U.S. offshore areas, we believe the questiuii is not whether the awards were justifiable on the basis of some iiatioiial security criteria but whether the Interior Department's method of selecting the companies which received the award satisfied customary standards of equity in all cases. There are indications that s )me oil oinpanies believe this was not the case. Unfortunately, the committee report does not ad- dress itself to this subject. DISTILLATE FTJEL OIL Iuronvs We agree with the committee report that the domestic distillate fuel oil supply situation ``is unlike that of residual fuel oil, for eco- norriics will pern~it refiners to turn out all volumes required to meet the demand for No. 2 fuel oU." However, we regret that the committee report completely failed to take note of the unsual counter-seasonal increase in No. 2 fuel oil wholesale prices at the U.S. east coast last April, although this increase was the subject of considerable discussion at the hearing. While the undersigned recognize the possibility that the special circumstances of the Middle East crisis may have had an indirect effect on east coast prices, we nevertheless are concerne(l with the price increase in domestic heating oil amid so should he the administra- tion under the aforementioned directives contained in the Presi- dential proclamation establishing the import control program. Perhaps adoption of the proposal made at the hearings that re- finers be given added flexibility to exchange crude oil imports for distillate heating oil imports within the limits of their total import quotas, would reduce the possibility of temporary suppiv tightness during the heating season with its consequent threat to the stability of heating oil prices. 31 37-143 0 - 74 - 4 PAGENO="0050" 44 STOCK LEVELS The committee report states that "adequate ainouiits of oil cannot be stockpiled, as can some other minerals, and any interruj)tion of our source of supply, even for a fe\v days or weeks would paralyze the commerical and industrial life of this Nation.'' The fact is that total U.S. crude oil and products stocks are cur- rentlv equal to 7S days of demand. Assuming that about 30 percent of these stocks are not available for slupinents because they are required for the continuous operation of eciuipment, our readily available inventories are equal to about 55 days of current con- sumption. The committee's statenient exaggerates therefore the short-term risks of (lependence on foreign oil supplies. HAwAII Coii-.iderable testimony has beeii received during the hearings regarding the special situation of Hawaii within district. V. Located 2,300 miles west of the mainland and devoid of any indigenous fuel supplies, all of Hawaii's fuel needs must be delivered by ta tiker across the open sea, \vhatever their source of origin. Hawaii also has no access, obviously, to overland oil sources from Canada and Mexico. Testimony has shown that over 90 percent of the State's oil supplies are of foreign origin. The crude oil refined in Hawaii by Standard Oil of California comes from Iran, Saudi Arabia, and Indonesia. Yet, be- cause of the workings of the oil import control program, Hawaii enjoys none of the economic benefits of this lower-cost foreign oil. On the contrary, retail prices of most petroleum products, even though pro- duced in Hawaii. are higher in Hawaii than anywhere on the U.S. west c ast the price is arbitrarily set as though produced on the west coast and includes a fictitious transportation cost as though it were shipped to Hawaii. We believe it is regrettable that the committee has ignored the massive testimony presented by all segments of the Hawaiian economy to the effect. that Hawaii should be exempted from the oil import control program. We believe the Interior Department. and the Office of Emergency Planning should be requested to undertake an investigation into the oil import control program as it. applies to Hawaii, to determine whether this State, in view of its geographic location, should be treated differently under the mandatory oil import ~)rOgram than the rest of district V. We are aware that. counter arguments to the above were presented to the committee. The claim that the situation in Hawaii is essentially not unlike that of the U.S. east coast., which is also an oil deficit area and must receive all its crude oil supplies and a large part. of its oil products by ocean tanker, is the failure to recognize the point in issue. Furthermore, it is said that as part of district V Hawaii could fully count on oil supplies produced within that district if foreign oil should become unavailable. This difference of opinion underscores the need for an investigation. While the committee rel)ort has gone to great lengths to include the thinking in the j)ast on the oil import program, it has seriously neglected consideration of the future. We believe that the national 32 PAGENO="0051" 45 security this program was designed to protect includes not oniy prep- aration for defense in unforeseen emergencies, but also the daily well-being of all America's people. Therefore, we regard such objec- tives as abating air pollution, promoting consumer interests, and alleviating economic hardships in a U.S. offshore territory as in- trinsic-not alien-to our national security. The oil import program was established and should continue to exist for the achievement of the best possible, and most secure, balance of foreign and domestic petroleum supplies. But in so doing, it must be recognized that other areas of national security are and wifi be affected and should be taken into consideration if the broad objective of the program is to be fulfilled. We, the undersigned members of the House Committee on Interior and Insular affairs, for the reasons stated above, hereby oppose the views and comments in the committee report on the mandatory oil import program. JOHN V. TUNNEY. BOB KASTENMEIER. LLOYD MEEDS. PATSY T. MINK. THOMAS S. FOLEY. HUGH L. CAREY. 33 PAGENO="0052" 46 ADDITIONAL DISSENTING VIEWS ON THE MANDATORY OIL IMPORT PROGRAM AS IT RELATES TO THE DOMES- TIC PETROChEMICAL INDUSTRY We disagree with the committee's findings that "the import program legally has only one basis for its existence, i.e., to protect the Nation's securit by promoting a strong (lc)mestic oil iudustr capable of dealing with unforeseen einergeiicie~.'' The national security determination is based on many facttrs including. but not limited to, the many sectors of the domestic oil il1(lu~ try. The need for a strong, healthy. domestic petroleum producing industry. ~ne capable of quickly increasing domestic production, is recognized. Biii, a glowing and vigorous and coml)etiiive domestic peti'oehieniical industry is just as essential to our nati nal security, if goveruniental policies protect the domestic petroleum industry. these same policies must protect and not hinder our third largest manufacturing industry, the domestic petrochemical industry. In a recent report prepared by the National Academy of Sciences and submitted to the Office of Emergency Planning in December 1967, the importance of the petrochemical industry to our Nation's security was succinctly stated as follows: Because of its tremendous technical capabilities, the petrochemical industry (PCI) would be a prime source of strength to the Nation in a time of emergency. It is con- tri})imting to every facet of time economy and is uniquely suited to supply the imagination and broad perspective for quickly finding alternate sources of supply and producing substitute materials during an emergency ir the critical areas of (a~ food and agriculture, (b) clothing, (c) shelter, (il) transportation, (e) communications, and (f) medical supplies. This basic industry marshals an investment of $19 billion and a 1ar~e and skilled work force of more than 320,000 employees for the production of thousands of chemical and plastic products essential to oumi' national defense and to almost every aspect of our national existence and is a major, positive contributor to our country's balance of trade. This industry must, however, have access to the same low- cost raw materials which its foreign competitors enjoy in order to maimmtaiim its domestic and international markets and to expand its domestic facilities. As a result of the oil import program, the price of U.S. crude oil is t~I) percent above the world market price. This price differential has the seine significant effect on the feedstock cost of petm'ocheimcal prod' icers. Pet roleiun products are the fundamental raw materials of the l)etrochlelimical iiit1im~trv. ~\atura1 gas i~qnids, the feedstoc.ks on whi~h the (jolliest ic petrochemimical industry is largely based, are moving higher in price because the demands of the petrochemical industry are expandin~ more rapjdiy than the availability of natural gas ~34) PAGENO="0053" 47 liquids. The domestic supply of feedstocks cannot be increased by use of heavier liquids from crudes because they have been made prohibitively expensive from a competitive standpoint by the oil import program. In contrast to the situation in the United States, foreign producers ate under no such restraints. They have unrestricted access to petroleum feedstocks at lower world prices. For these reasons, adequate access to foreign feedstocks is funda- mental to the health and growth of the domestic petrochemical industry. A great deal is at stake: 1. The continued growth of U.S. exports of petrochemical products. Petrochemicals currently contribute more than $1.1 billion a year to the Nation's balance of trade. These exports will inevitably go the way of the steel industry's exports, but for different reasons, if the burdens of higher raw material costs are added to the adverse effects of the Kennedy round tariff changes. 2. The potential loss of a significant part of the domestic market for petrochemicals-a market whose size by 1972-75 will double and reach an estimated $35 billion. Lower raw material costs combined with lower tariffs will give overseas products a running start on sales in the U.S. market. The American consumer uses petrochemical products in nearly every area of his daily life. Therefore, needlessly high domestic prices for these products places an extra and unnecessary burden on him. 3. The possible outflow of large numbers of jobs and large sums of capital. If the petrochemical industry is unable to remain competitive from plants in the United States, it can only retain its market share by investing in foreign plants. Among many others, this would hurt the very domestic petroleum industry which the oil import program is designed to protect, because oversea.s plants will not use domestic petroleum, either as feedstocks or as fuel. These are the clearly foreseeable consequences unless the domestic petrochemical industry is allowed the access to the same low-cost raw materials which its foreign competitors enjoy. It should be pointed out that despite the fact that the petrochemical industry is the third to largest manufacturing industry in the United States, its demands for petroleum raw materials are small in compari- son to the quantity of the oil going to the fuel and energy markets. This industry uses less than 5 percent of the total domestic demand for oil and natural gas liquid. The statement by the cnmmittee that "in each successive allocation period since then [1965] the set-aside for petrochemical use has been increased to its present level of 79,00() daily barrels * * ~" is erroneous. In 1966, 57,000 barrels per day were allocated via petrochemical or refinery quotas for production of petrochemicals UI districts I-I\ --not 30,000 barrels per day. In 1967, the petrochen~ica1 ifl(lustry received allocations totaling 67,000 barrels per day and in the first half of 1968, the industry received allocations totaling 81,000 barrels per day. In the last half of this year, the industry will receive allocations of 79,000 barrels per day, compared with allocations of almost 1 million barrels per day for energy uses and imports of almost another 1 million for residual fuel. We would recommend that the committee determine whether or not a petrochemical industry oil quota program should be established 35 PAGENO="0054" 48 pursuant to an independent national security determination. The essential feature of this recommendation is a recognition of the dis- tinction between the primary fuel and energy markets of the petro- leum industry and the petrochemical industries. The import for export program called for by the latest Presidential proclamation governing the oil import program should be implemented as soon as possible. We, the undersigned members of the House Committee on Interior and Insular Affairs, for the reasons stated above, hereby oppose the views and comments in the committee report on the mandatory oil import program as it relates to the domestic petrochemical industry. HUGH L. CAREY, JOHN V. TIJNNEY, LLOYD MEEDS, PATSY T. MINK. 36 PAGENO="0055" 49 SEPARATE DISSENTING VIEWS TO THE REPORT ON THE MANDATORY OIL IMPORT PROGRAM We are voting against the committee report on the mandatory oil import program for a number of reasons: 1. The report admittedly does not deal with the problems existing in district V (which includes Alaska, Arizona, California, Hawaii, Nevada, Oregon, and Washington). 2. In a matter of this importance, we do not feel that the 3 days of hearings allowed sufficient time (particularly at the busiest period of the congressional session) to evaluate the many factors that must be weighed in this all-important area. We would like to hear more extensive testimony regarding the impact this program may have, if any, on air pollution, consumer prices, exploration and development incentives, and national security. 3. In our opinion, it is not possible on the basis of the hearings held thus far to form a considered and informed judgment on this very complex matter. It would have been preferable to hold more extensive hearings and we believe it would be highly desirable that the committee do this next year. PHILLIP BURTON. WILLIAM F. RYAN. (37) PAGENO="0056" 50 VIEWS OF REPRESENTATIVES RYAN AND KUPFERMAN The quality of our environment is a matter of grave national concern. Air pollution may not yet be a major problem in certain sections of the southwest oil-producing States, but it is an inescapable fact of life for Americans living in urban areas across the coulitry. Every program undertaken by the Federal Governmeiit should be administered, wherever possible, to improve the quality of our environment. Therefore, it is most disturbing that the report on the mandatory oil import program adopted by the committee describes the alleviation of air pollutiuii as a purpose alien to the mandatory oil import pro- gram. F urt I iermore, the committee recommends that the program should not be used to alleviate air pollution. I cannot accept this narrow and restrictive approach which would deny the Secretary of the Interior the authority to utilize this program in order to remove impurities from the air. That high-sulfur residual oil causes serious damage to health, even death, through air pollution is incontrovertible. It is not in the national interest, in effect, to censure the Secretary of the Interior for the steps lie has taken to increase the amount of low-sulfur residual oil available in the Fnited States. The Secretary acted wisely whemi lie pn)1nhll~ated revision 5, section 1 1A, of the oil import regu- lations, which iirovicles that for each barrel of low-sulfur residual oil distilled from imported crude oil, a company is allowed to import another barrel uf oil without it counting toward its quota. Following the Secretary's actions. the Los Angeles Department of Water & Power ordered that power companies now must burn low- sulfur (less than 0.5 percent) fuel all year round. Formerly, these companies were permitted to burn high-sulfur residual oil, a situation which greatly aggravated Los Angeles' critical air pollution problem. Unfortunately, the ~erretarvs order covers only district V which contains those states west of the Rocky ~\Iountains. rfhe Oil Import Adinini~tratiou has published a tentative proposal to the Secretary, including the recommendation that he order a similar type of credit reimbursement program for districts I-IV which includes the east coast and the rest of the country. It is essential that the Oil Import Administration press for a credit reimbursement program in its final proposal. At the present. three major east coast areas, New Jersey, New York City, and \Vashiington, D.C., have air pollution laws limiting sulfur content. rj~ governments in these areas have set the following schedules: (38) PAGENO="0057" 51 New Jersey State regulations for residual fuel oil applicable to the entire State except for certain rural counties are as follows: Date Sulfur limit Fuel user (percent) May 1, 1968 1.0 All residu al fuel oil users. Oct.1,1970 .5 Do. Oct. 1, 1971 .3 Do. New York State regulations for residual fuel oil applicable to the New York City metropolitan area are as follows: Date Sulfur limit (percent) Fuel user October 1, 1968 October 1, 1969 October 1, 1969 1.0 1.0 .3 Powerplants in New York, Bronx, and Kings Counties. Powerplants in the remaining New York City metropolitan area. All residual fuel oil users except powerplants. Maryland State regulations for residual fuel oil are applicable to Montgomery and Prince Georges Counties. In addition, ordinances of certain northern Vu-gmia comnnuiities in the Washington, D.C., metropolitan area provide for identical limits as follows: Date Sulfur limit Fuel users (percent) July 1, 1968 1.5 All residu al fuel oil users. Julyl,1969 1.0 Do. It is clear that the demand for low-sulfur residual oil is going to increase in these areas in the future. In addition, it must be expected that governments in other major urban areas along the east coast and other sections of the country will be forced to enact air pollution control laws in the very near future, further increasing the pressure on the market for low-sulfur residual oil. It is clearly vital to the interests of the great majority of Americans that as much clean burning fuel as possible be on the market at a reasonable price. When the Oil Import Administration published its tentative pro- posal on May 24, Secretary of the Interior Udall said: The purpose of the proposal is to permit fuel oil users on the east coast to meet Federal, State, and local air pollution regulations. Air pollution is one of this Nation's most dangerous environmental hazards, and the Federal Govern- ment is totally committed to control this hazard with all of its available resources, includirlg the oil import program. Certainly the Secretary of the Interior should order exemptions for districts I-TV similar to those now granted in district V. He should not be thwarted in any respect. The concern for the health of our citizens must be a paramount consideration. WILLIAM F. RYAN, THEODORE R. kUPFERMAN. 39 PAGENO="0058" 52 91st Congress } COMMITTEE PRINT NO. 1 REPORT ON THE OIL IMPORT QUESTION (TOGETHER WITH DISSENTING AND SEPARATE VIEWS) SUBCOMMITTEE ON MINES AND MINING OF THE COMMITTEE ON INTERIOR AND INSULAR AFFAIRS OF THE HOUSE OF REPRESENTATIVES w AUGUST 1970 Printed for the use of the Committee on Interior and Insular Affairs U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 1970 PAGENO="0059" 53 COMMITTEE ON INTERIOR AND INSULAR AFFAIRS HOUSE OF REPRESENTATIVES WAYNE N. ASPINALL, Colorado, Chairman JAMES A. HALEY, Florida ED EDMONDSON, Oklahoma WALTER S. BARING, Nevada ROY A. TAYLOR, North Carolina HAROLD T. JOHNSON, California HUGH L. CARRY, New York MORRIS K. UDALL, Arizona PHILLIP BURTON, California JOHN V. TUNNEY, California THOMAS S. FOLEY, Washington ROBERT W. KASTENMEIER, Wisconsin JAMES G. OHARA, Michigan WILLIAM F. RYAN, New York PATSY T. MINK, Hawaii JAMES KEE, West Virginia LLOYD MEEDS, Washington ABRAHAM KAZEN, Jn., Texas BILL D. BURLISON, Missouri WALTER S. BARING HUGH L. CAREY PHILLIP BURTON THOMAS S. FOLEY JAMES G. OHARA JAMES KEE ABRAHAM KAZEN, JR. JOHN P. SAYLOR, Pennsylvania Ranking Minnriiy Member E. V. BERRY, South Dakota CRAIG IIOSMER, California JOE SKUBITZ, Kansas LAURENCE J. BURTON, Utah JOHN KVL, Iowa SAM STEIGER. Arizona HOWARD W. POLLOCK, Alaska JAMES A. McCLURE, Idaho DON H. CLAUSEN. California PIIILIP E. RUPPE, Michigan JOHN WOLD, Wyoming JOIIN N. hAPPY CAMP, Oklahoma MANUEL LUJAN, JR., New Mexico JORGE L. CORDOVA, Resident Commissioner, Puerto Rico LAURENCE J. BURTON E.Y. BERRY CRAIG IIOSMER JOE SKUBITZ JAMES A. McCLURE PIITLII' E. RUPPE JOHN WOLD WILLIAM L. SHAFER, Consultant on .lIining and Minerals NoTE-The chairman, Hon. Wayne N. Aspinall, and the ranking nsinority memher, HOn. JOhII P. Saylor, are ox officio mcmhers of each subcommitlec. SIONEv L. MCFARLAND. Staff Director and Chief Cle'k Lewis A. SIOLER, Counsel MINES AND MINING ED EDMONDSON, Chairman Ill) PAGENO="0060" 54 THE OIL IMPORT QUESTION I NTRODUCTION The ~ld)committee on Mines and Mining of the House Committee on Interior and insular Affairs held hearings on the oil import-oil I arid (juest ion that was raised by the divergent views expressed in the report of tile Cabinet Task Force on Oil Import Control. The task force rei~oi~ was released February ~() and subcommittee hearings comnmened March 9 and extended through March 10, 16, and 17 and April 6, 7, ~3. afl(l ~4. 197(1. Represented at. the hearings were major segments of the petroletim and natural gas industry, including both independent anti major oI)eratorS and producers, refiners, the coal industry, the petro{lwm1~ical industry, research groll~)S and others inter- ested in either the production. distribution or consumption of coal, petiolemim. and natural gas 1)roducts. In releasing the task force report, President Nixon commented that the menll)ers did not reach unanimous agreement on a set. of recom- mendations. The President also recognized and stated that ~The Con- ~ress rol)erl has a vital interest in this program which affects every area of our country and many facets of our economy. Committees of both the house of I~e1)resentatives and the. Senate have indicated interest in holding hearings on the oil import program and any recom- mlleflde(i changes in it. I expect that much additional valuable infor- mation will result from these congessional hearings, and I direct the Oil Pol IcV Committee to carefully review all such information." The hearings held by this subcommittee are an indication of the congres- sional interest referred to l.)v the President and were intended to pro- vide a forum by which the findings and recommendations of the Cab- inet task force could be reviewed. Although extensive consideration was given to the matter of oil im- l)oIt quotas versus tariffs by the Cabinet task force, no open public hieaiim~s were held and no opportunity was afforded for questioning or for cross exanufliltlon of those individuals submitting material. In (ont rast to this, the subcommittee hearings were open public, hearings and all witnesses were subject to questioning by members of the subcommittee. Before proceeding further it al)pears a1)propriate to point out that this subcommittee held extensive hearings on the. Mandatory Oil Tm- port program in 196s and submitted a rel)ort on its findings and rec- omniendations in August of that year. Those hearings and the report ~ive niucli of the background and tile operation of the Mandatory Oil Tmport from its inception in I9~9 up to and including 196~. For that reason it appears unnecessary to repeat much of that information in the present. report either as to the origin and operation of the prograrn or as to the committee's findings and recommendations. Suffice it to say that the majority views of the committee, while recognizing some de- (U PAGENO="0061" 55 fects in the administ~'at ~ve. operation of the Mandatory Oil limport program, strongly recommended it be retained and strengthened. In that. report it was stated as follows: If a meaningful program is to be coiitinuecl, it. is imperative that. a clear and definite policy be established under which the domestic petroleum industry and all others interested are fully informed as to the future of the program. If national security is of PIli'~n~ouI~t. consideration, and this Siibcommit- tee firmly believes that. it. is. together with the preservation of the domestic petroleum industry, then no further exceptions should be granted. If, on the. other hand, the. program has outlived its usefulness or if considerations other than national security are to be given equal or greater weight, whet.heer these be situations of hardship, 1)rice or temporary shortage, then the new criteria should also be clearly spelled out. and defined in order that all may follow the newly established policy. Upon completion of the recent hearings the sutcommittee is not aware of anything that would substantially alter the above general conclusion. T~SK FORCE ~\L~JORITY C(.)XCLFSIONS Careful reading of `The Oil Import Question"-the official report of the. Cabinet Task Force on Oil ilmport Control-is sure to leave some confusion in the reader's mind regarding the ~`majority position" in the task force. Most of the. newspaper publicity commenting U~Ofl the. report identi- fies Task Force Chairman (and Secietarv of Labor), George Schultz: Office of Emergency Preparedness Director. George Lincoln: Secre- tary of I)efense, Melvin Laird: Secretary of the Treasury, I)a.vid Ken- nedv: and Secretary of State, William Rogers as members of the task force ~`majoritv." These officials, presumably, reported to the President. in support of `~a 1)hasedl transition to a tariff system for controlling imports, to take initial effect no later than January 1, 1971, with the following prin- cipal features: (1) Initial imposition of an increased tariff on nonpreferre.d crude oil a.t. a level $1.35 per barrel above exist ing tariffs: (~) Phase.out of special quota privilege.s over a 3-year transi- tion period by means of a ~`tariff-free" quota (3) I)eferment of decision on further tariff liberalization until January 197~, at which time tile j)rograln managers may continue the process of liberalization if they are then persuaded on the basis of the best available evidence that indicated reserves in North American frontier areas will be sufficient to meet tile ag- gregate. lt)~() production estimates set forth herein, or until janu- az-v 1913 or .January 1974 if the ~)rogram managers are so per- suaded by then: (`4) A comprehensive review of the program no later than 1975, including an in-depth study of the. post-1980 situation, to determine whether it then appears consistent with the national security to contimie-or, if need be. arrest or reverse-the process of tariff liberalization. 2 PAGENO="0062" 56 Oilier ~uiIicipi1~ reomiiie d~ition~ in the report call for SI)ecial tariff rates oii re~idua1 fuel oil ~is well lI~ fiuiislied J)rOducts iifl(1 unfinished oils. ~o r Weste in II em i spl eve pvc fe ienees, transitional quotas, the tuetiollilig of Easterii I lemisl)lleIe inlj)ort licenses under sonic condi- t ions, a management system heade(l by the I)irector of the Office of It111(~Ige)l(V Plepare(liIess. and fuit her studies of security alternatives. `I'hiese far-reacliinu iecommendat ions procee(l from a series of find- ings and cowln~ion~al)out oil l)1i(es, domestic exploiatioii and pro- (ilict ion potential. and potential siviligs to the American consumer wIli(l1 are set forth in time reports "~uminar of Securit Analysis." The iiiost s})ectaclllai of these findings is the much-publicized state- ment that "American consumers would save about ~5 billion annually now and over ~s bill ion annually iiv 1t)~()" as a result of the abandon- mnent of import emit vol s* A~)proximately a. page and a half beyond the report 5 Sl)e(ta(lllai claim of ~i billion annual savings to American omisumimeis under time proposal appeals time significant conclusion At. a S~ j)rice, immiports could amount to about 51 PerCent of domestic. demand. Perhaps half of these imports would be. fioni the Eastern Hemisphere: about. 40 percent of all im- poits-or ~() percent of domestic demand-would be from Arab sources. Notwithstanding the recognition in the majority views of the essen- tial nature of Eastermi Hemisphere oil in the accomplishment of the dollar savings for American consumers claimed as a majority report result, the, majority "Conclusion" is stated at page 131 of the report: National security will be. adequately protected by adopting as a first step a revised control system and a modest immediate reduction in imj)ortant restraints. Further liberalization ap- l)eii1~ to be warranted. l)ut a decision on the timing and extent of subsequent relaxation in the level of restrictions should await the development of additional information about. the 1)roductive potential of North American "frontier areas." All of the conclusions and findings referred to are generally de- scribed as majority views, but the report very significantly cont.ains a. series of "supplementary views" which are credited to members of t lie majority-supplementary views which for all practical purposes appear completely inconsistent with the publicized majority position. For example, the Secretary of State, while agreeing that "changes in the oil import system are required and that the proposed new system represents a move in a desirable direction," nonetheless "em- phasis, however, that basic changes in an oil import program of long- standing might provoke serious adverse reactions which could have an iniportant bearing on national security." The Secretary of StateS, in Sup~)leiT1efltary views, makes it. clear that "full consultations with other governments will be necessary to enable the Department of State fully to assess the national security and foreign policy ramifications of time proposed changes." and warns that. "amendments to the pro- imiav be neiessiiy "iii tlìe I ighit. of those. security considerat ions." Xiiothmer majority member, the Secretary of the Treasury, strongly warns that the projected l97~ tariff liberalization should be undertaken "only if such action seems i)1udlemIt to the program managers in light of an objective and independent apl)raiSal of actual domestic exl)lOra- 3 PAGENO="0063" 57 tory drilling and other then-cu rrent information, including the results of an in-depth review of the post-1980 period." The Secretary further emphasized: ~Our domestic industry will be. expected and encouraged t.o continue to expand its output and to explore for and develop new sources of crudes and substitutes the revised oil import control sys- tem should be so managed as to work toward this goal." Certainly this charge to the Government. and industry should be heeded in all re- spects, yet. it would fall short of accomplishment if the industry were forced to operate under the economic disincentives outlined in the re- port of the taks force majority. This same Cabinet, member also com- mented that "changes in import levels and not predetermined price objectives should guide the program managers." Most. important as a qualification of the majority position is the statement of of the Secretary of Defense in his `~supplementary views." The Secretary of Defense, for example, warns that. "the tone of the report does infer a capabiht.y of reacting to an oil emergency that may be somewhat 01)tilfliStiC." The Secretary of Defense makes it clear that lie believes `~the ques- tion of residual fuel oil has not been adequately analyzed and * * * the effects of virtually free access to foreign residual oil on U.S. mar- kets~and U.S. refining capabilities have been such as to make the con- tinued exemption of residual oil from import controls open to ques- tion." He strongly urges that the entire subject of residual oil be studied as quickly as possible. These concluding conditions stated by the Secretary of Defense appear as pages 132 and 133 of the report.: Further, from a national security standpoint, it. is extremely important that. the program be carefully administered and security considerations be I)»=11'amflOiiflt. As a member of the Interdepartmental Policy Panel the Secretary of Defense would consider the following to be essential. (a) That. domestic. exploration be maintained at approxi- matelv current rates and that no reduction in reserves be allowed. (b) Tariffs be changed only after security needs have been satisfied. (e) Changes in import levels be accomplished slowly and gradually. He strongly objects to a schedule on levels of im- ports which will widely fluctuate, either up or down, from any source. (d) Continuous surveillance to l)re\ent. the i'eduction of the United States-or-U.S.-controlled tanker fleet. An in-depth review of any adverse effects of the relaxed controls on the United States-or---F.S.-controlled tanker fleet and ship- building industry should be performecL (e) An in-depth review of the post-1980 period. While higher imports in the next decade might be without security risks, we must look beyond 1980 when the larger oil produc- ing areas of the Western Hemisphere will most probably l)egiml a period of decline. Security in that period will depend heavily on the degree to which alternate energy sources have been developed in the 19T0's. lie believes that the financing 4 PAGENO="0064" 58 of such development will fall largely on the Government. One 1)OSSibilitV is to sllI)port such developments by receipts from tariff collections. "Finally, he strongly recommends that the economic and security implications inherent in the proposed program be brought to the attention of our Allies and affected nations at the earliest possible moment, after approval. Prompt and candid actions should mitigate the possible criticism in our changing policy and provide an incentive to others to initiate oil security planning in a different environment from that existing under our current import control policy. The conditions and qualifications stated by the Secretary of State, the Secretary of the Treasury, and the Secretary of Defense-com- prising three-fifths of the so-called majority-make very clear the absence of a Cabinet consensus in support of staff conclusions and recommendations contained in the task force report. On the vital security question. both the Secretary of State and the Secretary of Defense-the Federal officials primarily concerned with security- have strong reservations and have stated them for the record. TASK FORCE MINORITY CoxcL~sIoNs The Secretary of the. Interior and the Secretary of Commerce have been joined by the Chairman of the Federal Power Commission in a separate report on the oil import question strongly disagreeing with the recommendation of the. so-called task force majority. Four major reasons for their opposition are stated in their report: 1. The program would substitute a tariff for the present quota system. A tariff is highly undesirable in many respects and would lead to domestic and international problems of great significance. 2. The program would result in price fixing. Stripped of its foliage., t.he recommendation of a tariff of $1.45 is designed to produce a domestic pric.e of $3 a barrel for oil. The control of imports based upon any predetermined price for domestic oil is not only impractical, but would be a further retreat from a free market. 3. The program would risk the national security in funda- mental respects. It. would make us dependent on insecure foreign supplies by discouraging the exploration and develop- ment necessary to build our own reserves of oil and gas. Be- cause of its adverse impact on the natural gas industry the proposed program would disrupt. energy resource utilization and consumer demand for 75 percent. of our current energy base. 4. The program would involve substantial economic loss to the industry, to its 1.2 million employees and to the 31 oil- and gas-producing States, so as to weaken our internal economy and impair the national security within the meaning of the statute. These Federal offic.ials~ who share major governmental responsibility for government policy affecting oil a.nd gas production in t.his country have, indicated in their report that. "a significant reduction in oil and 5 PAGENO="0065" 59 gas exl)lOratiOn and development" would necessarily follow the actions recommended in the majority report. More seriouslY, they conclude that "at a price of S~.5~) a barrel the Inited States would be at the~ mercy of distant supplying countries within it) veal's. The separate rel)Ol't takes issue with majority con- clusions on other points of sigi~ificance. For example, the minority con- cluded, on page 353 of the report, that: (3) The cost to the consumel' of PI'eseI~t oil iml)Oi't con- trols is grossly overstated in the task force repoi't. Two arguments are advanced at tins point (a) If oil import conti'ols were removed, it (an l)e esti- mated that consumers of nat ui'al gas. by reason of dc- creased ex1)loration andl iessene(l 1)loduct ion could pay a large part, if not all, of this amount in increased prices for natural gas. 1) The statement implies that the prices paid for oil products as a result of controls are a total loss to the econ- omv. The fact is that this entire ~5 billion, assuming tile amount to be correct, goes to the States in production taxes, to royalty holders, to employees, and for eqlli~)meflt and other operating costs that benefit other individuals. The Secretary of the Interior and the Secretary of Commerce, along with the Federal Power Commission Chairman strongly emphasized the adverse effects on the ~LS. economy of the majority proposal and "increasingly adverse" results on our balance of paynients from increased imports. Pointing to 1.~ million employees in the oil industry, the minority predicts a siibstimtial reduction in enlplOylnent in oil exploration and production, pipeline construction, tanker construction and operation, oil well servicing, pipe 1)l'OdUctiOll l)y the steel industry, and allied industries, in the event task force majority recommendations were i rn pl emen t ccl. The testimony of a vice president of the Chase Manhattan Bank is also cited in the separate report: One of the Nation's leading banks has estimated that l)e- tween now and 1980 the petroleum industry, under normal conditions, would spend about. ~7() billion in the United States in search of additional reserves of oil and gas. I-Tow- ever, it further concludes that if import controls were relaxed enough to cause the domestic price of crude oil to fall by some 30 cents a bai'rel, these expenditures would not be more than ~20 billion. A reduction of $50 billion in the oil industry's capital spending in the next 11 years would have an adverse efi'ect which would be broadly felt in the national economy. The conclusion of the Chairman of the Federal Power Commission regarding impact of the majority recommendations on the natural gas and electric utility industries is strongly stated The impact of the. proposed tariff-based Oil Import Control program on the domestic petroleum industry will so weaken our national economy as to impair the national security as deflned in section ~ of the Trade Expansion Act of I9~. Oil supplies 4-f percent of our energy requirements. natural gas 6 37-143 0 - 74 - 5 PAGENO="0066" 60 ~i nercent. coal ~l peicelit, and water j~ower, iniclear energy and other fuels 4 percent. Ado1 tion of the ~Task Force Plan" ~vill not only disiup tile oil and gas industry, but will affect. 0111 total ener~v resource Ut ilizatioi~, and consumer deniand for ~ leI~sa~~ of our current energy base. The task force report has virtually ignored the natural gas sector and accordingly, has el-red in its conclusion that adoi)t ion of the task force tan fl-based oil import J)lan ~vi1l not adversely affect the national security. Exploration, devel- opnient. and production of natural gas and oil are not. prac- tically separable. Twenty-five major oil companies produce ~ ~ of the natural gas sold in interstate commerce in the Fnited States. However, the independent oil and gas pro- ducers found approximately 80 percent of the new gas and oil fields discovered in 1967 in the interior basins of the I~nited States. In 1968, the regulated pipeline and distribu- tion companies produced only 8.1 percent. of the gas trans- ported through their systems. The natural gas industry is dependent almost entirely on the oil companies or independent. producers of oil and gas for its basic. gas supply. Drastic reduction of oil prices over a term of 3 to 5 years will sig- nificantly reduce additions to natural gas reserves, curtail the growth of the natural gas energy sec.tor, and increase con- sumer costs. Basically, while conceding the need for revision and some changes to correct. problems and inequities resulting from some past policy decisions, the minority of tile task force have firmly concluded that the oil inhI)ort control ~)rog1am is meeting its fundamental objectives. It has dnal)led the ~\atiOn to draw on foreign oil to sill)- ~ieinent domestic supply ~vitlioiit becoming diangerously de- h)~1~~('11t on imports fioni itnee rtain sources in tune of crises. The nuiich (liscussedi `gas shortage would l)e far more critical today but for the operation of the current. oil import pl'ogram. Ille separate report contains an alternative, plan which provides for an increase in the present import quota formula in four of t.he geographic district.s of t.he Fnite.d States by the equivalent of one percentage point in each year for the period of 1970 through 1974. Other major recommendations include consideration of extension of tile unrest ri(ted entry of residual fuel oil to other districts besides dis- trict 1. negotiation with Canada of a commoii energy polic. negotia- tioij with Mexico to seek discontinuation of its 30-()00-barrel daily (1ilota, phiaseoimt of the refiners crude oil allocations based oii historical imports, retention of tile sliding scale preference for smaller refineries, increases of imports for petiochietnical 1)rodlucers, and a series of other proposals outhned on page ~59 of the report. M~jon POINTS MADE IN TESTIMONY BEFORE TIlE SUBCOMMITTEE ~earlv every witness testified to the necessity of controls on oil im- I)oI'ts as being essential to the national security. Petroleum industry witnesses were in unanimous agreement that the recommendations of the task force majority on oil import controls would not provide 7 PAGENO="0067" 61 the necessary national security, that their estimates of the supply of oil from domestic and other North American and South American sources were too high, that their estimate of the cost of the program was too high, and that they had made other serious mistakes. A few witnesses made special pleas for specific industries-petrochemicals, coal, and independent fuel oil terminal operators. Following is a summary of the major points made: NATIONAL SE('TRITY Because oil and gas supply three-fourths of F~S. energy. they are essential to the economic health of the country. Everyone including the task force majority on oil iml)Ort controls recognizes that if the United States becomes dependent on foreign sources for the majority of its ietroleum supply, our economy could be brought to a standstill, if that supply were denied for an extended period. Because such a large share of the world's petroleum reserve is in the Middle East, which has cut off oil supplies for short periods before and which ap- pears headed for Russian domination, the possibility that oil supplies from foreign sources could be cut off for an extended period of time is a distinct possibility. Therefore, it is essential that the United States adopt the measures necessary to provide as large a portion of its petro- leum supplies as possible from within its own boundaries. The domes- tic petroleum industry with the right incentives caii provide the neces- sary reserves. However, if imports rise to such an extent that a signifi- cant decline in the price of crude oil occurs in the United States, it will discourage domestic explorations and consequently. after a l)erio(I of years, will make us dependent on foreign sources for the majority of our petroleum supply. The task force majority analyzed the effects of its proposal only to 1980, but the real impact will not be felt until later. Today the United States has about a 10-year supply of oil reserves at current rates of consumption. Conclusions drawn from study of a period when we are liquidating our inventory cannot be ext rapolated to a period when our inventory is gone. Under the task force majority program, impOrtS by 1983 would supply over 60 percent of U.S. demand, and much manpower and capital previously engaged in exploration and production would be diverted to other purposes. Long before it became evident that the I)rice reduction proposal of the task force majority had created a serious threat to national security irreparable damage to the domestic oil industry would have occurred and at that point little could be done to forestall serious impairment to the Nation's security in an emergency situation. Pointed disagreement. arose concerning the task force majority projections of the 1980 supply and demand situation, particularly those based on the chairman's recommendation. Serious doubt was also expressed regarding existence of the large additional volumes of Western Hemisphere oil to be available to the United States in 1980. Also, the task force majority report anticil)ateS that only 10 percent 8 PAGENO="0068" 62 of domestic demand would be supplied from the Eastern Hemisphere in 1980; other projections indicate approximately 30 percent, and by 1985 nearly 50 percent. As CS. dependence on Eastern Hemisphere oil grows, the price of that oil will increase. The t.ask force majority has included no assessment of the risk of extension of Soviet influence in the Middle East, which would enable them to control and shut off oil to the `West at will. While the task force majority emphasized that national security is of prime consideration, the recommendation of the majority by re- ducing the price of crude oil by as much a.s 20 to 25 percent, would drastically reduce the domestic exploratory effort. The subcommittee received a substantial body of testimony from both independent and major producers tha.t if this should happen, their resources would no longer be employed in exploring for oil in the United States. ESTIMATE OF U.S. SUPPLY AND DEMAND BY THE TASK FORCE ON OIL IMPORT CONTROLS The Task Force Majority on Oil Import. Controls recommended a considerable relaxation of import controls to the extent that the price of crude would decline initially by 30 cents and later by 80 cents. They contend that even with a. decline in price of 80 cents, the ITnited States, in the event of a 1-year cutoff of Eastern Hemisphere supplies in 1980 still would be able to meet demand from domestic and other `Western Hemisphere sources. They did not, however, look beyond 1980 to the period when the decline, in exploration caused by the reduced price would most likely become effective. Therefore, their confidence that these recommendations would not. affect national security is incorrect. Their forecast. for 1980 moreover is a very questionable one on which to take. action, as it. could seriously affect our national security, in that they have used the highest probable production figures for each supply source and also assumed the availability of supplies in an emergency such a.s drawing down inventories which are very unlikely to be avail~ able. Any estimate of petroleum supplies for a period 10 years into the future is subject to a significant probable error, but their forecast is even more likely to he in error because they consistently based it on the most optimistic assumptions. Their forecast for 1980 based on a price reduction of 80 cents per barrel compares with two other forecasts as follows: [Millions of barrels per day] Mililo Task force ns of barrels per day- Standard Oil Co. (Indiana) Gulf Oil Corp. Total U.S. petroleum demand U.S. production Availabfefrorn Canada Available from Latin America Total Western Hemisphere supply Required from Eastern Hemisphere Additional supplies in an emergency Surpfusor shortage in an emergency 19.7 21.3 19.7 11.0 3.0 3.8 9.9 2.5 2.5 8.8 1.4 2.1 17.8 14.9 12.3 1.9 6.4 7.4 5.1 3.2 0.2 -7.2 9 PAGENO="0069" 63 All of these estimates ale subject to forecasting uncertainties but tile possibility of the forecasts made by the two petroleum companies being closer to reality is too great not to recognize. the serious possi- bihitv that the recommendation of the task force majority woUld make the United States dependent on ifl11)orts for up to 55 1)elcellt of petroleum supplies and on Eastern I-Iemnisl)Ilere sources for up to 3S The report of the (~abinet Task Force on Oil IIflj)ort. Control recog- nizes time dangers of becoming overly dependent on Eastern Ilemi- sphere imlll)ol'tS and recommends that such inhl)orts be. limited to 5 per- cent of U.S. demand. For example, in ~)aragra~)h 34~d the report states as follows Some fluctuations in imports by sources should, of course, be expected as refiners adjust to tile new environment, but if state regulators fail to release prorationing or if for any other reason Eastern Hemisphere imports begin to rise signifi- cantlv, the restrictions on Western Hem isphere imports should be relaxed or abandoned. if estimated Eastern Hemi- sphere imports for any six months of the transition period would otherwise exceed 5 Pei~ceI~t of U.S. demand, these volu- metric limits should be expanded so as to keep Eastern Hemi- sphere imports for the. period at S percent of U.S. demand. Again, iii paragraph 4~b the rel)Ort states as follows if during the transition period pro~ectecI imports from the Eastern Hemisi )here exceed ~ pem'cemmt of domestic demand. the volumetric limits on imports from tlle Western hiemi- sphere should be expanded prol)ort ionatel~v to forestall such excess imports. Ii~ 19(;~, imports from the Eastern I hemisphere totaled 7G~,OOO, bar- rels daily, ~ slmowii on the table below. These imports were equal to 5.4 percent of domestic demand based 111)011 the l9Gt) average of 14.l4~,(W)() barrels per day. Iii view of the long history and 1e1)eated experiences of interriip- tions of Eastern Hemisphere imuj)olts and the existing international tensions in that 1)ili~t of tile ~vorld~ particularly in the major oil l)1o- ducing countries, tile subcommittee recommends that time Congress eon- 51(1(1 time ililposit ion of a legislative quota 011 Easterii I Ienlisj)llere 1111 ports. 1 immliting such i1111)0i'tS to apl)m'oxinlately tile ratio that such imj)orts bore to domestic demand ill lPGf). Iii time interim, the subcommittee urges time Oil Policy Committee to give immediate consideration td) the establishment of an administrative 1 iniit.at ion on Eastern hemisphere imports at iiI)l )roxiniately S percent of diolilestic. demand. 10 PAGENO="0070" 64 U.S. PETROLEUM IMPORTS FROM EASTERN HEMISPHERE, 1969 (Thousand barrels dailyl Refined Crude oil products Total Middle East: AbuDhabi 14 14 Bahrein 7 7 Iran 42 4 46 Kuwait 34 4 38 Neutral zone 43 43 Qatar 1 1 Saudi Arabia 3~ 9 44 Total 169 24 193 Africa: Algeria 1 1 2 Egypt 40 40 Libya 134 1 135 Gabon 1 1 Ivory Coast 1 1 Nigeria 49 49 Angola 1 1 Total 225 4 229 Others: Belgium 11 11 France 9 9 Italy 75 Japan 4 Netherlands 35 Rumania 4 Spain 12 12 Sumatra 88 88 U.K - 20 20 U.S.S.R 2 2 Total 88 173 261 Indirectimports' 85 85 Total Eastern Hemisphere 482 286 768 `Estimated imports into the United States of Eastern Hemisphere oil refined in the Virgin Islands, Trinidad, and eastern Carada. Source: Data obtained from Bureau of Mines and the Department of Commerce. For purposes of comparison there follows a table showing oil imports from the Wrestern Hemisphere: US. PETROLEUM IMPORTS FROM WESTERN HEMISPHERE 1969 (Thousand barrels daily) Crude Refined oil products Total Canada 557 Venezuela 306 Total . 863 Other: 51 569 608 875 620 1,483 Bolivia 15 15 Chile 4 Colombia 43 27 70 Mexico 41 41 Peru 1 Argentina -- Leeward Isle 1 1 1 1 1 Netherlands Antilles Panama 449 11 11 Puerto Rico 72 72 Trinidad 215 215 Virgin Isles 117 117 Total other 63 934 997 Total Western Hemisphere 926 1,554 `2,480 `Includes estimated direct imports of Eastern Hemisphere oil of 85,000 barrels daily from the Virgin Islands, Trinidad and Eastern Canada. 11 PAGENO="0071" 65 NATURAL GAS SUPPLY Natural gas I)rovides about 31 l)ercelit of the country's energy and heats over half of the housing units in the United States. Of this amount. about 35 percent is found in association with oil. The natural gas industry would be adversely affected by the recommendations of the task force majority on oil import controls. The decline in the search for oil would reduce the gas found in association with oil, as well as nonassociated gas discoveries. To bring about an increase iii the search for natural gas to offset the decline due to the proposal of the task force majority would require a very substantial increase in the price of natural gas. According to the Chairman of the Federal Power Com- mission, if we assume an elasticity for gas at one-half the rate in- cluded in the computations of t.he task force majority, and other realistic conditions suggested by the Chairman, this increase would be from 8.8 cents to 17.6 cents per Mc.f. This means an additional cost to consumers of from $1.8 billion to $3.5 billion. This increase in the price of natural gas would largely offset the projected savings esti- mated by the majority recommendations under the tariff proposal. THE COST OF TIlE OIL IMPORT CONTROL PROGRAM The task force majority on oil import controls estimates that. the cost to the consumer of the present system of oil import. controls is $4.848 billion. This has been rounded to $5 billion and has been widely quoted. There have been numerous estimates of the cost to the con- sumer. The estimate by the Office of Oil and Gas of the Department of the Interior estimated it. to be $~.2 billion in 1975 and something less now. However~ any cost to the consumer is offset by other benefits to the economy such as tax and bonus payments to Federal, State, and local governments, wages paid to employees. et cetera. Estimates of these offsetting benefits are as high as $4.6 billion. Therefore, even if the cost to the consumer estimate is correct, it is offset. by other bene- fits to the economy. On balance, removal of import. controls could well result in a net cost to the public. It' should be noted that the $5 billion cost of the import. program cited by the task force majority is not~ the saving under their proposal which still restricts imports. Their proposal would take most of the savings on imports in the form of higher tariffs and would make higher oil and gas prices a certainty. TARIFFS AS A METHOD OF CONTROLLING IMPORTS The task force majority recommends that the present system of quotas for controlling imports be replaced by a tariff system. A tariff system applied equally to all nations, as has been the longstanding policy of the United States, would immediately shut off imports from Canada aiid Latin America-areas of the world considered most secure. Consequently, the task force majority has recommended a system of preferential tariffs with no additional tariff for Canada and Mexico and an increase of $1.35 per barrel for Eastern Hemisphere and $1.15 per barrel for Latin America. Although this appears to be a very questionable action with regard to our foreign relations as it seems to 12 PAGENO="0072" 66 j)eflaliZe friendly foreigii countries just because they are located in the Eastern Hemisphere., it is not the responsibility of this subcom- mitte.e to pass judgment on this aspect. 1ie~iardless of the. preference feature, however, it would be difficult to achieve a desired level of imports with a tariff because the effect of any given level of tariff upon imports cannot be known beforehand. As a result, a tariff program would result iii a process of constant trial and error in seeking a proper tariff, and effective administration of the program would be impossible. Even if a level of tariffs couRT be found that would give the desired level of imports. the tariff would have to be changed frequently. Re- cent~ changes in tanker rates suggest the magnitude of changes in tariff levels that. would be necessary every time tanker rates changed, and they change by significant amounts frequently. The task force majority recognized that tariffs might not provide the restrictions necessary so they recommend a maximum level of imports from the Eastern 1-Temispliere equal to 10 percent of demand ~nd propose that import licenses for this volume be auctioned, with importers paying the tariff as well as their purchase cost in the auction. It seems most likely that~ the. maximum would rule and thus the task force majority has recommended a quota system together wit-h a tariff which becomes a tariff for revenue. This system would also favor those companies with the cheapest foreign source of crude and would tend toward concentration in the industry among a few large companies. DETRIMENTAL EFFECTS The most- immediate effect of the task force majority recommenda- tions would fall on the small business operator, the small producer, the small refiner. and the stripper well operator. These operators would be. forced out of business. Besides the loss of jobs and opportunity that would result, the oil that these stripper wells and marginal operators now produce would be lost. This is not good conservation. At the end of 19(;8 the stripper wells, producing less than 10 barrels each per day, had reserves estimate(l at 5.5 billion barrels. This amount of oil would most certainly be lost, immediately. Also, costly secondary recovery of oil would become less attractive and would acId additional losses. Exploration by the small independent operator would be curtailed and the major operators would confine their exploration only to the most aecessil)le and low-cost areas. It is very questionable if the present North ~lol)e development in Alaska would have taken lilace had the proposed tariff system been in force 6 to 8 years ago when interest first started in that area. BALANCE OF PAYMENTS The additional imports that would be permitted under the task force maj oritv recominendat ion woul dl undoubtedly subst-a~tially in- crease this Nation's adverse balance of payments. The subcommittee received testimony that the net additional outflow- of funds would amount to $30u million in 1070, $700 million in 1973, and $2.2 billion in 1078. Substantial increases in the use of foreign crude supplies by 13 PAGENO="0073" 67 1980 and beyond would increase the a(lverse balance of payments beyond the $2.~ billion J)rojected for 1975. ln all fairness to the ma- jority position it should be 1)ointedl out that the adverse l)alance-of- payments problem is proportional to the amount. of o~l imported wlietlmer it. be under a quota. plan or controlled by a. tariff. Ilowevei, as the. tariff proposal is designed to lower the price of crude and Pelmit substantially larger amounts of foreign oil to enter the United States, the. adverse balance of panients would i~e pioportionately greater under the tariff pioposal. The task force niajoiitv has stated the ~ation univ become depend- emit, on imports for 50 l)eIcel~t of our petroleuni requirements by 19$() under its recommendation. Some additional estimates may he helpful as to the magnitude of the cash outflow involved. Estimates of U.S. oil requirements show that by 1980 this Nation will be consuming some 0 million barrels daily. If half of this requirement is supplied by im- ports and assuming there is no increase in the cost. of imports above the current. price of about $ per barrel, the. resulting outflow of dollars would be approximately $9.5 billion annually. This is based upon Department of Commerce. reports which show that the. outflow for each barrel of oil, including freight and insurance, averages about 65 per barrel. Furthermore, if time Nation should adopt. a policy of becoming 50-percent. dependent on oil imports in 1980. the impact on natural gas exploration and development, would be drastic with time result. that we would also have to rely heavily upon imports of natural gas. If we become dependent on imimports for ) l)(~m'c(~m~t of our oil requirements, it is logical to assume that we likewise, in time long inn, would become dependent upon imports for some So l)(~ieflt of our gas requirements. FPC Chairman John N. Nassikas, in his dissenting views in the. Cabinet Task Force report, estimates time, cost of liquefied natural gas (LNG) at. time eastern `seaboard at 60) cents per' thousand cubic feet. Every indication is that this is conservative and that. the cost actually might. be substantially higher perhaps rising to $1 or more, depending on how far inland the LNG might be used. But, using his estimate of 60 cents per thousand cubic. feet. and assuming that. our natural gas requirements which are now some :20 trilliomi annually will increase to 30 trillion by 1980 the dollar outflow for 50 percent of this requirement. would be a.n additional $9 billion annually. Thus, the dollar outflow by 1980 for both oil and natura.l gas im- ports could be in the order of $18 billion annually. By 1985, in view of rapidly growing requirements. the outflow would be substantially greater. It. seems to the subcommittee that this analysis indicates that time impact on tIme cash outflow could be absolutely intolerable a few years hence if we. should a.dopt. a. policy of increasing dependency on foreign sources for our oil and natural gas needs. THE NEED FUJi STABILITY TO A~FRACT INVESTMENT (`APITAL The Nation's economic system is basedi not only on actual profit and loss. but. on exj)ectat.ion that. a profit. ca.n be realized and loss can be avoided. Tax incentives for oil exploration were reduced by Congress in 1969 and now the very existence of time task force report, with its majority recommendations for reducing the. domestic. price of oil, introduces a new element of uncertainty into an already uncertain business. 14 PAGENO="0074" 68 Money is spent today for exploration and development in the hope of finding oil that can be sold profitably under conditions existing not in 1970. but in the decade 1975-85. (`.~PITAL TWQUIREMEXTS It ha~ been e~timatecl that the Iilite(l States will consume daily iiearlv 1.-i mill ion 1 )aI'I'els of oil an(l .)~ billion cubic feet of gas during 1970. By l9~5 this will have increased to about ~2 million barrels of oil and 90 billion culnc feet of gas or an increase of about 5) pei'cei~t. Based llJ)O1l test imoiiv of ,John (~. ~Vinger, vice president of the Chase Manhattan Bank. the domestic petroleum industry will need to dc- velop a total of about 105 1)illion barrels of oil and 560 trillion cubic feet of gas between now and 1985 if this Nation is to maintain a mini- mum safe inventory of proved petroleum reserves w-ithout becoming more dependent on foreign sources of supply. To find such amounts of petroleum will require an expenditure of ~150 billion. As the. total outlay during the past 15 years has been about ~68 l)illiOn, the capital outlay must. be doubled or tripled in the next 15 years to stay even with the increased amount. Fnless the rate of expenditure is increased that goal will not be reached. If the. present. rate of expenditure holds until 1985 the total outlay devoted to the search for more petroleum will amount to 875 billion. It follows that any decrease in the domestic price of crude will certainly not act as an incentive for the required and necessary increased exl)enditllres. As there has beemi a. constant relationship, for the last. 15 years, between funds spent on exploration and proven reserves, there appears little reason to expect this relation- ship to change. A decrease in exploration means a decrease in petro- leum reserves. It neither seems likel\- nor logical to expect that. the petroleum in- dustrv could increase exploration in the face of declining petroleum prices. The alternative is a decrease in pro\-en reserves and a greater dependency on foreign supplies. l'RORATION ING The task force majority suggested that their recommended program \vOlIl(1 eliminate State prorationing and implied that. market demand ~)rorationing was an evil and a J)I'ice-settlng mechanism. The testimony of several witnesses from State agencies showed that price control is miot. au objective of market demand prorationing and that it is neces- sary as a. conservation measure. They reviewed the chaotic conditions prevalent in the clays of unregulated production which was character- ized by waste amid sharply fluctuating prices. Eyiclence was presented to show that in constant 195~ dollars during the 40 years prior to J)ro- rationing, the average pi'ice of crude, despite the wide fluctuations, was ~ a. barrel. In the ~5 years under prorationing and before un- l)0I't controls the average price was ~ and in the 11. years of both ~)rorationing and import conti'ols the average price was I'Iiere was also in(lication by the task force majority that the cErn- mat ion of ~1'oratio1ling wouldi increase production and bring into play much of the shut-in ca~)acity of many of the wells in the southern and ~rulf coastal areas. The testimony received by the subcommittee brings into questiomi the a vailahihitv of much of this estimated shut-in capac- 15 PAGENO="0075" 69 ity. Although this shut-in capacity has been estimated to be of a substantial amount, efforts to increase production sign ificiuitiy (luring emergency periods of the past few years indicate this may be much less than originally anticipated 1)0th as to (holy ~1lU0Uflt5 aIl(l duration of )r()(luction. Indue ieliance on tins proi ectecl si lilt - 11 (~ )~icitv would be unwise without further detailed investiiiarion. SPECIAL PROBLEMS There. are two pioblein areas of special significance wli icli this sub- committee feels should be iioted. They are CoaJ.-The Government's policy on imports of iesidual fuel oil needs to be. reexamined and reevaluated. The pressures \vluclI have been building in recent months to open district Il-TV to imported residual fuel oil adds a sense of urgency to the poller review. Experience in district I (the east coast) shows dearly what can be expected to result once imported residual oil gains access to L.S. mar- kets. Imports into district I in 1909 totaled ahnost 4~() million barrels. Almost. ~5 perem~t of all residual consunied in the area oroiinates over- seas. This is an increase of about 125 million barrels over imports iii 1960, the rear in which all controls were essentially removed. This significant increase in imports raises a number of serious ques- tions involving national security. Secretary of Defense. Melvin ii. Laird, reflected the misgivings of this subcommittee about current residual oil import policy in his presentation to the Cabinet Task Force on Oil Import. Control. The report of the task force, in summarizing Secret a rv La irci's posit ion, states: 1[e. also considers that the question of residual fuel oil has not. been adequately analvze(l an(l believes that the effects of virtually free. access to foreign residual oil on U.S. markets and U.S. refining cal)abihties have 1 een such as to mimake the contmuecl exemption of residual oil from import. (ontrols open to question, lie strongly urges that tile entire sul)ledt, of residual oil be studied as quickly as possible. One. development. winch demands consi(leral)lv mole attention the ii it has received has been the. rapid conversion of the east coast electric generation system to burn imported residual fuel oil. Even if the un- ported oil should continue to originate in Venezuela and other Carib- bean areas, as it. has primarily iii recent years, there would still be cause of grave concern over the securit of supply in times of emer- gency. But in recent. months there lìas been an alarming shift in the source of sul)l)lv from the Caribbean to North Africa and Middle East oil producing areas. Even the most enthusiastic supporters of a liberal- ized oil import program must admit. that these. areas are the most insecure source of suppl~ and, therefore, the most readily subject to interruption. This subcommittee does not. believe, nor does it recommend, that re- sidual oil imports into the east coast should be. (lit off or rolled back. In time rst. place, it is doubtful that domestic fuels in sufficient. quantity \Vollld he availal)le. to replace them. Secondly. 511(11 a move would cause economic chaos until alternate fuel supl dies aie developed. But the 5l1l)cOmlllittee, believes that a stail must be mne(le iii ci iecknig 111(1 16 PAGENO="0076" 70 (ventuallv reversing the trend which, if it continues unchecked, will iiiake the entire industrial complex in the vitally important east coast area ~vlioIlv dependent upon a foreign fuel for its uninterrupted Opera- t ion. `This call be achieved Lv uSinL~ l)1~.sent import levels as a base and then permitting imported oil to share in the growth in fuel consulnp- t ion in the area in future years. In this manner, there will l)e re-est al)1 islle(l an incentive for domestic fuels industries, and l)artic- iilarlv oal, to develop the productive capacity to serve the area. 11w 1)rol)osedl imports of residual oil into the interior of the Nation, via tin Mississippi River. are predicated upon the need for more low- siliplilli fuel to meet air pollution control requirements. The cost. of low-siil phur fuel is high in relation to domestic fuels, as much as 50 ercent- greater in some cases The sul)committee fears that if a policy of permitting fuel consumers to meet their low-sulphur fuel require- ilieiits through imports is followed, serious problems, aside from n~t- tonal security, will be raised for the Nation. In the first. place, much of the incentive to develop technically and economically feasible methods br `ontrolling pollution from burning high-sulphur domestic fuels \vill he destroyed. This subcommittee feels that a major effort must be lIla(le In' this Nation to redeem high-sulphur coal for the market and to further (levelop and use the vast amount of low-sulphur coal in the \\esterml states. But to give assurance to electric utilities and other iiia~or users of fuel that they can meet air pollution regulations by iln~)orting fuel into an a lea which heretofore has been immune to im- orts is riot a sound way to approach this national commitment. The subcommittee. fully reco~nizes the need to control pollution hut feels hat there, are acceptable alternatives other than the importation of boi'eign fuel oil. Pei'mmiitting unlimited imports of low-sulphur oil w-ould add sign ifi- eantlv to our balance-of-payment l)mo1)lems. Tn 19(~9, this Nation had to expend ~G( ) million to pay fur time resichmal oil it iml)ol'ted. Perhaps ~()1iri' (ove!llmeIlt e(olIomists ale now attempting to downgrade the in this country, Payment of dividends and repatriation of profits. But the fat remains imported oil `ontril)utes substantially to our contm- lung balance-of-payments deficit and a policy of unlimited residual oil mports into the Midwestern states would add to the deficit. Some. Government econ~nmists are now attempting to downgrade the (cofloill i(' mm j)01'taflce of the I IIlulmce-uf-})avmnents deficits. This sub- committee cannot. accept. this approach to a difficult 1)IOl)lelfl and we urge that ever feasible measure. be taken to reduce or eliminate the avme.nts deficits. I changed policy on residual oil imports should l)e a iiiajor factor in achieving this end. Tile subcommittee urges that imports of residual oil into Districts IT--TV continue to be subject. to omitrol~, with special allocations ,~n'ant ed oilhy in tile most unusual of cases and with a clear understand- iimg that development of tile pollution control technology must take 1)1eccdlence. over imported fuel as a means of meeting the Nations goal of clearing up the air. Peti'oc/einieals.-The cost. of domestic crude is higher in the Tnited ~t at es t hi an imported foreign supplies. Consequently, the petroleum raw materials (feedstocks) employed by the domestic petrochemical industry in the production of chemicals and plastics are more costly here than in Europe or .Japan. This cost difference places domestic 17 PAGENO="0077" 71 petrochemical producers at a disadvantage with some overseas pro- (ulcers using the cheaper feedstocks and may threaten to impair the ~1.3 billion a year contribution which petrochemical exports make to the balance of trade.. The cost differential also provides an unfortunate incentive to locate petrochemical plants abroad rather than in the United States. These contentions were spelled out in some detail in the submissions filed with this subcommittee. Bot.h the task force majority report and the separate report of Secre- taries Hickel and Stans agreed that the supply of feedstocks to the petrochemical industry should be improved. The separate report spe- cifically recommends that petrochemical producers be provided with a growing volume of imported oil. The subcommittee is aware of the problems of this industry and rec- ognizes that for it to remain fully competitive in world trade some improvement in supply of feedstocks and their cost may be required. The subcommittee, while recognizing these industry problems is even more aware of the dangers of dependence of this industry upon dis- tant foreign sources and emphasizes the need to work out a solution to the industry's problems that takes into account the need for a healthy domestic petroleum industry. THE PRESENT MANDATORY OIL IMPORT PROGRAM During its deliberations in connection with the 1968 hearings this subcommittee found tha.t the present mandatory oil import program had been successful except for certain administrative weaknesses and inequities. Our more recent hearings reinforce this conclusion. Almost all witnesses appearing before the subcommittee testified as to the necessity for a continuation of the import program for the national security of this Nation. There was also widespread agreement that the present import program has been successful in its basic objective and needs only to eliminate certain special benefits built into the program after its inception. The subcommittee feels that it is highly significant~ that, on the basis of testimony received, it must be concluded that from the 1957-59 period up to 1969 crude petroleum prices inc.reased only 2.1 percent compared to a 12.7 percent increase for all wholesale prices. During the same period consumer prices increased 27.7 percent but retail gasoline prices were up only 10.5 percent and heating oil higher by only 15.2 percent. It appears to the subcommittee that few, if any, other major indus- tries have done~ as well in holding the line on l)Ii(e lilereases as has the Petroleum and natural gas industry. (o~IMITTEE FINDINGS The following points summarize the findings of the Subcommittee oii Mines and Mining with regard to the hearings held on the matter of oil imports awl the 1)ro1)os~Ils of t lie (~al a net Task Force on Oil Imports 1. The national security of the Fiiited States, is, and must me- main the overriding objective of any oil import program. Both the task force. majority, the separate views by Secretaries Hickel and Stans, and Chairman John N. Nassikas of the Federal Power 18 PAGENO="0078" 72 (ommission. as well as witnesses appearing before the subcom- mittee. agreed oii this as the. basic objective. There was also basic agreement that sonic form of import. restriction, whether it is a tariff or a quota. is necessary to l)reVeilt. undue reliance upon in- secure foreign oil. This subcommittee reaffirms its position that it is necessary to control the inflow of foreign crude and unfinished oils in order to maintain a. strong and healthy domestic petroleum industry for the protection of this Nation in time of emergency. 2. Imports of crude oil and refined products now make up a very substn I port ion of this Nation's petroleum requirements. Imports now average approximately one-third of domestic pro- duction and one-fifth of domestic. demand. In the opinion of this subcommittee any significant increase in the import must be avoided as they have already reached dangerous proportions. 3. Any future estimates of petroleum supply or demand are subject to the uncertainties of forecasting. However, the task force majority report a.l)pears to be unrealistically optimistic on the development, of as ~vet undiscovered reserves in the Western Hemis- phere and, accordingly, that. available from these sources. At the same time it has underestimated the probable need for Eastern hemisphere oil and the degree of dependency on this insecure source under the majoritvs recommended program. 4. Supplies of natural gas are. already critical and unless im- mediate relief is provided the shortage will undoubtedly increase. Any decrease in the price of domestic crude, brought a.bout by increased imports, will further discourage the search for bot.h petrol eumn a.nd n a.t ural gas. 5. The estimated cost of the present control program, as com- pared to no controls, has been greatly overstated. Rather than the ~5 billion annual cost suggested by the task force, a more realistic figure probably is less than $1 billion. When full consideration is given to intangibles and to the very real probability of higher foreign crude prices once this Nation's dependency on foreign sources is w-ell established, there actually may be a net benefit. to the economy from the present iml)ort program. ;. The. immediate effect of the ProPosed tariff proposal would fall hardest on the ~mnall operator. The small producer. the small refiner, and the stripper well operator would be forced out of business. 7. The 5.5 billion barrels of oil now estimated as reserves in stripper wells would be immediately lost. Such a loss cannot. be recovered later. This is not. proper conservation of a valuable and nonrenewable natural resource. Costly secondary recovery of oil from marginal and partially depleted fields would also be dis- con ra.ged. 8. Adoption of the task force majority proposal would have an immediate adverse, effect. on this Nation's balance of payments. This has been estimated at not less than $2.2 billion per year. 9. The subcommittee recognizes imperfection and inequities in the existing mandatory oil import program. It. believes, however, that these are faults of admiiinistration rather than deficiencies in the program as conceived. 19 PAGENO="0079" 73 10. I)uring the past I ~ year- the p(~tIolelu1~ iii(lustiv hats ~pent about. ~ l)i] lion searching for oil and gas. i\[iieh 1 arger amounts of capital will be needeti in the futu ic. Any de1 inc in the p1-ice of domestic. crude. will not provide ti ie iiecessarv inceiit i ye for in- creased exploration. Less exploration will result in less oil found. However, if proper incentives for exploration aiid development are provided this Nation has the potential of remaining sub- sta'ntiallv self-sufficient in the energy field. The vast potential energy reserves in coal and oil shale ha ye not been developed. ( )ur oil shale reserves (estimated at ~ ti-il] ion l)arre]s) exceed the petioleuin reserves of the Middle East and coal reserves are. esti- mated to exceed 1,0(H) years su])plv. Estimated undiscovered oil in the United states is l)laced at ~ trillion barrels and natural gas at. 1,~00 trillion cul)ic feet. While some small percentage increase. in iml)OrtS ma be cx- !)ected in the normal course of events, this subcommittee must tonclude that this is not a. nation lacking in energy supplies. The real question is our desire and ability to develop and use the re- sources available. ii. Prorationing, a.s practiced by the several States, is a neces- sarv conservation practice to assure maximum economic recovery from a. field. Elimination of prorationing as suggested by the task force. maiOritv may result in a. temporary increase, but would result. in an overall loss of production. 1~. The task force majority places more confidence and reliance omi the estimated shut-in capacity than is justified. Although there is undoubtedly some shut-in capacity in the United States, the subcommittee believes it to be substantially less than that est.i- mated by the majority report. Undue reliance on this source for future supplies may prove unwise. 13. The displacement of coal by oil is of special concern. to the. subcommittee. The east. coast now relies largely upon imported residual fuel oil. The subcommittee does not. believe that the amount of residual oil imported is likely to be cut back but it. does believe that. immediate, attention must be given to working out a. formula. under which imports would be permitted to increase at a i-ate which would be consistent with the increase in the overall (leman(l for competitive fuels on the east. coast. In this way im- 1 )orted residual fuel oil would be permitted to share in, but not dominate, the east. coast. growth market. for industrial fuels. In reaching this conclusion, the committee took note of the pub- lished concern of the Secretary of Defense over the effects of east toast dependence on foreign fuel, as well as the fact that a shift toward North Africa., an unstable. area of the \vor~d, as a source for imported residual is now beginning to develop. 14. The subcommittee recognizes the problems of the petro- chemical industry and its need for adequate. low-cost feedstocks. This was also recognized by both time. majority and tIme separate reports of the task force. If this industry is to ret.ain a competitive position in the world nmrket it. will require an improvement in the present feedstock situation, which should be accomplished without increased reliance on distant. sources and without penal- izing domestic industry, if possible. An in-depth study of this matter is urgently needed. 20 PAGENO="0080" 74 l~. Research should be continued and intensified for the use and development of synthetic fuels. The vast oil shale and coal deposits of this ~ation cannot be ignored as they make up the ~reatest potential source of fossil fuel energy in this country. This subcoimnit tee reaffirms its position that mt ensifieci researcl i and development, both by the Federal Government and private industry. are necessary in the synthetic fuels field. Any cutback iii Government research fimds in this area at. this time could force this Nation into a position of dependency upon unreliable sources ~f foreign crude. i(. The increasingly omnibus situation in the Middle East is of grave concern to this subcommittee and any increased reliance upon this geogra~)hic area as a source of oil al)pears to he less than prudent. In this respect the reservations expressed by the Secre- t~irv of Defense are well taken. The subcOmmittee fully agrees with Seretary Laird that. the tone of the majority report infers a capability of reacting to an oil emergency that is overly optimistic. The subcommittee also fully agrees with his observations that the residual fuel oil question has not been adequately analyzed and that. it. must. be given further consideration. And last, but. of utmost importance, the subconunittee fully concurs with the Secre- tory's views that domestic exploration must be maintained at. approximately current rates and that. no reduction in reserves be allowed. The subcommittee, while agreeing with the Secretary on these and most other reservations he expresssed, differs in that it is of the strong opnion that adoption of the majority task force recommendations will prevent the realization of these national security objectives. In view of the very grave storm signals coining from the Middle East this subcommittee cannot stress enough the danger in further reliance upon oil from this area. The subcom- mittee feels it would be remiss if it did not stress the national security aspect of this problem and strongly advises that top level consideration be given to any additional dependency upon oil from these~ troubled and unreliable sources. 21 PAGENO="0081" 75 SEPARATE VIEWS OF MR. O'IIARA ANT) MR. CAREY ON THE REPORT BY THE SUBCOMMITTEE ON MINES AND MINING: THE OIL IMPORT QUESTION BACKGTIOFND OF TI I F ~\ L~XDATOJIY OIL I ~iPowr (~oxTrioi~ PI~Oc,n.~M Any evaluation of the present iml)ort control program requires some knowledge of the circumstances under which it was established. For decades before and during World War II, wOrl(l oil prices were linked closely to the U.S. gulf coast price. With the development of market demand prorationing-lirniting productioi~ to whatever percentage of the maximum efficient recovery rate necessary to protect the price structure-by the principal oil-producing States, U.S. prices could be raised with the secure knowledge that the world 1)rice level would fol- low. This link was broken through a variety of factors during the 1950's. The 1956 Suez crisis provided an excuse for producers to raise U.S. crude prices by 25 cents per barrel (40 cents per barrel for gulf coast (`rudes) in February 1957, with Venezuelan 1)rices following. Mid- eastern prices went up by only half this amount, however, and even these prices could not be maintained. As Mideastern prices eroded in 1957 and 1958, matched by heavy discounting of Venezuelan prices, foreign oil began to move into the U.S. market in quantities sufficient to threaten the IT.S. price level. The domestic oil industry used its powerful political influence, aided by the coal industry, to persuade the Federal Governument- to limit this flow. A voluntary restriction program was inaugurated in July 1957. When voluntary restrictions proved ineffective, the President instituted the mandatory import control program on March 11, 1959. The stated purpose of the controls is to maintain a prosperous do- niestic industry in the interest of national security. There can be, and is, shari) disagreement on whether the program is essential for national security. There can be no disagreement about. the fact that its practical function is to insulate U.S. crude. oil prices from the decline in foreign prices, to implement State market demand prorationing, and to pre- serve a level of crude prices substantially higher than would be l)oSsible in the absence of controls. COST TO CONSFMET7S The success of the mandatory oil import control program in insu- lating U.S. crude oil prices from the world market has been achieved at tremendous cost. to the consuming public. Because of the 1)rogram consumers pa higher prices for gasoline, heating oil, pul)lic trans- ortation, eleetru'itv. and most things they buy than they would in the absence of controls. ~\[r. ,John Lichtblau, director of the Petroleum Tndustrv Research Foundation, found that. in 196$, excluding taxes, Montreal consumers paid 3 cents per gallon less for gasoline and 4 (22) 37-143 0 - 74 - 6 PAGENO="0082" 76 cents per gallon less for home heating oil than did New England con- sumers: the difference is that the Montreal products are refined from imported oil, delivered to Portland, Maine., and moved across New England via a Pipeline to Canada.' At the end of ~July 1970, the New ~1oik I larbor price for 1)111k regular gasoline was 13.3 cents per gallon at Rotterdam ( very nearly the same (liStance from the Persian Gulf, via, the Cape of Good Hope, as New York), the bulk price for 9l/9~ octane gasoline was (~ cents per gallon, less than half the New York price.2 These examples give, some indicat ion of the effect of import (ontIOls on prices. The Cabinet Task Force estimated that in 1969 consumers could have. saved nearly ~5 billion had controls been eliminated at the end of tile pi~ev1ous year: the Office of Emergency Preparedness estimate was ~5.3 billion. 13v 1~O, according to the task force staff, the cost to con- sunmers will be S~.4 billion a year. This long-run estimate is in general agreement with one submitted by the very competent economic re- search staff of Standard Oil Co. of New Jersey. Jersey Standard's estimate is for a cost of ST billion annually, asSumning a Price. increase o~ So cents per barrel for foreign oil under an alternative, assumption of stable long-run prices ( anticipated by most independent. econo- mists) time .Jersev ~tandarcl estimate comes to $10.~ billion a year by 19~). In more immediate terms, the task force estimated the 1969 cost to consumers throughout the. country at 524 a year, or S1~0 for a typical family of five. This is, in a very real sense, nothing more than a special tax levied on the general public for the exclusive benefit of the. oil industry. We are unimpressed by the majority view in this report. and time minority argument in the task force report that. the cost to con- sumers is not a cost to the economy, since the loss to consumers is offset by benefits in the forms of dividends to oil company stockholders, wages to industry employees, royalty payments, or State oil taxes. We look instead a.t the fact tha.t 200 million People are being taxed through inflated prices for the benefit of a. select, small segment of the popula- tion: and that. the citizens of 50 States are. expected, through the im- port control program, to sul)sidize the governments of, say, five States which produce most of our crude oil. We agree with the subcommittee. majority that the vague and am- l)iguOus tariff 1)1~o1)osal of the task force would prevent consumers from realizing more than a fraction of the potential savings through aban- doning the present program. T~.S. crude prices would still be pro- tected indefinitely at a. level well al.~ove the world price, although some- what. lower than current prices. About the most which can be said for the tariff proposal is that the economic windfall now enjoyed by re- finers would be channeled into the Federal Treasury. WTe would prefer a policy which would insure that. the fullest possible savings be passed omi to the consuming public. EMPLOYMENT EFFECTS OF INCREASING IMPORTS The majority view, in a striking piece of hyperbole, suggests that increased imports would threaten the jobs of 1.2 million workers in the oil. business. There is no explanation that most of these workers are Oil & Gas Jouri~a1. Mar. i) 19G9. p. 7S 2 `Platts Oligram' Price Service. July 28. 1970. 23 PAGENO="0083" 77 employed in the refining, distribution, wholesale and retail marketing segments of the industry, jobs which would be cornl)letely unaffected by an increase in crude oil imports. To the extent. that any employment effects were felt, it. would be among oil and natural gas field workers (total employment of 145,000 in 1969, according to the Department of Labor) and oil and gas field service workers (134.000 in 1969). It may be noted that the 1969 total of :279.000 employees was sub- stantially less than t.he 330,000 reported for 1959, the first year of the mandatory program. This can hardly be blamed on imports, since domestic production of crude oil and natural gas liquids rose by 36 percent and natural gas by 67 percent over the. decade. The loss of 5.000 jobs a year through productivity increases has not apparently caused any problem either to the industry or to the economy. Nor is it likely that a relaxation of controls would displace workers at a rate which would hinder their ready absorption into other areas of the economy. We are. not at, all convinced that. unemployment is a necessary result of the relaxation of controls. Even a sharp reduction in welihead price would have little effect on l)rodllctiofl from existing fields; in- deed, such production might increase with a concomitant relaxation of State controls which would permit wells to be operated at their most efficient rates of out1)ut. It is possible, but. by no means certain, that a decline in wellhead price would reduce employment in explora- tion activity. This could be prevem~ted. however, by the. development, of Policies which would encourage exploration more successfully a.nd at lower cost to consumers than the present import control program. RESIDUAL FUEL OIL The majority of this subcommittee views with alarm any proposals that imported lo~v-sulfur residual fuel be permitted into the Midwest. Such a position ignores the critical energy requirements of utility and industrial consumers in this area. as well as the right of citizens to reduce air pollut ion as rapidly as possible. In view of the price advantages of gasoline and distillate fuels, domestic refiners east of the Rocky Mountains endeavor to minimize the. proluction of residual oil : advances in refining technology had reduced the yield of residual oil to onl S lercemit of refinery output in districts I-TV by 196~: domestic residual product ion in that year was little more than one-third of industrial consumption. The inability of domestic refiners to Sul)pl'V residual fuel led the Government. t.o eliminate import restrictions in district I in 1966. To- day the industrial expansion of the Midwest is threatened by shortages of fuel capable of meeting new antipollution requirements. The major- itv would have us delay a solution to this problem-and delay indus- trial development, in the. Midwest-until the technology of eliminating I)ohlimtion from coal-burning plants has been perfectedi. We. cannot. agree to such a policy. Restrictions on the importation of residual fuel oil into districts TI-TV should be eliminated immediately. The. majority points out. that low-sulfur fuel is expensive : this in itself should provide an economic incentive to coal producers and users, with Government. assistance if necessary, to eliminate air pollution from 24 PAGENO="0084" 78 coal furnaces. Certainly, a strong effort should be made in this direc- tion, but the mandatory oil import program is not the proper vehicle ior such an effort. Lxperience in limited foreign wars suggests that. the availability of oil is not likely to be a l)I'ObleIlL According to the Department of De- feiise, 90 percent. of our military and naval requirements for t.he Viet- namese. conflict has been met from foreign sources-65 percent from the Persian Gulf and ~5 percent from Caribbean and Southeast Asian suppliers.3 DOD reports in the same source that sOme 440,000 barrels per day of the total US. defense requirement. of 1.1 million barrels per day is secured from foreign sources: this amount is less than 4 percent of domestic. output and well within the production capacity of the United States. So far as military requirements are. concerned, the Department con- chides that, "In the foreseeable future, partial or complete denial of foreign oil to this Nation would not, in any important degree, limit our capability for military action and/or negotiations." The Depart- inent points out, it is t.rue, that supply interruptions could pose a much more serious threat. to our allies in Western Europe and Japan, who are almost. completely dependent upon imported oil. We are not. con- vinced, however, that the mandatory oil import. control program pro- vides an acceptable or a satisfactory solution to this problem, consistent with the cost to American consumers. NATIONAL SECFRITY AND FOREIGN OIL SO~TRCES National security is the comprehensive argument advanced by the domestic oil industry and its supporters in Go~-ernment. to justify t.he oil import. control program. It. is l)resumed tha.t the nec.essity to be as self-sufficient as 1)os~sib1e in hydrocarbon energy sources requires the United States to maintain crude. oil prices which are at. least double the world price level. Evaluation of the import control program as a security measure calls for some definition of the problem. There appear to he. three contingencies in which security need be considered: general ~var. limited foreign war, and political interruptions to crude oil supplies. Little need be said with respect. to general war. It would be un- realistic. in the extreme to suppose that. such a war, involving the United Sta.tes and other developed nations, would be a protracted "conventional" replay of World Wars I or II: rather, it would be nuclear conflagration of short duration leaving unimaginable destruc- tion of lives and property in its wake. No military authority believes that. crude oil supplies would be a problem in nuclear war. The prin- cipal question would be whether the Nation would survive with suffi- cient. refining and transportation capacity to use the crude it possesses. The third contingency, political interruptions to supply, appears on its surface to offer the most. serious threat to security. Proponents of import controls advance. the. following argument: Should the United States become dependent upon foreign oil to any significant degree, we would be. at. the. mercy of politically inspired boycotts of such oil-not "Department of Defense Submission to the Cabinet Task Force on Oil Import Control,' iii~!~1on ~o. ~1 p ~. `Ibid., p. 4. 25 PAGENO="0085" 79 in the. military sense, but in terms of energy SuI)pl ies vital to the func- tioning of our economy. We. agree that the political risks with any Particular foreign source are greater than the risks associated with domestic production. This means that there may he occasional ternl)o- rarv dislocat ions of established supply lines (such as the one we see in the summer of 1970), dislocations which are inconvenient but which can hardly be classed as emergencies. We believe, however, that fears of widespread, general shortages of foreign supply have been grossly exaggerated by those who Profit from existing iml)Ort controls. Such fears ignore the simple fact that oil provides the l)riflciPal source of income to most oil-exporting countries. Their need to market oil is far greater than the needs of the [nited States or any other oil- importing country to buy oil from a single source. For this reason at- tempts to pressure. consuming nations by withholding oil have a history of failure. In the most serious example of this, the 3-year total shut- down of Iranian fields in 1951-54 (actually a ho cott. by the interna- tional oil companies against the Iranian Government), the elimination of Iranian supply was rapidly oflset liv an expansion of Saudi Arabian production. More recently, the attempt by certain Arab nations to boy- cott. the. ITnitecl States and several of its allies, following the. 1967 Arab- Israeli crisis, failed because its effect on consuming countries was neg- ligible compared to its cost to the producing nations. Excluding the United Sta.tes and the U.S.S.R., foreign production of crude oil rose. by 150 percent. between 1959 and 1968, from 3.4 billion to 8.5 billion barrels a year. Among the countries which produced this ojl, only three had production in excess of a. million barrels a day in 1959~ by 1968 there were 7 million-barrel-a-day suppliers. Each year new foreign sources of supply appear as factors in the. world market. This in itself minimizes the degree of risk from l)olitical interruptions to the world oil supply. We suggest that. participation by U.S. oil com- panies and by the. United States as an oil customer in developing these alternative sources is a viable alternative to the import. control pro- grain to protect. our national security. TIlE POLITICAL FFYURE OF THE MII)EAST The majority view expresses great concern over the possibility that the oil-producing nations of the Mideast will come under Soviet dom- ination. Indeed, there is no question but that Soviet influence in the area today is far greater than it was in 1959. That this is so can be. traced directly to this country's oil import control program. The. ex- ceptions which have grown up to riddle the existing program are de- signed to favor Western Hemisphere oil: the tariff proposals of the task force. would go even farther in discriminating against Eastern hemisphere crude. We are. in the anomalous position of telling the mideastern nations, ~`W~e won't. take your oil, but. we don't, want you to sell it. to time. Iron Curtain countries either." Considering the importance of oil to their economies, it. is not. sur- prising that the mideastern countries view our posture. as a deliberate affront. Iii their part. of the world, U.S. oil policy is U.S. foreign pOl icy. Oil import policy as it. exists today, and as the majority would have it. continue in the future, could not he better designed to force the Mideast, into the Soviet, sphere. Our only hope of retaining any influ- ence in the. Mideast. lies in an immediate relaxation of imi~rt controls 26 PAGENO="0086" 80 on a nondiscriminatory basis which will allow Eastern Hemisphere oil to conipete in the I .S. import market with that from the Western I leinisphere as freely as the economics of production and transporta- tion 1)erluit. }L~WAII The case of Hawaii affords an especially striking examl)le of the inequities \vllieh have. developed under the import control program. For purposes of the ~ Ha\vaii is considered part. of district. V, dlesj)ite the fact that ~,5OU miles of open ocean separates the State from the west coast. This treatment contributes absolutely nothing to na- ional security. In the event of international conflict involving sub- marine warfare, hawaii \vouldl be isolated from the west coast as effec- tivelv as from the Persian Gulf. Nor do the controls applied to Hawaii j)rovi(le. a market for domestic production, since, the one refinery in the state has always operated almost exclusively with Persian Gulf and Indonesian oil. The. effect. of import controls in hawaii has been to preserve a mo- nopolv over the supply of petroleum products by the single refinery in the state, operated by a major oil company and supplying four other major oil marketers and two small distributors. AJthough the refinery runs on inexpensive foreign oil (laid down in Hawaii at $~ to $~.25 a barrel), the output. is priced as if it came from west coast c.rude trans- ported to Hawaii at. F.S.-flag ship~)ing rates, a theoretical cost basis rou~ihlv double the actual cost of crude to the refinery. As a result, hawaiian consumers pay much higher prices, excluding taxes, for gasoline than west coast coiisumers. Paving asphalt is priced 7.~ to ~ l)el'(~e11t above the west coast price. Bunker C fuel normally costs more in Honolulu t han in any other port in time world eXcel)t Capetown, so that 5hIip1)ifl~ avoids l.mnkering in Hawaii whenever ~O5Sii le. Again we repeat that there are. no offsetting benefits in terms of national se(umritv 01 stimulation of domestic production to these excessi \e (onsunlel osts. `\Ve therefore urge an immediate. exemption from import controls for the state of l-Iawaii. Whij he coniiiuittee l)rOce(lllreS do not hermit niembers of the full com- mittee ~vhio are not. members of the subcommittee to join in signing these views, several meml.)ers of the full committee have indicated their agreement with time content of this statement. They are. Mr. Ryan. Mr. Meeds and Mrs. Mink, who is particularly interested in the sec- tion pertaining to oil import control inequities affecting her State of Hawaii. JAMES G. O'HARA. hirGil L. CAREY. 27 PAGENO="0087" 81 SUPPLEMENTAL VIEWS TO THE MAJORITY REPORT ON OIL IMPORT-TARIFF HEARINGS The majority report and views in conclusion provide a useful updat- ing of the long studied oil import program. As to the conclusions reached from the study of the President's task force finding and the testimony. the undersigned differ from the views of the majority in several specific areas. The majority report either omits or understates in detail the effect on consumers of a continuing overly restrictive import policy. This policy which restricts imports to 12 percent. of domestic production at a time of burgeoning energy and fuel demands works a hardship in the consumer energy demand areas such as the eastern seaboard of the United States. This calls for comment as follows: 1. Consumer costs are continually increasing because domestic in- ventories and supplies are inadequate to meet demands for distillate fuels to heat. and power family dwellings, community facilities, hos- pitals. et cetera, in suburban and niral areas. This situation is graph- ically exemplified along the St. Lawrence River where a U.S. resident homeowner paid 16 cents per gallon for No. 2 fuel oil in the year 1969-7(), while his Canadian neighbor on the other side was able to purchase the same commodity at 12 cents per gallon. The 25 percent premium paid by the U.S. homeowner on a necessity of life, namely, the fue.l for his home heating plant, is clearly the result of unwar- ranted restrictions on imported distillate fuel oil. Fortunately, this administration has seen fit. to recognize such a situation as the above and has provided emergency quota relief b~ an additional allocation of 40.000 barrels of No. 2 fuel oil daily in the current program year. For situations such as this the oil import. pro- gram should continue to remain sufficiently flexible to allow the admin- istration to meet. specific shortage and emergency demands on a prompt and expeditiousbasis and, indeed, the administration should be com- mended for its initiative in this regard. The program should be con- tinued in such a way as to allow such initiatives to be undertaken wherever the need requires. 2. The acute need of urban area authorities to cope with air pollu- tion by heat. and energy production plants is so immediate and urgent as to constitute a clear and present danger to the. maintenance of life. The majority view suggests that demand for low sulphur fuels in this area may be met. by greater utilization of coal and what it calls ~acceptable alternatives other than the importation of foreign crude." Lacking such alternatives (and none are sl)ecified in the majority views) here or on the horizon we face. pollution at such critical levels in our cities that it is imperative that the oil import program should not only permit but. actively encourage low sulfur importation in what- ever quantities are necessary to meet time demands for clean air now and in the foreseeable future. (2S) PAGENO="0088" 82 `\Ve strongly urge. that in no way would such an effort penalize the domestic l)roduction industry which by its own admission cannot. now I)rodlu(e to meet the current and prospective demand. Bather, the up- grading of heating and energy j)roduction 1)lantS through the utiliza- tion of fuels to reduce air pollution could result in the development in the private sector of a new domestic energy industry. It should aim to cal)ture a greater share of a growing market in much the same way as the major auto manufacturers are now ~)laflning compact cars to cater to the public requirements for less pollution nd more gas mileage in private transj)ortatiofl. In the majority views the assertion that the price of natural gas \vill escalate to the disadvantage of the consumer of this type of fuel, unless imports are curtailed, is a conclusion which is somewhat. ques- tional)le. In all probability the fact. that natural gas resources are now inadequate, on the industrv~s own testimony, would tend to indicate that such testimony should be carefully evaluated for the. following reason : If. indeed, natural gas resources are inadequate and the l)rices are due to escalate in keeping with an enlarged demand and an made- (jilate supply. it would appear that natural gas has been and is being oversold as a substitute for domestic heating oil and/or coal and not solely (inc. to the introduction of imports. `Whether import stocks are increased or not, natural gas as a source of energy and fuel would ai~pear to be overextended and that the market as it. now exists would be sufficient reason to promote new discovery operations to keel) l)ilce with the, very demand created by the intense marketing activity of the natural gas producers themselves. As to the supply of petrochemical~ the undersigned agree with the. subcommittee majority and separate task force in this particular. Both the. task force, majorIty report and the separate report of Secretary Ilickel and Secretary Stans agree that the supply of fcedstocks to the I)etlochlemical industry should be eased. The separate report specifically recommends that petrochemical h)ro~lucers 1)e provided with a growing volume of imported oil. In this the sul)committee evidently agrees and the undersigned heavily endorse this viewl)oint not only to keep the petrochemical industry competitive in world trade but also to allow this ~`ital industry to cx- pand its production facilities. This is in the interest, of consumer qual- ity and price benefits and the expansion of employment through its unparalleled supply of opportunities for manpower utilization at attractive rates of coml)ensatiOn. H~GII L. CAREY. JAMES G. O'H~RA. 29 PAGENO="0089" 83 MINORITY VIEWS OF JI( )N. P11 ILIP F. liI~PPE Aftee careful consideration of the findings of the ~iibcomimttee on Mines and Mining of the House Committee on Interior and Insular Xtiaii's on the oil iml)ort question. I recommend further analysis and evaluation of the divergencies of views expressed by the subcommittee and the Cabinet Task Force on Od Import Control majority and minority. While I. too, quest 1011 the oI)tiluisnl of the majority views, I believe that the merits of the majority position need to be carefully examined. While there is no disagreement on the stated purpose of controls, to maintain a prosperous domestic industry in the iiiterest of national security, I believe that further questioning of the efficacy, efficiency, and equity of the. presei~t mandatory import control program is war- ranted. I question whether pi'esei~t policy is the best to insure both a i~rosperous domestic industry and encourage growing sources of suppl at' a reasonable cost to the consumer. I feel that more alterna- tives should be developed and explored. Specificall. attention should be given to the assertion that the practical effect of the current quota system is to piotect US. producers of crude oil from the competition of lower world crude oil prices and, thus, maIntain a much higher price level than would be possible with- out controls. State h)rolationing' pratices, justified Iii the ~uterest of consei'vatim~ and stable prices, iieed to 1 )C (`Fit ical lv scriit in i zed. Curtail- ing product ion, i'ather than l)ellnltt ing niaximu ni re(ovel'v fi'oin effi- cient low-cost wells, tends to ilnl)ose a tax on th1e domestic consumer. )thei' possil )le inlurious etleits of prorationlilu' should also be exam- ined. Since the stated goal of any oil import control program is to assure adequate sources of suppiy and incentives for further explora- tion and cl~scoverv, perhaps the rolationhlig system, \viIichi limits pio- duc'tion, should be disbanded. `\V'hiile a relaxation of (`ontrols would bring a decline ill price her barrel, it could also result in an increase ~n production, volume, and effn"iencv of wells, and thus comparable net revenue. Ilather than a decline in the industry and diversion of niilnpow'er and resources to other sectors of the econom , maximum efficiency could I )C spurred, benefiting 1)0th 1)l'o(hllcers and consumers I am not convinced that exploration activities would decline. The. pros- ~ of increased production and revenue could well provide the in- centive to increase exploration and discovery ol)eIatiofls. In short, I feel that no recommenclat ions caii l)e adopted without further statistical evaluations. At a minimum, it seems we need to obtain and compare figures on (`nrrellt oil production costs and domes- tie. prodluction Potential to projected needs and reliable outside sources of supply. Specifically. it does not seem that a concerted attempt has been made to obtain estimates of maximum domestic Production in the absence of prorationing control~z. In addition, thought could 1)e given to alternative sources of supply such as the urìderground lines from (30) PAGENO="0090" A 84 (~anada and Mexico. the increased speed and efficiency of tankers, and the decreasing costs of oil storage. (hven the large divei~encies in the figures produced by the task force and the subcommittee witnesses. I feel that every attempt should he made to dievelol) an indej)endent set of projections. For while h)r~iectio1~ remain siilneet to change, we can hardly attempt to esti~ mate the likelihood and dangers of dependency on less reliable sources of supply abroad without. first projecting our own production capacity and ~o$~ here at lionie. Iii essenceS I feel that the subcommittee report has serve(1 more to ju~tifv the piesent oil import policy than to study and (levelop alternative. 1)olicies. Such alternatives might well achieve a better balance between the national security, a healthy and expand- ing domestic oil industry and reasonable consumer benefits. PHILIP E. RUPPE. 31 PAGENO="0091" 85 I)I~SEXTIXG VIEWS OF PI-IILLIP BTRTON I believe that the basic economics which underlv the, oil import program, and which are carefully explicat&l in the Shultz task force inajoi'itv report, dictate a difierent reponse. to that report than that of this subcommittee. To that end and to conserve this debate, I will confine my own views here to what. I believe are a number of mistaken or unfounded implications and assertions in the subcommittee's in- tended rebuttal of the majority conclusions of the Sliultz task force. For example. time subcommittee restates its own August 1968 findings that the import J)rOgram should be continued because national security is a singleminded goal of governmental policy. The subcommittee report. in 196$ stated that consideration other than national security should not be given equal or greater weight and restates that. again here with the new conclusion that no evidence has ` been cie veloj)ed which meets this standard. I believe, however, that this subcommittee standard mistate.s the problem by implying that other considerations are given equal or greater weight by the proponents of change. Hardly. Rather, the Shultz report merely gave soiiw consideration to these other concomi- tant and conflicting policy objectives-one of which incidentally is the preservation of time domestic oil in(lustry. In any event, time most rele- vant quest ion for the Shultz task force, but apparently not for this subcommittee. report, is the comparative cost of the national security provided with the quota system. The Shuitz report concluded that the cost of quotas was excessive. This conclusion came only after serious ~ examination of whether there were less expensive methods (to con- sumers) to obtain our national security goals. I emphasize that price reduction would not have to occur in order to benefit consumers, for ~ with a tariff plan, the consumer would gain not. so much by price ~ reduction, though some reduction is intended, as by a l)otential reduc- tion in taxes. The tariff fees collected could offset other needed tax I revenues, whereas under the 1)l'esent quota system the higher costs of crude oil are paid by consumers to private firms (mostly large oil I refiners). I do not believe the subcommittee report rebuts these con- clusions. ~. The report of the subcoimiiimittee implies that time I)epartrnents of State and 1)efense concur in its arguments: however, I do not be- - lieve that excerl)ts of the supplementary views of the Departments of State and Defense, which are sprinkled throughout this subcom- mittee's report, are probative of the points for which they are cited by time sul)comrnittee. Indeed, these qualifications of time I)epartments of State and Defense are an eloquent testimonial to the quality of the other facts that forced them to recommend a cimange in the quota system. 3. The subcommittee report restates the minority conclusions of the Shultz report without new evidence or reasons. Measured by a gen- erous standard, the minority conclusions of the Secretaries of Interior (32~ PAGENO="0092" 86 and Commerce are arbitraiv when not internally inconsistent. For example. the minority disapproves of a tariff system because it would substitute a tariff "which is hi~h1v undesirable and would lead to domestic and international rol lems of great significance [and] would result in price fixing * * [and I would he a further retreat from a free market.' I believe that the American public deserves some good evidence for these conclusions. In any event. though a tariff system might indeed have problems, the relevant question is how these problems compare with todav'~ quota l)rol)lemus. I believe the evidence shows that a tariff is on an almost all grounds less undesirable than a. quota system. Moreover. I do not believe that the tariff proposal can be legitimately eriti(ized for price fixing when the presei~t quota system is even more etlective in price fixing though it is perhaps less obvious). For the Secretaries of Commerce and Interior to simply assert that a tariff (unless it is so l)roliibitive so as to serve as a zero quota) is a "further retreat from a free market" only indicates a very Poor' understanding of the ~vorkin~s of a free market. This is particularly true of the exist- ilig quota. system in \vhIichI quotas are distributed on nonmarket ~iiouiids. In addition, I believe the conclusions of Interior and Commerce as to the economic dislocations which would result. from any charge, are niostlv overstated. Certainly the existing import quotas have be- (nme a p~uit of industry structure : there is no question but that certain juavillents and lobs are dependent upon their continuation. But that f~i(t does not in itself justify continuation. Every change of any pi~o- portion requires dislocations of this kind the administration certainly can think of ways to cushion such changes, and the Shultz report does this by ~)hIasing in the changes. but we must accept. that some will have to occur. Furthermore. it is the. strength of a free market economy to absorb such changes and to create a more efficient structure upon them. Mv basic objections to the quota method of restricting crude imnj)orts is that it is unnecessarily expensive and inefficient. Thus, if one believes in the free market system, he has to believe, that the economy would be strengthened as a whole by removing such expenses and inefficiencies. ( Xgain~ this is not, to den that local and sectional rol leius an develop but rather to say that they will be offset. by other advantages e'sewhere in the economy.) For example., the $5 billion cost of the quota system cannot be swept aside by the Secretaries of ~omnmllei(e and Interior merely stating that this money goes to various su )urces and is therefore ~)resunnWly justified. This thinking could be used to justify any Price increase or subsidy whatsoever: it is just as true of an unwarranted inflationary price hike as of the price for crude: further, one has to assume that con- sinners would burn the money saved or otherwise leave it. unused, for in any other case the economy uvihl get an equal-or even larger-boost as the mone is spent on other goods. 4. The subcommittee's discussion of national security problem cor- rectlv focuses on the real danger of an extended cutoff of petroleum supply rather than the short-term affair which can be. met by quite ditlerent kinds of insurance than a quota system. However, granting time possible long term threat itself suggests a number of attractive alternatives other than the hasty subcommittee conclusion that the 33 PAGENO="0093" 87 Ilflte(i states should I)IOVide niost petroleum `~fioni wit liin its own I)01del5." Otliei a ltetiiatj yes ill vol ye St 10fl~ West~in I Ie1nis~ )heie preference (~ti yen that a piolongeci entoil is not I ikelv to result from a nul itary war 1 nit froiii polit lin 1 oi e onom ic sa at 10115) : stork pi led te(lmnologic (leveloj)nlents like I iijuefication of r011I, (o1lI)Ied with enough storage for telIll;o1clv needs: 01 stockpiled oil fields in this (olilitly with rutient needs met froni imports. I do not here advocate any one of these. but do say that they are alternatives to domestic supply which ap~)ear attractive and most certainly were considered by the Shuliz reporL 5. The sul)cominittee's discussion of the taiifi svsteiii as a imiethod of controll big imports is. I believe, overly 1)essimistic about the diffi- culty of administering such a system. In any case, this complexity hardly (lenies t lie tali if's usefulness or mnelit-parti(iila rlv when that system would miot only end the unjustified subsidies to some (onipanies but would also raise substantial amounts of ieveiume. I stionglv dis- agree with the subcommittee's implication that a tamifi svstemii would be inequitable because it would favor those companies with the (lieai)- est foreign source of crude. Indeed. I believe that this favoritism is desirable because it represents just what a free market system is sllJ)- posed to do. I regret that the limitations of time and space make it impossible to treat these essential issues more deeply how-ever, for all the reasons stated in this view, and in consideration of the additional arguments found in the Shultz Task Force report, I dissent from many of the findings and conclusions of the subcommittee report. PIIII~LIP B:~ri'rox. 34 PAGENO="0094" 88 I)Is~EYT1N(r ViEWS OF THOMAS S. FOLEY Some of the maii deficiencies and disadvantages of the present oil iflh1)ort control progranl have been well set out in the dissenting views of other members of the subcomimttee. Additional negative effects of the. prograni could be cataloged but I will not attempt to do so in these brief comments. In general, I am persua(ledl that the 1)resent prograni is: (1) eiiormouslv expensive to consumers at. every level, (~) produc- t i ye of serious inefficiencies and inequities throughout our domestic petroleum and petroc1iemic~i1 industry, (3) of questionable value to oii r national securit v in any climensioii and (4) in some aspects, (tilectiv contrary to our national security interests. Nevertheless, we should carefully consider whether reforms of the l)Iese1~t quota ~)rogram are realistically possible, and could be of suf- ficient scope to justify its retention in some modified form; or whether the program shloUl(l lye. totally supplanted by an alternative a~)proach such asa system of tariffs as suggested by a majority of the Presi- deiits task force. I strongly believe that major modification or restructuring of the pi'esent quota ~)1og1~am is clearly indicated and that indefinite con- tinuatioli of its i)le~nt structure and adverse effects cannot be ration- ally justified. 1 iii tist eX~ o'ess ii iv ci isappointment that the majority report seems to me to follow a l):~tte1n of uncritical support for the. oil import ijiiota program. This patteril has characterized many of the previous statements and reports of tile Interior and Insular Affairs Corn- iiiittee. At the very least. I believe that a continuing critical examination and analysis of the quota program should be conducted in both the executive branch ~uiid in the Congress. More serious thaii inaction. however, is tile threat of the legislative freeze of the present quota program which would frustrate any effective reform or redirection by the Executive. Efforts to accomplish such a freeze are underway through the mechanism of including tile oil quota program in pending legislation in time jurisdiction of the \Vas and Means Committee. In my judgment it would be a tragedy if Congress were to approve such le~iislat ion. In that unhappy event. Congress will serve the interests of that sector of the petiolemmnm industry which enjoys the considerable special I )enehts and advantages of the present quota program. Congress would not thereby serve the interests of the petroleum industry as a whole, other domestic industries, or the consuming public. Nor, in my judg- ment. would such a legislative freeze advance any ot.he.r public interest including the national security of the Fnited States. For these reasons, I must respectfully but strongly dissent. from the findings and conclusions of the majority report. THOMAS S. FOLEY. (3:;) PAGENO="0095" 89 Representative CAREY. Thank you, Mr. Chairman. Chairman PROXMTRE. Thank you, Congressman Carey. Mr. Simon, this is an excellent statement. It certainly is most appropriate. What we are mainly interested in in this committee- incidentally, the reason for our hearings as you know, is because this committee is responsible for economic statistics, basic economic data on which economic policy is made. As you say, so well in your statement, the data we are getting from the petroleum industry simply is not adequate. You say that emphatically. You say we need much more, it does not do the work. You say voluntary information is not enough. We need to require information to be submitted and you go on furthermore to say-I am delighted to see that you are asking for action by the Congress, legislation which would man- date this data and make it available. All that is very welcome and I think most heTpful because it is the kind of thing that I think we must have along with vigorous competition in the industry if we are going to solve our problems on disclosure. So we know really what the score is. Incidentally, a little later on I would like to ask about our getting information and data about reserves in the public domain but that will come a little later. You said in one of your 1)1~ovOcative assertions at the beginning that you did not base the present policy of the administration in trying to bring supply and demand into adjustment primarily on price and price adjustments. Well, of course, we have a few other measures but it seems that very sharp increases we have already had in price, a sharper increase which you predict is going to come by next March, is certainly a fact of life and is going to have an effect both on demand and supply. You indicated that you have not much control because of the very great increases that we have suffered in the price of imported fuel. Now, on that score we assume-we have got to get a figure, so let us assume the price of gasoline in 1972 was about 36 cents, might be a little more or less. The foreign tax, as I understand at that time, figures out to about 2 cents a gallon. If you figure the cost per barrel at $2.50, et cetera, the tax-the posted price was $2.50 the tax was about half that. Now, in 1973 the price per gallon has risen to about 4 cents, or about 8 cents per gallon, but the foreign tax had gone up 6 or 8 cents but that applied to only one-third of the gasoline we were consuming. So that only 2 cents of the 8-cent increase could be accounted for by the increased price for foreign oil. And then we have the same kind of a situation coming up in 1974 where they tell us that the posted price is going to go higher and the foreign tax is going to go up to perhaps 16 cents a gallon and this w-ould account, again adjusting for the tax that w-e had ifl 1972. the difference being 14 cents and the fact we. are only using one-third of the oil that we consume in this country as imported, this would allow for a 5-cent increase. So I could see how we could justify perhaps a 38 cents a gallon price right now and perhaps a 41 cents a gallon price in 1974 based on increases in foreign taxes. I cannot see. though, how you can justify the rest of this enormous increase. Most of it seems to be PAGENO="0096" 90 based on some other kind of a theory, either the costs have gone up here which I do not think they have by anything like that amount, or this kind of an immense increase is necessary to get more pro- duction. What is the answer? Mr. Si~iox. Mr. Chairman, as you know, we have been dealing with this emergency energy crisis for several years. There have been many warnings issued by many experts, both within the petroleum industr and independents as well. We have been moving during this decade of the 1960s from an abundant. low-cost energy base to what is now a high-cost scarce energy base. We had exploration peak in 1956 in this country. Production peaked in 1970 and imports con- tinueci to rise where they are. now, as you accurately stated 35 per- cent of our ciomest ic petroleum consumption. Now, let me explain, a year ago at this time domestic crude oil was controlled, in our Cost of Living CounciL et cetera, at approxi- mately 53.40 a barrel here in this country. Everything was under price controls and still is. Now. if we want to induce additional domestic exploration and production, we have found all the cheap oil and gas in this country that we are going to find. Wells that cost $50.000 to S100.000 to drill a decade ago now in the lower 48, the on-land wells that must be drilled, we must bring out the additional reserves through the much more expensive secondary and tertiary methods of recovery. The Outer Continental Shelf drilling which hopefully will have between 40 and 45 percent of our proven reserves in the future. costs between 5500.000 and $2 million a well. The North Slope-we recently had a dry hole reported. It cost $5.6 million to drill. The Cost of Living Council announced at that time that. they would give an incentive for domestic drilling and that they would free-up for new production in this country, free from price controls and at the same time there would be a matched barrel from old cost control prices. This now accounts for approximately 12 per- cent of domestic production. Second. the Cost of Living Council recently anounced an increase in the. controlled price of old crude to $5.25 a barrel. This $5.25 a barrel was up Si from the 1)reviously controlled price as this incen- tive. which had been announced by the Cost of Living Council on several occasions. hut it is also up almost $2. Now. that accounts for its percentage of our domestic production which is about. 45 percent. This is the controlled price which is now at 51/4. Now, for the past couple of years the Cost of Living Council has not. allowed any nonproduct cost increase to take care of rents and inflation and everything else that has occurred. and they announced a 11/2 percent nonproduct cost increase. Congress-1l/2 cents, I beg your pardon. cost increase to retail. Stripper wells-a stripper well is a well that produces less than 10 barrels of oil per day. To encourage production. obviously, of these wells that pump this relatively small amount, it was felt by the Congress that the\- should he released from price controls. Chairman Pnox~rTRE. Let me interrupt at this point to say that I realize that we need an incentive and perhaps a very sharp incentive PAGENO="0097" 91 to encourage new oil, productioii of new oil, l)ut I understand we have had a big increase in the price of old oil and a very big one, and I just caniiot understand the. reasoning behind the amount of the. increase allowed there. Mr. SI~IoN. Well, the price there again has gone from approxi- mately $3.4() domestically controlled a year ago to the present price of $5.25 to take care, as 11 said, of the secondary and tertiary recov- ery which is more expensive. We have no intention of freeing up, if you will, from price controls the domestic crude. Chairman PROXMIRE. Now, that is a massive increase, is it not, from $3.75 to $5.25? Mr. SIMON. WTe have been exporting all of our exploration in this country-as I said, production has declined-exploration due to the fact that all the cheap oil and gas has been found and this incen- tive has indeed-we have got exploration going down in this country now on an all-out basis. All available rigs are presently being used. So we do not have to go to what I would call the emo- tional levels of the prices that are being charged by the Mideast and the other nations. Chairman PROXMIRE. Mv question is, wh we have gone as high as we have gone? Do you base that on independent data that you have or do you have to accept the cost data that the industry supplies without. having a chance to verify? Mr. SIMON. WTe have generated preliminary data in the Treasury that suggests that the long-term supph- price of alternate sources of energy and domestic energy in this country initiall would be in the area of $7, thai this would provide sufficient incentive to bring on the. massive capital investment, upward of $700 to $750 billion over the next. decade. Chairman PR0xMIRE. Is it not true. though. that the $7 million is something you may need 3 or 4 years from now, or 4 or 5 years from now, I might say. but is that not a price von should not need this coming year? When you go to $7 will von not just have a windfall profit which really is not going to get much more produc- tion than you w-ould get if you had a more moderate price? Mr. Si~rox. I agree w-ith you. Mr. Chairman. By no means should we instantly go to a long-term supply pi~~ We should continue to look at this and make sure there is not the (lisincentives created which would compel investment to go elsewhere and we have no intention of allowing price to go immediately to any level such as that. Chairman PROXMH~E. The. way this strikes me, here we have an industry which everybody now recognizes as being most profitable in the coming year. The president of the American Economic Association. Walter Heller. in an article in the Wall Street Journal just last week, pointed out whereas profits of corporations generally are expected to fall in the coming veai', the increase in the oil in- dustry is expected to be around $13 billion in profits. so massive that they expect overall profits to increase solely because of what is happening in the petroleum industry. Fnder these circumstances I just wonder if that kind of a colossal bonanza is necessary to get the kind of investment that we could use for more production or 37-143 0 - 74 - 7 PAGENO="0098" 92 if there is not a big excess here, a big price increase that the con- sumer is being required to pay which is unnecessary. Mr. SDiox. Basically, what we have done is submit to Congress in the closing days of the last session a windfall profit proposal which the chairman of the Ways and Means Committee said he would bring up immediately on the Congress return. Basically, we are agreeing with you, that the individual companies should not profit from this supply-demand shortfall. But. you must look at the profits. Chairman PROXMIRE. Let me just ask about. that windfall, so- called windfall profits tax. Is that not really an excise or a sales tax? What it amounts to. it is a tax on the gross price of the crude, as I understand it. that goes up as the price per barrel goes up, a price which in the present sellers' market will be shifted to the con- sumer. It is not a tax on the profits of the company which an excess profits tax usually is. I am against excess profits taxes but I think this is a good name, attractive name, good political name, but it is not an accurate description of what this is. Is t.hat not right? Mr. SDrox. We suggested the windfall profit tax because we cer- tainly agree with you on the inefficiency of an excess profits tax, that we direct our windfall profit. tax where indeed the windfall profit is and we suggest that is an opening dialog with the (a) options that we put it in this energy trust fund, or, (b), the partial or complete rebate to the companies who will indeed do the research and development. Chairman PROXMIRE. Now. when you are moving in that direc- tion. however, you must. imply at least that what you favor is an increase in price to discourage consumption as part of your plan. I presume that is the real justification for having this kind of a heavy excise or sales tax on gasoline. Mr. Si~iox. We wish to remove from the companies the inequity of a windfall profit and spend the money where it can be most productively used for the benefit of the consumer because the con- sumer is the ultimate beneficiary when we bring on t.his self-suffi- ciency which we can so certainly do in this country with the abun- dance of natural resources and technology we have. Chairman PROXMIRE. Now', how about the effectiveness of this tax? The Jieller analysis indicated that the increased cash flow because of these increased prices from 1974 for the petroleum com- panies will be around S16 billion. He indicates the Government will get about ~3 billion of that in this tax we are. discussing and that the petroleum companies will get ~13 billion. He said he can just see Congress rising to the bait on that. one and the American public, too. when they really realize what it is. This is a fantastic enrich- ment and I just do not see any basis for feeling that t.his kind of enormous increase in profits is necessary to elicit the kind of produc- tion we all want. to get. Mr. SIMoN. Mr. Chairman, what we are trying to do is encourage reinvestment in these industries and this proposal will commence the. dialog before the tax writing committees of Congress that will define the best method to do this and in the intermediate and longer run to make sure we are going to have energy priced at the proper PAGENO="0099" 93 level in this country and not be subject to the economic and political blackmail of any foreign nation for our increased needs. Chairman PROXMIRE. How about approaching this by recognizing that the oil companies do pay very low taxes on their net income, something like 8 percent as a whole, the estimates I have seen, compared to over 40 percent for the rest of industry. Atlantic Rich- field, for example, has indicated they feel that the oil depletion allowance is unequitable and unfair and very bad public relations for the industry. Would you consider the possibilities of eliminating the oil depletion allowance as part of the consideration for the increase in prices that the oil companies are getting under these circumstances? Mr. Sr~rox. I must take off my Federal Energ Office hat and put on that of Deputy Secretary of the Treasury and assure you we are looking at the entire tax system as far as the petroleum industry is concerned today and we will have definitive proposals for the Congress. Now, I note that Atlantic Richfield called for the elimination of the depletion. I think you will find that many economists have suggested that the depletion basically has been passed on to the consumer and has resulted in lower prices. Chairman PROXMIRE. That is exactly right and that is one of the things that is wrong. It has resulted in a subsidization by those who do not use as much gas as against those who do, so we have been artificially maintaining too low a price in the past for gasoline. Mr. SI~roN. You will find it. very- Chairman PROXMIRE. The suggestion of Atlantic Richfield is it ought to be decided in the marketplace what the value of the gaso- line is the way other commodities are. Therefore, you should elim- inate this subsidization which does result in an artificial price by eliminating the oil depletion allowance and some of the other tax privileges the oil industry has. Mr. SIMON. I think this can generate. as you can imagine, a very emotional debate in the Congress because the independent. pro- ducers raise money from various sources, independent sources all over this country. They drill 70 percent of the new wells in this country and this depletion is used as an incentive for them to raise these moneys. So this is where we must weigh the tradeoffs on this. Chairman PROXMIRE. Mr. Simon. my time is up. Congressman Conable. Representative CONABLE. I yield to Senator Javits. Chairman PROXMTRE. Senator Javits. Senator JAVITS. I am very grateful to my colleagues for their cooperation because I am under time pressure today. Mr. Simon. just one. question to follow that of Senator Proxmire. which I think is very pertinent on the national scene. Is it not a fact. that your answers have failed as yet to presup- pose the factor of competition and the enforcement of the antitrust laws as between the oil companies themselves and the continuance of some form of price control, and that these are two very critical additional factors which the Government must crank in during this period in order to keep a balance between the public not being PAGENO="0100" 94 fleeced-notwithstanding the fact that we want companies to make a profit and we want the attractiveness of the investment to get us more oil and many more efficiencies. But to keep the balance be- tween the public interest in price and supply and the private stim- ulation of investment, is it not necessary to have a very keen and intelligent enforcement of the antitrust laws and to continue price control in this area? Mr. Si~rox. Well, I did address. Senator Javits, I believe, perhaps incompletely, my comments-we intend to continue as we do have extension of authority to control prices on crude and related petro- leum products until February 1915 and we indeed intend to continue to control them and control them responsibly so they will not go to what I consider their again the emotional levels that are today being charged and would be charged in the event of the shortages that now exist. As far as the antitrust. I would certainly hope that the investigations that are and will continue to be carried on and in- deed broadened. will again place the facts before the American people as to any problems there are in the antitrust area because I think that we have to look at the entire energy industry and take a look and one of the roles of the Federal Energy Office, look- ing beyond this current problem, is to forge a new relationship, 1)0th domestically and internationally, between the U.S. Govern- ment and its energy requirements. Senator *TAvIT5. Now, do you feel that you have any authority either in existing law or do von want a new law to have a relation- ship to the antitrust laws and how they are administered, both at the State and Federal level? Mr. SDrox. That would be a matter for the Justice Department to answer. I do not know. Senator JAvITs. Well, what do you believe? What do you need? We are looking to you as the energy czar. Do you need to have anything to sa about the administration and enforcement of the antitrust laws in order to do your job? Mr. Sii'srox. No. I believe that is adequately handled in the Justice Department. Senator .Tavits. Senator JAVITS. Do you have any relationship to them, or con- sultat ion with them? Mr. SDrox. I do have direct liaison with the Attorney General and the Justice Department. The ,Tustice Department is a member of the Oil Policy Committee of this Government. Senator J.uvITs. Well. now, do you count on the fact that there will be actual competition in price, service, delivery, et cetera, among the oil companies in order to carry out the policy in the interests of the Nation that you are charged to administer? Mr. Si~iox. We will most certainly assure that and we are illus- trating that now with our IRS-FEO sweeps throughout the country and the investigations that are currently taking place right now. Senator JAyITS. Now, you said that we will illustrate that, et cetera. I do not think you directly answered my question. Mr. Si~rox. Sorry. Senator JAVIT5. I consider the answer important. Your activities must assume that von will see to the fact that there is an effective PAGENO="0101" 95 administration of the antitrust laws. That does not mean blind enforcement or the mere theory that bigness is wrong. It just means an effective enforcement in terms of this emergency. Do you count that among your duties? Mr. SIMON. Absolutely. Senator JAvITs. You talked about a law in which you could man- date from the oil companies the information that you need. Now, personally, I am quite prepared to sponsor or join in sponsoring such a bill and from what I heard from our chairman, he probably is, too. Perhaps Congressman Conable is, too. Now, have you got one? Can you give us a bill that you wish to introduce which will get you what you want? Mr. SIMON. We are working on that right now and have been during the congressional recess and we look forward to working with you because you can offer us suggestions on reporting requirements that perhaps we do not have because we cannot have all the answers. Senator JAvTTs. Well, do you plan to give us such a bill before the recess ends; that is, on January 21? Mr. SIMON. I do not think we will have it before the recess ends; no, Senator. We will have it shortly after the recess. Senator JAVITS. And you are prepared to cooperate with any of us that are so minded in the development of such legislation. Mr. SIMON. I would be delighted. That would be to our benefit, Senator. Senator JAVITS. Now, coming to New York, which has brought me down here, I would like to put two issues to you which involve not only the big companies that we have been discussing but in- dependents as well. Mr. Teretsky, the New York Federal Energy Office Regional Administrator, estimates a 200,000-barrel-a-day shortage of residual fuel oil in the Metropolitan New York area, the most severe for any area in the country. and obviously if we continue or worsen that shortage, we will have danger of electric blackouts of Con Ed, our principal supplier, which is receiving oniy about half its rseidual oil supply from its supplier, the so-called New England Power Co., Nepco. Now, if this situation is so, question: First, why aren't regional transfers being made to alleviate this danger to New York, and s~cond, will the mandatory allocations going in tomorrow aid in the solution of this problem? Mr. SIMON. The mandatory allocations that are being put in to- morrow are the most comprehensive ever put into place. They will encompass the entire barrel, if you will, fuel oil. distillates. petro- chemicals, feedstocks. crude oil. They will direct themselves at every- thing from the producer level directly to the consumer. These reg- ulations obviously will not be perfect. To allocate in this complex industry is extraordinafily difficult and I emphasize again as I have so often in the past. t.hat any of these regulations that. do not do what they are designed to do. we are going to maintain a flexibility and change them as long as it is done on an equitable basis. Now, the problem with Con Ed is that it gets about 50 percent of its supply from New England Power whose supply is almost completely imported. We have been working with Con Ed to con- PAGENO="0102" 96 vert its facilities from oil to coal where such conversion is essential to conserve residual fuel oil and where the environmental impact would not be too harmful and we have succeeded, working in con- junction with EPA. in doing this to a great extent. In investigating the New England petroleum situation, together with Con Edison, we have found inconsistencies in the reports and we are bringing them all together down here tomorrow, Tuesday- Con Ed, New England Petroleum, New York State Power Com- mission and the mayor's office, to find out what the problem is and we will do whatever has to be done. As far as diverting regions~ we have been active in what we have called-we instituted an early warning system, recognizing the New England area imports about 85 percent of its needs and residual is needed in the New England area, I believe the figure is 80 percent of the residual that is used is in the New England area and we have diverted from the gulf coast and other areas of tem- porary surplus to the New England areas where we recognize there are critical shortages and if we have this early warning system working throughout the country. not only New England. working with the Governors' conference-the Governors' conference have their adviser based in our Federal Energy Resources Office here in Washington. They can warn us of the problem so we have the ability to act rather than react. Senator JAVITS. Mr. Simon, we would like to sit in on your meet- ing tomorrow. Is that agreeable? Mr. SI3roN. Yes, sir, and also I have talked to Mayor Beame on the New York City problems after two snowstorms. We are allocat- ing 100 percent to all cities for essential services and where this snowstorm that, of course, was not predicted, came on and used up gasoline supplies, we were able to get suppliers to redeliver addi- tional supplies to New York City and it happened on two occasions within the last 2 weeks. Senator JAvITs. Now, under those circumstances, and my refer- ence to the fact that the New York area uses half the energy per capital of any other comparable population group in the country, is there any reason for these lines at gas stations, et cetera, in New York? Mr. SDI0N. Your major problem is just as it is in Arizona and Oregon. two other spot shortages. The distribution system is really very complex in this industry and there are going to be spot short- ages and indeed even before the embargo, just. as we had last spring and summer, spot shortages. and it is very difficult to predict which areas are going to be hit by these in advance. Now. in New York City, it appears that many independents have gone out of business and under former allocation programs, if a gas station sold 50.000 gallons and got a percentage of this base period that is what he would ~et in the allocation program. Now, what we have attempted to do is put in an allocation program. Regardless of the number of ~as stations left, and they are fewer. we are going to deliver what the area consumed rather than just do it on a gas station basis which will obviously increase the amounts hut with fewer gas stations you are going to have lines. PAGENO="0103" 97 Senator JAvrrs. When you say we are going, what is your timing? Mr. SIMON. This is right now. The regulations are out. Senator JAVITS. Right now? Mr. SIMoN. Yes, sir. So they become effective tomorrow morning. Senator JAVITS. Really, if there is good local information on what gas stations remain open and good service locally, there ought to be no lines in New York, is that right? Mr. SIMON. They ought to be kept to a reasonable minimum, yes, Senator, but we find the buying habits of some of the American people now during this period of shortages have changed rather dramatically. As you know, a lot of people drive in and out of New York City every day and you are finding a lot of these people who commute by car filling up in New York City where they did not before. People are going in with three-quarters of a tank full and buying $2 worth of gas just to keep a full tank, so we have got more rolling storage than before, whereas before three-quarters of a tank was the average amount of gasoline a person used to carry, and that difference is about 3 million barrels a day. Senator JAVITS. A New York Times analysis says all that means is about a day and a half supply and it should not materially affect the situation adversely, but can you advise the people, leaving to us our problems of consumer advice in New York, that there is really no need for hoarding and that the allocation to New York will be adequate for all reasonable purposes of travel, including going to work? Mr. SIMON. Utilizing the 10 gallons, and let us all try to do that, I cannot reasonably assure anyone. I can assure them of our com- plete determination to make sure that the shortage that we are try- ing to spread throughout these United States is done on an equitable basis and one area, whether it is New York City or Oregon or Arizona, is not penalized in the process where they are flat out while other areas have supplies. Senator JAVITS. What you are assuring them then is that they certainly will not be discriminated against. Mr. SI~roN. They will not be discriminated against but we still have, of course, a 20-percent shortage that we are presently dealing with. Senator JAvITs. Thank you very much. Chairman PROXMIRE. Congressman Conable. Representative CONABLE. Thank you, Mr. Chairman. Mr. Simon, are all our refineries now operating at full capacity? Mr. SIMON. They are all operating at. full capacity depending on what the amount of crude oil is. You know, when the figure came out on Texaco last week reporting all of its inventories and, of course, its inventories are much higher as all companies' inventories are higher, due to the fact that we had a warmer fourth quarter in 1973, that there has been a leakage in the embargo and indeed that our conservation measures~one key figure there in this again complex subject is that their crude supply is lower and their crude supply being lower means that refiners are going to begin to get less crude to refine for products and the inventories are ultimately going to suffer if this embargo continues and demand is not re- duced. PAGENO="0104" 98 Representative CONABLE. We do not have problems resulting from the availability of high sulfur content oil instead of sweet crude that has resulted in refiners- capacity not being used? Mr. Srstox. We have been experiencing that problem. Congress- man Conable. for the past year and this goes back to an environ- mental prol)lem where many of our east coast refiners are using the sweet crude for environmental reasons and denying the crude to inland refiners who must burn sweet crude waste. What we are doing is attempting to equalize refinery capacity more effectively for the amount of crude available in the Fnited States. All of the refineries will be as equal as this allocation works, whether it is 100 or ~)0 percent that depends on the availability of crude. Representative Cox~\BLr. I read somewhere the Government had ordered shifts in refiners- run between heating oil and gasoline. I wonder if you would describe that to us and tell us if there has been any waste of refinery capacity involved in these shifts and if we are currently putting the hulk of our refinery capacity where it is most needed. I assume we are l)ut can you describe just in summary what. kinds of problems you have in this area? Mr. SIMoN. We made a policy decision very early in the game, Congressman. and that was that the American people would be delighted to suffer some inconvenience and discomfort rather than lose their jobs. We felt that the tradeoff was to have the. refineries which, remember. were constructed in this country to generate gaso- line, to produce gasoline. The middle distillate, the middle part of the barrel for home heating and feedstocks for industry had to be maximized. If our thrust was going to be jOI)5 and employment, a 1~i-percent cutback of the feedstocks in the petrochemical industry could result in S~O million and losing jobs. We have been so taking this into consideration, lVe wanted to make sure that the refineries were producing at a maximum rate to provide industry through our allocation program the middle distillate needed for the reasonable functioning of their particular business. That meant that we had to penalize ~asoliue production. if you will, and centralize the shortage in the gasoline area and we think this is the right position to take and the right policy to set, but as we look weekly and we publish our petroleum situation reports and look at. how the leakage in the embargo and the weather and the conservation take place. we want to make sure that we keep a flexibility that will make sure that we do not have a lot of distillate at the end of the heating season and then all of a sudden have gasoline problems in the spring and summer. and this is judgmental and I suggest it is not very easy either to do. but what we are trying to do is make sure that this energy crisis that we have, the embargo, does not maxi- mize or have a greater effect on the slowdown that was already going on in our economy and keen it under reasonable control. Representative Cox~rn,v. What kind of authority are you operating under when you make this kind of an order shifting of refinery runs? Mr. ~TMox. The Emergency Petroleum Allocation Act. gives us that ability, and the Economic Stabilization Act. PAGENO="0105" 99 Representative CONABLE. I think it is quite apparent that we have been fortunate the Arab embargo has not. been more effective than it has turned out to be. Recent announcements about increased imports-I understand that is only part of the picture in terms of the availability of oil. But I am wondering if we are not careful, if making better data on imports available is not going to permit the Arabs the informa- tion they need to make their embargo more effective. Mr. SIMON. Congressman. we changed that reporting system, working with the Department of Commerce, and we just identify the aggregates. We do not identify on a country-by-country basis for exactly that reason, because we do not want to discourage the leakage. Representative CONABLE. I think it is fairly accurate to say that our long-term problem is potentially much worse than our short- run problem unless we take the steps now necessary to make available additional resources and alternative resources. Can you tell me in your opinion, what are the most important things to be done right now so that we can get immediate increases in production and can you tell me what is most important.. for instance, for 5 years out that we do now to avoid long-term--increasing and more acute long-term shortage? Mr. SIMON. My most difficult job, Congressman. as I said so often, is going to be to keep the American people awake after the present embargo ends. This energy crisis has been coming a long time. We knew during the period of the seventies our imports would increase which has the two-fold problem of, (a) a supply cutoff at any time, and (b) subjecting ourselves to these higher prices. TTnfortunately, there is no such thing as instant energy and the production of instant energy, but fortunately, we have the problem. as I said, due to the super-abundance of natural resources and technology in this country. to provide us with an answer over a period of time. Now, let me tell you what our thrust is in the Federal Energy Office. We have to establish a new energy ethic in this country because we are going to have to change our lifestyles. We are commencing studies in the Federal Energy Office now to present. and this will take a long time, proposals to the Congress on a sweeping change in the way we utilize our energy in this country. Six percent. of the world's population utilizes 35 percent of this world's energy just in this country. There is obviously a lot, of waste in that con- sumption. Some experts estimate it is between 25 and 40 percent. Preliminary industry audits-we have industry audit committees doing just the preliminary sweep through these companies-are providing us with initial results of 10 to 40 percent. saving in energy. So we have got the new energy ethic, the conservation. We must continue. But we cannot continue to have our demands for energy increase 4 t.o 5 percent each year. which would mean a doubling of our energy again between now and 1990. PAGENO="0106" 100 The new Government relationship must be forged, as I said, with our domestic industry and requirements. We must create the agency in the Government for the first time to put energy under one roof so we can establish the policy and do the research and development and implement the programs that are going to give us this ability for self-sufficiency. Project independence, utilizing this super-abundance of natural resources and technology including the massive research and devel- opment program which the President announced. We have an in- finite supply of coal in this country and due to a number of reasons we have allowed our coal industry to deteriorate where the coal in- dustry today contributes 17 percent to our energy needs. We have 600 to 800 years of identifiable coal reserves and much more that can be brought out at different levels. Our estimates in oil shale that are 85 percent owned by the Federal Government, we have an equivalency of 1,800 billion tons equivalent to a barrel of oil. This is 47 times our proven reserves right now. But we have got processes that scientists have been arguing about which is the best one. We ought to take the synthetic rubber experience during World War II and look at the ingenuity of the American people and the free enterprise system that has made this country the greatest country in the world and start going on these processes and produce this additional. I could go on. Representative CONABLE. Are you saying long term we can avoid this by allowing prices to rise because they can be economically feasible then and we can harness this remarkable system we have to generate these alternative sources? Mr. SDIoN. I could go on at great length, Congressman, through nuclear and gasification and liquefication and all the rest of it. Yes, indeed, we can at reasonable levels. Representative CONABLE. But they are not economically feasible at current levels, are they? Mr. Sn~foN. Congressman Conable, there are going to be oil shale pilot plants built because preliminary estimates show at around the $5 to $6 barrel equivalent which is where we have domestic oil right now, that oil shale is indeed profitable and we have one proc- ess, the in situ process. using conventional explosives that claim it is significantly less than that. Representative CONABLE. Is that with an adequate environmental input as well? Mr. Si~rox. Yes. The in situ process actually keeps the environ- mental wastes below ground but I can suggest that takes some per- fection. Gosh. we can solve this problem but it is going to require Government leadership and legislation and action on our part, at reasonable prices. I suggest. Chairman PRox~rnn. Senator Javits has a question. Senator JAVITS. Just. one question on my residual time. Mr. Simon. I did not ask you about the petrochemical business which involves heavy considerations of employment. We have an PAGENO="0107" 101 enormous number of such manufacturers in New York who claim that because of the two-tier pricing system which is being enforced by the Cost of Living Council, there is a shortfall in domestic supply with heavy adverse impact on employment and that the very same items are being exported because higher prices are obtainable and that this is so true that there is now a black market in these basic materials for plastics in the United States and that this is an ex- tremely adverse development to employment because there are many, many thousands of workers who could be thrown out of work in the plastics field. Could you tell us anything on that? Mr. SIMON. We recognize the fundamental nature of the petro- chemical industry in these United States. As I gave the illustration before, 15 percent of the feedstock and its impact on the GNP and employment. And for that reason we have given 100 percent of current requirements in the allocation system to them. We also recognize that there have been these charges made on exports that have been exorbitant. Now, as you know, we instituted an export licensing system on petroleum-related products because we did not want anybody to take advantage of the higher price they can get from the foreign country at the expense of our consumer. We are investigating the specifics right now with the Commerce Department as far as whether an export licensing system is needed for the petroleum derivatives. Now, I will defer to the Cost of Living Council and to John Dunlop but I know he is looking at that problem as well. Senator JAVITS. Well, I will get after him very hard and will you report to us on the findings of the Commerce Department? Mr. SI~roN. We certainly will. Senator JAVITS. Thank you. Senator. I want to thank Congress- man Conable for being so courteous. Chairman PROXMIRE. Mr. Simon, t.he crux of the consumer com- plaints right now is the price, the price he has to pay for gasoline, the price he expects he may have to pay, and his indignation over that price. Recently two eminent economists released a forecast in which they assumed the price of domestic crude oil would average $7 a barrel. I asked you something about that. I would like to ask you a little more because I missed part of the point when I was questioning you a little while ago. They assume the price will be ~7 a barrel in 1974. You indicated. I thought. in response to me earlier that von thought the $7 a barrel might not. be necessary or desirable or permitted in 1974. Do you think that $7 a barrel this comIng yearS this present year, is necessary? Mr. Sn~roN. The Cost of Living Council announced a year ago that they would allow gradual increases to provide the incentives, Mr. Chairman, for exploration and drilling in this country on a continual basis and they have had three such increases since that time. We are presently at $5.25 controlled in this country on the domestic price of crude oil. PAGENO="0108" 102 Now, we will continue to take a look, to make sure that that is a reasonable price under all circumstances but, remember, the new production in this country is uncontrolled. Chairman PROXMIRE. I understand the President is signing an Executive order turning the price controls over to your office from the Cost of Living Council with respect to petroleum prices, is that correct? Mr. SIMON. Yes, sir. Chairman PROXMIRE. All right. Now, Mr. Ash has indicated the fiscal year 19T5 budget will include-that is beginning next ~July 1- $4 to $5 billion in receipts from the proposed new excise tax on crude oil. That assumes a price of $7. Do you think that is sound or is Mr. Ash going too far? Mr. SIMoN. Well, here again, everyone has to make their judg- ments when they are asked specific questions about the figures, and you take a look at the average of old and new oil and, remember, the new oil that is brought on, the incentives for new oil plus the net barrel is uncontrolled in price. I can say what we have responsibility to control will be kept at reasonable levels in this country but the new oil, the stripper wells and the imports which abount to 55 percent of our domestic consumption, we do not have any control over and this is what is having the roll-in effect on the price of the gallon of gas. Chairman PROXMIRE. What troubles me about the reasonableness, I think many people, even though they are very unhappy about paying more for their gasoline, if they thought that was necessary to solve the problem, they would be more willing to go along with it, but the oil companies themselves indicate that in 1974, whereas the economic estimates I suggested before indicate they will have a cash flow of net after taxes, even after the new tax, of $13 billion, they only plan to invest $10 billion. So does that not by itself in- dicate that the price is too high. unnecessarily high, and that it will not result in any substantial additional investment or pro- duction? Mr. SIMoN. All the data I have seen, Mr. Chairman, recently on increased R. & D. and domestic exploration and production has been dramatically above anything they have ever spent in this country before and in looking back on where their profits came from during 1973, preliminary figures suggest that it was mostly due to their foreign operations where the price of product has literally exploded, where tanker rates went to extraordinary levels due to world demand for product. and that domestically their prices were not as high as the overall profits. Chairman Piioxi~rniE. Are you saying that their investment plans will be more than $10 billion? Mr. Sr~roN. Oh. I have not seen the total numbers, Mr. Chairman. Chairman PRox~rrnE. WelL without seeing the numbers, how can you arrive at a fair price? It would seem to me that price should be related to how much they are likely to be able to invest pro- ductively and the incentive for making a further investment. PAGENO="0109" 103 Mr. SIMON. Well, you have to look beyond what can be done in various areas because today we have a critical shortage of drilling rigs and tubular steel for drilling in this country. Chairman PROXMIRE. Well, I suppose nobody knows more about what investment they are going to make than the industry itself and this was taken from their official estimates that they made themselves in November and December, as recently as you can get, in reporting to the Commerce Department. Mr. SIMoN. I think we have to take a look at what they are going to spend, relate it to the overall profitability of the industry, and then you arrive at your conclusions. Chairman PROXMIRE. Now, let me get to an issue that relates directly to the jurisdiction of this committee and what we are here for this morning. When Congress returns we will resume considera- tion of the Emergency Energy Act.. The version of that act agreed to by the conference committee in December requires reporting of certain data by the oil companies. Under this provision all com- panies engaged in production, processing, refIning, nr pipeline trans- mission of oil, natural gas, or coal would be required to report every 60 days on reserves, production, destination of productfin, refinery run by product and such other data as the Administrator may re- quire. Do you support that provision? Mr. SIMON. Are we basically going to broaden that? We are even asking for more than that. Chairman PROXMIRE. Well, I hope so because as I understand it, the information we had on the floor at the time this was up for debate was the administration strongly opposed that provision and the impression was they opposed it on the grounds we were asking too much. Mr. SIMoN. No. Basically, what we were opposing at that time was the information was going to be sent to just everybody and as I mentioned in my testimony. the constraints. We have got legal problems on the proprietary information that is collected in this industry, and we felt that in order to get this information, depend- ing on what type information it is, that it should not be so broadly disseminated. There is much of this-most of it, if you will, is going to be made public to the. American people but some of it we are going to have great difficulty getting if indeed for proprietary anticompetitive reasons we were going to make it public. Chairman PROXMIRE. Well, here is. I think, the crux of the dif- ference because if we are going to develop public belief and trust and faith and support. they have to get the data. They have to get the information. And there always has been resistance and I have never been able to find any solid justification for the resistance on the part of industry for releasing the information of this kind. They say competitive but they certainly have a hard time showing how it adversely affects them. Do they have to make a clear showing that it is adverse? Mr. SIMoN. No. That, Mr. Chairman, is what we will have to decide in our dialog, what indeed the public should have and what indeed they should not. PAGENO="0110" 104 Chairman PROXMIRE. `Well, the conference committee report pro- vides, and I am reading now: Upon a showing satisfactory to the Administrator by any person that any report or part thereof obtained under this section from such a person or from a Federal agency, would, if made public, divulge methods or processes entitled to protection as trade secrets or other proprietary information of such person, such report of portion thereof, shall be confidential. Now, why would that not be adequate? This is what the con- ference committee report provided to protect the companies against disclosure of whatever could damage them competitively or in trade secrets. Mr. Sn~roN. I believe also that the reporting of this would have gone to many. many Federal agencies and to all interested and not interested Members of Congress and we thought that in the in- terests of good order that it should be restricted. Indeed, reported to the Justice Department and FEO and the Interior Department, et cetera, but perhaps wisdom would suggest that it be done on a more limited basis. We would have no difference of opinion. Chairman PRox~rIRE. I do not think we differ. Mr. Si~rox. No, we do not. No, we do not. Chairman PROXMIRE. It is very good to get you on record that way because I understand that what we need to have is this information disclosed saying that which can be shown clearly to be- Mr. SIMON. Precisely. Chairman PRox~II~E [continuing]. Adverse competitively. Mr. SDrox. And that is where we want to work with you in de- veloping what questions must be asked or have we gone far enough in asking these questions so we can make sure when this legislation comes before you it is as comprehensive as we need to get all the answers before the American people. Chairman PROXMIRE. Another reason why there is such public concern and unhappiness is that the-there is such direct and ex- plicit reliance on the basis of the report just erroneous information. The Wholesale Price Index, for example, for petroleum products is so inaccurate in the last 2 monthly releases the Bureau of Labor Statistics has inserted a warning that the data are not available. Now. we make policy in this country. we do, business does, on the basis of statistics of our Federal Government. BLS is working on an improved reporting system. It is my understanding that a major difficulty they have encountered with the oil companies is the refusal by the oil companies to supply requested data. Will you back up the Bureau of Labor Statistics in its request for price data from the oil companies and does either BLS or your energy office have the. legal authority to compel submission of this data? If not, would you like Congress to provide it to you? Mr. SDrox. We most certainly would cooperate in getting this data. Chairman PROXMTRE. You would a~ree they should provide this to the BLS so the data can be applicable? Mr. ST~roN. Assuming the legality is in place, Mr. Chairman. PAGENO="0111" 105 Chairman PROXMIRE. Once again, I want to go over a point I made earlier in questioning you. The tax increase in December was from $4.25 to $5.25 a barrel. Mr. SIMoN. This is the price increase. Chairman PROXMIRE. I mean the price increase. I beg your par- don. The price increase was $1 a barrel. What was your basis? What data did you rely on to determine that that was necessary? Was this completely supplied by the oil companies? Mr. Sn~IoN. What I would like, to do is introduce Mr. Charles Owens, late of the Cost of Living Council, who is joining the Fed- eral Energy Offlee. who participated in those discussions on the price increase from $4.25 to $5.25. Mr. OWENS. In responding to your question, Senator, much of the data we used were based on our concern that there was supply or was supply available in existing reservoirs that was going un- tapped by our regulations because if these old reservoirs were sub- ject to engineering through secondary and tertiary means, the oil, the additional oil produced from those reservoirs would neverthe- less not qualify for our new oil price and, therefore, would not qualify for the incentive. We determined that this high cost engi- neering, secondary and tertiary processes, an additional dollar for the old oil would stimulate production for this oil but nevertheless as I said before, would not be subject to the new oil incentive. Chairman PROXMIRE. How did you determine that? Who gave you the data? Mr. OWENS. We have our own price gathering data. At the same time we determined the effectiveness of engineering methods. You talk with both engineers who are part of the industry and those engineers who are not a part of the industry but are involved in this kind of work. Chairman PROXMIRE. `Well, basically, was not that big 25 percent increase just decided upon by t.he industry itself? What independent basis would you have for deciding it was too much? Mr. OWENS. For deciding whether it- Chairman PROXMIRE. `Whether it was too much. You say you had to rely on the engineers of the industry, have to rely on their esti- mates. The data that comes from them. It is not a matter they are just deciding what kind of a price increase they want and going ahead and putting this into effect in order to bring the so-called secondary and tertiary oil into production? Mr. OWENS. Let me emphasize we talked to engineers who are part of the industry and engineers who are not part of the. industry but sell their services, of course, to the industry, to give, us estimates on the cost of this very expensive process on both t.he secondary and tertiary methods of recovery. I do not. think the decision to increase those prices can be attributed to anyone else but the Federal Govern- ment. Chairman PROXMIRE. Well, this is history. Let me see if I can get an answer on what is going to happen when we move toward that PAGENO="0112" 106 $7 price. On the basis of the data which you say you are going to attempt to secure. Mr. Simon, do you feel that you will be in a po- sition to make an independent determination, more independent, than you were when you permitted an increase-the Cost of Living Commission permitted this dollar increase, 25 percent increase-in crude in December? Mr. SIMON. I most certainly do. Chairman PROXMIRE. Specifically, where and how? Mr. SIMoN. All of the changes that we are going to reguire through mandatory reporting on reserves and cost of the various producing and new methods is going to be helpful in what we are trying to do as far as the price of domestic coal in concerned. Chairman PROXMrRE. And you are going to get figures that you will be able to- Mr. SIMON. Verify. Chairman PROxMrnE [continuing]. Verify and contradict or challenge? Mr. Sn~roN. Yes. We most certainly- Chairman PROXMIRE. Audit the actual cost to determine whether they were incurred in fact. Mr. SIMON. Yes. Indeed, we do that now but they will be verified. Chairman PROXMTRE. But did you not indicate that your audit is primarily going to be confined to the refinery, refinery operation? Mr. Sn~rox. That is the initial sweep that we are doing right now. As I also testified, we are going to put in a very broad mandatory program to deal with the petroleum in the future as far as- Chairman PROXMIRE. Will that go all the way back to the cost of exploration, t.he cost of production, the cost of transportation, the cost of distribution? All of those elements as well as refinery? Mr. Sn~roN. Yes, sir. Chairman PROXMIRE. As I understand it, the refining process is only one part and a relatively modest part of the total cost of the oil. Mr. Si~rox. And basically, what we are trying to do is get an instant handle, if you will, during this period of emergency on the problems but it does not deal with the long-term system that is going to be put into place as far as the data-gathering is concerned. Much of this is done in various departments right now and we are going to bring it together in one department. Chairman PR0XMIRE. My time is up. For the record, I would appre- ciate it very much if you could have your office document exactly how you are going to be able to confirm the justification for the price increases beyond the present $5.25 a barrel. Mr. SDI0N. Absolutely. Mr. Chairman. [The following information was subsequently supplied for the record:] PAGENO="0113" 107 ECONOMIC STABILIZATION PROGRAM COST OF LIVING COUNCIL Office of Public Affairs Room 2104 cT~D TMMCflT nTr ~ Washington, D.C. 20508 L LLLM.)L Phone: 202-254-8830 Wednesday, December 19, 1973 DOMESTIC CRUDE OIL PRICE ADJUSTMENTS In further action to promote an increase in petroleum Output in both the short term and longer run, the Cost of Living Council today permitted an increase of $1.00 per barrel in the ceiling price of domestic crude petroleum. This one-time increase, in addition to other product cost increases, may be passed through to consumers of petroleum products on a once-a-month basis in accordance with existing Economic Stabilization Program regulations. Phase IV petroleum regulations establish a two-tier pricing system for domestic crude petroleum. Most of the crude produced in the U.S. is subject to a ceiling price which was fixed at the May 15, 1973, posted price plus $.35 per barrel. New production - that is, production above last years levels - is not subject to the price ceilings and may be sold at free market prices. Crude produced from stripper wells has also been exempted from price ceilings by Congressional action. A total of about 25% of the crude produced in the U.S. is not subject to price ceilings. The remaining 75%, which is subject to the ceiling, is affected by todays announcement. Council Director John T. Dunlop stated: "The Council's two-tier pricing system was designed to stimulate additional domestic crude production, while at the same time slowing the rise of domestic crude prices toward world price levels. When we announced the final oil regulations in August, we stated that we would continually monitor the ceiling prices of domestic crude petroleum and would periodically raise the ceiling price toward achieving parity with world prices." Since that time the world price has increased sharply, creating a very wide spread between domestic crude prices and world crude prices. During the same period the spread between the prices for new oil add old oil under the two-tier pricing system has also increased. Initially, the new oil price was quoted at about $1.00 per barrel over the posted price for old oil. At the present time, the spread has increased to about $2.00 per barrel on the average, and there are some quotes at more than $4.00 per barrel over the old oil price. Spreads of this magnitude are potentially de-stabilizing and cannot long be maintained. Consequently, the Council has determined to increase the ceiling price per barrel for domestic crude by $1.00, which will reduce the spread and move domestic crude prices somewhat closer to wor1~ prices. (rlore) - CLC- 489 37-143 0 - 74 - 8 PAGENO="0114" 108 -2- Dr. Dunlop added: "Todays action is the result of an intensive review of both worldwide and domestic petroleum price movements and pressures. It is designed to reduce the economic impact of the present uncertainty of continued regular supplies of imported crude and is part of the President's long-range program to decrease the nation's dependence on foreign oil supplies. "The increased ceiling price for domestic crude can be expected to generate only marginal increments to crude supply in the short run. Some increase, however small, is, of course, desirable in the current energy crisis. However, the announced increase will create additional incentive for the petroleum ~ndustry to pursue further research and developments efforts, new exploration and new technology to augment our energy resources." Dr. Dunlop stated: "We anticipate this action, in combination with other government and industry programs, will help put our nation on the road to self-sufficiency." 0 Oo CLC-489 PAGENO="0115" 109 December 19, 1973 Impact of One Dollar Increase on Domestic Crude Petroleum Prices Domestic Crude Prices At the beginning of the year (1973), the average domestic crude oil price was $3.40 per barrel. In late March and early April the average price increased by 25~' per barrel. A second round of increases averaging about 35~ per barrel was interrupted by the price freeze announced by President Nixon in June. Phase IV regulations were issued in August and permitted crude price adjustments of up to 35~ per barrel to complete the second round of increases and return the domestic crude price structure to normal differentials. In addition, a two-tier system of crude pricing was established by the regulations. Most of the crude produced in the U.S. is subject to a ceiling price which was fixed at the May 15, 1973 posted price plus $.35 per barrel. New production -- that is, production above last year's levels -- is not subject to the price ceilings and may be sold at free market prices. Crude produced from stripper wells has also been exempted from price ceilings by Congress in the Trans Alaska Pipeline Bill and the Emergency Petroleum Allocation Bill. A total of about 25% of the crude produced in the U.S. is thus not subject to price ceilings. The remaining 75%, which is subject to the ceiling, is affected by today's announcement. At the beginning of this month (December 1973) , the price of `old" oil averaged $4.25 per barrel. "New" oil was selling at an average of roughly $6.17 per barrel, which was slightly above the average price of imported oil of $6.00 per barrel. (See chart) The average price for imported oil continues to rise at an accelerating pace due in large measure to the cut off of Arab oil shipments to the United States and reduced shipments of Arab oil to other oil importing countries. Prices for spot purchases of foreign oil, as opposed to continuing shipments, are reportedly ranging as high as $17 per barrel during the current crisis. Imported Crude Prices At the beginning of this year, the average price of imported oil ($3.34) was $.06 per barrel less than the average price of domestic crude ($3.40). Since then, prices for foreign oil have risen much more rapidly than prices for domestic oil. Foreign crude prices now average $1.75 higher per barrel than the price of domestic crude which is subject to the Phase IV ceiling. New oil, on the other hand, Cost of Living Council PAGENO="0116" 110 has been selling at a higher price than imported oil on the average, but the price of imported oil is catching up rapidly. (See chart) Effect of Increase A $1.00 increase in the prices of "old" oil will result in an increase of the average "old" oil price from approximately $4.25 per barrel to approximately $5.25 per barrel. This dollar increase is expected to result in a comparable increase in the price of "new" oil, since "new" oil prices are generally quoted at a premium above "old" oil posted prices. Impact on Product Prices The price rules for petroleum products under Phase IV Price Regulations require that refiners allocate increased costs of crude petroleum to gasoline distillates and other covered products on the basis of historical sales volumes. Based on an average gasoline refinery yield of 45%, the crude oil price adjustment of $1 per barrel translates into a 2.3~ per gallon increase in prices for gasoline, home heating oil and diesel fuel. This increase, together with other increased costs of imported and domestic crude petroleum, can be passed through on a once-a-month basis under the Phase IV petroleum regulations. Supply Response The increased ceiling price for domestic crude can be expected to generate only marginal increments to crude supply in the short run. Any increase, however small, is of course desirable in the current energy crisis. However, the announced increase will create additional incentive for the petroleum industry to pursue further research and development efforts, new exploration and new technology to augment our energy resources. PAGENO="0117" PET!~DLEUM PRICE INCREASES 1973 (National Average Prices) Cost Jan. 10 May 15 Aug. 15 Oct. 15 Nov. 30 Increase Projected Domestic Crude Prices Old crude (per bbl) $3.40 $3.62 $3.86 $4.17 $4.25 $1.00 $5.25 New crude (per bbl) - - - $5.17 $6.17 - - Import Crude Prices Arabian Light (Per bbl) $4.09 $4.24 $4.57 $6.62 $6.54 Libyan Crude (Per bbl) $4.38 $4.62 $5.18 $9.53 $9.66 - - Average import $3.34 - $3.93 $5.24 $6.00 - Price Differential Import Over Domestic Prices Difference over "old oil" $ -.06 - $ .07 $1.07 $1.75 - - Difference over "new oil" - - $+.07 $-.17 - - Retail Prices Regular gasoline (per gallon) 37.2~ 38.4~ 38.7~ 39.7~ 42.3~ 2.3~ 44.6'~ Heating oil (per gallon) l9.4~ 2l.7~ 23.9~ 26.3~ 28.4~ 2.3~ 30.7C PAGENO="0118" 112 Chairman PROXMIRE. Congressman Conable. Representative COXABLE. Mr. Chairman, the great concern about the oil shortage and increasing cost here has led the public and Con- gress to look for scapegoats. We have had the Government as the scapegoat. for so long and it dose not seem to do any good, in identi- fying it, so the oil companies are having the black mustache pasted on them right now. We hear a lot about oil company profits usually expressed in terms of a percentage of their-of increase in profits. Do you have any summary of the. relative profits of different industries in the Treasury that we can get. hold of. both during the sixties and recently, re- flecting this increase? Mr. SI3rox. We- Representative CONABLE. Could you tell us, for instance, what the return on capital is in the oil industry compared to some other big industry like, let us say, the New York Times or Washington Post? Mr. SIMON. W~e are preparing a detailed un to date analysis right now. There have been many studies done by the Chase Man- hattan Bank about this industry and- Reprensentative COXABLE. Are those accurate statistics? Mr. Si~iox. WelI~-~- Representative COXABLE. Do you depend on them as~ Mr. SIMON. We use part of their data but basically, we are doing this independently right. now to supplement what already has been done in the Goverment. Our preliminary assumption, using the figures 1972. is really fine. Profits have exploded for reasons I gave before. Foreign operations, the tanker rate increase, the explosion, if you will, in the European prices gave them a good portion of their profitability. Looking at a net ret.urn on invested capital, I think we will find these studies are complete tha.t compared to other manufacturing industries in this country, over an 8-, 10-, or 15-years period you will find they are in the middle range of these companies as far as their rate of return is concerned: and we will look back in calmer times, Congressman Conable. and suggest that. this was an extraordinary period of profit for these companies. Representative COXABLE. Let me ask you, if we get a little too tight~ on controls here or if we get too tough on the oil companies which are mostly multinational concerns-the big ones all are ob- viously. and are responsible for oil distribution all over the world- the result. can be substantial diversion ultimately of oil into other areas. Oil does not flow uphill any more than water does and do you see any dangers here. and if so. how can we be sure that taking steps to protect the American people may protect them so well that we do not get any oil at all? Mr. SDrox. I just could not agree with you more in the long term. That is why allowing moderate-and I use this term and em- phasize the term "moderate"-increases really is insuring the longer run stability of the consumer in this country, recognizing the fact that the days of cheaper energy that we knew during this period of super-abundance. seemingly unlimited supply, is ended. Representative CONABLE. We have heard a lot about. the underesti- mation of reserves and it appears that. there has been a substantial PAGENO="0119" 113 underestimation of reserves, that this is not entireFv the result of less consumption than we had thought. I am wondering how much of the underestimation of reserves relates to the real estate taxes Paid by the oil industry. You take a State like Texas. It has no income tax. Quite obviously it taxes oil assets quite heavily as a matter of real estate taxation. Has this resulted in a. deliberate understatement of oil reserves by concerns-I do not mean to pick out Texas in particular but that is an obvious place to look at-to avoid real estate t.axat ion? Mr. SIMoN. I have no knowledge of that subject whatsoever but this is one of the major reasons I am going down to Texas next week to speak with the Texas Railroad Commission. I am going to the other oil producing States and I will do the same thing and assess how indeed reserves are estimated in t.his country and what is the basis and who does it and thereby gain some accuracy. Now, I know there. have been reports of shut-in production in this country which have been proven to me. We do know, Congress- man, one thing, that somewhere between 10 and 35 percent of the oil in the ground will come out on a primary recovery basis; that it requires, as we mentioned here several times this morning, the more expensive secondary and tertiary recovering processes to bring out the additional oil. Now, that oil is in the. ground and so, there- fore, we have obviously anot.her pooi of oil to go with the proven reserves that we have in this country today. So to that extent indeed, it is correct. There is more oil in there and it is going to take more money to get it out. Representative CONABLE. But you have no knowledge of any deli- berate underestimation of reserves by companies for real estate tax purposes. then. That is somet.hing t.hat you will look into? Mr. SIMoN. Yes, indeed, I will look into it, but there again, all the production in the St.ate is regulated by the Stat.e independent regulatory authories. Representative CONABLE. With the price of fuel oil going up as it is and natural gas still regulated to the extent it is, ca.n you give us any idea of the disparity in cost between the two at the present time and if t.his might not result in rapidly overtaxing our natural gas supplies? I know anybody building a new house up in my area does not want to have fuel oil as a mean of heating the. house nowa- days and the result is that oil distributors are taking it in the neck in relationship to the natural gas utilities. Can you tell me if this is creating serious problems t.hat ca.n put great. pressure on our natural gas resources? Mr. Si~rox. It already has and this is illustrated by the curtail- ments in the natural gas area. This has been warned for the past 20 years, that the Phillips decision of 1954 which effectively regu- lated the priec of natural gas at the welihead. Bt.u equivalent basis, at about six times under what its Btu equivalent is in a barrel of oil. So naturally, everyone wishes to use the natural gas. Natural gas being volume discounts to the electric utilities who were. switched to -forced to switch from coal to oil and utilize natural gas to burn under burners, and this critical supply of reserves continuing to decline, we are just looking for a great deal of trouble and we have recommended that. prices of natural gas be deregulated. PAGENO="0120" 114 Representative COXABLE. Yes. I anticipated that conclusion on your part, and so I would like to ask you how much deregulation of natural gas would cost t.he American consumer generally. New natural gas is-~ Mr. Si~rox. It is just-. Representative COXARLE [continuing~. All von are seeking to deregulate, is that not right? Mr. SiMoN. It is just the new natural gas, yes. indeed. Representative CONABLE. So it. would result in an automatic gradual increase in the price of natural gas in all probability that will still be substantially below the. cost of oil and still be given a premium to natural gas consumption? Mr. Si~rox. Yes. It would be and there is also an overseer: that is, to put. a cap on the price of natural gas so it does not go to what I describe, as emotional levels but remains at a price that gives the incentive to bring on the new production and at the same time pro- vi(les llat~iial ~ at a reaSonal)le cost which is the- Representative COXABLE. You feel that there can be safeguards to see that it does not cost the consumer an inordinate amount, at the same time trying to harness the laws of economics to keep us from having rather bad pressure on natural gas resources, is that right? Mr. Sn~rox. I most certainly do. Chairman PROX3IIRE. WTh cannot the Congress give the Federal Power Commission the authority to do exactly that? You have on the FPC now- two members of the five who favor a complete deregu- lation of natural gas. two additional of the five who favor deregu- lating new natural gas. I presume the reason they do not let. the price, go up a. little more than they have, although they have let it go up quite a bit, is because they have to relate it to a fair return. It seems to me that Congress could modify the law to give them a little more. leeway to provide wha.tever is necessary for further in- centive. Mr. SIMoN. That is correct. Chairman PROXMIRE. And still ke.ep it regulated. Mr. SDrox. The national overseer, if you will, could be the Chair- man of the Federal Power Commission or the Secretary of the Interior, as was suggested in our original- Chairman PROXMIRE. Deregulate or washed out. Talk about. a bo- nanza. you will have a situation-everybody indicates the price of natural gas will triple for 60 percent of our people who heat. or cook with natural gas. That means a colossal increase in this cost. It means a S13 billion a year incease in profit for t.he oil companies plus a windfall because of their reserves of. I understand, around $150 billion. With that kind of colossal economic consequence it seems to me it. is something we have to be pretty careful about.. Mr. Si~rox. I agree with you. Chairman PROXMIRE. I would like, to ask you this. How high will the price go at the automobile service station gas pump? Is 55 cents the limit, in your view? Mr. SIMON. I cannot set a. limit beca.use you are asking me to tell you-55 percent of our domestic consumptioh is uncontrolled in price. If you can tell me what t.he OPEC nations are going to be PAGENO="0121" 115 charging for their crude oil 6 months from now. 3 months from now, then I will attempt to make the judgment on this. Chairman PRox~IIR1~. Yes, but this is the kind of-in the first. place, under the two-tier system with charging only a part, an appropriate part of the increase in price, that is force by imported oil, and then it woul.cl seem, recognizing that price should be as much a considera- tion as how long the line is at the service station, in fact, it seems to me that is a. far more objective and reasonable basis. Wrhen you move to rationing. you have a. standby rationing scheme to which you can move. Would you be inclined to move to rationing if the price goes above 55 cents a gallon? Mr. Si~rox. I relate more the supply-demand as far as instituting rationing is concerned, and the equit. what we are asking the American people to do. using gasoline. just. to use that one product, rather than providing a rationing program is going to do its job in keeping the price down. I do not see where the rationing program, Mr. Chairman, directly relates to the uncontrolled area which is going to get. passed through anyway assuming the embargo ends. Chairman PROXMTRE. But this could go sky high. In some foreign countries they are paying $1, $1.15, and $1.25 a gallion. The price a gallon could go up to 75, 80 cents under this kind of philosophy. Mr. Suiox. Actually, Mr. Chairman. I think you will find that I)rior to the recent OPEC increases that. the price in Europe was anywhere from 90 cents to $1.10 and 75 percent of that was taxes levied by the countries involved. So I would expect it would even go higher now. Chairman PROXMIRE. The point I a.m speaking to is the elasticity of demand is such that people will, if they have to, apparently pay a great. deal more thaii was considered possible before. Mr. SIMoN. But we. are controlling the prices here at. the pump on the gasoline price allowing the costs to passthrough for the higher price which we do not control such as the stripper wells, et cetera, and that will continue to be controlled. Chairman PR0xMIRE. But von refuse to tell us that von would not stand still, say, for a 60 cents, 65 cents, 70 cents a. gallon price at the gas pump. Mr. Si~rox. Mr. Chairman, I can say that we are going to con- tinue to control the price at. what is controllable in this country and that we will keep it at. these reasonable levels and if $5.25 is a rea- sonable level t.o get. all the exploration and new production on line which we are going to have to watch very carefully, then that is where it ought to stay for a time. Chairman PH0XMIRE. Mr. Simon. nobody knows more about this than you do, in my view. On the assumption that. the foreign price goes to. say. $13 a 1)arrel, posted price, on that assumption. that seems to me about as high as it will go. maybe it will go higher. but stick with that assumption. then would you say that. we should be able to maintain the price at 55 cents a gallon and if it. has to go higher, that we will go to rationing it? Mr. SnI0N. The price will vary, Mr. Chairman. from market to market, due to the extent they rely on imports, so I would not put a number- PAGENO="0122" 116 Chairman PROXMIRE. No, no. I am talking about the overall aver- age price. It varies now. I paid 57 cents a gallon for gasoline just the other day. Mr. SI~roN. Wrhich would be primarily the important-recognizing the fact that this supplier- Chairman PRox~Inu. This is regular gas. Mr. Si~rox. The supplier was using imports. You will find others utilizing domestic, which is cheaper. Chairman PROXMIRE. I am talking about overall. If the posted price is $13, would you permit the price to go above 55, 60 cents? How would you permit it to go? Mr. SIi~roN. I am looking at this current price right now and what is the average price- Chairman PRoxi~rIRE. 44 cents? Mr. Si~rox [continuing]. Today, 44 cents. The full impact of the recent. price increase has not been completely felt, obviously. We are going to see the price of gasoline from the levels of the increase go up in the area of 10 to 11 cents and that is where it should stay, assuming no further increases. Chairman PROXMIRE. WTell, I heard you say that and that takes it up to 55 cents. You do not assure, rather than permitting it to go higher. you would impose rationing. You would rather go higher if the situation changes, is that right? Mr. SI3I0N. I just there again do not equate how rationing is going to keep this price down to reasonable levels, Mr. Chairman. Chairman PROXMIRE. Well, you could certainly do it by ration- ing if you had the kind of white market system that you have in- dicated you are going to follow. I would think you could have the price at an even lower level, perhaps. Mr. SI~roN. The only way we could do that would be to restrict imports. That is something that some people are suggesting. Chairman PROXMIRE. I am giving you the assumption of $13 posted price so the import price is fixed. Mr. SIMoN. And, of course, the tickets cost money where the peo- pie wish to exceed their-there again, that is a judgmental question, posted price of $13 versus $11.65 today. The actual price did de- pend on several factors. It is $8 FOB Persian Gulf today. Now we have to add on that what the tanker rates will be, the spot tanker rates, the long-term charter rates. So it is judgmental whether the oil is going to come into this country between $9 for the company- owned tanker rate or $9.25 all the way up to $11 for the spot market or perhaps even to $12 or $13 where these tanker rates have gotten as high as $4 a barrel of oil before. So believe me, I am not trying to evade your question but it is extraordinarily difficult to pinpoint and say we are going to hold to 55 cents or 50 cents for a gallon of gasoline on the average basis. The only thing I can say is I will continue to appear before you and other Members of Congress and answer my responsibility as far as the prices are concerned and maintain prices at the lowest reasonable level to assure the supply to the American people on an equitable basis. Chairman PR0XMIRE. And that could be 60 cents, 70 cents, no way of knowing. is that right? PAGENO="0123" 117 Mr. SIMON. I do not see it going to 70 cents a gallon, Mr. Chair- man. Chairman PROXMIRE. If consumption is reduced as much as you want it to be reduced, what effect will this have on unemployment? Mr. SI~roN. The consumption of gasoline, I would hope- Chairman PROXMIRE. We have had estimates that unemployment is likely to increase as much as 600,000. That is what one prominent economist estimated recently because of the energy shortage in the coming year. Mr. SIMON. There again, the Council of Economic Advisers has attempted to do their studies with all the uncertainties involved and the major uncertainty is how the FEO does the job of allocation of product and if we do our job right and keep the embargo to a min- imum-by supplying the middle distillates to the industries that need them for their feedstock, and there will be obviously a con- servation and there is elasticity of demand, Mr. Houthhaker's recent study which is, I believe, the most comprehensive that ever has been done, coupled with that, should- Chairman PROXMIRE. What does he estimate, minus 0.2? Mr. STJ~ION. Really, over the intermediate term, the short-term elasticity of demand is relatively small but the intermediate and longer term is 6 months to 1 year. You can look for every 10-cent increase, a reduction in demand of about 71/2 percent. Chairman PROXMIRE. That means that you could get-probably have to get a 25-cent increase to get your 20 percent reduction in consumption. Mr. SIMoN. Well, coupled with conservation that we have already seen, that should be sufficient. We see American people today buy- ing smaller automobiles, the automobiles that will utilize 20 miles to a gallon versus the big gas burner we have all been driving. I would hope that this change in buying habits would do it. Chairman PROXMIRE. You did not give me a figure, did you, of what you expect the impact of the energy shortage would be on un- employment? Mr. SIMON. The impact of the energy shortage coupled with a slowdown that has already occurred- Chairman PROXMIRE. No. I just want the energy shortage figure. We have the estimate on the slowdown. We estimated-most econ- omists have estimated about a 500.000 to 1 million increase in un- employment anyway, depending on their degree of optimism or pessimism. I would like to know what your-you are especially gifted to give us what the effect of the energy slowdown itself is. Mr. SIMON. The Council of Economic Advisers-and they are the people who did this study-estimate that the energy problem coupled with the slowdown will not increase unemployment to more than 6 percent. It is extraordinarily difficult to just take energy outside of the rest of it. As you know, the adjustment assistance process of attempting to give the number of people who are unemployed due to the energy problem, it is very difficult to identify. Chairman PR0xMIRE. Mr. Simon. you say the companies should get together to develop an integrated program. Yesterday Attorney General Saxbe said something to the effect that would require PAGENO="0124" 118 changes in the law because the Justice Department is so tough on them because if they get together even to play golf, the caddy might be listening. Do you have any notion how we could meet this anti- trust probieni? Mr. SIMON. Thot is svhat we are going to have to be meeting with the Justcc Departni~nt on, Mr. Chairman. You are 100 percent correct. W~ cannot e~ll meetings down here and get this industry to sit in one room. ~Ve have to do it individually with their at- torneys before they ~-iIl respond to questions. They are extraordi- narily sensitive and I guess for good reason, with the antitrust problems. Ch~iirrnan PROXMIRE. I would like to ask one other question I stateu I vcs very interested in when we began. The energy resources owned i-v ftc Federal Government, what appears to be a great ignorance on our part as to what these resources are, what the re- serves are, how much there is. From estimates I have seen, as much as 80 percent of the economically recoverable domestic energy re- serves belon~ to the Federal Government in the form of oil and gas on the Outer Continental Shelf and coal and shale oil and other mineral rights on public domain lands, but it seems the Government is very poorly informed about the nature, extent and in some in- stances even the location of its own natural resources and ill equipped to learn where they are, where its energy resources are and how much are in its possession. Will you tell us whether you agree with the statement that the greater part of future oil and gas and coal, shale oil and other energy production will come from the public domain? Do you have any figures or estimates how much will come from the public domain? Mr. SIMON. You are completely accurate in saying we do not have the accurate information. Remember, a lot of that is done on estimates and it is estimated that the Outer Continental Shelf, for instance, holds potentially 40 to 45 percent of our proven reserves and that is Federal lands. I have already stated that there are estimates that in the oil shale area, 2,800 billion equivalent barrels of oil, 85 percent of which is owned by the Federal Government. So we have a significant portion of this petroleum and nonpetroleiim related future energy resources. And we are going to compile all this data as to- Chairman PRox~rIRE. You agree the present situation is not ac- ceptable. that we must do far better in getting the information we do not now have. Mr. SnroN. Yes, sir. Chairman PROXMIRE. Why should not the Government have the capability of conducting its own seismic and geophysical tests, the means and facilities for gathering and analyzing its own informa- tion about potential reserves under the Outer Continental Shelf? Do you object to providing the Government with that capability? Mr. STMON. Basically, we do that in the Geological Survey now, the extent of which is rather small and I think it should be ex- panded. Chairman PRoX3IIRE. So that we should rely more on the Federal Government in that way than we do. Mr. SDrox. Yes, sir. PAGENO="0125" 119 Chairman PROXMIRE. Just one point I would like to call your attention to and ask how you feel about it. Senator Nelson, my colleague from Wisconsin. has introduced a bill to provide some- thing like the following: The bill would establish three categories of information within an energy information system in order to elicit as much information from corporations about the energy sit- uation as possible. The first category would be public, the second confidential, the third secret. Each category of information would be stored in a separate library. Everyone would have access to the public library, only Government officials needing the data for official purposes would have access to t.he confidential library, while the secret library would be closed to all except the limited number of personnel needed to compile the data in that library for anonymous statistics. What do you think of that kind of approach? Would it be helpful? Mr. SIMON. Yes, it would be, and we are working with this com- mittee right now on this piece of legislation. Chairman PROXMIRE. So you in general support the principle. Mr. SIMON. We have not come down-the principle, fine. The principle is supported. What we have to do is now get down to the specifics of it and that is what we are working on right now with them. Chairman PROXMIRE. Congressman Conable. Representative CONABLE. Thank you, Mr. Chairman. Mr. Simon, we would carry on this interrogation at some length and, of course, we would like to if we had the time and you had the time to do so. The American public is extremely confused on this issue as to whether a shortage exists, how serious it is and what it means to them and I think it is terribly important that your office be as open and as accessible as you have made it during the past few weeks. You have been either appearing before some interro- gation or holding press conferences or putting out statements daily, I believe, and I hope you will continue that. Energy is so central in our lives that we need this information, need it desperately, and I hope you will continue to be as open as you have been and will make every effort to get this information, complete information in as simple a form as possible because it is coming out now in piece- meal form and people write from a point of view or talk from a point of view and, therefore, the public feels as though it is being whipsawed about this information. So some sort of a central re- porting agency is necessary. I do not know who it will be if it is not you in your office and I hope you will keep the tremendous importance of this to the credibility of Government and to the cred- ibilitv of the public laws have have to make relating to energy which we obviously can no longer take for granted. I have no particular additional questions in view of the further pressure on everybody's time here except I am somewhat surprised at your statement about the economic feasibility of developing oil shale at current levels. Mv understanding was that this involves a ton of oil shale for a barrel of oil and that fully to exploit this resource. would require digging something of the equivalent of Suez Canal daily. I find it difficult to believe that if we have that kind of PAGENO="0126" 120 environmental problem as well as that kind of a problem of ma- terials handling that it can be done at this level. I think we have to be realistic about these things and I think also that those of us in Congress who have to concern ourselves particularly with the long-term shortages-we cannot do a great deal about the short- term shortages but we can about the long-term-have got to get as accurate information as possible about this sort of alternative, and so if there is any further information you can put in the record about the economic feasibility of these alternative sources, I think it would be of considerable use to the committee since we are a Joint Committee. Mr. STi~IoN. Yes, sir. I agree with you, Mr. Conable, and let me explain that part of the answer, of course, rests in the fact that they are indeed financing these plants and they are financeable once the environmental constraints are met, and it is judgmental on their part also whether or not it is going to be economically feasible. They will not know until they try it. We have the uncontrolled system as far as pricing is concerned on new oil at present and, of course, that is partial incentive, but basically they are assuring us, various private interests that are willing to go out and spend their money to build these plants, that it can be done in this present range of prices. Now, only time is going to tell whether that is true or not but on your first point which is what I consider the most critical, that the. American people in t.heir confusion, and I can understand that with the many statements that have been made, and their anger over the high prices- Representative CONABLE. If I may interrupt at that point, accord- ing to the papers we are all going home to find out what the Amer- ican public is thinking nowadays. That is pretty hilarious because we go home every weekend anyway and we get about-a little Congressman from upstate New York gets 1,000 letters in a week in the mail, so we do not exist in a vacuum as it is, but one thing that has been interesting to me as I ride around back home listening to the radio and reading the newspaper and watching television occasionally, is that there is simply a tremendous mass of contra- dictory information beleaguering the minds of the public particu- larly on something so important as this. They are not only confused, they are angry that there seems to be almost a conspiracy to confuse them about this and that I must say, is one thing I have learned at home that I did not expect to learn because I was not aware of what the people back home were hearing until I started listening to local news. I am not indicting you or our local news sources. They are every bit as good as anyone else in the country. They have a great system. I am simply saving the way it is coming out certainly is confusing and I hope you will do all you can to mitigate that condition. Mr. Srr~rox. We will continue to be as open and responsive to get- ting the facts as I said right at the outset before the American people and at times there are reasons we cannot answer a specific question and that is frankly because we do not know, but we are working terribly hard to get the system into place that will satisfy these questions. PAGENO="0127" 121 Chairman PROXMIRE. Mr. Simon, I have no more questions. Before you go, I would like to join with Mr. Conable in thanking you very much for your most impressive presentation, your obvious knowledge and understanding of this, and intelligence, and deter- mination to get information. At the same time, it seems to me that we are left with some curiosity as to how serious a shortage we have. You say we have an energy crisis. We probably do but when we do not know really what the situation is because we have not learned from the companies, we have to send auditors out now to audit and verify the information we get, as you say, we have an abysmal lack of information about the 80 percent of the reserves and potential petroleum that the Government itself controls, very little information in that area, so it is very hard to come to a con- clusion about how serious this crisis is and, therefore, what policy steps we have to take. Finally, I also am concerned about what seems to me to be in all fairness a softness with respect to price. I appreciate that this is a very, very tough problem but I can tell you that is the problem that is really concerning the American consumer. The millions of people who have to buy gasoline and buy fuel oil for their house, that price going up constantly, and they do want to know that there must be some limit because it is getting to a point where people are going to have a great deal of difficulty getting to work and small business is going to have a lot of trouble operating because they simply cannot afford to do so. I earnestly hope that we can arrive at a policy which can assure people that the price will not go above some definite reasonable limit. I know you are doing the best you can and I think that best is very good. I am very grateful to you. Mr. Sn~roN. Thank you very much. Chairman PROXMIRE. Thank you. Our next witness is Ralph Nader. Mr. Nader, I very much appreciate your willingness to come on such short notice and, of course, neither you nor Mr. Simon nor witnesses who appear today are required to provide statements be- cause you were given very little notice. If you have, a statement available I would be able to follow your presentation when you deliver it. If von do not, of course, that is understandable. Go right ahead. STATEMENT OF RALPH NADER, CONSUMER ADVOCATE Mr. NADER. Thank you, Mr. Chairman. I would like to discuss this alleged energy problem from a con- sumer standpoint because I do not think the administration has focused on the consumer's interests other than to impose the prin- cipal sacrifice on the consumer. Chairman Pnox~rIRE. Other than what? Mr. NADER. Other than impose the principal sacrifice on the con- sumer. There have been, earlier in 1973. detailed reports indicating that this energy crisis has been a created one. A principal report ap- pea.red in July in the Philadelphia Inquirer based on a long investi- PAGENO="0128" 122 gataion by two of its investigative reporters. I could commend that to vour attention as one of the best invetigative reports on this problem. That was in July 19~'3. well before the stepped-up developments in the fall of last year. Now, the words "energy crisis" are used very frequently without adequate definition. I think it is an energy crisis for consumers who are I)eing subjected to billions of dollars of unarmed robbery by the oil companies in collusion with governmental support. It is most certainly not an energy crisis for the oil industry. Almost every- thing that has happened in the last few years~ particularly in the last few months. will redound or are redounding or have redounded to the benefit of the oil companies. For example. prices have in- creased rapidly. Profits have increased rapidly. The tax system regarding oil industry activities overseas is increasing the benefits enormously. The writeoffs, for example. which the oil companies are taking on their F. S. Federal taxes via their payments of royal- ties and other expenditures abroad are increasing as the price per barrel abroad increases. The pressure by the oil companies to eliminate or reduce pollu- tion controls is initiated by this so-called energy crisis. The inde- pendent competitors. the gas stations and the independent refineries. are being put under severe pressure and in some cases driven out of business by the activities of the oil major. one of their principal oh- j ectives. The pressure to develop, without adequate environmental controls, offshore drilling. I)articlllarly in the area around Florida and on the Atlantic Coast. is increasing to the point where the oil industry may succeed here as well. The desire to increase the level of prices so that synthetics can become competitive. particularly from coal, is also another ob- jective of the oil companies who have l)een buying up coal com- panies at a rapid rate in recent years. I think in order to understand the administration's energy policy. one has to understand the chief implementer of that policy, who is William Simon. And in order to understand William Simon. one has to go behind the public relations facade that has created an aura of independent, decisive decisionmaking on his part. To under- stand Mr. Simon. one has to understand Mr. William A. Johnson, who is his principal economic and policy adviser. Mr. Johnson's beliefs, statements. and feelings are in accord with the most ex- tremist representations of tile American Petroleum Institute. I have, seen him in action personally and have also observed a little- noticed speech dated September 13. 19~3. which he delivered to an industry conference. And here was one of his principal conclusions. This is a man working for the F. S. Government whose presumed priorities should be the welfare of the consumer. Tie, stated in that speech: Our short-term difficulties with gas, coal and oil are very likely the result of various ill-conceived policies of Federal. State and local governments. For years we have been sacrificing the long-term interests of the nation to secure short-run objectives as unrealistically low prices for consumers and the too rapid application of environmental costs and restrictions. Now, unfortunately, we are paying for those policies. PAGENO="0129" 123 He went on to blame the problems in the coal industry principally on the Coal Mine Health and Safety Act of 1969 for what he called reducing productivity and output from underground mines. He also blamed restrictions which some States are putting on what he calls surface mining, what the people call strip mining. He also blamed air quality standards which have pushed the shift from coal to oil and he continually pointed out the usual American Petroleum Insitute statements that inadequate depletion allowances, too severe price controls on the industry, and other governmental policies have decreased the incentives for increasing the supply of crude re- fined oils. Now, more than any other time, I think it is important to under- stand there is no Federal Government policy toward this energy crisis. It is clearly the oil industry policy. This is illustrated first, by the highly active policymaking role of various petroleum ad- visory committees, some of which have been in operation for many years, such as the National Petroleum Council and other advisory committees to the Department of the Interior and other Govern- ment agencies. Secondly, the entire upper echelon of Mr. Simon's corps is in- dustry-oriented. He himself has an investment banker background. He does not in any way appreciate the need for a powerful anti- trust policy to break up the oil industry majors and to develop the kinds of marketing incentives that proceed from competition rather than from collusion or official price escalation. The entire energy problem, I think, can be usefully broken down into four categories, supply. price, health and demand. In the supply area Mr. Simon's agency has not challenged the data of the oil industry and only recently is he promising to collect independ- ently some of this information. It is important. to realize that any Government agency can create a shortage by simply announcing it because when a shortage in a material good or a raw material is announced, there are several predictable consequences. There is hoarding. There is stockpiling. There is gueuing up. There is a black market. There are other market distortions. For example, if the White House announced tomorrow. mistakenly. that there is a shortage of straws, there would be a shortage of straws in the next few weeks because people would rush to bu~ straws, industry would stockpile straws, and there would be a blackniarket in straws and there would be other economic distortions. Furthermore, the suppliers of straws would anticipate a price rise in the future so they would say why sell all our straws now when we can sell them 3 or 6 weeks from now at a much higher price? The question. then, is. Is there an energ~- shortage? The answer, No. There is no physical energy shortage. I think there is wide agreement on this. The world is literally drowning in oil, tradi- tional oil as well as the oil shale and tar sands and other forms of synthetics. It is doubtful whether one-fourth of the world's reserves of conventional oil have even been discovered. I think the industry will admit~ that possibly less than 60 percent has been discovered. But their record in public prediction of the oil shortage is about as bad as any industry record could ever be. If you read the history 37-143 0 - 74 - 9 PAGENO="0130" 124 of predicted shortages in the oil industry starting with the 1920's, the refrain is the same and the mistake is the same. Shortages are predicted. caveats about the need for higher prices and greater tax privileges are repeated. and yet the supplies keep increasing. I would refer you, Mr. Chairman, to the Federal Trade Com- mission report on the oil cartel dated 1952, which gives a good his- tory of this, at least up to that time. The second question is whether there is a market shortage. That is, quite apart from what is under the ground, is there an avail- ability of supply starting at the well to the refinery to the gas station or to the fuel distributor. Here again, the assumption by the Government is that there is a shortage and as you just pointed out to Mr. Simon, you seem to infer that how could this be stated so categorically if they are just in the process of getting necessary information independently and not from the American Petroleum Institute or the American Gas Association? Indeed, as economists have pointed out in elementary textbooks, the fact that a shortage can be created by a stampede or a mistaken impression from official sources does not mean there is actually a shortage. The Wall Street Journal recently had an article which also equated proven reserves with price and the authors of this article noted with the recent price increases proven reserves in the United States have about tripled. So proven reserves as defined by the oil industry and accepted by the Federal Government are those reserves which are technologically reachable under present economic conditions. So you are dealing with technology and price and, of course. technology has been improving in terms of drilling deep under ground for oil and recovering that oil for many years and price has been increasing quite substantially in recent years as well. So the secondary and tertiary recovery potential here is enormous and I would like to give you some rough comparisons. If you called up the Geological Survey or the Department of the Interior this morning and ask what are the proven oil reserves in the United States. they would refer you to a compendium published by the Department of the Interior based on American Petroleum Institute figures as of 1972 which were 36 billion barrels of proven oil reserves. Any geologist you now talk to. even people in the Fed- eral Government. will state that that figure is probably one-tenth of what the proven reserves are in this country. not those yet to be discovered offshore. or shale, of what the proven reserves are in this country given present technology and present price. Since the United States consumed about 6.7 billion barrels last year, that figure gives von an estimate of just how many years we have to go before we even run out of the proven reserves in existing wells that have been and are being exploited. Second. turning over to the price area for a moment, it is no secret. rather. that the Federal Energy Office thinks that the way to solve this short-term energy problem is to drive the price up to a point where demand is decreased and production is increased. Now. where they get the substantiating figures for this, I do not know. I do know that the Cost of Living Council a few weeks ago, PAGENO="0131" 125 when they approved the price increase for old oil, domestic old oil to $5.25 a barrel, also stated they could not say at all there was going to be an increase in production. As far as the demand is concerned, one of the things that the oil industry learned sometime ago is that the consumer demand for petroleum products is largely inelastic. That is, they know that the American people, if they had to pay $1 a gallon, would pay $1 a gallon with very little reduction in the mileage that they travel in their automobiles. There may be a re- duced demand by virtue of buying smaller cars but it is not likely it is going to be reduced demand of any significance by virtue of reducing their mileage, which are two different things that need to be made clear. Now, Mr. Simon continually, and he did it today, uses the foreign price of oil as the reason why controls over domestic prices are unrealistic, if not impossible. It is quite clear that in this country 70 percent of the petroleum that we are now using is domestic, 30 percent comes from abroad, including Canada and Venezuela. I would suggest to you, Mr. Chairman, that you inquire of Mr. David Freeman, when he comes here this afternoon, as to his response for this elaborate rationalization of using foreign oil prices as a reason to permit domestic oil prices to increase. One of the most striking phenomena of this entire energy picture is how both the oil industry and their Government supporters con- tinually make elaborate arguments as to why prices of various forms of energy have to be increased to meet the competition. That is exactly the reverse of the way the market should operate. Prices are reduced to meet competition. They are not increased to meet the competition. And this is a point which I think reveals that what is required here is a very candid inquiry as to whether the Govern- ment really wants the market to operate and for the market to operate there needs to be a competitive industry structure as well. Really, what it is doing is developing an intricate type of corporate socialism where industry decisions are then adopted as governmental policies with all the full force of Government authority. The health aspects of this energy problem have received probably the least amount of attention. I do not think it is accurate simply to talk about environmental effects. We are dealing here with the following. When Consolidated Edison switches from oil to coal, they are switching to impacting more people with more respiratory diseases and more cancer. That is what we are talking about. I would think that Mr. Simon should, every time he permits such a policy to go into effect on the part of a utility or a petroleum com- pany, that he should also reveal to the public what the increased probabilities of death and morbidity are as a result. And I would suggest that he can get those figures from either the Environmental Protection Agency which has them for the New York area or from the American Public Health Association which has been putting out some very serious projections about increased disease and death as a result of the reduction of environmental controls on burning instrumentalities. The aspect of nuclear power deserves a few sentences. I asked Mr. Simon recently, "Whether he supported the President's state- PAGENO="0132" 126 ment before the Associated Press editors that there should be a speed up in the licensing of nuclear powerplants." He said, "Most definitely." I said, "Do you know anything about nuclear power- plants or does your office know anything about them?" He said, "No. that they rely on the Atomic Energy Commission." Well, first of all. Mr. Nixon's San Clemente residence is next to a nuclear powerplant and even he did not know that there was a serious accident about 3 weeks before he made that statement to the Associated Press and that that plant was closed down completely because of that accident. But more to the point here is an experiment which we conducted at the end of last year. We wanted to know who knew in the Fed- eral Government what the reliability of these nuclear powerplants at any given point in time. We were not talking about the hazards of these plants. We just wanted to ask the question how many of these plants at a given time or date are producing electricity and how man plaiits are not producing electricity. We first phoned up the Federal Energy Office, presuming they would have that information. The did not. We phoi~ed up the Federal Power Commission. That Commission did not have the in- formation. It took several calls to the Atomic Energy Commission before they p~o(11~edl the following report and the latest figures they have were for T)ecemher 1(). 1973. Out of 38 operable nuclear powerplants in the United States, one-third or 13 plants were completely shut down on that date. Five were operating at full-power capacity. Six were not allowed to op- erate at full power bacause of safety problems and the rest were operating between 2 and 92 percent of capacity for various opera- tional reasons. Now, before we allow this energy crisis stampede to push us into a plutonium economy. I think we had better take very, very great caution in emphasizing in all our deliberations on this energy problem the health and safety aspects before we in turn are stampeded out of our consciousness and policymaking framework. The last category of approaching the energy problem is from the demand side. Now, when observers from abroad comes to the United States. the first thing that strikes them is the enormous waste of energ. This is true whether they come from Japan or Britain or South America. What has to be, I think, emphasized is whether we really have an energy crisis if we are wasting 30 to 40 percent of our energy in our daily operations of building design, lighting, boiler inefficiencies, automobiles, other transportation systems. Can anybody argue that they are lacking food if they overeat? I do not think they can. Let me give you a few illustrations. The Office of Energy Con- servation in the Department of the Interior, which has been advising Mr. Simon. has estimated that the waste factor in the economy alone is between 30 and 40 percent. Now, that is defined as the amount of energy that can be reduced without affecting productivity. If you look at some of the figures here, they are quite stunning. For example. General Motors a few months ago sent directives to its installations and is fully confident that it will reduce energy PAGENO="0133" 127 intake in its installations by 20 percent this winter simply by the thrift factor and 15 percent over the entire year. ITT has also announced similar savings figures. In one plant in Camden, N.J., RCA cut energy intake by over 40 percent. Du Pont, which has a consulting firm advising companies how to save energy, states, "That at the minimum 15 percent of a factory's energy is wasted and could be stopped almost immediately." To give you a few illustrations of the waste here, there is vast overlighting in buildings in the United States. New buildings are being built with 110 to 120 candle power when 30 to 40 candle power is more than enough for comfort and visual adequacy. Of course, automobile waste in terms of its consumption miles per gallon has long been known. So the same is true for many trucks rumbling over the highways. Only 6 percent freight car utilization prevails in this country. Many European countries are up to 20, 25 percent of freight car utilization. Many of our freight cars are used for standing ware- houses instead of shipping goods. There also needs to be emphasized how important it is to try to develop policies, whether they involve deregulation by the ICC or other policies to shift more and more transportation to rail freight away from the far more inefficient freight on the highway. In factories and offices in skyscrapers around the country, the traditional thrift factors of reducing thermostat levels, closing doors, improving new building design, adding insulation, circulating waste heat, improving boiler efficiencies, shutting off electricity for Un- utilized machinery and the like, could make a remarkable dif- ference. In short, if we did nothing else on this energy problem but just cut out immediately avoidable waste we could walk our way out of this situation in the short term. To give you an illustration which I think is a striking example. Mr. Chairman, of how we have developed an economy that is geared to using energy wastefully in order to jack up sales and profits for utility companies and energy suppliers. I would like to show you an illustration of how it could be done. In the first. place. Paris. which is no more technologically ad- vanced than New York City. converts its trash to usable BTU's. Something on the order of 15 percent of its energy usage is reduced as a result of burning the trash to produce heat or energy. But closer to home. just as here at Baltimore Police Headquarters in Baltimore, Md. This is the system they use. And I quote from a description of this system which could be built all over the country presumably. It was built for the Baltimore Police Headquarters: This building is being heated strictly from the heat generated by its lighting fixtures, electrical equipment and the personnel occupying the premises. In these times of severe energy crisis we cannot understand why Government agencies and private enterprise have not adopted this type of system in the construction of all normal office buildings. The principle of this system is based on the fact that more than enough heat is generated by standard lighting fixtures, electrical equipment and people employed in this building. All of this heat is simply returned through conventional building systems except that this energy is absorbed in water jackets in each and every lighting fixture and redirected through to areas where it is most called for. Rarely is the core of a building heated. It is only the perimeter. Therefore, this system simply PAGENO="0134" 128 relocates the heat energy where it is required. The building does not have a boiler because of the utilization of the electrical energy required for lighting and, therefore, no air pollution of any type is being emitted from this building and the water that was utilized is recirculated and not dissipated. The system is useful in lowering air conditioning load as well by again relocating heat, thus saving electrical energy in the summer time. This description comes from the company that supplied that sys- tem. We called up the Baltimore Police Headquarters to see if it was verified and we got the most casual affirmation, as if, sure, so what else is new? Well, to most people in this country you think we have to go through the conventional pathways of more coal and more oil when there are many other alternatives that could reduce the need for these fossil fuels or make these fossil fuels more efficient. I think we should look at t.hese and other illustrations and I think the joint committee could do no better service for the American public than to have a hearing on alternative sources of energy, many of which date back many, many years but which never were subjected to modest investment by corporations because they did not generate the kind of profits and the kind of control over supply that char- acterizes the fossil fuels economy. Mr. Simon said in his statement this morning. Senator Proxmire, that the independent preliminary corporate audits which they are receiving reveal a 10 to 40 percent savings in energy that could be possible of being made. I would assume that is what it meant. Since industry and commerce in this country consume 70 percent of the energy supplv-consumers only consume less than 30 percent, the rest is Government-the real savings are in industry and com- merce. The 70 percent area, that is where the bulk of the waste is, but that is not where the Federal Energy Office is placing its policies or its public relations committees. They are placing it in- deed more on the consumer rather than on industry and commerce where the very possible efficiencies could be passed on to the con- sumer. Now, you showed a considerable interest, in the degree of informa- tion which Government has received about these critical factors. I would want to suggest that although it is reassuring that Mr. Simon is going to Texas and Louisiana and Oklahoma soon to find out. what the reserves are and how they are calculated and what the proper rationing formula is all about, and what the efficient utili- zation factors are all about. it comes a little late. I think it reflects on the sincerity of the Federal Government's efforts here. Not only should this information have been obtained by the Federal Govern- ment many years ago or 2 years ago or 1 year ago but certainly it should have been obtained last fall and I think it is only a reflection of the kind of pressure which this committee and other congressional committees and the public are placing on the Federal Energy Office. I would not be optimistic. however, about the kind of information they are going to release to the public from their inquiries. Basic- ally. there are three facets to the information disclosure problem. One. how much information is the Government going to get in- dependently? Two, how much will the Government share with the American people? And third. how about the kind of information PAGENO="0135" 129 that is generated about what these petroleum advisory committees do in shaping Federal policy behind closed doors here in Wash- ington or New York. I might add that many of these committee meetings are not open to the public, contrary to some of the statements made by the Fed- eral Energy Office. There needs to be independently verified and obtained data on oil and gas reserves. There has been considerable emphasis from the FTC and elsewhere that these reserves are un- derestimated and certainly the definition of proven reserves provides opportunity for that underestimation. There needs to be information obtained by the Federal Govern- ment about the research and development expenditures in the oil industry. Forbes magazine recently reported that oil has one of the lowest expenditures on research and development of any industry in the United States. There needs to be data on the work of offshore operations. At the present time so strapped for personnel is the U.S. Geological Sur- vey, and the Office of Management and Budget has strapped it con- tinually in terms of not providing them with adequate personnel and computer facilities, that they basically rely on the oil industry to tell them how much oil and gas prevails on the land owned by the people of this country, the Federal land, which-even a banana republic, to use a much abused description, a banana republic would not tolerate that kind of delegation of critical information about the Nation's publicly owned oil and gas reserves. Chairman PROXMIRE. Mr. Nader, would you wind up in a couple of minutes so we can get to the questions if that is all right with you. Mr. NADER. Yes. I am about to complete it, Mr. Chairman. The additional area. I think, of inquiry which the committee should go into relates to property tax assessments. `While the value of energy resources in the ground, coal and oil and gas, has been going up, there has been no comparable increase in property tax assessments at the local level. As one of the members of the sub- committee pointed out this morning, there has been a strong in- centive for the companies not to disclose their full reserves so they do not have to pay the full amount of property t.ax on those reserves to local governments. Now, I do not lmow whether von intend to call Lt. Comdr. Kirby Brant up as a witness but I think he could provide some very useful information about~ one dimension of this problem: namely, Naval reserves. He is the Deputy Director of the Navav Petroleum and Oil Shale Reserves who just resigned in anger at the oil companies' policies and the Federal Government's practice. Press reports report him to have said: "I have written my last lie" in support of White House policy on the reserves. He has submitted a letter of resigna- tion to the Pentagon which notes his complaints about the oil com- panies. To my knowledge. this letter has not been released publicly by the Pentagon. I think it would be useful for the subcommittee's deliberations. In conclusion, Mr. Simon noted that he wanted the American people to have full information about the facts dealing with the PAGENO="0136" 130 energy crisis. I would point, out that that same Mr. Simon lobbyied very heavily a few weeks ago to reduce the information disclosure provisions in the emergency energy bill as it was arrived at by the House-Senate conference, and by virtue of his lobbying and White House lobbying, a number of critical areas of information which would have been shared by the public are now restricted to a few Government agencies. That information, I am sure, is available to your staff and I think needs to be focused on prior to the resumption of the deliberations on this bill next week by Congress. I would just like to comment briefly on one last point. Mr. Simon stated. "That. the oil industry needs incentives to increase its explo- ration." We have been hearing this, of course, for years and the oil depletion allowance and other tax benefits have allegedly been given to the oil industry precisely for this incentive to explore. And yet the Federal Government does not reveal t.he extent to which, after receiving the benefits of the oil depletion and other allowances and writeoffs, the oil industry has allocated some of these or a large proportion of these benefits as Congress intended them to be allo- cated to domestic exploration. Instead, our tax system encourages investment abroad, both from wellhead to the retail area, and if anything. it. biases the investment here not because the oil companies cannot get enough profits here but because they can get even higher profits in Europe and in Japan. It is rather anomalous for an oil company like Exxon to tell the Congress that. they need more incentives for domestic exploration when Exxon in 1972 and 1973 spent $250 million to change its name from Standard Oil of New Jersey to Exxon. I have yet to see a study of what the rate of return to that oil company is from the $250 million expenditure to change its name, to get that name across and to change its signs around the country and the world to Exxon. Second. these oil companies have been spending tens of millions of dollars in institutional ads which prepared the public for this so-called energy shortage. And so deceptive are these ads that they not only have been the subject of numerous congressional criticisms but the FTC is completing a study with a possible objective of bring- ing deceptive advertising act.ion against them. Last, it. is said that the companies have not been able to build refineries in t.his country because of environmental objections. This is unadulterated nonsense. First of all, the environmentalists just are not that strong and didn't even constitute an identity until the late sixties. Second of all. t.he entire projection of investment flow has been into Europe and Japan~ not domestically, simply because they can get a higher rate of return in a faster growing market. And third, you might ask the oil companies. Senator Proxmire, who opposed successfully the proposal by Occidental Petroleum Co. to build a 300.OCO barrel a day refinery in Maine? To be sure, there were some weak environmental objections but the main opposi- tion that defeated the construction of that refinery came from t.he oil majors. some of the seven sisters. working on Washington offi- cials. They defeated that refinery because of their unwillingness for them to see an independent company share in the oil import bonanza and they did not want to see a free port. PAGENO="0137" 131 These companies also successfully opposed other refineries when they were not their own. I think that needs to be very, very closely monitored by the congressional inquiry of which you are a part. Thank you. Chairman PROXMIRE. Thank you very much, Mr. Nader. [The following information was subsequently supplied for the record by Mr. Nader in the context of his statement:] RESERVES OF CRUDE OIL, NATURAL GAS LIQUIDS, AND NATURAL GAS IN TEE UNITED STATES AND CANADA AND UNITED STATES PRODUCTIVE CAPACIVY AS OF DECEMBER 31, 1972 1 Part I. Report of the Committee on Reserves and Productivity Capaeity of the American Petroleum Institute INTRODUCTION For the years 1946 through 1965, annual estimates of proved crude oil reserves in the United States were prepared by the American Petroleum Institute Com- mittee on Petroleum Reserves. The API committee also cooperated with the American Gas Association Committee on Natural Gas Reserves in the prepara- tion of estimates of proved reserves of dissolved gas and natural gas liquids. In 1966, the API committee's name was changed to the "Committee on Re- serves and Productive Capacity." In addition to continuing its work with re- spect to proved reserves, the committee's responsibilities were expanded to inelude the development of estimates for crude oil in the follo\ving categories 1. Original oil-in-place and ultimate recovery categorized by: a. Geologic age of reservoir rock; b. reservoir lithology; c. type of entrapment. 2. Indicated additional reserves from cased-off reservoirs and from the fu- ture installation of fluid injection projects in known fields. 3. Allocations back to year of discovery of: a. Current estimates of ultimate recovery and, b. current estimates of original oil-on-place. 4. Reserves and production data by subdivision for the states of California, Louisiana, New Mexico, and Texas. 5. Crude oil productive capacity in the United States. Estimates for categories 1, 3, and 4 were published for the first time in 1966, and comparable data may be found in subsequent reports. Crude oil potentially available from cased-off reservoirs and from the future Installation of fluid injection projects in known fields was reported in 1966 as "indicated additional reserves" (see category 2 above). However, since reserves from eased-off reservoics were found to account for only three per cent of total additional reserves, the committee discontinued this estimate. Consequently, Indicated additional reserves as reported for the years 1967-1972 only include estimates of reserves from the future installation of fluid injection projects in known fields. Estimates of crude oil productive capacity by states and major areas of States (category 5 above) were reported for the first time in 19fi7. In order to properly interpret reserves and production data developed by the committee, the reader should be familiar with the underlying definitions and concepts. The section on concepts and definitions are, therefore, integral parts of this report. COMMITTEE ORGANIZATION AND POLICIES Each member of the committee (except the Secretary) appoints one or more subcommittees for the purpose of preparing reserves and productive capacity estimates for his area of responsibility. These Subcommittees, which are re- sponsible for determining annual reserves and productive capacity estimates, are composed of geologists and engineers who (1) represent various segments of the producing industry having prominent ownership holdings in the Spb- committee's assigned area; (2) have broad experience in the estimation of re- serves and productive capacity; and (3) have an intimate knowledge of the 1 Extract of pp. 4-25, 82, and 83, report by the American Petroleum Institute, dated May 1973. PAGENO="0138" 132 areas and the more significant sized fields assigned to them. The Subcommittee are expected to make multiple assignments of selected fields to their members where it will beneficially contribute to the quality of reserve and productive capacity estimates and promote the exchange of expert views important thereto. Members of the API Committee on Reserves and Productive Capacity, sub- committee chairmen, and members of the subcommittee are listed below. Areas of responsibilities, and subdivisions of California, Louisiana, New Mexico, and Texas used in reporting reserves data are shown on Maps I-V. The Committee on Reserves and Productive Capacity operates under the API policy on petroleum statistics which includes the following: "Statistical information is published under Institute sponsorship in the maxi- mum degree of detail consistent with the safeguarding of proprietary informa- tion of individual companies, while mindful of the cost and utility of the data involved. The Institute's statistics are confined to current and historical data. The Institute does not participate in the publication of forecasts of future de- mand for petroleum or its products. nor of estimates of crude oil, natural gas, or natural gas liquids recoveries that are speculative in nature of that rely upon c( nj ectu re regarding future physical or economic conditions." To assure continued cooperation of its subcommittee members who exercise complete integrity and a high degree of professional judgment in the perform- ance of their assignments, the committee adheres to the firm policy of main- taining strict confidence with respect to basic data and estimates of reserves and productive capacity for individual fields. T~o member of the committee or its subcommittees is authorized to make available to anyone outside the com- mittee organization any information beyond that which is published in this report. Committee on Reserves and Productive Capaoity 31cm bers M. W. Haas (Chairman) Exxon Company. U.S.A., Houston, Texas Charles F. Bowden, Union Oil Company of California. Houston, Texas W. M. Campbell. Atlantic Richfield Company, Dallas, Texas F. L. Carpenter, Gulf Oil Company - U.S., Houston, Texas W. A. Daniel, Mobile Oil Corporation. Houston. Texas T. A. Dawson. Indiana Geological Survey, Bloomington, Indiana J. K. Drisdale, Texaco Inc.. Houston, Texas 0. A. Graybeal, Sun Oil Company. Dallas. Texas A. T. Guernsey. Shell Oil Company. Houston, Texas D. D. Little. Standard Oil Company of California. San Francisco, California J. W. Phenicie. Amoco Production Company. Tulsa, Oklahoma G. R. Schoonmaker. Marathon Oil Company. Findlay. Ohio S. Smith. Phillips Petroleum Company. Bartlesville, Oklahoma B. L. Waggoner, Continental Oil Company. Houston, Texas J. E. Hodges (Secretary) American Petroleum Institute, Washington, D.C. Members of the subcommittees Adams. W. W. Benavides, A., Jr. Alkire, Robert L. Berry. George F. *Andrea D. W. Blanchard. L. A. Artley. Roger Blomberg. John R. Ashill. J. S. *Breaux Ernest J. Bahione, Herbert A. Brown. Joseph Barnett., K. Cardwell, Dudley H. Barthel, B. 0. Carr, L. A. Baskin. Lloyd Chaky, Alex Beckner. N. N. Chatfield, Leslie E. * Subcommittee Chairmen and Vice Chairmen. PAGENO="0139" Cheshire, M. E. Clark, Charles R. Clime, W. H. Cochran, K. R. Connelly, F. B. Conner, William D. Constant, Frank L. Coppedge. D. A. Coverstone, D. F. Croushorn, Austin L. Curry, J. R. Daniel, W. B., III *Davjdson, Thomas L. tDavis, Clyde Davis, IJ. D. Davis, W. C. Daviston, S. E. DeBrosse, T. Dewlen, H. D., Jr. Diver, C. J. Doiph, J. R. Douglas, E. R. Dunn, J. B. Dupuy. H. J. Dye, C. C. Ellison. Floyd *Elljson, R. H. England. Jack Ewing. H. H. Fallin, W. S. Farrar, C. R. *Fish, George E. Fowler, J. C. Frnka, W. A. Galloway, J. R. *Ga~er, E. S. Gillespie, Murray Gould, R. C. Grasso, V. C. Gray, Robert E. Greve, J. E. Hansen, P. W. Harmer, H. W. Haupt, H. J., Jr. Heck, E. T. Heinrich, Carl Hickox, I. N. Hill, Hayward H. *Hunt, J. F. 133 Irwin, R. A. Isaacs, V. A., Jr. Jerry, D. W. Johnston, Howard F. *Jones, J. Paul *Jordan James R. Jordan, Kirk Jung, K. D. Kallenberger, C.H. Kellogg, Walter Kiersznowski, S. E. *Lancaster, William R. Lane, R. D. Lawry, Thomas LeBlanc, C. J. Lee, A. E. Leighner, T. J. Leml)cke, R. R. Leutz, W. K. Linn, Earl H. Lloyd, Frank T. *f~oper, Raymond G. Lovingfoss, Warren J. *LynCl~, Harold W. Lytle, W. S. Mansoor, Raja A. Marl)le, C. L. Matthews, T. A. McClellan, J. R. McConnell, Kenner, Jr. *~\I(.Donald, John H. McMaster, C. G. McMullen, Edward L. Meek, J. W. Milhous, Holman C. Mills, Lloyd C. *Morel, Thomas J. ~".al)ors, Fred L. Nevill, B. *Norgaard, P. B. Olson, Dale C. Patterson, W. M. Paynter, W. T. Pearson, Peter D. Perry, A. T. *persofl, 0. C. Pert, D. Peyton, W. L. Plaza, Joseph B. * Subcommittee Chairmen and Vice Chairmen. PAGENO="0140" 134 Popovec, George Sullivan, Dan M. Robbins, C. B. Summers, ~V. A. Roberts, C. A. Swingle, M. P. Robertson, C. L. Sykes, R. L. Robitshek, M. F. Teer, George A. Romine, L. D., Jr. Thiede, D. M. RowaIt~ R. J. Tsimortls, Paul `Sanders, John L. Van Tyne, A. M. Shambaugh, J. ~. Van Zelfden, Gordon Smiley, William G. Wade, Wallace L. Smith, L. H. Wagner, D. P. Smith, W. D. Waid, W. 0. Stanfield, John Waugh, G. A. `Statler, Anthony T. `Wells. H. C. Steele, Horace C. Whitaker, M. T. Stereck, R. J. Whitlock, Edward Stewart, Lyle Wieder, C. A. `Stocker. George R. Wiesner, Gale M. Stone, V. C. Young, Roger Straw, Henry Zerda, Kenneth V. `Stuart, 0. M. C1oiiriu~n inl \`ici' (`heirmen. CHANGES IN LIQL'ID HYDROCARBON RESEflVES IN THE UNITED STATES FOR TH~ YEAR 1972 Summary data pertaining to reserves of crude oil, natural gas liquids, and total liquid hydrocarbons in the Tnited States for the year 1972 are ~ follows: Crude oil [Thnnsand~ f h~rreIs nf 42 U.S. gallonsi Total proved reserves of crude oil as of Dec. 31, 1971 38, 0~2, 957 Additions to proved reserves in 1972: Revisions of previous estimates 820, 107 Extensions of old reservoirs 459, 31! New reserves discovered in new fields 123, 210 New reserves discovered in new reservoirs in old fields 155, 220 Total proved reserves added in 1972 1, 557, 848 Total 39, 620, 805 Less production during 1972 (3, 281, 397) Total proved reserves of crude oil as of Dec. 31, 1972 30, 339, 408 Net change in proved reserves during 1972 (1,723, 549) Additional information: Indicated additional reserves as of Dec. 31, 1972 5, 190, 257 Total oricinal oil-in-place estimated as of Dec. 31, 1972 434, 038, 198 Total ubimate. recovery estimated as of Dec. 31, 1972 130, 253, 050 Cumulative production as of Dec. 31, 1972 99, 913, 642 Estimated "00-day" productive capacity per day attainable on Mar. 31, 1973 10, 301 PAGENO="0141" 133 a ral gas 7 ig ii ids liv ~ ic ivUli tic AIwIiv~fl1 (Uc- \~-ocia1io1i} 42 1.5. Uii~J Total proved reserves of natural gas liquids as of Dec. 31, 1971___ 7, 304, 227 Additions to proved res rves in 1972: Revi~iiins of previou5 estimates 38, 796 Lxtensins of (lid reservoirs 112, 537 rts rves cliseoverrd in new fields 32, 652 New reserves do.covered in new reservoirs in old fields 54, 288 Total proved reserves added in 1072 238, 273 Total 7,542,500 Less production during 1972 (755, 941) Total proved reserves of natural gas liquids as of Dec. 31, 1972 6,780,559 Net change in proved reserves during 1972 (517,668) Total liquid hydrocarbons lTiiousan~u t l~riils of 42 iS. valloii.-] Total proved reserves of liquid hydrocarbons as of Dec. 31, 1971~. 43, 367, 184 Additions to proved reserves in 1972: Revisions of previous estimates 858, 903 Extensions of old reservoirs 571, 848 New reserves discovered in new fields 155, 862 New reserves di~covered in new reservoirs in old fields 209, 508 Total proved reserves added in 1972 1, 796, 121 Total 47, 163, 305 Less production during 1972 (4, 037, 338) Total proved reserves of liquid hydrocarbons as of Dec. 31, 1972 43, 125, 967 Net change in proved reserves during 1972 (2,241,217) RESERVES AND PRODPCTION-CONCEPTS AND DEFINITIONS Crude oil-Crude oil is technically defined as a mixture of hydrocarbons that exists in the liquid phase in natural underground reservoics and remains liquid at atiiiospherie i)res5tir~ after passing through surface separating fa- cilities. For statistical purposes. volumes reported as crude oil include 1. Liquids teelinicahl y (lefined as (`ru(le oil. 2. Small amounts of hy(lroearhons that exist in the gaseous phase In natural ilndergrotllid reservi irs I)lit are I i(lui(l Ut at ni si hone Iressuro after being re- covered from oil well (easeinghead gas in lease separators,3 and ~3. Small :i mounts of nonhydroearbans produced with the oil. Statistie~l d:i Ia pertaining to crude oil produeeitn. reserves, and productive capacity ire roiiorted as liquid equivalents at the surfeet (excluding basic sediment nd \va icr) measured in terms of stock tank barrels of 42 U.S. gallons at atmospheric pressure, and corrected to 60°F. Protect rcscr'es of crude oil-Proved reserves of crl1de oil as of December 31 of any given year are the estimated quantities of all liquids statistically defined as crude oil, which geological and engineering data demonstrate with 2 From :i technical eta ridpotnt. those liqulde are termed `condensate'' : however. they are eomnun tried with the crud' steani ii rid it is not practical to nueasumrp amid report their volume spa ru tel v tI] thor hiqum ide recovered front natural ca (1 no] udimu it lease con* densuitel inc iuo'iuiil'l in tie natural vms liquid volimnies rejuorted by the ~\G.\ aithiouch ~omuue of tic I'm s1' eondu'ti em to who] is re e vered nil nun ~ui red separately from crude oil may hi unucuuuuiuivh'cl wit ii oriole i] iii pipelines wlc'n ncirlsu't'd. \Vhii'rc' a ~i,uu' reunm]:uiorv :i~'ney spoilies a ]i'funitin cci' crude oil whdchi differs from t ha I `at fri Ii chive, the Onuit nut tree. fir eta ti stUn I pa rposi `s, fm]] we I lie eta I definition. In uli ` ,U,c',ii'c' f a leilniticimi h ur'vnlatnry authority, reserves. priductin and productive capacity data are reported ccii thu basis of classification made by thu operator. PAGENO="0142" 136 reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation tests. The area of an oil reser- voir considered proved includes: (1) that portion delineated by drilling and defined by gas-oil or oil-water contacts, if and; and (2) the immediately adjoin- ing portions not yet drilled but which can be reasonably judged as economically productive on the basis of available geological andengineering data. In the ab- sence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Reserves of crude oil which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the `proved' classification when successful testing by a pilot project, or the opera- tion of an instanced program in the reservoir, provides support for the engi- neering analysis on which the project or program was based. Estimates of proved crude oil reserves to do not include the following: (1) oil that may become available from known reservoirs but is reported separately as `indicated additional reserves'; (2) natural gas liquids (including conden- sate) ; (3) oil the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoic characteristics, or economic factors; (4) oil that may occur in untested prospects; and (5) oil that may be recovered from oil shales, coal, gilsonite and other such sources. Indicated additional reservc8.-With the present state of industry technology, certain quantities of crude oil (other than those defined and reported as proved reserves) may be economically recoverable from the following potential sources: Known productive reservolce in existing fields expected to respond to im- proved recovery techniques such as fluid injection where (a) an improved re- covery technique has been installed but its eect cannot yet be fully evaluated; or (b) an improved technique has not been installed but knowledge of reservoir characteristics and the results of a known technique installed in a similar situation are available for use in the estimating procedure. Crude oil potentially available from these sources is reported as "indicated additional reserves." The economic recoverability of these reserves is not con- sidered to be established with sufficient conclusiveness to allow them to be included in proved reserves: however, if and when improved recovery tech- nnques are successfully applied to known reservoirs, the corresponding indicated additional reserves will he reclassified and added to the inventory of proved reserves. The `indicated additional reserves" are reported separately from "proved" reserves to provide continuity to the proved reserves' statistical series. Indicated additional reserves do not include reserves associated with acreage that may be added to the area of a proved reservoir as the result of future drilling. Di.woverie8.-DiscoverieS reported as of December 31 for any given year ar proved reserves credited to new fields and new reservoirs in old fields as the result of successful exploratory drilling and associated development drilling during the current year. The reliability of estimates of the proved productive area of new discoveries or partially developed reservoirs varies in relation to the amount of geological information available at the time the estimate is prepareed. Important factors such as the areal extent of the structure, the average thickness of the produc- ing reservoir, the oil column within the reservoir, and the continuity and char- acteristics of the reservoir formation cannot be determined accurately unless sufficient subsurface information is available. The ultimate size of newly discovered reservoirs, whether in new or old fields, is seldom determined in the year o discovery. Therefore, first-year estimates of proved reserves in new reservoirs are often only a small part of the total that will he ultimately assigned to the new reservoirs. It follows that reserves credited to discoveries in any given year are usually less than total extensions and revisions for the same year, since extensions and revisions represent ad- justments of reserves discovered in all prior years. Subcommittees are not necessarily aware of and may not have access to the subsurface information for all new discoveries at the time reserve estimates are prepared. This is especially true if a discovery is made late in the year for which a report is being prepared or when competitive situations dictate that that the subsurface information he held as proprietary. In such cases, new proved reserves are reported in Tahie I as discoveries in new fields or new reservoirs in old fields for the year in which the discovery becomes known or when subsurface information becomes availahie. In Table III. these reserves are assigned to the year in which the field was actually discovered. PAGENO="0143" 137 Ext ensions.-T he ultimate size of newly discovered fields, or newly dis- covered reservoirs in old fields, is normally determined by drilling in years subsequent to discovery. Wells drilled in subsequent years usually add to the proved area of previously discovered reservoirs, thereby serving to increase estiniates of Proved reserves. The reserves credited to a reservoir because of en- largement of its proved area are classified as "extensions." Revisions.-Both development drilling and production history add to the basic geological and engineering knowledge of a petroleum reservoir and pro- vide the basis for more accurate estimates of proved reserves in years following discovery. Changes in earlier estimates, either upward or downward, resulting from new information (except for an increase in proved acreage) are classified as "revisions." Revisions for a given year also include (1) increases in proved reserves associated with the installation of improved recovery techniques; and (2) an amount which corrects the effect on proved reserves of the difference between estimated production for the previous year and actual production for that year. Proved acreage.-Proved acreage is that which has been credited with proved reserves. Acreage is credited with proved reserves if the presence of a pro- ductive formation has been verified by drilling and testing. Undrilled acreage adjacent to drilled acreage and certain other undrilled acreage are also credited with proved reserves if geological and engineering inforina ti on demonstrate with reasonable certainty that the underlying formations are continuous and productive. Improved recovery technique&-Improved recovery techniques Include all methods for supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir. Such techniques include: (1) pressure maintenance; (2) cycling; and (3) secondary recovery in its original sense; (i.e., fluid injection applied relatively late in the productive history of a reservoir for the purpose of stimulating production after recovery by primary methods of flowing or artificial lift has approached an economic limit). Im- proved recovery techniques also include thermal methods and the use of mis- cible displacement fluids. Reserves resulting from the application of any of the methods listed above are reported as "revisions" to proved reserves for the year in which successful testing by a pilot project or the operation of an installed program in the reser- voir, provides support for the engineering analysis on which the project or program was based. Original oil-in.-place.-The estimated number of stock tank barrels of crude oil in known reservoirs prior to any production is defined as "original oil-in- place." Known reservoirs include (1) those that are currently productive; (2) those to which proved reserves have been credited but from which there has been no production; and (3) those that have been depleted. The estimation of original oil-in-place is based on calculations using volu- metric or material balance methods when sufficient factual data are available concerning reservoir rock, fluid properties, reservoir limits, and production per- formance. Where such data are not available, or are seriously incomplete, the estimation procedure utilizes Information and performance characteristics from reservoirs believed to be comparable. Ultimate recovcry.-Ultimate recovery represents the estimated quantity of crude oil which has been produced from a reservoir and is expected to be pro- duced in the future if there are no substantial changes in present economic relationships and known production technology. Accordingly, the current esti- mate of ultimate recovery is the sum of cumulative production to date plue the current estimate of proved reserves. Ultimate recovery may also be expressed as the percentage of original oil-In- place which is expected to be eventually produced. This percentage will vary from one reservoir to another in accordance with the reservoir fluid, rock char- acteristics. and in the producing mechanism or drive which is present. A8signment of current estimates to year of (liscovery.-The Committee deter- mines and reports, in Table III, by the year of discovery, the ultimate recovery and original oil-in-place for each geographical reporting area. Also listed in Table III is the historical record of actual production and the year-end reserve estimate for all fields that were discovered during previous years as well as the year noted. The year of discovery numbers are simply a listing of the ultimate recoveries and oil-in-place, as currently estimated, according to the year in which the fields and reservoirs were discovered. The discovery year is basically assigned as that of the initial field recovery. The reservoirs in these fields which may have been discovered in later years are combined, for this particular record and PAGENO="0144" 138 tabulation, with that of the initial reservoir discovery. Excepted are those reservoirs which are themselves geologically significant and were discovered through application of a new exploration concept as compared to that which underlay the original prospect testing and discovery. For these latter reservoirs the assigned discovery years are the ones in which they were actually discov- ered. These assignment decisions involve geological and exploratory judgments best developed by the experts in the local Subcommittees. Estimates of ultimate recovery and original oil-in-place for fields discovered in recent years are often subject to substantial revision in future years based on information provided by additional drilling, production and performance and the successful installation of improved recovery techniques. For this reason, caution should be exercised in the interpretation of recent data of this kind. Geological information on oil ocourrence.-Current estimates of original oil- in-place and the ultimate recovery of crude oil from known reservoirs (includ- ing those considered to be depleted) are differentiated in this report as follows: 1. By age of reservoir rock according to the geologic systems of the Mesozoic and the Paleozoic, and the series of the Cenozoic. 2. By Lithology of reservoir in three categories: (a) `Sandstone" where quartz grains or other non-carbonate mineral or rock detritus predominate ranging in grain sizs from that found in siltstones through conglomerates. (b) "Carbonate" where calcite or dolomite predominate. (c) "Other" which includes occurrences in non-sedimentary rocks and in some sedimentary rocks such as fractured shale. 3. By type of entrapment under two broad categories: (a) Structural traps which are defined as entrapments in which fluid hydro- (arbon migration has terminated because of closure induced by structural de- formation and/or hydroynamic forces. Most Gulf Coast piercement salt dome reservoirs are included in this classification. (b) Stratigraphic traps which are defined as entrapments in which fluid hydrocarbon migration has terminated because of truncation, nondeposition, or facies changes in the reservoir rock. Where a pinch out of facies changes pro- vide part of the barrier to migration and structural elements form the remain- ing closure, the entrapment is classsified as stratigraphic. To the extent possible, the occurrance of oil is classified on the basis of a review of individual reservoirs. Where single reservoirs overlap various cate- gories or cumulative production from several reservoirs cannot be separately identified, the local subcommittees exercise judgment in allocating estimates of production, original oil-in-place, and ultimate recovery to the various cate- gories, or they assign all estimates to the category which dominates the ulti- mate recovery from the field. New information on reservoirs regarding age, lithology, and type of entrapment may cause some adjustments in previously published data: however, major annual revisions usually reflect revisions in estimates of original oil-in-place and ultimate recovery. Production.-Crude oil production is the volume of liquids statistically de- fined as crude oil, which is produced from oil reservoirs during given periods of time. The amount of such production for a given year is generally estab- lished by measurement of volumes delivered from lease storage tanks (i.e., the point of custody transfer) to pipelines, trucks, or other media for transport to refineries or terminals with adjustments for (1) net differences between opening and closing lease inventories, and (2) basic sediment and water (BS&W). For purposes of the annual reserves reviews, the subcommittees need pro- duction data for Individual fields and for the specific geographic areas for which they are responsible. Since "official" sources such as state agencies and the U.S. Bureau of Mines do not provide the required detail, the subcommittees must analyze all available data (including company records, commercial serv- ices, state records, and Bureau of Mines reports) and make such adjustments as may be necessary to develop production series which satisfy their particular requirements. Because of differences in definitions and differences in data col- lection procedures used by various sources. and because of the variety of ad- justments which must he made, production data used in annual reserves reprots should not he expected to agree precisely with that published by such sources as state agencies and the U.S. Bureau of Mines.3 It should be noted that the difference between the final production data used by the Committee on Re~erces and Productive Capacity and "official" sources are small. For example, the total r.S. production for 1971 shown in Table III of the report for 1972 is 100.1 ç~ of the total 1.S. production reported by the 1J.S. Bureau of Mines. PAGENO="0145" 139 In addition to the problems outlined above, it should be noted that when re- serves estimated are prepared for a current year, the subcommittees only have access to actual production data for the first nine or ten months for that year. Consequently, production totals reported for the current year are preliminary estimates prepared by the subcommittee on the ba~is of incomplete information. However, by the time teach annual report is prepared, the subcommittees have access to the "actual" total production for the preceding year and the figures shown on Table III are revised accordingly.' Cumulative production.-The sum of the estimated crude production for the current year and the actual production for each of the prior years is the cumulative production reported by the committee. However, this cumulative productive is subject to the qualifications outlined in the section on production. Offshore reserves and production-The combined Louisiana-Texas offshore area, termer the Gulf of Mexico, is reported as a distinct geographical area for the first time in 1970. However, reserves, productive capacity, and related data for the offshore Louisiana-Texas Area are included in the land totals of each of the two states. Offshore reserves in the Gulf of Mexico for the States of Louisiana and Texas are those which lie seaward of the Chapman Line and the coast line of Texas, respectively. Productive capacity.-Estimates of productive capacities of crude oil devel- oped by the American Petroleum Institute Committee on Reserves and Produc- tive Capacity represent the maximum daily rates of production which can be attained under specified conditions on March 31 of any given year. The definition of productive capacity used by the Committee is as follows: "The ninety-day crude oil productive capacity is the maximum daily crude production rate, at the point of custody transfer, that could be achieved in ninety days (following December 31 of any given year) with existing wells, well equipment, and surface facilities-plus work and changes that can be reasonably accomplished within the time period using present service capabili- ties and personnel and with productivity declining as it would under capacity operation." Estimates of the productive capacity of particular fields or reservoirs are based on proved acreage, wells, well equipment, and surface production famili- ties as of the previous December 31, with adjustments for (1) increases in productive capacity which would result from alterations and improvements in existing facilities and programs for development drilling and improved re- covery techniques, which could be completed within the ninety-day period with existing capabilities and personnel: and (2' the natural decreases in produc- tive capacity resulting from capacity operations during the ninety-day period. It should be noted, however, that there is no adjustment for additions to re- serves and increased productive capacity that result from exploratory drilling during the ninety-day period. Furthermore, estimates do not include quantities of crude oil in lease storage on March 31 which could be drawn upon at the time of capacity operation. Estimates prepared by the Committee are based on the following assumptions: 1. There will be no restrictions on production resulting from a lack of mar- kets for crude oil. 2. There will be no change in crude oil prices or the unit cost of materials, equipment, and labor within the ninety-day period allowed for the buildup of capacity. 3. There will be no statutory restrictions on production, but gas and water production will be controlled according to prudent and accepted engineering practices, where appropriate, to prevent the significant reduction of crude oil recovery. The only other production restrictions applicable would be those which prohibit the pollution of water and those which prohibit air pollution with gas or the creation of fire hazards from gas by operations up to the point of transferring the gas to market or to gas processing facilities. 4. There will be no restrictions on production resulting from the Inadequacy of storage or transportation facilities beyond the point of custody transfer. 5. Introfield equity considerations will be satisfactorily resolved so that pro- duction for given fields can be maximized. 4 The difference between the preliminary estimate for any riven year rind the actual production for that year. as subsequently determined by the subcommittees, is treated as a revision" in Table I of the follnwinr year's report. It should be noted that the oririnril annual estimates of production used in Table II are not revised since this would disturb the internal balance and consistency of the reserves estimates. 37-143 0 - 74 - 10 PAGENO="0146" TABLE 1.-ESTIMATED RESERVES OF CRUDE OIL IN THE UNITED STATES Jlhousands of barrels of 42 U.S. gallonsj Alabama Alaska - Arkansas California3 Coastal region Los Angeles basin San Joaquin basin Colorado Florida Illijois Indiana Kansas Kentucky Louisiana3 Proved Revisions reserves as of Dec. 31, 1971 Plus Minus (2) (3a) 61,478 1,117 10,116,195 52,805 -- - 117, 648 6,634 3,705,750 273,951 New reservoir New field discoveries Extensions discoveries in old lields Proved reserves as of Production' Dec. 31, 1972 513, 322 (30, 450) 246, 250 1, 282, 048 (61, 969) 499, 500 1, 758, 365 (59, 596) 727, 400 326,411 (6,362) 94,250 208, 149 4, 027 167, 942 174, 883 (33, 880) 9, 100 29,383 (1,472) 2,700 453, 394 (48, 158) 11, 750 48, 193 (4, 355) 2, 800 (370, 522) 140, 197 12,290 62,002 3,237 3,100 60,592 312,458 (29,910) 23,452 33, 904 241, 248 13, 063 53, 520 State (1) Changes in proved reserves during 1972 1, 842 4,835 89, 002 Net changes in proved reserves during 1972 (3b) (4) (5) (6) (7) (8) (9) (10) 4,277 1,400 2,835 4,869 4, 243 1, 700 Indicated additional reserves from known reservoirs 4, 230 3, 905 9, 696 56, 734 72,718 10,096,282 18, 281 113, 100 346, 812 3, 553, 735 (4, 744) (19, 913) (4, 548) (152, 015) 543,772 56,940 15,012 640 1,700 3,685 78,403 1,344,017 84, 342 8,827 1, 105 20 138, 609 1,817,961 132,669 65,163 2.498 200 129,800 332, 773 12, 957 5,724 9,270 7,428 2,031 32, 324 204, 122 149 8,946 11, 193 15,963 208,763 17,046 18,186 269 105 19 33,133 30, 855 4,744 1,869 520 1, 205 80 6, 152 501, 552 33, 228 23, 418 11, 379 4, 276 378 74, 001 52, 548 2, 349 483 3, 000 70 490 9, 781 5,399,000 250, 198 129, 809 145, 080 39, 005 104,890 779,886 5,028,478 32, 521 37, 100 10, 944 1,473, 150 Michigan Mississippi Montana North South 306,918 5,092,082 17, 146 233,052 4,384 125, 425 1,747 143, 333 39,005 460 104,430 40 436 739, 450 281,451 4,747,027 (25 467) (345:055) 31 712 108, 485 58 765 3,039 182 7,710 4,960 342, 368 27, 980 18, 472 12, 572 6, 778 1,824 228. 185 45. 917 6, 834 4,876 3,008 PAGENO="0147" 1 Preliminary esimate. 2 Additional reserves include additional recoveries in known reservoirs (in excess of the proved reserves) which engineering knowledge and judgment indicate will be economically available by application of fluid injection, whether or not such program is currently installed. 3 Includes offshore reserves. 4 Includes Arizona, Missouri, Nevada, South Dakota, Tennessee, and Virginia. Included with Texas and Louisiana. Denotes negative volume. Nebraska New Mexico Northwest 22,561 8,761 1,857 556 26 5,801 Southeast 634,324 50,780 39, 190 9,228 3,061 801 100,657 New York florth Dakota Ohio Oklahoma Pennsylvania 36,124 3,556 1,729 1,090 229 8,717 30,553 (5,571) 4,775 656,885 59,541 41,047 9,784 3,087 801 106,458 582,593 (74,292) 121,111 9, 772 174, 011 129, 144 1, 404, 608 47, 052 Texas3 - 13,023,529 400 11, 110 1,382 2,074 1,300 7,576 23 84, 132 43, 601 27, 023 8, 642 20, 617 7,734 14,000 568, 374 310, 166 24, 246 1, 685 5, 125 558,347 (75,977) 115,986 926 21, 080 9, 358 198, 417 3, 441 District 1 District 2 District 3 District 4 District 5 District 6 District 7-B District7-C District 8 District 8-A District 9 District 10 Utah West Virginia Wyoming Miscellaneous 4 Total United States Gulf of Mexico 9, 246 166, 033 127, 385 1, 303, 004 37, 345 90, 640 15, 812 14, 005 1,258, 137 12, 144, 057 (879, 472) 2,406,905 (526) 2, 000 (7, 978) 33, 170 (1,759) (101,604) 319,337 (9, 707) 42, 770 157, 078 785, 638 1,638,611 415,664 118,305 2, 359, 624 209, 473 251, 304 3, 528, 991 10, 441 28, 708 85,803 22,996 1,921 14, 596 58, 037 25, 525 189, 235 2, 122 106, 674 30,704 41,953 1,387 1,777 6,657 13, 470 65, 756 4,282 5, 166 11,169 1,592 267 895 10, 076 9, 784 33, 562 1, 185 239 1,361 777 5 644 1,885 398 2,864 144 2, 799 3,364 3,382 80 1,000 125 645 905 23, 684 79, 108 173,178 58,706 20,228 166, 544 36, 977 34, 916 287, 443 147, 324 636, 768 1,536,426 343,752 98,963 2, 208, 438 235, 962 239, 270 3, 402, 358 (9, 754) (148, 870) (102,185) (71,912) (19,342) (151, 186) 26, 489 (12, 034) (126, 633) 35, 927 19, 920 184,132 41,310 36,000 191, 055 13, 476 14, 458 1,030, 108 3,002, 588 356, 007 200,246 165 806 100, 275 29, 800 1,037 16 281 17, 428 19, 393 2,845 1763 8,003 4,539 1,305 89 300 4, 894 1,426 134 1 138 718 658 185 305, 547 49, 019 22,787 26 365 2, 793, 503 324, 018 177,275 244 397 (209, 085) (31, 989) (22,971) 78 591 849, 261 24, 258 3,000 35 800 51, 731 996, 985 7,308 88, 497 319 15,000 22, 297 12 30 16, 487 330 6,817 1,950 165 2,721 138. 660 1,584 34,040 949, 779 6,526 (17,691) (47, 206) (782) 5,000 156, 863 38, 062, 957 2, 748, 310 1,571,909 751, 802 459, 311 123, 210 155, 220 3,281, 397 36, 339, 408 (1, 723, 549) 5, 190, 257 109, 199 87, 447 100, 526 36, 500 65, 836 407, 062 2, 565, 862 (182, 448) 29, 515 PAGENO="0148" 142 - ° - - ~c~e~or-~o ~ w ~ oo ~ o ~ v-.! ~c-~ej~c,j.- ~ e ~O-~'~(.O[- 0? C,) ~o-~ ~ ~E o a ~ - COCO-~C'4c-~C)~-t-J 2 - - ~ ~` ~ o ~ E-c o = `d'c 0= j-- - -- - `-2 -- -- -- C- U- E o .- LU OL()~-(~ C~O~LCOfl-~ ~ a: ~ 5 a~o,c~no ~-LU~-(~) e(~fl-.LUOO ~ -c-v a: II PAGENO="0149" 143 TABLE 111.-HISTORICAL RECORD OF PRODUCTION AND PROVED RESERVES; ALSO THE ULTIMATE RECOVERY AND ORIGINAL OIL-IN-PLACE BY YEAR OF DISCOVERY, TOTAL UNITED STATES IThousands of barrelo of 42 U.S. gaIIons~ For all tieldo diocooered For fieldo diocovered fo dote daring yeor° Proved 1972 estimate 1972 estimate Year Production reserves at during year' end of year2 of ultimate of original recovery oil-in-place (1) (2) (3) (4) (5) Pre-1920 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 - 5,064,485 442,609 471,379 558,689 732,850 713,081 763,927 771, 137 901,722 901,443 1,007, 382 895,966 850,017 783,542 904,930 905,681 991,590 1,086,896 1,265,222 1,202,243 1,253,416 1,334,525 23, 791, 584 2,178,992 3,176,042 1,322,530 770,344 1,149,411 1,020, 334 4,537,632 1,655,238 2,827,631 3,503,291 7,694,721 2,186,620 533,025 1,496,681 3,553,935 2,512,288 6,044,264 3,411, 580 3,985,968 1,862,596 3.752,380 92, 374 751 8,999,247 11,836,511 4,198,618 2,658,354 3,998,867 4,043, 328 13,206,460 5,136,844 8,107,132 10,232, 178 13,545,392 5,052,971 1,899,781 4,481,948 8,938,225 7,119,864 19, 133, 253 8,456,386 10,457,616 5,414,609 8,954,687 1941 194~ 1943 1944 1945 1946 1,388,985 1,374.132 1,492, 529 1,669,218 1,704,786 19,941,846 1,727,701 20,873,560 2,255,469 1,345,953 1,332,761 2,269,874 2,084,030 1,478, 183 7,088,469 4,361,135 4,139,794 7,475,451 6,929,372 4,166,593 1947 1,850,420 21,487,685 1,492,011 5,702,871 1948 2,002,162 23,280,444 3,403,783 8,614,250 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1,823,873 24,649,489 1,950.866 25,268,398 2,211.770 27.468,031 2,256,380 27,960,554 2,313,492 28,944,828 2,272,320 29,560,746 2,425,176 30,012, 170 2,558,813 30,434,649 2,558,873 30, 300,405 2,377,009 30,535,917 2,493,505 31,719,347 3,079,560 2,592,129 1,630,523 1,386,929 2,099,629 2,143,163 1,487,405 1,794,826 2,071,249 1,040,927 705,810 15,843, 161 7,395,828 6,083,686 4,824,054 7,934,817 7,097,356 5,570,146 6,256,007 6,525,982 3,677,539 2,688,489 1960 2.472,913 31,613.211 874,472 2,963, 247 1961 2,507,823 31,758, 505 467,156 1,921,212 1962 1963 2,552.006 31,389.223 2,663,309 30,969,990 970,856 621,772 2,727,323 2,252,549 1964 2,645,453 30,990,510 814,525 2,966,775 1965 1966 1967 1968 2,699.282 31, 352,391 2,864,127 31,452,127 3,047,233 31,376,670 3,160,987 30,707,117 1,071.157 467,818 733,834 10,378,768 4,102,434 1,924,253 2,846,382 26,798,602 1969 3,188,010 29,631,862 444,699 1,580,337 1970 1971 3,328,008 39, 001. 335 3,298, 352 38,062,957 464,462 196,215 2,044,239 789,415 1972 3,281,397 36,339,408 86,015 499,408 Actual production except for latest year reported. See Appendix A fur snurceo of production data used. Figures published prior to 1945 included proved reserves of cycle-plant and leone condensate and are omitted since they ure not on the same basis as the series beginning in 1945. 0 For all currently productive and depleted fields according to the year of discsvnry; based on proved reserves, cumu- lative production, and original si-ho-place as estimated at Dec. 31, 1972. New pools of enplorutory signihcunce are assigned to the year of actual discovery; other pools are assigned to thuir fields' discovury yoor. PAGENO="0150" 144 CHART I PROVED RESERVES OF CRUDE OIL IN THE UNITED STATES, 1945-1972 BILLIONS OF BARR(LS 43 U II 15 II II 14$ 44414$ 4133313213444314 5131331$ $1125314 IS $4 SI US$211172 PAGENO="0151" PAGENO="0152" 146 ANALYSIS OF SALIENT ISSFES REGARDING THE ESTIMATION OF PROVED OIL AND GAS RESERVE FIGL-RES~' PREFACE Consideration of oil and gas reserve figures has become an important aspect of congressional study of energy polics needs. Not everyone agrees on the defi- nitions of reserves-as contrasted to "resources"-and confusion exists con- cerning methodologies (if estimation and reporting. There has been increasing criticism, on technical and policy grounds, of reserve estimates released by industry and trade associations. Legislation has been introduced which would require full disclosure of industry "internal' reserve estimates. Other proposals call for the establishment of some agency in the Federal Government to prepare and publish standards. Validated figures on oil and gas reserves as the basis for formulating national energy policy and related fuels programs. The study which appears on the following pages is designed to define and analyze a number of the salient issues associated with the above-stated prob- lem within the appropriate historical perspective. The study utilizes current examples where oil and gas reserves are either at issue or are used as a basis for future projections. The last part of the study investigates the issue of `credibility' and whether "proved reserve' figures can be relief upon for the purposes intended. Finally, the authors suggest a number of alternative me- thods by which statistical data on reserves can be utilized for determining a sound national energy policy. This study was conducted by Energy Research, Inc. for the Congressional Research Service of the Library of Congress under CRS Contract No. 1036. II. THE ESTIMATION OF RESOtRCES AND RESERVES It is apparent that. as time goes on, more is known about a reservoir, and estimates of oil and gas present can be made with greater precision and validity. When an untested area of marine rocks is to be initially explored, the only basis for estimation is the estimated volume of the marine rocks to producible depths: perhaps some surface geological information on the rocks and the structural features: and analogies with better known but apparently similar areas. As more is learned, the geologist can build a concept of the number, size, and distribution of reservoirs. porosities. permeabilities, content of gas and oil, nature of the crude, reservoir pressures. and the like. Fairly precise estimates can then he made of the oil and gas that are likely to be produced and over what time interval. Tlu' nature of resert'oir.s The characteristics of an oil and gas reservice. and the care with which it is produced. determine to a large extent the proportion of the oil and gas originally in the reservoir that can he recovered. The percentage of the oil may range from about 15 percent to about 75 percent. Around 35 percent is often used as a good average. The proportion of gas that can he recovered is much higher: an average figure may h)e about 50 percent. The rate of production is also important. If oil and gas are produced too rapidly from a reservoir, favored channels are developed in the reservoir toward the wells, the water below the oil may drive it too rapidly and un- evenly. and the full yield of the reservoir is not attained. Some reservoirs are much more sensitive than others to rate of production in terms of amount of final recovery. In general about one-eighth of the producible oil in a reservoir may he withdrawn in a year. The corresponding figure for natural gas is about one-twelfth. *Extrnct of pp. Ii. i-~7. 71. 72. and 7G-SO, study by Energy Research. Inc., dated Nov. 12. 1972. PAGENO="0153" 147 Production from a reservoir using its own energy-gas pressure. water pres- sure. or both-is primary production. Later it may be desirable to stimulate the drive by the injection of water and/or gas at appropriate points into the reservoir, resulting in secondary production. Unitization Normally the oil rights to a reservoir are owned by more than one individual or company and in most cases by many parties. It is evident from the fore- going that the management of production from a reservoir should embrace the whole reservoir, not just parts under indivi(luaI ownership. In many cases, the various owners will get together and agree on a unit plan for operation of the sei'ervoir. One of the owners generally is (lesignated the operator. The costs and returns are divi(led on the basis of the proportional ownership agreed on in time unit plan. Most states today have enacted statutes that require unitization of a pe- troleum 1)001 when proper conservation practices require it. Some of the older oil-producing states, such as Texas. encourage the voluntary unitization of fields. hut (To not authorize their regulatory agencies to require it.1 Jljxtor(/ of reserve estimates In 1915. Ralph Arnold. a geologist, prepared an estimate of crude oil reserves. Similar estimates were I)rel)ared by the F. S. Geological Survey in 1916 and 1019. For the year 1922. estimates of crude oil reserves were prepared jointly by the F.S. Geological Survey and the American Association of Petroleum Geologists. Estimates of crude reserves were prepared by the American Petrol- eum Institute (API) in 1925, and estimates for 1927 and 1933 were made by tIme Federal Oil Conservation Board. The petroleum reserves of the United States have been systematically re- viewed and reported on an annual basis by industry technical groups since 1936. Initially, the estimations were made by the Committee on Petroleum Re- serves of the American Petroleum Institute, and were limited to reserves of crude oil, including lease condensate. The Committee on Natural Gas Reserves was formed by the American Gas Association (AGA) in 1946 for the purpose of preparing annual estimates of reserves of natural gas and natural gas liquids. Since that late, the API and AGA committees have worked cooperatively, and now issue a combined annual report. I) isp lay of nm in era! rcso u rccs The F.S. Geological Survey has devised a way of displaying estimates of niineral resources. including oil and gas estimates. that is remarkably simple. flexible. and useful.~ A roughly scaled rectangle represents the resource. The rectangle in its simplest form is divided, and scaled into two columns-the left one called Identified and the right one ~n(liscot'crcd. The rectangle also is di- vided horizontally into a top part and bottom part. also scaled. The top row is labelled Recoverable and the bottom row Submarginal. This concept can be used by legislative bodies in consideration of policy formulation by legislation, as is explained in flaure 1 on pare 148. The vertical scale is feasibility of economic recovery, increasing upward. The horizontal scale indicates degree of certainty of the estimates, increasing to the left. Thus the upper left block of the rectangle will show identified recoveragle resources of the commodity depicted. such as oil or gas. to scale. The lower right block will show nndiscevered submarginal resources. The user can draw a line across the diagram starting somewhere along the left vertical line, rising upward to the right until it intersects the top line. Everything above the line can be chosen by the group considering policy as representing resources to be included in policy-making: everything below the line can be excluded. The position and slope of the line can be debated by the group and drawn in any agreed-upon location. Footnotes on page 109. PAGENO="0154" Paramarginal Submarginal IDEETIFIED UNDISCOVERED .e Reserves Figure 1. Conceptual diagram for the classification of mineral resources. From PcKe.lvey (1972). U.S. and foreign practices in regard to resource estimates Two other points remain to be covered. The first pertains to the comparison of ITS. reserve estimates to estimates in other countries. No significant differ- ences in ordinary practices are discernible. In many instances U.S. estimates are based on more and better data, but there seem to be no differences of sig- nificance in definitions used or in methodology. Hendricks has pointed out that the United States has been drilled for oil and gas far more intensively than any other large and geologically diversified areas in the world. Consequently the results of this drilling should provide the most meaningful statistical sample for appraising possible ultimate potential." ~ The second point involves consideration of the methods of estimating oil and gas reserves with methods utilized in determining the availability of other mineral resources. The process of estimation in the oil and gas industry is significantly more difficult than is the estimation of most other mineral re- sources. including coal. The estimation of metallic ore bodies and of other fossil fuels like coal or oil shale is different in many respects. The latter materials are solid bodies that are sometimes exposed at the earth's surface or in underground openings. Their physical and geometric characteristics and their geological relationships can be studied by direct observation. 148 CHART Recoverab. `p.' a > 0 U I)) U a 0 C 0 0 `.4 0 >~ 4J `-4 .0 U) (I) a) Degree of certainty Footnotes on page 160. PAGENO="0155" 149 Oil and gas, on the other hand, are fluids that were collected in underground reservoirs which are never directly observable. Their presence iii reservoirs is in fractures and pore space, and they move during development. Furthermore, they are present in a much wider range of geological settings. III. ECONOMIC ISSUES IN DEFINING AND MEASURING OIL AND GAS RESERVES Despite the seriousness of the U.S. oil and gas position at this time, the exhaustion of domestic resources of these commodities is not indicated. The situation, among other things, reflects industrys inability to produce enough from proven reserves. In 1956, consumption had reached a level that would have required all possible domestic production, if the U.S. had not imported any oil. By 1972, U.S. production actually reached capacity. The U.S. is simply not finding oil and gas fast enough to provide the reserves required for increased production. Although large quantities of oil and gas remain undiscovered in the United States, the outlook in the past few years has not been encouraging enough to stimulate sufficient exploration and discovery, particularly in erespect to natural gas. Hendricks in 1965 estimated that the amount of unexplored favorable rocks in the U.S. was about six times the amount already explored.4 He also concluded that, in spite of the increasing cost of discovery, economic incentive in time would result in the exploration of at least one-third of the unexplored rocks, and that the incidence of oil found would be three-fourths as great for the presently explored rocks. This would result, if his lre(lictions prove correct, in the discovery of about 600 billion barrels of crude oil. He concluded that "the petroleum industry can continue to explore for some time with a decreas- ing finding rate before reaching the limit of profitability." Hendricks also presented a table that permitted the calculation of the follow- the decreasing amounts of oil found per foot of exploratory drilling: 1945-0.17 barrels per foot of drilling; 1950-0.14 barrels per foot of drilling; 1955-Oil barrels per foot of drilling; 1960-.09 barrels per foot of drilling; 1965-OS barrels per foot of drilling. Of course, at some time the point will be reached at which the finding rate will no longer be profitable, but that point is still a long way in the future.5 The same general subject has been reviewed, with emphasis on some of the economic aspects and capital requirements, by the Chase Manhattan Bank.6 Its report noted: "... much of the energy resources of the United States is not accessible within the current economic framework. To find, develop, and make available the energy the nation requires will necessitate the use of vast amounts of pri- vate capital. And if the capital funds are to l)e available, the price structure will have to be adequate Currently, less than 5% of the average family's annual income is devoted to energy-much smaller than the proportions used for food or housing or clothing or taxes. `Clearly it is vitally important that the United States maintain the highest l)OSSil)le level of self-sufficiency in respect to its energy supply. And, if that goal is to he achieved, major changes are essential-there is no hope that it can he won as long as existing conditions persist. The restrictions that have stifled both the generation of capital and the incentive to invest must be removed at once." Oil and ga.~ a part of an energy system Economic issues should loom importantly in the definition and measurement of oil and gas reserves and additions to those reserves, because of the impor- tance of economic considerations in determining what kind of measures will he useful in making decisions about energy policy and l)ecause of the character of the present (lefinitions and measurement processes. At present the official definitions of reserves for oil and gas set by the API and AGA read as follows: `Proved reserves of cru(le oil (natural gasi as of December 31 of any given year are the estimated quantities of all liquids statistically reported as crude oil, which geological and engineering data demonstrate with reasonable cer- tainty to he recoverable in the future from known rcscrroir.s under c.risting economic and operating conditions." [Emphasis added~I. In theory, this definition is part of a complete system for measuring the raw material inventories of the industry as a whole and hence of the nation. In Footnotes on page 169. PAGENO="0156" 150 practice we do not know precisely how the system works. There are no quality control provisions or official descriptions of the system that would reveal what weight each set of factors are given in the actual course of the annual esti- mating sessions. Inditions are that geological and engineering considerations loom larger in the estimates than do economic assumptions. Furthermore, this definition relates to oil and gas that can be recovered from known reservoirs. It does no tell anything about the availability of inventories of oil and gas from reservoirs that are yet to be discovered but which are assumed to exist in nature. If geological and engineering factors are set aside in favor of concentration on the economic issues, the reserves problem can be conveniently analyzed in terms of the influence of economic factors at each of five stages in the produc- tion and use of energy, though it must be remembered that the system actually operates simultaneously rather than in parts or stages. These stages are: (1) Demand for energy in total both in terms of the tasks or missions to be performed and the efficiency with which the energy is used. (2) Choice between competing sources of energy. (3) Desired levels of oil and gas inventories or reserves. (4) Additions to inventories or reserves that can be achieved by further development of or more intensive exploitation of existing or known reservoirs. (5) The rate at which reserves are added through discovery of new fields or reservoirs. This brief sketch emphasizes that it is not the absolute level of oil and gas reserves that is important, but rather the relative size of those reserves or the ratio of reserves to current and prospective use. At present the common prac- tice is to judge reserves in terms of their ability to support the current rate of use or production into the future. More important is their capacity to support prospective rates of use in the future when demand will be different than at present. In conventional terms, crude oil reserves have averaged about 12 years. Natural gas reserves were over 30 years' use at the end of World War II and were down to 11.8 years at the end of 1972, as use rose over the period faster than additions to reserves; but these ratios are in terms of use from domestic sources. If measured in terms of total use, including that demand now filled from imports, both these reserve ratios would be significantly lower. They would be still low-er if measured in terms of future demand at current prices for each source of energy. This strongly emphasizes the fact that reserve figures acquire meaning only in terms of the prospective operation of the total system for producing and using energy including future trends in prices and costs of energy from all sources. This sugrests the first issue that economic analysis should raise: whether the measurement of oil and gas reserves should be part of a national system for the objective measurement of the current and prospective operation of the total system for the discovery, development, production and use of energy as a basis for the formulation of intelligent public and private policies. If so, then numerous changes would have to be made in the system as presently conceived and operated. For example, it would he necessary to coflect hotter and more extensive data on prices and costs in each segment of the energy field so that the economic assumptions used in measuring oil and gas reserves could he made more explicit and uniform throughout the system. Also such data would he needed in order to guage the relative cost per unit of discovering new reser- voirs of oil and gas, as compared to costs for finding and developing some alternative source of the same amount of future energy. Such a system also might force the standardization of the units of measurement on some units other than barrels or Mcf. Consideration of oil and gas reserves as part of such a larger energy system indicates that these measurements can he affected by changes in economic con- ditions and policies which: (1) Alter the relative price or cost of oil and/or gas compared to those of other possible or actual source of energy: (2) Alter the cost of finding an additional quantity of reserves: (3) Reduce the costs of increasing the ratio of recoveries to total oil and/or gas in each reservoir: and (4) Alter the costs of transporting, processing and delivering a given quantity of energy from oil or gas or the cost in energy of performing a given end-use task. Most attention has been given to the costs of discovery as a factor in determining the size of additions to proved reserves, but the others mentioned could prove equally important in the long run. PAGENO="0157" 151 To fully appreciate the significance of discovery costs or what MIT Professor M. A. Adelman has labeled the "minimum economic finding costs" it is first necessary to outline a few other characteristics of oil and gas operations. First, these are joint products in two ways: (a) the two occur together in nature in proportions that cannot be predicted in advance of drilling and development; and (b) much of both products come jointly from the same wells in the same field. Second, the total quantity of oil and gas in the natural resource base is not known, so that at best we can produce only informed estimates of this larger total of which the known or proved reserves are only an unknown frac- tion. Third, oil and gas are but two of many varieties of hydrocarbons and these, in turn as noted earlier, constitute only part of a total energy resource system which includes such elements as nuclear, coal, solar, hydroelectric, and geothermal energy. Finally, it must be kept in mind that the proved reserves as usually measured constitute only a part of the whole system of oil and gas energy supply which runs from the unknown total of all reservoirs in nature to the discovered or known reservoire to the proportion of the contents of these that can be re- covered using present technology, equipment and costs to the efficiency with which oil and gas can be processed and transported to point of use, and at last depends on the efficiency with which the energy is used. These considerations reveal why economists insist that decisions about public and private policy making must rest on a broader and more complex base of information than merely the proved reserves of oil and gas that have been the heart of so much of the policy controversies. For example, inventory analysis generally rests on some procedure for evaluating the optimal level of inventories in the light of the trend in demand, losses to be incurred if inven- tory proves inadequate to service actual demand in the predictable future, the costs of holding inventory per unit, the time period necessary to order and bring into being added output, and the probable trend of costs and prices over the future period for which plans are being made. In the case of oil and gas, it is generally realized that costs of holding oil and/or gas in the ground for long periods is likely to prove very high by typing up large amounts of capital, and that discovery is an uncertain process so far as any short time period is concerned. Hence we find that oil reserves have been fairly stable at an average of about 12 years' prOduction with a range since World War II of between ~3 and 13M years' supply. Apparently this has been about the amount that costs and rate of discoveries would permit. If economic conditions or economic incentives provided by public policies were to reduce the costs of discovery or of holding reserves relative to the prices re- ceived for oil, then reserves probably would increase. It would take a much larger change in the relationship of gas prices to costs of discovery or holding to produce a similar result, however, due to the problem of joint costs and joint occurrence. It is worth noting that present incentives provided by public policy are aimer at encouraging prodnction. am! nse. am'! are not incentives directed spec'i.ficaily to the discover,! and 1~o1ding of reserves. Indeed they are not incentives to improve efficiency in the use of energy, including that derived from oil and gas, which could make large differences in the significance of any given total of proved reserves of the various fuels. Any examination of the past record on new discoveries suggests that chang- ing economic conditions have a significant Impact~ in the ease of additions to proved reserves from revisions and extensions, the record Is surprisingly bleak, however. Changes seem mainly to reflect geological and engineering considera- tions or the accumulation of knowledge about already known fields combined with the correction of mistakes of a clerical or statistical character In the previous estimates. Should these revisions and extensions reflect cyclical changes in costs and prices or should the estimates he related to longer-run trends in prices and costs? If the latter is the case. then does this imply that estimates must take into account future prices and costs. and not merely pres- ent values as is the current practice? This analysis also suggests that reserve data for oil and gas may have quite different meanings and may even behave differently If inflation becomes the permanent expectation. In a growing economy, In which incentives such as depletion and investment credits shift part of the costs of the industry to the public through the tax system rather than through the price system to the users and investors, inflation may seriously alter the operation of the Industry Footnotes on page 169. PAGENO="0158" 152 compared to its performance in a world of reasonably stable prices-particu- larly if inflation is accompanied by a permanent system of price controls that shifts part of the costs of the inflationary monetary and fiscal policies from users of oil and gas to the workers and investors in these industries. It is easier to set up controls over prices than over output and costs. What happens? An incentive to maximize reserves in ths ground? New discoveries? Or a rush to exploit reserves as fast as possible? Costs of capital and optimum resources This is an appropriate point to consider briefly the frequently raised issues concerning the cost of capital, and the optimum ratio of reserves to produc- tion. Given the present tax laws and the typical arrangement between the owner of the land or mineral rights and the exploration and development com- pany, there exist strong incentives to raise production to high rates from suc- cessful drilling and hence to produce a low ratio of reserves to production. Other considerations, already enumerated, push the companies in the direction of longer planning periods-that is, in the direction of larger ratios of reserves to current production. Where the outcome falls depends in part on the cost of capital tied up in these reserve holdings over time. If interest rates are low, as after World War II it may pay to extend holdings: while if inflation raises capital costs in money terms, as in recent years, one might expect to see com- panies shortening up the ratio of reserves to production. Interestingly enough that appears to he the case, which hints, though does not guarantee, that in a time of reasonably stable prices and relatively low cost of capital, reserves would eventually move up relative to production. On the other hand, if one ex- pects inflationary price increases in the future, why not increase reserves to be able to profit from subsequent price increases? Is it the real cost of the money cost of capital that is decisive: What is the role of price control uncer- tainties: How do they affect price expectations; These observations and issues regarding the possible effects of the costs of capital on holding periods in oil and gas must he modified in two directions. First. since thee are joint products. the chain of causation is more complex than usual and changes in costs may have different effects according to whether they affect both products equally, or in some other ways, because of the joint but unpredictable character of occurrence in any particular case. What this amounts to in practice is that changes in costs in general, as well as changes in the costs of capital, can have differential effects on oil as compared to gas or gas liquids without the exact nature of these differences being predictable. Further. since these are wasting assets as far as any one well or reservoir is concerned, it follows that if a company is to maintain a steady flow of output to its customers, it must over time increase its reserves by extensions, improved recovery methods or new discoveries if it is to avoid running out of supplies at some future time. This is true even in the case of a mythical company with a stable deman(l, since the additions would be needed to offset exhaustion of old wells or reservoirs. This again emphasizes the importance of viewing these proved reserves as only part of an ongoing system where new discoveries, ex- tensions, changes in technologies, changing use patterns, and changes in relative costs and prices of all energy sources, all play roles in giving significance to any reported level of reserves. The API/AGA effort recognizes the importance of economic factors in esti- mating proved reserves. In the definition of such reserves "existing" economic conditions are assumed to continue into the future as these deposits are de- velopecl and produced. Nevertheless. it should be noted that the appraisal of "existing" economic conditions often lies in the eyes of the beholder. Conse- quently, if the effect of economic conditions on reserve probabilities is to be assessed by those who use these API/AGA data. the detailed assumptions used by the estimators should he explained. Conferences with API and AGA person- nel have established that uniform assumptions are not developed and those who prepare estimates for each field/reservoir are expected to use their own judgnient in applying the economic limitation on reserve estimates. IV. RESERVE ESTIMATES Oil and gas are non-renewable commodities. For all amounts that are pro- duced. that much less remains in the ground. Oil and gas influence virtually all human activities. Therefore, it is most desirable to have available reserve esti- PAGENO="0159" 153 mates in many categories, a number of which have already been mentioned in this report. Reserve data are needed by industry to predict amounts and costs of future production, to devise and execute exploration and development plant, to assist in pricing, to make distribution plans, to ljrovide for storage and transportation facilities, and for many other purposes. Such data are needed by government to formulate national plans for adequate energy supplies, for tax purposes, for economic prediction, and for regulatory purposes to name a few. F~conomists nee~I reserve data for development plans, for capital requirements, and for estimates of fiscal income. Such data are of little significance, if their meaning and interpretation are not understood. A common fallacy among those not familiar with the industry and its terms is to equate proved reserves with petroleum resources. Proved reserve estimates are more like bank accounts. At a given time the proved reserves are analagous to the bank balance. Both additions (deposits) and use (withdrawals) are contemplated. Because oil and gas in the ground are not subject to actual viewing, it has been traditional to be very conservative in estimating undiscovered oil and gas resources. Actually discoveries repeatedly have far exceeded estimates made a few years earlier. This occurrence is so common that it approaches a rule. Similarly, estimates of production from identified deposits have generally proven to be much too low, and must be revised upward sharply as time goes on. This tendency, and the reasons for it, must be grasped by policy makers. The principal additions to reserves are extensions and revisions of earlier estimated reserves of fields discovered in earlier years. For example, in 1960, extensions and revisions of estimates of fields discovered through 1936 were almost twice as much as the estimates made in 1936. For the Western Hemisphere the proved reserves in 1962 were on the order of 70 billion barrels, while total production through that year was about 110 billion barrels. Ten years later, in 1972, cumulative production had reached approximately 160 billion barrels. In spite of the roughly 50 billion barrels pro- duction in the ten-year interval, reserves had climbed to just under 90 billion barrels.8 A recent example of the principle that has been described is afforded by the Swanson River Field, Alaska's first significant oil field.9 That field was dis- covered in the 1950's and, at the time, it was estimated that it would yield 50 million barrels. By the end of 1972 it actually had produced more than 118 million barrels, and the field in still far from exhausted. In an attempt to apply the principle to a current situation-the Prudhoe Bay area of northern Alaska-J. C. Reed of The Arctic Institute has prepared a scenario as to what he calculates the Prudhoe Bay region might yield through the year 2000.'° In 1973, the proved reserves a Prudhoe Bay were estimated at 10 billion barrels. Reed estimated that 43 billion l)arrels would be found by 2000. His scenario has the Alyeska pipeline starting to carry oil in 197S. a second pipe- line to the central U.S. beginning to operate in 1982, and supertankers beginning to carry additional oil to the East Coast through the Northwest Passage in 1995. By 2001, a total of 26.56 billion barrels of oil would have been produced, and the North Slope would then be believed to have a remaining reserve of more than 35 billion barrels, according to Reed. Reserve estimates may be subject to distortion, deception and perhaps even fraud, from time to time, since reserves often have a direct relationship to the availability of capital. Basic units being measured; precision considerations The basic units from which an energy (gas and oil) reserve estimate is de- rived are fields, pools, reservoirs, etc. of oil, gas, or a combination of 1)0th. In many social (population, employees) industrial (establishments, production), of economic (wages, prices) surveys, the basic units can be readily defined and consistently identified. They may be visually identified (characteristics of a person or members in a family). may have been previously recorded (produc- tion records, payroll records, personnal summaries), secured from related rec- ords using some judgments, or may be known by the respondent. The reporting or quantification of the desired information is fairly straightforward and is accompanied by a relatively small margin of uncertainty resulting from lack of Footnotes on page 169. PAGENO="0160" 154 information about the desired item and/or judgments involved in its recognition (or measurement). This differs from sampling differences or procedural errors when combining the inrividual readings into an overall total. The basic unit upon which energy reserve estimates are based have markedly different characteristics. For relatively new discoveries, the characteristics of fields, reservoirs, pools `proved" by sample borings in areas selected as being promising can only be estimated from the structure and shape of the geological formation as revealed by the few sample borings. Such estimates of hidden basic units depend on judgment and can be expected to be accompanied by a large amount of uncertainty. Different experts and different samples can result in differing estimates of the same unit being measured. Additional samples (or actual production readings) help to define the field, pools and reservoirs more precisely and reduce the uncertainty about the size and shape of the resource. Uncertainty still remains and will continue to remain, however. The basic unit being measured, by its very nature, will remain not visible. Its general reline- ation and description are developed from interpreted associated readings which, over time, contribute more information, but can never completely describe or reveal all the characteristics of the unit being considered. This results in a potential for large variations and uncertainty in the estimates, Added to this measurement problem is the definition of the estimate desired, e.g., `proved reserve". The API and the AGA use a current inventory approach to oil and gas reserves-how much gas and oil can, with reasonable certainty, be expected to be recovered (in the future) from known reservoirs under exist- ing economic and operating conditions: The definition uses judgment to bridge the gap between the unseen. highly variable estimate of the resource in the ground and the desired estimate of the amount to be counted in the proved reserve estimate. This process is subjective and is accompanied by variability depending on the character of the personal judgments being made. The characteristics of the petroleum basic units and the processes used to arrive at "proved reserve" estimates should he kept in mind when the methods of developing the reserve estimates are described later and the precision of the estimates are discussed. The methodology of reserve estimates In general, reserve estimates are made by use of a geological method, a mathematical method, or. as in most cases, by a combination of the two with differing emphasis on one or the other. Both methods employ statistical rec- ords of exploration and production, but the mathematical method relies very largely on statistical records. Estimates of different authorities that~ emphasize statistical records are more likely to he comparable than estimates that emphasize geological interpreta- tion. Statistical data are hard and firm, although considerable latitude is evi- dent in how those data are used. Geological interpretation, on the other hand. is largely a matter of individual judgment, and estimates employing a good deal of geological interpretation may differ markedly. In the pattern of depiction of oil and gas resources employed by the U.S. Geological Survey (described earlier), the identified recoverable resources that are designated by the upper left block (see fig. 1) are more suitable to the mathematical method of estimation because more specific data are available. The geological method becomes increasingly applicable both downward and to the right, and is the only method applicable in the lower right block-undis- covered submarginal resources-because there are virtually no hard data for that block. In general in the United States the estimates for the upper left block-identi- fied recoverable resources-have been provided only by the API and the AGA. Other groups, especially the U.S. Geological Survey. National Petroleum Coun- cil, and the Potential Gas Committee are more active in regard to the other three blocks (upper right = undiscovered recoverable: lower left = identified submarginal: and lower right = undiscovered submarginal). As to the actual process of estimation in regard to the upper left block of the Geological Survey's method of showing resources-the identified recoverable block, where the data most nearly adequate for precise estimation-ordinary laws of physics, mathematics. and fluid mechanics are applied. In a typical case. for a well explored, well developed field with a long history of production, many sound data are available on dimensions. retailed stratigraphy, geologic struc- PAGENO="0161" 155 ture, rate of production, change of pressure with time, porosity, permeability, rate of encroachment of water, and the like. An oversimplified analogy may be useful. If a small rubber balloon, the size of a pink pong ball, is inflated to a given pressure and then punctured with a tiny hole, the pressure will decrease rapidly. If it were possible to inflate to the same pressure a balloon the size of a city block, and then puncture it with the same size hole, it is obvious that the pressure would decrease very slowly. This phenomenon occurred about three years ago, when an exploratory well In the Canadian Arctic Islands penetrated a high-pressure gas reservoir, blew out of control and caught fire, and flowed through an open hole for many months with virtually no change in pressure before it could be brought under control and shut off. The most widely used series on reserves are those prepared by the American Petroleum Institute and the American Gas Association. The Federal Power Commission conducted a comprehensive survey of gas reserves as of the end of 1970 which can be compared with the AGA estimates. The method used by each to develop their estimates are described in this section. 1. American Petroleum Institute (API) In 1966 the API assumed responsibility for setting standards for the sta- tistical reporting of petroleum industry operations in the U.S. The API is struc- tured to cover all aspects of petroleum statistics, one of which is estimating crude oil reserves. The relation of "reserves" is the overall petroleum industry statistics endeavor is presented in Appendix A, Organization of API Statistical Services. The Committee on Reserves and Productive Capacity has the primary re- sponsibility for preparing annual estimates of crude oil reserves in the U.S. The members of the Committee and its chairman are appointed by the Chair- man of the Committee on Statistics, initially for a two-year term. Appointments are usually renewed as long as members retain an active and participating posture. The Director of the API Division of Statistics serves as Secretary of the Committee. The Federal Government Is represented by a designated observer (or his alternate). Each member (except the Secretary) is assigned a specific area of the U.S. for which he assumes the responsibility for preparing the estimates of its oil reserves. The member establishes one or more subcommittees composed of qualified technical personnel to develop estimates of the districts In his area. The subcommittee members are appointed for a one-year period, but member- ship Is usually retained so long as there Is active affiliation with the petroleum industry which enables the subcommittee member to carry out the subcom- mittee's work. Estimates are prepared for individual reservoirs or fields. Such Information is usually considered highly confidential by companies owning the reserve and an estimate developed by a subcommittee member Is based on his own company's data, from similar information received from other operators in the field on a strictly confidential basis, and on information he can secure from other related sources (scouts. lease brokers, etc.). For newly discovered or early stage of development fields, reserve information will be highly secret because of leasing possibilities and the subcommittee member may find it ex- tremely difficult to secure information anr may have to resort to informed guesswork. For developed fields, the estimate is based on production informa- tion, well logs, core sample reports. etc. and the estimate become more accurate. An estimating manual U defines the-geographic areas for which estimates are to be prepared: coordination in reserves estimates work being compiled by API and AGA subcommittees: policy on confidentiality of information and records: schedule of meetings for the presentation of reserve estimates: definition of terms: information-type to he prepared; and relationship among data pub- lished. To summarize, reserve estimates are developed at the local level for indi- vidual reservoirs/fields by subcommittee members using confidential informa- tion and following a recorded set of standard definitions. Individual interpreta- tion and judgment are exercised but the continuing nature of the membership tends to result in continuity in the estimates over time. The level of reserve estimate, however, may he affected when a change in membership occurs. Since turnover in membership is not great. such differences will be difficult to observe unless they are very large. The estimates for an area are assembled and are reviewed at the subcommittee level (meeting). The member of the main corn- Footnotes on page 169. 37-143 0 - 74 - 11 PAGENO="0162" 156 mittee having the responsibility for an area, is expected to make sure that each of his subcommittees is staffed properly and that the work is performed in accordance with the procedures established by the committee. The estimates are then assembled for presentation and review at a full committee meeting. Questions may be raised and referred back to the subcommittee, where adjust- ments to the estimates can be made. Referral to the subcommittee for adjust- ment of an estimate stems from the availability of data at the local levels its confidentiality, and the need for personal judgment and interpretation at the local level of estimation. Technical Report No. 2, cited previously, specifically states that "The professional judgment of the Committee members, as reflected in the development of estimates of crude oil reserves and productive capacity, is recognized and preserved without modification by higher authority or other committees within the Institute." Thus, the process of estimating reserves at the local level by technical personnel is recognized as the most accurate method. For the 1972 estimates, the API Committee on Reserves and Production Capacity was composed of 15 members, of whom 13 were associated with major oil producing companies, one with a state geological survey, and one on the API statistics staff. The work was carried out by 159 members, of whom 22 were subcommittee chairmen and vice chairmen. The reserve estimates were published in the annual publication of the API which contains oil and gas data for the U.S. and Canada. The data for the U.S. are presented by category (re- visions, extensions, new field discoveries, new reservoir discoveries, etc.). The state data, however, do not show the same amount of detail because of the confidential nature of the basic data used and the possibility of disclosing in- formation about a single company. 2. American Gas Association (AGA) The AGA is one of the principal sources for consistent U.S. gas industry statistics. As part of its overall program, a Committee on Natural Gas Reserves was established to prepare annual estimates of gas reserves in the U.S. the Committee derives its authority from, and is responsible to, the Board of Di- rectors of the Association. The Chairman of the Reserves Committee is appointed by the AGA President on behalf of the Board of Directors of the Association. The Secretary of the Committee is a staff member of the AGA and is a member of the Reserves Committee. A representative from the U.S. Bureau of Mines is an ex-officio member of the Committee. Other Committee members are appointed by the chairman. They are assigned geographic areas of responsibility. Each Com- mittee member maintains an organization of an area subcommittee composed of qualified technical personnel who compile and report the desired necessary gas reserves and other related data. Committee procedures and guidelines are followed in the preparation of the data which, after compilation, are forwarded to the Committee member responsible for the area. The information is incor- porated into the Annual Report. of the Committee. Membership on the Committee and Subcommittee is retained so long as assignments are properly carried out and each individual is expected to serve only as long as he retains affiliation with the oil and gas industry in an active capacity. Subcommittees are r&~uired to maintain records for reserves on a reservoic and/or field total basis as required to adequately support the com- posite statistics reported. Subcommittee members have available well forma- tion and production data accumulated from many sources and compiled in com- pany records. They also have access to confidential studies in their own com- pany files to support their determinations by reservoir and field. Such informa- tion is proprietary in nature and is confidential. The annual report, issued jointly with API and the Canadian Petroleum As- sociation, defines the geographic areas for which estimates are to he made, policy on confidentiality of information, schedule of meetings, coordination with API Committee on Reserves, procedures, and definition of terms. The organizational structure, mode of operation, and definition of terms follow closely those of the API. The definitions of gas industry terms appear in Standard Definitions for Petroleum Statistics, Technical Report No. 1, pub- lished by the API. rn general, the same concepts of reserves are followed by AGA and API. A manual describing in detail the estimation process to be employed (similar to API Technical Report No. 2) is not available. For the 1972 estimates, the AGA Committee on Natural Gas Reserves was composed of 14 members. of whom 12 were associated with gas transmission or PAGENO="0163" 157 producing companies-five of these represented major oil companies (Texaco, Gulf, Exxon, Mobil and ShelI)-one with central office (AGA), and one with the Federal Government (U.S. Bureau of Mines). Of these 14 members, 10 were subcommittee chairmen responsible for developing the area totals. The detailed estimating work was carried out by 99 subcommittee personnel under the guid- ance and supervision of the 10 chairmen. The reserve estimates were published in the annual API-AGA publication which presents oil and gas data for the U.S. and Canada. Gas reserve estimates are built up on a field-by-field basis using raw data from company files. Such data are confidential. Also, the amount of effort a subcommittee member can contribute is limited (time he can contribute from his official duties or free time) and he may tend to use the most readily avail- able source upon which to base his estimate. For established producing oil wells, there is usually a body of supporting data and estimates are expected to be reasonably accurate. For newly discovered fields, the estimates may be subject to greater uncertainty because of the combination of paucity of infor- mation and the limited time that may be available. Because the estimates are prepared on a field basis using raw data, reviewing the estimates at the sub- committee level (or above) becomes very difficult and is usually limited to a few cases of large variation from expected results at a subcommittee meeting. The individual field estimates are summarized at the area level and the area summaries are presented to the main Committee for general review and con- solidation into the tables for the annual report. Detailed field information re- mains at the area level. However, subcommittee personnel are invited to attend the Committee meetings during which the area estimates are presented. The AGA has been publishing estimates of natural gas reserves since 1946. In 1966, following the recommendations of the Bureau of the Budget Petroleum Statistics Report (March 1965), the AGA expanded its statistics. Revisions to estimates at the national level were reported separately (previously they were combined with extensions), and additional detailed tables were incorporated into an enlarged annual report, as well as a short description of the organiza- tion, definitions and procedures used in developing the gas reserve estimates. A more detailed statement of the definitions of gas terms used in petroleum statistics appears in Technical Report No. 1, Standard Definitions for Petrol- enn~ Statistics, released in 1969. The definitions were coordinated with those for crude oil terms and the concept of "proved reserves" is consistent with the one used by API. Federal government representation at the Gas Reserves Committee meetings was provided by naming an official of the Bureau of Mines as a member. The basic methodology of synthesizing a total U.S. gas reserve estimate by summing estimates for individual fields has not been changed, nor has a quality check been made of the adherence to instructions when field estimates are developed. A measure of the overall accuracy of the reserves estimate became possible with the completion of the 1970 gas reserves study conducted by the Federal Power Commission. (Sec Chapter V.) The AGA 1970 reserve estimate was slightly less than 10% greater than the FPC estimate. This is within acceptable limits where sampling and non-sampling errors (variations) are considered. However, the FPC study found, "In certain fields, the reserves found by the FPC reserves estimation team were substantially less than those reported by AGA. It appears that such AGA reserve estimates were based on recovery fac- tors which were too optimistic. The recovery factors did not seem to have been revised to reflect later information relating to field performance." ~` The nature of the AGA estimating process limits the personnel time that Is available. This results in the possibility of continuing faulty prior estimates. However, it appears unlikely that operating records for large producing wells would be overlooked. An FPC finding of deviation can be expected whenever a strictly controlled sample survey duplicates a parallel system which Is not as strictly controlled and has a more stringent demand on time (availability of time of personnel to cover all fields). V. USE OF PROVED RESERVE FIGURES UTILIZED IN CURRENT STUDIES The best manner In which to view the use of "proved reserve" flgtires gath- ered by API and AGA is to analyze their use in current studies. Two such studies are available. The first is entitled the "National Gas Reserves Study" Footnotes on page 169. PAGENO="0164" 158 and was conducted by the Federal Power Commission (FPC) to develop an independent estimate of the total proven gas reserves in the U.S. as of Decem- ber 31, 1970. The second is a report entitled, "U.S. Energy Outlook" which was prepared by the National Petroleum Council (NPC) in response to a request from the Department of the Interior to project the energy outlook in the Western Hemisphere into the future as near to the end of the century as fasible with particular reference to the evaluation of future trends and their implications for the United States.13 1. Yatural gas reserres study A gas reserves analysis program was initiated by the Federal Power Com- mission for the purpose of compiling data on the Nation's natural gas reserve. The first step of the program was the National Gas Reserves Study (NGRS) as set forth in an order dated December 21, 1971, whIch described procedures, operational units, and specifications for the study. The study program was designed to yield an independent estimate of the total proven gas reserves in the United States as of December 31, 1970. The scope of the NGRS was limited to estimating the magnitude of the proven re- serves but not an analysis of deliverability. Also, no estimate of total gas re- sources nor forecasts of future discoveries were to be made and gas volumes not then economically producible were not to be included, even if new tech- nology could be expected to lead to their recovery. Although there are many sources for data on gas reserves, only one has pro- vided a continuing comprehensive estimate for the United States. This is the one prepared by industry specialists working through the AGA Committee on Natural Gas Reserves (previously described). The NGRS undertaking was to be an independent government study producing an objective analysis of gas reserves. It required the application of: (a) sound statistical techniques; (b) accepted petroleum engineering, geological, and economic practices; (c) recog- nized accounting (summarization and control) principles; and (d) modern computer processing methods. A complex structural organization was outlined to permit the interplay of the different requirements: Nomenclature problems were resolved by the FPC staff, a comprehensive list of all gas fields was compiled by the Oil Information Center (OIC) at the tJniversity of Oklahoma Research Institute, reserve teams composed of FPC geologists and other professional staff members made esti- mates of reserves by field, with assistance from the U.S. Geological Survey (Outer Continental Shelf Fields), United States Department of the Navy, and from colleges and universities, an independent private industry accounting firm (Accounting Agent) was selected by FPC to provide security for the individual field reserve estimates, and to do the necessary classification and tabulation work, and a team of government and academic experts (Statistical Validation Team) was named to prescribe sampling procedures for developing valid esti- mates of reserves. The study and analysis involved the following major activities: (a' The total gas field population was delineated together with their non- associated and associated gas reserves. (1) Lists of gas fields and their reserves were submitted by AGA to the Accounting Agent for compilation and transmittal to the OTC. (2) The OIS developed a list of gas fields based on data available in its Petroleum Data System file and compared it with the testing of AGA fields compiled by the Accounting Agent. This resulted in a gas field population list that was a complete and accurate (no duplications) as possible. (b) A list of fields for which independent reservoir-by-reservoir reserve esti- mates were to be made was selected from the complete population list by sta- tistical sampling. (1) The Accounting Agent provided the Statistical Validation Team with distribution or stratification of gas fields needed for the development and se- lection of a statistically sound sample. (2) The Accounting Agent then selected the sample following instructions of the Statistical Validation Team. (3) The selected sample of gas fields. augmented by all "AGA omitted fields" (as noted by OTC' made up the list of fields for which the independent esti- mates, reservoir-by-reservoir, were to he made. (c) The FPC reserve teams developed the gas reserve estimates for the fields selected. Footnotes on page 169. PAGENO="0165" 159 (1) The supervisor of the field teams scheduled reserve team visits to the different companies involved. (2) Companies furnished work space, facilities, and the primary data needed. (3) The reserve team decided on the types of reserves calculation techniques to be followed. (d) Results were transmitted to the field team supervisor on a confidential basis. (1) The field team supervisor compared his team's estimate with the AGA estimate for the corresponding field. At his discretion he could request a re- check of the work of a reserve team, or a re-examination of the data by a reserve team of his choice. A final estimate for each field was transmitted to the Accounting Agent. (2) The Accounting Agent, following procedures established by the Statistical Validation Team, used the FPC field team results and the AGA reserves data to develop statistical parameters. (3) The FPC, through an agent, prepared an estimate of dissolved gas re- serves and forwarded to the Accounting Agent. (4) The National Gas Survey Staff prepared breakdowns of proven gas re- serves for various categories desired. This complex process, following scientifically and technically accepted prac- tices under strictly controlled conditions, resulted in an independent estimate of gas reserves which differed from the AGA data, as follows: TABLE 1.-COMPARISON OF AGA AND FPC ESTIMATES OF PROVEN RECOVERABLE GAS RESERVES IN THE UNITED STATES AS OF DEC. 31, 1972 [Volumes in billions of cubic feet[ Category FPC AGA Reserves Percent of Percent of total Reserves total Nonassociated gas Reported fields Omitted fields Associated gas Reported fields Omitted fields Dissolved gas Total 189, 546 72.45 204, 098 71. 18 189, 440 106 72. 41 204, 098 71. 18 .04 39, 047 14.92 47, 923 16.71 39, 044 3 14,92 47, 923 16.71 0 33, 050 12.63 34, 721 12.11 261, 643 100.00 286, 742 100.00 The statistical estimate of gas reserves is 261.6 trillion cubic feet (TCF). The reliability of the estimate was determined to be within 10% with a high degree (95%) of confidence, considering only the statistical procedure for extrapolating the sample field reserves to a total reserve estimate. The characteristics of the gas fields being measured, and the variability of estimating proven recoverable reserves under stated conditions of "reasonable certainty of recovery under existing economic and operating conditions" in- volve judgment decisions. Therefore, an additional uncertainty factor is intro- duced (apart from the statistical process uncertainty). ~Fhe Statistical Valida- tion Team has judged that the calculated sampling error and the measurement error possibilities are of the same order of magnitude; sampling of additional fields would not greatly improve the reliability. Among the more important findings of the study are: AGA field lists are essentially complete. A total of 62 "AGA omitted fields" were identified, but their total reserves were less than 0.1 percent of the AGA total. Gas reserves estimates can be made on a reservoir-by-reservoir basis using selected teams. The FPC and AGA estimates of gas reserves differ by 25.1 TCF, slightly less than 10 percent. This is within the slated sampling error for the survey. PAGENO="0166" 160 Critique The purpose of this FPC study was to develop an independent estimate of the total proven gas reserves in the F. S. as of December 31, 1970. The only comprehensive estimates of F. S. natural gas reserves then available were those compiled by the AGA. The results of both AGA and FPC studies can be used to complement each other, especially in evaluating procedures and the final estimates. The FPC study was designed, controlled, and executed in a highly-acceptable manner. The sample design is statistically sound. The steps taken to maintain the confidentiality of the basic data were acceptable to industry. The use of independent FPC' estimating teams to develop estimates of reserves from corn- pany-confidential raw data (electric logs, core sample analyses, pressure read- ings) avoided conditioning the estimates by the previous API (or company) estimates. The use of an independent Accounting Agent to do the tabulation and suniniarization led to written procedures for the treatment of the data and recognition of unforeseen problems. Because of the many units involved, a comprehensive set of published instructions are available. The FPC study should he considered of very high quality and its results (with qualifications as described later) may be used as a benchmark of gas reserves as of Decem- ber, 1970. In addition, its sampling approach and operating procedures (use of an independent team and company records) have been proved operational. The FPC gas reserve estimate, as published, is lower than the AGA estimate by slightly under 10~. This is not too alarming since it is within the usual acceptable sampling variability and: The FPC is a single time sample survey, and all sample surveys can be expected to vary about the "true" figure being measured: the characteristics of the basic units being measured-reservoirs, fields-are not always clearly defined and their measurement is accompanied by considerable latitude of personal judgment and recoverable reserves from a given field or reservoir also involves personal judgment and contributes to the variability expected. The FPC report presents a comparison of its results with those of the AGA (Table 1 of the report). This implies that the AGA and FPC estimates are strictly comparable. Three factors, of indeterminate magnitude, may have affected the FPC estimate and tended to make them closer to the AGA estimate. The first results from the use of a different definition: the other two from the method of opera- tion. A. The FPC Reserve Estimates Manual states "the estimator will not limit his consideration to the `prevailing practice' in the field, but rather should consider the possibility of adding compressors or other equipment and base his estimate on the recovery efficiency which would result from installation of such equipment, if he felt it appropriate to install the equipment." 14 The instal- lation of new equipment or the introduction of new producing techniques would result in a higher reserve estimate since it is not logical to add equipment or change production procedures to become less productive. As a result of this difference from the AGA definition, the FPC field estimates would be higher than corresponding AGA estimates whenever additional equipment or new tech- niques were assumed for a field. The FPC overall estimate would be affected and be too high. Its difference from the AGA reserves estimate would have been greater had such modifications in l)ractice not been permitted. The effect of this definition change on the total F. S. reserve estimate depends on the number of instances in which improved equipment or techniques were intro- duced. and the average aniount of increase in the reserve: the larger either of these two factors, the greater the increase in the total reserve. Unfortunately, an attempt to develop an estimate of the impact was unsuccessful, since con- tacting the FPC revealed that records of such variations were not available. B. The FPC study was made in 1972. more than a year after the preparation of the AGA estimates. During, this time period new equipment or technology may have been introduced at some recovery operations (apart from the assumed introduction mentioned above). This, too, would tend to increase the FPC reserve estimate wherever additional or new equipment was added or a different technology introduced. No information is availahle on the resulting effect on the total reserve estimate. However, any adjustment would tend to lower the FPC estimate as compared with the AGA estimate, thus increasing the differ- ence between the two estimates. Footnotes on page 169. PAGENO="0167" 161 C. The FPC reserve team developed reserve estimates on a field-by-field basis using basic company-confidential records. The estimates were forwarded to a supervisor who conipared each estimate with its corresponding AGA prepared estimate. The suI)ervisor could return the FPC reserve team estimate for recheck by the originating team, or obtain re-examination by a senior reserve team.15 The procedure of checking two independently-prepared estimates tends to bring them closer. Should a pair of estimates be close, they are accepted; should they differ (more than the criterion used), they are subjected to addi- tional examination. As a result. errors or other differences have little chance of being identified when they are incorporated in similar size estimates. If. however, an error occurs which results in a significant difference, the estimate would be re- examined and the error (or poor estimate) identified and corrected. Concen- trating on differing estimates while tending to accept similar-size estimates is biased in favor of developing estimates of about the same size. The incidence of such checks, and their effect on the overall FPC estimate could not be readily secured from FPC. It should he noted that this bias is in favor of pulling the overall estimates closer, not making one consistently higher or lower than the other. Adjusting for the effects of definition modification and the timing change (tendency to raise the FPC estimate) and the operating procedure which tends to equalize the size of the estimates. the difference between the FPC and the AGA estimates would become larger. Unfortunately, no data are available to quantify this effect. The AGA estimate is almost at the lower boundary of statistical reliability (sampling only) with 95% confidence. The difference after adjustments would, most likely, be greater. However, as stated by the study's validation team, the real yardstick for measuring significant differences in the estimates is a mixture of statistical findings and operation factors (inaccu- racies of measurement). Thus the resulting difference, larger though it may l)e, cannot be used as concrete evidence that both estimates are significantly different. In future surveys, however, records may he kept which would tend to hell) quantify the effect of these factors. And these future surveys may be geared to test the Statistical Validation Team's statement that "both the possibilities of inaccuracy due to measurement and the statistically calculated reliability are of the same order of magnitude *" `` A more accurate measure is needed for testing the significance of the difference between the two estimates. From a purely statistical approach (no operational differences), the AGA reserve estimate would be expected to be at least 10% higher than the FPC estimate once in about 40 readings. If the adjustments to the FPC estimates could be made, the difference would be greater and would reduce the expected incidence. The uncertainty of the variation contributed l)y operation differences, however, makes impossible a purely statistical approach and leads to the state- ment of statistical insignificance". 2. National Pctrolcuni Council Stud~,-L.~S1. Energy Outlook On January 20. 1970, the National Petroleum Council. an industry advisory board to the Secretary of the Interior, was asked by the Department of Interior to undertake a comprehensive study of the C S. energy outlook. This marked the first time the NPC had been assigned a study which encompassed all energy forms. The NPC established a Committee on F.S. Energy Outlook, which included over 200 representatives of the oil, gas, coal, nuclear, and other energy related industries. The organization chart for the NPC appears as Appendix C. The 381-page study published in December, 1972 included chapters on both foreign and domestic oil and gas availability (1971-1985). The objective of the oil and gas portion of the study was to examine the factors which affect future supplies with a view toward increasing domestic supplies. Ranges were assumed for drilling levels, finding rates and additional recovery efforts to develop new oil and gas supplies. Two finding rates (the volume of oil and gas found per unit of exploratory effort) were used to project oil and gas supplies. A low finding rate which represented an extrapolation of past trends and a high rate approximately 50% higher were assumed. Three drilling rates were used ranging from a continuation of the current 4-5% per year decline to a rate which represented an approximate 6% increase per year. The three drilling rates and the two finding rates were then combined in a set of four principal cases for analysis. Footnotes on page 169. PAGENO="0168" 162 OH reserve additions for the lowest case investigated (Case IV) are projected at about 2.8 billion barrels per year for the next 15 years. The highest case investigated (Case I) adds reserves at an average annual rate of 4.4 billion barrels. In Case IV total annual gas reserve additions are projected to decline from 11 trillion cubic feet (TCF) in 1970 to an average of about nine TCF in the next 15 years. In Case I. total annual gas reserve additions are estimated to average 27 TCF. The XPC report stated: "The XPC's Future Petroleum Provinces Report (Ed. Note July, 1970) was used to define the discoverable oil-in-place of the U.S. In that report, estimated future discoverable oil was separated into `probable and possible' and specu- lative categories. Only half of the speculative oil was included along with all of the probable and possible for purposes of this study. This represents the median (expectable estimate) presented in the Petroleum Provinces Study" ~ Ultimate discoverable oil-in-place is estimated at 810.4 billion barrels, some 90.6 billion more than estimated in the Petroleum Provinces Report. In the case of ultimately discoverable gas. "the definition of ultimate gas discoverable was derived by combining the volumes of past production and current proved reserves with the Potential Gas Committee (PGC) estimate of the remaining potential supply of natural gas~~.ls The study estimated ultimate discoverable gas at 1857.3 TCF. The study concluded that U.S. oil and gas supply is not expected to be limited by the potentially discoverable resources during the period from 1971-1985 and that `an estimated 3815 billion barrels of oil (48 percent of the estimated ultimate discoverable oil-in-place) and 1,178 TCF of gas (68 percent of the ultimate discoverable gas reserves) remained to be found at the end of 1970."" Critique Since the NPC study was prepared by industry representatives It is subject to the same criticism leveled at the API/AGA proved reserve statistics. The NPC estimates should be compared with the following tables contained in the study which demonstrates the wide disparity of estimates of ultimately discoverable oil and gas originally in place. TABLE 2.-ESTIMATES OF ULTIMATELY DISCOVERABLE PETROLEUM LIQUIDS ORIGINALLY IN-PLACE (In billlon~ of barrelsj 1972 1969 1959 1970 USGS Hubbert Weeks Moore 1968 EllIott end LInden Lower 48 States 1, 519 516 (1) (1) Alaska 376 78 (1) (1) (1 (I Total United States 1, 895 594 1, 315 670 1,286 1 Not estimated. TABLE 3.-ESTIMATES OF NONASSOCIATED AND ASSOCIATED-DISSOLVED GAS (In trillion cubic feeti 1970 1972 1969 1959 1970 1968 Elliott PGC USGS Hubbert Weeks Moore and Linden Lower 48 States 1,877 3, 556 11,312 (1) (I) Alaska 447 862 188 (1) (1) (1 (1 Total United States 2,324 4,418 1,500 11,250 1,934 2,175 1 Not estimated. Footnotes on page 169. PAGENO="0169" 163 While the accuracy of the NPC estimates may be debated, it should be noted that studies of this type provide a more rational basis for national energy policy than the reliance on "proved" oil and gas reserve estimates alone. A recent staff analysis of the Senate Committee on Interior and Insular Affairs entitled `Federal Energy Organization" criticized the over reliance on Industry data and mentioned the U.S. Energy Outlook Study in particular: The Federal government also presently obtains data from industry which is not peculiarly industrial data. For example, the Department of Interior relies heavily upon industry for information concerning the potential value of fuel resources on the public lands. Greater disclosure of raw exploration data or exploration directly by the Federal agencies could be substituted for such information. There are indications that the present Federal reliance upon energy informa- tion from industry is excessive. Federal decisionmaking is influenced not only by the facts, hut the assumptions used in analysis. Furthermore, the Federal government is unable to recognize deficiencies or errors in industry decisions. The recently released U.S. Energy Outlook report of the National Petroleum Council is an example of predigested, policy advice which often is offered to Federal decisionmakers in the guide of industry data. An analysis of similar major energy studies which were available at the initiation of the Senate energy study showed that the underlying assumptions were so thoroughly con- cealed that the projections of supply and demand could not be reliably normal- ized among the reports considered. The staff study further indicated that: Greater Federal "in-house" data collection and analysis is needed. Technical field work (such as geologic exploration) should be assigned to technical agen- cies (such as G.S.). More authority to require "proprietary" data from Industry and to verify it is probably needed. The analysis should be done by Federal agencies to insure validity from the Federal viewpoint.20 The U.S. Geological Survey Circular No. 650 also provides a discussion of the 1970 NPC Petroleum Provinces Study which was used extensively in the prep- aration of the U.S. Energy Outlook Study. The data used were taken from table 22, p. 104, and several paragraphs of the report by Miller and others (1970). Their table 22 was based on a recovery factor for crude oil of 30 percent. The original oil-in-place was estimated by NPC for each of 11 regIons, In the three categories of probable, possible, and speculative, but the estimates for the probable and possible categories were reported as one figure. Ultimate recovery estimates were also made by the NPC using recovery factors of 42 percent and 60 percent, but they have not been included in figures 13-18. A flat estimate of 49 billion barrels of ultimately recoverable NGL was reported In table 25, p. 108, of the NPC report (Miller and others, 1970) without any details as to how this quantity should be assigned to the various regions. Therefore, it is reported as a single number in figure 13. The quantity of original NGL-inplace reported under the NPC at the bottom of figure 13 was calculated by the USGS on the basis of an 80 percent recovery factor. Future potential gas reserves were also reported in the NPC publication, but as these had been received from the PGC, they are reported in figure 16 with PGC as the source. A variety of geologic methods were used in preparing the NPC report. The methods include extrapolation and interpolation along trends, comparison of similar areas and strata, evaluation of structures determined by geophysical prospecting. evaluation of the irndrilled parts of known fields and pools, and assignment of average oil incidence to rock volumes. The results, though con- servative, are probably the most detailed estimate of potential crude-oil re- serves that has been made for the United States to date. Some oil in the probable-possible category can be considered to have been already discovered but not cited as proved reserves at the time the NPC report was prepared. This is oil in undeveloped parts of fields and pools that have been "discovered" but not drilled out. There is no way to tell, from the report, Footnotes on page 169. PAGENO="0170" 164 how much this might be, but roughly it might be assumed to be an amount nearly equal to the proved reserves reported by the API. The NPC report does not cover all potentially favorable areas. Those left out are onshore and offshore areas of Washthgton and Oregon; parts of North Dakota, South Dakota, Michigan, Montana, and the Great Basin area; the offshore areas of Alaska. except for parts of Cook Inlet and Bristol Bay; and the offshore areas of California north of the Santa Barbara Channel. VI. CREDIBILITY One of the most important aspects of the entire reserve estimate problem is the issue of credibility. Included in a discussion of this area are the subjects of validity of proved reserve figures, measure of these figures, and criticisms leveled by public officials, including members of Congress. The most important aspect of the problem is that the concept of "proved reserves" is developed by the petroleum industry through its principal industry representative, the American Petroleum Institute. The key issue becomes: is is "credible" far the general public, Congress, and the Administration to rely on industry data to determine a component of national energy policy? Based on interviews with industry officials, it is clear that large segments of the petro. leuni an(l gas industries are of the opinion that current procedures lack "credi- bility" and that the Federal government should play a greater role in validating `confidentiality" of company information should be an essential factor in API-AGA proved reserve figures. Industry spokesmen stress the fact that any government program if industry cooperation is to be meaningful. In general, the "credibility" issue is somewhat analogous to the problem of "conflict of interest". Federal regulations involving "conflict of interest" provide that the "appearance of a conflict" is also a violation of the regulations, regardless of whether an actual conflict exists. Assuming that "proved reserve" figures are completely accurate, a problem still exists because the figures are suspect, being derived and compiled by industry without Federal validation. What is needed at the minimum is a capability which would permit a responsible Federal official to testify before a Committee of the Congress that the figures have been reviewed and validated under his supervision and that they can be relied upon. Bureau of Budget study The lack of standardization of terms also affects the credibility issue. The Petroleum Study Committee, in its September, 1962 Report to the President, concluded that "satisfactory information concerning petroleum reserves . . . is seriously lacking." The Bureau of the Budget (now the Office of Management and Budget) issued a Petroleum Statistics Report in March 1965 which rec- ommended more technical description of reliable petroleum statistics, state and Federal governments explore the possibilities of using petroleum related infor- mation under regulatory and tax programs to develop general statistical use data. explore the I)ossihilities of establishing, on a continuing basis, formalized relationships between the federal government and a group of experts from outside the industry, and periodic progress reports from those designated to implement recommendations and the circulation of such reports. In the section on reserves, the BOB Report recognizes that petroleum reserves are not precisely measurable and that judgments enter into the reserve esti- mation process. The report discussed the availability of historical data and presented a scheme for classifying resources of known fields into several recov- erable and non-recoverable categories. Recommendations in the reserve section recognize the need for estimates compilation by field while still maintaining the confidentiality of proprietary information. It was suggested that the Department of Interior consult with Federal agencies, state governments and other organi- zations and petroleum associated individuals to design a system that will provide data following the classification outline recommended. There has been some agreement since 1965 on petroleum statistics, stemming from industry and governmental efforts. However, the main sources for current PAGENO="0171" 165 petroleum reserves estimates are still industry prepared. The recent roles of API, AGA, and FPC in the current petroleum reserve statistical picture follows. In 1966, API assumed the responsibility for setting standards for statistical reporting of petroleum industry operations in the LS. Since then it has: Increased the amount of detailed information (recommended to be compiled) published following its established definitions, has published technical reports on the Standard Definitions for Petroleum Statistics (oil and gas) ; Organi- zation and Definitions for the Estimation of Reserves and Productive Capacity of Crude Oil; including more descriptive material in this annual statistical reports, and has provided for closer and more intensive governmental partici- pation by having an "official observer' at main committee meetings and several at subcommittee meetings (two regularly and one on a rotating basis). Since 1965. API has continued to develop reserve estimates following the established procedures. An independent check on the variability of the esti- mates (at the field level), and an independent survey similar to the FPC survey has not been made. As a result, little more is known today than in 1965 about the effective quality of their estimates, of the potential effort of non-integrated company fields (small). And yet the API estimates are the only current series available: they are used as the basis for nearly all studies. And no other ap- proach has been found suitable for replacing an expert appraisal of company confidential field-by-field available geologic and production data when develop- ing an estimate of reserves. From one approach, more intelligence may be possible from the existing body of API data. The definition of proved reserves is based on a working inventory approach and is conservative. The resulting estimate defined a "most likely minimum", not a probable or possible future volume if improved tech- nology and equipment (and perhaps price) were allowed to he introduced. Estimates of crude oil reserves in the U.S. have been consistently under estimated by API, as indicated by the series of API annual revisions. According to the API definition of revision: I)evelopment drilling and production history add to the basic geologic and engineering estimates of proved reserves in years following the discovery. Changes in the earlier estimates, whether upward or downward, resulting from new information (except for an increase in proved acreage) are classified as "revisions". Revisions for a given year also include (1) increases in proved reserves associated with the successful installation of improved recovery techniques; and (2) an amount which corrects the effect on proved reserves of the difference between estimated production for the previous year and the actual production for that year. Revisions, as defined, can be classified into two general types-(1) those that may raise or lower the prior estimate, and (2) those that can only raise the original estimate. Revisions of type (1) result when: Preliminary production estimates are replaced by final production data becoming available. They may be higher or lower: drilling of additional wells in a reservoir better defines the production area thus providing additional information al)Olit the reservoir. Additional drilling would tend to increase the reserve estimate of a field if the usual prac- tice of initial discoveries is to estimate reserves conservatively. Additional drilling, however, would contribute progressively less information until a point is reached where the additional drilling confirms or modifies the prior estimate. At that point in time, downward revisions may result. Given a long period of time with fields in all stages of development, the net result of additional (lrillings should not be expected to keep on increasing reserves for the prior period consistently: and mechanical or procedural errors are made in the large number of estimates being made, transcril)ed, and forwarded to the central office. Such errors are expected to he few in number and small in size since large errors would tend to be reviewed at the subcommittee or committee meet- ings. At any rate, these mechanical-procedural errors are not expected to result in increasing the I)rior year reserve estimate consistently. PAGENO="0172" 166 Revisions of type (2) result from the successful application of improved recovery techniques, such as fluid injection, or the introduction of better equip- ment. These are expected to result in increased production or reserves since the expenditure of funds would not occur otherwise. Type (2) result from the successful application of improved recovery techniques, such as fluid injection, or the introduction of better equipment. There are expected to result in increased production or reserves since the expenditure of funds would not occur otherwise. Type (2) revisions are associated with technological improve- ments and have a repetitive upward push on estimates of reserves. Estimates may be revised upward or downward. This is clearly revealed in Table I of the 1972 API Reserves Report which shows the positive and negative revisions by state. Several states show a net downward revision, but the overall 1972 adjustment is an increase of 820 million barrels. Table II in the 1972 API Reserves Report presents data on revisions at the U.S. level from 1946 through 1972, a period of 27 years. (See Appendix B.) During the period, all net revisions were upward, ranging from slightly under half a billion to more tl1an two billion barrels. Such revisions are not trivial. In some years they constituted more than reserve increase resulting from extensions (in old fields), new field discoveries, and new reservoir discoveries in oil fields. And these revisions are comulative in nature-a revision once made is incorporated in the new estimate which becomes the base for the following year estimates. From a probability approach, the chances of getting 27 upward revisions and no downward revisions from an unbiased estimating procedure is exceedingly small (less than 1 in 100 million). The 27 consecutive yearly upward revisions Ijoint to a methodological downward initial estimating process which is repeat- edly corrected. This information can be used as the basis for improving the accuracy of the reserve estimates-develop a bias correction based on historical data to be applied to the current estimate. It should be pointed out that this adjustment may start at the field of reservoir level (different and may imply a change in API definition) : or may be introduced at the overall U.S. level without allocation to states (easier, but also implies a change in definition since the estimated effects of improving technology are being introduced). Whatever the implications, the estimates of proved reserves would have been closer to the following year estimate if an average rate of prior years' revisions were in- corporated. One minor point should, perhaps, be made relative to the application of reserves to productive capacity. Reserves implies future recovery at a changing recovery rate-a combination of increased flow because of improved technology, and a reduced flow when a reservoir is reaching the end of its recovery capacity. The terminal recovery rate cannot be speeded up appreciably because of the geological formation constraints on the flow of the remaining in-place oil. Therefore, developing a reserve/production ratio may be of limited meaning since the stated production in a given year may not be attainable from the terminal flow of a reservoir. The inappropriateness of such a ratio has been pointed out in the past: it should be emphasized. Consistency and applicatiosm of "proved reserves" definition The definitions of "proved reserves" for gas and oil are similar. The key words in the definition are: Estimated quantities * * * which geological and engi- neering data demonstrate with reasonable certainty to be recoverable, known reservoirs, and under existing economic and operating conditions. This definition has been used by API and AGA in compiling and presenting data on gas and oil reserves. The measurement of the degree of application of the definition to everyday occurrances has not been measured (a type of quality control on either a spot, sample, or universal basis). The FPC in its study of natural gas states "the primary goal of the program was to establish, on a consistent basis, a conclusive estimate of the proven reserves of natural gas available under existing economic and technical condi- tions." This differs from the API-AGA definition that the word "operating" has been replaced by "technical". Following its definition, the FPC study has instructed its estimating team to ", . not limit his consideration to the PAGENO="0173" 167 `prevailing practice' in the field, but rather should consider the possibility of adding . . . equipment . .". This change in definition points the way to a different type of estimate produced by FPC. Although the degree to which the definition has been followed by API and AGA has not been measured, the data themselves appear to indicate a variation when the Alaska discoveries were made. The AGA and API historical records by year of discovery include the Alaska find in 1968 (some 10 billion barrels of oil ultimately recoverable, 31 trillion cubic feet of gas). These findings do not appear as "proved reserves" In the U.S. total until 1970 (9.8 billion barrels of new oil field discoveries; 27.8 trIllion cubic feet of gas in new fields). The 1971 and 1972 data show no impact of these new discoveries in the production totals. Questions may be raised as to the strict application of the definition. There is no doubt (or quarrel) with the geological and engineering data, nor with acceptance of the reservoirs (even though size may be indeterminate). There may be no doubt that the technology exists for recovery on an economic basis. No production has resulted in the three years since the "proved reserves" appeared in the total reserve. The only condition that appears to have prevented production is "existing operating conditions". And since these conditions are preventing production, one may question whether the find had been included in "proved reserves". The question to be asked is whether an extremely large discovery should be treated differently than any other discovery. It should be accepted that the information about the discovery is important; but perhaps it should be handled in a special manner until such time as it becomes recover- able under "existing conditions". This may be accomplished by carrying a foot- note explaining the find, the reason for its not being included, and its approxi- mate size. The Alaska discovery may have been introduced for public relations consid- erations. This is of course understandable. However, if the discovery were mailer and it were introduced, the impact would not have been obvious and th definition would have been violated. Consistency in statistical procedures must be maintained if credibility is to be assured. The frequency of occurrence of such deviations from the present standard definition is not known. The potential problem of differing estimates which may result from non-exact definitions is clearly brought to light by the FPC definition. The substitution of the word "technical" for "operating" conditions would result in the inclusion of the Alaska discovery in the FPC estimates. This difference points to the need for additional classifications which would categorize the item more definitely- perhaps future recoverable reserves (under certain conditions) or probable reserves or possible reserves. Because of the importance of oil and gas to the United States economy, data on reserves are widely disseminated. The Federal government, the oil and gas industries, banks, financial and economic analysts, newspapers. and magazines are principal users of these findings. Reserve figures provide the basis or departure point for many analytical studies. Unfortunately many of those working with the data are unaware of the limitations imposed in the definition of "proved reserves~' or the methodology used to estimate proved reserves. As previously mentioned one of the common misunderstandings involves the belief that proved reserves of oil and gas represent the total known quantities of these resources. Of all the calculations derived from API figures, the most widely known and commonly referred to is arrived at by dividing annual production into the aggregate proved reserves at the end of each year. To this ratio of proved reserves to production the names of "reserve life index" of "reserve ratio" are commonly assigiied. The almost mysterious quality of this ratio is its remark- able stability over time. For fifteen years, 1946-1964. proved reserves at year end varied only 11.5 and 13.5 times the annual production. At the higher level of the scale of ignorance about reserve figures this ratio is often interpreted to mean that, at present rates of production, all the known oil will be exhausted in eleven to thirteen years. and any further domestic supplies will be dependent upon future discoveries. The name of "reserve life index" is well designed to foster this misapprehension.~ Footnotes on page 169. PAGENO="0174" 168 Many equate proved reserves with the amount of oil and gas ultimately recoverable which will be produced from known fields. However, as has been described earlier, production has consistently been much greated than the initial estimates of proved reserves. As a means of demonstrating the costs of exploration and development of new reserves, the reserve additions for a given year are divided into the exploration, development, and production expenditures on exploration, develop- ment, and production made in prior years as opposed to current expenditures. It is also J)ossible to find statements in studies which relate drilling activity to additions to reserves. This type of study divides the number of barrels of API reserves added by the number of total or exploratory wells or by the foot- age drilling in each category, to get the number of barrels found per well or per foot drilled. Such studies, if adequately explained and properly done with the necessary time adjustments in the data, can be informative. However, such data are alniost invariably related in a superficial fashion to prove a point and rarely are the limitations of reserves data explained.~ The criticism of proved reserve figures has intensified in the last several years. primarily due to the controversy surrounding the shortage of domestic oil and gas to meet current energy requirements. However, many of the recent criticisms are surprisingly similar to those heard in the past. Critics of reserve figures charge that the accurancy and credibility of these figures is suspect since they are industry generated figures. It is argued that industry figures are subject to manipulation for selfish economic interests insce these statistics are used to demonstrate the need for government incentives to promote the exploration, development, and production of oil and gas or in the determination of the wellhead I)rice of natural gas, for example. by the Federal Power Com- mission. It is argued that as a matter of public policy the government should make its own determination of proved reserves and make estimates of the future prospects for discovery, development, and production of oil and gas rather than relying on industry I)rojections or those prepared principally by industry responsentatives. Two examples of recent criticisms are cited below. First, the Subcommittee on Special Small Business Problems of the House Select Committee on Small Business, in its findings addressed itself to criticisms of gas reserve data. Relying largely on industry-supplied gas reserve data, the FPC has granted gas producers sizeable wellhead rate increases in an effort to coax gas pro- ducers to explore, drill, and develop new gas supplies . . . . Those opposed to the use of the AGA reserve information assert that the industry-furnished gas reserve estimates have not been subjected to an independent in-depth analysis and evaluation. In addition, these critics state that the confidentiality restric- tion imposed on AGA gas estimates have resulted in a denial of the true facts about the ~ation's gas supply situation to small business and consumers, who ultimately must bear the heaviest burden of the rate increases. time Federal Government should conduct an independent in-depth reser- voir-by-reservoir evaluation of the Nation's gas reserves . . . free of the taint of industry understatement. Independent reserve estimates would also provide the Federal Power Commission with the op~)Ortunity to liberate itself . . . In addition, other Government decisionmakers could utilize this data in develop- ing a realistic and viable natural resource policy . . . detached from industry domina tion.~ Secondly, in testimony before the Subcommittee on Antitrust and Monopoly of the Senate Conimittee on the Judiciary in June 1973, James T. Halverson, Director of the Bureau of Competition of the Federal Trade Commission, charged that "serious under-reporting by the natural gas producers to Federal Power Commission of natural gas reserves has existed and continues to exist; the procedure of reporting reserves through a subcommittee of the American Gas Association composed of employees of major producers could provide the vehicle for a conspiracy among the companies involved to under-report gas reserves. but more information is needed in this area." Footnotes on page 160. PAGENO="0175" 169 Halverson also pointed out that original estimates of natural gas reserves can only be obtained from company sources which are not subject to independent audit. In addition, company documents on reserves and AGA estimates from 1962 to 197() when compared by FTC staff revealed (liscrepancies which increased significantly in 196~ and 1969. Halverson cllarge(I that in-house company esti- mates of proved reserves applicable to the South Louisiana area, which were used primarily for tax purposes, had been found to be lower than estimates or I)roved reserves that were used to justify decisions to build drilling platforms or to sell reserves to a piPeline company. According to Halverson, the differences in these proved reserve figures in some cases amounted to over 200% FOOTNOTES 1 Bradner, Tim. Oil and Gas Conserration Regulation in Alaska: Review of Business and Economic Conditions, University of Alaska, Institute of Social, Economic and Government Research, Vol. X. No. 1, July, 1973, P. 7. 2 Theobald, P. K., Schweinfurth, S. P., and Duncan, D. C., Energy Resources of the inited ~tatcs, U.S. Geological Survey. Circular (~O. 1972. p. 19. Hendricks, T. A. Resources of Oil. Gas aiul Natural-Gas Liquids in the United States and the World, U.S. Geological Survey, Circular 522, 1965, p. 3. ibid.. PP. 8-10. A somewhat more detailed discussion of some of these points may be found in Risser, H. E., Energy Supply Problems for the 1970's and Beyond, Environ- mental Geology Notes, Number 62, Illinois State Geological Survey, May, 1973. °Winger, J. G., et. al., Outlook for Energy in the United States to 1.985, Chase Manhattan Bank, Energy Economics Division, June, 1972, p. 5-55. In addition to consulting the published writings of Prof. Adelman, Energy Research Inc.'s economic consultant interviewed him by telephone. However, the views expressed in this report are not necessarily those of Prof. Adelman. BP Statistical Ret'icw of the World Oil Industry-1972. London, 1973, p. 5. Bradner, Tim, op. cit., p. 12. `° Reed, J. C., Oil and Gas Development in Arctic North .4nzerica. Through 2000. The Arctic Institute of North American, September, 1973. 11 Organization and Definitions for the Estimation of Reserm'es and Productive Capacity of Crude Oil. Technical Report No. 2, American Petroleum Institute, Washington, D.C.. 1970. 12 Federal Power Commission. National Gas Reserves Study, May 1973, Appen- dix IV, p. 7. ~National Petroleum Council, U.S. Energy Outlook (A Summary Report), Washington D.C., December 1972. 14 Reserves Estimation Mann al, Federal Power Commission, Washington, D.C. p. 13. 13Ibid., p. 8. 16 Federal Power Commission. Op. Cit.. Appendix VI, p. 26. ~ National Petroleum Council Committee on U.S. Energy Outlook, U.S. Energy Outlook, Washington, D.C., December, 1972, p. 70. `~ Ibid., pp. 80-81. 19 National Petrolemn Council. Op. Cit., p. 35. ~Federal Energy Organization, a staff analysis, U.S. Senate Committee on Interior and Insular Affairs, 1973, pp. 22-23. ~ Lovejoy, Wallace F. and Homan, Paul T. Methods of Estimating Reserves of Crude Oil, Natural Gas, and Natural Gas Liquids, Resources for the Future, Inc., Washington, D.C., 1965, p. 24. 22Ibid., p. 27. Concentration by Competing Raw Rual Industries in the Energy Market an.d its Impact on Small Business, Vol. 3. A Report of the Subcommittee on Special Small Business Problems of Select Committees on Small Business of the House of Representatives. 92nd Congress, September, 1972. PAGENO="0176" NATIONAL PETROLEUM COUNCIL COMMITTEE ON US. ENERGY OUTLOOK ORGANIZATION CHART OIL DEMAND TASK GROUP OIL SUPPLY TASK GROUP ~~~ITTEE OIL LOGISTICS TASK GROUP GAS DEMAND TASK GROUP GAS SUPPLY TASK GROUP GAS TRANSPORTATION TASK GROUP COAL TASK GROUP OIL SHALE TASK GROUP TAR SANDS TASK GROUP NEW ENERGY FORMS TASK GROUP NUCLEAR TASK GROUP .~ C COORDaNATING ENENGY 1)[MA~ SUBCOMMITTEE TASK (; up ELECTRICITY TASK GROUP WATER AVAILABILITY TASK GROUP PAGENO="0177" 171 APPENDIX D Bibliography One of the purposes of this study is to identify the available source materials regarding the subject of oil and gas reserves. The following references were developed in the course of ERI's research effort. Adequacy of Mineral Fuels, Robert E. Hardwicke, American Academy of Sci- ence, Washington, D.C. America's Stake in TVorld Petroleum, Roger, Sharp, Harvard Business Review, 1950, Cambridge, Massachusetts. An Analysis of Natural Gas Supplies, Martin Elliott, Journal of Petroleum Technology, February 1968, 135-41. Annal Statistical Review, United States Petroleum Industry Statistics, April, 1972, Washington, D.C. Assessment of Available Information on Energy in the United States, U.S. Senate Interior and Insular Affairs Committee, 1962, Washington, D.C. Basic Factors Affecting the Future Supply of Natural Gas for the Interstate Market, American Petroleum Institute, 1959, Washington, D.C. British Petroleum Statistical Review of World Oil Industry 1972, British Petroleum Company, Ltd., London, 1973. Capability of the Naval Petroleum and Oil Shale Reserve to Meet Emergency Needs, General Accounting Office, U.S. Government, 1972, Washington, D.C. Charts on New Reserves of Natural Gas Found Annually, Gas Wells Completed Annually in the United States, Northern Natural Gas Company, 1969. Charts for 1969-1990--Statistical Depletion of Proved Reserves and Potential Supply of Natural Gas in the United States as of December 81, 1968, John M. Hanley, Northern Natural Gas Company, 1969, Com~uon Fallacies in Oil and Gas Reserve EstImates 1967, William Huckaba, Willis Meyer Society of Independent Professionals and Earth Scientists. Conoentration by Competing Industries in the Energy Market and Its Impact on Small Business, House Select Committee on Small Business, 92nd Congress, September 1972. Concerning Estlmate8 of Potential Oil Reserves, Lewis Weeks, American Asso- ciation of Petroleum Geologist Bulletin, Vol. 84 :1, page 947. Crude Reserves, J. R. Arrington, Oil and Gas Journal, 1960, No. 9, 180-185. Definition of Petroleum Re8ources, Martinez, Annibal 1962, Organization of Petroleum Exporting Countries. Domestic Oil Reserve8 As Affected By Welihead Prices, Kenneth Price, 1965 (Speech), Washington, D.C. Economic Aspects of National Gas Supply, Bruce Netschert, 1962, Johns Hopkins Press, Baltimore, Maryland. Eoononvio Potential of the Mineral and Botanical Re8ources of the Continental Shelf and Slope, Economic Association, 1968. Energy Model for the United States 1947-.65, Warren Morrison, Charles Reading Bureau of Mines, Department of Interior, Washington, D.C. Energy Resources, M. King Hubbert, National Academy of Science, San Fran- cisco, California, W. H. Freeman and Company, 1969. Energy Re8ouroes of the United States, United States Geological Survey, Cir- cular 650, 1972, Washington, D.C. Energy Supply Problem of 1970 and Beyond, H. E. Risser, Illinois State Geo- logical Survey, May 1973, Chicago, Illinois. Energy Under the Oceans, Don Kash, Irvin White, University of Oklahoma, 1973, Norman, Oklahoma. Estimates of Additional Recoverable Reserves of Oil and Gas for the United States and Canada, Degolyer and MacNaughton, 1969, Dallas, Texas. Estimation Manual, Federal Power Commission, 1972, Washington, D.C. E8timation of Future Re8erves, J. R. Arrlngton, W. Texas Geological Society, 1966. Estimation of Natural Gas Reserve, Ralph Davis, April 1964, Gulf Publishing Co., Houston, Texas. Factors Affecting United States Exploration Development and Production, 1964-65, National Petroleum Council, 1967. Gas Supply: A Panel Presentation, American Gas Association, Boston, Mass. 1971. Gas Supply and the National Energy Situation, American Gas Associatiou. AprIl 1972, WashIngton, D.C. 37-143 0 - 74 - 12 PAGENO="0178" 172 Graphic Review of United States Oil Reserves, 1952, Petroleum Administration for Defense, Washington, D.C. Method for Evaluating U.S. Crude Oil Reserves and Projecting Do~n.esti4, Crude Oil Availability, C. L. Moore, U.S. Department of Interior Office of Oil & Gas, 1962. Methods of Estimating Reserves of Crude Oil, Natural Gas and Natural Gas Liquids. Wallace Lovejoy, Paul Homan, Resources for the Future, Inc., Johns Hopkins Press, Baltimore, Maryland, 1965. National Fuel Reserves and Fuel Policy, Senate Interior and Insular Affairs, 1951, Washington, D.C. National Gas Reserves Study, A Staff Report, Federal Power Commission, May 1973, Washington, D.C. National Petroleum. Council Studies: Committee on Oil and Gas Availability. 1964-73. Petroleum Productive Capacity. 1952. Committee Proven Petroleum and Natural Gas Reserves and Availability, 1961. Natural Gas Supply and Demand 1970-1990 Staff Report #2, Bureau of Natural Gas. Federal Power Commission, 1972. Washington, D.C. Oil and Gas (`onservation. Regulation in Alaska, Tim Bradner, Review of Busi- ness and Economic Condition, University of Alaska, July 1973. Oil and. Gas Development in Arctic North America Through 2000, J. 0. Reed, The Arctic Institute of North America, September 1973, Washington, D.C. Oil and. Gas Property Appraisal Reports, Willis Meyer~ Society of Independent Professionas & Earth Sclientists, 1967. Organization and Definitions for Estimation of Reserves and Productive Caqiao- ity of Crude Oil, Technical Report #2, American Petroleum Institute, June 1970, Washington. D.C. Outlook for Energy in the United States to 1985, J. G. Winger, Chase Manhattan Bank, June 1972, New York City, New York. Petroleu~n Productive Capacity, National Petroleum Council and Office of Oil and Gas, Department of Interior. 1952. Washington. D.C. Petroleum Reservoir Engineering. James Amyx, Gulf Publishing Company, 1960. Houston, Texas. Potential Gas Committee Study on Supply of Natural Gas in. the United States, Golden, Colorado. Colorado School of MInes, December 1968. Projections of Petroleum Supply to 1980, C. L. Moore, U.S. Department of Interior, Office of Oil and Gas, 1966. Proved Reserves of Crude Oil and Natural Gas Liquide and Natural Gas, April 1972, American Petroleum Institute, Washington, D.C. Quantitative Evaluation of Predicted. Reserved of Oil and Gas, N. J. Buylov, N. S. Erofeev. 19~4. Russian Consultants Bureau, New York, New York. Resources of Oil and Gas and Natural Liquids in the United States and World, T. A. Hendricks. Geological Survey Circular 522. 1965, Washington. D.C. Standard. Definitions for Petroleum. Statistics, Technical Report No. 1, American Petroleum Institute. July. 1969, Washington. D.C. Supply a.n.d Price of Natural Gas, M. A. Adelman, 1962, Basic Blackwell, & London. Survey of Action. by State and Federal Regulatory Agency, Statement by Staff Experts to Gas Committee, 1972, National Association of Regulatory Utility Commissioners. Symposium of Fuel Reserves in United States, George Armistead, The Journal, 1967, Washington. D.C. Systems Study of Data. Availability on Natural Gas, Bureau of Mines, United States Department of Interior, 1971, Washington, D.C. Ultimate Domestic Petroleum. Discoveries and Discovery Rates, C. L. Moore, Trans. of the West Texas Geological Society, Publ. 66-53, 1966. United States Energy Outlook, National Petroleum Council, December 1972, Wash.. D.C. United States Petroleum through Year 1980, National Petroleum Council, Wash., D.C. 1968. World Off shore Petroleum Resources, Lewis Weeks, American Association Petroleum Geologists Bulletin, 49 1680-93. PAGENO="0179" 173 Chairman PROXMIRE. Mr. Nader, you reflect a very widespread public skepticism and you articulate. it more emphatically and clear- ly than I have heard it. You say as I understand it, that you think the energy crisis is a fake. It is a phonev. You do not believe it. At the same time there do seem to be facts and figures which show that the availablity of imported oil from the Arab countries which is around 10 or 12 percent of our total consumption in t.he past has been at least partially interrupted. Leakage permits us to get 600,000, perhaps 1 million barrels a day but that is far less than the 2'/2 to 3 million barrels that we got. Now, given our wasteful practices, given all these other defects which you properly point to, would you agree that we do have a shortage in the sense that we do not have as much oil available as there is clearly a demand for at the present time? Mr. NADER. Well, given the waste, as you say. I would not. There already is a reduction of demand due to conservation effects. Chairman PROXMIRE. But it is a fact of life that a lot of the con- sumption is wasteful, I would agree. Mr. NADER. That is right. As you pointed out, to analyze whether there is an energy shortage now, you have to ask how much is demand decreasing which, of course, relatively increases the supply that is available, and how much is available. I think the demand is de- creasing. The figures show that whether they are Consolidated Edi- son figures for reduction in electricity demand to other figures that have been displayed in newspapers around the country recently. But I also maint.ain that the Government has not proven its case that there even is an energy shortage of available supply, that they may be able to get information later on but they ha.ve not proven their case. In fact, in the last few weeks it has been just the opposite. They suddenly discovered a 70,000-barrel-a-day increase in imported oil that they did not allow for in their leakages in other areas as well. For instance., let me give the most recent- Chairman PROXMIRE. Let me~ say what we have gotten. you see, is a public report. from the oil companies. as I understand, which they are making regularly now which has indicated that they have a greater supply in many categories than they had last year at the same time. However, I think that while they specify that, t.hey indicate that the availabilit.y of crude coming now into the pipeline is substantially less than it was last year and, there.fore, if we main- tain somet.hing close to the same consumption as we did last year, there is going to be a shortage this spring. Tha.t is what they are concerned for and prepared for. Mr. NADER. That is exactly what they said in October would be the case for November and December. Second of all. never underestimate their ability to store or withhold supplies or reallocate supplies in order to postpone their bringing these supplies to market. For instance, on January 1, I believe, or thereabouts, a massive tanker owned by Texaco took on refined gas- oline from a refinery in the east, around the New Jersey area, and set sail through the Panama Canal to California with millions of PAGENO="0180" 174 gallons refined ~asoline. Here was the east coast supposedly thirsty for refined gasoline and they were taking this slow boat to California so that by the time this tanker reaches California. perhaps the prices will be higher and they can make more profit. Secondly. the magazine Petroleum Economist which comes out of London. said that world crude oil output rose 8 percent or 1.6 billion barrels to nearly 20 billion barrels in 1973 despite the Arab production restrictions started in October. Here is the critical state- ment. It said. "The increase would have been closer to 10 percent without the restriction." That is. it was an 8-percent increase instead of a 10-percent increase. As you know, other countries have increased t.here output. Chairman PRox~rIRE. Increase in 1973 compared to 1972? Mr. NADER. That is right. Chairman PROxI\rIRE. Of course. world consumption has increased very rapidly. too. In this country it goes up. what, 7 or S percent a year and abroad it goes up even more rapidly. Mr. N~~D1~R. Yes. You see. that is another point. The point I am making is that they have attributed a 2-percent decline in the in- crease. In other words. instead of a 10-percent increase if there was no embargo. there is now an S-percent increase because other countreis such as Iran and Nigeria have been increasing their output. Chairman PRox~rIRE. Let me get to what von think you see as our policy responsibilities here. Should Congress try to force the ad- ministration to control prices by spelling out in law a specific price control program? Mr. NADER. Yes. I think for the short term there needs to be not only a price control, but there needs to be a price rollback. Chairman PR0xMIRE. Can you tell us what kind of data disclosure legislation should be required? Mr. NADER. Yes. I think-I do not want to repeat what you have said this morning in terms of what is needed. Chairman PROXMTRE. Do you favor the- Mr. NADER. storage. for example. Chairman Priox~rini: [continuingi Nelson bill ? Mr. NADEI~. Reserv~s. oil and gas reserves. The levels at which these reserves prevail underground. cost figures. refinery capacity. refinetv output. storage tank levels. et cetera. But I would have some more structural recommendations, Mr. Chairman. For example. are you aware that the Freedom of Infor- mation Act when it was passed a few years ago, had a specific ex- emption for data from the F.S. Geological Survey? Now, I would eliminate, that exemption. That specific exemption came from the oil industry. For instance, does it not outrage von that the information which the oil companies obtained on the leases that the Federal Govern- ment gives them is considered confidential? That is. the people cannot have this information and it is information on extent of reserves on Federal land. presumably owned by the people. Secondly. I would require consumer and business user groups as well as independent representation on all advisory groups asso- ciated with the energy issue. That is an information issue. You PAGENO="0181" 175 see, right now Mr. Simon has segregated advisory committees. He has one for the oil producers. the big ones, then one for the inde- pendents, and one for the consumers. I asked him, "Do you not think there would be. a better exchange if they were all mixed so you could have consumers across the. table from the majors and independents ?" He said, "I will take that. under consideration." But. you see, unless that occurs, we are going to have the typical symbiotic relationship between the Federal agency and these industry advisory committees and there is going to be a flow of secrecy both ways that is not helpful. Chairman PROXMIRE. Let me ask you this. You have been very, very critical of Mr. Simon and the people he has advising him and the people carrying out policy in the Energy Office. Do you think Congress is in the process of turning over too much authority to the proposed Federal Energy Administration and how would you like to see the. bill altered before it is enacted? I am talking about the energy bill t.hat is still pending because we did not. act on it at the end of the Congress. Mr. NADER. Well, I think in a number of ways there is too much of a discretionary grant of authorit.y to the. Federal Energy Office. For example, I disagree strongly with the information disclosure requirement. which I noted in my prior remarks. I do not think the public is given legal standing of sufficient clarity to challenge the agency's rulings in court. You will notice that we have. that same problem with the Price Commission and unless people can chal- lenge the Federal Energy Office's determinations in court, there is going to be government, by fiat. I think thirdly, there needs to be. and this is quite important, a consumer advocate's office right in the agency to represent the in- terests of the consumer and to represent the interests of Congress in finding out real1~ what. is going on inside that agency. I think fourthly. there need to be toughe.r penalties for violations. Tn these acts, for example. they have, one bite of the apple. where they have a modest fine of a few thousand dollars before any crimi- nal penalties apply for willful and knowing violation. I think finally, and this is something that Congress cannot do very much about unless it really exerts its prerogatives, that. is to make sure that the people who run this agency feel for the people in this country, feel for their interests in health and safety as well as in the economy of their purchasing power and that. is what I do not see occurring in terms of appointments that are being made in that. office. Chairman PRox~1THE. You called for a price, rollback, actually reduce the present prices of gasoline and oil. That. T am sure, con- sinners would welcome but. do `von really think that. is praetical)le? Would that not have an immediate adverse effect on production if we. actua1l~ reduce prices and how much of a rollback would you think is Practical or possible? Mr. NADER. Well. T think we need, first of all, a selective rollback to make sure that the foreign oil does not distort-the foreign price of oil (Toes not distort domestic price. By selective. I mean if we are going to have a rollback we had better have an export tax or a PAGENO="0182" 176 control on exports of oil. Otherwise we are going to see the tradi- tional pressure to get it. sold overseas or to cycle it back by getting it overseas and bringing it. back as imports which are not subjected to price controls. There needs to be a study made as to the precise amount of rollback that is necessary. But I think the answer is in the profit figures. Senator Proxmire.. If they are receiving higher and higher profits and if Mr. HelTer's predictions are right, then von need a rollback which is equivalent to to a kind of generic excess profits tax. Chairman PROXMIRE. That prediction by Mr. Heller assumes there will be a very further sharp increase which Mr. Simon indicates he expects. too. this coming year. going from $5.25 to $7 a barreL that the gas pump price will go up to at. least 55 cents. Testimony this morning suggests to me. it is likely to go substantially higher than that. So it seems to me. the practical thing we ought to do is try hard to hold the. line or at. least. not permit it to go up as high as it would go if they simply let. their own preference take' its course. Mr. NADER. ~OU see. that is the position that. the. Federal Energy Office and the Cost of Living Council is putting you in. Chairman Piioxl\nRE. That is right.. Mr. NADER. They are putting us all in the position of saying let us first make sure it does not go higher rather than say. look, there have been fantastic windfall profits and consumer gouging here. I think Mr. Freeman and Mr. Allvine who will come this afternoon, will detail the extent of this. Chairman PnoxMnw. Before I yield to Congressman Conable. let me. just ask you this. There has been a lot, of discussion and a lot of people around the country. a lot of people in my State, for example. have brought. up the. possibility of nationalizing the oil industry. A very powerful Senator has suggested we make it subject to public utility regulation. Mv own preference is for vigorous anti- trust. action to require competition. How do you come down in that area? Mr. NADER. I come down in three ways. One, vigorous antitrust action to break the oil major up and to make a more competitive industry to the point, for example. of severing a pipeline's activi- ties from the producing and refining activities and eliminating the vertical integration that has stifled the independents on both e.nds of the producer and retail area. Second. I would advocate a Federal oil and gas energy corpora- tion on the model of the TVA to be. a yardstick, to make sure supplies will always be available for national contingencies and emergencies and for small refineries, distributors and retailers whose being driven out of business by monopolistic, practices and to ex- plore for and produce oil and gas on Federal lands where so much of the new oil and gas remains t.o l)e found. And third. I would give the. potential victims of oil industry policies and Government policies their full right to sue. individually and under class actions. That means to sue not only for price roll- backs. not only for private damages. but also to sue for information. It is not. enough simply to say you. Mr. Simon. should give this information. What if he does not? There has to be not only a con- PAGENO="0183" 177 gressional review function here but also the exposure to expeditious litigation. I think with that combination of policies we will see the onset of what the Economist has called the coming energy glut, and I would like to submit for the record an article which has appeared in t.he Economist of London entitled "Too Much Energy." It is their case for predicting that there is going to be an energy glut over the next few years and the rest of the century. Chairman PRox~IIRE. We will accept that for that record. [The article referred to follows:] [Reprinted In the Washington Star-News, Jan. 13, 1974] Too MucH ENERGY (From the Economist) There is a case for arguing that the world is likely to be glutted with energy before the end of this decade. The present energy "crisis" is about the 15th time since the war when the great majority of decision-influencing people have united to say that some particular product is going to be in the most desperately short supply for the rest of this century. On each of the previous occasions the world has then sent that product into large surplus w-ithin 5-10 years. The reasons for this are now quite logical and rather technical. In modern conditions of high elasticity of both production and substitution, plus surpris- ingly equal lead times for many investment projects, we now generally do create overproduction of whatever politicians and pundits 5-10 years earlier thought would be most urgently needed, because both consensus-seeking gov- ernments and profit-seeking private producers are triggered by that commen- tary into starting the overproduction cycle at precisely the same time. In 1946-49, a agricutural experts forecast a permanent postwar shortage of dairy produce: this led to butter mountains within a decade. In 1950-51, the Korean war boom was said to show that raw material prices would keep rising forever; instead, some took until 1970 to regain their 1950 peak. In particular, an international action group was set up in 1951 to deal with the world's "worst permanent bottleneck" of sulphur, shortly before the stuff became practically unsaleable. The future chief economic adviser to the British Treasury published his book on the world's lasting dollar shortage in 1953-54, which was the first of the world's 20 consecutive years of dollar surplus. Russia's first sputnik in 1957 was said to be so far ahead of the West's conceivable technology that it would leave America for the rest of our lives at the back end of a "niissile gap"; within six years the Americans were preparing to fire surplus rockets at the moon. Then there was going to he a worldwide shortage of university graduates especially from the science departments: within a decade they were one of the bigger groups of the unemployed. As the 1960s started, there were said to he limitless prospects for offshore funds and other equity investment media for the small man, for go-go business conglomerates, for high technology companies like Rolls-Royce: these were therefore the ventures that ~vent bust (as property developers and then North Sea oil may in the 1970s). In the inid-1960s we were told it was impossible to bridge the lasting tech- nological gap between America and the rest of the world: this meant that the dollar would soon be devalued. As a result of yesterday's trendinesses, we now have created in the developed world an unfortunate excess of both birth control devices and anti-pollution controls, although the rearguard of yesterday's i~reachers about ever-rising birth rates and ever-increasing pollution is still infuriated when the figures are pointed out. Energy has played its part in the game of cheat-the-prophet, too. During the coal crisis of 1947, it was said that no coal miner in Europe or Japan need fear for his job during the rest of this century; within a decade a majority of European and Japanese coal mines had closed down. PAGENO="0184" 178 In 1956, France and Britain went briefly to war because the closing of the Suez Canal for a week would starve Europe of oil and cause an insurmountable rid shipping shortage. The two nations went to war even though it was agreed that this invasion would put France and Britain into the Arabs' bad books for a millennium. Instead. Europe continued its quick switch to cheaper oil even when the canal closed again: the rear-admiral whom Mr. Macmillan appointed to ration Britain's share of world shipping was still recruiting staff when the biggest- ever laying-tip of the worlds surplus shipping began; within rather less than a millennium France and Britain are the Arabs' European friends. For the last 200 years. energy seems to have had a higher elasticity of supply than anything else except transport. Indeed, the accelerating elasticity of sup- :~v r~f these two things is what the industrial revolution since Watt's steam ~~ne has been largely about. A product generally has a high elasticity of supply (a) if it can be produced in many different ways: (1)) if technology seems on the brink of bringing in more powerful new ways : c) if the distribution system for it can be greatly improved. Gluts will also occur if (d) economies of the product's use seem fairly easy Energy fulfils each of these conditions in profusion. There are many thousand possible ways of releasing energy from storage in matter. They range from petty ways like 25 BTLT per pound of matter by letting a pound of elastic bands untwist; through fairly petty ways, like 20,000 BTFs by burning a pound of petrol; through more sophisticated ways like 250 million BTUs from the fission of the F-235 isotope in one pound of natural uranium: up to 260 thousand billion BTLT5 frm the fusion to helium of a pound of hydrogen. Note that this last system, in which the waters of the oceans could serve as a limitless reservoir of fuel, would therefore be more than 10,000.000.000 times more effective per pound of matter than burning a pound of the Arabs' oil. Of course, new technology will drive on towards the cleaner power sources nearer the top of the range. The distribution of electricity-and, indeed, of all energy-is grossly in- efficient. Look at the towering chimneys of your local power station to see how many of them throw up into the wasting air two-thirds of the heat and energy they could produce. Remember that those in control of most devices for bringing you the energy released from storage In matter have not been concerned with economising on the use of that energy, because far too many distribution systems, from garages to antediluvian electricity transmission lines, are in the hands of monopolies (especially the worst sorts of monopoly, called public utilities) which do not have a competitive Incentive to attract your custom by improving their technology. Among possible economies in energy use, the Americans would save the equivalent of three-quarters of Britain's annual imports of oil if they used cars with the same economy of fuel consumption as Europe's. The whole advancing revolution of microrn-iniaturiSation with integrated circuits will be enormously energy-saving. because we are going to be increasingly able to put n to a chip the size of a postage stamp properly connected electrical circuitry which would l)reviusly have required great assemblies of machinery that would fill a room. Amazing savings in energy can be secured by even a small staggering of working hours ( why not let Britain south of the Trent-but not north of it-go back to British Summer Time this winter?). Above all, the greatest of the three main transport revolutions since the 1770s is now speeding towards us. It will clearly replace the internal combustion engine revolution as dramatically as that revolution replaced steam, and it happens to he extraurdinary energy saving. This great new transport revolution is telecommunications. Because the businessman's future essential tool, the (`omputer. talks to other cmputers by telecommunication, instead of by taking a walk, much of present business travel and then personal travel to work are goimig to become 1mnhmece~sary in the main growth jobs in post-industrial societies. Even in the ibTOs some of this travel will be replaced by a great growth in telex transmnissiI1i. facsimile transmission by telecommunication, picturephone, etc. As there is nt logical reason why the cost of telecommunication should vary with distance. quite a lot of people by the late 1980s wiil telecommute daily to their London offices while living ott a Pacific island if they want to: and temporary price rises for oil-driven travel in the early 1970s will now bring a fcw of these habits frward. PAGENO="0185" 179 Some critics say: `Which of these science-fiction inventions do you really expect to be operating within six of seven years?" The pons asinorun~ of economies is to recogiHze why that question is absurd. If you were so foolish as to try to draw lip a computer model of energy economics over the next 6-T years, you would have to combine the thousands of possible ways of producing energy, and of possible ways of changing distribution systems and consumption patterns for it, together with estimates of time lags for each, and today's prices for each, and of guessed elasticities of supply and substitution for each, into an equation with multibillion factors. Governments which ijroduce "energy policies" do not work with multibillion- factor models of this kind, but with the guesses of perhaps three boffins (scientific experts) and a minister-w-hich is why such policies have no serious chance of being right. Apostles of a free market say that it arrives infallibly at the best possible answer to the multibillion factor equation. Actually, it usually does something much less perfect but still rather useful: a free market will generally bring the mix of production-consuniption-distribution patterns within the spectrum of the "several million l)OSsible answers" which are not wholly incompatible with the multibillion factor equation. If you then change some price in the system rather marginally, a different but overlapping spectrum of several million possible answers" replaces the present spectrum; if the market has already rather haphazardly chosen one of the answers within the overlap, then neither production nor demand will change with the change In price, and both supply and demand are said to be surprisingly inelastic over that range of Price. But If you change expectations about the price of the most Important l)r~sent energy source, namely oil, from under $8 a barrel before this autumn to a level where people and governments and profit-seeking enterpreneurs actually believe that It Is going to be over $12 a barrel or $17 a barrel (or whatever Is the figure that the latest hopeful Arab or temporarily panic-stricken auction bidder last thought of), then people and governments and profit-seeking entrepreneurs suddenly believe that billions of possible new answers will be more profitable than which ever one of the "several million possible answers' is the one most people are using now, If other factors remained as now, they would be more profitable; but other factors won't remain as now, because the new ventures will themselves change them. It is because you cannot get many quarts Into a pint pot-or an expectation of billions of possible answers Into a situation where only a changing several million answers will at any one time be possibly logical-that forecasts of lasting shortage generally do lead nowadays, within a short time span, to embarrassing glut. It is always most difficult to persuade people within the particular Industry and within the scientific establishment to see this, because all their habits of thought are geared to the relationships existing within the multiblilion factor equation now. So the only proper answer to the P0fl8 a8(florum question "Are you relying on advances In magnetohydrodynamics, or solar energy, or fusion, or what?" begins "Well, now, an Improvement In magnetohydrodynamics would affect the multibilllon factors in the energy equation in the following multi- billion ways." No economist can give that answer, because (a) no economist Is clever enough, and (b) he would anyway be dead before he reached answer number multlbillion minus one-and a hundred-year time for answering a question about what to do in the next seven years is not very useful. What an economist can say is that the recent wild changes in expectations about oil prices will lead to an energy glut, within a debatable time span, according to all that has been known up to now about the elasticity of supply for energy. The most respectable argument on the other side is that the time lag may nevertheless stretch beyond the end of the 1970s, because of a supposed long lead time before changes can come into effect (which is true of some of the investment, but most unlikely of economies in demand), or (this is a better argument) because the elasticity of substitution from an oil-based to an another-energy-based system will he low since people are romantically in love with the expensive oil-using machinery such as motor cars which they possess. There are three answers. First, the speed of change has in fact been very quick in the downward direction. People forget that from 1963 right up to the early 1970s the "oil PAGENO="0186" 180 question' in America meant that you should not allow Texas oil milli?narieS to make so much money. Indeed, it was this trendy populism in Amenca in the past decade which created much of the present temporary energy "crisis." In 19(34 American courts compelled a quite unprepared Federal Power Corn- mission to regulate for the first tiaie the prices charged for natural gas by 1970 the FPC had a backlog of over 2,000 producer rate cases in natural gas, which would have taken 13 years for it to give answers to. The price allowed for this enviromnentally clean and premium fuel was therefore so low and out of date that it not only iiiade more production of natural gas uneconomic, but also distorted the market for other fuels and cut investment in them at jtist the wrong moment. Through the years of gathering crisis, the price of gasoline in America was about half the price of petrol in niost other countries. In President Nixon's first budget. as late as 1969, there was universal acclaim when he cut drilling for oil through reducing the rate of percentage depletion allowances for oil and gas from 27~ to 22 percent. Then in 1970-72 environ- mental restrictions were directed niost especially against the energy industries. By 1971 fewer exploratory oil wells were being drilled in America than at any time since 1947. One reason why Mr. Herman Kahn and others think that it is going to be very easy to step up output of energy in America is because they are aniong the few who remember that almost everything has been done for a decade to bring it down. Secondly. the very low figures usually published for oil reserves round the world are mostly reserves discovered In days when just about the only known way of striking oil was to get a Texan to go and sniff for it. There really is now a must greater. and still expanding, ability to find the stuff by electronic senors attached to computerised systems. Third, it will gradually he realised that the mechanism through which the price of anything is determined-including oil-really is a bit more sophisticat- ed than an Arab saying what he wants for it. So oil's price should come down rather sharply well in advance of the energy glut which its price rise this winter will not create but this is unlikely to be in time to stop the energy glut, because the new investment and habits will already be in train. Until this winter, it had seemed marginally likely that the oil price would rise in 1970-SO by more than most other prices the main consequence of the past three months is that it will now presumably rise by less. Most of this article should not be regarded as good news for Britain. A main implication is that Britain's North Sea oil "bonanza" may very well come on full flow just \vhen oil is coniing towards glut. Another is that the 1 billion pounds being spent on Britain's coal mines will be wasted, because it will be surprising if by the inid-1980s any man-operated coil mines should remain open at all. A more tragic implication is that the niost deserving charity of Christmas, 1950, will ~rolably he to relieve Arab states ruined by their monoculture of unwanted oil-a charity which is likely to be mainly stibscribed by rich Jews Not enough tears seem to be raised by that. This orticic is reprinted, by pcrmMsiofl, from Thc Economist of London. The magazine describes it 05 "0 new year prophecy that sounds unconventional, but has a 900(1 chance of proring right." Chairman PRONMIRE. Congressman Conable. Representative CONABLE. Thank you. Mr. Nader. I wonid like to apologize for my temporary absence. I have been briefed by the staff on some of the things yon have said. I wonld like to say also that yon speak with a strong and an im- portant voice and that yon have made a great many contributions in this conntrv. citizens contributions far beyond that of any other private citizen I know. I compliment you on yonr diligence and your attention to the Nation's business in this capacity. I would like to know-first of all, Mr. Nader, have yon described yonr sources of information about the oil industry? We have a good deal of criticism of the Government for its reliance on oil indnstry statistics. It must he difficnlt to check these statistics and I wonder PAGENO="0187" 181 how you go about finding what you need to know about the oil industry. Mr. NADER. WTe11, several ways. First of all, you analyze internal consistency of the official data. For example, if you want to know what proven reserves are you say what. is your definition of proven reserves? If they say it is a function of the economic level and technology level you say when was that. function dated? Was it dated 1955, 1960? Does it take into account new drilling technology and new economics? When you make these kinds of probes with both Government. people and geologists and others they will admit that the amount of proven reserves reflecting recent. prices and technology over the last 10 years is enormously greater than the 36 billion barrel figure that is given for this country. Representative CONABLE. Do you not get rather a picture of in- accuracy rather than of the direction of that inaccuracy in most cases? Mr. NADER. You get a picture of inaccuracy, of underestimation, and an idea of the order of magnitude but you do not get enough to say, this is the exact figure. But if you are working on order of magnitudes like five times the official figure, and some would even go higher- Representative CONABLE. Might. not in some cases it be five times less than the official figure? Mr. NADER. No, because the oil companies would not want to engage in overestimating reserves if only because they pay more taxes. They pay more property taxes and other assessments. Representative CONABLE. I asked Mr. Simon about that and he said he was going to look into this when he got to Texas where they have no income tax and the real estaate tax is rather burdensome, I suspect, on the oil companies. Now, you have talked about breaking up the oil industry. I take it that you are talking primarily about breaking it. up along vertical lines, as you said. Will that not increase costs? In fact, most com- panies go into vertical organization m order to cut out middle men, in order to cut out independent. profitmaking agencies that usually, because they are somewhat less efficient, tend to he. therefore, more expensive ultimately for the public. Acknowledging that. monopoly is not a desirable condition, is not the result of breaking lip vertical integration likely to be more slack in the pricing ~ generally? Mr. NADER. I think vertical integration, which is officially justified on the basis of efficiency has basically become a way to knock out the competitors and to preserve the power of the major oil com- panies. Let me give ~-ou an illustration. Representative CONABLE. One of the greatest dangers. incidentally, I acknowledge at this point is that. all the independents are going to be gobbled up in the process of trying to administer this shortage if such there be. Mr. NADER. And if there is any source of competition for the majors, it has been the independents, 1)0th at. the retail and the refining and producing areas. If von are an independent oil pro- ducer. and you want to get your oil to market, you want to get. to a pipeline. That pipeline is owned b a consortium of majors. It is PAGENO="0188" 182 supposedly regulated by the ICC which has never regulated oil ripe- lines for decades and if that consortium can make your business miserable in terms of not giving you the right time to put your oil into the flow or increasing the price or giving discounts to the owners of the pipeline, they can keep you off the market. That is why economists who have studied this area in the anti- trust context put such a high priority on separating the pipeline. Others put a high priority on separating crude production in re- fining. But I would go further than simply deintegrating vertical integration. I think the companies, the seven large companies, are a kind of shared monopoly and need to be broken up into smaller units to begin with. You know, it often amazes me how with a straight face a Govern- ment official can say that there is information that has to be kept confidential from the American people that the Government gets from the oil industry. I would state that there is no information from the oil industiv that the Government. obtains or will obtain that. should be kept confidential. for several reasons. If it is national security, what are they letting BP and Shell in for? They are for- eign companies. Not to mention the multinational companies. If it is confidentiality, if the Government applied the following rule it would release all the information to the people. That rule should be that the Federal Government will release all information to the American people about Exxon that Texaco knows. They just can apply that standard. Sure. it is a cruel joke to represent. to the public that the oil companies are giving them confidential informa- tion to the public that the oil companies are giving them confidential information on a trade secret justification when they collude through many joint ventures, the American Petroleum Institute and the American Gas Association with that very same information. How can they share it with their trade association and t.hen say: "Well, we will give it to you finally. IT.S. Government. but do not give it to the people because it is a trade secret." Representative COXABLE. As I go down by Main Street back home I get the impression that there is a gas station on every corner and that there is a rather vigorous competition at the retail level and that in fact the American public calls gas stations rather quickly to account when they get outside the pattern of pricing the American public feels is reasonable. Now, how about that? Does not retail competition have the effect of policing the industry to some extent? There may be only seven or eight total oil companies but they cer- tainly are competing for the ultimate American consumer dollar. Mr. NADER. The competition flows from the stick of the independ- ents held over them or when they undercut their prices when they used to get surplus refined petroleum products. I think Mr. Alivine has produced definitive work here, and is going to testify this after- noon. and will he able to reply to that question in great detail. Studies by both the small business committees and FTC and ot.her agencies has been that although there are a lot, of gas stations, that the competition comes from the independent gas station, both de- terrence and actual. rather than between Texaco and Mobil distrib- utors who communicate price levels right at the retail area. That has been shown. They as well. mix each other's branded gasoline. PAGENO="0189" 183 Representative CONABLE. If there is no competition, how do you account for the much lower retail price of gasoline in this country than in the rest of the world? I acknowledge that the rest of the world depends to a much greater degree upon Middle Eastern oil which has had a dramatic increase but for as long as I have been aware of gasoline prices abroad, they have far exceeded ours and I wonder if there is not some element of competition then in the lower American retail price of gasoline. Mr. NADER. Yes. There are several reasons for that. One is the enormous taxation in Europe that comprises their so-called dollar a gallon of gasoline. You have to discount the taxation that in- creases the retail price. Representative CONABLE. Some of them are nationalized distribu- tion systems are they not? Mr. NADER. Yes, but still taxation. But second, Europe is not much of an oil producer, although it is beginning to be in the North Sea. The United States is a very large producer. There are more independents in this country. It is the phenomenon of independents that explains a great deal of the difference, in reply to your question, as well as the phenomenon of much greater taxation by the Euro- pean governments on gasoline. Let me just make one point in this context as a reflection on the sincerity of the oil industry. If the oil industry really wanted to reduce demand, one thing they would do is become crusaders for automobile and usable gasoline station price posting for octane levels. Now, the Cost of Living Council under phase IV requires a particular posting of octane levels but it is on a formula which is not comparable to the information that~ the motorists get on buying their automobiles and looking in the manual. Let me just give you one stunning fact here. If the people were not overbuving in octane, because they were given adequate infor- mation about what their automobile can use, they would be paying as of last summer 5 cents less per gallon of gasoline and there would be far-there would be considerably less pressure on refineries be- cause I think the figure is the following. This comes from Oil Daily. The Oil Daily states that lowering the octane rating by a single number enables oil refiners to produce up to 5 percent more gasoline. Just by a single number. So if all the cars in this country just bought the octane level that is suitable for their car, the refineries could produce a good deal more gasoline. Now, if the oil companies were candid and really sincere, that is where they would put a lot of their emphasis. Representative CONABLE. Thank you. Mr. Chairman. Chairman PROXMIRE. Mr. Nader, thank you very much. You are a marvel. I do not know how you know all of this. It shows what one mind can do when it is not engaged in the kinds of trivia that amuse the rest of us. Thank you very, very much for a fine performance. The subcommittee will stand in recess until 2 :30 this afternoon when it meets with Fred Allvine, Joel Darmstadter, and David Freeman. [Whereupon, at 1 :10 p.m.. the subcornmitt~e recessed, to reconvene at 2 :30 p.m., the same day.] PAGENO="0190" 184 AFTERNOON SESSION Chairman PROXMIRE. The subcommittee will come to order. This afternoon we are very fortunate, we have three really out- standing experts in this field. Mr. Fred Alivine, energy consultant, and specially an expert in the retail area, who has written a book on marketing gasoline: Joel Darmstadter, who is also a distinguished author and expert. He works now in the Resources for the Future. David Freeman is an old friend of the committee. And, of course, he is from the Ford Foundation Energy Policy Project, formerly with the Federal Power Commission. Very happy to have von gentlemen. We will start off with Mr. Freeman. STATEMENT OF DAVID FREEMAN, FORD FOUNDATION ENERGY POLICY PROIE~1~ Mr. FREEMAN. Thank you. I am pleased to be here. In a sense, the situation we find ourselves in today with our lack of information about the operations of the fuels industry is analogous to the situa- tion in the thirties. Chairman PROXMIRE. Let me interrupt to say that we have no copies of your statement. That is understandable because this hearing was called on short notice. I would appreciate it if you could con- fine your remarks to 10 or 15 minutes, then we will have questions. Mr. FREEMAN. Yes, sir. I will be delighted to. The situation today is analogous to the. situation we found our- selves in in the thirties with respect to the utility industry. Then, after a massive investigation by the Federal Trade Commission, there was enacted the Federal Power Act. There was a uniform system of accounts established for the electric utility industry based on pioneering regulatory work in the State of Wisconsin, I might add. We began to get an even and steady flow of public oriented facts about. the electric power industr. Today we need such a fundamental reform with respect to our ability to extract information from the fuels industry: not only extract it but compile it. digest it and make it available to the public in a meaningful way. If one starts in the ground. which is perhaps a pretty good starting place. we find that we don't know what is there. And it is not. just the oil industry that one must point the finger toward. The Federal Government which is the owner of most of the economic fuels left in the ground. turns out. to be a very, very poor store- keeper. We haven't spent the money or taken the effort to find out what the people own, not in the outer continental shelf and not out in the West with respect. to the massive coal resources. We are amaz- ingly deficient in knowledge of the quality and quantity of the fuels that the people of this country own. And when one thinks of the hundreds of billions of dollars that are coming into the Treasury from the sales of the right to ex- ploit these fuels in recent years, and the fact that little of that money is being spent to find out what else we haves we get some idea of the magnitude of the neglect. PAGENO="0191" 185 After we lease the land, which is really a fancy word for selling the mineral rights therein to the oil industry, we as a goverumeat don't have a very good idea of the pace at which those leases are being developed. Our capability for evaluating the development program is meager. The third point I want to make is we are in a situation where a lot of people believe the industry is probably making extraordinary profits, windfall profits. And yet all the years that I was in govern- ment in energy policymaking positions and even today I have been unable to find out the cost of producing oil in the TJiiited States. The Government doesn't know, as far as I can find out, and the public doesn't know whether producing oil in the outer continental shelf or anywhere else costs $2 a barrel, $3 a barrel, or $4 a barrel, or $6 a barrel. We have to guess at what the size of the profit margin is and whether the country needs prices higher or lower than the prices that are in effect in order to provide a reasonable margin to encourage exploration and development. It is maddening in a sense to think that these are resources that the Government. owns, that it sells to the industry, and that we don't even have the. commonsense to extract. conditions t.hat would require the. cost information be made available to the Government and of the people of the country. W~e have no knowledge of the timetables for building refinery capacity in this country. The oil industry has no legal obligation to build refineries. Their legal posture is no different than the grocery business in that respect. They build, if it meets their economic criteria. The country is traveling. I think, without any real understanding. without any real knowledge of whether gasoline shortages will con- tinue in I 9Th and 1976 and 1977. no matter what the ~)I'o(lucing nations (10 about supplying crude. We would have had a gasoline shortage in this coming summer anyhow, and these. shortages are apt to persist indefinitely unless there is some public interest oriented game plan for building refineries. Now I can understand that an oil company might have, questions about going ahead with refinery construction in view of the un- certainty of crude supply. We have to get into the issue in a much more meaningful w-ay than simply a guessing game as to whether the oil industry is going to build or not. WTe have inadequate informa- tion, in my opinion, as to w-hat the oil industry does with the money it receives. And we could go on almost indefinitely in this tale of traveling in the dark as far as policymakers and the public is con- cerned. This is a l)asic fact. about. the industry. I return to my opening comment, Mr. Chairman. I l)elieve the time has come for something much more fundamental than simply filling a gal) here and there in terms of spot items of information that might. be missing to some of this week's dilemma about this industry. I believe that it is time that we have a basic bookkeeping system for the industry that will provide a basis for meaningful informa- tion, that. information be channeled continuously to an agency of governrnent~ with sufficient staff and public interest orientation to digest. the information, make it available to the ~)olicymakers and PAGENO="0192" 186 the general public on a continuous basis, something analogous to the Bureau of Labor Statistics. I thank you, sir. Chairman PROxMIPJ:. Thank you very much. Mr. Darrnstadter. please proceed. STATEMENT OF JOEL DARMSTADTER, RESOURCES FOR THE FUTURE Mr. DARMSTADTER. Thank you, Mr. Chairman. I also have no prepared statement. but I do have some notes. I though I might contribute to a balanced presentation by touching on some of the analytical gaps in our knowledge about energy. This is not because I think the problem of current data reliability is unimportant but because some of the broader aspects of energy information deserve airing. One way of exposing or illustrating the deficiencies in the energy data-base is to cite some of the more incessant questions being asked by people trying to understand the dimensions of the current energy crisis and policies designed to deal with it. Of course, our hasic data system shouldn't be unduly governed by random. if precipitous~ events llke the Arab embargo. This could drive us paranoid: on the other hand, some of the quantitative questions being asked in connection with the current oil crisis may well have a more enduring importance~ so that by using the current problems in energy as a jumping off point needn't be an exclusively short-term reflex. One question being asked these days is just what is the disposition of energy utilization in the Inited States? After all, if we are ex- horted to reduce thermostat settings. to drive more slowly, and to dim lights, it would be of more than casual interest-to policy- makers and others-to know just what the quantitative importance of these components of energy use in the Fnited States is. (It turns out, incidentally, that household lighting is probably a very minor fraction if residential energy use. let alone the national total.) I don't dispute the demonstration value of exhortations with respect even to insi~nifieant energy sources. But I do think that a far more discreet st~tistic~l l)reakdown of F.S. energy usage would be most desirable. The raw materials for such a system in the form of census and other data-are probably there. But so far the Bureau of Mines has contented itself with exceedingly broad and aggregate sectoral statistics, and only a one-time study commissioned by the Office of Science and Technology a couple of years ago made any sort of a start toward development of a detailed statistical picture of energy consumption in the Fnited States. Another area is foreign trade statistics. Just what is our depend- ence on Arab oil ? There is really a lot of guesswork about this. Much ~Aral) oil reaches us indirectly through European and WTest Indian refineries, and given the logistical ingenuity of the oil com- panies at diverting. rerouting and whatever else is being done, much information simply is not captured by statistical data. More specific origin-and-destination data and more comprehensive information PAGENO="0193" 187 about foreign operations of oil companies in general would be most constructive. The third point, is that we know next to nothing about regional energy uses and requirements. I have myself tried for the past year or so to look at the total energy picture in a large metropolitan area-in this case New York City and its environs-and here, except for gas and electric utility data, there is virtually a total void in our quantitative knowledge about energy. The interest in this kind of information is apt to be more than transitory. It impinges on such questions as pollution and emissions from different energy uses, the private-public transport mix, and saturation of energy using appliances in the region. WTe, would gain considerable insight into the potentiality for further energy demand growth. for powerplant siting requirements and numerous other questions of essentially a regional nature. Today, we simply don't have adequate regional energy data, and there is too much guesswork about such issues as the regional im- pacts of shortages. fuel and pow-er. In other words, I'm calling for the kind of information needed for a much more enlightened policy- making on a subnational level. What I have given you so far are examples of mobilizing essen- tially raw data which would be useful even without a great deal of further analytical transformation. As we get into things that have a more analytical cast, the following topics come to mind. There is obviously intense interest right now in the employment and industrial impacts of energy shortfalls. This is the kind of question that seems to point to interindustry-input-output-analy- sis, except we need much more discreet information than the stand- ard 1-0 coefficients now available. We need to translate the dollar information in input-output tables into physical flow-s. We need to know much more about w-hat goes on within specific cells of the input-output matrix of interindustry purchases and deliveries. In particular industrial establishments there may be far more potential for saving on energy utilization when the energy is used for space heating than when it is required for an electrolytic manufacturing processes. The aggregation of our interindustry matrix is simply too gross to permit us to identify such distinguishing characteristics. But. w-ithout. the information im- pact analysis and allocative decisions are hampered. The scope for substitutability betw-een scarce and abundant fuels in particular industry groups is another property which standard I-U tables fail to disclose. Ohvioush-. this calls for an exceedingly high degree of disaggregation and I have given no thought to the cost-benefit limits to a substantially expanded input-output effort yielding more detailed information. Again. however, the intense longer-term interest in energy conservation, self-sufficiency and re- source management points to an energy slanted input-output effort as probably warranting a pretty close look. Another analytical tack that need~ to be 1)ur~uecl is the question of the demand response to rising energy prices-especially for elec- tricity and gasoline. Once again this has topical as well as longer run importance. As you know our whole experience has been with 37-143 0 - 74 - 13 PAGENO="0194" 188 low and falling real fuel and power prices in the United States and the little bit of economic work done to date has necessarily been constrained by data cast within this historical setting of abundance and low costs. Clearly much work is needed in this area for facing up to public policy questions. Then, finally, there is the ever-present question of the utility or futility of energy projections. I do believe that an ongoing and systematic effort at short- and long-term forecasting would be most desirable. These kinds of projections should embody the best explicit demand and supply response to price that can be developed. On the supply side, particularly, this would quickly expose prob- lems connected with the systematic development and standardization of reserve and resource concepts-statistics which Mr. Freeman has alluded to. I will be glad, Mr. Chairman. to get into other questions that may be of interest to the subcommittee later on. Thank you. Chairman PRox~rrnF. Thank you very much. Mr. Alivine. please proceed. STATEMENT OF FRED ALLVINI, ENERGY CONSULTANT Mr. ALLVINE. I would like to talk about my general reactions to what I heard this morning and, I think, some real salient, questions that need to be considered. First of all. I think that Energy Czar Simon and Consumer Ad- vocate Ralph Nadar asked more questions than they answered, and I think many of us. me included, are getting bogged down in a quagmire of industry statistics. I don't really know how short we are and I think that is one of the real reasons for additional informatioi~. I endorse generally the nature of the statistics that were suggested by William Simon. I would point out, however, that industry has historically fought every effort. to provide the Government with the type of statistics which are being asked for today. This was to keep the Government from becoming too involved in industry activities leading to perhaps to more. control. I had calls from Government agencies within the last year asking me if I couldn't. do something to get industry to cooperate more in the. statistical area. With that setting I would like to point, out though that I don't think too much should be made of statistics because statistics will not solve any problems and we can be misled and direct our atten- tions in the wrong way. There are some real significant questions we need to get into. For example. this past week an oil company released information about. the condition of inventories. This information was almost meaningless. It. didn't really help the public to understand and corn- prehend anything. You don't sell from fundamentally inventory, von sell from production. If they told the public what they planned to produce in February, March. and April. then the public would have some idea where we really stand with regard to shortage. So I think the public can be misled by the presentation of a great deal of mumbo-jumbo statistics which don't lead to any direction. PAGENO="0195" 189 I would like to move on to what I think is really the issue before Congress, and the issue before Congress is that we don't funda- mentally have any petroleum policy in the United States. You have along with other Senators delegated some responsibilities and now are considering an energy bill to delegate more responsibilities to the White House to make decisions that I think are your responsi- bilities and I would like to be more specific about the areas where I think Congress needs to look very carefully where we have come from and where we want to go in the future. I don't think neces- sarily that today the interest of the international oil companies with great influence at the White House are necessarily those that co- incide with t.he general public interests. Let's take one thing, for example. The foreign tax credit. The foreign tax credit as I understand it is working out today is robbing the Treasury. It has resulted in international countries swooping in and taking the tax dollars that these international organizations would otherwise be paying to our Treasury from investments in the United States. This is going over to the Middle East. What we are doing with the foreign tax credit as it exists, they were subsidizing the Middle Eastern development of oil and that oil is being em- bargoed against the United States. I think if the public recognized what this tax policy was doing there would be a public outcry. So I hope you and others will look at tax policy and particularly the foreign tax credit. Once when foreign oil was low there was justi- fication. It is contrary to our own national interest. And while you are looking at that, look at the depletion allowance. Already there has been a break in the dike. Atlantic Richfield has come forward and advocated it be eliminated, prices be allowed to increase and it would be a natural way to cut back on some of the demand. No longer are energy resources cheap. What we need to do is let the prices go naturally, quit subsidizing the price of the petroleum and other fuels, let the price rise and let that curtail demand. Let me move on to one other area where I hope that you will commence to look in terms of broader energy policy, not just a question of information but energy policy, petroleum policy. Right now it is your interest to get on with the job of developing indige- nous petroleum reserves. We need to improve our resource base in this country, particularly in crude oil and natural gas. If we look at the policy coming out of the White House now delegated to them we can look at the leasing of offshore land for development. That is where our future lies, as Bill Simon told us this morning, and what policy is being advocated? We have a bonus bidding system which is driving up the cost, increasing the prices and really dis- couraging exploration and development in the ITnited States. Fur- thermore, it is a policy that has been advocated by some of the giants of the petroleum industry to keep the little smaller producers out of this vast. new recourse. What we need to do is have an energy policy which is set up which is uniquely American which will get on with the job of developing our own petroleum resources. And the bidding system is not one to drive up the cost. it is forcing the two- tier price structure to occur in the United States and reducing the profitabiTity and necessitating increased cost. and I think this is another aspect of policy that has to be looked into. PAGENO="0196" 190 Then we go into some other things. This morning Bill Simon was telling you that we have price controls. That is so much malarkey. We don't have price controls in the country. Only at least 50 percent of the production. That. is a smoke screen. I don't care what anyone says. We have to come up with a two-tier price structure.. The best thing the Government got out of the price control, two-tiering, all of this business with regard to trying to regulate petroleum prices. I think what we need to do is let the prices go and use some sort of tax base for seeing that. unfair return is not brought to the industry, but I think everyone has to recognize industry needs. It may be wrong for me to say increase profitability to get on with the job. It. comes to the final question you raised this morning, what do you advocate? You advocate a policy nationalism, you advocate a policy of public utility approach, or do you advocate a policy of free enterprise or antitrust enforcement? I think I side with you, Senator. Maybe I am ideal but what I would like to see is more competition in the industry. `With government interference, look what. happens when government, becomes involved in policy. It is subverted to the interest, of the powerful few, and what I would like to see is a change made in the industry which will help to restore. the competitive process so that profits are used to develop the U.S. resource base.. Thank you. Chairman PRox~rIRE. Thank you, Mr. Aflvine. These are cer- tainly stimulating viewpoints. This morning Mr. Simon stressed the inevitability of a fuel price rise. He feels apparently there. is a limit, on what. the Government can do to limit price increases, and Mr. Ailvine certainly under- lined that. with his observation that we have just heard, even though the Economic Stabilization Act provides a very broad price control authority. I would like to get. your reaction to the following point. First, what is the price increase needed in the long run in order to bring forth fuel supplies from new sources such as shale oil or coal gasification? Mr. Simon has zeroed in on $7 per barrel of crude oil, yet he also indicated that. it may be possible to produce oil from shale cheaper than that. Do we have the data necessary to know what the various types of new production might. cost. us? Mr. FREEMAN. No. sir, we don't. My testimony this afternoon represents just my personal views on these matters. I happen to l)elieve that we need a rollback ~ prices rather tha.n further increases. The price of new crude oil in the United States is SlO a barrel. Tt is too high in my opinion, much too high, and T happen to believe that. consumers of this country are paying much too much for oil today. The price increases that have been allowed in the last couple of months bear no relationship to the cost as far as I have been able to find out. A dollar a barrel increase, on crude oil that. was authorized, in fact. suggested by the White. House just before Christmas, amounts to approximately PAGENO="0197" 191 $3 billion a year in my gasoline bill and your gasoline bill and everyone else's. This is on crude oil that has been discovered long ago, and as far as I know the price of producing that oil didn't go up a penny over the Christmas holidays. Chairman PROXMIRE. Mr. Simon argued secondary and tertiary development might be influenced by an increased price at the established wells. Mr. FREEMAN. It is my judgment if you want to get secondary and tertiary recovery that you don't have to pay the $7-$8 a barrel on all of the oil that is already flowing. Let's develop a very sharp tax incentive, a depletion allowance that would apply to the secondary and tertiary recovery in an amount needed to make up the difference in cost. The idea of permitting a very high price on all of the oil flowing just to get another 5 or 10 percent strikes me as a very bad bargain for the consumer. I would like to know what the costs are so that we can have prices that will permit a generous return, not an extraordinary return. This is a multibillion- dollar issue for the American people that needs to be debated and not decided on the basis of ignorance about what the facts are. As far as what price is needed to encourage the development of aletrnat.ives, I don't believe there is anyone in t.his country that knows for sure today because most of the questionmarks about the shale, for example, are about the environmental impacts. We have to build a demonstration plant, in my opinion, and get some hard data to find out. I worked in the White House Office of Science and Technology for years evaluating these new technologies. They all looked fairly attractive on paper, but without exception they become much more expensive and very difficult when you try to implement them, I don't think that fixing today's prices for oil and gas discovered years ago on the basis of some guess as to what the market might require for bringing in new alternative sources is a very good bargain for the American consumer. Chairman PROXMIRE. Mr. Alivine, you came down hard on the side of relying on the market. to do the job and competition to do it. Do you feel that we can dispense with price controls now or we need a short-term transition at. least while we~ Mr. ALLVINE. I think all we are maintaining. Se.nator, is a facade of price control. T don't think we have price control. Chairman PROXMIRE. You said we have price controls on 50 per- cent and not on the other 50 percent.. Mr. ALLVINE. On the ot.her 50 percent. they boost. that. to whatever is needed to make up the difference. They have a passthrough so they can take their transportation differences and now make one~ Chairman PRox~rIRE. Are you arguing the best policy would be to eliminate the price controls? Mr. AJ.~LvINE. I truthfully think the more and longer the Gov- ernment fiddles with measures like this the w-orse the. situation is going to be. I would be very much opposed to the suggestion of Mr. Freeman and Ralph Nader. we roll back prices. We. will have a hell of a shortage in the TThited States. Maybe we should go to the excess profit tax if we get to playing around with the price PAGENO="0198" 192 mechanism and you have to realize that I am opposed to how we got into the shortage to begin with. I don't think it was a natural phenomenon. I think it was encouraged in part by business and Government, oversight. Chairman PROXMIRE. What would happen to prices if we followed your advice and took off price control entirely? Mr. ALLVIXE. I would really be surprised if we took off price controls on the other 50 percent to see much happen to prices. The rate of return might go up. I would be surprised to see the overall average price of crude oil go up any higher than it will anYway. It. is going to happen. Whatever is needed to accomplish the goals of increased exploration of producing to give the petro- leum companies the capital flows necessary for them to restruct.ure their industv is going to take place. we don't have any control. Chairman PJiOXMIRE. The. point Mr. Xader and the point t.hat seems to have validity is that a strong element. of competition did help hold down prices, and that. was from the independents, the independent marketers, independent, refiners. They have been squeezed out. To a considerable extent the.y are pretty much at the mercy of the majors for the crude in the case of refiners and for their products in the case of the marketers. You really feel under present circumstances with the limitation on imports that we have, because of the embargo. if you took off price controls now that prices wouldn't go much higher? Mr. ALLVIXE. Senator, as you know, I am very concerned about the position of the independent refiners and marketers and their being squeezed and many are being murdered at this particular point in time. We also have the other problem here of improving our domestic energy base and we have to have adequate incentive to accomplish. One thing I don't want to do is destroy another. What I would do in your information bill and what I had in my statement and forgot to mention, one bit of information should be forced out. I doubt it will come forward, and that is rate of return on down stream refining and marketing O1)erations. That is how they squeeze the independent. They are subsidizing this end of the competition to squeeze the major source of private competition. T would hope one thing in the information bill, it would have to l)reak out the super secret information about how they subsidized downstream refiners and artificially squeeze by administering the- Chairman PROXMIRE. Do von think the information can do it or do you think we have to reduce the integrated power. Congressman Conable pointed out this morning if we eliminated integration there might be an increase in cost. But, on the other hand, if you eliminate integration you would have, a. greater degree of strengths on the part of the independent refiners, you wouldn't be at the mercy of the situation. As I understand it. the way the oil com- panies operate they can charge themselves whatever price they wish, of course. so they charge themselves a nice high price for the product they sell to their refinery that increases the value of their depletion allowance, also discourages any refinery competition. and narrows the margin for the refiners. As long as you have vertical integration they will have the power and incentive to do this. PAGENO="0199" 193 Therefore, should you have to have the Anti-Trust Division break it up the way they did in the shoe industry, break up vertical integration? Mr. ALLVINE. Your first question is would it be more efficient if we had an industry that wouldn't. vertically be integrated? I would argue it would be more efficient, not. Chairman PROXMIRE. More efficient to have- Mr. ALLVINE. Because of the wasting. Do not result in the proper allocation of resources. The second point you raise is with regard to. do we have to have divesture~ and there are two types of divestures. Fiscal divesture where we lop off crude oil. We have functional divesture where we require clearcut separation in an accounting type of sense so we can see what is taking place~ and the lesser of the problems would be bringing that functional divorcement in the accounting system so we actually see where they would st.and and it would be difficult for them to come forward and say we need another dollar a barrel increase. If they had another dollar why are you holding-that exerts pressure back on them now. What I think structurally is needed but I don't doubt if we will ever see separation of crude oil from downstream activities severed, cut off. Make them separate industry. This indus- try unlike the metal industry, film, is integrated, which leads right on through to the gas pump. That is where we are getting many of the problems today. That is why we have four times as many service stations as we need in the United States. We are getting all of the. disfunctions coming out. The public has not prospered under this. So I t.hink we can do it functionally or physically. If there is not enough guts for some- one in Government to stand up and make the oil companies report earnings on the market, earnings on distribution, then we might as well go all the way to get a resource base restored in t.he United States so we are not. subservient to some middle eastern sheik and let. the downstream restructuring and let the market systems cave in. Chairman PRox~rmE. I would like your comment, Mr. Darni- stadter, on what your colleagues have said and also whether you think the profits must go much higher than presently in prospect to fund their necessary investment. Just how much more resource and oil exploration can he physically conducted? Mr. DARMSTADTER. I'll limit, myself to the following observation. An important distinction has to be made. between, on the one hand, the short-term Price of oil which the scrambling among consumers is now driving to unreasonably high levels, and, on the other, the long-term cost of now reserve development, and greater producible supplies of oil and gas in the United States. There is no question that. some of the current market prices for new oil are probably in substantial excess of a long-run equilibrium price which would elicit a far greater degree of indigenous petro- leum producing capability in the United States. The point, is that the flow of oil resulting from development of additional reserves in the United States inevitably is going to take a. matter of years. so that there has to be some mechanism by which producers are PAGENO="0200" 194 assured of a satisfactory level of return and adequate price over the long run-inducing them to undertake the development of these new reserves-without at. the same time generating enormous wind- fall profits over the short run for flowing oil. But I offer no par- ticular judgments about the specific policies that are most. conducive to performing the degree of fine tuning that is here needed. Chairman PROXMIRE. A policy developed without getting gov- ernment in it is pretty massive, and complicated. Mr. DARMSTADTER. Pardon me. Chairman PR0XMIRE. What. you are asking we do is to provide an assurance. to the oil compaines sufficient to warrant their invest- ment. that the price will be adequate to give them good return over a. period of years but at the same time not an excessive price in the. short term which is unnecssarv? Mr. DARMSTADTER. That. is right. Chairman PROXMTRE. And give them a short-term windfall. Mr. DARMSTADTER. Xes. sir. Chairman PROXMIRE. How do you design t.hat. kind of thing without. squeezing out of the free market.? It is prett.y hard to do. Mr. DARMSTADTER. I really don't. know. There are suggestions about coupling some of the benefits of higher prices with variable scaled excess profit. taxes. I don't. know whether the. proposal that originally appeared in the. Senate bill in December was the ideal approach or not. There are additional proposals for coupling the retention, if it is to be retained, of the depletion allowance with a. willingness by the companies to plow back funds into develop- ment of new reserves. There is the additional necessity for simply trying to determine what is actually the long-term equilibrium price that will elicit the quantities that will achieve some reasonable degree of self-sufficiency for the Tjnited States over the long run, and there I agree with Mr. Freeman that we are confronted with an enormous amount. of uncertainty. Yet I should point out. that. on the basis of some speculative. but. at the. sa.me time fairly serious research work that we have done. at Resources for the Fut.ure over the last. several years. it does appear that an equilibrium price-in today's price level-of something like ~7 a. barrel of oil in the long run approximates the level needed to elicit substantial increases in the. development of new reserves of oil in the United States. It also appears. subject to the qualifications that Mr. Freeman introduced about. our uncertainty about the environmental constraints on oil shale and doubts about whether this technlogv is going to work or not, that. the price of oil from shale is likely also to find itself hovering around this price of $6.50 or $7 a barrel of oil. These are not. too far from the figures that come from Mr. Simon's office. Another kind of safeguard that. has to be reviewed in turning these prospects into reality is some assurance about. future U.S. oil iml)ort policies. We know that the price of imported oil currenfly arriving in the United States is perhaps $9 a barrel. It is vastly in excess of what it costs to produce expending quantities of oil in the major producing oil regions of the Middle East. and North Africa. There is no assurance that. if we. embark on a serious and substantial effort to increase our self-sufficiency by exploration, development PAGENO="0201" 195 and produceabilit.y of reserves in the. TTnitecl States, that t.he domes- tic price, will Dot be. undercut by foreign producing countries once electing to reeenter the. US. market. on a very substantial scale. So I think that if we. expect. American companies to divert their exploratoiv and developmental activity from elsewhere in the world back to the. United States there. has to be some mechanism that assures them of a reasonable protection from foreign competition in the future. Chairman PR0xMIRE. Mv time is up. Congressman Conable has permitted me. to let Mr. Freema.n reply too. Mr. FREEMAN. Mr. Chairman, I would lust like to add this thought. 1 don't believe that it. is possible to eliminate the Federal Government. from very deep involvement in the future of our energy supply and demand situation. Most of the remaining oil and gas that. is economical to be found is on Federal land and the supply for the future is going to come from a mixture of price, and environ- mental acceptance. It. seems to me that it is just. misleading to continue to talk about. whether it. takes $7 or or $9 to bring in our future energy supply. It is going to take a lot more than money. It. is going to take a. combination of governmental and private enterprise working together. There are a couple of specific. suggestions that might do as much good as throwing money to the. oil industry. One is to use the Federal Government's very large need to puwliase. oil by the Defense Department. and others. WTe could use our purchasing some synthetic oil, see what. the oil industry would (10 in terms of power and take bids for say 50.000 barrels a (lay of shale oil or responding to potential bidding in the Defense Department. The bids should include. an environmental protection plan and permit Russell Train, head of the Environmental Protection Agency, to review- the bids. If we get satisfactory bidding we could go forward at. whatever the lowest hid is audi move into developing the shale industry or synthetic oil industry rather than simply raising the price of the existing oil and hoping that. it might happen. A second suggestion is that if we changed our leasing policy so that the Government would share in the profits. so that. we. had some sort of royalty bidding system where the Government got a large. percentage of this higher price, then there wouldn't be quite. as much concern about the prices going up. Only in America. do we sell our resources in the. ground at. a very low piic' and sit back and let the price. go up and let. the profits simply go to the 1ndustrv that is exploiting it. We should have a leasiiiit system that gives the Government a very high percentage of these profits so that. as the prices go up we don't have this problem of windfall profits. Chairma ii PIuOXMIRE. Congressman Conahie. Representative Cox~\ruLE. Thank `von. i\[r. Cha uiiiaui. Gentlemen, it has been very interesting this afternoon listening to von. Mr. Alivine, with all clue respect. you characterized the witnesses this morning as asking more. questions than they answered, and I have the feeling that von have done the same thing. ~fr. AILVIXE. 7robably. PAGENO="0202" 196 Representative CONABLE. I noted down three things, for instance, about which I have some questions. You deplore.d our handling of these, and one of them had to do wit.h the foreign tax credit. It seems to me quite unlikely that a foreign government would let us take a bigger tax bite out of the product of their particular baliwick, that they would in all prob- abilit.y compete with us for that. We also have the serious problem of- Mr. ALLVINE. Can I answer your question? Representative CONABLE. I haven't asked the question yet. We also have a serious problem of what we do with multinationals of other countries which, of course, are included among the oil multinationals, and it has always seemed to me this was an important part of the incentive for the way we handle our foreign tax credit, it is an important part of the incentive for exploring for oil in ot.her parts of t.he world, in the Middle East.. Now, that. altogether constitutes a question, I guess. I am not arguing with you about the foreign tax credit because I don't pre- tend to he an expert on it. but. what would you substitute for the foreign tax credit were you to eliminate it? It has been suggested we go to a deduction, for instance, instead of a credit. Mr. ATJLVINE. Congressman. I don't oppose a legitimate foreign tax credit. This has been manipulated fa.r beyond any legitimacy. What they have done, they have t.wo prices. They have a posted tax price and they have, a real price. Now if they taxed on the real price. I have no problem with it because the tax rate wouldn't be too different from what t.hey have in the United States a.nd what we have in the. foreign countries. WThat they do is, they developed back in the 1950's some sort. of mechanism to artificially balloon the tax payment so it goes up 70. 80. 90 percent. and t.hey apply the difference, 80 percent. as opposed to 50 percent in the United States, and they swoop over and apply that artificial ballooned foreign tax credit. against so you would believe- Representative CONABLE. Is this conversion of royalty? Mr. AI~vTxE. it is the way in which the foreign tax c.redit has been manipulated. Would von believe that these major oil com- panies on their domestic efforts are paying fundamentally no tax to the IT.S. Government on their earnings and all that tax is being diverted right out of our Treasury right over to the Middle East. It takes a lot of gall for those countries to do that.. Legitimate foreign tax credit. is one thing. All legitimacy has been swooped away from it. I think we have every right in the world to say that we are riot, going to let. earnings on dollars invested in the United States go to the foreign treasuries, and that. is in essence what we have today. Representative CONABLE. Is what you are saying limited to the oil industry? Mr. ALLVTNE. As far as I know they are t.he ones t.hat have manipulated this system to divert its purposes and it has been diverted very badly. Representative CONABLE. That is very interesting and I am glad you have cleared that up for me. PAGENO="0203" 197 The second issue is the depletion allowance. I have a feeling, although I may be wrong, that the companies that benefit from the depletion allowance, at least relative to their total income, are for the most part the small independents and the wildcatters and so forth, and that it was quite appropriate for ARCO to suggest we do away with the allowance for depletion because the heavy international oil companies would come in in pretty good shape and if we were to eliminate the depletion allowance it would substan- tially result in a decrease in competition in the industry. Am I wrong about that? Mr. ALLVINE. Congressman, I hate to go against you again. I think the facts are to the contrary. Representative CONABLE. Please, this is the purpose of a hearing, to try to instruct the Members of Congress present. Mr. ALLVINE. That the independents have smaller producing wells, the higher cost wells and they have not historically been able to take full advantage of the depletion allowance. It. is the large com- panies with the big producing wells that have historically taken the near maximum advantage of the depletion allowance. R.epresentative CONABLE. Aren't a great many of our small com- panies surviving primarily by virtue of their tax incentives rather than their power, their economic power? Mr. ALLVINE. I think the point that we are raising is not going to be answered there. I think it needs to be looked into and my proposition would be that the depletion allowance is more advan- tageous to the large petroleum companies with t.he. high producing wells and lower cost wells and less advantageous to the independent small producers and particularly the strippers. The strippers don't enjoy much of a depletion allowance. Representative CONABLE. Well, perhaps you have straightened that out for me. I am not sure. I think there may very well be a greater economic advantage expressed numerically for the big oil industries here but I think t.here also is a serious question of competitive survival involving the smaller ones. I may be incorrect on t.hat but I accept the general outlines of your statement. What about bonus bidding. what are you going to suggest in lieu of that? You are perhaps suggesting a. royalty arrangement such as~ Mr. ALLVIXE. I won't go as far as Mr. Freeman. Representative CONABLE. I want to raise questions because I can just imagine, the outcry t.hat would go up for giveaways were we not to have bidding on offshore oil. Actually, we have, a deficit coming up this year of possibly $4 billion instead of $8 billion because of the revenue t.hat has been derived from the sale of off- shore oil leases and it has been a one-shot deal, to he sure. but if the public were to t.hink that the oil companies could get something worth $4 billion to them, without having to bid on it., I am sure there would be some political repercussion involved. Mr. ALLVINE. Well, we haven't got it vet. The. money that they paid the United States, from $2.5 to $4 billion, is paid for by the citizens in terms of higher prices. Don't feel sorry for yourself from tha.t. standpoint. If we brought in oil at low cost, if we don't have PAGENO="0204" 198 the enormous bonus bidding system. if we. had a reasonable tax structure. I think it is enough to let. Fncle. Sam take 50 percent off the profitabIlity of the oil earnings. I would rather have that. any day over the long run than I would the money that. would rise and assure. the. destruction be dominated over the long run by the giants in t.he industry. Representative C~x.\1iLE. That is to me the dilemma about this. However, offshore oil is very expensive to develop in any event and I have serious questions whether von are going to get the small peo- ple to Particil)ate in that. We have had a very difficult time keeping together a consortium that would include some small interests with respect to the Alaska pipeline. Mr. ALLVTNF. Congressman. over the long run the only ones that can afford the big bonus bids are those companies that are going to eventually, and I say eventually, when Government gets out of price control. as it will after it gets things screwed up so badly, you are going to have one price, when von have one price~ only one, that is going to afford, when the long run equilibrium to pay the high prices are the giants of industry that. will get the windfall from ex- istmg cru(le oil. an(l that is the way it is going to shake out. in the long run. These peolle that get their neck out and are getting $8, $9, Sb for new oil, wait until equilibrium sets in. They are not getting the 510 price and oil industry giants are going to take over the oil. It is not working to the benefit of the competition to have~ a~ bonus bidding system. Representative C(x.\T~LT.:. Well. thank von for further clarifying those points. As von cail see. T did have some questions. You are an expert on (listribution. T wonder if von would instruct us a little about price elasticity. Mr. Simon's whole position seems to be based on the assuhlI1)tion there is appreciable price elasticity in the tlistri- bution of gasoline. Mr. Nader said that there was virtually none. Certainly, if there is virtually more, we are not going to accomplish much by increasing the cost or permitting the cost of gasoline to in- crease. ~o. what is your view as an expert on distribution? Mr. ALTvlx-}:. I would rather defer to someone else. Representative C rc.~m~v. Really: whoever wishes. Mr. Ti\m~rs'r.\nTni. Chances are that both Mr. Nader and Mr. Simon, iii their divergent views on this matter, are. to misquote Mark Twain, exercising or indulging in a vast amount of conjecture on the basis of a small investment in facts-the point being that there is really very little hard information available. about the re- sponse of users to high prices in the case of automotive fuels and electricity. There have been a nuniber of studies and Mr. Freeman is directing some of these in connection with his energy policy project for the Ford Foundation and. hopefully, some of the work now being done will elicit more information audi insight into the question of elasticity. The data going into these studies--to which the results ultimately are sensitive-are based on historic experience iii which prices have fallen : there is no certainty at all that users are going to respond s\~mmetricahly to rising prices as they did when stimulated by falling prices iti the past. Another deficiency arises because we have to use cross setioual data. Investigators look at State A, State PAGENO="0205" 199 B. compare the retail l)riceS for gasoline at the pump between those luris(lictions and look at the quantity sold and somehow contrive their assessments of predicted elasticities from this kind of tenuous statistical base. Representative CONABLE. It seems apparent to me that you are going to have ranges in elasticity of demand depending on regional circumstances, the availability of alternative modes of transporta- tion? Mr. DARMSTADTER. That is right. Representative CONABLE. And yet it must be possible to predict some sort of a generalized rule of thumb. Mr. DARMSTADTER. To some extent the regional variatiomis in trans- port modes already reflect~ circumstances enablving us to speculate on likely impacts. In a region like New York City-where prices tend to be higher than surrounding jurisdictions-there is already a far more l)ervasive utilization of public transport relative to pri- vately owned automobiles thaii elsewhere, so that if prices of gaso- line rise further in New York City, the chances are that you are not going to get much of an additional diversion away to other forms of transport. My own judgment. Congressman. is that in the short run it would probably take a really large increase in the price of gasoline to cur- tail demand significantly. Over a period of ears, as allow for the possibility of more attractive alternatives in transport and for the acquisition of more efficient automobiles, you will no doubt get a more positive (lownw-ard response. Representative COXABLE. Mr. Darmstadter, you eXl)ressed some concern we know so little about the profitability and some of the other aspects of the oil incliustry. Isn't this true of almost every in- dustry in the [~nited States, and is your concern about this based on the assumption that we will have a great deal more Government reg- ulation and therefore it is essential that it be better informed. Gen- erally speaking. we haven't worried much about ~)rofltabihty, we have instead worried about appropriate taxing of profits and have allowed competition to do the regulating. and from that have as- sumned that we didn't~ need to know a great deal about the detailed functioning of the industry, and I assume that what. you are saying, when you say we need to know a great (Teal more about the oil in- dustry, that ou are assuming that the Government will be in fact involved to such a degree that unless its regulation is informed and wise it will be more disruptive than helpful is that correct Mr. D~uIt~rs'rADTER. Without (lodging your question. I believe it w-as Mr. Freeman who was speaking about the lack of knowledge about the profitability of the industry. Representative COXABLE. I think you all are talking about the same thing to a certain degree. Mr. D.uinus'i'An'rInu. Let me get~ in the following thought. which may be somewhat irrelevant, before deferring to him. I often have the feeling that we know not much more about other ifl(lulstries than we do about the oil industry. but soimiehmow, the oil industry is cur- rently having to take it on the chin a bit unfairly. We tend very often to question the validity of information from the oil industry PAGENO="0206" 200 because it is descrbied as reflecting a vohintary or cooperative sub- mission of information. But much information to the Government about American industries rests on vohintary furnishing of data and in formation through trade associations or companies. Of course, some census-type information is mandated as a result of legislation and here I)enalties are imposed if there is no compliance. Perhaps more oil industry data should fall into this category. But a blanket condemnation of voluntarily furnished data seems to me unwar- ranted. Mr. FREEMAN. The short answer is. yes. We are finding out that energy is indeed the lifeblood of modern society. that it is the one shortage that we cannot tolerate, that the industry was correct when it said a country that runs on oil can't afford to run short, and that it is an industry affected with the public interest. An oil refinery is just as important to America as electric powerplants. and, as a mat- ter of fact, electric powerplants are not going to be able to run very well if they don't have fuel to burn in them. We have had decades where the oil industry delivered the goods without question and we didn't as a nation feel we needed to know quite so much about their operation as we do now. Representative CONABLE. If I could interrupt I think it was you who mentioned a long period of neglect. You can say the same thing. the Government for a long time neglected the Rockefeller children. Neglect is a function of need to a certain extent and, of course, we haven't had that: the Rockefeller children didn't have Se- rious need so we haven't had serious need to develop all of these which now we suddently are finding ourselves short of. So it isn't neglect unless you need it and perhaps we have needed it longer than we realized, but I somehow bristled a little at the characteriza- tion of neglect with respect to the development of this information largely involving higher cost production than what was so readily available and so taken for granted by us. Mr. FREEMAN. I use the word "neglect" in the sense of lack of foresight. perhaps speaking about myself as much as anyone. I was in Government many of these years. We did try to get some of this information in the past. I don't think that the Government com- pletely neglected the oil industry. We maintained an oil import quota for 14 years to protect them against price competition from foreign oil. We maintained the Connally Hot Oil Act to give a Fed- eral sanction to proration and production controls in Texas and Louisiana and we maintained the depletion allowance for all these years. So neglect was not complete. We also, I might add, main- tained price controls over natural gas all those years. So there were a number of governmental interventions but we never were able to get the attention of the poeple at the top to extract from the petro- lenin industry information on costs and some vital information that I think is highly relevant to the policy then and more relevant today. Chariman PROXMIRE. Mr. Freeman. this morning we had a collo- quv with Mr. Simon about how high the price at the gas pump is going to go. It is now averaging say 44 cents, roughly. And at one time his office did indicate that they thought it might go to 55 cents. PAGENO="0207" 201 This morning he indicated he didn't know to how high it would go; eventually it might go higher than that. What is your expectation about the price of gasoline given the present attitude of the Energy Office and the economic factors in- volved, and how high do you think it should go in order to do the job of providing additional incentive for production and so forth? Mr. FREEMAN. I am reluctant to join ghe crowd of predicting higher and higher prices because I am a great believer in the projec- tions being the father of the event. It seems to me that all this talk about gasoline prices at some astronomical levels permits people to overlook the fact that every penny that it goes up on the pump is a billion dollars of additional revenue coming out of the consumers' pockets and moving into the oil industries cash flow. A person in a position that I am in, based on my experience over the years, doesn't lightly begin to talk about the kind of numbers that are being ban- died about. My own feeling on the basis of the costs and the cash flow needed for the industry is that. we ought to be talking more in terms of rolling back the price than in terms of further increases. Chairman PROXMIRE. With that in mind what kind of policies should the Government adopt? Mr. Alivine has takeii the position, as I understand it, that we ought to get out of price controls. We only have 50 percent control now. He says it is not working, and I think we can make a st.rong case on the basis of what has happened to the price recently. What do you think we ought to do? Mr. FREEMAN. It seems to me we ought to start enforcing the thrust of the Economic Stabilization Act in controlling prices. I think just because price control administrators are not terribly en- thusiastic about their jobs is no reason to change the policy. Chairman PROXMIRE. Do you think we can do that if at the same time we can combine it with export controls? We will need that, of course. Mr. FREEMAN. It seems to me either an export. control or export tax such as the Canadians have that places a tax on domestic oil in an amount of the difference between our price and the world market price. The Candians can do it, why can't we do it? Chairman PROXMIRE. If you hold the price down you lose one of the elements in discouraging consumption. discouraging demand, do you have to have rationing? Mr. FREEMAN. I believe we need gasoline rationing today and that is the only item that we need to ration. I don't. believe the way to ration gasoline is through the price structure. The short-term elastic- ity is too small to make that anything other than a very mean and cruel type of rationing system for the working poor and the people in the lower income groups. I am not opposed to, in fact. I would favor, a tax on gasoline to develop a mass transit. system in this country. I am not opposed to Congress raising the price of gasoline through the tax laws to raise money for t.hings that. need to be done in this country. It seems to me though until we get. some more facts to prove to the contrary t.hat. the cash flow of the petroleum indus- try, whose profits increased 50 percent in 1973 over 1972, is not at least high enough, I assume it can finance the further expansion of that industry. One must remember this is an industry that hasn't PAGENO="0208" 202 gotten accustomed to the idea of borrowing money. The utility in- dustries and many other industries financed most of their expansion from borrowing money. The oil industry is moving into the kind of expansion that is more nearly akin to manufacturing plants when they go into oil shale and coal gasification. Chairman PROXMTTm. I)o it entirely through cash flow, plowing back their profits Mr. FREEM\X. Essentially. I (lout have the facts before me but compared to the natural gas pipeline and electric power industry they have a very, very high portion of equity and very little l)OrrOW- ing. Rather than the consumers of this country financing the oil in- dustry. they are going to have to borrow more money than they have in the past. I think these issues need to be further debated and explored. Representative Cax\BLE. Would the consumers pay for that too? Mr. FnEF~r.\x. Not directly through higher prices. Of course, they will pay the interest on the bonds but I think if one looks at the financing of the electric power industry and the natural gas indus- try. you find that the high degree of debt in those industries has been beneficial to the consumers over the years. Chairman Pnox~r~riy. Now von pointed out how little~ the Govern- ment knows about the energy resources owned by private industry and are woefully ignorant, the Government is. about its own re- sources. Could you come down with Mr. Simon on the ground with a finding there is a genuine shortage, or Mr. Nader that it is a pho- ney? Mr. FREEr\x. T clout think it is phonev. Tt seems to me we are at the end of an era. One of the most distressing elements is the uncer- tainty about the situation that leaves the average consumer with the feeling that it is phoncv. T can sympathize with and understand how the. average consumer who is given green stamps a couple of years ago to buy gasoline and now sees the price at the pump jumping is very, very skeptical. T happen to believe that we have been in a pe- riod over several years where the clem and for energy has been just ~al1oping and additional increments of supply have been a trickle. We are moving out of the era of abundance into an era of scarcity. The problem is much more fundamental, much more serious than the questions about oil i11(lustry profits. We have. T think, a time in our history when we need to fashion a new growth policy for the coun- try. Chairman PROXMTRE. Tt is true since 1970 we have had a decline in 1)roductlon Mr. FREEMAN. Tn domestic producti on. Chairman PROXMTTiI:. Tt is true since 1970 we have had a continii- otis increase in consumption. it is true we have had greater and greater and greater reliance on imports. it is true we have the em- bargo coming from the area where you have two-thirds of the world's reserves. Fnder those circumstances it seems to me inevitable that there is a shortage of a kind. T think Mr. Nader is right in pointing out we have a great waste in this country and that there are all kinds of ways it ought to be met and the fact is under pres- PAGENO="0209" 203 ent circumstances it seems to me there is a shortage. Would you other gentlemen disagree with that or agree? Mr. DARMSTADTER. Mr. Chairman, I believe very strongly that we have a genuine shortage in this country. I don't think it is a con- trived one. Which is not to say that the existence of a shortage may not lead companies and industry from trying to exploit, the shortage for short-run benefits and profitability. I am not. saying they are doing this. But one must distmguish between the question of whether the shortage was artificallv induced-willfully, conspirato- rially induced, as is sometime alleged. I think, by Mr. Nader amongst others-or whether there are rational explanations for it. I submit. the latter, though I grant you that the reasons accounting for the dilemma in which we find ourselves are complex and not tidy. Chairman PROXMIRE. You would simply conclude that there is definitely a genuine economic shortage and you accept those fact.s. Mr. FREEMAN. Yes. Chairman PROXMTRE. However arrived at? Mr. FREEMAN. Yes. Chairman PRox~IIRE. Mr. Allvine. Mr. ALLVTNE. I don't see how there is any way to know unless we have the facts and data supporting it. If we can believe what the Government. says, there we are now short two and- Chairman PROXMIRE. That is our dilemma. I am asking you as ex- pert.s, somebody who has written a book in the area and knows, what your best judgment is. Do you think we have a genuine shortage on t.he basis of t.he meager information all of us have, or do you con- elude that it is probably contrived? Mr. ALLVINE. Well, that. is two different t.hings. How we got into it, where we are today, Senator- Chairman PROXMIRE. I phrased that improperly. What I meant to say. genuine shortage. or is it something that people talk about.. Mr. Nader said this morning if the Government. announced there is a shortage of straw-s. that there would be a shortage of straws, people would go out and buy them and hoard them and you would have a shortage. And he implied that that. is the nature of this shortage. Mr. ALLVINE. Senator. I came to Washington this morning feeling that. there is a shortage. believing the information presented by our energy Czar that we are 2½ to 3 million barrels a day or somewhere 12 or 15 percent short of what we need. If Mr. Nader is correct, world production of crude oil is up and has been in recent months, in the last month or so and continues 8 percent over a year ago, t.hen I would have serious reservation whether or not something is not happening that doesn't meet the eye. If we are only 2 percent short in the free world there is a lot of it ending up in the ITnited States where we seem to be today. He raised a red herring this morning and I would like to check into his sources and see whether or not that is true. Chairman PROXMIRE. The nature of the shortage is we are embar- goed and if we want to pay an immense price I suppose we can overcome t.he shortage. Is that. your conclusion? 37-143 0 - 74 - 14 PAGENO="0210" Mr. ALLVINE. That would be my conclusion. Chairman PROXMIRE. There is sufficient world production to meet world demand. Mr. FREEMAN. I happen to have read the same article, it was 8 percent for the entire year. and as I recall the article is suggested- Chairman PROXMIRE. What article was this? Mr. FREEMAN. I have forgotten. I read something this morning that said world production is ~ percent in 1973 over 1972. The point they made is it would have been higher than that if it weren't for the curtailment. Chairman PROXMIRE. That wa.s specified by Mr. Nader. He said it would have been 11) percent otherwise. Mr. FREEMAN. I don't see that particular statement. would change the basis of your opinion about whether there is a shortage or not.. Mr. ALLVTXE. I misunderstood Mr. Nader. I t.hought he said cur- rently. Tf it is not current then I still stand, we have a short.age of significant magnitude. Chairman PROXMTRE. How can we know whether we have a short- age if we don't know the amount of proven reserves in light of new technology and- Mr. FREEMAN. The issue is production, not proven reserves. I think that we all understand in Saudi Arabia t.here are hundreds of billions of barrels of oroven reserves. The question is how much are they Producing? And they sax that they cut back several million barrels a day and everyone that I speak to that. has any personal knowledge swears to me that is true, so I have to believe it. Chairman PROXMIRE. How do we know if we don't know what the production is. we haven't gotten that, except this article that you can't identify that Mr. Nader referred to. You gentlemen are famil- iar with it. Mr. FREEMAN. I don't have the benefit of the CIA at my disposal but I gather that there are ways of checking. Mr. DARMSTADTER. It turns on the integrity of the kind of data we have on trade. Chairman PR0XMTRE. That is our dilemma. Mr. Simon himself ad- mitted over and over again, he has done it. consistently, that the data we have is very unsatisfacorv, inadequate. you can't. count. on it. And, as you say, whether or not there is a shortage depends upon the integrity of data, whether we can believe it. Mr. DARMSTADTER. I have enough faith in the integrity of the data to permit the general observation that there is a shortage. TJn- fortunately. some users, some critics of the industry, and some of skeptics of governmental pronouncements. would like to use unex- plained aberrations and transitory movements in these statistical se- ries as basis for an indictment. We should note that this is really the first time. Mr. Chairman, in which we find ourselves having t.o rely on weekly-not seasonally adjusted quarterly. not monthly, but un- adjusted weekly figures-statistics on oil imports. production and in- ventory change in order to evaluate major national policy issues. The data were never designed to permit that kind of fine tuned uti- lization. Data were designed to permit broad guaged interpretation of what was happening. PAGENO="0211" 205 Chairman PROXMIRE. The data we have. Mr. DARMSTADTER. In the past no one has ever inveighed against the integrity of those statistics because they were being used for the purpose for which they were intended. We are trying to put them to a use they were not intended to be used for. Chairman PROXMIRE. Let me ask Mr. Freeman. In view of the fact we are putting them to a new use, we want to know what the situation is, do you feel we can rely on the present system of gather- ing the data? After all the poeple who issue it have a clear conflict of interest. They have an interest in giving us the feel there is a shortage and they have had enormous success. In December they had a cost-price increase permitted. another price increase coming down the pike in March that will enrich them, even more fabulous profits, they are going to make. Should we rely on them telling us what the data is or should we have government derived statistics secured by the Governernment independently and objectively the way we do in agriculture, the way we do in banking and other areas. Mr. FREEMAN. There is no question that the latter is the only al- ternative. The very fact we are having this colloquy and that the question is raised proves the fact that we need a system t.hat has credibility. Chairman PROXMIRE. Were you satisfied, did you hear Mr. Si- mon's testimony this morning? Mr. FREEMAN. No, I didn't. I wasn't in the audience this morning. Chairman PRox~IIn~. Were you gentlemen satisfied, Mr. Ailvine and Mr. Darmstadter, were you satisfied wit.h, I think both of you heard part of his testimony. Mr. DARMSTADTER. I did not hear it. Mr. ALLyINE. I did. I thought the data he was suggesting be sought would be useful and go a long way to answering many ques- tions. Chairman PROXMIRE. He seems to be. making a very substantial ef- fort in that. effort. He didn't satisfy Mr. Nader. You feel it would be adequate if he gets all of that.? Mr. ALLVIXE. Plus the information I said about return on invest- ment for different functional activities. Chairman PROXMIRE. I would like to ask Mr. Freeman and Mr. Darmstadter for the record if you would take a look at this, and you can see it when you review your remarks, the assurance that Mr. Simon gave us and tell us whether you think that. is adequate to get accurate information. [The following information was subsequently supplied for the record:] RESPONSE OF JOEL DARMSTADTER TO CHMRMAN PR0xMIRE's REQUEST To COMMENT UPON HON. WILLIAM E. SIMON'S TESTIMONY BEFORE THE SUBCOMMITTEE The following brief remarks respond to Senator Proxmire's request that the witnesses read, and comment upon, Mr. Simon's testimony before the Subcom- mittee: 1. Mr. Simon states: "A comprehensive domestic and international data sys- tem is clearly needed and the FEO is now analyzing the best ways to struc- ture and implement such a system. Such a system is of little use now in this time of petroleum shortage . . . there has never been in existence an adequate PAGENO="0212" 206 energy data system. One was never needed or even desired until recently." It may today seem gratuitous to ask why, in the face of recurrent Arab threats to use oil as a political weapon and in the face of an awareness-over a pe- riod of years-that domestic producibility was peaking, an adequate informa- tional system was not being constructed. What, if not this type of undertak- ing, was the purpose of the Office of Emergency Preparedness or of other groups within the Executive Branch? Better contingency planning, served by a systematic data base, represents a minimal safeguard for future developments. Periodic updating and modifcations (as new events dictate) of such a system is called for. Domestic and-conceivably-_foreign economic impact analysis might also be appropriate, The desirability of extending such an emergency planning framework to other potentially critical resources besides energy should also he considered. 2. Mr. Simon should he commended for the proposed improvements in data collection and analysis, particularly as regards (a) the integrated mandatory reporting system for petroleum products; (b) the reconciliation of Bureau of Mines monthly data with API weekly reports: (c) inventory change; (d) sea- sonality: and (e) regional coverage. 3. Mr. Simon alludes to future plans which would, among other things, em- brace the assembling of energy reserve estimates. No doubt such an effort would draw- upon the specialized geological and other capabilities of what today extends nc ross a number of governmental agencies. This objective-far more basic than merely an administrative reform-might provide the opportu- nity to fill a long-existing gap in the conceptual underpinnings of reserve-re- source estimation, both with respect to petroleum alone and with respect to the intercomparabihit-y of multiple energy sources. Problems of reserve-resource base concepts and measurements are discussed in two Resources for the Fu- ture staff reports: (i) U.S. Enerq,~ Policies: An Agenda for Research (Baltimore: Johns Hop- kins Fniversity Press, 1905) : see, for example. pp. 50-51 and 132-35. (ii Encrg,i Reseai'eh iVeeds. A Report to the Nationals Science Foundation, prepared jointly with the MIT Environmental Laboratory (Washington: U.S. Government Printing Office, 1972) : see especially Chapters II and X. 4. Mr. Simon's testimony did not touch upon the FEO's current practices in reporting the oil situation to the public. I feel that these releases could do a more skillful job of relating (ex-ante) projected oil demand w-ith realized (ex- post) consumption, the latter being necessarily constrained by available supply. Failure to distinguish between these two estimates leads to public confusion over the basis for predicting anticipated shortfalls and, after the fact, can lead people to doubt their very existence-an unfortuante consequence of a well-in- tentioned effort. Mr. FRFF~L\X. I dont know- w-hether he has in his game plan the program for the Government to find out what it. owns. The first on hi~ list perhaps should he for the Federal Government to get data about its own resoiii'ces so that we-- Chairman PROXMTRE. He a~reed to that. He agreed on that. Representative CONARLE. Do you favor the opening of Elk Hills. for instance? Chairman PROXMIRE. Opening of Elk Hills. Representative CONABLE. This has been controversial lately. We had a naval officer apparently resign over it. or something of the sort, and there has been a great deal of news about this particular naval officer, and T dare say it. relates to his concern that that is no longei' going to be a permanent naval reserve of splendid dimension. Mr. FREEMAN. Mv opinion would be that. we should spend the money that is needed to upgrade Elk Hills and increase the produc- tive capacity. I would produce it at least until the Alaska. pipeline comes on stream. I would do a whole lot more than that.. I think we ou~ht to enlarge the peti-oleum reserve. That is the more important point. PAGENO="0213" 207 Chairman PROXMTRE. Do you believe in view of the depletion al- lowance, in view of the intangible drilling benefit which the oil in- dustrv has, and in view of the 14-point western hemisphere and the golden gimmick foreign tax credit. in view of that, does the oil in- dustrv need further incentive for production at an additional price? Mr. FREEMAN. No, sir; specially in light of the price increases they have received. Chairman PROXMIRE. When you put all of these together they are mighty potent incentives for exploration and producing. is it not? Mr. FREEMAN. Yes, sir; it is the thrust of my personal testimony that prices ought to be rolled back. Chairman PROXMIRE. Gentlemen, thank you very, very much. You have been most. helpful. This has been an excellent. panel. I deeply appreciate it. The subcommittee will stand in recess until next week, Monday, ,January 21, when we meet in 5-107, the .Joint Committee on Atomic Energy hearing room, to hear Deput.~ Assistant Secretary of the Interior. ,John Rigg: Chief Statistician of the Office of Manage- ment and Budget. Julius Shiskin; and John Hodges of the Ameri- can Petroleum Institute. I should say Julius Shiskin is the Commis- sioner of the Bureau of Labor Statistics. [Whereupon. at. 4 p.m.. the subcommittee recessed, to reconvene at 10 a.m., i~Ionday, January 21, 1974.] PAGENO="0214" PAGENO="0215" ENERGY STATISTICS MONDAY, JANTTARY 21, 1974 CONGRESS OF THE UNITED STATES, SuBco~1MIrrsE ox P1U0RITIEs AND Ecoxo~r~ IN GOVERNMENT OF THE JoINT Ecoxo~iic COMMIrrEE, Washington., DII. The subcommittee met, pursuant to recess, at 10 :05 a.m., in room S-407~ the Capitol. Hon. William Proxmire (chairman of the sub- committee) presiding. Present: Senator Proxmire and Representative Conable. Also present: John R. Stark, executive director, William A. Cox, Richard F. Kaufman, and Courtenay M. Slater, professional staff members; Michael J. Runde, administrative assistant; Leslie J. Ban- der, minority economist; George D. Krumbhaar, Jr., minority coun- sel; and `Walter B. Laessig, minority counsel. OPENING STATEMENT OF CHAIRMAN PROXMIRE Chairman PROXMIRE. The subcommittee will come to order. This is the second day of hearings we are holding on the adequacy, limita- tions, and integrity of the Government statistics affecting the energy shortage. From the evidence we have so far, the statistical information this Government. has on which to base public policy is a disgrace. The country is asking: "Is there a real energy shortage ?" And while many of us believe there is, there is yet. no way to prove it be- yond a reasonable doubt.. For the most part we rely on the oil and gas industry for what fig- ures we have. But even if these figures are reasonably accurate, there are great gaps in our information-reserves, pipline flows, invento- ries, refinery, and amounts in the hands of industry, dealers, et cetera. I might. note that. just this morning in the prepared statement submitted to us Mr. Rigg affirms that. position by saying that the in- formation we have is grossly inadequate. The American people have been asked to make great sacrifices. This they are willing to do. But on top of that they are being asked to pay very high prices for their gas and fuel oil. Gas prices have already gone up by at least 8 cents at the. pump. Mr. Simon tells us they probably will go up another 10 cents, and Mr. Simon tells us they will probably go (209) PAGENO="0216" 210 up maybe l~ or ~0 cents or more and no one knows, and Mr. Simon told this subcommittee lie had no plans to restrict any price increase although, of course, he would be hopeful it would not go above 70 cents. This is justified on the ground that price increases are needed as an incentive to bring forth more fuel. Since refinery capacity is limited and will continue to be limited for some considerable period of time. that argument may not be true, or only partly true. But the true test of what price we should pav~or the consumers should pay~is what is the cost of the fuel and what is a big enough return to those who produce it. to encourage further production. re- fine it. and distribute it. So far as I can determine, unlike the rest of American industry in oil, we have absolutely no reasonable cost figures on which the price increases have been based. Further. T can find no one in the administration who appears to be interested in getting that information. While Mr. Simon was very good in his testimony to this committee on the need for factual in- formation on production. reserves and distribution, he was very, very soft on price and cost figures. Today we continue our hearings to see if we can plumb both the gaps in our information and the answer to these questions. Our first witness is my colleague Senator Gaylord Nelson from Wisconsin who has concerned himself for a very long time with the issue of the adequacy of the official figures. Next we w-ill hear from a panel of three experts. Mr. Julius Shiskin is the Commissioner of the Bureau of Labor Statistics and has jurisdiction over the l)rice and employment in- dexes. Previously lie was at the Office of Management and Budget with general supervison over the statistical programs of the entire government. From that background he will be able to provide us with numerous insights into our problems and the answers. Mr. John B. Rigg. Deputy Assistant Secretary for Minerals in the Department of Interior has jurisdiction over the most iniportant en- ergy bureaus in the Government-the Bureau of Mines, the Geologi- cal Survey. the Office of Oil and Gas, and the Office of Coal Re- search. Mr. .Tohn Hodges of the American Petroleum Tnstitute is here today to tell us about the statistical information which the API pro- vides, its stren~tlis and weaknesses, and whatever answers and re- joinders he would like to make to whatever charges or criticisms have been aimed at the industry. Senator Nelson. l)lease l)roceed. STATEMENT OF HON. GAYLORD NELSON, A U.S. SENATOR FROM THE STATE OF WISCONSIN, ACCOMPANIED BY RAYMOND D. WATTS, COUNSEL, SELECT COMMITTEE ON SMALL BUSINESS Senator Nri~ox. T have a statement that is S or 9 minutes long. It may be more economical to read it than to extemporize from it. Mr. Chairman, the subject of these hearings. energy statistics. has suddenly emerged as one of the most important-and emotional- PAGENO="0217" 211 topics of the country. Suddenly everyone has become aware that en- ergy statistics are not just dry numbers in big books; they are an es- sential element in the world's power and wealth arrangements, a factor in every human's quality of life. Energy is the lifeblood of a modern, technological society. Its availability is, quite simply, a matter of survival. Is there any con- ceivable reason why the information about this critical resource should be~ the private preserve of a handful of powerful oil compa- nies? The degrees of possession and use of energy separate the world's powerful from the powerless. the rich from the poor. That is scarcely a new perception. although we are all feeling it more now. What is a new perception, for many, is that the posses- sion or nonpossession of knowledge about energy-of energy statis- tics-also separates the powerful from the powerless. the rich from the poor. It is incredible-but true-that in a society premised on freedom and equality we have permitted public energy statistics to become so bad and have allowed many vital energy statistics to become the mo- nopolized property of a privileged few. It is incredible-but true-that today's energy crunch finds much of the public disbelieving its reality and demanding of the Govern- ment, "Show me !", and finds the Government~ not having the means to "show" the public to its satisfaction. Seven months ago, I introduced the Mineral Fuels Reserves Dis- closure Act as a proposed amendment~ to the Alaskan pipeline bill. Senator Proxmire and a number of other Senators cosponsored the amendment. Its purpose was to end one main part of the unbelieva- ble state of affairs then and now existing; namely this: Our public data on mineral fuel reserves come almost entirely from unverified private sources, sources whose interests are often opposite to the public interest. That amendment was withdrawn with assurances by Chairman Jackson of the Interior Committee that the Interior Committee would conduct hearings on the proposal when Congress convened early in 1974. Senator Jackson and I have cooperated in rewriting and greatly expanding the Mineral Fuels Reserves Disclosure Act. It is now the. Energy Information Act. S. 2782. which I introduced on December 6, with Senator Jackson as the first of a present total of 14 cosponsors including Senator Proxmire. This bill is designed to provide a means for ending the present mess ~ur energy statistics are in. That is an essential step toward ending the mess our present total energy situation is in. There are two things that are most wrong with energy statist.ics today. First, there are too many of them in too many different places and in a form that makes much of the information unuseable. They are too complex. too voluminous. and too contradictory. Second, in many vital respects they are incomplete. Let me first discuss the problem of volume and complexity. and then the problem of insufficiency. incompleteness. The General Accounting Office has identified 64 different offices within the various departments and agencies of the Federal Govern- PAGENO="0218" 212 ment. that are dealing with energy in one way or another and there- fore collecting and generating energy statistics. There are, in addi- tion. innumerable private statistical sources and services and agencies. and still other energy statistics sources in the State and foreign governments. As a result, we have things like this occurring: A Federal Trade Commission staff official says that the numbers being reported to and by the Federal Power Commission about natu- ral gas reserves are in some cases as much as 1.000 percent low-that some companies' actual reserves are 10 times greater than their re- ported reserves. During a single month last fall, the White House estimate of U.S. dependency on Arab oil changed from 1.2 million barrels a day on October 12 to 1.6 million barrels on October 20 to 2.0 million on October 24 to 2.5 million on October 30. Tn November, the Defense Department changed the estimate to 3.0 million barrels per day. The Bureau of the. Census. in its quinquennial Census of Mineral Industries, has to explain-or, more accurately, note without really explaining-the fact that its numbers provide different answers to the same questions than the numbers published for the same year by the Bureau of Mines. In this kind of a statistical world, even the most dedicated and ex- pert policyrnakers need help that is not now available to make sense out. of these mountains and jungles of numbers. So the first purpose of the. Energy Information Act is to provide that help. I shall ex- plain how in a minute. but let me first describe the other problem. The second thing that. I mentioned is wrong with energy statistics is that they are incomplete in vital respects. That deficiency is due, first and foremost, to corporate secrecy and to a government policy that condones and protects corporate secrecy. The incompleteness is also due to another Federa.I policy-a policy of not having the Government. find out for itself what it owns in the way of energy resources. It is simply astounding that, in the middle of an alleged energy crisis, we do not really know what our energy resources are, because the. Government has not taken inventory of t.he fuel reserves and other energy resources in the public lands. and because it permits the reserves in private ownership to be, to substantial extent, secret. The Energy Information Act deals with both these major prob- lems by establishing a National Energy Information System. The job of that System will be to pull together in a systematic way the information that we have and to ferret out. in a systematic way the information that ol)solete policies and practices have kept. us from having. The bill sets up the National Ener~v Information System within a new Bureau of Energy Information in the Department of Corn- merce. When hearings on the bill start next month, on February 5, one of many issues up for discussion will be whether Commerce is the best place in the Federal Government to put the System. That is where it. is placed in the current. draft legislation, but there are many arguments for possible other locations. The System will have three main jobs: PAGENO="0219" 213 First, to make contact with all the existing main collectors and disseminators of energy information, public and privateS and estab- lish a computerized capability for pulling all that information to- gether for comparison and analysis. Second, to collect systematically from major energy companies in- formation on their properties and operations~ in sworn, mandatory reports. Third. to divide all this information into three categories for three uses: Public. confidential, and secret. The reason for that classification of information into three catego- ries is to strike a reasonable balance, to draw a fair boundary line, between two essentially conflicting interests. One is the energy cor- poration's interest in keeping secret as much as it can of the energy information it has developed at its own expense in hopes of using it to make a profit. The other is the public's interest in having as much of that same information as possible come out iii the open, so that the forces of competition or regulation or both can keep those profits within reasonable bounds. The bill draws this boundary line at a point much more in the public's favor than do existing Federal laws, regulations and poli- cies. We can naturally expect the corporations to contest that re- drawing of boundaries as vigorously as they can, and one of the purposes of the forthcoming hearings in the Interior Committee will be to give that difficult problem a full airing. It is absolutely vital that. the Government know how much energy we have and it is the purpose of this legislation to provide the au- thority and means to get it. Something that Mark Twain once wrote catches, I think, the mood of the American people today. In volume I of his autobiography, the sage of the Mississippi wrote: Figures often can beguile, particularly when I have the arranging of them myself. The remark attributed to Disraeli would apply-"There are three kinds of lies-lies, damned lies, and statistics." Mr. Chairman, we cannot have the American people thinking of our energy statistics as the third and lowest form of lie. The Energy Information Act is intended to establish a national System for pro- viding energy statistics that will be current, complete, analytic, corn- parable, and above all, believable. Mr. Chairman. I have two editorials on this issue. from the New York Times and the Washington Star-News which T would submit as part of this statement, if the committee wishes to include them in the record, and I have a copy of statements that were made at the time we introduced the bill by Senator Jackson and myself, which may be of some value to the record. I also have a monograph by Ray Watts, who is here with me at the table, of the Select Commit- tee on Small Business, in which he has compiled a number of quota- tions on the benefits, the costs and the specifics of corporate informa- tion disclosure from 1776 to 1973. which I will submit for the committee files or for the record, if the committee believes that they are a valuable part of this hearing record. Thank you, Mr. Chairman. Chairman PRox~rrRE. Thank you. PAGENO="0220" 214 We would be delighted to have, all that information. The editorials will be printed in the record at this point and the rest. of the material we will look over and include as much as we can. [The information follows:] [Editorial from the New York Times, Jan. 17, 1974] KNOWLEDGE AND POWER The credibility gap created by the energy crisis is threatening to match that of Watergate. The paucity of verified facts has provoked angry complaints from Congress and state governments and led to widespread public suspicion that the oil shortage may he "contrived' rather than "real," in the Words of New York State's Attorney General. In response to this pressure. which has been mounting for many weeks, major oil companies now have abandoned some of their secrecy and published statistics on their petroleum stocks. And the Administration's Federal Energy Office (F.E.O.I has departed from its willing dependence on unverified indus- try data to order a field unit of refinery prices, profits and supplies. These moves are in the right direction. But they do not go far enough. Nor does the information authority requested by the Administration in the emergency en- ergy bill now before Congress. as Federal energy chief William Simon has im- plicitly acknowledged. He told a Senate subcommittee this week that he would soon propose new legislation providing "mandatory reporting systems and mechanisms to check and enforce their proper operation." In the pending emergency bill, the Administration inexplicably did not ask a mandate for systematic verification of company reports by the Government, to be conducted regularly on a thorough-going basis. A study by the General Ac- counting Office concludes that such verification is essential to "credibility of the data on which policy decisions are based." But leaving such veritication solely to the F.E.O. is not sufficient, for the Government undoubtedly will respect the confidentiality of company data. In what has often been a highly competitive industry, an argument can be made for the right of oil companies to insist on confidentiality. But there is little competition in times of shortage. If public confidence is to be built, an inde- pendent review of company and Administration records is vital. It could be carried out by the Congress-perhaps through a joint energy committee-or on behalf of Congress by the G.A.O. Unlike electric power plants, oil is an energy industry "that is almost totally unregulated, Chairman Jackson of the Senate Interior Committee recently noted. adding that the international oil companies, among other things, deal with foreign governments "almost as their own State Department". The suspicions that this situation has created at present makes it essential either that the public he informed directly or that a Congressionally-responsi- ble body, such as the G.A.O., verify the facts for the country on a regular basis. [Editorial from the Washington Star-News, Jan. 17, 1974] GET'FING THE ENERGY FAcTS By far the most frustrating aspect of the energy crisis is that nobody knows enough to take it.s measurement. The government's information about oil sup- ply comes mainly from the petroleum industry, and projections have gone up and down like a roller-coaster during the past year. One day the fuel outlook is horrific, the next day things seem to look much brighter, then the next week brings scary prophecies again. No wonder the public takes a cynical view of the whole affair. Obviously, the information-gathering system, which always has been a loose and poorly coordinated effort, must be perfected if the energy dilemma is to be coped with, and if the government hopes to generate public confidence. Too many people still question the reality of a critical oil shortage, which undoubt- PAGENO="0221" 215 edly is real in spite of the variations in estimating its size. The Federal En- ergy Office, under the new directorship of William E. Simon, has tried to esti- mate for the worst eventualities, but only time will tell whether enough margin has been left for error. Admittedly, the FEO is waiting to see if intol- erable car backups develop at service stations before it decides on gasoline ra- tioning. This is what the early aviators referred to as flying by the seat of one's pants. Of course the big oil companies, upon which the government depends for its data, have been all too secretive about their operations. Simon now is launch- ing the first mission to pry the essential facts from them-about their supplies, prices and profits. T~sing his own investigators, and agents of the Internal Rev- enue Service, he proposes to audit every petroleum refinery in the nation, to get a clear picture of total inventories and test the fairness of price hikes. It's a bold stroke, long overdue, but more is needed. This short-term process should be institutionalized in law and expanded for the years of energy insufficiency that lie ahead. And that would be achieved through legislation offered by Senators Henry M. Jackson of Washington and Gaylord Nelson of Wisconsin. Their full-disclo- sure bill calls for creation of a federal Bureau of Energy Information, empow- ered to collect all needed facts from every element of the energy industry. No less important than acquiring this vast information is having such a central, separate agency to coordinate and analyze it. Some beneficial alterations in the bill may be proposed, in hearings to be held soon, but the concept is right. For energy, as we all finally have realized, is the key element in our economic life, and shocking surprises of supply and demand must be avoided in the future. The country could be brought to great grief if a big enough shortage shock should come along. [From the Congressional Record, Dec. 6, 1973, pp. S22002-S22014] (By Mr. NELSON (for himself and Mr. JACKSON) S. 2782. A bill to establish a National Energy Information System, to au- thorize the Department of the Interior to undertake an inventory of U.S. en- ergy resources on public lands and elsewhere, and for other purposes. Referred to the Committee on Interior and Insular Affairs. ENERGY INFORMATION ACT Mr. Nelson. Mr. President, for the first time since World War II, the lights are going out all over America. Our people are reading this morning's bad news in half-darkened restau- rants. At this moment, Americans are getting traffic tickets for driving over 50, al- though they have paid-dearly, if not wisely-for cars and highways designed to carry them at 70. Here and there factories are closing and their employees are being laid off. There are many reports and more rumors of closings of plants, offices, and schools soon to come. Rationing of gasoline, heating oil, or both seem real possibilities this winter. Suddenly, the concept energy crisis is very personal. Suddenly, the impor- tance of fuel in our accustomed way of life is obvious in a new, more intimate way. Yet the crisis should not have come as a surprise to the country. Phere were warnings enough so that 10 years ago we should have had ready contingency short-range plans for any crisis and long-range plans to meet our continuing energy requirements. Alti~ough for over two decades a small number of indi- vidual experts have repeatedly warned about the impending energy crunch, the President, the Congress, the press, and the public paid scant if any atten- tion to it. They probably did not notice the warnings at all. It was not current news. It was not today. And for most of those who did notice the warnings it was considered alarmist nonsense because, after all, some magic technology would solve the problem in timely fashion anyhow. PAGENO="0222" 216 It should be specifically noted that it was the environmentalists and re- source experts who understood the problem and issued the warnings. If their advice had been followed we would not now be in this critical situation. The question now is where do we go from here? No single cause is responsi- ble for our plight, and no simple remedy will cure our situation. Still we must pinpoint each separate mistake that has contributed to our present condition and correct it as best we can. One major mistake in American practice and policy is quite obvious: We have failed to manage energy because we have failed to manage energy infor- mation. We are sitting in the dark because we have been making our energy policy in the dark. The we" in these remarks refers, generally, to the whole American people and their government: but, most specifically, to the President, the executive branch, and the Congress. Three especially important shortcomings in our management, mismanage- inent. and failure to manage energy information stand out. UNKNOWN RESOURCES Failure No. 1 is that we have never obtained a thorough public inventory of our energy resources. The Government has never taken the trouble to deter- mine the energy resources in the public lands of the United States, and has accepted the word of private interests about the resources in the private lands. Without Government inventories of public reserves, without Government vali- dation of private reserves, our speculation about our long-term energy situa- tion is just that: speculation. Surely the subject is important enough to de- serve something better than guesswork. INFORMATION EXPLOSION Failure No. 2 is that we have not developed better methods-indeed we have developed no thorough, systematic methods at all-for the comprehension and use by the Congress and the public of the massive amounts of energy informa- tion that are available. We have not faced up to the problem of the informa- tion explosion. GOVERNMENT AND CORPORATE SECRECY Failure No. 3 is that we have not insisted that a great deal of other vital energy information that. has not been available to us, to the Congress and the public, be made available. We have not faced up to the problem of government and corporate secrecy. NATIONAL ENERGY INFORMATION SYSTEM The bill we are introducing today. the Energy Information Act, is intended to avoid these mistakes in the future by dealing forthrightly with all three of these past failures. It does so by establishing a National Energy Information System to be oper- ated by a new agency, the Bureau of Energy Information, which will be a Co- equal sister agency of the Bureau of the Census. The Bureau, together with the Department of the Interior, will have all necessary powers to correct these old failures. In function. the Bureau of Energy Information will somewhat resemble an amalgamation of the statistical and analytical roles of the Bureau of the Cen- sus, the Bureau of Mines, the Congressional Research Service, the American Petroleum Institute, the American Gas Association, and the Texas Railroed Commission: but the new Bureau will specialize in energy information of the "hard." objective. smallest-unit. statistical-base variety. The bill expressly con- templates that the Bureau will draw on the work of each of those-and many other-public and private energy information gatherers and analysers, without displacing any of them and. to the utmost extent practicably, without duplicat- ing any of the immensely useful work they are all doing. Rather than redoing the work of others. the Bureau will be directed to tie together and relate and compare the work of others. hut also to fill in certain large and vital gaps in the work of others. And it will make the results of all that work available, in a more manageable form. to those who need them. PAGENO="0223" 217 THE ENEB.GY INFORMATION PYRAMID The two problems we need to solve-the great proliferation of energy infor- mation and the great secrecy of some energy information-are so interrelated that they are most easily discussed together. All the information in the world about our supplies and consumption of en- ergy might be likened to a great pyramid, immense at the bottom, a tiny point at the top. In the base level of the pyramid are all the smallest unitary, objective, quantitative facts of supply and demand. Examples on the supply side would include the proved reserves and daily production of a known oilwell, the crude oil input and refined product output of a particular, refinery, the route and cargo of a named tanker, the daily quantity and type of product moving through a specified pipeline, the kilowatt hours generated by a particular elec- trical plant, the contents of identified fuel storage tanks, the daily sales of a particular service station. On the consumption side examples would include the jet fuel burned by a named airliner, the coal consumed in a particular powerplant or steel mill, the natural gas burned in Mr. X's home and Mr. Y's apartment building. Ob- viously, each fact has two components-one of things, the other of people. Every building-block fact in the foundation layer of our pyramid includes the name of a person, country, or company having a proprietary or controlling in- terest in the energy resource that is being produced, transported, converted, or consumed. The second layer of the pyramid is smaller than the base, the third still smaller, and so on. The second and all successive layers to the top are not only supported by the bottom layer-they are the bottom layer, condensed and repeated and rerepeated at progressive stages of summary and analysis. Each upper level is only as good-that is, reliable-as the basic facts that were taken into it from the layer beneath, and the process by which those facts were selected and summarized and analyzed- and presented. VISIBLE AND INVISIBLE FACTS While the pyramid of energy information is built-as all pyramids must be from the bottom up, it is viewed by most of us from the top down, or in lit- tle spots and patches, here and there, near the top, or near where we happen to be. Just as in the case of the real great pyramid, in our pyramid of energy in- formation the bottom layer, the basic layer that supports everything above it, is completely hidden from us. Most of the blocks are on the inside; but even the outside blocks of the lowest layers are covered up by the sands. In the past, this invisibilit.y of the foundation facts of energy information has not troubled many Americans. The blocks of the pyramid that they could see, near where they lived and worked, looked good enough, and the banner waving from the very top looked best of all. It read, "Energy Is Cheap and Abundant." Now-it seems suddenly to most citizens, although some of us have been warning for years that it would happen-the blocks near where we live and work look dark and crumbling, and the banner at the very top has been changed. It now proclaims, in every language of the world and in letters high enough for all hut the blind and illiterate to read. "There isn't Enough En- ergy." These shocking changes in the appearance of the part of our energy infor- mation pyramid that we can see are making all of us-in and out of the Con- gress-look more closely at the whole pyramid, and start to wonder and ask about the parts we have never seen. This new curiosity is a healthy thing. "Knowledge is power," Francis Bacon wrote in the 16th century. To increase our power to deal with the energy cri- sis, we need to know many things about energy that we have not troubled our- selves to know before. Furthermore, it is not enough merely to "know" some "fact"; we need to know how we know. When our source for a particular fragment of knowledge is something other than our own observation and expe- rience, we w-ill be wise to inquire about our source's source. There is real peril, if we omit this. that some fact we are learning about oil will prove, actually, to be snake oil. PAGENO="0224" 218 TOURING THE PYRAMID With these thoughts in mind, let us take a tour of the energy information pyramid and see how it is constructed. The top layer contains just. one pointed stone: The net supply-demand ratio for all kinds of energy. worldwide. Right now, as we have noted, the largest mark on that stone is a minus sign, and the fiat on top reads, "There isn't enough." That pinnacle conclusion represents the sum of conclusions for the supply- demand ratios of the various different sources of energy. We find those on the suext-to-the-top layer of the pyramid. Separate stones there report the world- wide reserves. preduction and consumption figures for petroleum, natural gas, coal. hydroelectric power, nuclear fuels, geothermal power, and everything else combined-to name them in the order of their current importance as energy sources in the Fnited States. Each figurative "stone" in that next-to-the-top layer is, in reality, made up of immumerable and often conflicting official and unofficial reports. They are presented in every information-storage medium known to man: Books, pam- phlets, periodicals, and electronic tapes are some of the most important. Each conclusion for a particular energy source in that next~to~top layer, the global level, is of course made up of the sum of data and conclusions at the level of continents, the next layer down, and countries, the layer below that. To w-ork one's way down the pyramid in an effort to understand just one of the major fuels is to develop a healthy respect for the enormous complexity of the information that is publicly available-the first problem-and a growing irritation about the information that is not publicly available-the second problem. PETROLEUM sTATIsTIcs Let us make that trip, as a legislative or newspaper office staff not made up of energy experts might try to make it, for just one fuel, the most important, petroleum. From a pamphlet called "Commodity Data Summaries" published by the Bu- reau of Mines, F. S. Department of the Interior, in January 1973, we can learn such facts as these: At the end of last year, the world total of crude petro- leum reserves was 6,31.9 billion 42-gallon barrels, and world production of crude oil in 1972 was 38.1 billion barrels. The world total is broken down into eight country and area totals, as follows: PETROLEUM, CRUOE~ Production Proved reserves 1971 19722 World production and prsved reserves: United States Iran Kuwait 3,454 1,662 1,068 3,462 1,800 1,200 38,100 55,500 66,000 Libya Saudi Arabia 1,008 1,642 808 2,100 25,000 145,300 Venezuela Otherfree wurld 1,295 4,408 1,180 4,700 13,900 189,900 Csmmusist countries (except Yugoslavia) World total 3,098 3,250 98, 200 17,635 18,500 631,900 2 Volumes in million 42-gallon barrels. a Estimate. Source: Oivision of Fossil Fuels, Bureau of Mines, January 1973, Where did those country and area totals come from? Obviously, the world totals are only as good as the parts. A study of the Bureau of Mines' compre- hensive annual Minerals Yearbook gives some idea of how widespread and di- verse are the sources of the components from which these great aggregate numbers w-ere derived. Libya's annual total production, for example, is the sum of monthly totals obtained from Petroleum Press Service. PAGENO="0225" 219 Reserves data for the United States and some foreign countries are obtained from the Committee of Petroleum Reserves of the American Petroleum Insti- tute, a private trade association. U.S. annual production totals are the sum of monthly totals obtained from State agencies in each of the 31 oil-producing States. By the time all these data are pulled together into one reasonably complete and fairly well-organized-although unindexed-source, the Minerals Yearbook, they are at least 2 years old. A complementary statistical service, the Census of Mineral Industries conducted every 5 years by the Bureau of the Census of the Department of Commerce, is published on an even more delayed schedule. The 1967 census data did not become available until late in 1970. Data from the 1972 census will begin to trickle out in 1975. As a result, if a Senator or a journalist wants to keep up with oil-to say nothing of other energy fuels-he must consult a whole host of weekly, monthly, and quarterly bulletins from such sources as the Bureau of Mines, the American Petroleum Institute, the American Gas Association, the Texas Railroad Commission-and of course the other 30 State agencies which have less comprehensive reporting programs-and the specialized press. Even if this were done, there are some questions to which answers are not available, at all, ever-and they are not small questions. Here are some exam- ples: What are Gulf's proved oil and gas reserves, State by State in the United States and country by country in the world? What are Exxon's current, separate profits derived from each of its sepa- rate, vertically integrated operations and in each principal locality: for exam- ple, what was Exxon's return on invested capital in crude petroleum produc- tion in Texas, or on gasoline retailing in Pennsylvania. The Federal Trade Commission cites "estimates of Rice, Kerr & Co., Engineers," as its presumably best and perhaps only source of data on com- pany shares of domestic proved reserves. The American Petroleum Institute's committee of petroleum reserves, like its counterpart committee on gas re- serves in the American Gas Association, is sworn to keep secret all individual company data it obtains. This secrecy is harmful in at least three principal ways. First, it obstructs Government validation and analysis of t.he basic information on which our pe- troleum and gas policy are founded. The Government is in something like the position a bank customer w-ould be in if his bank gave him a monthly state- ment on his checking account without the canceled checks and deposit slips, provideing instead only the beginning and end-of-month balances. Second, corporate secrecy impedes the operation of both of the two systems on which we rely to curb corporate abuse and corporate greed: The competi- tive system and the regulatory system. Competitors cannot compete and regula- tors cannot regulate without access to reasonably detailed information on the individual companies that make up the energy industries. Third, secrecy works a grave inequity on small business. The great size, vertical integration, and diversification of the major energy companies give them a tremendous information advantage over their smaller, more specialized competitiors. The little company. if it is public, must disclose fairly intimate details in its registration statements and annual reports filed with the Securi- ties and Exchange Commission. The major company tells far less, because so many data are consolidated in its reports. HOW ENERGY INFORMATION ACT WILL HELP The Energy Information Act is intended to help Congress, the rest of Gov- ernment, and the public deal with the twin problems of the information explo- sion and corporate secrecy. It will give one new agency, with new perspectives, authority to take a new approach to these old problems. The agency will be the Bureau of Energy In- formation, which will he established as a sister agency of the Bureau of the Census in the Commerce Department, coequal with both that agency and the Interior Department's Bureau of Mines. It will to an important extent rely on t.he ongoing work of both these older bureaus; but it will have two functions that differ from the functions of either of them. 37-143 0 - 74 - 15 PAGENO="0226" 220 First, it will be charged with a duty to survey on a current basis all exist- ing major energy information sources and pull the data together for quick, computerized comparison and analysis. It will be an agency expected to be able to answer specific questions about specific current conditions, both in fine detail and in global aggregates. It will-with certain limitations I shall de- scribe shortly-answer those questions, no matter who asks them. It will as- semble in one place the computer hardware and software and the expert per- sonnel to develop a new capability for fast question answering. Second, in order to do those things, the Bureau will be authorized to collect and make public some corporate information that is now secret. Let me give three examples of the kinds of requests and questions I hope and expect the Bureau of Energy Information would be able to handle, for a Member of Congress or a member of the public. First. During the national and congressional debate on the trans-Alaska pipeline, public reports of the quantity of proved crude oil reserves on the North Slope of Alaska ranged from 10 billion barrels to 24 billion barrels. Please prepare a report or a computer printout showing all items of the esti- mates, and the source of each item in the estimates, that produced these widely different totals. My source for the 24-billion-barrel figure was Senator JACKSON'S proposed amendment No. 315 to the Alaskan pipeline bill, 5. 1081, while the 10-billion-barrel figure came from a display ad supporting the pipe- line which the Atlantic Richfield Co. ran in the July 2 Washington Post dur- ing the debate. Second. What companies have reported what quantities of heating oil in in- ventory in the State of Wisconsin, and to whom and when were such reports made? Third. The following table appeared in the November 19 Washington Post: OIL FIRM PROFITS 1P Percentage of increase in major U. S. oil companies' net earnings according to Petroleum Intelligence Weekly Average annual 1973 over 1972 1 percent increase, 1970-73 Exxon Texaco Mobil Standard of California Gulf 80.7 48.2 64.1 50.7 90.9 22.8 13.8 17.9 19.6 10.8 1 3d-quarter figures. Please furnish a report showing the quarterly and annual profits of the five companies named in this table, itemized for major geographical areas of t.he world and major separate lines of business, such as production, refining, trans- portation. wholesaling, and retailing. In order to answer questions of this type in the kind of detail their impor- tance deserves, the Bureau of Energy Information would have to obtain some types of data that are not now made public. The bill would give the Bureau the authority to get that information. Reasonable competitive equities of individual companies would be protected by this bill, but the wholly unreasonable corporate secrecy that present law tolerates would be ended. The bill would establish three categories of informa- tion within the Energy Information System. The first category would be pub- lic, the second. confidential, the third secret. Each category of information would be stored in a separate library. Everyone would have acce~ to the pub- lic library. Only Government officials needing the data for official purposes would have access to the confidential library, while the secret library would be closed to all except the limited number of personnel needed to compile the data in that library into anonymous statistics. In general. the bill would permit other parts of Government, including the Congress. to have confidential use of much of the same type of information ob- PAGENO="0227" 221 tamed from very significant companies that now the Bureau of Mines and the Bureau of the Census can see, that is, information from particular plants, mines, and stores. In addition, reserves data for companies, now secret even from those two Bureaus, would become available to Government officials, for official use on a confidential basis. The Bureau of Energy Information would be authorized by the bill to collect such information directly from the significant companies, or, in t.he interests of speed, efficiency, or economy, from associations to which companies now report it, such as the American Petroleum Institute and the American Gas Association. Small business would suffer no new reporting burdens under this bill, be- cause the legislation exempts from its reporting requirements companies hav- ing less than $5 million worth of mineral fuel reserves or less than $50 million in other energy assets for in annual sales in the energy industries. It is the theory of the bill that sufficient data from the smaller concerns are being ob- tained now. It is the major companies that now have and are permitted to keep too many secrets which impair our ability to understand and manage our energy resources and the energy crisis. These large companies would have to disclose-as they are already doing to the Bureau of the Census, the Bureau of Mines, and their trade associations- certain data of a fairly detailed and competitively sensitive sort. However, the bill expressly provides that these detailed data would not be made available to their competitors in other than a reasonably aggregated or large-package form. Specifically, any line-of-business or profit-center information about a company could be kept out of the public domain under this bill if it were shown that the reasonable competitive equities of the company so required. In general, the bill would permit giant corporations to keep confidential any information that pertained to a segment of the business smaller than $25 mil- lion a year in annual sales. Business segments larger than that would not have to report in any more detail than would be required in the annual re- ports which the segment would file with the SEC if it were an independent company. SURVEYS BY INTERIOR DEPARTMENT The bill would also provide, for the first time, for a regular annual inven- tory by the Department of the Interior of Mineral fuel reserves and other en- ergy resources in the public lands of the United States. The Department would be authorized to use estimates where necessary, but to make onsite geological and engineering tests whenever practicable for this purpose. In addition, the Department would be authorized, when requested by the Director of Energy Information, to make onsite spot check inspections on private lands to validate information on fuel reserves and energy resources reported by private compa- nies. PREDECESSOR MEASURES, AND BAcKGRoUND The Energy Information Act is an amplification of the Mineral Fuels Re- serves Disclosure Act, which I proposed as an amendment-No. 319-to the Alaska pipeline bill, S. 1081. Title III of this new bill, pertaining to invento- ries and inspections by the Department of the Interior, is derived from the amendment-No. 321-to my amendment, which was offered by the Senator from Minnesota (Mr. Humphrey) and accepted by me. Those interested will find discussion and debate on those two amendments in the CONGRESSIONAL RECORD for July 16, 1973, beginning at page S 13601. Both amendments were withdrawn upon reaching an undei~tanding and agreement with the distinguished chairman of the Committee on Interior and Insurlar Affairs (Mr. JACKSON) that he would cooperate in the rewriting of the amendments as separate legislation and would arrange for early hearings on the legislation before that committee. Beyond the energy crisis the basic premises of this legislation are, first, that the power of giant corporations over the quality of life has become so great that such corporations must now be regarded as if they were governments, for govern they do: second, that governments-including corporate governments- derive their just powers from the consent of the governed: third, that consent, to he meaningful, even to be real, must l)e informed consent: fourth, that the free exchange and availability of industrial as well as political information PAGENO="0228" 222 are therefore the lifeblood of a free society; and fifth, that the Congress has no higher duty than to provide channels and mechanisms for the exchange and availability of information about the holders and uses of governing power. CONCLF5ION If this Nation is going to manage and contain the energy crisis, the Con- gress and the public must lie able to get quick, reliable answers to extremely complex questions. To achieve the necessary question-answering capacity will require a greater effort. aad a somewhat greater expenditure, on information collection and processing than we have heretofore given. The Energy Informa- tion Act is offered as a vehicle for discussion of that urgent new effort. At hearings which will begin early next year, I hope that the best experts on both energy management and iaformation management will help us refine this measure and as refined, quickly enact it into law. Mr. President. I ask unanimous coasent to insert both a digest and the text of the bill in the RECoRD at this point. Following these insertions. I wish also to insert the text of an article from last Sunday's Washington Post-December 2-by Bernard D. Nossiter, captioned "North Sea Oil: More Than We Know." The article very trenchantly illustrates the type of inexcusable secrecy about mineral fuel reserves that now exists, and which the Energy Information Act would go far to correct. There beiag no objection, the bill and material were ordered to be printed in the Record, as follows: DIGEST OF S. 2762. THE ENERGY INFORMATION ACT Energy Information Act-States purposes to provide for improved energy in- formation within a National Energy Information System, for inventories of en- ergy resources in the public lands, for regular reporting of information by sig- nificant corporations in energy industries, and to provide information that will aid in improved policy making. conservation, science, environmental protection, competition and regulation. Defines terms. Title I: Bureau of Energy Information-Establishes a Bureau of Energy In- formation ("the Bureau") within the Department of Commerce, headed by a Director of Energy Information ("the Director") appointed by the President by and with the advice and consent of the Senate. The Bureau is to operate, maintain and improve the National Energy Information System. The Bureau is to establish consultation, coordination and exchange arrangements with other department.s and agencies of government, and private institutions, which have libraries of energy infonnation, The Bureau is also to conduct extensive stud- ies and reviews of the state of information on such subjects as the institu- tional structure of the energy supply system, energy consumption patterns, sta- tistical and accounting methods and problems in energy information, price and cost factors affecting energy, technological and environmental factors, and capital requirements of public and private institutions responsible for energy. The Bureau is also to report monthly, quarterly and annually on specified classes of energy information. Title II: National Energy Infonnation System-Establishes a National En- ergy Information System ("the System") to he operated and maintained by the Bureau, Establishes the System in three components: a public library, a confidential library, and a secret library, Provides that the System shall use other available libraries of energy information: use modern, including micro- form and electronic, methods: have its information on energy industries orga- nized by establishments, companies. Standnrd Industrial Classifications, geo- graphical locations and other referents: and have capacity to receive and answer questions of fact concerning, and compare sources of energy informa- tion. Provide for unlimited public use of the public library of the System, at fees generally sufficient to cover costs of simch use: but provides for waiver or reduction of fees in certain cases of public-interest use. Provides for access to the confidential library by Federal Government officials, for official use only. Establishes the secret library as repository for information that may be used only for statistical purposes in anonymous aggregates, Establishes priorities for entry of information into the System. Establishes standards for placement of energy information in the public, the confidential, or the secret library. De- PAGENO="0229" 223 fines and limits national security and reasonable competitive equities as rca- sons for placement of infonnation in the confidential or secret library. Pro- vides for removal of information more thaa 25 years old from the confidential or secret library to the public library. Provides for hearings in eases of dis- pute on placement of information in a particular library of tbe System, and for placement of information iii questioa in the secret library pending resolu- tion of the dispute. Provides penalties for unauthorized disclosures and thefts of information from the System, and for failure to provide required informa- t ion for the System. Authorizes Secretary of Commerce or the Director to ob- tain from an affiliate of a company, or an organization of which it is a member, any information which they are empowered by this Act to obtain di- rectly from the company, provided the company is notified. Gives Secretary of Commerce and Director pow-er to inspect records and subpena documents in certain cases. Confers jurisdiction on District Courts to enforce such subpenas. Title III: Energy Resources Inventories and Inspections by the Department of the Interior-Directs Secretary of the Interior to compile and maintain, on annual basis, an inventory of mineral fuel reserves and other natural energy resources in public lands of the U.S.. including the Outer Continental Shelf. Provides that the inventories may be based on estimates, supplemented as fea- sible by oasite geological and engineering inspections by departmental pei~on- nel. Provides that the first inventory is to be completed within iS months and reported to Congress within 20 months of effective date of this title. Provides that copies of all such annual reports by the Secretary of the Interior be fur- nished the Director for the System's public library. Provides that, on request of the Director, the Secretary of the Interior shall make onsite physical inspections of mineral fuel reserves and natural energy resources reported in private lands. Contains directions for the contents of reports by the Secretary of the Interior. Title IV: Information on Mineral Fuel Reserves and Natural Energy Re- sources-Provides that substantial energy resources companies are to file veri- fied annual reports w-ith the Director on the mineral fuel reserves and natural energy resources they control. Contains directions on the contents of such re- ports. Provides for promulgation by the Director of forms for the making of such reports and also of the reports required by title V of this Act. Provides for clearance of such forms by Office of Management and Budget within seven months after the effective date of this title. Provides that such forms shall be mailed by the Director to reporting coaipanies within ii months of effective date of tbis title and be returned by companies to the Director within 60 days after receipt. Provides for single rather than dual reports by companies which are 1)0th substantial energy resources companies and major energy companies, as defined in Act (companies controlling $5 million in mineral fuel reserves, $50 million in other natural energy resources, or $50 million in sales or assets in the energy industries are, generally. within the definitions). Provides that information obtained by Director on report forms required by this title and title V shall lie placed in the public. confidential. or secret library of the Sys- tem, as provided elsewhere in this Act. Title V: Information on the Energy Industries-Requires major energy com- panies in commerce to file verified annual reports. on an establishment basis, on their operations worldwide. Provides for the making of such reports in tw-o parts, one being for the public library of the System and the other for the confidential or secret library. Contains directions for the contents of such re- ports. including information on shipments by Standard Industrial Classifica- tion, total business receipts. and in certain cases profit infonuation. Authorizes the Director to require such reports more often than annually in certain cases, and to require from major energy companies lists describing all mandatory and voluntary reports they file elsewhere, containing energy information. Title VI : General Accounting Office Oversight-Provides that Comptroller General of the F. S.. upon his ow-n initiative or by direction of Congress, shall review and evaluate procedures of the Bureau. Review may include issues arising under claims that certain energy infonnation required by the Bureau under this Act is proprietary or involves the national security and therefore is entitled to he kept secret. Directs Comptroller General to report to Congress at least annually on such review-s of the Bureau : but provides that such report may he by endorsement of or addendum to the Bureau's own annual report. Title VII : Conformance of and with other statutes-Provides that the Direc- tor may excuse a company from providing energy information required by this PAGENO="0230" 224 Act, if the company waives confidential status of the same information as pre- viously provided by it to the Census Bureau and protected by the Census Code [13 F. S.C 9. Amends the "Freedom of Information Act," 5 IJ.S.Cm 552, to pro- vide that clauses (4~ and (91 of siibsection (b), pertaining to corporate and geological information, shall be construed consistently with policy of this En- ergy Information Act. Amends Federal Reports Act of 1942. 44 U.S.C 3504, 3506. 3505 and 3509. to make it consistent with policy and purposes of this Act. Title VIII : Miscellaneous-Contains usual separability section and blanket authorization of appropriations. Establishes effective date as date of enact- ment. except titles IV and V. which are made effective on first day of third full calendar month after date of enactment. [From the Washington Post, Dec. 2, 1973] NORTH SEA OIL: MORE TITAN WE KNow (By Bernard D. Nossiter) London-Sometimes next summer, a tanker is due to take 10.000 barrels of oil from the Arygyll Field in the North Sea. 200 miles east of Edinburgh, and land the precious cargo in Aberdeen. This will be Britain first oil delivery from the cold and forbidding waters al)ove its contenental shelf, the start of a flow with incalculable economic and political consequences. The government here is modestly estimating that the North Sea will yield about 2 million barrels daily a decade from now about two-thirds of what officials think Britain will then consume. This would he pleasant for Britain hut of no great consequence for Western Europe as a whole. The official line here echoes Frank McFadzean, the managing director or chief of the huge Royal Dutch Shell Co. "The realization of present hopes for the North Sea." he said recently, "will not materially change Western Europe's dependence on Outside sources ... for the foresecable future there is simply no alternative source (to the) Middle East." However, interviews with oil company executives, their bankers, geologists and economists, make clear two things: The British government has persist- ently underestimated the oil resources of the North Sea, and deliberately turned attention away from its sizeable deposits of natural gas. NOBODY KNOWS FOR CERTAIN For oil alone. British officials are reliably reported to have privately doubled their figure of the sea's likely yield. In the City of London. where unromantic financiers raise the money for risky drilling ventures, this doubled estimate is doubled again. Tf the money men are right and the North Sea yields 8 million barrels a day of oil, plus the equivalent of another few million barrels daily in gas, the pic- ture changes dramatically. The continental shelf off Britain and Norway would then, in oil company Jargon, become far more "interesting" for Western Eu- rope's energy demand than the public is now officially told. The crucial point is that nobody knows for certain. Those with the best knowledge-the big international concerns like Shell, British Petroleum. Exxon and Mobil-have strong business interests in keeping silent. But the wide range of estimates and the rapid pace at which the govern- ment changes its own forecast-it was predicting only 1 million barrels daily not long ago-says something al)out government oil policy. It suggests that crucial political and economic decisions about energy are made by officials no better equipped than a blind-folded man stumbling around a carnival funhouse. According to informed critics, the government here has belatedly learned or acknowledged these things: The profits of major companies could escape any taxat.ion in the United Kingdom because they will he offset by the aritifical levies imposed in the Mid- dle East. PAGENO="0231" 225 Instead of the stiff exploration program the government thought it had im- posed on firms, the companies are drilling at a rate of their own design, and most are behind their own schedules. Instead of a thorough, independent examination of the companies' exploring experience, the government has relied on a handful of geologists of limited standing. As late as 1972, the agency concerned employed only nine technicians for offshore petroleum licensing. A leading economist who served as a key adviser to the Department of Trade and Industry, the ministry in charge of energy problems, says: "I can tell you from my experience that the government does not even know such elementary things as the current stocks of refined products." DIFFICULTIES OF DRILLING Oil company executives and their geologists retort that there is nothing very remarkable about changing and increasing estimates for North Sea oil. To find oil and gas anywhere, they stress, is a risky, costly, uncertain affair. "You simply don't know what you have until that drill bites in and hits it," says a geologist who once supervised several hundred others geologists in one leading concern. The North Sea, it is argued, is a particularly chancy and expensive place to look for oil and gas. The deposits lie deep below the surface, as much as 600 feet down. Working conditions are the worst that offshore oil men have en- countered anywhere. Stiff gales blow up to 28 knots, and the icy waters and towering waves are far more hazardous than the gentle waves in, say, the Gulf of Mexico. Optimists' estimates of what the North Sea contains, industry men argue, are based on guesses about areas that have not even been drilled. The chilling wa- ters off Norway above the 62d parallel, the shelf west of the Shetland and Orkney Islands and north of Scotland, the Celtic Sea between Ireland and south- ern England. A former civil servant who played a leading role in shaping Britain's North Sea energy policies and is now a consultant to an oil equipment firms says: "Responsible government must be cautious. Its estimates are necessarily based on the known, not on guesses about the unknown." An oil financier contend that there are good legal and business reasons for understating finds. "Your Securities and Exchange Commission," he says, "takes a dim view of companies that exaggerate their discoveries and thus promote their shares. Moreover, these firms are still bargaining with govern- ments over the terms of licenses to explore and produce in the North Sea. Some of the richest finds have been along the median line, dividing Britain's shelf from Norway. If the companies disclosed their private estimates, the dif- ficult Norwegian government might fix even harsher terms for the blocks that have not yet been awarded." `FRONTIERS OF TECHNOLOGY" The industry scoffs at the suggestion that it has not conducted an all-out search, at least for oil. The hunt, however, is expensive, it says. An explora- tion well costs $2.5 million to $5 million in the difficult waters. Once oil is found, the capital or investment cost of lifting it out is put at $2,500 for each daily barrel the field will yield. 10 or 15 times as much as on shore. Above all, the industry complains that it lacks the big and expensive rigs needed to extract the oil as well as the skilled manpower to operate them. "You are at the frontiers of engineering technology in the North Sea," one executive says. "We are building structures for conditions we have never met before." Finally, the Department of Trade and Industry is blamed in part for hold- ing up the search and production. The companies acknowledge that the govern- ment gave them liberal terms-they can hold on to their North Sea blocks for 46 years and must pay in royalties only 12.5 per cent of the price of oil they find. But the ministry deliberately steers licenses to companies that buy Brit- ish equipment. and the equipment makers performance here is universally con- demned. They are blamed for an unwillingness to design new rigs, failing to meet specifications, delays because of strikes and every other failure of British industry. PAGENO="0232" 226 The buy-British policy has pushed back oil company schedules as much as 19 months, industry men say. "We have gone as fast as we can." an expert from one big company con- tends. "There have been, of course, honest differences of opinion over what the North Sea contains.' Industry men delight in telling how Shells persistent interest pushed a re- luctant and rival Britsh Petroleum into exploring its Forties Field off north- ern Scotland. A very conservative estimate in London's financial circles now calculates that this field alone will yield from $150 million to $250 million an- nually in profits after taxes by the end of the ~970s. THE CRITICS' CASE Despite this imposing array of oil company and civil servant arguments, there are prominent critics who are unimpressed. They insist that the big com- panies have deliberately held hack on exploiting resources in Europe's back- yard and that successive governments have knowlingly or ignorantly abetted them. One leading skeptic is Peter Odell. an economist who worked for Shell and now directs an institute of economic geography at Erasmus liniversity in Rot- terdarn. "Presentations of the scale of Western Europe's oil and gas resources and their production potential are unrealistic," lie says, "either through ignorance or deliberate distortion on the part of the vested interests, The ignorance stems from the failure of governments to place necessary obligations on the compa- nies to reveal a comprehensive set of publishable facts on their activities and then to make sure they have adequate numers of staff competent to collate and evaluate the flow- of information and so to give valid advice on which to base policy decisions . . . The distorting or withholding of information appears to he the North Sea norm." Odell points to a study made of 128 oil pools in Alberta, Canada. It shows that estimates of proven reserves increased 880 per cent between the first and 20th year after discovery. He complains that the major oil companies have underplayed and underex- plored the North Sea in order to take as much as possible from the Middle East while the taking is good. In w-hat now- may he an exaggerated time span, Odell calls this the companies' "last. decade of opportunity" in the Arab world. Thomas Balogh, the Oxford economist who w-as personal advier to Harold Wilson in Britain's last Labor government and first to disclose the big firms' tax-free honanza, says much the same thing. He recently told his fellow peers in the House of Lords: `With their hold on Arab oil steadily w-eakening, the oil companies, the In- ternational giants, planning in the long run, must know- that the best way w'ould be to exploit as much as they are allowed of Arab oil and keep as much British oil in reserve as possible." GAS DOESN'T PAY Such charges, of course, cannot apply to the independent companies who lack oil holdings elsewhere. The giant.s like Shell. British Petroleum, Exxon and the others who have the largest share of North Sea blocks, dismiss Odell and Balogh as wild-eyed socialists. However, some candid company executives concede at least part of the charge, that they are turning their hacks on gas. The first North Sea discover- ies were gas deposits, hut the search for this fuel by the majors abruptly halted when oil w-as found in 1970. The companies blame their lack of interest on the diminished prospect of profits from gas. In Britain, they must sell all they find to a single buyer, the government's British Gas (`orp. The companies say this puts them at a bar- gainint disadvantage and that the Gas Corp. has exploited it by offering low prices. If the companies went after gas vigrously-and they are certain to find some along with the new- oil fields they discover-Odefl contends that Europe's energy picture could alter sharply. The standard estimate for 19S0. he observes, puts North Sea and other local gas at only 10 percent of Europe's energy demand. He calculates, however, PAGENO="0233" 227 that indigenous gas could fill 22 per cent of Europe's fuel requirement, and thus considerably reduce the role of oil. He thinks it is reasonable to expect that the North Sea will be yielding 6 million barrels daily at the end of the decade. If he is right, the basin's gas and oil would provide nearly half of Western Europe's energy. Instead of the conventional estimate that forecasts Europe must import oil to meet nearly two-thirds of its 1980 energy demand, Odell slashes this figure to 33 per cent. Industry men concede that North Sea gas reserves are likely to turn out well above current estimates, although much smaller than Odell's figure. his forecast for oil, however, is in line with predictions made by some oil men un- attached to the major firms. If Odell is anywhere near the target, Europe's dependence on the Middle East would be reduced drastically. The lack of official candor about the North Sea is strikingly illustrated by the fuss that Balogh kicked up over taxes. Parliaments legislative oversight of ministerial agencies is shallow and un- informed compared to the searching spotlight a congressional committee some- times shines on the executive branch in Washington. But, largely prodded by Balogh and Harold Lever, a knowledgeable Labor MP, a parliamentary com- mittee did take a close look early this year at how much the British treasury would get from the North Sea. At first, T)epartment of Trade and Industry witnesses asserted that British taxes would cream off half of any company's profits from a large field in full production. rnder close questioning, the civil servant.s conceded that these cal- culations did not apply to the majors. The biggest firms enjoy what Sen. Paul Doublas once called a "golden gim- mnick," far bigger than the much better known depletion allowance. The majors call the bulk of the royalties they pay to Arab states a "tax" and this "tax" is based on a national "posted" price. These "taxes" are offset, dollar for dollar and pound for pound, against tax liabilities iii the United States and the Fnited Kingdom. As a result, in Brit- ain alone, nine big companies have already piled up more than $3 billion in tax "losses" to wipe out levies on future profits from the North Sea. With characteristic British restraint, the parliamentary committee called this "unsatisfactory." It also regarded as "unsatisfactory" the fact that the ministry could not examine the companies' costs in the North Sea. In the House of Lords. Balogh was less restrained. The committee's findings, lie said, underscore "one of the most scandalous and costly derelictions of duty by ministers and their officials advisers." He called the report "a warming to bureaucrats that their follies would not go unnoticed." The chancellor of the exchequer, Anthony Barber, has now promised to close the loophole. It becomes bigger every time the price of oil rises or the Arabs increase their take from the national posted price. The affair is one more example of the fog that hangs over the North Sea's potential. Whatever energy resources do exist in the basin, they are clearly much more than official versions now allow. Policies based on the assumption that Europe must remain indefinitely in thrall to Arab oil may fit the plans of major oil companies. Whether they reflect the facts is a still unanswered ques- tion. Mr. Jackson. Mr. President. I am pleased to cosponsor the Energy Informa- tion Act introduced today by time Senator from Wisconsin (Mr. Nelson). The enactment of this legislation is important to our present efforts to solve short- range energy problems, and is absolutely crucial to our goal of identifying and solving energy-related Iroblems in time future. In the past months, as many of us struggled to construct a clear picture of the U.S. energy supply system, our almost desperate need for accurate, corn- plete and timely statistical information has been painfully obvious. Severe, short-term shortages are upon us. Government has a tremendous responsibility to see that these shortages are borne equitably and that damage to the econo- my is minimized. But in undertaking this task, we in the Congress are at a terrible disadvan- tage. The gathering of energy information by the Federal Government is in such a chaotic state that is has been Possible for industry spokesmen to charge repeatedly that Members of Congress and the executive branch do not under- PAGENO="0234" 228 stand the energy supply system. The implication is that energy policy ought to be made I A energy industries. Given the disastrous shortages we face this winter, no Member of Congress cOUl(l advocate such an abrogation of responsibility. We have to act on the basis of the best information available from Government, industry, and public sources. Mr. President. a prime example of the deficiencies in our access to critical energy information is the apparent rapid growth in our dependence on Arab sources of petroleum during the past year. According to the Bureau of Mines, direct dependence on Arab crude oil and products averaged some 0.560 million barrels per day during 1972. This represented 3.4 percent of the total U.S. con- sumption during 1972 f 16.5 million barrels per day. Early ia the fall, as the Mideast ~var began. the best data available from the Bureau described imports for the second quarter of 1973 and showed a di- rect dependence on Arab sources of 0.910 million barrels per day, or approxi- matelv 5.3 percent of the 17.0 million barrels per day U.S. consumption. The important deficiencies in this data are First, it is not timely. We now- know from analyzing raw- census figures, that direct dependence oit Arab iniports for September 1973 was over 1.2 million barrels per day-approximately a third larger than in the second quarter-and over 7 percent of consumption. Second. It is not complete. There is no way to use available data to dern-e the significant indirect dependence on Arab sources through imports of prod- ucts from refineries abroad which use Arab crnde. Even though these refineries are run either by U.S-based companies or companies which do significant busi- ness in the United States, our Government does not monitor, on a continuous basis. the flow of petroleum through them to the United States. We now know that this indirect dependence in September was probably at least 1.2 million barrels per day. increasing our dependence on Arab sources at that time to over 2.4 million barrels per day. or almost 14 percent of consumption. Thus, when the wor broke out in the Middle East. the very critical information re- lating to U. S. dependence on Arab oil was greatly in error. This situation led to the escalating estimates offered by the administration during October: On October 12. White house Aide Charles Di Bona estimated dependence at 1.2 million barrels per day. On October 20. the estimate was raised to 1.6 million barrels per day. On October 24. it went to 2.0 million barrels per day, and on October 30 to 2.5 million barrels per day. Now. in the middle of winter when demand for petroleum is at its highest, the amount of oil we maight have received from Arab sources could undoubit- odly be higher still. But the important point is that the administration and the Congress should have Icon aware of the petoleum situation w-hen the war broke out. The fact is that important information was simply not available, and the infoi-mation which was availal di' existed only in unorganized bits scat- tered in different Federal offices. The (`ongress eannot a 11ev energy policymakers to render their decisions an( recommendations on anything less than the most complete and timely in- formation. Simailarly. (`ouigress cannot allow energy policymnkers to flounder in a seemingly endless sea of incoherent and contradictory numbers. graphs, clia rI s, and diagrams. Tile bill whicli the Senator from Wisconsin (Mr. Nel- SOIl ) is introducing today will give Congress tile opportunity to solve both of these llroldenis. Beyond the present crisis, it is the considered opinion of nearly all those wile work iii this area that energy scarcity, over long term, will impose con- tinuimlg and important responsibilities ~n the Congress for the management of enerry policy. Any attempt tI carry out these responsibilities without the kind of fllndamentai information which tile Bureau of Energy Information w-ould prev:de will 110(0 the (`0 ngrecs in an impossible situation. This legislation is an essential first ~te~ in eqinppiag Congress and the executive branch w'ith the tools wilicil they urgently need to formulate and carry out public policy with respect to energy resources and supply. TO obtain an oieqnate understanding of the flow- of energy through the U.S. ecoanly. statistical information is required at several junctures in the system. ill tilL' case of I etroieum. for example. we need to know-, among other things, the extent a ad location of existing petroleum reserves, tile potentials for PAGENO="0235" 229 achieving various rates of extraction. the rate of flow of crude oil from the wells to the refluieries by piiwline or by tanker, the refinery throughput capaci- ties. and the various product yield ranges. To understand tile distribution of petroleum products, we have to know transport capabilities and stock levels and the structure of the transportation network which supplies fuel to various users. At the consumption end. we should know who the big users of fuels are, both on an individual level and in terms of significant consuming sectors. Ad- ditionally, we need to know the levels of efficiency with whichi fuels are con- verted and tile potential for substitution of alternate fuels by these users. In cnniieetion with each point at which we collect. information on the basic operation of tile supply system, information about operating costs. environmen- tal costs, and profit levels for existing and alternate technologies are essential if we are to understand how the system works and how policy should be written to govern it. We need all this information, and we need it in an orga- nized andI usable form available at a central locatioii in the Federal Govern- ment. A second vital area in which we must expand our collection of energy infor- ination is in estimating the resources owned by tile Federal Government in the public lands. These are truly national resources, belonging to the people of the United States. They will undoubtedly be developed, for they 1)rovide the only possibilities for significantly increasing our domestic energy supplies. Unless tile Congress and the executive branch have adequate knowledge as to the ex- tent of these resources, it will be impossible to 1)11111 adequately for the future and to fix reasonable compensatioli in the transactions with the private compa- nies which must do the developing. If we are to decrease our dependence on foreign energy sources significantly over the coming years. the resources owned now by the people of the United States will be an extremely important ingre- (hient in our mix of new supplies. `We must begni tile inventory of these re- sources to (letermine tile extent of the contribution they can make. Mr. President. this bill will go a long way toward filling what, in some in- stances, is an lilformation void, and iii other instances is unintelligible information overkill. Tile bill being introduced today is an expanded version of an amendment offered by the Senator from Wisconsin (Mr. XF:LsON) last sum- iiier ihtriur the debate on S. 1081. At that time, I respectfully requested that the Senator withdraw his amendment, in hopes that w-e could work together and draft ~ mu ire comprehensive bill and begin hearings on it before the end I) tiìe year. Tile distinguisiled Senator from Wisconsin (Mi'. Nrvsox ) gra- cionsly honored my request and withdrew his amendment. in light of this un~ dei'standing. Tile bill introduced today fairly represents. I believe, a melding together of the amnelldment offered by the Senator from \Visconsin with the expanded for- mat that. I felt was iieeessary to deal effectively with the problems posed by inadequate energy information. Put in simplest terms. Mr. President. the i~urpo~e of this bill is to provide for the improved (`ohlectioa. 0i'giifliZatiOll. (`oordillation. and dissemination of energy information by a National Energy Tilformation System. This system is to lie operated and ma ilitaimled by a (`eiisims-hike Bureau (-If Energy Information established within the 1)epartnient of (` Ililiierce. Tb' Ba rena w II have the aim- thority to collect and coordinate energy information from tie pa1 (lie domain- infoi'mation collected now by some fi4 Federal agencies and eomnniissiomis-afld essential infornmatiomi available only from private industi'y and/or its trade as- sociations. The Bureau, like tile Census. is intended to collect and organize en- ergy information iii an atmospllere of strict impartiality. with ample protec- tion for reasonable competitive equities and national security. Ta particular, tile primary function of the Bureau will he the collection (If statistical infer' iaation which can then be used by (.`ongress. Federal agencies. and commis- sions in preparing analyses essential to tue formation of policy. Time inforniation collected w-ill lie stored iii three libraries : the public ii- 1 ira ry. time comm fidential Ill ra ry. 011(1 the secret Ii 1 ira i'y. The rea si ii for such a system. Mr. T!m'esidemit. is to insure that while the pnl lie will Ii' gun m'anteed ac- cess to the vast maJority of the information deflected lv rh' llimri'au. reason- able compel itive equities 1111(1 national security ivihl hut hue alversely affected and (`an he protected 1 iy placing ``senstitive information'' iii either (if the latter twO libraries. PAGENO="0236" 230 In addition to the information-collecting activities of the Bureau, the bill provides for a series of studies to be undertaken by the Bureau in an eort to improve the quality of the energy information collected and improve the coor- dination between the many agencies and institutions which now gather and re- port energy information. Mr. President. a bill of this scope and complexity is. admittedly, very diffi- cult to draft. It is my hope that when hearings are held on this bill in January. my colleagues in the Senate will offer constructive suggestions and comments that will improve this legislation. It is also my sincere hope, Mr. President. that my colleagues in the Senate share my sense of need and ur- gency for this 1)111. I feel that the enactment of this legislation is necessary if the (`ongress and the public are to understand the energy supply system, and have the capability of directing its operations toward the enhancement of the public good. Chairman PROXMTRE. Senator Nelson. when the head of the Fed- eral Energy Office. Mr. Simon. was here. T asked him about your bill and he expressed some hesitancy about it. he indicated that he fa- vore(l the Principle of the bill but he recognized that there were some problems involved. At the time~ the bill was being discussed ap- J)arenti\- he indicated some reluctance to support it. W~hat is the reason for Mr. Simon~s reluctance and on what points do you differ Senator NELSON. Well. I haven't seen his testimony. I would as- sume he might disagree with the bill on the question of how much public disclosure there should be of reserves that a company has: that is. disclosure by name of the company. I think that that is probably the issue. I am assuming that no one could reasonably defend the proposition that the Government should not know what the reserves are. Now, if it were the position of Mr. Simon that in fact the Govern- ment should not have the right to require sworn statements from companies and should not have the right and the capacity with its own geologists to examine the estimates and the methodology of esti- mating reserves of a particular company. I would disagree with him. I would assume that nobody would want to be in the position of saving the Government should not be able to do that, on the funda- mental principle that we are dealing with a resource upon which the survival of our system depends. Surely you cannot leave it up to the private sector to decide what the Government will know about the resources that will decide whether or not the whole economic, social, cultural. industrial system collapses. If we had had this information and had been established to report it and bring it to the public attention some years ago, as many re- source people were advocating, we w-ould not be in the situation we are in today. In fact, if we had had this information and this legis- lation ~O years ago. the Research and Development Act authored by Senator .Jackson and recently passed by the Senate very quickly, calling for the expenditure of S~ billion a year in R. & D., would certainly have passed no later than 1955 instead of 1973. The warn- ings had been coming prior to 1955 that w-e were going to run into an energy crunch, and if we had had the kind of information the Energy Information bill would provide us. and if it had been brought to the attention of the Congress on a formalized basis, then we would have passed something like the Jackson R. & D. legisla- PAGENO="0237" 231 tion 15 years earlier than we did. We would have been in the field of R. & D. on coal liquefaction, gasification, geothermal energy, re- search, solar energy research, a whole number of fields. We would have been active for the past 15 years because, if the public had un- derstood awl Congress had understood what we were running into, we would have acted then instead of now. So I am assuming that nobody will be appearing here to say that the Government of the I~nited Sates is not entitled to know what our resources are, even on our own public lands, offshore or else- where. So I think probably the issue with Mr. Simon most likely revolve around the question of how much of this information should be dis- closed to the public by name of the companY. In other words, when the Government. finds out that Exxon has a certain number of mil- lions or hundreds of millions of barrels of oil reserves underground, or has so much gas underground. should they identify it publicly? I don't think it makes any difference to the company. I think it is a phoney issue. I think that Standard Oil of New Jersey knows as much about Exxon reserves as Exxon does and I think Exxon knows as much about. Standard Oil of New Jersey. After all, all you have to do is watch the interchange of personnel between the two compa- nies. General Motors won't tell us how much it costs to build a car, or how much it costs for the metal or how much it. costs for the labor, but General Motors executive and engineers are being hired by Ford and Chrysler each year. and vice versa, and they do not leave behind them the knowledge they gained when they were there. And the same is true in the oil companies. I doubt ver much whether the issue is really an issue of proprietary right for competitive reasons between the competing companies. I think the real reason is they do not want the j)llblic to know. In any event. I would think that would be the issue mainly in dis- pute. But certainly there can be no dispute about the public and the country knowing how- much reserves we have of gas and oil and coal and any other energy source. Chairman PROXMIRE. has there been any representation made to you as to what specific damage. what harm, will be done to the com- panies if this information on reserves, for example. is disclosed or this information on costs is disclosed? Senator NELSON. Not recently. hut I think it is the traditional, classic proprietary right argument, in which industry says: "We have a l)rOprietary right here to this information and it. should not be disclosed because it will adversely affect us with our competitors." Chairman PROXMIRE. In any event, von will provide in your bill if there were any adverse effect on the companies. if that could be shown, and if disclosure of the information were not essential to the national interest, then it could be classified either as confidential, in which case it. would be available only to certain government officials, or secret, in which case it would he available only to a few govern- ment officials who would have to have it in order to compile data or in ordei' to act? Senator NELSON. Yes: if it is really a question of proprietary right., which would affect their competitive position, and if there is PAGENO="0238" 232 no conflict in the public interest, then it would be classified and not made public. Chairman PRoxulnE. I would assume that the reason for their objection would he that they woul(l be concerned that the public in- terest might suggest that if information should be disclosed that might be (lamagmg to their competitive position. is that a possibil- itv? Senator ~\ELSoX. T assume that that is what they are talking about. I want to repeat. however, that none of the information about how much of any resou ice we have, that is. the question of the total amount, none of that should be withheld from the Government or the public. They might have some argument for saying that, is all right hut (lont identify how much we have by comapnv name. That is an issue on which we will have to take some rather extensive testi- monv. But the heart of the mattei' is to find out how much we have got and to have the public know how much we have got. and in those areas where there may be a valid question of a proprietary right, to allow whatever that information is. and I cannot imagine exactly what it is. not to he made I)ublic by company name. Chairman Pnox~rinr. I have some. additional written questions for the record but I also have one or two I would like to ask now. Your bill. as I understand it. requires the Interior Department to gather data about the reserves and resources on public lands, includ- ing making on-site surveys. I am talking about public lands. WThat authority does the Interior Department have to do this and to what extent is that authority being utilized? Senator NELSON. Well. counsel says that on the public lands they may have authority now. hut mostly don't use it. awl on private lands, they don't have the authority. Chairman PROXMTRE. Do von agree that with respect to the public domain the Government should have its ow-n exploratory and ana- lytical capacity for determining the extent and quantity of resources, it should not have to rely on private industry for knowledge in this area on its domain Senator Nrrsox. I think the Government should have it on both the public domain and private domain. Chairman PnoxMliiE. Finally, as I understand your bill, it would not take current functions away from existing major statistical agencies. the Bureau of Labor Statistics would continue to gather statistics on prices and employment in energy industry, the SEC would continue to gather the corporate business information it does now, how-ever, this information would be made available to the En- ergy information Bureau and addled to their public libraries. Is that the case? Senator ~rvsox. Yes, sir. Chairman PROXMTRE. Congressman Conable. I See response of Senator Nelson to additional written questions posed by Chairman Proxnijrp iU~1IIJflIII~ on p. 2'14. PAGENO="0239" 233 Representative CONABLE. Senator. at. the outset let me say I hope Standard Oil of New Jersey and Exxon don't get. into a. dispute over this. I think it unliketv they will because they are the identical company. Senator ~ELSOX. These big companies change their names so often. I realized when I said it T was talking about the same com- panv. That is probably another technique for confusing us. Representative CONABLE. It appears quite likely that there is very substantial agreement between von and the other proponents of your bill and the administration about the need for this and I hope we can move promptly and with cooperation to get. some sort of enact- ing legislation requiring mandatory reporting. something that will not. bog down into any protracted dispute relating to the matter of degree, but as it does appear that one of the first steps we must. take if we are to resolve the confusion the American 1)eol)le feel about fragmentation and frequently contradictory reporting is to build a sound base, and that. this first step should have full cooperation and T hope that you will work as closely with the administration as it appears to be likely to advance that goal. And it shouldn't be erased between conflicting political interests at this point because the public does have grave concern about what the facts are. That. is not. a question. that is a statement and a hope. Senator NELsoN. I would agree with that. Representative CONABLE. I would like to ask von one thing, sir. In your statement you refer to an FTC official statement regarding some natural gas reserves and underestimates of those reserves up to 1.000 percent being reported to or by the Federal Power Commis- sion. Can you tell us the name of the FTC official. when and where he made the statement, what information he based it on ? \Ve would be intereste(l in that l.ecause we heard verY similar testimon regarding underestimates of oil reserves from Ralph Nader last week and this kind of statement is very disturbing to the public. Senator NELSON. Yes, the statement was made. before Senator Hart's subcommittee last sinner by Mr. James Tialverson. Director of the Bureau of Competition of the Federal Trade. Commission. Representative CONABLE. Bureau of Competition? Senator ~ELSON. Director of the Bureau of Competition. Federal Trade Commission. Mr. ,Tames TTalverson. Tt w~is before Senator 1-Tart's hearings last summer. T do not have the (bite (~t hand. Representative (xABI~. Thank you very much. Senator. That is all. Mr. Chairman. Chairman PIiox~[TRE. WTeII. thank you very. very much, Senator Nelson. It was most helpful and we deeply apl)reciate it. Your legislation is precisely the kind of legislation that our hear- ings are designed to exj)lore and to develop infoi.ination on and we certainly need it and you have made a devastating case. if we had had this kind of information in the past our problem would not. be nearly as acute as it is today. Representative COXABLE. Thank von very much. Senator Nelson. PAGENO="0240" 234 [The following information was subsequently supplied for the record:] RESPONSE OF HON. GAYLORD NELSON TO ADDITIONAL WRITTEN QUESTIONS POSED BY CHAIRMAN PROXMIRE Question 1. I note that the new Energy Information Bureau Set U~ by your bill would he located ia the Department of Commerce. That raises several questions: Why not the new Energy Administration? Why not the Interior Depart- ment? Why not the FTC? The FTC has been suggested by others because it al- ready has responsibility for collecting certain similar business information. Hopefully it is expanding this activity `with its proposed "Line-of-Business" re- porting. which would give data on sales, profits, etc. by product line. Also the FTC is an independent regulatory agency and, nnder an amendment to tbe Alaska pipeline bill, it no longer needs 0MB clearance for its questionnaires. However, I note that section 703 (dj of your bill does impose on 0MB the re- quirement to approve forms speedily-a very important provision. Answer. The Senate Interior Committee has now- completed four days of hearings on S. 2782-hearings which were still in the future on Jan. 21. Con- siderable testimony was received on the issue of where in the Federal Govern- ment the proposed National Energy Information System should be placed. The energy information bill, S. 2782, was drafted as a joint effort by Sena- tor Jackson nnd me as an enlargement of the concepts first put forward as the "Mineral Fuels Reserve Disclosure Act." That proposal w-as offered in tw-o alternative versions. which w-ere drafted as amendments to the Alaska pipeline hill. The first version (S. Amendment 303. 93d Cong.) placed the responsibility for operation of the information function in the Federal Trade Commission. The reasoning for that placement-my own initial choice-was much as stated In your question. The second version of the amendment (S. Amendment 319, 93d Cong.) placed the responsibility in the General Accounting Office, primarily in the interests of consistency with the Senate-passed Energy Policy Act. 5. 70. In drafting S. 2782. Senator Jackson and I chose an independent new bureau of the Department of Commerce. to be a co-equal sister agency of the Bureau of the Census, as a good. neutral site for the information function. Our reason- ing was that the information-gathering and analysis function would be done better if it w-ere completely divorced from regulatory functions-a considera- tion which, if accepted. would rule out the new- FEA (Federal Energy Admin- istration) as w-elI as the FTC and the FPC. The Nixon administration is now- strongly supporting the FEA as the best interim home of the National Energy Information System, and the proposed new Department of Energy and Natural Resources as the best permanent home. It is the administration~s position that the regulatory and data-gather- ing functions should not he separated. Testimony at the hearings on S. 2782 was divided on the issue, with w-itnesses of equal credentials arguing for and against the desirability of divorcing the long-tenn, analytical information func- tion from the regulatory function. The Departments of Commerce and Interior w-ere both criticized, by some witnesses, as inappropriate places for the new- information function, because of their advocate-client relationship with industry. In the course of much discussion to date. the Senate Interior Committee has most recently leaned most strongly in the direction of creating a new-, entirely independent agency, the National Energy Information Administration, which might even-and probably should-be made an agency of the Legislative rather than the Executive Branch of Government. Increasingly I tend to favor that approach myself, for these reasons: (11 The FEA will necessarily have an information-gathering and analysis function of its own, sufficient to meet its ow-n needs. The main criterion for success of FEA's information arm will he w-hether it provides support for FEA's policy functions and administrative directives. FEA's information arm w-ill always and necessarily be most concerned w-ith answering the energy in- formation questions of the FEA administrator, and those will often be short- term, today's-energy questions. PAGENO="0241" 235 (2) Congress, the public, the press, small business all need a source of ex- pert answers to their hard questions involving energy information. An independent National Energy Information Administration within the Legisla- tive Branch could meet the need, and meet it more effectively than a mere arm or bureau of a regulatory agency in the Executive Branch. The NEIA, having access to all the basic data now collected in and out of Government, having the expert personnel and equipment required to make independent anal- yses and evaluations of data, and-most important-having no affiliation with any policy maker or policy or regulation. could perform a uniquely valuable function. The NEIA would engage in model-building and report-writing, and its mod- els and reports would be available to everyone. Congressional committees could exercise oversight functions. The criteria by which the success or failure of the agency would be judged would be, first and foremost, whether it was able to answer questions in a prompt and credible manner, whether it was able to make predictions that the passage of time would prove to have been correct, whether it was able to meet the energy information needs of all parts of the Government, industry, the press and the public, to the extent they were not able to meet those needs themselves. (3) Very soon now, the country is going to need an information system cov- ering all resources: protein, metals. water, fibers, and the industry that ex- tracts, transports, processes and distributes all the necessities of human life and advanced technological society. In other words. the National Energy Infor- mation System proposed l)y S. 2782 will very shortly need to be redesigned and ~expanded into a National Resource Information System. Whatever arguments might be offered to put a National Energy Information System into the Fed- eral Energy Administration, they can hardly apply to a National Resource In- formation System. This is probably the strongest argument of all against the Nixon Administration's position that the NEIA should be placed in FEA. Since the Jan. 21 hearing before your subcommittee, incidentally, I have introduced S. 3209, the National Resource Information Act, to accomplish that very pur- pose. The bill is pending in the Committee on Government Operations. Question 2. The Director of the Bureau you propose would be subject to Senate confirmation, as is the Director of the Bureau of the Census. However, 1)0th these Bureaus would be under the Social and Economic Statistics Admin- istration, and the head of that. Administration is not subject to Senate confir- mation. Presently that office is occupied by a Mr. Edward Failor, whose only known qualification is that he is a loyal Republican. Would it not be desirable if that office were also subject to Senate confirmation. I presume you envisage that t.he Director of this new Bureau would be a competent, non-partisan professional? I know you are familiar with the reluct- ance of the present Administration to make non-partisan professional appoint- ments to the statistical agencies. I would put great stress on building a legis- lative history about the kind of person we want in this new job. 4nswer. I agree with all these points. The Social and Economic Statistics Administration was created, not by statute. but by a departmental order (De- partment Organization Order 35-4A) signed on Dec. 23. 1971 by theii Secre- tary of Commerce Maurice H. Stans. The order transferred to the new SESA, as its major components, the Bureau of the Census and the Office (renamed "Bureau" by the order) of Business Economics. The effect was to make the T)irector of the Census, a statutory office requiring presidential appointment and Senate confirmation, co-equal with another newly-named "Bureau" director and subordinate to a newly created Administrator, neither of whose offices has statutory standing nor requires Senate confirmation. It would probally be most useful for the Congress to provide, by law, for presidential appointment and Senate confirmation of both the SESA Administrator and the Bureau of Business Economies Director. While the energy information bill. S. 2782, does not take those steps, it does provide for presidential appointment and Senate confirmation of the position of Director of Energy Information, which would be a statutory office on a par with that of Director of the Census. The bill also provides, in section 104. that the Director of Energy Informa- tion will be a person "who, as a result of . . . training, experience, and attain- ments, is well qualified for this position." The chairman's suggestion that this explicit provision of the proposed statute should also be buttressed 1)y a strong legislative history on time point is well taken. 37-143 0 - 74 - 16 PAGENO="0242" 236 Chairman PROXMTRE. I would like to ask the next three witnesses to come forward as a panel. \Ve are very fortunate to have these dis- tinguished men: .Tolin TI. Rigg. Deputy Assistant Secretary. Depart- mnent of Interior: .lii]ius Shiskin. Commissioner, Bureau of Labor Statistics. and John Ifodges. Director of Statistics. American Petro- lenin Institute. Suppose we pmo~eed with Mr. Rigg first. Mr. Shiskin second, and Mr. Hodges last. May I say in view of the, fact we have you three gentlemen and we would like to question you, if you could confine your remarks, if possible. to about 10 minutes. and your full pre- pare(l statements will he printed in the record and we would appre- ciate that very much. Mr. Rigg. T guess you had two statements and one I lresume you are going to present and one is for the record, is that right? Mr. P~m';. That is ri~hmt. Chairman Pnox~r mum:. They will both be printed in full. Please proceed. Mr. Rigg. STATEMENT OF HON. JOHN B. RIGG, DEPUTY ASSISTANT SECRE- TARY, DEPARTMENT OF THE INTERIOR: ACCOMPANIED BY V. E. McKELVEY, DIRECTOR, U.S. GEOLOGICAL SURVEY; JOHN D. MORGAN. JR., ACTING DIRECTOR, BUREAU OF MINES; BILL ELLIOTT, DIVISION OF FOSSIL FUELS, BUREAU OF MINES: AND ROBERT RIOUX. CONSERVATION DIVISION, U.S. GEOLOGICAL SURVEY Mi~. Rmo. ~ Chairman. I wish to tell von T have accompanying me today here Mr. V. F. McKelvev. Director of the IT.S. Geological Survey: Mr. .Tohn Morgan. Acting Dirctoi, Bureau of Mines: Bill Elliott. Division of Fossil Fuels, Bureau of Mines; and Robert Hiomix. Conservation Division. T'.S. Geological Survey. It is a pleasure to appear before you and this subcommittee to de- scribe the activities of the Department of the Interior with regard to the collection and publication of statistics on energy minerals. With your permission I shall subunit a prepared statement for the record, and confine mv oral i'emarks to the highlights of the more detailed prepared statement. In the face of the current energy situation, we are aware of the need for accurate and quickly obtained information on refinery data and stocks and other energy information. Yew methods are mirrently under review in the executive branch and we expect to forward our recommendations to the Congress shortly. In his address of Saturday, January ~0. President Xixon said: I will propose legislation requiring companies to provide a constant account- ing of their inventory. their production and their cost and their reserves. This legislation will make it possible for the Federal Government to monitor these supplies independently. Pending this action. Administrator Simon has announced that the Federal Energy Administration has begun its own audits of refiners stocks as well as con~pliance with Federal pi'ice ceilings. PAGENO="0243" 237 For many years the Bureau of Mines has engaged in the collec- tion. assembly, analysis. and publication of a large amount of data on all of the energy minerals : Coal. natural gas. petroleum, and ura- nium. In addition data are also collected on helium and two minerals of potential use as sources of energy, oil shale and thorium. The data collected and published by the Bureau are extensively used at all levels by public and private agencies and individuals. They are de- rive(l from a wide assortment of collection points and procedures Voluntary industry canvasses, exchange information from State agencies and other Federal offices: personal contacts with industry leaders: l)ublicatiolls and meetings of trade associations and profes- sioiial socieites: I~.S. Geological Survey resource reports; special studies, by our personnel and under grants to universities, and nu- merous other individual contacts. both foreign and domestic. The data collected are assembled and published in a number of forms the best. known of which are fuel commodity sections of the annual "Minerals Yearbook," a series of mineral industry surveys dating from l~3. Numerous monthly. quarterly, and annual reports describe current operations of production. pi ssing transj)orta- tion, consumption and sales, and foreign trade as they relate, to en- ergv minerals. A 1)erio(lic survey of the mineral industries, "Mineral Facts auid Problems," is published every 5 years. with a chapter ded- icated to each of the fuel resources. In addition. a large number of monographic reports oii specialized aspects of energy minerals are published each year. We believe that in general the data provided b this effort have been adequate in the past. Analysis of the information provided led scientists and engineers into research on oil shale and coal gasifica- tion with sufficient leadtime to develop invaluable basic knowledge for current expanded research in these areas. Metallurgical and min- ing research programs also were guided into such useful research as that on special property materials for nuclear energy generation and on advance(l mining methods for coal and oil shale. Industry has made wide use of Bureau data for commercial deci- sions. Although it. is difficult for us to measure the data's adequacy for such use, our working relationship with industry invites criti- cism, comment. and suggeSte(l improvements. The system is not static, but respon(ls to expressed changes in requirements. Our confi- dence in the adequacy of the information system was supported by a survey in l96~ by Opinions llesearchi Corp. on Bureau of Mines sta- tistical l)ubhicatiolis. The survey revealed that the diverse audience for these reports found them generally adequate. There. have been special circumstances. however, under which rapid change has overrun the ability to adapt to new an(l sometimes critical requirements. In wartime. data collection has had to be ex- pandled to meet needs of defense agencies. Wluen the envirionmental and land-use issues blossomed almost overnight. they revealed short- comings in our basic data that have not yet been fully overcome. We do believe we have met Tuterior's and congressional needs in these areas. but have found it difficult and costly to satisfy EPA. The latest test of adequacy is the energy crisis. Its approach was clearly evident, and Interior Department officials have warned of its PAGENO="0244" 238 coming for many years-repeatedly and specificaTly warned against the hazards of dependence upon foreign oil supplies. Tii early 1973 the "Second Annual Report. of the Secretary of the Interior Fnder the Mining and Minerals Policy Act of 1970" clearly described the unfavorable energy supply-demand trends confronting the Fnited States. The report recommended several corrective gov- ernmental policy actions some of which have been taken under stim- iilus of the Arab oil embargo. Thus, in summary, hard data devel- opeul in Interior have been adequate to alert us to the hazard. Now that shortage has occurred, however, the data are insufficient to pro- vide a basis for energy allocation, and it appears that the informa- tion system may be barely adequate for general longer term plan- ning in the light of current uncertainties. We have requested a(lditional funds to strengthen our capability. In the course of reassessing our data collection functions in the light of the new requirements we have identified a number of prob- lem areas. The design of a basic. practical. and effective information system to assess the consequences of l)Olicies. existing and potential, is a major problem. The system must be responsive to change and vet maintain continuity, The standardization of definitions, the for- mat of statistical reports that limits items that~ can be collected, and the organization of primary data to improve its retrievability and usefulness are difficult problems because of the complexity of the en- ergy ill(lustries. Problems arise with the sorting of fact from conjecture in the sta- tistical area. This is especially true in reserve renorting. Collection of data has been necessarily confined to the collection of information where there is a recognition of standardized definitions and of pro- cedures such as are reported in the measured and indicated catego- ries. The capability to conduct analytical studies that could provide energy information essential to an adequate data system is seriously in ad eqi iate. The matching of statistical information is a difficulty that con- fronts and often precludes good analysis. Current information sys- tems have essentially been designed to serve specific purposes than being multipurpose. This limits the utilization of collected data, Im- provements are being made l)llt greater improvements are essential. A recognition of a requirement for the need of proprietary infor- mation results in some limit to data collection. This is especially true in the cost-price and reserve information areas. The cost of obtaining specific information as well as the time re- quired are major problems. Although timeliness is essential, faster compilation of reliable indepth data on a national basis even for emergency purposes. is impractical under current. reporting concepts when the magnitude of the energy industries is considered. Tmprove- ments also are needed in the relation of energy to smaller geographi- cal areas. Data relating to international operations of energy industries are seriously inadequate. Improvements in data~ collection, processing, analysis, an(l l)llblication must be made. Standardization of defini- PAGENO="0245" 239 tions and procedures or improvements in matching methods is a must in this area. Mr. Chairman. in closing I would like to reiterate the two main points of my testimony this morning. First, the products of the mineral intelligence effort in the statisti- cal area have for the most part been adequate for Government and industry needs. However, at. times, imposed limitations have deterred the collection of some desirable data and the development of related analysis. Second. statistical requirements change from time to time, and the Department of the Interior data collection and analysis efforts have, within their funding limitations, been responsive to those changes. This concludes my oral statement, Mr. Chairman. and I shall be pleased to attempt to answer any questions that you or the other members of the subcommittee may care to ask. Chairman PROXMIRE. Thank you. [The prepared statement of Mr. Rigg follows:] PREPARED STATEMENT OF HON. JOHN B. RIGG I. INTRODUCTION My name is John B. Rigg. I am Deputy Assistant Secretary-Minerals, De- partment of the Interior. Under my jurisdiction are the United States Geologi- cal Survey and the Bureau of Mines. I am here to discuss the adequacy of the energy industry statistics. The Bureau of Mines has the responsibility for collecting and publishing those statistics. To assess their adequacy, it is important that we understand the background and procedures used for data collection and analysis. Secretary Morton is well aware that the statistical base for Government planning needs improvement. Indeed, in his Second Annual Report to the Con- gress under the Mining and Minerals Policy Act of 1970 he pointed out the probleni that the U.S. Government information base for the conduct of its min- eral responsibilities is grossly inadequate. To an ever accelerating degree our Government must act promptly on ques- tions of national and international concern involving mineral resources, re- serves, production. use, and technology. Government policies and programs are no better than the data upon which they are based. In a free society government does not have detailed knowledge of many as- pects of research, mineral reserves in private hands, investment plans, process details, etc. Information on foreign mineral operations is even more fragmentary. Currently information is scattered among a number of agencies: Interior, Commerce, Treasury, Securities and Exchange Commission. Federal Power Commission, Atomic Energy Commission, etc. Secretary Morton indicated that the solution to the above problem was that government organization must he improved and streamlined, and cooperative measures must be developed so that information available in the public and private sectors can be brought to hear properly Upon questions of concern to all. II. BACKGROUND Hi8tory The present Bureau of Mines procedures for data collection and analysis evolved from almost 100 years of collecting mineral information by many Gov- ernment agencies. The first report of the U.S. Geological Survey, published 1SSO. states: . . . mining cannot be prosecuted without drawing upon some industries for supplies and in its turn furnishing others with raw materials. This well understood interdependence of human pursuits makes it desirable for the pul)lic at large that information should he collected concerning many other features of the mining industry besides its mere production." PAGENO="0246" 240 T~nder an arrangement with the Census Bureau. the Geological Survey was entrusted in ISSO with the first ininc'rai census ever the entire United States. "Mineral Resources of the [nited States, 1S52" began the annual series that continues unbroken to the present ( shine 1932 as the ``Minerals Yearbook"). The Survey continued its role of collecting mineral information through fiscal year 1925. On July 1 of that year the data collection activities of the Survey were transferred to the Bureau of Mines w-liidh at the same time was trnllsferre(l to the 1)epartment of Commerce. By fiscal year 1925, all mineral statistical sur- veys and economic inquiries formerly handled in the Geological Survey and the Bureau of Foreign and Domestic Commerce were consolidated in the Bureau of Mines. In 1934, the Bureau of Mines was transferred hack to the Department of the Interior. Some consideration was given to leaving the data collection function in the Department of Commerce, but it was finally decided to continue that re- sponsil)ility in the Bureau of Mines. Present organization Many years of experience with various organizational forms have resulted in the present modus operandi of the Bureau's data collection and analysis activi- ties. Basic to the system are the conunotlity and area specialists located at the Washington Headquarters. These senior employees are scientists or engineers with many years' experience in mining or related fields both with Government and private industry. There are 51) specialists sharing the responsibility for 324 commodities and geographic areas monitored by the Bureau (110 commodities, 50 States, 5 [.5. territories or possessions, and 159 foreign countries). While this would indicate an avei'nge of fwmi' separate responsibilities for each specialist, only one would he assigned where the conimnodity or geographic area is of major mineral im- portance as. for example, zinc. West Virginia and U.S.S.R. These specialists live on a daily basis with their commodities and geographic areas. It is neces- sary for them to know and keep in contact with the key personnel in the in- dustry. the production facilities, trade associations, and consumers of their particular commodity. For the States, they work closely w-itli State Geologists, State Mining Bureaus, and other State agencies, other commodity specialists, and the Bureau of Mines State Liaison Officers. For foreign country assign- ments, they work with commercial and mineral attaches of foreign and U.S. embassies. with individual firms and international trade associntions, and di- rectly with governments involved. The entire operation is tuider the direction of the Bureau's Assistant 1)irec- tor-Mineral Supply. opernting through four commodity divisions, three sup- portinL~ offices and fonr field offices. The specialists receive support from statisticians. ec'onomnists amid engineers 1)0th w-ithin their commodity division and also in the field offices. Staff support is available through the three Head- quarters offices. All the offices and divisions become involved to varying de- grees in specialized con~modity or area studies. The manning table lists a total staff of 555, with 301 professional and 257 support personnel. Hiring freezes and budget restrictions, how-ever, have kept personnel w-ell below that level and as of the first quarter of fiscal year 1974 the total was about 100 below full strength. The operating budget for fiscal 1974 is approximately $11.5 mil- lion. Energy industry statistics are pi~mari1y the responsibility of the Division of Fossil Fuels w-liieh has an authorized staff of 95 with 43 professional awl 52 support personnel and a fiscal 1974 budget of approximately $2 million. The Division is organized into four branches. Petro1eunm, Natural Gas, Coal and In- terfuels and Special Studies. The Franium and Thorium Specialist is assigned to the Division of Nonferrous Metals. Data (`cIIlcction procedures The specialists in the four Bureau conimodity divisions supported by the field and Ileadqu:irters offices utilize a large number of sources of information including 1. [oluntarml Industru (`an ras.ses--nionthly, quarterly, semi-annual, annual, 200 surveys. 150.Obb responses. 2. State Agcui ---State Geologists, State regulatory agencies, etc., aided l)y Federal -S ta te cc q ma ti ye a greements. PAGENO="0247" 241 3. Personal contact-frequent visits in person and by telephone, and corre- spondence with industry leaders. 4. Bureau of Mines state Liaison Officers. 5. Trade Association s-publications, meetings, and conventions. 6. Tee/i ii ical Societies-journals and meetings. 7. Federal :lqencies-Federal Power Commission. Department of Commerce, Federal Trade Commissioii. Atomic Energy Commission. etc. 8. Pu bush e(l (1(1 ta-periodicals, technical reports, foreign service dispatches, I)ooks, company animual reports and reports to the SEC and othei' agencies. 9. Special Studies-field investigation of selected industries or areas. 10. U.S. Geological Surrey resource reports-The Geological Survey provides information on the much broader category of "resources," and makes detailed special studies in support of assignnients made by the Secretary. A recent ex- ample of a major Geological Survey resource study is Professional Paper 820, "Fnited States Mineral Resources" issued in mid-1973. The Geological Survey requires, and makes available to the Bureau of Mines and the public, data on mineral production from mineral leases on Federal lands and the Outer Conti- nental Shelf. 11. U.S. Bureau of Mines reserve and resource reports. 12. Office of Oil an(l Gas Special Studies and Data. 13. Grants to universities for special studies. 14. United Nations reports. 15. Mineral and coin ni ercial em bossy at/ac/i es. 16. Mining Enforcement and Safety Administration in(lu.c'try surveys. The data are reviewed, verified, and finalized by the specialists and pub- lished at least annually and often more frequently (monthly or quarterly) The annual "Minerals Yearbook." a statistical summary by commodity and by area, is recognized as the most comprehensive assemblance of mineral data available in the world. in addition. animual Commodity Statements are pre- pared for internal use and published in an edited edition every 5 years as "Mineral Facts and Problems." These statements not only review supply and demand historical data, but also consider the outlook-future supply/demand relationship. A section is included on reserves and resources and possible prob- lems and future trends in the industry are predicted. III. WHAT IS INFORMATION ADEQUACY? This committee is making a specific and urgent inquiry. Although I am re- luctant to introduce philosophic consideration that nmay divert us from our main course, I believe it is vital to an understanding of the diverse and shift- ing nature of informational needs for commercial and governmental decision- making. `We can only measure information adequacy in the context of these shifting needs. The mission of the miimeral intelligence unit of time Bureau of Mines has been defined as follows "To collect, analyze, and disseminate mineral supply and demand informa- tion and evaluate nmeans and costs of meeting national mineral objectives." Measured against this mission the Bureau's energy information setup has for the most part been adequate. Analysis (if this information led scieiitists and engineers into research on oil shale and coal gasification with sufficient lcadtime to develop invaluable basic knowledge for current expanded research in these areas. Metallurgical amid mining research programlis also w-ere guided into such useful research as that on special property materials for nuclear en- ergy generation and on advanced mining niethiods for coal and oil shale. Ifl(IuStry has made wide use of Bureau data for commercial decisions. Al- though it is difficult for us to measure time data's adequacy for such use, our working relationship with industry invites criticisimi. comment, and suggested improvements. The system is not static. but responds to expressed changes in requirements. ()ur confidence in time adequacy of the immformnation system was supported by a survey in 196$ by Opiniomms Research Corporation on Bureau of Mimics Statistical Publications. The survey revealed thmuit the liverse audience for these reports found them generally adequate. There have been special c'ircunistamii'es. how e\-c'r. under wlii'hi rapid change has overrun the ah dlii y to adapt to new and somet imules cmiii cal requirements. In wartime, (l~itil collection has had to be expanded to macct mmeeds of defense agencies. `When the environmental a mmcl land-use issues 1 lossomm~ed almost over- PAGENO="0248" 242 night, they revealed shortcomings in our basic data that have not yet been fully overcome. We do believe we have met Interior's and Congressional needs in these areas, hut have found it difficult and costly to satisfy EPA. The latestest test of adequacy is the energy crisis. Even with the advantage of hindsight, it does not seem that any set of physical facts would have fore- warned us of the combination of events that precipitated the crisis. Neverthe- less. in early 1973 the Second Annual Report of the Secretary of the Interior Under the Mining and Minerals Policy Act of 1970 clearly described the unfa- vorable energy supply-demand trends confronting the United States. The report recommended several corrective governmental policy actions some of which have been taken under stimulus of the Arabian oil embargo. Thus, in summary. hard data developed in Interior have been adequate to alert us to the hazard. Now that a shortage has occurred, however, the data are insufficient to provide a basis for energy allocation, and it appears that the information system may he barely adequate for general longer-term planning in the light of current uncertainties. We have requested additional funds to strengthen our capability. Iv. THE ENERGY INDUSTRIES Energy permeates the entire fabric of an industrial society. Thus, industries involved with energy range from those manufacturing the specialized tools needed to search for or produce fuels to the remote small store selling gasoline or heating oil to an ultimate consumer. Intermediary fossil fuels industries in- clude the exploration firms, producers, extractors, transporters, refiners, im- porters, and distributors. One of the large associated energy industries is that of electric energy generation and distribution by public utilities. The magnitude and (liverse nature of the energy industries precludes com- bining them into a discrete unit for informational needs. The Department of the Interior has a long history of involvement in energy resources, energy min- erals production and hydroelectric generation. Consequently, Interior has been held responsible for energy industries data collection in the part of the spec- trum from exploratioii to production of mineral fuel commodities and on a limited basis, electric energy. In response to increasing need, the Department expanded its concern on a limited basis to distribution and consumption. Departmental analytical efforts encompass nearly all of the energy indus- tries. The initial data collection responsibility for some important elements, however, is properly assigned to other agencies. V. ENERGY DATA COLLECTED AND PUBLISHED Oil and gas The Bureau of Mines conducts 26 separate industry canvasses involving the petroleum and natural gas industry. Ten of these are monthly surveys, 15 are annual and 1. Crude Oil Pipeline and Storage Survey, is on a 3-year basis. The number of establishments contacted range from as few as 12. District V Petro- leum Supplement. to as many as 5.000. Fuel Oil and Kerosine Sales and Inven- tories. Six monthly. 1 quarterly, and S annual Mineral Industry Surveys are dis- tributed free to industry and interested Federal and State agencies. Data also are published in the annual "Minerals Yearbook" and every 5 years in "Min- eral Facts and Problems." The results of the Bureau of Mines canvasses of the oil and gas industry for operating data both monthly and annually on a voluntary basis have been highly satisfactory. A comparison of the information received in these can- vasses with related data from other sources indicates a high degree of accu- racy. In the survey of the petroleum refining operations for September 1973 264 plants were canvassed, of whieh 250 reported. The operating data on the 14 unreported plants. representing 5.3 percent of all the companies canvassed, were estimated based on reports previously submitted by these companies. These estimated data amounted to 0.3 percent of the total crude oil refinery runs for the month. This reporting patten~ is representative for other months. The accuracy and reliability of the survey is shown by a comparison of refin- ery crude runs to the supply of crude oil as indicated by State production fig- ures and the amounts of crude imports. PAGENO="0249" 243 In the face of the current energy situation, we are aware of the need for ac- curate and quickly obtained information on refinery data and stocks and other energy information. New methods are currently under review in the Executive branch and we expect to forward our recommendations to the Congress shortly. Pending this action, Administrator Simon has announced that the Fed- eral Energy Administration has begun its own audits of refiners stocks as well as compliance with federal price ceilings. Iii the case of natural gas, the Bureau's annual survey on natural gas con- sumption accounts for approximately 95 percent of the annual production re- ported by State agencies. Goal Eleven industry coal canvasses are conducted, 3 monthly, 1 quarterly, and 7 on an annual basis. Approximately 6,000 mining establishments are contacted for the Bituminous Coal and Lignite Survey. Response rate is poor, less than 30 percent, but those companies reporting produce over 85 percent of U.S. coal production. Data are verified by State reports. Results of the surveys are published in 3 monthly, 1 quarterly, and 4 annual Mineral Industry Surveys. Two weekly Mineral Industry Surveys report bitu- minous and anthracite production as estimated from railcar loading informa- tion. Data also appear in the annual "Mineral Yearbook" and "Mineral Facts and Problems." The Geological Survey and the Bureau of Mines estimate coal resources and reserves from a variety of data sources. A part of the data is from industry records, but the majority comes from original Survey and Bureau investiga- tions, some of which date back to the turn of the century. vi. OTHER SOURCES OF ENERGY DATA A number of data sources other than Bureau of Mines conducted surveys are used in compiling energy statistics. Atomic Energy Commission For statistics on domestic uranium production, resources and reserves the Bureau relies on the AEC data. Until 1962 the AEC was the only market for uranium which it purchased from industry under negotiated contracts. These contracts required that the contractor reveal cost and other information to the Commission. After 1962 Government purchased only that uranium which had been developed into reserves by 1958. The owners submitted their detailed jus- tification of their claimed reserves to the Commission and Government and in- dustry geologists worked together to develop the final allocation. Through this procedure, an industrywide standard basis for reserve calculations was devel- oped. Although the last purchase contracts expired in 1970, the system developed in the late 1950's and early 1960's has continued on a voluntary basis to the present. Reserve and cost data are submitted on a regular schedule to the AEC and calculations are jointly reviewed by Government and industry. Strict confidentiality is maintained. Selling prices are determined by a voluntary canvass of the utility industry which reports average annual contract prices for t30s on a 10-year forward basis. The AEC thus predicts price trends and estimates reserves at varying prices. The AEC maintains a staff of about 65 at Grand Junction, Colorado, to oper- ate its program. Resource estimates from nonoperating lands are prepared for the AEC by its contractor, Lucius Pitkin, Inc. (LPI). LPI, staffed by over 100 professional and support personnel, has a continuing contract for updating re- source information. American Pcti-oleum Institute and American. Gas Association For domestic oil and gas reserves the Bureau relies on the annual studies of the American Petroleum Institute (API) and the American Gas Association (AGA). These tw-o organizations each have created a reserve committee of sen- ior executives from major companies to oversee the gathering of data and pub- lishing of reserve estimates. The API has a 15-member committee and each member appoints one or more suhconnnittees for the purpose of preparing re- serve estimates. The subcommittees are composed of approximately 175 geolo- PAGENO="0250" 244 gists and engineers who (1) represent segments of the industry having promi- nent ownership holdings iii the assigned area; (2) have broad experience in estimating reserves; and (3) have intimate knowledge of the fields assigned to them. The AGA operates in a similar manner, but with about 100 subcommittee members. Thus, some 300 industry executive and professionals with a close as- sociation with the problem are involved in the oil and gas reserve estimates. Confidentiality of proprietary information is carefully guarded. The estimates are believed to he of high quality. A senior employee of the Bureau of i~1ines is currently a member of the 15-man AGA reserve committee. State agencies Coal, crude oil, and gas production data are compiled from State reports by the Bureau of Mines specialists. Although the coal mining industry is can- vassed, the data obtained are used for determining mining methods, equipment used, and transportation modes rather than production statistics. These State reports are considered to he adequate. Other Federal agencies Largely for consumption data hut also for imports and exports, the Bureau supplements its statistics with (lata from the following Federal Departments and Agencies: 1. Federal Pow-er Commission; 2. Department of Commerce; 3. Department of Transportation; 4. Department of Defense; and 5. The Depart- ment of the Treasury. VII. PROBLEM AREAS The design of a basic, practical, and effective information system to assess the *:onsequences of policies, existing and potential, is a major problem. The system must he responsive to change and yet maintain continuity. The stand- ardization of definitions, the format of statistical reports that limits items that can be collected, and the organization of primary data to improve its retrieva- bility and usefulness are difficult problems because of the complexity of the en- ergy industries. Problems arise with the sorting of fact from conjecture in the statistical area. This is especially true in reserve reporting. Collection of data has been necessarily confined to the collection of information where there is a recogni- tion of standardized definitions and of procedures such as are reported in the measured and indicated categories. The capability to conduct analytical studies that could provide energy infor- mation essential to an adequate data system is seriously inadequate. The matching of statistical information is a difficulty that confronts and often precludes good analysis. Current information systems have essentially been designed to serve a purpose rather than being multipurpose. This limits the utilization of collected data. Improvements are being made but greater im- provements are essential. A recognition of a requirement for the need of proprietary information re- sults in some limit to data collection. This is especially true in the cost/price and reserve information areas. The cost of obtaining specific information as -a-elI as the time required are major problems. Although timeliness is essential, faster compilation of reliable indepth data on a national basis even for emergency purposes, is impractical under current reporting concepts w-hen the magnitude of the energy industries is considered. Improvements also are needed in the relation of energy to smaller geographical areas. Data i-elating to international operations of energy industries are seriously inadequ ate. Improvements in data collection, processing, analysis, and publica- tion must be made. Standardization of definitions and procedures or improve- meats in matching methods is a must in this area. VIII. SIJM MARY In conclusion Mr. Chairman. the prohlems are complex and w-e in Interior are determined to rearrange our priorities so that every possible effort is made to obtain accuurate and timely information, not only for the energy crisis in which we now find ourselves. but also. to avert, if possible. any parallel devel- PAGENO="0251" 245 oping situation with respect to the non-fuel minerals on which our economy depends so entirely. Chairman PROXMIIiE. Mr. Shiskin. please proceed. STATEMENT OF HON. JULIUS SHISKIN, COMMISSIONER, BUREAU OF LABOR STATISTICS, DEPARTMENT OF LABOR, ACCOMPANIED BY JANET NORWOOD, DEPUTY COMMISSIONER FOR DATA ANAL- YSIS; AND MARGARET STOTZ, CHIEF, WHOLESALE PRICE DIVISION \lr. STITsKIx. Thank von. Senator Proxmire. Like Mr. Rigg, I have a~ prepared statement, which I will read oniy part of. only an abstract of. Also, I have with me Mrs. Janet Norwood. who is the Deputy Commissioner for Data Analysis of the Bureau of Labor Statistics, and Mrs. Margaret Stotz, who is Chief of our Wholesale Price Divi- sion. As you may know, the BLS has great tradition for having distin- guished women professionals in high positions and I am very pleased that the hearing today offered me an opportunity to bring two of them with me. There are also other members of the staff present to support us in some of the more detailed questions that may come lip. I will now read my summary statement which will take about 10 minutes. Mr. Chairman and members of the subcommittee, I welcome this opportunity to appear before your committee to discuss the efforts of the Bureau of Labor Statistics to improve wholesale and retail price data for petroleum products. I found when I came to BLS last August that. the staff was very much aware of the need for better information on petroleum prices and had been struggling hard to obtain it. However, neither they, nor I, anticipated early enough the speed with which these problems would become urgent.. This morning I would like to describe current BLS procedures for compiling the wholesale price imidexes for refined and crude petro- leum products. components of the wholesale price index-~WPI- and efforts to improve them. In addition, I will describe briefly re- cent improvements in the accuracy and timeliness of retail gasoline price data. The BLS wholesale price indexes for the major components of the refined petroleum index-gasoline, light distillate, middle distillate, and residual fuel oil-have for years been based on prices quoted in trade publications. These secondary source data have been used with great reluctance, since BLS policy is to collect data directly from companies wherever possible. Although we have long recognized the risks of using secondary data, we were unable to introduce direct collection for two reasons. First. the BLS relies completely on vol- untary reporting in its price programs. ~We have no legal authority to compel companies to report price data to the Bureau. BLS efforts to achieve the voluntary cooperation of the petroleum companies in past years have been unsuccessful. PAGENO="0252" 246 Their reluctance was explained on the grounds that, until recently, the spot. market data used in the WTPI constituted a reasonably good indication of the price trend for refined petroleum products. Second, secondary data is far cheaper than direct price collection, and the BLS has not been able to secure, as a part of its regular budget. adequate funds for the WPT. Data used in BLS price indexes should be directly collected at t.he primary source. As is well illustrated by the present situation in the prices of refined petroleum products. shortcuts to save money on key statistical indicators do not. pay in the long run. Historically, the trend of the WPI for refined petroleum products, based on spot market quotations. was similar to that of retail prices. Events during 1973. however, appear fo have changed t.he relation- ship of the spot market data to the total market. As shortages devel- oped. domestic spot market transactions began to represent a declin- ing portion of the total refined petroleum market and, thus, became a less reliable indicator of the total market. I have a chart in my prepared statement which shows how whole- sale prices and retail products moved quite similarly from 1967 to 1972 and then departed markedly in .1973. We have called attention to our concerns over this index in the November and December WPI press releases, and will continue to do so until a new refined petroleum index is available. In order to get an idea of the possible magnit.udes involved, we have calculated a special WPI which removes the direct impact. of price changes for refined petroleum products on the WPI. This spe- cial index increased 14.6 percent from December 1972 to December 1973. compared with an 1.2-percent rise in the published WPI. The BLS began to develop a better index for refined petroleum products in 1972. with funds-and specifications-provided by t.he Office of Emergency Preparedness-OEP. This program. funded by OEP in fiscal years 1972 and 1973. was designed primarily to meet the contractor's-QEP-requirements. The OEP specifications were designed to yield both monthly average unit. prices and price in- dexes. It required the selected companies to adjust. their recordkeeping. Many companies were unwilling to make such adjustments and would not participate in the program. In addition, some companies were reluctant to report because they had reservations about the use of these data to compute average unit prices. Man of the difficulties in this program have stemmed from our attempt. to adapt and implement. on a voluntary basis, a program to meet. OEP needs which would also be suitable for the WPI. BLS options in this situation were limited because of t.he needs of the sponsoring agency. the attitude of the companies, and inadequate funds for the WPI. It may be useful to note the BLS has received in its fiscal year 1974 appropriation an increase of $4t~O.OOO for the WPI. This increase of almost. 50 percent of the total appropriation for the WPI will en- able us to make many improvements. In early 1973. the BLS tried to reduce the reporting burden and to provide more time for companies to adjust. their accounting sys- PAGENO="0253" 247 tems to the program's requirements. With OEP concurrence, the BLS concentrated on the collection of national data and temporarily discontinued regional data. Unhappily. the response rate did not. im- prove markedly. In mid-1973. the OEP contract authorization ex- pired. In view of the public interest in these data, the BLS diverted fiscal 1974 funds from other WPI activities in order to continue this program, and made another effort to increase cooperation. To pave the way for better reporting. a decision was made to con- centrate on improving the measures of price change and to postpone development of average unit prices. In addition, requests for data for some products were discontinued and some product descriptions were modified. The BLS gave a top priority to this program and hoped to have had it operational by this time. However, serious problems still remain. The most important is the timelag in the reporting of the data to the BLS. The WPI is re- leased in the first week of the mont.h following the month covered by the data, for example. on January 8 figures for December 1973 were released. Volume and revenue data cannot be available until the month is over. Because. of this time schedule, cooperating companies would, therefore, be unable to provide refined petroleum data without. a time- lag of at. least 1 month. In fact, however, in most cases data are being reported with a 2-month lag. Coverage of the industry has been another problem. At. the pres- ent time onl about half of the companies selected for the probabil- ity sample of producers have agreed to furnish the national data re- quired. Why do we request revenue and volume data covering the whole month, which results in lag. rather than average prices for a partic- ular day as is the practice in most other parts of the WPI? WTe are working intensively with the companies to resolve the cov- erage problem and to reduce the lag in reporting. We hope to intro- duce a better refined petroleum component in the Spring. but I cannot specify any completion date today. As soon as we can secure sufficient coverage to assure reasonable reliability and prompt reporting. we shall introduce the new dat.a into the index. The timeliness requirement would necessitate that the cooperating companies currently reporting data speed up their re- ports from about. 40 to 50 days from the end of the reference month to 15 clays. And this would still leave us with a 1-month lag: that is, the report issued at the beginning of March covering February would use January refined petroleum products data. We shall also make a more comprehensive study of direct price re- porting and if that approach proves feasible and more t.imely we shall switch to it. About 2.7 percent of the weight in the WPI lags by 1 month and 0.5 percent by 2. months. In addition to its work on refined petroleum. the BLS also initi- ated a program last year to expand and improve the pricing of crude petroleum for the WPI. For many years. BLS has directly priced domestic crude petroleum in six major producing areas of the PAGENO="0254" 248 United States. Early in 1973, it became apparent that the price trends for these. six major areas were no longer representative of price trends for areas not direct lv priced for the index. Therefore, we developed plans to expand the price coverage to include seven additional producing areas and began additional collection. This ex- pansion from 6 to 13 directly priced areas will be reflected in the WPI beginning with the index for January 1974 to be released next month. Although this testimony is concerned mainly with the WPJ, I wish to take this opportunity to report that we have made impor- tant improvements in the gasoline component of the Consumer Price Index-CPI---and have begun publishing new retail price measures for gasoline. In mid-1973. with funding from the U.S. Department of the Treasury. BLS started to improve the timeliness and accuracy of re- tail price data for gasoline. First, the retail gasoline sample was re- vised with greater use of probability techniques, and expanded in the 23 areas for which a CPT is published. The total sample is now about twice as large and the sample in the 23 areas almost four times as large. Further, prices are now col- lectecl every month in each of the 56 cities in which price data are collected for the CPI. Formerly they were collected quarterly in 42 of the cities. In ~ovember 1973. we began the publication of new indexes of price changes and average retail prices for gasoline in each of 23 malor metropolitan areas. In addition, we now have average prices at the U.S. level and improved U.S indexes of price change. Those are in my 1)repared statement. They were not published viou sly. Cost data for the CPI. including the new- material, will be re- leased tomorrow. I will now try with the help of Mrs. Norwood and Mrs. Stotz to answer ally (ll1est1o1~s. Chairman PROXMTRE. Thank you very much. [The prepared statement of Mr. Shiskin follows:] PREPARED STATEMENT OF HON. JULIUS SHISKIN Mr. Chairman and members of the subcommittee. I welcome this opportunity to appear before your Uommittee to di~cu,ss the efforts of the Bureau of Labor Statistics to improve wholesale and retail price data for petroleum products. In these times of shortages and rising arices. the need for accurate and timely data is of utmost. importance to the country. As you know, during my four years as Chief Statistician of the Office of Management and Budget, one of my major activities was to promote the speed-up in the publication of current eco- nomie indicators including the WPI and the CPI. I found when I came to BLS last August that the staff was very much aware of the need for better information on petroleum prices and had been struggling hard to obtain it. However, neither they, nor I, anticipated early enough the speed with which these 1)roldems would become urgent. This morning. I would like to describe current BLS procedures for compiling the whole~ale price indexes for refined and crude petroleum products, compo- nents of the Wholesale Price Index (WPI). and efforts to improve them. In addition. I will describe briefly recent improvements in the accuracy and time- liness of retail gasoline priee data. PAGENO="0255" 249 CURRENT PROCEDURES FOR PRICING REFINED PETROLEUM PRODUCTS The BLS Wholesale Price Indexes for the major components of the refined petroleum index-gasoline, light distillate, middle distillate, and residual fuel oil-have for years been based on prices quoted in trade publications. These secondary source data have been used with great reluctance, since BLS policy is to collect data directly from companies wherever possible. Although we have long recognized the risks of using secondary data, we were unable to introduce direct collection for two reasons. First, the BLS relies completely on voluntary reporting in its price programs. We have no legal authority to compel compa- nies to report price data to the Bureau. BLS efforts to achieve the voluntary cooperation of the petroleum companies in past years have been essentially un- successful. The information we sought is detailed and comprehensive and many petroleum companies were unwilling to accept the extra reporting burden. Their reluctance was explained on the grounds that, until recently, the spot market data used in the WPI constituted a reasonably good indication of the price trend for refined petroleum products. Second, secondary data is far cheaper than direct price collection, and the BLS has not been able to secure, as a part of its regular budget, adequate funds for the WPI. Generally, until a crisis occurs, it is extremely difficult to stimulate interest in improving statistical information and this has beeii espe- cially true for the BLS data. Data used in BLS price indexes should be di- rectly collected at the primary source. As is well illustrated by the present sit- uation in the prices of refined petroleuni products, short cuts to save money on key statistical indicators do not pay in the long run. The price statistics required for Government policymaking must be highly reliable at all times, so that when a crisis situation does come up, accurate and timely data are avail- able to provide a sound basis for policymaking. Historically, the trend of the WPI for refined petroleum products, based on spot market quotations, was similar to that of retail prices. Events during 1973, however, appear to have changed the relationship of the spot market data to the total market. As shortages developed, domestic spot market trans- actions began to represent a declining portion of the total refined petroleum market and, thus, became a less reliable indicator of the total market. This deterioration in the representativeness of spot market data can be seen by comparing the WPI for gasoline, based on spot market prices, with the Consumer Price Index for gasoline. As can be seen in the accompanying chart, the two indexes tended to move together from 1967 and through 1~72. The CPI increased 10 percent and the WPI increased 8 percent over this five-year pe- riod. During the first 11 months of 1973, however, the relationship changed dramatically. Gasoline prices increased 15 percent in the CPI, which they soared 82 percent in the WPI. The same patterns held for heating oil, another component of the refined pe- troleuni products index. A comparison of the WPI, based on spot markets, with the CPI, based on direct pricing, shows the heating oil component of the WPI rising about the same percentage as the heating oil component of the CPI from 1967 to December 1972. During the first 11 months of 1973, however, the retail price increased 32 percent while the wholesale index increased 125 percent. These comparisons suggest that the spot market prices used in the re- fined petroleum index overstated the price increase during 1973 and cannot he relied on as indicators of prices in the total market. While it is. of course, possible that it is the CPI which is off the mark, this seems less likely because the CPI data are collected directly from retailers. We have called attention to our concerns over this index in the November and December WPI press releases, and will continue to do so until a new re- fined petroleum index is available. Let me quote the statement that has ap- peared: "Prices for these products used in the index were chiefly quotations from spot markets which now. because of developments over the last few months, ap- pear to represent a declining portion of the transactions taking place in domes- tic markets. The Bureau of Labor ~tatitics has underway a prograiii to de- velop the I)rice data required to improve the refined petroleum products component of time WPI." In order to get an idea of the possible magnitudes involved, we have calcu- lated a special WPI which removes the direct impact of price changes for re- fined petroleum products on the WPI. This special index increased 14.6 percent from December 1972 to December 1973. compared with an 1S.2 percent rise iii the published WPI. PAGENO="0256" 250 ~PI AND k~PI FUEL INDEXES 1967-1973 1 967~ 100 EMILOG SCRLE 225 215 205 195 155 155 145 ~ 135 L 125 k- 115 f- 105 i- 95 85 L_ 501 LOG SCPLS 270 260 250 H 240 230 220 210 200 190 180 H 170 150 ISfl 140 130 12] H 117 - 100 ~ L r SF1 GASOLINE I.JFI GASOLINE I ~ -!,~- i2~ CFI FUEL OIL I~FI MIDDLE DISTILLATE ~ - - -L L±hI Ij~ i!,, I N~ -" ~ S S 11 L 0 -~ ~ 225 -~ 215 -~ sos -i 195 -~ 185 -, 170 -. 155 - 155 - 145 -~ 130 115 -J - 105 I -1 ~ SEll] LOG * SCRLE -j 270 -1 260 * -~ 250 -~ 240 -1 2i0 -i 220 -~ 210 200 -~ 190 -~ 180 H 170 160 -H -4 140 -. 130 120 -. 110 -~ 100 9° 1967 1968 1969 1970 1971 1972 1973 THE NEW APPROACH TO PRICING PETROLEUM IN THE WPI The BLS began to develop a better index for refined petroleum produnts in 1972, w-ith funds-and specifications-provided by the Office of Emergency Pre- paredness (OEP). This program, funded by OEP in fiscal years 1972 and 1973, was designed primarily to meet the contractor's (OEP) requirements. The OEP specifications were designed to yield both monthly average unit prices and price indexes. This required the collection of revenue and volume data for 30 petroleum products at the wholesale distributor level from a probability sample of companies. Prices were to be derived from the revenue and volume data for the LS. and nine geographic areas of the country. The collection of data for a large number of products by region required that the selected com- panies adjust their recordkeeping. Many companies were unwilling to make such adjustments and would not participate in the program. In addition, some companies were reluctant to report because they had reservations about the use of these data to compute average unit prices. PAGENO="0257" 251 Many of the difficulties in this program have stemmed from our attempt to adapt and implement, on a voluntary basis, a program to meet OEP needs which would also be suitable for the WPI. The BLS tried to provide complex measures for one of the most complicated industries in the country at a time when companies were not convinced that the existing data were inadequate. BLS options in this situation were limited because of the needs of the sponsor- ing agency, the attitude of the companies, and inadequate funds for the WPI. (It may be useful to note parenthetically here that the BLS recently received in its Fiscal Year 1974 appropriation an increase of $450,000 for the WPI. This increase, almost 50 percent of the total appropriation for the WPI, will enable us to make many improvements.) In early 1973, the BLS tried to reduce the reporting burden and to provide more time for companies to adjust their accounting systems to the program's requirements. With OEP concurrence, the BLS concentrated on the collection of national data and temporarily discontinued regional data. Unhappily, the response rate did not improve marked.y. In mid-1973, the OEP contract author- ization expored. In view of the public interest in these data, BLS diverted fiscal 1974 funds from other WPI activities in order to continue this program, and made another effort to increase cooperation. To pave the way for better reporting, a decision was made to concentrate on improving the measures of price change and to postpone development of average unit prices. In addition, requests for data for some products were discontinued and some product de- scriptions were modified. The BLS gave a top prioroty to this program and hoped to have it opera- tional by this time. However, serious problems still remain. The most impor- tant is the time lag in the reporting of the data to the BLS. The WPI is released in the first week of the month following the month covered by the data, e.g., on January 8 figures for December 1973 were released. Volume and revenue data cannot be available until the month is over. Because of thLs time schedule, cooperating companies would, therefore, be unable to provide refined petroleum data without a time lag of at least one month. In fact, however, in most cases data are being reported with a two-month lag. Coverage of the industry has been another problem. At the present time only about half of the companies selected for the probability sample of producers have agreed to furnish the national data required. Why do we request revenue and volume data covering the whole month, which results in a lag, rather than average prices for a particular day as is the practice in most other parts of the WPI? One reason is the complexity of the production, marketing and pricing of petroleum products. Since prices for petroleum products differ among regions, it would be necessary to obtain data for all of the many, different marketing areas of each company included in the sample. In addition, petroleum companies sell to several different classes of trade, who are sometimes charged different prices. Furthermore, significant amounts of inter-company sales and transfers occur. Second, there are prob- lems in trying to obtain representative price data. For example, average posted prices would not reflect discounts for some products. Finally, BLS has been re- luctant to ask companies to change their reporting procedures so soon after ob- taining their cooperation on the existing alternative program established for OEP purposes. We shall, however, make a more comprehensive study of direct price reporting, and if that approach proves feasible and more timely, we shall switch to it. We are working intensively with the companies to resolve the coverage prob- lem and to reduce the lag in reporting. We hope to introduce a l)etter refined petroleum component in the spring. but I cannot specify any completion date today. As soon as we can secure sufficient coverage to assure reasonable relia- bility and prompt reporting, we shall introduce the new data into the index. The timeliness requirement would necessitate that the cooperating companies currently reporting data speed up their reports from about 40 to 50 days from the end of the reference month to 15 days. And this would still leave us with a one-month lag, that is, the report issued at the beginning of March covering February would use January refined petroleum products data. About 2.7 per- cent of the weight in the WPI lags by one month and 0.5 percent by two months. 37-143 0 - 74 - 17 PAGENO="0258" 252 DOMESTIC CBUDE PETROLEUM In addition to its work on refined petroleum, the BLS also initiated a pro- gram last year to expand and improve the pricing of crude petroleum for the WPI. For many years, BLS has directly priced domestic crude petroleum in six major producing areas of the U.S. Early in 1973, it became apparent that the price trends for these six major areas were no longer representative of price trends for areas not directly priced for the index. Therefore, we devel- oped plans to expand the price coverage to include seven additional producing areas and began additional collection. This expansion from six to thirteen di- rectly priced areas will be reflected in the WPI beginning with the index for January 1974 to be released next month. It should be noted that prices for imported crude oil are not included in the WPI at this time. The reason for this exclusion is that until recently, very lit- tle imported crude oil was sold in commercial markets. Most importers con- sumed the product within their own refineries. We viewed this type of transac- tion as an interplant transfer and, for that reason, considered it to be outside the scope of pricing for the WPI. We have been encouraged with our progress in pricing crude petroleum. However, in the latter part. of 1973 new complications arose. Late in August, the Cost of Living Council instituted a two-tier pricing system for crude oil. Under this system, "old" oil was controlled, and "new" and "released" oil were uncontrolled. Special procedures had to be developed to take account of this new pricing system. The effect of the two-tier pricing system has been reflected in the WPI since November. We are making every effort to assure that the ratio between controlled and uncontrolled crude oil used in in compiling the index is representative of market transactions. RETAIL GASOLINE PRICES Although this testimony is concerned mainly with the WPI, I wish to take this opportunity to report that we have made important improvements in the gasoline component of the Consumer Price Index (CPI) and have begun pub- lishing new retail price measures for gasoline. In mid-1973, with funding from the U.S. Department of the Treasury, BLS started to improve the timeliness and accuracy of retail price data for gaso~ line. First, the retail gasoline sample was revised with greater use of probabil- ity techniques. and expanded in the 23 areas for which a CPI is published. The total sample is now about twice as large and the sample in the 23 areas almost four times as large. Further, prices are now collected every month in each of the 56 cities in which price data are collected for the CPI. Formerly they were collected quarterly in 42 of these cities. In November 1973, we began the publication of new indexes of price changes and average retail prices for gasoline in each of 23 major metropolitan areas. In addition, we now have average prices at the U.S. level and improved U.S. indexes of price change. Since these have not yet been published, I am provid- mg them here for your convenience: U.S. AVERAGE RETAIL PRICES FOR GASOLINE October 1973 Nov ember 1973 Regulargasoline Premium gasoline $O.4a2 .439 $O.418 .454 Average prices for each of the 23 major metropolitan areas were published in a press release which was issued December 21, 1973. These data are being used in compiling the CPI each month and will be pub- lished in the Bureau's monthly report, "Retail Prices and Price Indexes for Fuels and Utilities." This report also contains information on other energy items including fuel oil, natural gas, and electricity. The December data will be released tomorrow. My statement is concluded, and I will now try to answer your questions. PAGENO="0259" 253 Chairman PROXMIRE. Mr. Hodges, you have a somewhat longer prepared statement than the other witnesses. I would appreciate it if you could limit the oral presentation to about 10 minutes and the en- tire prepared statement, which is a very useful and helpful state- ment, will be printed in full in the record, including the exhibits, at the end of your oral statement. Mr. HODGES. And there may be other materials, Mr. Chairman, you might like to have that we will provide. Chairman PROXMIRE. Very good. Mr. Hoixu~.s. With your permission, my prepared statement, I as- sume, has been accepted for the record? Chairman PROXMIRE. Yes, sir. STATEMENT OF JOHN E. HODGES, DIRECTOR OF STATISTICS, AMERICAIi PETROLEUM I}~STITUTE Mr. HODGES. I am director of statistics at API and the record shows I have had extensive experience both on the academic side and in industry as a collector of primary data and as a user of data per- taining to the petroleum industry. Indeed, I have been involved with these matters since 1944, long before I came to the API. Because of the current interest in this problem, I am pleased to review what the API is doing in this area. But before describing the program, I would like to emphasize that the API does not publish forecasts or make projections of any kind and we do not collect sta- tistics on prices. The first major element of our program is the weekly statistical bulletin. This bulletin provides data pertaining to petroleum supply and refinery operations. In recognition of the importance of the time factor, the bulletin is usually published each Wednesday on the basis of information reported directly to us by the companies as of the previous Friday. In order to put the bulletin in proper perspective it should be noted that the U.S. Bureau of Mines publishes monthly reports on the domestic supply system that are much more comprehensive than the API weekly reports. However, their monthly reports run at least 2 mont.hs behind in publication. Nevertheless, the industry and I believe many Federal Government agencies consider the Bureau of Mines to be the defini- tive source of information of the types reported in their monthly pe- troleum statement. It should be emphasized that the primary purpose of the weekly statistical bulletin is to provide the most timely information that can be collected covering selected operating series pending release of the definitive data by the Bureau of Mines. Now we do not get as good a coverage as the Bureau of Mines and it has been customary for the API to introduce a factor to take our 90-odd-percent coverage and make an estimate for the total industry. Exhibits A and B attached to my prepared statement show the percentages of volumes reported to the API against the Bureau of PAGENO="0260" 254 Mines, and also shows a comparison of the accuracy of the data pub- lished by the API in relation to the Bureau of Mines. We believe that this record shows that we have done an extraordi- narily good job in this area. The second report that we concentrate on is that pertaining to re- serves. The APT has been involved in this in an organized fashion since 1~35. In 1966, in response to a petroleum statistics report sponsored by the Bureau of the Budget. the work of this committee that prepares the reserves estimates was greatly expanded and also expanded to mci iide estimates of productive capacity. Now, there is a common misconception about APT reserve esti- mates and how they are derived. I believe many people think that we take information submitted directly by the individual companies. In fact, estimates published by the APT are prepared by highly qualified professional personnel who prepare individual and inde- pendent estimates of what proved reserves may be in their respective areas. The details of the organization of the API committees that actually do the work, and the procedures and definitions are set forth in exhibit C attached to my prepared statement. The third major project in the division pertains to drilling costs and expenditures. In cooperation with the Mid-Continent Oil & Gas Association and the Independent Petroleum Association of America, APT compiles and publishes data pertaining to the estimated cost of drilling oil wells, gas wells, and dry holes, by depth ranges for var- ious areas of the United States. The second part consists of an estimate of expenditures for oil and gas exploration. development, and production in the United States. These data are published in what we call the joint association sur- vey. Now, there are no annual sources of cost and expenditure informa- tion comparable to that published in the joint association survey. However, the "Census of Mineral Industries" is now available every ~ years-previously at 4-year intervals. This provides benchmark data against which the results in the JAS can be compared for accu- racy. We have made a very careful study of the two documents for the years 1963 and 1967 and we are satisfied that we have come up with results that in our opinion are better than what Census has done. The Federal Power Commission has also collected voluminous data of a similar nature. The Chase Manhattan Bank collects data and prepares estimates of total expenditures. The point is there are a lot of cross-checks to the data we are publishing. The fourth area pertains to drilling statistics. Prior to 1966, the basic sources of statistics pertaining to the drilling of oil and gas wells were the trade journals. The States published drilling statis- tics. the American Association of Petroleum Geologists published drilling statistics. There were also commercial scouting associations. However. none of these agencies were covering the United States uniformly and they were not using standard definitions. PAGENO="0261" 255 According to the Kruger report, the study I referred to a moment ago. there. was no single, timely, uniform, accurate, and complete set of data. In response to that report the API worked out an arrange- ment with the American Association of Petroleum Geologists whereby we are getting a ticket filled out. on each well drilled and completed in the United States. A copy comes to the API for tabu- lation. In the meanwhile a copy passes to the American Association of Petroleum Geologists Committee on Statistics of Drilling. They review this in the light of their professional judgment as to how the well is classified and their judgment, prevails when the final tabula- tions are made. Again there are sources of data against which these API publica- tions can be cross-checked. The "Census of Mineral Industries" every 5 years, the trade journals still publish data. There are also scout.ing associations and commercial companies that collect a great deal of drilling information for the United States. Now beyond these basic elements of the program, a major func- tion of the API for t.he past 7 years has been to establish standard definitions which are crucially important to the development of use- ful and compatible statistical systems. I can say for certain t.hat the Bureau of Mines definitions and API definitions are uniform. The definitions used by Census are uniform with respect. to what the API uses. We also publish petroleum facts and figures in recogni- tion of need for a compendium of all data pertaining to t.he petro- leum industry. This is simply an encyclopedia. On an annual basis we publish the annual statistical review, which is primarily a summarization of data published by the Bureau of Mines. The. purpose is to put it. in a more convenient reference form. Very soon we anticipate expanding the annual statistical review to include other series. In effect it. will be come an annual supplement to "Petroleum Facts and Figures." Mr. Chairman, this completes my statement but I would like t.o make several observations which I believe are related to these hear- ings. First, contrary to certain opinions, there is a vo'uminous amount of data available with respect to the petroleum industry. The API statistical program provides only a small fraction of the total data available. I am fully in agreement with the panelist a moment ago who said we have so dang much of it it is hard to correlate; it needs organization definitions are different. We have a problem. Second, I am convinced that much of the current controversy con- cerning the availability and credibility of petroleum statistics stems from confusion as to t.he difference between statistics on the one hand and projections on the other. This is reflected in t.he confusion of the public as to the degree of the energy shortage. What the pub- lic really wants to know is what the situation will be next February. next March, what the situation will be in August. with respect to gasoline supplies. The real measure of the current adequacy of stocks of gasoline and fuel oil is not so much how they compare a year ago, but. how they relate to an expected summer travel de- mand, whether in February and March, the level of refinery runs that will be possible to support. demand in view of the embargo. PAGENO="0262" 256 Statements about~ the future must be based on assumptions involving numerous variables such as these. When forecasters differ in their assumptions they may arrive at different conclusions. Finally, the allegation has been made that the API gathers statis- tics solely for the benefit of its larger members: This is not the case. All of the information the API collects is published in summary form. Our publications are distributed on a complimentary basis to all members of the press and government agencies without restric- tions of any kind. Our publicat.ions are available to all others on a subscription basis regardless of whether the individual or the agency is a member of API. Thank you. Chairman PROXMIRE. Thank you. Mr. Hodges. [The prepared statement, with exhibits, of Mr. Hodges follows:] PREPARED STATEMENT OF JOHN E. HODGES Mr. Chairman, I am John Hodges, Director of Statistics at the American Pe- troleum Institute. I joined the staff of the API in 1966. Prior to that time, I taught statistics and economics at three universities for a period of approxi- mately twenty-five years. Concurrently, I accumulated twenty-three years of full-time industrial experience as statistician, economist, and vice president of a large oil well equipment manufacturer. Since 1944, I have been continuously involved with problems pertaining to petroleum industry statistics. My work in private industry involved collection of primary petroleum data and the use of petroleum statistics for forecasting. My academic career (and personal interests) led to my involvement with the collection, analysis, and use of petroleum statistics, long before I became a member of the API staff. Because of current interest in data pertaining to the petroleum industry, I welcome this opportunity to review the basic elements of the API statistical program. The API was organized in 1919. From its inception, the API has been pro- foundly aware of the public's interest in the adequacy of petroleum supply. In 1920, the API established a statistical department charged with responsi- bility for the collection and prompt publication of vital statistics pertaining to the petroleum industry. The first efforts of the new department were directed toward the prepara- tion of estimates of daily average crude oil production. From that beginning, the work of the department has been gradually expanded in well-defined but limited areas. Before describing API statistical publications I wish to emphasize the API does not make or publish forecasts or projections of any kind, and it does not collect statistical information on prices. The Weekly Statistical Bulletin.-The Weekly Statistical Bulletin in its present format is a direct outgrowth of the work that was started in 1920. This Bulletin provides data pertaining to the domestic petroleum industry such as weekly crude runs to crude oil distillation units, the utilization of operable refining capacity, weekly refinery production of gasoline, jet fuels, distillate fuel oil, and residual fuel oil. In addition, the Bulletin shows weekly stocks of crude oil and refined products, weekly estimates of domestic crude oil produc- tion, and weekly information pertaining to the imports of crude oil and refined products. Stocks (i.e., inventories) reported by the API and the Bureau of Mines are referred to as "primary stocks." These stocks are located at refiner- ies, bulk terminals, and in pipelines. They do not include inventories in the hands of distributors and consumers, i.e.. secondary stocks. In recognition of the importance of the time factor, the Bulletin is usually published each Wednesday on the basis of information reported directly to the API by refiners and pipeline companies involved with supply and refinery oper- ations. The information reported to the API each week reflects operations for a seven day period ending on the Friday preceding publication. PAGENO="0263" 257 In order to put the Weekly Statistical Bulletin in proper perspective, it should be noted that the U.S. Bureau of Mines publishes monthly reports on the domestic supply system that are much more comprehensive than the API weekly reports. However, their monthly reports dealing with various aspects of supply, demands, movements of crude oil and products, refinery operations, and inventories, run at least two months behind in publication; e.g., as of today, the latest figures available are for the month of October. (This lag represents about the normal time required to collect and compile the voluminous statistics in the 24 tables in their "Monthly Petroleum Statement.") Nevertheless, the in- dustry as well as the federal government, considers the Bureau of Mines to be the definitive source of information of the types reported in the Monthly Pe- troleum Statement.' It should be emphasized, therefore, that the primary purpose of the API Weekly Statistical Bulletin is to provide the most timely information that can be collected covering selected operating series pending release of the definitive data from the Bureau of Mines. The data published in the Bulletin are made possible by the voluntary coop- eration of those members of the API willing to provide information pertaining to their operations. A comparison of volumes reported to the API with vol- umes reported to the Bureau of Mines for the first nine months of 1973 is shown in Exhibits A and B on a percentage basis.2 For example, the volumes of crude runs reported to the API during the first nine months of 1973 aver- aged approximately 97 percent of volumes of crude runs reported to (and pub- lished by) the Bureau of Mines. In order to publish estimates of total industry volumes reported in the Bul- letin, the API has traditionally introduced an estimate of unreported volumes. These estimates are based on a comparison of the latest figures available from the Bureau of Mines with data actually reported to the API for the same pe- riod. In other words, we are currently using adjustment factors based on a comparison of Bureau of Mines data for the month os September, 1973 with data actually reported to the API for weeks ending in September 1973. API weekly estimates are audited regularly against Bureau of Mines reports as they become available. This enables us to detect deficiencies in our estimates and to make necessary adjustments in our estimating procedures. Comparisons of the reliability of data published by the API as related to data published by the Bureau of Mines are shown in Exhibits A and B. For example, with re- spect to crude runs, API data published for the first nine months of 1973 were within four tenths of one per cent of crude runs published by the Bureau of Mines. Our agreement with the companies that cooperate in this statistical program is that we will use the data supplied to arrive at and publish estimates for the industry, and that the API will not release information pertaining to indi- vidual companies operations. This understanding reflects a basic view that re- lease of data on the operations of a company is the proper function of that company and not of a trade association. The accuracy of weekly API data can be verified for any given month by comparison with monthly results published by the Bureau of Mines. As shown in Exhibits A and B, the weekly averages have compared exceptionally well with final data published by the Department of the Interior. Furthermore, the major companies in the industry are called upon periodically to testify before the Texas Railroad Commission as to their inventories of crude oil and major products. Those statistics are a matter of public record available to everyone, and are frequently published in trade journals. They have not been considered of general public interest in the past when supplies were adequate to meet de- mands and only industry totals were of concern to business publications and newspapers. In the present period of shortages, additional interest has developed in cur- rent statistics other than those published by the API. For example, questions are being raised as to the accumulation of secondary inventories outside the hands of major refiners and pipeline companies, and trends in the actual cur- 1 Definitions of all terms used by the API are the same as those used by the Bureau of Mines. 2 October results from the Bureau of Mines were not received in sufficient time to up- date Exhibits A and B. PAGENO="0264" 258 rent consumption of fuels. The API does not collect data on inventories in the hands of distributors and consumers.3 This would involve an extensive and elaborate reporting system in order to cover inventories existing in, for exam- ple, gasoline service stations, fuel oil tanks for home heating systems, etc. The task of collecting information from thousands of dealers, distributors, and con- sumers, who are not now- faced with that burden, would be impossible for a trade association relying on voluntary cooperation. It should also be noted that the API does not try to measure actual con- sumption of fuels on a weekly basis because it has no basis for estimating the changes in stocks held outside of primary storage. Reserves Data.-The first organized effort by the API to develop an estimate of the country's over-all reserves of oil (as far as I have been able to deter- mine) was made in 1935 by a Subcommittee on Known Reserves of the API's Special Committee on Production and Supply. This Committee's finding was that, as of January 1, 1935, domestic proved oil reserves were 12.17 billion barrels. Since that initial effort, the name of the committee has been revised several times to reflect the nature of its work more accurately, and its work- load has been greatly expanded. In 1965, a study entitled Petroleum Statistics Report was prepared by the Petroleum Statistics Study Group at the request of the Bureau of the Budget. (This group was comprised of members of the various agencies of the federal government including Commerce, interior, Justice, the Council of Economic Ad- visers, Office of Emergency Planning, and the Federal Power Commission. Here- after, the study prepared by this group will be referred to as the "Krueger Re- port.") The Krueger Report called for a substantial amount of additional information pertaining to crude oil reserves in the United States. Late in 1965 the Director of the Office of Oil & Gas was given focal responsibility for coor- dinating federal government requirements for petroleum statistics. Observers from the Office of Oil & Gas were present at meetings of the API Committee on Reserves & Productive Capacity where various reserves definitions and in- formation requirements were discussed. As a result of these efforts, the API reserves report was expanded from approximately thirty pages to approxi- mately two hundred and fifty pages. Since 1966, the Director of the Office of Oil & Gas has been serving as an observer on the API Committee on Reserves & Productive Capacity, and qualified government observers have been attending some of the subcommittee meetings for several years. The API publishes annual estimates of proved reserves and productive ca- pacity of crude oil, and collaborates with the American Gas Association in the preparation of estimates of proved reserves of natural gas liquids. At this point it may be helpful to define the meaning of proved reserves as developed by the API Committee on Reserves and Productive Capacity. Proved reserves as of any given date are the estimated quantities of all liquids statis- tically defined as crude oil, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reser- voirs under existing economic and operating conditions (including technology at the time the estimate is made). Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation tests. The area of an oil re- servoir considered proved includes: (1) that portion delineated by drilling and defined by gas-oil or oil-water contacts, if any; and (2) the immediately ad- joining portions not yet drilled but which can he reasonably judged as econom- ically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest know-n structural oc- currence of hydrocarbons controls the lower proved limit of the reservoir. Reserves of crude oil which can lie produced economically through applica- tion of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the en- gineering analysis on which the project or program was based. Estimates of proved crude oil reserves do not include the following: (1) oil that may become availal)le from known reservoirs but is reported separately as "indicated additional reserves"; (2) natural gas liquids (including conden- `The Bureau of Mines Is presently collecting some inventory statistics for a selected number of independent terminal operators on the East Coast. This Is, however, not a complete accounting. In addition, the Federal Power Commission collects statistics on one very important category of secondary stocks, i.e.. those held by electric power com- panies. Their latest report contains data as of December 1972. PAGENO="0265" 259 sate) ; (3) oil the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (4) oil that may occur in untested prospects; and (5) oil that may be recovered from oil shales, coal, gilsonite and other such sources. The API has not developed a definition of "potential future reserves." How- ever, it appears that this phrase is used in referring to the estimated volume of a resource in the ground that has not yet been discovered. Potential future reserves are sometimes designated as probable, possible, and speculative. Whether estimates so characterized will ever be discovered, and what the vol- umes will actually be, will depend upon the interplay of future economic, polit- ical, and technological factors. Such factors do not fall within the scope of the API reserves program. For purposes of developing estimates of reserves, the United States is di- vided into fourteen geographic districts. A subcommittee is appointed for each district and charged with responsibility for the determination of reserves and productive capacity estimates in that district. The district subcommittees are made up of qualified technical personnel (professional engineers and geolo- gists) from API member companies, having know-ledge of the fields and reser- voirs in their areas of responsibility. Annual reports for each district are submitted by the subcommittee chair- men to the member of the main Committee on Reserves & Productive Capacity that has responsibility for the district. District totals are submitted to the Division of Statistics about I~Iarch 1 of each year for tabulation by the API staff. About the middle of March the main committee meets for the purpose of reviewing year-end estimates prepared by the district subcommittees. There is a common misconception that API reserves data are based on re- ports submitted by individual companies. In fact, estimates published by the API are prepared by highly qualified, professional personnel who prepare indi- vidual and independent estimates as to what proved reserves may be in the various areas. An estimate prepared by an individual serving on a subcommittee may very well differ from the reserves data carried on the books of his company. Among other things, such differences may reflect the use of definitions by the various companies that differ from those used by the reserves committee and applied uniformly in all districts. Such differences may also occur because of different interpretations that may be placed upon complex geologic and reservoir data by qualified engineers. The complexity of the physical behavior of oil, gas, and water within the pro- ducing reservoirs means that the preparation of estimates of reserves requires detailed study of changing reservoir performance by experts with very special- ized training in engineering and geology. The estimates involve judgment as well as interpretation of available data, with the result that some variations can exist in the numbers calculated by different qualified experts. Reserves estimates made in the early stages of development of a field may differ substantially from estimates made after further development has been completed. Details of the organization of the Committee on Reserves & Productive Ca- pacity and the definitions used for estimating proved reserves and productive capacity may be found in Exhibit C. Drilling Costs and Expenditures Data.-In cooperation with the Mid-Conti- nent Oil & Gas Association and the Independent I'etroleum Association of America, the API collects and publishes data pertaining to (1) the estimated cost of drilling oil wells, gas wells, and dry holes, by depth range for major areas of the United States (referred to as Section I); amid, (2) estimated ex- penditures for oil and gas exploration, development, and production in the United States (referred to as Section II). These data are published annually in the Joint Association Survey (JAS). The first JAS, which was published in 1956, included data for the year 1953. In 1956, expenditure data for the years 1944 and 1948 were also published. The complete report was next published for the years 1955 and 1956. Begin- fling with the survey year 1959, the JAS has been published annually. Since 1966, a number of improvements have been made in the JAS. However, the API has not been able to respond to recommendations that expenditure es- timates be segregated by areas, and reported separately for oil and gas. The API has devoted considerable study to this problem and we have not yet found a satisfactory solution. A basic obstacle is the fact that companies do not keep PAGENO="0266" 260 their records in this manner. There is also the theoretical problem of handling expenditures for products (crude oil and natural gas) which are explored for, developed, and produced jointly. Data used in preparing the JAS are submitted directly to the API by com- panies. In 1972, Section I of the JAS was based on reported data covering 42 per cent of total wells and 50 per cent of total footage. Data in Section II were based on expenditures by companies having 79 per cent of total industry revenues from oil and gas production. The data in Section 1 of the JAS are derived from a sample of wells, foot- age, and costs collected from operators of different sizes who drilled wells in various areas of the United States. The drilling costs reported are those in- curred for drilling and equipping wells through the "Christmas tree" (that is, through the well-head equipment required to produce the well). The estimates of costs are derived by combining sample data with annual drilling statistics as compiled by the American Petroleum Institute and the American Associa- tion of Petroleum Geologists. Section II provides annual information pertaining to expenditures incurred by operators incident to finding, developing, and producing oil and gas for the total U.S. However, the estimates for Section II do not include income taxes, interest charges on debt capital, and returns to investors. Expenditure esti- mates are based on regression analyses which correlate company size (meas- ured by revenues reported to the JAS) and the various types of expenditures incident to the exploration, development, and production of oil and gas. There are no annual sources of cost and expenditure information comparable to that which is published in the Joint Association Survey. However, the Cen- sus of Mineral Industries (which is now available every five years) provides bench mark data which can be compared to the JAS. We have made a careful analysis of both publications for the years 1963 and 1967 and we are satisfied that JAS results (with respect to costs and expenditures) compare favorably with the Census of Mineral Industries. The Federal Power Commission has also collected voluminous data of a similar nature. The Chase Manhattan Bank collects data and prepares estimates of total expenditures on an annual basis. Drilling Statistic9.-Prior to 1966, the basic sources of statistics pertaining to the drilling of oil and gas wells in the U.S. were the trade journals. Such data were also compiled by the various states and oil scout organizations. The American Association of Petroleum Geologists (AAPG) for many years had been compiling information on exploratory drilling. However, none of these agencies was covering the U.S. uniformly, and all were using different defini- tions. According to the Krueger Report, there was "no single, timely, uniform, accurate, and complete set of data." In response to the Krueger Report, the API worked out an arrangement with the AAPG for the collection of drilling statistics for the U.S. on the basis of a uniform set of definitions which were developed with the participation of rep- resentatives from various government agencies that were interested in this problem. Approximately three-fourths of the area of the United States has been di- vided into seventeen districts. Each district is assigned to an API respondent company that is especially qualified to collect and report drilling information for its area of responsibility. For the remainder of the U.S. (roughly the Northeast quadrant) nineteen states report drilling information directly to the API. API respondents initiate an individual well ticket for each completed well. A copy of this ticket is transmitted to the API and used for compiling current statistics on a monthly and quarterly basis. A copy is also transmitted to the AAPG Committee on Statistics of Drilling (AAPG-CSD) which reviews all well classifications reported to the API and further classifies all exploratory wells in accordance with the guidelines originally developed by Dr. F. H. Lahee (Chairman of the AAPG Committee on Statistics of Drilling, 1945-1955) and applied by CSD members for more than twenty years. Annual drilling statistics published by the API are reported in accordance with CSD classifications. Although the API-AAPG system is considered to be the most reliable source of drilling statistics. there are other sources of such information. For exam- ple: the Census of Mineral Industries, trade journals, oil scout associations, and commercial scouting companies. PAGENO="0267" 261 Standard Definitions for Petroleum Statistics.-An important function of the API Division of Statistics has been to establish standard definitions which are of crucial importance to the development of useful and compatible statistical systems. For example, the API and the Bureau of Mines are using the same definitions in the area of supply and refinery operations. Definitions used in the Census of Mineral Industries are the same as those used by the API in connection with drilling statistics, costs, and expenditure data. Petroleum Facts c~ Figures.-The first issue of Petroleum Facts & Figures was published by the API in 1928 in recognition of the need for a statistical compendium on the petroleum industry. Subsequent to that date, PF&F was published at roughly two-year intervals. As with most statistical publications this volume has grown in size. The 1971 edition included almost every impor- tant statistical series pertaining to the domestic petroleum industry and a number of tables pertaining to international operations. This publication is considered to be a secondary source of information since almost every series in this volume is available from sources other than the API. Annual Statistical Review.-Each year the API publishes the Annual Statis- tical Review which is a sunimarization of the most important Bureau of Mines Data pertaining to petroleum supply and refinery operations for the most re- cent years, and by months for the latest two years for which data are avail- able. The purpose of the Annual Statistical Review is to provide a convenient reference to Bureau of Mines Data. The next edition will include additional data and, in effect, will become an annual supplement to Petroleum Facts & Figures. Mr. Chairman, this completes my statement on work being done in the API Division of Statistics. A list of our publications is attached as Exhibit D. However, before concluding I would like to make several observations related to the purposes of this hearing. 1. Contrary to certain opinions there is a voluminous amount of data avail- able with respect to the petroleum industry. The API statistical program pro- vides only a small fraction of the total data reported and available to the pub- lic. There is considerable information published by various government agencies including the Department of Commerce, the Department of the Inte- rior, Atomic Energy Commission, Federal Aviation Agency, Federal Power Commission, Department of Transportation, etc. All the data submitted to API are summarized and published with the exception of information that would in any way reveal individual company data. This is consistent with policies adopted by the Department of the Interior. Despite the numerous sources of statistical information, many of the data published by these sources are not uniformly reported in accordance with standard definitions or a common statistical format. Nevertheless, these data can be useful in understanding the operation of the oil industry if an individ- ual is willing to take the time to research and perform the necessary analyti- cal work. 2. 1 am convinced that much of the current controversy concerning the availability and credibility of petroleum industry statistics stems from confu- sion as to the difference between statistics on the one hand, and projections on the other. This is reflected in the confusion of the public as to the degree of the energy shortage. What the public really wants to know is what the situa- tion will be next February, next August, etc. Statements about the future are not necessarily simple extensions of the past. The real measure of the current adequacy of stocks of gasoline and fuel oil is not so much how they compare with a year ago but how they relate to expected summer travel demand, weather in February and March, and the level of refinery runs that will be possible this spring in view of the embargo. Statements about the future must be based on assumptions involving numerous variables such as these. When forecasters differ in their assumptions, they may arrive at different conclu- sions. 3. The allegation has been made that the API gathers statistics solely for the benefit of its larger members. This is not the case. All of the information that the API collects is published in summary form. Our publications are dis- tributed on a complimentary basis to all members of the press and governmen- tal agencies without restriction of any kind. Our publications are available to all others on a subscription basis regardless of whether the individual or agency is a member of the API. PAGENO="0268" PER CENT REPORTED TO API vs. BUREAU OF MINES - TOTAL U.S. Crude 1973 Runs REFINERY PRODUCTION Motor Napti. Kero. Distillate Residual Avia, Gasoline Jet Jet Fuel Oil Fuel Oil Gasoline IMPORTS Crude Refined Oil Products Jan. 96.4 95.3 73.3 100.2 97.1 98.2 127.1 102.3 Feb. 96.0 96.0 10.9 95.3 96.9 97.0 141.9 105.4 Mar. 96.6 96.1 83.3 99.3 97.4 98.9 115.1 115.2 Apr. 96.3 96.9 70.1 98.6 91.5 101.2 104.5 109.8 May 97.0 96.6 68.2 99.6 98.8 97.5 109.4 134.7 June 96.5 97.1 69.9 102.8 95.0 94.8 107.9 109.6 July 96.9 96.5 76.6 99.3 97.2 96.9 107.1 132.8 Aug. 98.3 97.3 66.4 97.7 96.2 93.5 102.1 141.5 Sep. 96.8 96.1 71.0 101.1 94.4 94.6 123.6 119.4 92.8 57.1 86.6 54.5 88.7 56.4 96.4 65.1 92.3 51.5 93.8 52.2 90.5 51.2 98.4 48.3 95.1 61.8 High 98.3 97.3 83.3 102.8 98.8 101.2 141.9 141.5 98.4 65.1 9 Mos. Avg. 96.8 96.4 72.2 99.3 96.7 97.0 115.4 119.0 92.7 55.3 Low 96.0 95.3 66.4 95.3 94.4 93.5 102.1 102.3 86.6 48.3 1973 High 102.2 100.5 112.2 9 Mos. Avg. 100.4 99.5 101.7 Low 99.6 98.0 93.5 PER CENT API PUBLISHED vs. BUREAU OF MINES - TOTAL U.S. Division of Statistics - American Petroleum Institute H H `-a Kerosine Jan. 99.7 98.0 Feb. 99.6 98.9 Mar. 100.0 99.4 Apr. 100.1 100.3 May 100.6 99.7 June 100.4 99.9 July 100.7 99.4 Aug. 102.2 100.5 Sep. 100.7 99.4 107.9 106.1 112.2 98.5 98.3 97.9 105.3 93.5 95.9 102.4 98.3 101.3 100.9 102.7 105.9 101.9 99.7 102.3 105.9 101.7 98.3 98.7 95.1 85.6 91.2 98.7 95.2 122.3 94.4 99.4 99.0 87.1 102.3 99.5 101.6 81.1 95.1 101.0 97.5 86.9 115.2 97.7 95.9 94.6 97.7 99.9 98.6 97.1 114.8 99.8 93.4 90.2 130.0 97.0 95.2 104.1 107.5 101.0 101.6 122.3 130.0 99.1 96.8 94.3 105.4 97.0 93.4 81.1 91.2 97.0 102.5 92.4 96.0 95.7 97.6 104.3 114.3 100.5 97.3 103.8 95.6 99.6 92.0 104.4 87.3 101.7 104.7 104.4 114.3 99.9 98.6 92.4 87.3 PAGENO="0269" PER CENT STOCKS REPORTED TO API vs. BUREAU OF MINES - TOTAL U.S. Kero. Distillate Residual Unfinished Crude 1973 Jet Fuel Oil Fuel Oil Kerosine Oils Oil Jan. 93.7 96.3 85.4 Feb. 97.0 96.9 86.1 Mar. 99.4 97.0 85.9 Apr. 96.7 97.1 86.3 May 99.6 96.1 87.1 June 97.9 97.7 88.2 July 96.6 91.3 86.9 Aug. 94.1 98.3 87.4 Sep. 93.9 94.4 88.2 98.3 88.2 96.8 86.8 94.4 85.4 PER CENT STOCKS API PUBLISHED vs. BUREAU OF MINES - TOTAL U.S. 1973 Motor Gasoline Naph. Jet Avis. Gasoline High 9 Moe. Avg. Low 94.7 87.0 91.9 95.0 17.1 110.7 95.8 83.2 94.9 97.0 80.6 96.6 97.1 84.1 93.6 94.3 82.1 99.6 94.5 92.3 92.4 92.2 78.5 95.2 95.8 88.3 96.8 95.7 75.7 92.5 94.5 90.4 95.2 95.1 74.3 96.3 92.8 83.9 89.0 95.6 15.4 82.7 94.4 84.4 92.9 94.2 75.9 89.8 93.4 91.0 89.9 94.8 72.4 94.4 97.1 92.3 91.9 97.0 82.1 110.7 99.6 94.8 81.2 93.6 94.9 71.3 95.3 96.5 92.8 83.2 89.0 92.2 72.4 82.7 93.7 Jan. 98.8 99.4 103.0 101.5 101.5 116.3 100.2 100.5 99.2 Feb. 100.5 95.5 98.9 102.9 104.7 102.5 104.6 100.8 100.3 Mar. 101.9 95.8 97.0 98.8 101.9 105.7 106.0 100.6 99.8 Apr. 99.2 104.9 96.2 91.4 91.0 101.4 102.1 100.1 100.2 May 100.2 101.4 101.3 102.1 96.3 98.7 104.4 99.8 100.4 June 98.4 105.1 99.4 101.8 97.0 102.5 102.3 101.7 101.7 July 96.5 99.9 93.1 102.1 98.8 88.0 100.6 101.4 100.8 Aug. 98.0 100.7 91.1 100.3 102.2 95.4 98.0 102.4 101.2 Sep. 97.1 106.0 93.3 100.6 101.3 98.9 97.8 98.4 102.2 High 101.9 106.0 103.0 102.9 104.7 116.3 106.0 102.4 102.2 9 Mos. Avg. 99.0 101.0 97.7 100.8 100.1 101.0 101.8 100.7 100.6 Low 96.5 95.5 93.1 97.4 96.3 88.0 97.8 98.4 99.2 Division of Statistics American Petroleum Institute PAGENO="0270" ma m ~4~~ -4~4 1#I m m S I ** - ~ ~ ** ~ I -~ - ~ ~ ~4-~ ~ ~--~ - 2 ~ ~ - - - k--, t~ ~/ ~ !~- -~ ~ / I ~ PAGENO="0271" 265 ORGANIZATION and DEFINITIONS for the ESTIMATION of RESERVES and PRODUCTIVE CAPACITY of CRUDE Oft PAGENO="0272" 266 PREFACE This is the second of a series of Technical Reports published by the American Petroleum Institute which provide information concerning definitions, organization, procedures, and methodology used in compiling petroleum industry statistics. Technical Report No. 2 is specifically concerned with (1) the definitions used by the API Committee on Reserves and Productive Capacity, and (2) the organization responsible for the compilation of estimates of proved reserves of crude oil, productive capacity, and related information. The petroleum industry and the general public have long been alert to the need for infor- mation pertaining to reserves of crude oil and natural gas. In 1915, Ralph Arnold prepared an estimate of crude oil reserves. Similar estimates were prepared by the U. S. Geological Survey in 1916 and 1919. For the year 1922, estimates of crude oil reserves were prepared jointly by the U. S. Geological Survey and the American Association of Petroleum Geologists. Estimates of crude reserves were prepared by the American Petroleum Institute in 1925, and estimates for 1927 and 1933 were made by the Federal Oil Conservation Board. The petroleum reserves of the United States have been systematically reviewed and reported on an annual basis by industry technical groups since 1936. Initially, the estimations were made by the Committee on Petroleum Reserves of the American Petroleum Institute, and were limited to reserves of crude oil, including lease condensate. The Committee on Natural Gas Reserves was formed by the American Gas Association in 1946 for the purpose of preparing annual estimates of reserves of natural gas and natural gas liquids. Since that date, the API and A.G .A. committees have worked cooperatively to insure that all liquid hydrocarbon reserves are properly classified and reported. PAGENO="0273" 267 In 1966, the API Committee's name was changed to the "Committee on Reserves and Productive Capacity." In addition to continuing its work with respect to proved reserves, the Committee's responsibilities were expanded to include the development of supplementary data including the following: 1. Original oil-in-place and ultimate recovery categorized by: a. Geologic age of reservoir rock b. Reservoir litho logy c. Type of entrapment 2. Indicated additional reserves resulting from the future application of known improved recovery techniques in known fields. 3. Allocations back to year of discovery of: a. Current estimates of ultimate recovery b. Current estimates of original oil-in-place 4. Reserves and production data by subdivisions for the states of California, Louisiana, New Mexico, and Texas. 5. Crude oil productive capacity by states and by subdivisions for the states of California, Louisiana, New Mexico, and Texas. This report is intended primarily as a handbook for the engineers and geologists who actually prepare the detailed estimates that are aggregated and published by the American Petroleum Institute. It is anticipated that this report will also be helpful and informative to those interested in using data pertaining to U. S. crude oil reserves and productive capatity. Washington, 0. C. June 30, 1970 iv PAGENO="0274" 268 TABLE OF CONTENTS Page PREFACE iii SECTION A. ORGANIZATION Introduction 1 Responsibilities of the Committee on Reserves & Productive Capacity. 2 Authority 2 Membership Role of Chairman Organization of the Committee 4 Steering Subcommittee 4 Subcom mittee on Certificates of Appreciation 4 Subcommittee on the Annual Report 4 District Subcommittees 4 Coordination with American Gas Association Committee on Natural Gas Reserves 6 Records and Reports of District Subcommittees 7 Confidentiality of Information 7 Meetings 8 The Annual Report 9 API Certificates of Appreciation 9 SECTION B. DEFINITIONS Crude Oil 10 Production 11 Cumulative Production 12 Proved Reserves of Crude Oil 12 Proved Developed Reserves 13 Proved Undeveloped Reserves 14 Indicated Additional Reserves 14 Discoveries 15 Graphic Illustrations 16 Extensions 17 Revisions 17 Proved Acreage 18 Improved Recovery Techniques 18 0 riginal 0 il~In*Place 19 Ultimate Recovery 20 Productive Capacity of Crude Oil 20 PAGENO="0275" 269 Page SECTION C. GEOLOGICAL INFORMATION ON OIL OCC!JRRENCE Introduction 24 Oil by Age of Reservoir Rock 24 Oil by Reservoir Lithology 25 Oil by Type of Entrapment 26 SECTION D. GEOGRAPHIC BOUNDARIES 27 APPENDIX A. Organization of API Statistical Servicas 29 APPENDIX B. Map I - Geographic Districts of the United States covered by API Reserves Subcommittees 32 Map II - Subdivisions of California used in reporting reserves data 33 Map Ill - Subdivisions of Louisiana used in reporting reserves data 34 Map IV - Subdivisions of New Mexico used in reporting reserves data 35 Map V - Subdivisions of Texas used in reporting reserves data 36 APPENDIX C. Figure 1 New Field Discovery 38 Figure 2 New Field Discovery in Area of Additional Well Control 39 Figure 2-A Cross-Section of Structure in Figure 2 39 Figure 3 New Field Discovery 40 Figure 3-A New Field Discovery 40 Figure 3-B New Field Discovery 41 Figure 4 Cross-Section of Field Discovery 42 APPENDIX 0. Arithmetic Relationships Applicable to Tables Published in Annual Reports 44 PAGENO="0276" 270 SECTION A. ORGANIZATION INTRODUCTION The statistical program of the American Petroleum Institute is conducted in accordance with the Statement of Policy on Petroleum Statistics which reads as follows: The American Petroleum Institute assumes a leadership role on behalf of the petroleum industry to insure that adequate statistical reporting of its operations is achieved on a timely basis. Close liaison is maintained with governmental and trade and professional organizations with regard to the collection and dissemination of statistical data on the petroleum industry. The Institute actively cooperates with other groups with the objective of improving the report coverage of the industry. By doing so it seeks to avoid the collection of statistical data already being compiled by others. Statistical information is published under Institute sponsorship in the maximum degree of detail consistent with the safeguarding of proprietary information of individual companies, while mindful of the cost and utility of the data involved. The Institute's statistics are confined to current and historical data. The Institute does nor participate in the publication of forecasts of future demand for petroleum or its products, nor of estimates of crude oil, natural gas, or natural gas liquid recoveries that are speculative in nature or that rely upon conjecture regarding future physical or economic conditions. This policy is implemented by an organization of five standing committees as follows: 1. Committee on Well and Orilling Statistics 2. Committee on Reserves and Productive Capacity 3. Committee on Expenditures and Revenues 4. Committee on Supply and Consumption Statistics 5. Comm ittee on Marketing Statistics Each of these committees operates under the general direction of the API Corn rn ittee on Statistics. (See Organization of API Statistical Services, Appendix A.) PAGENO="0277" 271 2. RESPONSIBILITIES OF THE COMMITTEE ON RESERVES & PRODUCTIVE CAPACITY* The primary function of the Committee on Reserves and Productive Capacity is to develop and report estimates of reserves and productive capacity of crude oil in the United States. In addition, the Committee has the following general responsibilities: 1. Continually assess existing reserves and productive capacity data regarding reliability, usefulness, and timeliness. 2. Recommend the development of additional series which will eliminate data gaps and provide adequate coverage of reserves and productive capacity. 3. Recommend revisions of reserves and productive capacity series which are not accurate and timely. 4. Recommend elimination of series which do not provide worthwhile information. 5. Seek means of reducing the cost of providing data without jeopardizing accuracy or timeliness. AUTHORITY The Committee has authority to initiate whatever actions or studies are necessary in the discharge of its responsibilities. It may approve changes in existing statistical series which will improve their reliability, usefulness, and timeliness. Extensions to existing statistical series, the creation of new series, and the elimination of existing statistical series require approval of the Committee on Statistics. Recommendations for such changes are submitted to the Comm ittee on Statistics through the Statistics Coordina- ting C omm ittee. This committee replaces the former APt Committee on Petroleum Reserves which developed and reported annual reserve estimates from t936 through 1965. PAGENO="0278" 272 3. The professional judgment of the Committee members, as reflected in the development of estimates of crude oil reserves and productive capacity, is recognized and preserved without modification by higher authority or other committees within the Institute. MEMBERSHIP Members of the Committee on Reserves and Productive Capacity and its Cheirman are appoint- ed by the Chairman of the Committee on Statistics. Initial appointments are made for a period of two years and appointments are generally renewed on a year-to-year basis as long as members retain an active affiliation with the petroleum industry in a capacity which enables them to contribute to the work of the Committee. The Director of the API Division of Statis- tics serves as Secretary of the Committee. The Committee is composed of individuals who are professionally competent in the committee's area of responsibility. These individuals are selected from the management of the petroleum industry, industry-associated companies, and independent agencies. Normally, no more than one representative from each company (including its subsidiaries) or agency will serve on the Committee at the same time. The Federal Government is represented on the Committee by a designated observer. ROLE OF CHAIRMAN The Chairman of the Committee is responsible for insuring that the work of the Committee is performed in an expeditious and timely manner. The Chairman calls meetings, appoints subcommittees of the main Committee and their chairmen, appoints special task groups, and makes such assignments as may be necessary to perform the work of the Committee. He reports the results of the Committee's work to the Committee on Statistics through the Statistics Coordinating Committee. PAGENO="0279" 273 4. ORGANIZATION OF THE COMMITTEE The Chairman of the Committee assigns to each member (except the Secretary) responsibility for the development of data pertaining to reserves and productive capacity for a specific area of the U. S. In carrying out this responsibility, committee members may appoint one or more subcommittees made up of qualified technical personnel that are responsible for the development of estimates for specific districts. These subcom- mittees, which are responsible for determining annual reserves and productive capacity estimates, are compos- ed of geologists and engineers who (1) represent various segments of the producing industry having prom- inent ownership holdings in the subcommittee's assigned area; (2) have broad experience in the estimation of reserves and productive capacity; and (3) have an intimate knowledge of the areas and the more significant sized fields assigned to them. The subcommittees are expected to make multiple assignments of selected fields to their members where it will beneficially contribute to the quality of reserve and productive capacity estimates and promote the exchange of expert views important thereto. The Chairman of the Committee on Reserves and Productive Capacity appoints standing subcommittees from the membership of the main committee as follows: 1. Steering Subcommittee- This subcommittee is concerned with the development of defini- tions, guidelines, procedures, etc., which will assist in the determination and compilation of data required by the Committee. 2. Subcommittee on Certificates of Appreciation. This subcommittee recommends members of district subcommittees that are eligible to receive certificates of appreciation for services rendered. The Subcommthee on Certificates of Appreciatio~ also recommends members of the main committee that deserve special recognition for outstanding service. 3. Subcommittee on the Annual Report. This subcommittee oversees the preparation of the annual report giving special consideration to the wording of the text, organization and format of tables, etc. DISTRICT SUBCOMMITTEES Members of the district subcommittees are appointed for a period of one year, but membership is usually retained as long as responsibilities are properly discharged and the policies of the main Committee are observed. However, each member is expected to serve only as long as he retains an active affiliation with the petroleum industry in a capacity which enables him to contribute to the work of a subcommittee. PAGENO="0280" 274 5. The geographic districts of the United States assigned to members of the Committee on Reserves and Productive Capacity and their respective subcommittee organizations are as follows (see maps in Appendix B): 1. Northeastern District Subcommittee. a. Tennessee b. Ohio c. West Virginia d. Virginia e. New York, Pennsylvania, and other northeastern states. 2. Southeastern District Subcom mittee. (Arkansas, North Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and North Carolina.) 3. South Louisiana District Subcommittee. 4. N orth Central District Subcom mittee. a. Illinois, Indiana, and Kentucky b. Michigan 5. Central District Subcommittee. (Oklahoma, Kansas, and Missouri.) 6. Texas Gulf Coast District Subcommittees. a. Texas Railroad Commission Districts 1 and 2 b. Texas Railroad Commission District 3 c. Texas Railroad Commission Oistrict 4 7. East Texas District Subcommittee. (Texas Railroad Commission Districts 5 and 6.) 8. North Texas District Subcom m ittees. a. Texas Railroad Corn mission District lB b. Texas Railroad Commission District 9 c. Texas Railroad Commission District 10 9. Southeast New Mexico and West Central Texas District Subcommittee. (Southeast New Mexico and Texas Railroad Commission District 7C.) 10. West Texas District Subcommittee. (Texas Railroad Corn mission Districts 8 and 8A.) 11. South Rocky Mountain Oistrict Subcommittees. a. Eastern Colorado and Nebraska b. Western Colorado, Utah, and Northwest New Mexico PAGENO="0281" 275 6. 12. North Rocky Mountain District Subcommittee. a. North Dakota, South Dakota, and Montana b. Wyoming and Idaho 13. Pacific Coast District Subcommittee. (Arizona, California, Nevada, Oregon, and Washington) 14. Alaska District Subco mmittee. The member of the main Committee having responsibility for a given area is expected to assure himself that each Subcommittee under his jurisdiction is adequately staffed with competent personnel and that the work is performed in accordance with the guidelines, procedures, and rules of the Committee on Reserves and Productive Capacity. The District Subcommittees bear the primary responsibility for the deter- mination of estimates of reserves and productive capacity. In discharging these responsibilities within the Subcommittees a special effort is made to assign the more significant sized fields to individual members who are knowledgeable thereof either directly or through their affiliations. Additionally, the Subcommittees are ex- pected to make multiple assignments of selected fields to their members where it will beneficially contribute to the quality of reserve and productive capacity estimates and promote the exchange of expert views important thereto. COORDINATION WITH AMERICAN GAS ASSOCIATION COMMITTEE ON NATURAL GAS RESERVES Reserves and production of associated-dissolved gas are directly related to the reserves and production of crude oil. Therefore, since the A.G.A. Committee on Natural Gas Reserves develops estimates of reserves and productive capacity of natural gas and natural gas liquids, close cooperation between the A.G.A. and the API subcommittees is required. Each API subcommittee designates one of its members to work with the appropriate A.G.A. subcom- mittee in order to assure that all necessary information is available for the determination of reserves and pro- ductive capacity of associated-dissolved gas. Information supplied to A.G.A. subcommittees by the API is limited to that which is required for specific applications, and such information is held confidential by the A.G.A. Coordination between A.G.A. and API subcommittees is also necessary in order to avoid the omission or duplication of certain field statistics where the distinction between crude oil and natural gas liquids requires specific interpretation. Such cooperation insures that various types of hydrocarbon reserves in the United States are reported by the appropriate committee. PAGENO="0282" 276 7. RECORDS AND REPORTS OF DISTRICT SUBCOMMITTEES District subcommittee records are maintained for individual reservoirs or fields as required to support information reported to the main Committee. These records are kept by chairmen of the subcommittees during their tenure and transferred to new chairmen at the time of their appointment. Subcommittee chairmen are also responsible for maintaining statistics on depleted or currently abandoned fields even though such fields have no remaining reserves or productive capacity. These data are necessary to maintain a complete history of discoveries, cumulative production, and other statistics. Annual reports for each district are submitted by subcommittee chairmen on designated dates (on forms provided by the API Division of Statistics) to the member of the main Com- mittee responsible for the area. Copies are also submitted to the API Division of Statistics for summarization. Subcommittee chairmen are responsible for the content and accuracy of their respective reports. Prior to release, each table is checked for accuracy and internal consistency according to the relationships shown in Appendix D. CONFIDENTIALITY OF INFORMATION Records of the Committee on Reserves and Productive Capacity and its subcommittees are maintained strictly in accordance with the following policy: It is essential to the success and integrity of the statistical program that members of the Committee and subcommittees adhere to the long- established policy of the former Committee on Petroleum Reserves by maintaining in strictest confidence the basic data and reserve estimates for individual fields used in the preparation of totals. No member of the Committee or its subcommittees is authorized to release any reserve or productive capacity information beyond that which is published in API reports on reserves and productive capacity. Each member of the Committee and its subcommittees is informed of this policy and his responsibility for its observance. Any information as to a possible violation of this policy should be reported to the Chairman of the Committee on Reserves and Productive Capacity. PAGENO="0283" 277 8. MEETINGS The Committee meets annually and more often if deemed necessary. The annual meeting is usually held in March for the primary purpose of reviewing and approving year-end estimates of reserves and productive capacity prepared by the district subcommittees. Subcommittees meet as often as required for the accomplishment of their assignments. Subcommittee members are encouraged to attend the annual meetings in order to become better informed as to the overall operation of the Committee, its policies, and responsibilities. Meetings are held at locations convenient to as many members as possible and distributed between the following geographical locations: east of the Mississippi River; west of the Mississippi River and east of the Continental Divide; and west of the Continental Divide. In preparation for each meeting, members are given adequate opportunity to suggest items to be included on the agenda. The annual meeting is held at the same time and place as the meeting of the American Gas Association Committee on Natural Gas Reserves. Representatives of the Canadian Petroleum Association's Central Reserves Committee attend the annual meetings of the API Committee on Reserves and Productive Capacity and report changes in the status of Canadian reserves. Each year, prior to the annual March meeting of the Committee, Committee members and subcommittee chairmen responsible for the various areas of Texas meet to review data for Texas which are to be submitted to the Committee. The Chairman of the Committee on Reserves and Productive Capacity schedules and presides over this meeting which is held in Houston, Texas. PAGENO="0284" 278 9. THE ANNUAL REPORT Reserves estimates and related statistics, as compiled and approved by the API Committee on Reserves and Productive Capacity, the A.G .6. Committee on Natural Gas Reserves, and the Central Reserves Committee of the Canadian Petroleum Association, are published annually. Estimates of the productive capacity of crude oil, natural gas, and natural gas liquids in the U.S. were included in the annual reports for 1967 and 1968 and will be published in the future at intervals to be determined by the API and the A.G.A. Following the annual meetings of the API and A.G.A. Committees, summary data for the United States are released to the press together with appropriate explanatory text. The complete annual report is available for distribution about June 1 of each year. API CERTIFICATES OF APPRECIATION Members of subcommittees are eligible for certificates of appreciation in accordance with the following rules: 1. An individual is eligible for a Certificate of Appreciation when he has served as chairman of a district subcommittee for a period of five years before completing a total of ten years of service. He will also be eligible for a certifi- cate when he has completed a total of ten years, fifteen years, twenty years, etc., representing a combination of service as a member or chairman of a subcommittee. 2. An individual serving only as a member of a subcommittee will be eligible for his first award at the end of ten years of service. He will also be eligible for an award at the end of fifteen years of service, twenty years, etc. 3. An individual who has not served a minimum of five years as a subcommittee chairman, but has served a combination of ten years as a member of a subcom- mittee and as the chairman of a subcommittee will be eligible for an award at the end of ten years. Thereafter he will be eligible for an award at the end of fifteen years, twenty years, etc., for any combination of service. 4. In any given situation, years of service do not have to be consecutive and the individual does not have to serve on the same subcommittee continuously. However, service on two or more subcommittees in the same year is counted as one year of service. Service as an alternate to a subcommittee member does not satisfy the conditions of eligibility set forth above; furthermore, the names of alternates are not listed with subcom- mittee members in annual reports. PAGENO="0285" 279 10. SECTION B. DEFINITIONS CRUDE OIL DEFINITION Crude oil is technically defined as a mixture of hydrocarbons that exists in the liquid phase in natural underground reservoirs and remains liquid at atmospheric pressure after pass- ing through surface separating facilities. For statistical purposes, volumes reported as crude oil include: 1. Liquids technically defined as crude oil; 2. Small amounts of hydrocarbons that exist in the gaseous phase in natural underground reservoirs but are liquid at atmospheric pressure after being recovered from oil well (casinghead) gas in lease separators;* and 3. Small amounts of nonhydrocarbons produced with the oil. Statistical data pertaining to crude oil production, reserves, and productive capacity are reported as liquid equivalents at the surface (excluding basic sediment and water) measured in terms of stock tank barrels of 42 U. S. gallons at atmospheric pressure, and corrected to 60° F. 5From a technical standpoint, these liquids are termed "condensate"; however, they are commingled with the crude stream and it is not practical to measure and report their volume separately. All other liquids recovered from natural gas (including lease condensate) are included in natural gas liquid volumes reported by the A.G.A. (See American Petroleum Institute Technical Report No. 1, "Standard Definitions for Petroleum Statistics," First Edition, July 1, 1969, pp. 16 and 17.) The distinction between "condensate" which is statistically reported as crude oil, and condensate reported as natural gas liquids, is based on the type of well (oil or gas as generally classified by a regulatory agency) from which the condensate is produced. However, it should be understood that in the case of multiple completion wells (see p. 24 of Technical Report No. 1), the "condensate" that is reported as crude oil is the liquid recovered from casinghead gas produced from oil completions. In most cases, the distinction between an "oil" completion and a "gas" completion is based on classifi- cations by a regulatory agency and these classifications are used for statistical purposes wherever they are available. These classifications may be changed from time to time during the life of a reservoir and they may not be the same as the classifications assigned to wells when production equipment was first installed (see COMPLETION DATE, p. 23 of Technical Report No. 1). In the absence of a regulatory authority, production data are reported on the basis of classifications made by the operator. PAGENO="0286" 280 11. PRODUCTION DEFINITION Crude oil production is the volume of liquids statistically defined as crude oil, which is produced from oil reservoirs during given periods of time. The amount of such production for a given year is generally established by measurement of volumes delivered from lease storage tanks (i.e., the point of custody transfer) to pipelines, trucks, or other media for transport to refineries or terminals with adjustments far (1) net differences between opening and closing lease inventories, and (2) basic sediment and water (BS&W). For purposes of the annual reserves reports, the subcommittees need production data for individual fields and for the specific geographic areas for which they are responsible. Since `official" sources such as state agencies and the U. S. Bureau of Mines do not provide the required detail, the subcommittees must analyze all available data (including company records, commercial services, state records, and Bureau of Mines reports) and make such adjustments as may be necessary to develop production series which satisfy their particular requirements. Because of differences in definitions and differences in data collection procedures used by various sources, and because of the variety of adjustments which must be made, production data used in annual reserves reports should not be expected to agree precisely with that pub- lished by sources such as state agencies and the U. S. Bureau of Mines.* In addition to the problems outlined above, it should be noted that when reserve esti~ mates are prepared for a current year, the subcommittees only have access to actual produc. tion data for the first nine or ten months of that year. Consequently, production totals tIt should be noted that the differences between the final production data used by the Committee on Reserves and Productive Capacity and "official" sources are small. For example, total U. S. production for 1966 shown in Table Ill of the report for 1967, is 99.96% of the total of all production reported by state agencies, and 94.9% of the total U. S. production reported by the U. S. Bureau of Mines. The larger differ- ence between Table Ill and the Bureau of Mines reflects the inclusion of lease condensate in the Bureau of Mines fIgure. Begmmngin 1969 the Bureau of Mines reports lease condensate as a separate production item. PAGENO="0287" 281 12. reported for the current year in an annual report are preliminary estimates prepared by the subcommittees on the basis of incomplete information. However, by the time each annual reporf is prepared, the subcommittees have access to the "actual" total production for the preceding year and the figures shown in Table Ill are revised accordingly.* CUMULATIVE PRODUCTION DEFINITION The sum of the estimated crude oil production for the current year and the actual pro- duction for each of the prior years is the cumulative production reported by the Committee. PROVED RESERVES OF CRUDE OIL DEFINITION Proved reserves of crude oil as of December 31 of any given year are the estimated quan- tities of all liquids statistically defined as crude oil, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation tests. The area of an oil reservoir considered proved includes: (1) that portion delineated by drilling and defined by gas-oil or oil-water contacts, if any; and (2) the immediately adjoining portions not yet drilled but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. *The difference beeween the preliminary estimate for any given year and the actual production for that year, as subsequently determined by the subcommittees, is treated as a "revision" in Table I of the following year's report. It should be noted that the original annual estimates of production osed in Table II are not revised since thss would disturb the internal balance and consistency of the reserve estimates. PAGENO="0288" 282 13. Reserves of crude oil which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classifica- tion if successful testing by a pilot project, or the operation of an installed program in the reservoir, provide support for the engineering analysis on which the project or program was based. Estimates of proved crude oil reserves do not include the following: (1) oil that may become available from known reservoirs but is reported separately as "indicated additional reserves"; (2) natural gas liquids (including lease condensate); (3) oil the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (4) oil that may occur in untested prospects; and (5) oil that may be recovered from oil shales, coal, gilsonite, and other such sources. COMMENTS At the close of each year, estimates of proved reserves are made for each new pool and new field discovery. In addition, previous estimates of proved reserves for fields and/or reservoirs discovered prior to the current year are reviewed and adjusted for (1) changes in proved areas; (2) revisions in recovery estimates based on better defined performance of the reservoirs or other geologic and engineering factors; and (3) the effect of the current year's production. PROVED DEVELOPED RESERVES DEFINITION Proved developed reserves as of December 31 of any given year are proved reserves estimated to be recoverable through existing wells. Reserves in proved reservoirs penetrated by wells but currently not being produced are classified as "developed" if it is anticipated that such reserves will be recovered through existing wells requiring no more than workover operations. PAGENO="0289" 283 14. PROVED UNDEVELOPED RESERVES DEFINITION Proved undeveloped reserves as of December 31 of any given year are defined as econ- omically recoverable reserves estimated to exist in proved reservoirs which will be recovered from wells to be drilled in the future. Reserves in undrilled areas are included in proved reserve estimates if they are considered proved by geologic analysis of the current well information. INDICATED ADDITIONAL RESERVES DEFINITION With the present state of industry technology, certain quantities of crude oil (other than those defined and reported as proved reserves) may be conomically recoverable from the following potential sources: Known productive reservoirs in existing fields expected to respond to improved recovery techniques such as fluid injection where (a) an improved recovery technique has been installed but its effect cannot yet be fully evaluated; or (b) an improved technique has not been installed but knowledge of reservoir character- istics and the results of a known technique installed in a similar situation are available for use in the estimating procedure. Crude oil potentially available from these sources is reported as "indicated additional reserves." The economic recoverability of these reserves is not considered to be established with sufficient conclusiveness to allow them to be included in proved reserves; however, if and when improved recovery techniques are successfully applied to known reservoirs, the corres- ponding indicated additional reserves will be reclassified and added to the inventory of "proved" reserves. Indicated additional reserves do not include reserves associated with acreage that may be added to the area of a proved reservoir as the result of future drilling. 37-143 0 - 74 - 19 PAGENO="0290" 284 DISCOVERIES DEFINITION Discoveries reported as of December 31 for any given year are proved reserves credited to new fields and new pools in old fields as the result of successful exploratory drilling and associated development drilling during the current year.* COMMENTS The reliability of estimates of the proved productive area of new discoveries or partially developed reservoirs varies in relation to the amount of geological information available at the time the estimate is prepared. Important factors such as the areal extent of the structure, the average thickness of the producing reservoir, the oil column within the reservoir, and the continuity and characteristics of the reservoir formation cannot be determined accurately unless sufficient subsurface information is available. The ultimate size of newly discovered reservoirs, whether in new fields or old fields, is seldom determined in the year of discovery. Therefore, first-year estimates of proved reserves in new reservoirs are often only a small part of the total that will be ultimately assigned to the new reservoirs. It follows that reserves credited to discoveries in any given year are usually less than total extensions and revisions for the same year which represent adjustments of reserves in reservoirs discovered in all prior years.** 5For definitions of field, pooi, development drilling, exploratory drilling, etc., see Technical Report No. 1, pages 18, 26, and 27. * tSubcommictees are not necessarily aware of all new discoveries at the time reserve estimates are pre- pared. This is especially true if a discovery is made late in the year for which a report is being prepared. In such cases, new proved reserves are reported in Table I as discoveries in new fields or new poois in old fields for the year in which the discovery becomes known. In Table HI these reserves are assigned to the year in which the field was actually discovered. The classification of discoveries as "new field" discoveries and "new pool" discoveries is based on the final classification of wells drilled. Well classifications are defined in Tech- nical Report No. 1, Part II. PAGENO="0291" 285 16. Current-year estimates of discoveries in new fields and new pools in old fields are report- ed in Table I of the annual report. These estimates are also included in Table Ill of the annual report where they are credited to the year in which the field was initially discovered under the headings of "Ultimate Recovery" and "Original Oil-in-Place." (See definitions of "Original Oil-in-Place," and "Ultimate Recovery," pp. 22 and 23.) These two columns in Table Ill pro- vide a historical record of all discoveries classified according to the year in which each field was first discovered. Discoveries in new fields are credited to the years in which the new fields were found. New pools discovered in old fields are credited to the years in whichthe old fields were found. Exceptions are made when new pools have special exploratory significance or discovery results from the application of new exploration concepts as compared to those applied in the discovery of the old fields. In such situations, new discoveries are credited to the years in which the new pools were found. Special decisions as to the year to be credited for a particular discovery involve geologic and exploratory judgments made by subcommittee members. Estimates of ultimate recovery and original oil-in-place for fields discovered in the most recent years are often subject to substantial revision in future years based on information provided by additional drilling, production performance, and the successful installation of improved recovery techniques. For this reason, caution should be exercised in the interpreta- tion of the most recent data of this kind. GRAPHIC ILLUSTRATIONS Figures 1 through 4 (Appendix C) serve to illustrate (1) the generalized procedures used in classifying "new field" and "new pool" discoveries; (2) the allocation of acreage between the "drilled" and "undrilled" proved categories; (3) the range in estimates that may be expected under varying conditions and the effect of limited data on the estimates; and (4) the fact that original estimates of discoveries are not restricted to blocked out developed areas if geological information warrants an interpretation of a larger area with proven reserves. PAGENO="0292" 286 17. EXTENSIONS DEFINITION The ultimate size of newly discovered fields, or newly discovered pools in old fields, is normally determined by drilling in years subsequent to discovery. Wells drilled in subsequent years usually add to the proved area of previously discovered reservoirs, thereby serving to increase estimates of proved reserves. The reserves credited to a reservoir because of enlarge- ment of its proved area are classified as "extenSions." REV ISI ON S DEFINITION Both development drilling and production history add to the basic geological and engin- eering knowledge of a petroleum reservoir and provide the basis for more accurate estimates of proved reserves in years following discovery. Changes in earlier estimates, either upward or downward, resulting from new information (except for an increase in proved acreage) are classified as "revisions." Revisions for a given year also include (1) increases in proved reserves associated with the successful installation of improved recovery techniques; and (2) an amount which corrects the effect on proved reserves of the difference between estimated production for the previous year and actual production for that year. COMMENTS The drilling of additional wells in a reservoir better defines the productive area and pro- vides additional basic geological and engineering data pertaining to the reservoir. Estimates of porosity, interstitial water, pay thickness, and other reservoir factors may. be revised on the basis of information provided by additional drilling. Analysis of the producing history of a reservoir, including production of oil, gas, and water and pressure performance, results in more accurate knowledge of the producing mechanism, recovery efficiency, and the performance of the reservoir. This new and improved PAGENO="0293" 287 18. information provides the basis for more accurate estimates of ultimate recoveries and remain- ing reserves, and results in revisions to previous estimates, either upward or downward. Changes in reserve estimates brought about by the successful application of fluid injec- tion or other improved recovery techniques are classified and reported as "revisions" to proved reserves. Changes in reserves resulting from a reduction in the estimate of the proved area are reported as "revisions," but changes due to an increase in the proved area are classifi- ed and reported as "extensions." PROVED ACREAGE DEFINITION Proved acreage is the area which has been credited with proved reserves. Acreage is credited with proved reserves if the presence of a productive formation has been verified by drilling and testing. Undrilled acreage adjacent to drilled acreage and certain other undrilled acreage are also credited with proved reserves if geological and engineering information dem- onstrate with reasonable certainty that the underlying formations are continuous and produc- tive. IMPROVED RECOVERY TECHNIQUES DEFINITION Improved recovery techniques include all methods of supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir. Such techniques include: (1) pressure maintenance; (2) cycling; and (3) secondary recovery in its original sense (i.e., fluid injection applied relatively late in the productive history of a reservoir for the purpose of stimulating production after recovery by primary methods of flowing or artificial lift have approached an economic limit.) Improved recovery techniques also include thermal methods and the use of miscible displacement fluids. PAGENO="0294" 288 Reserves resulting from the application of any of the methods listed above are reported as "revisions" to proved reserves for the year in which successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. COMMENTS Additional reserves related to the application of improved recovery techniques are report- ed as "revisions" to proved reserves, or an "indicated additional reserves," in accordance with the definitions of these terms. Since it is not possible to separate primary production from production resulting from improved recovery techniques, no attempt is made to classify production and remaining reserves according to the method of recovery. ORIGINAL OIL-IN-PLACE DEFINITION The estimated number of stock tank barrels of crude oil in known reservoirs prior to any production is defined as "original oil-in-place." K nown reservoirs include (1) those that are currently productive; (2) those to which proved reserves have been credited but from which there has been no production; and (3) those that have been depleted. COMMENTS Original oil-in-place is not to be confused with recoverable oil-in-place. Original oil.in- place is a gross quantity independent of recovery efficiency or economics of operation; recov- erable oil-in-place is a net quantity which is dependent upon recovery efficiency and economics of operation. The estimation of original oil-in-place is based on calculations using the volumetric method or the material balance method when sufficient factual data are available concerning PAGENO="0295" 289 20. reservoir rock, fluid properties, reservoir limits, and production performance. Where such data are not available, the estimation of original oil-in-place may be based on information and performance characteristics of reservoirs believed to be comparable. Oil-in-place estimates are limited to the reservoir area and volumes associated with proved reserves and past production. ULTIMATE RECOVERY DEFINITION Ultimate recovery represents the estimated quantity of crude oil which has been produc- ed from a reservoir and is expected to be produced in the future if there are no substantial changes in current economic and operating conditions. COMMENTS Ultimate recovery also may be expressed as the percentage of original oil-in-place which is expected to be eventually produced. This percentage will vary from one reservoir to another in accordance with the erservoir fluid, rock characteristics, and the producing mechanism or drive which is present. Estimates of ultimate recovery from a given reservoir may be revised in subsequent years if (1) there is a successful application of an improved recovery technique; (2) there is an increase or decrease in the extent of the reservoir; or (3) there is information which indicates that recovery mechanisms are performing more or less efficiently than previously estimated. PRODUCTIVE CAPACITY OF CRUDE OIL DEFINITION Estimates of productive capacities of crude oil developed by the American Petroleum Institute Committee on Reserves and Productive Capacity represent the maximum daily rates of production which can be attained under specified conditions on March 31 of any given year. PAGENO="0296" 290 21. The definition of productive capacity used by the Committee is as follows: `The ninety-day crude oil productive capacity is the maximum daily crude production rate, at the point of custody transfer, that could be achieved in ninety days (following December 31 of any given year) with existing wells, well equipment, and surface facilities - plus work and changes that can be reasonably accomplished within the time period using present service capabilities and personnel and with productivity declining as it would under capacity operation." Estimates of the productive capacity for particular fields or reservoirs are based on proved acreage, wells, well equipment, and surface production facilities as of the previous December 31, with adiustments for (1) increases in productive capacity which would result from alterations and improvements in existing facilities and programs for development drilling and improved recovery techniques, which could be completed within the ninety-day period with existing capabilities and personnel; and (2) the natural decreases in productive capacity resulting from capacity operations during the ninety-day period. It should be noted, however, that there is no adjustment for additions to reserves and increased productive capacity that might result from exploratory drilling during the ninety-day period. Furthermore, estimates do not include quantities of crude oil in lease storage on March 31 which could be drawn upon at the time of capacity operation, Estimates prepared by the Committee are based on the following assumptions: 1. There will be no restrictions on production resulting from a lack of markets for crude oil. 2. There wilt be no change in crude oil prices or the unit cost of materials, equip. meat, and labor within the ninety-day period allowed for the buildup of capacity. 3. There will be no statutory restrictions on production, but gas and water pro- duction will be controlled according to prudent and accepted engineering practices, where appropriate, to prevent the significant reduction of crude oil recovery. The only other production restrictions applicable would be those which prohibit the pollution of water and those which prohibit air pollution with gas or the creation of fire hazards from gas by operations up to the point of transferring the gas to market or to gas processing facilities. 4. There will be no restrictions on production resulting from the inadequacy of storage or transportation facilities beyond the point of custody transfer. 5. lntrafietd equity considerations will be satisfactorily resolved so that produc- tion for given fields can be maxim ized. PAGENO="0297" 291 22. COMMENTS For the guidance of subcommittee members, individual elements of the working definition of productive capacity may be interpreted as follows: 1. Maximum daily crude production rate~ - The figures reported in most cases reflect production that could be obtained from the proved and, in some instances, the indicated additional reserves as defined and reported by the API Committee on Reserves and Productive Capacity. The definition excludes reserves and producing capacity that might be developed by exploratory drilling during the 90-day period. The concept implies nothing about the determined rate being sustainable over any specified period of time - it is simply a point on a continuous curve. The production decline rates applicable in each specific field are considered in determining the capacity at the end of the 90-day period. Data are reported as of December 31 and reflect the capacity that would be developed by March 31, based on field conditions and information as of December 31. 2. Point of custody transfer - The point in the production system at which capacity is estimated is that point at which the oil is transferred from the producing function to the transportation function. In most cases the point of transfer would be where the oil is put into another system (pipeline, truck, barge, etc.) for movement to refineries or terminals. The selection of this point to measure capacity implies that not only may reservoir characteristics and down-hole equipment place limitations on capacity, but well-head equip- ment separators, flow lines, lease tanks, intrafield barges and other oil handling facilities may also create limitations. 3. That could be achieved in ninety days with existing wells, well e~uioment aftd surface facilities - plus work and changes that can be reasonably accomplished within the time period using present service capabilities and personnel - The - wells considered include those already producing, those shut in that could and would be put on stream, and development wells on proved acreage which would be completed and put on stream within ninety days. Various changes in, or additions to, down-hole and well-head equipment and lease facilities could be made; e.g., pumps, tubing, flow lines, separators, etc. Also, certain steps could conceivably be takeii to stimulate or improve production from the reservoir; this includes various types of formation treatments and workovers. The limitation imposed by the definition of such changes or additions is that they must be capable of being completed in ninety days with present services, personnel, material, and equipment capabilities. For example, although it may be desirable to work over most of the wells in a given field, work-over equip- ment and personnel, reasonably expected to be available, may only be capable of handling a rew wells; or, it may be desirable to install larger pumping units or flow lines in a field, but the equipment cannot be obtained and installed in this short a time. It should be assumed that all fields would be undergoing such servicing and improvement and that no one field could expect a larger share of services, equipment or personnel than it would receive in normal times. PAGENO="0298" 292 23. 4. With productivity declining as it would under caoacity ooeration - It was mentioned under item 1. that consideration should be given to the declining production capability of a reservoir over time - in this case, 90 days. The specific rate of decline selected will vary from field to field and will be determined by the particular set of circumstances in each field. Both reservoir characteristics and ability of well and surface equipment to handle maximum production will influence the choice of a decline rate; however, in all instances, it is assumed that production over the time period will be limited only by facilities and equipment or the reservoir itself. For example, two fields with similar reservoir characteristics may have drastically different producing rates if one has a restriction imposed by separator capacity and the other does not; as a result the two fields may have drastically different decline rates. 5. It is assumed that there would be no change in crude oil prices or costs of material. eguinment and/or labor - This is a simplifying assumption to avoid predicting movements of crude oil prices and operating costs. The intent is to emphasize the capacity that would be developed because of incentives accru- ing from additional production andnot from incentives resulting from increas- ed crude oil prices. It is conceivable that ~.Qfgj operating expenses might be increased, but the increase would result from the use of more labor, services, equipment, etc., and not from a rise in the prices of these items. 6. No statutory restrictions on producing rates (but adhering to judicious operat ing practices) - All market demand restrictions are removed and the maximum daily producing rates established for a field by regulatory agencies (statutory ME A's) can be increased if in the judgment of the Subcommittee these rates may be exceeded without causing a significant reduction in ultimate crude oil recovery. It would be assumed that intrafield equity considerations can be satisfactorily resolved so that a fields production can be maximized. Gas-oil and water-oil ratio limitations cannot be ignored where it woutd violate prudent and accepted enginerring practices and result in a significant reduction in ultimate crude oil recovery. The only other production restrictions applicable would be those which prohibit the pollution of potable water sources and those which prohibit air pollution with gas or the creation of fire hazards from gas by operations up to the point of transferring the gas to market or to gas processing facilities. No limitations should be imposed due to a limited gas market or limited capacity of existing gas processing facilities. 7. No restrictions on Storage or transportation beyond the point of custody transfer and no marketing constraints - It is assumed that transportation facilities, storage, refineries, terminals, and markets are adequate, and so situated, to accomodate all the oil made available at the point of custody transfer if the current market prices for crude oil persist. Estimates of productive capacity are, to the extent practicable, handled on a field-by- field basis giving consideration whenever possible to basic production units within a field. Priority attention is given to those fields believed to have significantly'large excess productive capacities. PAGENO="0299" 293 24. SECTION C. GEOLOGICAL INFORMATION ON OIL OCCURRENCE INTRODUCTION Current estimates of original oil-in-place and the ultimate recovery of crude oil from known reservoirs (including those considered to be depleted) are differentiated by age, by lithology, and by type of entrapment. To the extent possible, the occurrence of oil is classified on the basis of a review of individual reservoirs. Where single reservoirs overlap various categories or cumulative produc- tion from several reservoirs cannot be separately identified, the district subcommittees exercise judgment in (1) allocating estimates of production, original oil-in-place, and ultimate recovery to the various categories; or (2) assigning all estimates to the category which dom- inates the ultimate recovery from the field. New information on reservoirs regarding age, lithology, and type of entrapment may cause some adjustments in previously published data; however, major annual revisions usually reflect revisions in estimates of original oil-in~pIace and ultimate recovery. OIL BY AGE OF RESERVOIR ROCK The distribution of crude oil by geologic age of the reservoir rock is reported in terms of estimated ultimate recovery (cumulative production from both producing and depleted fields plus remaining proved reserves) and the estimated original oil-in-place which is related to such recovery. The published compilation is on a total basis for the United States and according to geologic age units as follows: ERA SYSTEM SERIES Cenozoic Quaternary Recent Pleistocene Tertiary Pliocene M iocene Oligocene Eocene Paleocene PAGENO="0300" 294 25. ERA SYSTEM SERIES Mesozoic Cretaceous - Jurassic - Triassic - Paleozoic Permian - Pennsylvanian Mississippian Oevonian Silurian o rdovician Cambrian Pre-Cam brian It should be recognized that the age period of a limited number of reservoirs has not been firmly established particularly where dual classifications such as Permo~PennsyIvanian, Cambro-Ordovician, etc. have been traditionally applied. In such cases the younger age is assigned unless reasonable evidence is available to the contrary. Additional problems are presented for multi-reservoir fields when production is commingled or not identifiable from the individual reservoirs of different ages. When a reasonable basis for assignment to different ages is not available, the age of the reservoir which dominates as to ultimate recovery is used. OIL BY RESERVOIR LITHOLOGY The occurrence of crude oil according to the lithology of the reservoir rock is reported in terms of estimated ultimate recovery (cumulative production plus remaining proved reserves) and the estimated original oil-in-place of both depleted and currently proved reservoirs. The three lighologic categories used in reporting oil occurrence are defined as follows: 1. Sandstone - A sedimentary rock composed predominantly of quartz grains or other non-carbonate mineral or rock detritus. Included in this reservoir type are unconsolidated sand, sandstone, siltstone, graywacke, arkose, granite wash, conglomerate, and sedimentary breccia. 2. Carbonate - A sedimentary rock composed predominantly of calcite (lime- stone) and/or dolomite. Clastic carbonates are included in this category. 3. Other - All reservoirs not fitting the definitions of the sandstone and carbon- ate categories. Included in this reservoir type are igneous and metamorphic rocks and some sedimentary rocks (i.e., fractured shale and chert). PAGENO="0301" 295 26. In multi-reservoir fields having more than one type of reservoir lithology, reservoirs are individually handled to the extent possible. Where cumulative production from different types of reservoirs cannot be estimated with reasonable accuracy, the ultimate recovery and original oil-in-place are credited to the lithology which is believed will supply the greatest recovery for the field. OIL BY TYPE OF ENTRAPMENT Crude oil occurrence according to two broad categories of entrapment types is reported in terms of estimated ultimate recovery (cumulative production plus remaining proved re- serves) and original oil-in-place for the depleted and currently proved reservoirs. The two types of entrapment are defined as follows: 1. Structural - An entrapment in which fluid migration of hydrocarbons in tIte reservoir rock has terminated primarily because of closure induced by struc- tural deformation and/or hydrodynamic forces. Most Gulf Coast piercement salt dome reservoirs are included in this category. 2. Stratigraphic - An entrapment in which fluid migration of hydrocarbons has terminated because of (a) the pinchout of a reservoir rock due either to trun- cation or non-deposition, or (b) a facies change in the form of diminished permeability of the reservoir rock. Also included in this category are entrap- * ments in which a pinchout or facies change provides part of the barrier to migration of hydrocarbons and structural elements provide the remaining closure for entrapment. In multi-reservoir fields where both of the two types of entrapment occur, estimates of ultimate recovery and original oil-in-place for each individual reservoir are assigned to the appropriate category if it is reasonable to do so. In those cases where production from different types of entrapments cannot be separately identified, ultimate recovery and original oil-in-place for a combination of reservoirs are assigned to the category which is expected to provide the larger ultimate recovery. PAGENO="0302" 296 27. SECTION 0. GEOGRAPHIC BOUNDARIES Data pertaining to reserves and productive capacity are reported for each state. Additional geographic detail is reported for the land areas of California, Louisiana, New Mexico, and Texas. (See Maps II, Ill, IV, and V, Appendix B.) As a general rule, reserves and productive capacity figures for offshore areas are not reported separately but are included in the totals for adjacent land areas. In the case of Louisiana and Texas, offshore proved reserves of crude oil are included in the state totals, but also reported separately as a combined total for these two states. The same practice is observed in reporting other reserves data and productive capacity estimates for Louisiana and Texas. The term "offshore" is defined as that geographic area which lies seaward of the coastline. In general, the term "coastline" means the line of ordinary low water along that portion of the coast which is in direct contact with the open sea or the line marking the seaward limit of inland waters. If a state agency uses a different basis for identifying onshore and offshore areas, the state classification is used, PAGENO="0303" 297 APPENDIX A PAGENO="0304" 298 29. APPENDIX A ORGANIZATION OF API STATISTICAL SERVICES API PRESIDENT DIViSION OF STATISTIcS r--- 1 I TASK GROUP ON L __J PETROLEUM STATISTICS DEFINITIONS 1 1 LIAISON GROUP (~) Footnotui 1 9 eppisr on following p.gs. PAGENO="0305" 299 30. FOOTNOTES PERTAINING TO APPENDIX A ORGANIZATION OF API STATISTICAL SERVICES 1. Committee on Statistics: Functions - (1) prepares for Board approval policies on API compilation and publication of statistics; (2) provides policy direction for the API Division of Statistics and API committees engaged in statistical activities; (3) conducts studies of adequacy of industry statistical programs; and, (4) reports to the Board on API statistical activities. 2. Statistics Coordinating Committee: Function - coordinates assignments of committees and insures consistency of statistics reported throughout API organization. 3. Petroleum Statistics Liaison Group: Function - meets periodically in an advisory capacity with Statistics Coordinating Committee to review current statistical programs and propose new and revised information systems. 4. Committee on Well & Drilling Statistics: Function - reviews and evaluates statistical series pertaining to wells, drilling, and exploratory activities; recommends procedures and sources of well and drilling data. 5. Committee on Reserves & Productive Capacity: Function - prepares annual estimates of U. S. crude oil reserves and productive capacity. 6. Committee on Expenditures & Revenues: Function - reviews and evaluates statistical series pertaining to drilling costs, and estimated expenditures and receipts of U. S. oil and gas producing industry; recommends procedures and sources of expenditure and revenue data in the areas of exploration, development, and production. Committee on Supply & Consumption Statistics: Function - maintains surveillance over statistics relating to crude oil, N 13 L, and natural gas production, crude oil and product inventories, transportation of petroleum and its products, refining output and capacity, petrochemical intermediate production, and consumption by broad categories of refinery output. 8. Committee on Marketing Statistics: Function - maintains surveillance over data of a marketing nature, such as dealer turnover surveys, service station statistics, product price indexes, lubricant consumption by state, petroleum wax, product sales by area and class of customer, and market survey information on petroleum consumers. 9. Task Group on Definitions: Function - reviews definitions used by various API statistical committees and other agencies; develops standard definitions recommended for statistical pur- poses and promotes their use by various committees and agencies. 37-143 0 - 74 - 20 PAGENO="0306" 300 APPENDIX B PAGENO="0307" MAP I GEOGRAPHIC DISTRICTS OF THE UNITED STATES COVERED BY API RESERVES SUBCOMMITTEES PAGENO="0308" 302 MAP II SUBDIVISIONS OF CALIFORNIA USED IN REPORTING RESERVES DATA 33. ~/ ~i PAGENO="0309" 303 34. MAP III SUBDIVISIONS OF LOUISIANA USED IN REPORTING RESERVES DATA ~`1 OFFSHOII LOUISIANA PAGENO="0310" 304 35. MAP IV SUBDIVISIONS OF NEW MEXICO USED IN REPORTING RESERVES DATA PAGENO="0311" C m zC o~ -I C)' OFESUORI -I R~I,~d ~ ~ PAGENO="0312" 306 APPENDIX C PAGENO="0313" 307 4OAc 4OAc 4OAc FIGURE 1 - NEW FIELD DISCOVERY No additional welt control in immediate vicinity and little data on type and extent of structure. CASE I - Discovery in a reservoir known to have a wide areal extent. (Blanket sand or porosity) A. Discovery has reasonably thick produc. ing section, 30 feet, all saturated. Regional rate of dip 150 to 200 feet per mile. Prove 60 to 100 acres on initial estimate. B. Thick producing section, as (A) but dips are steep. Prove 20 to 40 acres on initial estimate. C. Thin reservoir, 6 to 10 feet of saturation normal rate of dip. Prove 20 to 40 acres on initial estimate. CASE II - Discovery in a reservoir known to have lenticular or variable porosity and permeability. Prove 10 to 20 acres on initial estimate. 38. PAGENO="0314" 308 FIGURE 2 - NEW FIELD DISCOVERY IN AREA OF ADDITIONAL WELL CONTROL Discovery Well No. 4 proved production in reservoir from sub-sea 5000 to 5040. Proved area limited by structural position of low oil occurrence. Proved drilled area 40 acres, proved undrilled area 170. Total proved area on initial estimate 210 acres. -4500 FIGURE 2-A - CROSS-SECTION OF STRUCTURE IN FIGURE 2 Wells drilled in numerical sequence. Reservoir volume between fault and low proved oil occurrence considered proved. Reservoir volume between low proved oil and highest proved water is prospective. 39. -5 150 21 4 -5150 _S~00 -S ~50 4 -5160 O 1000 20t 3000 SCALE FEET OIL HIGH PROVED WATER -5150 PAGENO="0315" 309 Reservoir "A" with 30 feet of oil saturated reservoir. One oil completion, Well No. 2. Rate of dip on structure 225 feet per mile indicated by data on Well No. 1, dry hole. Proved drilled area 40 acres. Total proved area 90 acres on initial estimate including 50 acres proved undrilled. Completion of extension Well No. 3 in discovery Figure No. 3. Proved area of Reservoir "A" increased to 140 acres. Oil column is 35 feet, from sub-sea 4970 to 5005 as reservoir was found to be 5 feet thicker than in Well No. 2. Developed or proved drilled area is 80 acres. Total proved area 140 acres. 40. -5165 PROVED Oft. -5005 ~ 10~1O 200 SCALE FEET FIGURE 3-NEW FIELD DISCOVERY FIGURE 3-A - NEW FIELD DISCOVERY PAGENO="0316" 310 41. FIGURE 3-B - NEW FIELD DISCOVERY Completion of Well No. 4 in New Field Discovery Figure 3, confirms struc- tural interpretation of Figure 3-A, and estend oil column in Reservoir "A" to sub-sea 5040. Proved drilled area 120 acres; total proved area 425 acres. Well No. 5 tested water in Reservoir "A" below sub-sea 5040 and proved the limits of the reservoir on the south side of the structure; and also, discovered oil accumulation in a new reservoir "B" from sub-sea 4070 to 85. New Pool discovery assigned 15 to 20 acres on initial estimate. Reservoir "B", not present in Wells Nos. 1, 2, 3, P ~OO 2~OO SCALE FEET -and 4. PAGENO="0317" -S000 311 42. ~* ~.: ±E~ ~ ~i*~*~ ~ ~" ~ - ..~ ~ ~ ~ -~ \\ ~-~---- -~.... ~ ~. ~- ~:,i ~ ~ ~- -~--- ~- -~: : ..~ .~ 7~ -~- - . .~.. ~ \` .,, ~.. ~ ,~ *0 ~ FIGURE 4 - CROSS-SECTION OF FIELD DISCOVERY (Wells Drilled in Numerical Sequence) New Field Discovery Well No. 1 tested gas in Reservoir "A" and oil in "C" end "0". Reservoir "8" not tested. Well completed as dual oil well in Reservoirs "C" and "D". Development Well No. 2 completed as an oil well in Reservoir "0". Reservoirs "B" end "C" not present. Productive area of Reservoir "C" initially considered proved between Well No. 1 and fault, revised downward on basis of new information. Development Well No. 3 extends the proved area and defines the limits of Reservoir "A". Tests oil in Reservoir "B". Completed as dual well in "C" and "0". Classified as new pool discovery in Reservoir "8". Reserves in Reservoirs "A" and "B" are classified as proved but undeveloped if they are not to be produced by Wells 1, 2, or 3. New Pool Discovery Well No. 4 drilled at location across fault found in Wells Nos. 1 and 2 is en exploratory well which tests gas in Reservoir "A" and oil in Reservoir "0". This well classified as new pool discovery by proving production in separate structural segment. B D ~ PAGENO="0318" 312 APPENDIX 0 PAGENO="0319" 313 44. APPENDIX D ARITHMETIC RELATIONSHIPS APPLICABLE TO TABLES PUBLISHED IN ANNUAL REPORTS TABLE I: Col 2 for current year = Cal 8 for previous year C0l2+C013+C0l4+C015+Co16_Coll=Col8 Col 8 - Cal 2 Cal 9 TABLE Ill (For Individual States): Total at Cal 2 = State total in Col 3 of Table IV Total of Cal 4 = State total in Col 4 of Table IV Total of Cal 5 = State total in Cal 2 of Table IV Production for current year in Cal 2 = State total in Cal 7 of Table I Cal 4 for current year is equal to or less than Cal 5 + Col 6 for state in Table I TABLE IV (For Individual States): Cal 4 - Cal 3 = State total in Cal 8 of Table I TABLE V (For Individual States): Cal 2 + Col 3 + Cal 4 = State total in Cal 2 of Table IV Cal 5 + Col 6 + Cal 7 = State total in Cal 4 of Table IV TABLE VI (For Individual States): Total of Cal 2 = State total in Cal 2 of Table IV Total of Cal 3 = State total in Cal 4 of Table IV TABLE VII (For Individual States): Cal 2 + Cal 3 = State total in Cal 2 of Table IV Col 4 + Cal 5 = State total in Cal 4 of Table IV PAGENO="0320" 314 EXHIBIT D AMERICAN PETROLEUM INBTITUTE DIVISION OF STATISTICS 1974 - PUBLICATIONS --1974 Annual Statistical Review An annual report containing operating statistics for the U.S. petroleum industry by years, and months for the latest two years for which data are available. The next issue which will include data for 1956-1973 will be available in April 1974. Price per copy. U.S.. Canada and Mexico $6.50 Overseas $8.00 Joint Association Survey (Sections I and II - 1972) Published jointly with the Independent Petroleum Association of America, and the Mid-Continent Oil & Gas Association. Section I includes the estimated cost of drilling oil wells, gas wells, and dry holes by depth range for major areas in the United States. Section II includes estimated expenditures for oil and gas exploration, development, and production in the United States. Price per copy. U.S., Canada and Mexico $4.00 Overseas $5.00 Liquefied Petroleum Gas Report A monthly publication which includes inventories of liquefied petroleum and liquefied refinery gases located at plants and refineries, and in underground storage, by areas, and by individual products. Annual Subacription. including First Class postage to locations as follows: US., Canada and Mexico $14.00 Ovsrseas $18.00 MONTHLY REPORT ON DRILLING ACTIVITY IN THE UNITED STATES A monthly publication which shows by states the number of oil wells, gas wells, dry holes, stratigraphic and core tests, and service wells, reported as completed to the American Petroleum Institute; and a table showing exploratory wells (oil, gas, and dry) by states. Also includes a summary of oil wells, gas wells, and dry holes in the development and exploratory categories. Annual Subscription. induding First Class postage to locations as follows: U.S.. Canada and Mexico (twelve issues) $12.00 Overseas (twelve Issues) $14.00 PAGENO="0321" 315 PAGE 2 Magnetic Tape Files for Well and Drilling Statistics These tapes contain data for all wells reported in 1967-1973. Reported wells include all developmental wells, exploratory wells, stratigraphic and core tests, service wells, and old wells drilled deeper related to exploration and the production of crude oil and natural gas. Prices available upon request. Quarterly Review of Drilling Statistics - 1974 Includes quarterly and annual tabulations of U.S. drilling statistics compiled by the American Petroleum Institute. Wells and footage drilled are reported by type of well for each state and major areas of states. Special tabulations are also shown for multiple completion wells. Annual Subscription. U.S., Canada and Mexico $12.00 Overseas $14.50 Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the United States and Canada and United States Productive Capacity as of December 31, 1973 Published jointly with the American Gas Association and the Canadian Petroleum Association. Report for 1973 (available in June 19741 will include end of year reserves data for crude oil, natural gas liquids and natural gas in the United States and Canada. U.S. data include ultimate recovery and original oil-in-place by year of discovery; and reserves of crude oil and natural gas by reservoir lithology, geologic age of reservoir rock, and type of entrapment. Price per copy. U.S. $5.00 Canada and Mexico $6.00 Overseas $6.50 Weekly Statistical Bulletin A weekly publication containing U.S. data relating to refinery activity and principal inventories; crude oil and product imports; crude oil production; gasoline consumption by states; etc. Annual Subscription, including First Class postage to locations as follows: U.S., Canada and Mexico $17.50 Overseas $28.50 Technical Report No. 1: "Standard Definitions for Petroleum Statistics," First Edition Part I - Reserves and Production Definitions Part II - Wells and Drilling Definitions Price per copy. U.S.. Canada and Mexico $5.00 Overseas $6.00 37-143 0 - 74 - 21 PAGENO="0322" 316 PAGE 3 Technical Report No. 2: "Organization and Definitions for the Estimation of Reserves and Productive Capacity." First Edition, June 1970 Part I - Crude Oil Price per copy U.S., Canada and Mexico $5.00 Overseas $6.00 Instructions for Completing Individual Well Tickets for U.S. Drilling Statistics, Second Edition, January 1, 1972. Part / - Cards 1 & 2 (API) Part II - Card 3 (AAPG-CSD) Price per copy U.S., Canada and Mexico $5.00 Overseas $6.00 Annual Summaries The following items are published annually. $25 each, plus postage for multiple copy orders. SUMMARY OF DISABLING WORK INJURIES IN THE PETROLEUM INDUSTRY SUMMARY OF MOTOR VEHICLE ACCIDENTS IN THE PETROLEUM INDUSTRY REVIEW OF FATAL INJURIES IN THE PETROLEUM INDUSTRY SALES OF WAX BY END-USE CATEGORIES REPORTED FIRE LOSSES IN THE PETROLEUM INDUSTRY PAGENO="0323" 317 Chairman PRox~rrnE. Gentlemen, we are very fortunate to have this morning three men who represent agencies and who personally probably know as much about the energy shortage as any three men we could possibly have as far as the statistics and available informa- tion that exists. Mr. Rigg. you have responsibilities. I indicated when I introduced you. over four of the most. important agencies that gather informa- tion in the petroleum field. Mr. Shiskin, you are the most. responsible person in our govern- ment for price statistics, not only in petroleum but other agencies. And Mr. Hodges. you speak for the industry association which has provided most of the material that is available. I would like to ask you. Mr. Rigg, and Mr. Hodges, particularly, and I will come to Mr. Shiskin on other questions later-I would like to ask Mr. Rigg and Mr. Hodges about the actual existence of an energy shortage. I would like to have you give us a little docu- mentation on it. because I think the American people want that, would like to hear it, would like to hear some justification. As you know, there is a lot of skepticism about the extent and even the ex- istence of the oil shortage. At least two recent quite authoritative and impressive articles throw further doubt. on the matter. An arti- cle in last. week's Science magazine shows that the demand for en- ergy is down, demand is down and supplies are up. According to it: Incoming supplies and stockpiles are larger than they were one year ago and that overall major inventories are greater than those of a year ago. In yesterday's Washington Post. Christopher Rand writes, and I quote: "There is no gasoline shortage." There is no gasoline shortage in January because there was no crude oil shortage in December. Rand maintains that. if Caribbean refineries owned by the majors are taken into account, there is a refinery capacity shortfall of only 500,000 barrels a day, or 3.1 percent of the total demand, but that the companies' own product. stocks stood at 513.7 million barrels on December 21. enough for 1.000 days of shortfall. What is your response to these statements? Has the shortfall ac- tually occurred, are we talking about. a prospective shortage which has not. occurred but. which may materialize in the future? Mr. RIGG. Mr. Chairman. I read Mr. Rand's article in the paper yesterday also. I do believe there is an energy shortage. Now. I use the term "guardedly" in the respect. of using it as far as availability goes. As you look at the world there is plenty of oil in the world for our needs. If you look at the United States- Chairman PR0xMIRE. That is fascinating. That statement coincides with what Ralph Nader told us. He had a little more colorful lan- guage. He said the world is drowning in oil. You said there is plenty for our needs worldwide if we could get it. Mr. RTGG. But it isn't available and it is the same thing domesti- callv. We haven't increased our domestic refining capacity of any marked degree and many of the refineries suffer from what I call energy octogenarianism, pretty old and inefficient. Chairman PROXMTRE. Are Caribbean refineries available to us~ Mr. RTGG. Yes, they are, and they are putting refined products into the United States from the Caribbean area, but. also you have PAGENO="0324" 318 the problem. which I think is as important as anything else, of an increase in the demand for your refined products. When von increase the amount of automobiles 10 percent every year for 3 or 4 years von have a lot more people driving and there are more people coming down to the pump all the time to get gaso- line and the gasoline isn't available in the amounts needed. Chairman PROXMTRF.. You see, the statements by Mr. Rand and the statement of science magazine referred to the fact that the amount. available is more this year than last year. Certainly there is the implication that even limited conservation measures we have taken so far have resulted in some diminution in demand. At least it is not greater than it was last year. And the 1.000 days of shortfall, enough to take care of 1.000 days of shortfall, that is 3 years, would seem to be reassuring. Mr. RIGG. I (lout know whether the thousand days of shortfall is an accurate statement or not. I thought the latest figures I had seen showed only about a 30-day su~)plv. Chairman PISOXMIRE. Then would you say that Mr. Rand is wrong? Mr. RTGG. No: I would have to check it out. I haven't had oppor- tunity this morning to compare it. Chairman PROXMIRE. ~\Vill you check on it and let us know? Mr. RIGG. We will be delighted to submit it to you. [The following i nfoimation was subsequently supplied for the record :] How many (lays of gasoline supply does the United States have in gasoline stocks based on API Jan. iS weekl~i report and Bureau of Mines October 1973 Report? API-Week ending Jan. 18, 1974: Barrel8 Motor gasoline production' 41, 447, 000 Motor gasoline imports 812, 000 Motor gasoline stock change2 -2, 183, 000 Total supply during week 40, 076, 000 Daily supply 5, 725, 000 Primary stocks (Jan. 18)~ 208, 116, 000 Daily need 5,725,000 Total supply (in days) 36 Bureau of Mines-October 1973: Motor gasoline production 205, 467, 000 Motor gasoline imports 6,020,000 Motor gasoline exports -252, 000 Motor gasoline stock change2 -4,251,000 Total supply during month 206, 984, 000 Daily supply 6,677, 000 Primary stocks (Oct. 31)~ 214, 610, 000 Daily need 6,677,000 Total supply (in days) 32 1 Excludes small anlounts of motor gasoline produced at natural gas process plants. 2 A pills means a stock withdrawal and a minus means an addition to stocks. API weekly data excludes exports. Primary stocks (or inventories) are those located at refineries, bulk terminals, and in pipelines. An estimated 35 to 40 percent of these inventories are unavailable for shipment as they are required to assure continuous operations. PAGENO="0325" 319 WEEKLY STATISTICAL BFLLETIN Week Ended January 18. 1974 NOTICE Input to refineries on a total U. S. basis during the week ended Jan. 18, 1974 decreased 298,000 bbl. per (lay froai the previous week, with the result that utilization of operable refining capacity dropped to S4.4 per cent. The decline in input was principally due to lack of crude oil and scheduled and unscheduled shut downs for maintenance and repairs. The largest decreases (in barrels per day) occurred in the following districts: West Coast (District 5)-110,000; Texas Gulf Coast-62,000; Indiana, Illinois, Kentucky-41,000; and the East Coast-26,000. Production of distillate fuel oil in the U.S. increased 47,000 bbl. per day during the same week at the expense of other products. While crude oil imports in Districts 1-4 increased in the week by 68,000 bbl. Per day to 1,895,000, imports of crude oil into the West Coast (District 5) dropped `by 244,000 bbl. per day to a level of 276,000, with the result that total crude oil imports into the U.S. of 2,171,000 bbl. per day were down by 176,000 bbl. per day from the previous week. This is the lowest U. S. level since the week ended February 9, 1973-2,143,000 bbl. per day. Total stocks of crude oil in the U.S. declined by 1,232,000 1)1)1. per day during the week to a level of 230,818,000 bbl. A drop in crude oil of domestic origin of 684,000 bhl. per day combined with crude oil stocks of foreign origin declining 548,000 bbl. per day made up the total decrease in stocks. The processing of foreign crude oil at a rate of 2,~S6,000 bid. per (lay for the week, the lowest level since the week ended February 23, 1973-2,577,000 bbl. per day. PAGENO="0326" WEEKLY STATISTICAL BULLETIN District 2 total Inland Texas Texas gulf coast Louisiana gulf coast North Louisiana and Arkansas New Mexico District 3 total District 4 total District 5 total Input to crude oil processing Crude runs units 3, 320 407 ~ 2, 556 ~ 1, 723 150 49 24690 34,885 5,817 422 465 503 1,744 1,825 2,264 85.7 1,842 27 88. 1 262 77.5 1,115 94.3 4837 84.7 58 89.1 25 84.0 ~2,297 92. 4 229 80. 6 876 Distillate Residual fuel oil fuel oil 442 137 45 20 38 487 157 7 3 510 168 66 27 18 281 25 97 864 223 84 19 728 125 ~391 95 37 12 12 3 96 239 1, 252 4 12 122 43 150 261 Weeks ended: Jan. 18, 1974 Jan. 11, 1974 Jan. 19, 1973 611,425 11,901 14, 109 2 11 619 3 12199 ~14 106 12: 134 ` (8) 13, 396 962 1,086 1,044 Jan. 18, 1974 Jan. 11, 1974 Jan. 19, 1973 9,681 10,076 11,845 29756 ~10 264 ~11 842 10:272 `(8) p11,219 85. 1 5, 045 86.7 ~5,144 91.6 5,298 140 386 2, 725 165 485 2, 633 102 542 2, 645 1 See p. 323 for production of aviation gasoline and kerosine. 2 East coast from 1,222 to 1,215; District 1 from 1,401 to 1,394; Texas gulf from 2 467 to 2,433; Louisiana gulf from 1,654 to 1,638; District 3 from 4,718 to 4,668; Districts 1-4 from ~,813 to 9,756; total United States from 11,676 to 11,619. 3 East coast from 1,277 to 1,270; District 1 from 1,457 to 1,450; Texas gulf from 2,652 to 2,618; Louisiana gulf from 1,749 to 1733; District 3 from 5,014 to 4,964; Districts 1-4 from 10,321 to 10,264; total United States from 12,256 to 12,199. 670 709 707 4 Louisiana gulf from 837 to 854; District 3 from 2,360 to 2,377; Districts 1-4 from 5,127 to 5,144; total United States from 5,971 to 5,988. 5 Louisiana gulf from 422 to 405; District 3 from 1,247 to 1,230; Districts 1-4 from 2,650 to 2,633; total United States from 2.956 to 2.939. 6 Includes 2,586~ barrels of imported crude oil as follows: District 1-1,084f; District 2-601; District 3-244f; District 4-69; District 5-588. 7 Based on new definition. S Not available. 9 Based on old definition. American Petroleum Institute, Division of Statistics and Economics INPUT TO CRUDE OIL DISTILLATION UNITS AND PRODUCTION OF THE FIVE MAJOR PRODUCTS Daily average in thousands of 42-gal barrelsJ Crude oil distillation units [astcoast 21,175 Appalachia No.! 16! District ltotal 21,336 Appalachia No.2 - - 39 - Indiana, Illinois, Kentucky 2,074 Minnesota, Wisconsin, North Dakota, South Dakota 224 Oklahoma, Kansas, Missouri 896 Refinery production I Jet fuel Operable Percent Motor (naphtha capacity operated gasoline type) Jet fuel (kerosine type) ~1,244 1,463 85.0 606 9 38 162 189 85.7 71 4 3 1, 406 39 2, 142 236 903 1, 652 60 2, 542 287 984 - 85. 1 65. 0 84. 3 82. 2 91. 8 3, 233 397 2 2, 444 21,657 144 48 677 13 29 1, 161 13 140 3 512 11 3,873 76 3 462 3, 296 1, 827 177 55 14 21 24 110 48 107 5 1 Total United States 84.4 5,921 86.5 ` 5,988 90.6 6,115 254 36 292 Districts 1-4 183 536 2, 986 228 652 5 2, 939 193 706 2,903 PAGENO="0327" 321 STOCKS OF MAJOR REFINED PRODUCTS' (In thousand, of 42-gal barrels( Motor gasoline Jet fuel Jet fuel (naphtha (keronine type) type) Distillate fuel oil 2 Residual fuel nil East coast Appalachia No. 1 District 1 total Appalachia No.2 Indiana, Illinois, Kentucky Minnesota, Wisconsin, Dakotan Oklahoma, Kansas, Montana District 2 total Inland Texas Texas gulf cnast Louisiana gulf coast North Louisiana and Arkansas New Mexico District 3 total District 4 total District 5 total Weeks ended: Jan. 18, 1974 Jan. 11, 1974 Jan. 19, 1973 Jan. 18, 1974 Jan. 11, 1974 Janl9,1973 5l~ 251 5,342 154 5,337 63 205 72, 729 3,795 21, 528 714 55, 593 217 5,542 76, 524 22, 242 3,372 36,999 7,947 19, 317 26 205 297 3,745 164 727 761 1, 186 2,698 29,937 7,615 16, 228 269 6,066 792 967 67, 635 1,248 5,863 56, 478 8,094 8,405 22,501 2 10,756 10, 465 928 317 1,075 746 2,234 664 1,423 283 606 169 69 2,976 18,947 ~9,642 5,718 346 325 3,879 2,193 239 79 `53,055 7,562 224,271 2,179 5,407 269 406 1,423 5,370 ~37, 629 3,449 ~14, 572 6,715 622 11,383 Total United States 208,116 2205,933 217, 852 5,336 22,588 6,123 23,571 5,887 19,560 188,652 ~194, 115 142, 538 49,056 52,165 52,688 Districts 1-4 183,845 `182,242 191,759 3,913 17, 218 4,599 18,314 4,052 14,774 174,080 ~180,00S 130,569 37,673 39,945 36,638 kernsine, and unfinished oils. I See p. 323 for stocks of aviation gasoline, 2 Includes Grade No. 4 fuel oil. 3 Louisiana gulf from 13,106 to 13,222; District 3 from 55,571 to 55,687; District 5 from 23,284 to 23,691; Districts 1-4 from 182,126 to 182,242; total United States from 205,410 to 205,933. 4 Louisiana gulf from 8,13800 8,023; District 3 from 35,777 to 35,662; DistrictS frsm 14,078 to 14,110; Districts 1-4 from 180,120 to 180,005; total United States from 194,198 to 194,115. PAGENO="0328" PAD DISTRICT I BY GEOGRAPHIC AREAS IMPORTS OF PETROLEUM PRODUCTS ~DaiIy average in thousands of 42-gal barrelsj Jet fuel Jet fuel Grade Petro- Unfin- Plant Motor Special (naphtha (kerosine Distillate No. 4 Residual chemical ished con- Area gasoline naphtha type) type) Kerosine fuel oil fuel oil fuel oil Asphalt L.P.G. feedstock oils densate Total New England 36 7 4 143 25 109 324 Central Atlantic 37 11 79 -- - 174 50 1,051 - - - 10 71 1,483 LowerAtlantic 33 4 10 391 28 466 Total Dictrict 1, weeks ended: Jan. 18, 1974 106 11 90 4 327 75 1,551 28 10 71 2,273 Jan. II, 1974 34 97 3 101 96 1,638 30 10 65 2,074 Described by the Bureau of Mines as follows: New England-Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and Connecticut; Central Atlantic-New York, New Jersey, Pennsylvania, Delaware, Maryland, and D.C.; Lower Atlantic-Virginia, West Virginia, North Carolina, South Carolina, Georgia, and Florida. STOCKS OF PETROLEUM PRODUCTS IThnusands of 42-gal barrelsi 1. PRIMARY STOCKS REPORTED TO THE API Area 1 Motor Gasoline Aviation gasoline Jet fuel (naphtha type) Jet fuel (kerosine type) Kerosine Distillate fuel oila Residual fuel oil Unfinished oils New England Central Atlantic Lower Atlantic Total District 1, weeks ended: 6,168 28,921 20, 504 97 304 258 33 164 20 652 2,198 2,692 1,548 4,048 2,922 16,991 47,400 12, 133 3,049 15,702 3,491 420 13, 255 678 Jan. 18, 1974 Jan. 11, 1974 55,593 53,253 659 712 217 166 5,542 5,312 8,518 8,766 76,524 81,599 22,242 24,651 14,353 14,759 I Described by the Bureau of Mines as follows: New England-Maine, New Hamsphire, Vermont, Massachusetts, Rhode Island, and Connecticut; Central Atlantic-New York, New Jersey, Pessylvania, Delaware, Maryland, and the District of Columbia; Lower Atlantic-Virginia, West Virginia, North Carolina, South Carolina, Georgia, and Florida, 2 Includes grade No. 4 fuel oil. PAGENO="0329" 323 PRODUCTION AND STOCKS OF SELECTED PRODUCTS (Daily average production and stockn in thousands ot 42-gal barrelo( Production Stocks Aviation gasoline Aviation Kerusine gasoline Kerosine Uotininhed oils Eastcoast Appalachia No. 1 District 1 total Appalachia No. 2 Indiana, Illisoin, Kentucky Minnesota, Wisconsin, Dakotas Oklahoma, Kansas, Missouri 1 District 2 total 1 Inland Texan 1 Tenan gult coast 28 Louisiana gult coast 3 North Louisiana and Arkansas New Mexico District 3 total 32 District 4 total District 5 total 4 Weeks ended: Jan. 18, 1974 37 Jan.11,1974 41 Jan. 19, 1973 34 Jan. 18, 1974 33 Jan. 11, 1974 32 mv. 19, 1973 30 596 7 63 7,870 648 13,507 846 7 659 8,518 14,353 3 59 685 89 195 463 4,375 1,048 766 126 12, 111 516 7,540 62 969 6,652 20, 293 4 272 62 550 60 573 1 8 1 21 177 2,497 1,653 504 18 1,855 22,765 9,031 251 t66 128 1,424 7 56 5 718 4,849 460 449 34, 068 2,501 22,092 Total United States 209 3,826 208 3,841 253 4,029 20,928 21,679 16,619 93,307 93,850 91, 151 Districts 1-4 204 3,108 205 3,143 250 3,342 20,479 21, 203 16,279 71,215 71, 219 67,724 Note: The inventories shown above are located at rehnerieo, bulk terminals, and in pipelives. These inventories include stocks unavailable tor shipment, those available tor current shipment, and those held in reserve tor ohipment daring the high consuming season an a supplement to then current production. Unavailable stocks are those required tor processing, held in tank bottoms, in pipeline till, and in other equipment in order to assure cootinuous operatiooo. Accordingly to studies by the National Petroleum Council, the unavailable portion ot the industry's total inventories appear to vary sea- sonally between Sept.30 and the tollowing Mar. 31, about no tollowo: Finished gasoline 37 percent and 36 percent; keronine 23 percent and 33 percent; distillate tuel nil 19 percent and 34 percent; revidual tuel oil 16 percent and 36 percent, PAGENO="0330" ESTIMATED DOMESTIC PRODUCTION OF CRUDE OIL (INCLUDING CONDENSATE), IMPORTS, AND STOCKS OF CRUDE OIL tIn thousands of 42-gal barrelsi Week ended: Dec. 28, 1973 Jan. 4,1974 Jan. 11, 1974 Jan. 18, 1974 4-weeks average: Jan. 18, 1974 Jan. 19, 1973 8,070 1,987 792 207,466 8,019 2,035 576 205, 869 7,988 1,827 600 206,553 8,047 1,895 696 201,823 8,031 1,936 8, 198 1, 906 Daily average Crude imports2 Estimated -------- _________ domestic From production Total Canada 3 Daily average Crude imports 2 Estimated ---------------- - Crude domestic From stocks production 1 Total Canada 3 862 937 1 Estimated domestic crude oil production by States is shown on p. 326. 2 Imports of refined products are shown on p. 327. 3 Included in total crude imports. 4 Reflects stocks by State of origin rather than actual location. Districts 1-4 Daily average Crude imports2 Estimated domestic From Crude production I Total Canada 3 stocks District 5 (west coast) Total United States 1,105 692 213 35,905 9,175 2,679 1,110 556 213 33,683 9,129 2,591 1, 105 520 200 32, 888 9, 093 2, 347 1,105 276 157 28,995 9,152 2,171 666 1,106 511 196 9,137 2,447 652 1,147 740 285 9,345 2,646 Crude stocks 243, 371 239, 552 239, 441 230, 818 1, 005 789 800 853 PAGENO="0331" 325 State of origin STOCKS OF CRUDE OIL BY STATE OF ORIGIN (Stocko and daily anerage change in thnunandn of 42-gal barrelni Doily anerage Week ended change from ian. 18, 1974 Jan. 11, 1974 Pennoyloania grade Other Appalachian Lima-Michigan lllinoio-lndiana Kanoan Nehranka and North Dakota Oklahoma Arkanoao Mionionippi, Alabama, Florida Tenan 85,419 -189 Eaot Teoao 7,034 +26 Went Teoan 48,093 -148 Gulf coant 13, 118 -64 Panhandle 2,354 +2 North 7,146 -11 South 3,312 +20 Other 4,362 -14 Lnuiniana 30,426 -114 North 3.645 -30 South 26,781 -84 New Meoicn 54 W,yoming 14, 347 +11 Other Rocky Mountain 8,586 -52 California (including Alanka) 20, 752 -202 Foreign in Dintrict 5 8,243 -354 Other foreign 23, 974 -194 Total crude ntnckn in United Staten 230, 818 -1,232 Location of ntnckn: PAD Dintrictl PAD Dintrict 2 PAD Dintrict3 Louiniana and Tenan gulf coant PAD Dintrict4 PAD Dintrict 5 1, 702 466 890 2,833 6, 560 1, 698 11, 963 566 5, 554 -11 +3 -9 -70 -15 -9 +48 18, 624 66, 875 102, 408 39, 995 14, 045 28, 866 -157 -215 -474 -419 +167 -553 PAGENO="0332" 326 ESTIMATED DAILY AVERAGE PRODUCTION CRUDE OIL AND CONDENSATE tIn thousands ot 42-gal. barrelsi Texus: District I District 2 District 3 District 4 DistrictS District 6 East Tecas field Other District 7-B District 7-C District 8 and 8-A District 9 District 10 Total Tecas `4,123 Nerth Louisiana South Louisiana Total Louisiana 61,242 57 3 60 +1 59 208 9 217 +2 215 ~483 u24 507 +14 496 136 24 160 161 57 3 60 -2 62 248 248 +7 243 212 6 218 +6 215 100 1 101 +2 99 93 5 98 +2 96 1,811 25 1836 +64 1,790 126 1 127 +1 126 58 5 63 +2 61 3, 589 106 3,695 +99 3,623 3, 522 17 118 118 `246 2,014 -17 2,037 1,869 263 2,132 -17 2,155 2,414 State crude nil allowable beginning Jan. 1, 1974 Estimated production week ended Jan. 18, 1974 Change from previous week 4 weeks ended Jan. 18, 1974 4 weeks ended Jan. 19, 1973 Crade Crude Con- and con- oil densate dennate *New York-Pennsylvania Florida West Virginia *virginia Ohia-asutheast Ohio-other Indiana Illinois Kentucky Michigan Missouri-Tennessee Nebraska Kannas 230 Oklahoma 2520 North Dakota South Dakota 13 92 7 (1) 14 6 14 79 22 40 1 19 171 454 14 55 1 13 92 7 (1) 14 6 14 79 22 40 1 19 171 468 55 1 +1 -1 +1 -24 13 12 91 70 7 7 (1) (1) 15 12 6 8 14 17 79 93 22 26 40 39 1 1 20 27 177 193 494 518 55 56 1 1 65 217 507 177 58 242 213 103 99 1,649 127 65 101 `1,768 132 2, 282 Arkansas 54 51 51 51 51 MississippI 153 1 154 154 165 Alabama 32 32 32 29 New Meaico-southeast 360 ç 238 7 245 245 265 New Menico-other 1 1 20 8 28 28 30 Wyoming 418 418 418 379 Montana 95 92 Colorado 106 106 106 98 Utah 89 89 89 73 Arizona 2 2 2 3 Nevada (1) (1) (1) (1) California 909 1 910 910 947 Alaska 193 193 194 197 United Staten 8,752 400 9,152 +59 9,137 9,345 Pennsylvania grade (incorporated above) 34 34 35 31 I Less than 500 barrels. 2 Oklahoma Corporation Commissian estimate of production in January 1974. 3 Includes an estimate of production in the area aubiect to the regulations of the Federal Government as follows: Crude oil 2, condensate 1. `Latest available allowable for Teuas, as of Jan. 15, 1974. Includes an estimate of production in areas related to a line described by the Federal Government and subiect to Ito regulations as fslluwn; leases whully seaward of the line, crude oil 828 , condenuate 84; seaward portion of leases split by the line, crude oil 29, condensate 10; disputed area landward of the line, crude uil 83, condensate 4. 6 Eucludeo area oubject to the regulatiuns at the Federal Government. PAGENO="0333" Grade Jet fuel Jet fuel Petro- Plant Motor Special Distillate No. 4 Residual (naphtha (kerosine chemical Unfinish- conden- gasoline naphtha Kerosine fuel oil fuel oil fuel oil type) type) Asphalt LPG feedstock ed oils sate 216 97 1690 107 399 61 1,678 130 133 96 1,660 113 358 75 1,586 11 110 21 100 112 26 100 182 30 97 93 28 98 102 114 2,510 96 2,805 75 2, 376 96 2,584 Total United States: Dec.28, 1973 24 Jan. 4, 1974 ~ 20 Jan. 11, 1974 76 Jan. 18, 1974 116 4-weeks average ended: Districts 1-4: Jan. 18, 1974 73 5 18 277 82 1,654 Jan. 19, 1973 56 3 4 108 122 2,124 District 5: Jan. 18, 1974 10 109 Jan. 19, 1973 20 Total United States: Jan. 18, 1974 Jan. 19, 1973 7 61 13 34 6 240 4 61 25 34 9 156 IMPORTS OF PETROLEUM PRODUCTS [Daily average in thousands of 42-gal barrelsi Weeks ended: Districts 1-4: Dec. 14, 1973 24 29 Jan. 4, 1974 77 20 36 Jan. 11, 1974 76 3 Jan. 18, 1974 116 4 District 5: Dec.28,1973 Jan. 4, 1974 Jan. 11, 1974 lan. 18, 1974 Total 10 100 7 59 13 45 6 240 C.~ 10 10 119 100 7 7 62 60 12 12 20 32 6 6 236 227 -i 29 226 97 1,807 36 409 61 1,778 3 143 96 1, 779 4 368 75 1,686 7 170 21 114 152 7 189 26 113 227 7 175 30 109 113 18 170 28 110 134 120 2,767 102 3, 045 81 2,612 102 2,811 73 5 18 287 82 1,763 56 6 4 108 122 2, 144 3 115 26 99 122 5 93 13 68 11 105 95 2, 569 93 2, 805 10 176 26 112 156 9 154 13 93 11 139 101 2,809 102 2,961 PAGENO="0334" GASOLINE CONSUMPTION BY STATES lIn thousands of gallonsj Motor gasoline consumption Total gasoline consumption Total 8 months Total 8 months Percent August August Percent Percent 1973 1972 change 1973 1972 change 1973 1972 change Alabama 1,264,800 1,193, 562 +6.0 177, 156 163,603 +8.3 1,275,813 1,203890 +6.0 Alaska 82,277 74,505 +10.4 11,760 12, 516 -6.0 89,542 82,361 +8.7 Arizona 808,481 719,426 +12.4 106 004 99,261 +6.8 815,732 727,097 +12.2 Arkansas 776,860 740, 168 +5.0 109 309 103, 702 +5.4 784, 198 747,667 +4.9 California 6,921,998 6,653,445 +4.0 931, 166 899,651 +3.5 7,000,706 6,746,893 +3.8 Colorado 905,839 810,615 +4.0 123,295 128,178 -4.3 909,838 873,664 +4.1 Connecticut 891, 444 867,654 +2.7 120, 450 115,491 +4.3 914,715 883, 132 +3.6 ~ Delaware 202, 731 189,689 +6.9 26, 105 24,778 +5.4 205,282 191,752 +7.1 t-.~ District of Columbia 167, 734 151,688 +10.6 20 896 20, 571 +1.6 174,935 158, 895 +10.1 ~ Florida 2,935,933 2,619, 309 +12.1 384, 028 333, 284 +15.2 2,977,936 2,657, 258 +12.1 Georgia 1,902,298 1,776,825 +7.1 260,953 243,297 +7.3 1,906,382 1,783,429 +6.9 Hawaii 176,651 167, 117 +5.7 21 840 22,979 -5.0 181,651 177,324 +2.4 Idaho 313,824 301, 416 +4.1 48 192 48,980 -1.6 323,245 309,037 +4.6 Illinois 3,357,005 3,176,190 +5.7 442' 007 417, 881 +5.8 3,366,948 3,185,830 +5.7 Indiana 1,914,284 1,816,402 +5.4 258 894 252,062 +2.7 1,927,132 1,838,765 +4.8 Iowa 1,219,731 1,068, 923 +14.1 155 690 132, 266 +17.7 1,234,758 1,082,158 +14.1 Kansas 866, 539 945, 487 -8.4 37, 183 117, 768 1 -68.4 884. 139 962,918 -8.2 Kentucky 1,139,835 1,086,402 +4.9 160 087 148, 725 +7.6 1,147,183 1,091,496 +5.1 Louisiana 1,165,397 1,119,259 +4.1 156 034 160,253 -2.6 1,178,251 1,131,058 +4.2 Maine 361, 621 345, 174 +4.8 59 791 58, 339 +2.5 368, 813 350, 112 +5.3 Maryland 1,237,506 1,179,767 +4.9 166 389 164,727 +1.0 1,244,232 1,186,615 +4.9 Massachusetts 1,580,702 1,503,222 +5.2 214 798 210 212 +2.2 1,591,432 1,513,323 +5.2 Michigan 3,161,474 3,014,099 +4.9 442341 415066 +6.6 3,185,615 3,040, 115 +4.8 Minnesota 1,406,085 1,352,582 +4.0 204 484 198 273 +3.1 1,430,470 1,385,948 +3.2 Mississippi 816, 915 791,683 +3.2 103, 254 105,909 -2.5 821, 761 793, 146 +3.6 Missouri 1,778,299 1,740,141 +2.2 235 856 235 736 -i-. 1 1,796, 324 1,754,079 +2.4 Montana 308, 150 277,968 +10.9 50 448 55729 -9.5 332,868 300, 195 +10.9 Nebraska 599, 576 606,691 -1.2 74,678 86, 869 -14.0 621,655 629, 197 -1.2 Nevada 251, 981 234, 343 +7.5 38, 073 36,830 +3.4 257,060 239,810 +7.2 New Hampshire 272, 410 259, 431 +5.0 42, 251 41, 222 +2.5 274, 538 261, 242 +5.1 NewJersey 2,175,713 2,116,944 +2.8 286,736 304,595 -5.9 2,186,697 2,129,208 +2.7 PAGENO="0335" New Mexico 453, 558 434, 929 +4.3 59,005 64, 757 -8.9 464,393 444, 759 +4.4 New York 3,991, 358 3,999,572 -.2 488, 820 549, 999 -11.1 4,020,852 4,018, 131 +. 1 North Carolina 1,891,603 1,795,569 +5.3 264, 467 243, 003 +8.8 1,931,766 1,830,724 +5.5 North Dakota 284,483 282, 772 +6 49,230 61,983 -20.6 289,919 287,894 Ohio 3,457,303 3,286, 422 +5.2 465, 199 453, 840 +2.5 3,475, 197 3,301,604 +5.3 Oklahoma 1,069,682 1,141, 346 -6.3 147, 173 128,649 +14.4 1,162,639 1,123,285 +3.5 Oregon 840,111 796,149 +5.5 121,557 117,787 +3.2 845,856 801,058 +5.6 Pennsylvania 3,225, 417 3,107,123 +3.8 395,938 442,389 -10.5 3,251,593 3,137,803 +3.6 Rhode Island 270,779 266,787 +1.5 36,288 36, 545 -.7 280,893 270,785 +3.7 South Carolina 989, 333 938,942 2 +5.4 140,833 135,959 2 +3.6 997, 265 943,642 2 +5.7 South Dakota 305,953 295,632 +3,5 44,937 49, 748 -9.7 309,959 299, 537 ` +3.5 Tennessee 1,491, 744 1,387,909 +7.5 215,587 180,474 +19.5 1,511,152 1,406,245 +7.5 Texas 4,545,631 4,619,381 -1.6 668, 771 616,667 +8.4 4,670,201 4,733,908 -1.3 Utah 412,368 397, 124 +3.8 59,560 59,679 -.2 471,413 461,834 +2.1 Vermont 165, 532 160,435 +3.2 25,686 25,270 +1.6 165,980 160,999 +3.1 Virginia 1,583,888 1,441,708 +9.9 214,475 192, 240 +11.6 1,763,232 1,599,334 +10.2 Washington 1,153,475 1, 101, 534 +4.7 164,284 162, 747 +.9 1,159,002 1,102,193 +5.2 West Virginia 520,588 485,990 +7.1 70,492 68,807 +2.4 522,080 487,302 +7.1 Wisconsin 1,482,520 1,423,842 +4.1 216, 512 210,696 +2.8 1,488,926 1,428,730 +4.2 Wyoming 199,830 192,319 +3.9 36,396 36,435 -.1 206,978 198, 797 +4.1 Total United States 69, 299, 249 66, 515,612 +4.2 9,355,358 9,197,033 +1.7 70,399 147 67, 456, 178 -1-4.4 Due to the inconsistency of varying cutoff dates used by States' tax departments for tabulating a month's collections. 2 The State of South Carolina revised as tollows: September October November December Total Mater gasoline consumption- 1972: South Carolina 96,634 129,744 114065 118,832 1,398,217 Total United States 8,334,691 8,658,601 8, 118, 643 8,571,918 100, 069, 623 Total gasoline consumption- 1974: South Carolina 97,614 131,047 117,684 122,220 1,412,207 Total United States 8,460,478 8,826,785 8,240,722 8,701,391 101, 685, 554 Notes: 1. This tabulation presents a series of gasoline consumption by States showing a separation between total consumption (including use on highways and oft highways, as well as sales to U.S. Gavernrnent and aviation gasoline) and motor gasoline consumption excluding U.S. Government sales and aviation gasotine. As the data becomes available, this separation will be published monthly 2. The data shown in the above table is based upon returns made in accordance with the gas- oline tan nr inspection laws in the respective States. PAGENO="0336" GASOLINE CONSUMPTION [In thousands of gallonsi Total 8 months Motor gasoline consumption 1973 1972 Percent change August 1973 August 1972 Percent change Total gasoline consumption Total 8 months 1973 1972 Percent change January 1973: South Carolina 110,009 101,691 +8.2 110,996 102, 174 +8.6 Total UnitedStates February 1973: South Carolina Total United States 213, 173 15,914, 116 206637 +3.2 14, 891,443 +6.9 8,112,895 103, 164 7,751,221 7,409,497 104,946 7,552,960 -f-9.5 -1.7 +2.6 8,246,898 215, 149 16, 105,896 7,535, 133 207,832 15, 150,788 +9.4 +3.5 +6.3 March 1973: South Carolina Total United States 333, 535 24, 275, 057 322,638 +3.4 22, 852,984 +6.2 102, 362 8,393,445 116, 001 7,967,763 -11.8 +5.3 336, 501 24,650, 207 324,407 23, 251, 454 +3.7 +6.0 April 1973: South Carolina Total United States 452,751 32,607, 824 434,101 +4.3 30, 832, 525 +5.8 125, 751 8,339,282 111,463 7,979, 541 +12.8 +4.5 462,425 33, 130, 414 435, 870 31, 356,773 +6. 1 +5.7 Ma~ 1973: South Carolina Total United States 588, 320 41,710,891 553, 855 +6.2 39,608, 349 +5.3 129, 569 9,097,067 119, 754 8,775, 145 +8.2 +3.7 593, 120 42,372,499 556, 239 40,269, 276 +6.6 +5.2 June 1973: South Carolina Total United States 714, 251 50, 750, 056 677, 000 +55 48, 389,073 +4.9 125, 931 8,969, 165 123, 145 8,780,051 +2.3 +2.2 720, 065 51, 488, 977 680, 070 49, 183, 181 +5.9 +4~7 July 1973: South Carolina Total United States 848, 500 59, 944, 250 802, 983 +5.7 57, 180, 357 +4.8 134, 249 9,263,835 125,983 8,791,285 +6.6 +5.4 855, 286 60, 900, 652 806, 868 58, 109, 989 +6.0 +4.8 PAGENO="0337" 331 MOTOR GASOLINE CONSUMPTION lb thousands of gallonsj 9 months Percent change September 1973 September Percent 1972 change 1973 1972 Total 45 States and District of Co- lumbia 1 74, 817, 446 71,661, 964 Rhode Island 306, 509 301, 338 Total 46 States and District of Columbia 75, 123, 955 71, 963, 302 10 months ~~------ 1973 1972 Total 31 States 2 354,337,115 51, 774, 296 District of Columbia 209, 816 191, 239 Maryland 1,546,152 1,477,694 North Carolina 2,366,606 2,258,665 Pennsylvania 4,050,056 3,970,261 Rhode Island 343,493 333, 561 Tennessee 1,882,975 1,751, 412 Ohio 4,340,701 4,110,698 Total 37 States and District of Columbia 69, 076,914 65, 867, 826 +4.4 +1.7 8,446,751 35, 730 7,976,162 +5.9 34, 551 +3.4 +4.4 8,482,481 8,010,713 +5.9 Percent change October 1973 October Percent 1972 change +4.9 +9.7 +4.6 +4.8 +2.0 +3.0 +7.5 +5.6 3 5,647, 854 20, 651 158, 002 238, 914 426, 936 36, 984 211,077 451,665 5, 352,632-f-5.5 20, 053 +3.0 149, 708 +5.5 238, 198 + .3 466, 957 -8.6 32, 223 +14.8 171, 856 +22.8 426,481 +5.9 +4.9 7,192,083 6,858,108 +4.9 1 State breakdown previously published in the Weekly Statistical Bulletin, vol. 55, No. I for week ended Jan. 4, 1974 2 State breakdown previously published in the Weekly Statistical Bulletin, vol. 55, No. 2, for week ended Jan. 11, 1974 3 The State of Michigan revised as follows: Michigan 3,969,852 3,777,944 +5.1 421, 704 391, 237 +7.8 Note.-The data shown above is based upon reports made in accordance with gasoline tax or inspection laws in the respective States. Mr. IRIGG. The voluntary cutback in consumption I think has been one of the primary things that has helped us over this bad period. People have responded to the need to not have excess-~ Chairman PROXMIRE. Now we are told the price is going to have to go higher. We are told the conservation measures are going to have to be sharper and the data that seems to be available seems to contradict that, seems to indicate that if we simply proceed on the basis we have in the last month or so that we will be in good shape. Will you answer that. Mr. RIGG. I don't think we will be in good shape. I haven't seen anything out of Mr. Simon's office of recent day but even though stocks are high. whether there will continue to be the leakage out of the embargo or not is a matter of conjecture. Chairman PROXMIRE. Let me ask you this. The Interior Depart- ment contains the Office of Energy Conservatioii and the Office of Energy Data and Analysis? Mr. RIGG. They are now over in Mr. Simon's office. Chairman PR0XMIRE. They did. Let me then ask you, I suppose, therefore, the recent~ estimate of fuel savings through voluntary con- servation came at. least in part from your Department. Mr. RIGG. That is right. Chairman PRox~rIRE. The President said on Saturday that: "Ga- soline consumption was down by 9 percent. in December and that heating oil consumption also is much reduced." Can you tell us how these figures were arrived at ? 37-143 0 - 74 - 22 PAGENO="0338" 332 Mr. RIGG. I cannot specifically give you those. Those are compila- tions of figures from the Bureau of Mines and the Office of Oil and Gas and various State agencies. associations such as APT and others. Mr. HODGES. Right. Mr. RIGG. And then the Office of Energy Data and Analysis com- piles those into a series of monographs and charts in which this was extrapolated. Chairman PROXMIRE. \Vhen the president said 9 percent. he didn't say 10. round it out, he said 0 l)eiTent. I am wondering how precise and reliable and accurate that kind of estimate is. Mr. RIGG. I would say relial)ilitv pins or minus 5 to 7 percent. Chairman PROXMIRE. In other words, it could be down 4 percent or down 14 Percent? Mr. RIGG. No. no. I mean using 9 J)ercent as 100 percent. Chairman PROXMIRE. 814 to 91 ~ percent? Mr. RTGG. Ies. sir. Chairman PROXMIRE. In your oral statement you say: "The De- partment's capacity to conduct analytical study is seriously limited." Mr. RIGG. Yes. sir. Chairman PROXMIRE. May I ask what, if anything. is now being done to alleviate that deficiency? Mr. RIGG. We have recently instituted some additional computeri- zation in the Bureau of Mines and also the TT.S. Geological Survey has done the same thing. It is a matter of funds and people and this matter of adequacy of the information and ability to digest. it to get a specialist, a man who has spent. many years working with the data in energy and have a good staff with him so when they see a figure, the figure itself isn't important. it is what the significance of the figure is. Chairman PRoxi~uRE. Have you ever requested more funding so you could get the additional personnel you need for this purpose? Mr. RIGG. We have requested it. Chairman PROXMTRE. And had it denied? Mr. RIGG. Whenever we are denied finids it appears to me that. we don't sell our need. Chairman PROXMIIIE. Well. I didn't ask that. It. is not a philo- sophical question. it is a question of fact. Have you been denied funds ? Mr. RIGG. Certainly we have been denied funds in all- Chairman PROXMHIE. For this particular purpose? Mr. RIGG. For this particular purpose I don't think we have, this time around. We have gotten what we asked for this time. Chairman PRoxMniL. You didn't ask for enough? Mr. RIGG. We didn't ask for enough: we were going along- Chairman PROXMTRE. Have you ever been denied? Mr. RIGG. Ies. Chairman PROxMIRE. \Vhen? Mr. RIGG. Oh. 1 year or so ago. I believe, we were denied funds in the Department. but it wasn't an amount of denial that was signifi- cant at that time l)ecause there was no energy crisis at that time. Chairman PROXMIRE. Mr. Hodges. I would like on to help us with this question of the shortage and the fact. that Science maga- PAGENO="0339" 333 zine and a responsible exl)ert writing for the Washington Post has argued that there is not a shortage. How would you answer that. Mr. }-lO1X~ES. I answer it to this effect. There certainly is a short- age but a shortage is sometimes one of these flexible things a little (lifficult to defiuie as to what we mean. Chairman PJiOXMTRE. Let me ask. ~\1r. 1-lodges. I understand you are very careful in what von said you could provide. 1ou provide data and information on the situation as it is and has been. Mr. HODGES. Right. Chairman PROXMIRE. You provide data on the reserves and pro- duction and so forth. You do not ~roject. however. Mr. HODGES. That is right. Chairman PR0XMIRE. ~Without projection how can you tell us whether there is a shortage or not, since we are talking about the situation as I understand it, not today, but the situation in the spring. Mr. HODGES. Well. I am familiar with the Bureau of Mines data. for example. and I am generally familiar with many of these analy- sis that have been made by others, which is, of course, secondhand to me. I have not made a calculation as to what I think the shortage is today but there is an awful lot of evidence that points in that direc- tion. Chairman PROXMIRE. \Vould von deny that there is this assertion that the stocks are higher now than they were 1 year ago? Mr. HODGES. That depends on the record. I am not. sure I have them all. Motor gasoline I guess is down about maybe 10 million barrels. Chairman PROxMIRE. Now that is based on what? Does that in- elude the gasoline in inventories? Mr. HODGES. This is stocks as reported by Bureau of Mines and the API. This is stocks in what. we call ~rirnary storage. stocks in the hands of the refineries, it. is stock in transient, it is stocks in the bulk terminals. Chairman PROXMIRE. How about Mr. HODGES. This does not include the stocks that are in the hands of the wholesalers, distributors, and retailers. Chairman PROXMIRE. 1-low can we tell whether Mr. Rand is right or you are right? Mr. HODGES. He doesn't have any better evidence than I have. Chairman PROXMIRE. He is at least making an estimate on the total picture and you are giving us an estimate on part of the pic- ture and saving on that. basis that there is some shortage there but you don't. know what the rest of the picture is. Mr. HODGES. I am freely admitting that there is one gap in this that the Government needs under these circumstances and that is more information on secondary storage. Coming back to the quotation about how much gasoline we saved by conservation and somebody says that is about 9 percent. I say I don't know how he found it out or how he made the calculation. Chairman PR0XMTRE. That. was the President of the Fnited States. ~\lr. HODGES. I have heard an awful lot of statements that. I don't necessarily believe, Mr. Chairman. PAGENO="0340" 334 Chairman PROXMIRE. And you then would challenge that state- ment by President Nixon? Mr. HODGES. I simply say I (lont know. Chairman PROXMIRE. You know as much about it as any man I can think of. Mr. HODGES. Not in that Precise sense because I do not have that data. Chairman PROXMIRE. Well, didn't the API Provide the data? Mr. HODGES. They used our weekly statistical bulletin, somebody cranked it in. but I have not seen the analytical work, I don't know how they did it, but I would say I don't know how you can measure the impact of the conservation measures as of last week or 2 weeks ago. Chairman PROXMIRE. Your response then would seem to suggest that this analysis may be largely guesswork? Mr. HODGES. ~1es. Chairman PROXMIRE. Thank ou. My time is up. Congressman Conable. Representative COX\BLE. Thank you, Mr. Chairman. I am some- what confused about how much information is available on imports of oil. Do you feel. Mr. hodges. von have accurate enough informa- tion about that Mr. HOD(;ES. I would say, and I have told the staff of the GAO that has been making this study, and incidentally I would like to say we have, been cooperating fully with staffs from Congress and all sorts of agencies-I lìave pointed out that information on im- ports is a mushy area. I do not think it is an API problem. I think it is a Government problem. It lies between the census and customs and I personally have not audited it but I know- we have problems in this area. Representative COXABLE. For instance, do you have any current information from which we could figure out during this past year what percentage of our petroleum needs have been met by imports? Mr. HODGES. ~\Vell. we (lon't have the official record yet but I am sure it is going to run in the neighborhood of 3~ percent of our total domestic demand. Representative COX\BLE. So a very substantial part of our oil con- sumption in this country is dependent on a resource which you de- scribe as mushy in terms of availability of statistics? At. least 1 out of each 3 gallons or barrels consumed in this country is coming from abroad. Mr. HODGES. All of these statements necessarily require infinite ex- planation. By the time the year is over, for example. fiscal year 1972. I think we will have pretty good data because by then the Bu- reau of Mines and Census have done an awful lot, of reconciliation. I don't know whether it is off by ;~ pei'cent or 2 percent. but I was speaking. when I ma(le the statement, it. is on a month-by-month basis where there is a delay in the ~apei flow, and sometimes the stuff goes up the line and it gets kicked back, it may not be reported in the pi'oper month. it is partly a matter of timing. partly report- ing. partly (lefinition. but I am reasonably confident. that once the PAGENO="0341" 335 Bureau of Mines has balanced all of these data out that we have a good picture of what happened in 1973. Representative COXABLE. Many of your member companies are in- ternational oil companies. Do you have different requirements with respect to their foreign reserves and with respect to their American reserves. Mr. HODGES. We do not~ get involved with any foreign activities whatsoever. Representative COXABLE. So you feel that is not appropriate for the American Petroleum Institute? Mr. HODGES. That has beeii the American Petroleum Institute's policy long before I came here. Representative CONABLE. Now, Mr. Rigg. do you feel that we have an adequate lever on an international oil company, ownership of which is sited in this country, so that we can get information about foreigii reserves and their relationship to the I)rObable supply of oil in this country? Mr. RIGG. I would say that I do not believe we have adequate ca- pability of retrieving this information, of assessing its validity. Representative COXABLE. Do we have the legal authority to do it? Mr. RIGG. WTe do when it comes across the border, when the Cus- toms have the authority to find the amounts, but as far as what their reserves are in the various countries, I know of no authority that would require the companies to submit that to the Department. Representative COXABLE. Do you see any possible difficulty with trying to improve our information in this way? Is it possible that pressure to (10 so, to determine the extent of foreign reserve, might resuht~ in some possible loss of some access to those reserves for our country. Mr. RTGG. This could happen. The accumulation of this foreign data is done by the State Department who attempts in the various countries to get any information that the can make available to us for our use and sometimes the countries do not even make this infor- mation available to them. Other times it is available a year or two late. So a lot of the information is not up to date. Representative COXABLE. So as we become increasingly dependent on imported oil it is quite obvious our statistical basis is going to be- come mushier and mushier, isn't that correct ? Mr. RIGG. That is correct. Representative COXABLE. And this probably is going to be a greater problem than the accuracy of our identification of American reserves which, in fact, are going to ciwincUe in importance in rela- tion to our total available resources: isn't that correct? Mr. RIGo. Well, we have tremendous resources domestically here that~ we could make available for utilization and "Project Independ- ence" addresses itself to that problem. Representative COXABLE. Well, let me ask you this. Mr. Hodges gave us apparently a detailed description of the oil reserves, how these reserves are determined. Now, these reserves are going to differ in their accessability and availability depending on the price of crude oil at the wellhead. are they not ? WThat is an appropriate reserve at one price may not be an appro- priate reserve at another price? PAGENO="0342" 336 Mr. RIGG. That is correct. Representative CONABLr. Simply because it isn't economically fea- sible to recapture the greater amount at the lower price. Ralph Nader told us that oil reserves should be pegged at a level of up to 10 times the level used in policy planmng during the recent past be- cause the economic conditions, price. affect. the proven reserve level. Now, is that an accurate fact? Mr. RIGG. I don't know that I would agree with Mr. Nader that it should be pegged 10 times higher. Representative Cox.~BI~y. Well, really economic feasibility has changed dramatically, has it not. because of the changes in prices that have already occurred ? Mr. RIGG. That is right. There is a function of both price and technology involved and either one or a combination of both can change the reserve and the resources figures. The careful analysis of the information though must be l)asecl on the fact that what one good technical man will say is a reserve another one will disagree. Representative Cox.~BLE. Do we have the capacity to adjust these reserve figures on the basis of economic feasibility? Mr. RIGG. We have the competence. Whether we have the capacity or not I would question under our current levels. Representative COXABLE. Well, is that a possible source of disa- greement about what reserves are available to us now? Mr. RIGG. Yes, that is true. Representative CoxAimE. And once we understand that there must be some way of converting and of recapturing an accuracy which many people feel has been lost because of the statistics being based on conditions of. let's say, a year ago in the price field. Isn't that correct? Mr. RIGG. That is right. Representative CONABLE. Well, I hope we can. You know it is very difficult for us to analyze these statistics as laymen and see what we are talking about and why there is so much disagreement. with it, and that. is one of the things this committee is trying to ascertain. Now. Mr. Shiskin. von say in your statement that you have no legal authority to compel companies to report price data. to the Bu- reau of Labor Statistics? Mr. STITSKTX. That is correct. Representative COYARLE. Tnder the Economic Stabilization Act dosen't the President have the authority to do that? Mr. Snisiux. Well. maybe. I don't know. The Cost. of Living Council can get data from the companies but. they are not available to the BLS. Representative COXABLE. They are not available to you? Mr. Smsiux. No, sir. Representative Cox~~BLE. So the authority, if it is there, doesn't attach to von as a statistical gathering agency? Mr. STrTsT~Tx. Right. Representative Cox~~nLE. Do von see any problems in the release of proprietary information if you ask the petroleum companies to report price data to the Bureau of Labor Statistics? ~\1r. SnisKix. The Bureau of Labor Statistics has a great tradi- tion of maintaining confidentiality of reports. I am very hopefull PAGENO="0343" 337 that we. will before long have a new law which will strengthen the confidentiality provisions of data reported to the BLS. Under those conditions I think the reports to the BLS should be made manda- tory. Representative CONABLE. You point out at one point in your state- ment that. oil companies are not convmcecl the. existing data provided voluntarily is inadequate and you go on to imply this is one reason why you are having trouble getting voluntary compliance with a more up to date reporting system. I wonder if you could explain in a little greater detail what the differences of opinion are that seem to be preventing this greater voluntary compliance? Mr. SIrTsTcTx. Yes; as I understand it, now, I am fairly new to BLS and I may not get this precise, but I think the essence of it will be there. In the past the. BLS policy was, as it is tod~~. to col- lect data directly from companies. Now BLS tries to collect price data from companies. However, the companies were reluctant to give it and they explained as their reason that the price quotations that were publicly available were satisfactory for this purpose. Now that may have been true in the past but it is very doubtful that it is true today. If you will look at the chart I provide-in my prepared statement -yoU will see that. there is now a very large gap between the move- ments of the WPI and CPI, whereas in the past these two indicators moved together. Representative. COXABLE. Yes. Mr. Siiisi~ix. The point. I made is that it seems to me as an expe- rienced statistician you can't take shortcuts like that, you never should. You should always stay with the basic principles of collect- ing data. from the. respondent. Now, we deviated from t.hat principle and I think we are paying a price today. Representative COXABLE. Mr. Hodges, do you have any comments? Mr. HoDGT~s. I believe I should comment on this. In the first place, for legal reasons, our attorneys feel that we should not ge.t. involved in discussions of prices in any way. But with regard to the comment Mr. Shiskin has just made, and since you are new I hope you under- stand I may have a little more current. information-I believe the companies, I cannot speak for them, but there is evidence. t.hat they understand that the sources of data. used by BLS are not. adequate. Now, to what extent. this is spread around and how much agree- ment we would find I do not. know, I believe there. has been a change of attitude on that or change of understanding. Now, there are perhaps some proprietary problems I certainly cannot speak to. Some of the problems that BLS encountered, however, involve some definitional problems that. were very difficult for the companies to conform to and there were also problems of collecting dat.a. in the regional format required by BLS. So there. is a lot. more to the story, I believe, than just reluctance to report. Representative CONABLE. That. is all, Mr. Chairman. Chairman PRoxi~IIRE. I would like to followup, Mr. Hodges, on the question that Mr. Conable was addressing to Mr. R.igg, because PAGENO="0344" 338 you think this is absolutely fundamental in determining what. our reserves are. You say in your prepared statement: Proved reserves as of any given date are the estimated quantities of all liq- uids statistically defined as crude oil, which geological and engineering data demonstrate wit.h reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, Now obviously if von have a 03.25 or ~ or $4.25 or $5.25 price it has an enormous bearing on how big your reserves are. They are far lower when the Price is low and substantially higher when the price is high. Mr. Nader ma~ or may not be right. It. may be 50 per- cent more, 100 percent more. Tt seems to r~ when you have this kind of sharp increase in price it has a prc T effect, immediate effect, which many of us haven't grasped on ~e of oil reserves and we have had, as indicated, a very big increase ~i price already. Is there any way that we can tell, do von have. any statistics, any data, any information that would indicate what. the present. eco- nomic conditions would warrant in terms of the impact on reserves? Mr. HODGES. This would involve speculation on my part. and pre- iudgrnent. of what the Reserves Committee will determine about March 20 when all of the figures from the country are. brought to- gether and added up. Chairman PJIOXMTTIE. lVhen are they going to do this? ~\li'. HODGES. March 20, thereabouts. Chairman PnoxMnur. `What will they come forth with at the. time, they will give a new estimate? Mr. HODGEs. A new estimate of reserves as of December 31, 1973. Chairman PROXMTRE. And the last estimate of the reserves are what? Mr. HODGES. 30-odd some. T didn't bring my report. I have, a re- serves expert in the audience if ou want to pursue this. Representative ~ May I ask something here.? You know, we are assuming. of course, that. if economic feasibility permits the recovery of more from existing pools of oil that that. can be done in a reasonable 1)enod of time. I have to ask von isn't see- ondarv and tertiary reeovei'v not only more expensive but. doesn't. it require different techniques and, therefore, aren't many of these ad- ditional reserves that we might eventually be able to recover sub- stantially off in the future? Aren't we without the capacity to real- ize them in a short period of time ? Mr. HODGES. Well, with respect to the tertiary, what I understand, again I will allow the expert to answer more definitively, these are the most esoteric methods that perhaps have not been proved com- mercially and they certainly are in the future. Now, water flooding and things of this sort. are real and if the in- crease in price justifies the installation I would assume that we. will see some indicated additional reserves taken out of one column and plugged into the proved reserves. but I have no data. Mr. Chairman, T do not make tlies~ calcui'ations, Chairman PROXMIRE. The reason I asked that is, of course, next March. I know that it is a short. time, when you consider how tech- PAGENO="0345" 339 nicallv difficult. this is and the kind of responsibilities you should have in this kind of estimate, but at the same time in terms of this energy crisis and the policies we should follow and whether we have rationing or whether we don't, and so forth it is quite a long time. Mr. HODGES. Well, I agree. Chairman PROx1%IIRE. And I would wonder if we could get just some kind of ball park notion of what we are talking about if the tenfold is too big. is it within, say a 100 percent increase? Let me follow up. What was the date on which the current esti- mates of reserves was based? Mr. HODGES. The one available now? Chairman PROXMIRE. Yes. What were the prices. Mr. HODGES. What price? Chairman PROXMIRE. Based on the $3.25 price. Mr. HODGES. Whatever it. was last December 31. Chairman PROXMIRE. December 31, 1972? Mr. HODGES. That is right.. Chairman PROXMIRE. You do this once a year? Mr. HODGES. Yes. Chairman PROxMnn~. That was about $3.25, was it not, something like that? You said you have an expert who can tell us how big the reserve is now. Mr. HODGES. He can talk about procedures and what it was as of December 31. 1972. We do not have any numbers for Dec. 31, 1973. The men are iii the field, they are working on it right now. The first returns will start coming into my office around February 15. They are not due until March 1. Chairman PROXMIRE. Can he tell how many billion barrels we had in reserve as of last year? Mr. HODGES. This is John Drisdale of Texaco, Mr. Chairman. On December 31, 1972. it. was 36.3 billion barrels. Chairman PROx~rn~E. What is that? Mr. HODGES. 36.3 billion barrels. Chairman PRox~rIRE. 36.3 billion barrels? Mr. HODGES. That is right. Chairman PROXMIRE. That is as of December 31, 1972? Mr. HODGES. That. is right. Chairman PRox~rIRE. Do you have any experience that could tell us what has been the result when the price has gone up in the past? Mr. HODGES. That was before my time, until this recent round, I guess. Mr. Drisdale, do you c~u'e to comment. on that? Mr. T)RISDALE. Only to the effect that the recent price increases will enable industry to go into the innovative, creative procedures to recover more oil that. previously were not economical. WTe will be able to now afford field trial tertiary recovery processes. Chairman PRox~rIRE. Of course, we know that. What I am trying to pin down, if I can, is some notion, some overall estimate that we can get, and I realize you gentlemen are not going to give a precise estimate. Just give us some notion of whether or not this will enable us to double our estimates of the amount of reserves or increase them 50 percent or by what proportion, roughly. PAGENO="0346" 340 Mr. HODGES. I will say, first., I do not believe there have been any studies made to my knowledge where we have tried to determine-I am not sure whether we should call this supply elasticity or reserve elasticity, in response to an increase in price. I am not aware of any study. Chairman PR0XMIRE. Why should not the API be very interested in that? Was that not the principal reason or a principal reason for the tremendous burden on the American consumer, a classical in- crease in price that we had in December. for example, $4.25 to $5.25? I would think it would have to be based on some notion of what this would do. If it would not increase supply significantly, I think it is very hard to justify. If it would increase supply significantly then I think you have a strong argument for it. But we would like to know how much it increased it. how much of an estimate they had had. Mr. HODGES. The basic thread of the thought, I would think, has been that. with higher prices that you are going to improve the in- centive for drilling, and that. is where you really get your reserves. I do not know that we have had any experience of what price does to these kinds of estimates. Chairman PRoxi~rIitE. The Cost of Living Council made this deci- sion. this profoundly important. and costly price decision without any knowledge of how this would affect reserves? Mr. HODGES. I was not. present. and I do not know what knowledge they had or what information they used. Chairman PROXMTRE. When the executive committees get to- gether. the executive committee. gets together to decide on what the reserves will be. these are oil industry executives? Mr. HODGES. These are engineers, geologists, reservoir- Chairman PROXMIRE. They all work for oil companies? Mr. HODGES. Most of them. There are one or two exceptions. We have a Stat.e geologist as chairman of one of the subcommittees. Chairman PROXMIRE. They will make their estimates which will then be accepted. Is there any way to get. behind this? Supposing there is an under- standable tendency, since these are industry people, to underestimate the reserves, which if you did so might result in a further price in- crease. How could you get. behind this to determine its integrity and accuracy, or is there a way? Mr. HODGES. I will have to say this. That the industry is painfully aware that. they have spent. hours and tons of money doing this on a voluntary basis and they are aware of the credibility problem, Mr. Chairman. We starte.d last. year with a top level committee to try to close the gap between industry and Government to see what could be done. For various reasons that effort did not come out with an an- swer. I strongly suspect. it was because t.here was a certain amount of chaos in Government and they did not have many people to talk with. They would talk to one person one day and he was not there the. next.. We. are again trying to come to grips with this problem. I cannot make an official statement of what we would propose because it has not been settled. I hope certainly that industry leaders will be PAGENO="0347" 341 talking with Government and that we can find a way to close this credibility gap. Chairman PROXMIRE. Mr. Rigg, in your prepared statement you said, and I quote: "U.S. Government information base for the con- duct. of its mineral responsibilitis is grossly inadequate." Mr. RIGG. That is right. Chairman PROXMIRE. WTho is responsible for this over the years, the Congress, the. Interior Department. past Presidents, or the pres- ent administration or who? Mr. RIGG. I think it is the same persons that you can put the en- ergy crisis on, every one of us. I think we are all to blame. I think we are all to blame because we. felt basically that we had plenty of energy resources available and we had stable supplies. The Secre- tary, in his report that. I referred to, pointed out that the shortfall as one of the points in that report that he sent to Congress last year, and that statement is out of his report.. Chairman PRox~nRE. Well, let me see if I can pin it down a little. Earlier you said there was a denial of your agency's request for ad- ditional funds to upgrade your analytical capability. First, I would like you to provide for the record, within 10 days, details showing how much money has been requested of Congress specifically to upgrade the Interior Department's analytical and factfinding capability with regard to energy resources for each of the past 5 years. Second, you said the denial of the request for funds last year was not significant because there was no energy crisis a year ago~ yet in your prepared statement you say the approach of the energy crisis has been clearly evident and the Interior Department has been warning about it for many years. Mr. RIGG. That. is correct.. Chairman PROXMIRE. How do you reconcile your oral response to your prepared statement? At one point. you have said, "There was no energy crisis last year" and then you say you, "Have been warn- ing about an energy crisis for years." Mr. RTGG. The energy crisis really did not happen until we had a shutoff from insecure foreign sources. Up to this time we pointed out to the Congress and to the people that dependency on unsecured foreign sources is a matter of concern. Chairman PROXMIRE. All right., if it is a matter of concern, why should you not. have been pressing. and since the data would be in- adequate under those circumstances, why were you not pressing for more funds so you could get. more competent analytical capability and so you could gather data. that. would be more reliable and more far-reaching and comprehensive? Mr. RIGG. `We were pushing forward but we were not pushing for- ward with the intensity we obviously should have been doing nor had anyone else pushed us to make us get the data. Chairman PROXMIRE. `Will you give us what funds your agency re- quested that were denied by Interior or 0MB before the budget went to Congress? Mr. Rrno. Yes, sir. PAGENO="0348" 342 [The following information was subsequently supplied for the record:] BUREAU OF MINES-COMPARISON OF BUDGET REQUESTS WITH ALLOWANCES AND APPROPRIATIONS-DATA COLLECTION AND ANALYSIS (In thousands of dollars( Bureau of Departmental 0MB mines request allowance allowance Appropriation Fical year: 1970 7,540 7,540 7,540 7,540 1971 8,473 8,473 8,268 1972 10,018 10,018 9,018 8,268 9,018 1973 10,571 10,571 9,571 1974 9,263 9,263 9,263 9,571 10,763 BUREAU OF LAND MANAGEMENT-ENERGY DATA COLLECTION AND ANALYSIS (In thouuandn of dollarn( Bureau req ueut/ Department 0MB Congressional allowance allowance Supplemental appropriation Fiscal year: (1969 base) (2, 529) (2, 529) 1970 2,994 3,114 1971 3,209 3,209 (2, 529) 3,114 3,209 1972 3,209 3,209 180 3,389 1973' 5,824 4,964 4,964 1974' 8,739 8,114 1,250 9,364 1 lncludeu funds for land-use planning in energy resource areas. Also includes funds for oil shale title clearance, envi- ronmental assessment efforts for the Outer Continental Shelf leasing program, and preparation and review of environ- mental analysen and impact statements on proposed energy leasing activities. U.S. GEOLOGICAL SURVEY-ENERGY ACTIVITIES (ANALYTIC AND FACTFINDING), JAN. 31, 1974 Fiscal year- 1970 1971 1972 1973 1974 Request to 0MB Request to Congress Appropriation (Total USGS Appropriation) $5, 732, 000 4,209,000 3,909, 000 (102, 020, 000) $5, 947, 000 4,237,000 4, 713, 000 (114, 603, 000) $5, 328, 000 5,210,000 6,783, 000 (131, 050, 000) $15, 191, 000 12, 420, 000 12, 514, 000 (150, 450, 000) $15, 260, 000 15, 630, 000 15, 930, 000 (161, 382, 000) Chairman PROXMTRE. You said in your prepared statement that the freezes kept personnel below strength. i\Ir. RTGG. That is right. Chairman PROXMIRE. What effect did that have on your capabil- itv? Mr. RTGG. Well, it had the effect of inadequate numbers of highly competent people to analyze the data. We have a lot of data that we do not even get to utilize. Chairman PROXMTRE. You indicated that we did not have a crisis last year. we do have a crisis this year. Most people have told us, in- cluding Mr. Simon, that the end of the embargo will not be the end of our crisis. PAGENO="0349" 343 `Was Mr. Simon wrong, in your view, once the embargo is over, is that it? Mr. RIGG. No, I think it will continue and whether it will continue and whether it. will be. of a higher magnitude than it is today I do not know; I cannot look in the future. and give you an honest an- swer on that, Mr. Chairman. Chairman PRox~rIRE. In your prepared statement you discuss the difficulties you had and say it. is particularly difficult to meet EPA requirements. Mr. 1RIGG. Yes, sir. Chairman PR0xMIRE. Environmental policy requirements? Mr. RIGG. Yes, sir. Chairman PRox~rIRE. How and why and to what extent? Mr. RIGG. Well, they also want to have more information to look to alternative sources to when you are looking, for instance, at a sit- ing of a powerplant or the development of a resource, they want to look at alternate sources. They also want to look at the effect on the air standards, the effect on the ambient air by the discharges of var- ious processes using energy. These are difficult to come by. Many times and one of our~- Chairman PROXMIRE. Difficult in what way, they are costly? Mr. RIGG. Not only costly but they are technologically difficult. We know that of the more than 92 elements that are present in major minerals, if there is an inadequate amount there are certain effects on biological systems and on plants and on the humans, and if there is too much there are certain effects, but we do not know with a degree of accuracy that it is comfortable, what the ranges are of these concentrations, so when EPA wants to know what the effect is of a certain concentration of SOx or NO~ we do not have that data. Chairman PROXMTRE. You say it is more than a matter of cost; it is a matter of technological competence? Mr. RIGG. That is right. Chairman PROXMIRE. To many of us this is so important, satisfy- ing the environmental question, that I think we would be willing to provide more funds if that would be the answer. I would like to have you. for the record, if you could, answer this a little more detailed, indicate what competence you need and where the funding has been inadequate. Mr. RIGG. We will be delighted to do so. [The following information was subsequently supplied for the record:] We believe that the greatest deficieincies in our part of the Federal Govern- ment's energy resource fact-finding and analytic capability are in the areas of resource appraisal, resources evaluation and environmental data and analysis. Our FY 1975 budget proposals provide for significant and necessary funding and positions in these very areas of inadequacy. Chairman Pnox~rTRE. You say in your prepared statement, "T11e report recommended several corrective governmental policy actions, some of which have been taken under stimulus of the Arabian oil embargo," indicating other recommended corrective actions that have never been taken. What actions were those? PAGENO="0350" 344 Mr. RIGG. Mr. Morgan of the Bureau of Mines, I would like to have him come up and bring a copy of his report for you, Mr. Chairman. Chairman PRox~IT~. Mv question really is, Mr. Rigg, what signif- icant corrective governmental policy actions have not been taken? We have been remiss in enacting them? Mr. RIGG. This report dated June 1973, the Second Annual Report of the Secretary of the Interior, on page 5. we have a series of rec- ommendations to improve the development of domestic resources and to provide more responsive administrative mechanisms. These in- clude the formation of the Department of Energy and Natural Re- sources. and providing an Organic Act for the Bureau of Land Management. The only one that has happened is to modify the right-of-way limitation, that was on the Alaskan pipeline bill. Also included were: Revision of the mineral leasing laws, regulation of surface mining activity, amending the Natural Gas Act, facilitating development of deepwater ports. and encouraging domestic produc- tion. Additionally. the Treasury Department proposed tax changes to encourage oil explorations. We should develop ways to stimulate maximum cooperation among industry. Government, and academia. We should expand our cooperation in resources. Chairman PROXMTRE. For the record, will you refer to the pages and so forth and provide the report so we can check that out? Mr. RIGG. We will do so. [The report was subsequently supplied for the record:] PAGENO="0351" 345 rsee ~gs 5 ~ ~ D? t~ r~ort~ MINING AND MINERALS POLICY 1973 Second Annual Report of the Secretary of the Interior under the Mining and Minerals Policy Act of 1970 (P.L. 91-631) June 1973 Library of Congress Catalog-Card No. 72-622941 PAGENO="0352" 346 Public Law 91-631 91st Congress, S. 719 December 31, 1970 g11 84 STAT. 1876 Toe-tttdish a national ing and ninerato II it e ,mrt~I by the .`ooat 091/ house of /?e,os nt,to-es of thin I mind ~tatex of J mci-ira in (mmnyienn ,;nu'antatm/. Ihat this A(t SlAV Honing and hc cited as the M mug 01(1 Minerals Policy Art of tOOt. HonersJs Polisy sex-. hi. The ( `otigress declares that it is the unit inning policyo f the Sot of 1970. Federal (iovernmetit in the national Interest to foster and eticotirage privite eiiterpriu~ iii (I) the developttieiit of economically sound and .ntdde domestic timing. n~tierahs, metal and in itieral iecl1itiiatioli ii (Inst ries, Ii) tie orderly am I e-onoin IC (le ye lopinent of domestic nuneral resonlrre~. reserves, 111(1 re laniatioti of nietals and ni.itierals to he] pauni 0 nitisfastiori of iiiilistrial, se-uritv and envii-ontiiental needs, 1) noting, tni eral, and iiietallnrgtmal reseir-ti, includitg tile use and recycling of u-rip to lroin~te the wise and efficient use of onr natural atod reilainiahie tnmneral resonts-es, and (4) the study atiil leveloptiieiit if inetboxis for the ilisin sal. control, 111(1 reclamation of iunuiral waste products, 1111(1 tile reclaiiiattoii of mined latd, so as to le~eeo any adverse impact of mineral ext ractioti and it sensing tipon the physic-al environment that uiav re-nit froiii mining or tnineral activities. For tile. piii~rnseof this Act minerals' shall tn-lode all nhineriilspane.alss and to iner,tl fuels including iitt, gas, coal, oil SIll le 111(1 U rani utti It shall se the responsibility of the Secretary of the Interior to i-arrv out this policy svhen exercising IOn authority under such pro- grams as may be out Ilorized h~ law other t bait ti is Act. For t 105 Report to purpose the Secretary of tile Interior shall itoH ode in his annual report Congress. io the Congress a report on the state of the (lOnlest ic initling, mitierals, and mineral reclatnat ion industries. inuludi ig a stilt etilent of the trend in utilization and depletion of these resources, t(agetller with such rec- ommendations for legislative programs as may he necess'irv to implement the policy of tlus Act. Approved December 31, 1970. LfSISLATIVF HISTORY: 5ESOS PIHoRT No. 91-1442 (COen. on Interior and Insular Affairs). SEm'E 8I~RT No. 91-990 (S~iri. on InterOor and tnsular affairs). cStG8~SI StOAt RECORDi Vol. 115 (1969): Sept. 5, oonsidered and passed Senate. Vol. 116 (1970): Sept. 21, oonsAdered and passed House, amended. Oot. 14, Sea. it, Senate oonourred in House oj,mendmenta. 11 PAGENO="0353" 347 FOREWORD Energy and minerals are the lifeblood of our industrial economy. Recently the President reaffirmed his concern about energy in his messages of April 18 and June 29, 1973, and he has also expressed concern about our natural resources and environment in his message of February 15, 1973. The Mining anC Minerals Policy Act of 1970 requires that I make an Annual Report to the Congress on the state of the domestic mining, minerals, and mineral reclamation industries. It is submitted herewith. Development of our domestic resources is not keeping pace with needs. The Executive Summary which follows presents a concise estimate of the current situation, together with recommendations for major actions intended to improve our national mineral posture. GERS C.B. MORTON SECRETARY OF THE INTERIOR iii 37-143 0 - 74 - 23 PAGENO="0354" Minerals And Elements . Exploration Mining Moving Bulk Minerals . Processed Minerals And Energy Mineral Uses Mineral Reclamation Mineral Imports Global Perspective Role of Minerals Energy Petroleum And Natural Gas Coal And Uranium Ferrous Metals Major Nonferrous Metals Plastics 9 11 13 15 17 19 21 23 25 27 29 37 39 41 43 45 47 49 51 53 The Mining, And Energy 55 57 59 61 63 65 67 69 71 73 348 TABLE OF CONTENTS Public Law 91-631 - "The Mining And Minerals Policy Act Of 1970" Foreword Executive Summary, Including Recommendations The State Of The Domestic Mining, Minerals, And Mineral Reclamation Industries Page ii Nonmetallic Construction Materials Fertilizer Materials A Look To The Future Reserves And Resources Major Problems Which Presently Confront Minerals, Metal, Mineral Reclamation, Industries, And The U.S. Government Mineral Balance of Trade Expropriations, Confiscations, Etc. Foreign And Supranational Activities Transportation Disturbing The Earth Financing Needed Expansion Public Land Management Need For Improved Environmental Data Inadequate Information Base V PAGENO="0355" 349 LIST OF FIGURES AND TABLES Figures Page 1 Old Scrap Recycled In The U.S. Is Significant But Improvement is Possible 20 2 Imports Supplied Significant Percentage Of Total U.S. Demand In 1972 22 3 U.S. Production Is Falling Behind In Relation To The Rest Of The World 24 4 The Role Of Minerals In The U.S. Economy . . . 26 5 U.S. Demand For Major Energy Sources 30 6 Consumption Of Energy By Sources (1972). . . . 30 7 Sulfur Emission Regulations Are Forcing Major Changes In Costs And Sources Of Fuels For Electric Power Generation 32 8 U.S. Supplies And Uses Of Petroleum 36 9 U.S. Supplies And Uses Of Natural Gas . . . . 36 10 U.S. Supplies And Uses Of Coal 38 11 U.S. Supplies And Uses Of Uranium (U3O8) . . . 38 12 U.S. Supplies And Uses Of Iron 40 13 U.S. Production Of Raw Steel By Furnance Type 40 14 U.S. Supplies And Uses Of Major Nonferrous Metals 42 15 U.S. Supplies And Uses Of Plastics 44 16 U.S. Supplies And Uses Of Major Nonmetallic Construction Materials 46 17 U.S. Supplies And Uses Of Major Fertilizers . 48 18 Developing Deficits - U.S. Primary Mineral Demand vs. U.S. Primary Mineral Supplies . . 50 19 Mineral Resource Diagram 52 20 U.S. Imports Exceed Exports Of Raw And Processed Minerals 56 21 Minerals Are Major Transportation Users . . . 62 22 Over The Past Decade, Steel, Copper, Chemicals, And Cement Stock Prices Have Lagged The standard & Poor's "500" Index 66 Table 1 Resources Of Selected Mineral Commodities . . . 54 PAGENO="0356" 350 EXECUTIVE SUMMARY, INCLUDING RECOMMENDATIONS Mining and agriculture are the fundamental industries that convert natural resources into useable forms. The output of our mining, minerals, metal, mineral reclamation, and energy industries was valued at more than $150 billion in 1972. Over 4 billion tons--40,000 pounds per person-- of new mineral supplies are needed annually in our economy. Our use of energy is equivalent to 300 persons working around-the-clock for each one of our citizens. As we assess our current position we must keep in mind that our population of 210 million is but 6% of the world's population, and our 3 1/2 million square miles are but 6% of the world's land area. The other 94% of the people on earth also want significantly improved living standards, and worldwide demand for energy and minerals is rising rapidly. Fortunately, our land areas, plus the continental shelves and seabeds appertaining thereto, are one of the largest areas under the sovereign control of any one nation, and they contain vast mineral resources. However, despite our vast natural resources, we find increasing evidence that development of domestic mineral resources is not keeping pace with domestic demand, with consequent unfortunate effects upon the entire economy. For example: * * Domestic exploration in 1972 continued its downward trend. * * Some forms of energy have been in short supply. PAGENO="0357" 351 * * Even with present domestic oil wells producing at full capacity, we imported 29 percent of our petroleum in 1972. * * Domestic petroleum refining capacity is less than adequate to meet current demand and we import refined petroleum products. * * Over 17 million tons of steel were imported in 1972. * * We had a deficit of $6 billion in the U.S. mineral balance of trade in 1972. We are encountering greater difficulty and higher costs in acquiring mineral raw materials in foreign areas and we are also encountering greater difficulty in world markets in selling many manufactured articles. Comparing forecast future U.S. demand trends with U.S. mineral production trends of the past two decades indicates that our annual deficit in the mineral balance of trade could approach as much as $100 billion by the Year 2000. The Mining and Minerals Policy Act of 1970 affirmed that it was in the national interest to foster and encourage private enterprise in the development of economically sound and stable domestic mining, minerals, metal and mineral reclamation industries." 2 PAGENO="0358" 352 Improvement ~f domestic productivity in the mining, minerals, metal, mineral reclamation, and energy industries requires accelerated development of new and improved technology and rapid introduction thereof into all stages including: Exploration Mining and petroleum and natural gas production Processing Use Recovery and Recycling In all of the above appropriate provision must be made for the health and safety of workers and for environmental enhancement through: minimizing air, water, and land pollution, land restoration, and esthetic improvement. To bring all of our national technological resources to bear upon the solution of current major problems, the Government must sponsor industry-government-academia consortia to tackle major problems, sponsor measures that will encourage rapid introduction of new and improved technology into industry, and improved mission-oriented research supported by the Bureau of Mines, the Geological Survey, and the Office of Coal Research. Major problems to tackle include: * * Discovery and assessment of resources presently untouched by our existing mines and wells. * * Development of safe and efficient coal mining systems to significantly increase underground extraction ratios from the present level of about one-half. PAGENO="0359" 353 * * Development of improved petroleum recovery methods to significantly increase extraction ratios above the present level of about one-third. * * Development of underground and surface mining methods to minimize degradation of the land surface, subsidence, and harm to surface and subsurface waters. * * Development of clean solid, liquid, and gaseous fuels from coal, petroleum, and other energy materials. * * Improvement of combustion processes to increase efficiency and to reduce emissions of fumes and particulates. * * Improvement of electricity generation, transmission, and conversion methods. * * Development of new energy sources including geothermal and solar. * * Development of stronger, lighter, corrosion- resistant and temperature-resistant materials. * * Improvement of recycling techniques to conserve natural materials and energy, and to promote environmental enhancement. * * Stimulation of measures to conserve energy and materials in actual or potential short supply. 4 PAGENO="0360" 354 RECOMMENDATIONS 1. To improve the development of domestic resources and to provide more responsive administrative mechanisms, action should be taken by the Congress on Administration recommendations to: a. form a Department of Energy and Natural Resources (H.R. 9090) b. provide organic act for Bureau of Land Management (S. 1041 and H.R. 5441) ~c. modify right-of-way limitations (Part of S. 1041 ~nd H.R. 5441) d. provide for revision of the mineral leasing laws (S. 1040 and H.R. 5442) e. provide for regulation of surface mining activities (S. 923 and H.R. 4863) f. amend the Natural Gas Act (S. 2048 and H.R. 7507) g. facilitate development of deepwater ports (S. 1751 and H.R. 7501) 2. To insure that the varied scientific and technologic resources of the nation are brought to bear upon solving current major minerals and energy problems, ways should be developed to stimulate maximum cooperation among industry, government, and academia. 3. To encourage domestic exploration and to stimulate increased productivity through prompt introduction of new and improved technology, the tax structure should be reviewed to insure a favorable economic climate. (For example: The Treasury Department's "Proposal for Tax Change" dated April 30, 1973, covered exploratory drilling for new domestic sources of oil and gas.) 4. To improve our knowledge of domestic energy and mineral resources, the Department of the Interior should expand its cooperation with industry in investigations of these resources. 5 PAGENO="0361" 355 5. To improve the national information base for assess- ment of energy and minerals problems, the Department of the Interior should expand its information collection, analysis, and dissemination functions, including foreign data as appropriate. 6. To provide protection of domestic industries threatened by unfair trade practices, the Trade Reform Act of 1973 (H.R. 6767) proposed by the Administration should be enacted by the Conoress. 7. To provide reliable transportation at reasonable a for the mining, minerals, metal, mineral reclamation, and energy industries, industry and government must intensify development of coordinated plans for efficient handling of large volumes of low-value materials such as mineral fuels and ores. Deep-water ocean ports for deepdraft ore-oil- grain bulk carriers, and improved domestic rail, barge, and pipeline systems are needed. 8. To provide accurate information on the possible harmful effects of elements and compounds, scientific agencies should give high priority to the determination of the minimum quantities essential for life and the maximum levels that can be safely tolerated by plants, animals, and man, as well as normal backgrounds and details of emission and absorption mechanisms. 9. To aid ± )nserving energy and materials in actual or potential short supply, the Government should promote continuing education in resources conservation. 6 PAGENO="0362" 356 THE STATE OF THE DOMESTIC MINING, MINERALS, AND MINERAL RECLAMATION INDUSTRIES PAGENO="0363" 357 THE LAND AREA OF THE U.S. IS ABOUT 31/2 MILLION SQUARE MILES, 6% OF THE EARTH'S LAND AREA. "NATURAL RESOURCES"- PRIMARY SOURCES OF ALL WEALTH. ROCKS, SOILS, WATER, AND AIR CONTAIN "MINERAL RESOURCES" CENTER OF THE EARTH 8 PAGENO="0364" 358 MINERALS ARE THE MAJOR SOURCE OF THE ~ELEMENTS" ACTINIUM EINSTEINIUM MENDELEVIUM SAMARIUM ALUMINUM ERBIUM MERCURY SCANDIUM AMERICIUM EUROPIUM MOLYBDENUM SELENIUM ANTIMONY FERMIUM NEODYMIUM SILICON ARGON FLUORINE NEON SILVER ARSENIC FRANCIUM NEPTUNIUM SODIUM ASTATINE GADOLINIUM NICKEL STRONTIUM BARIUM GALLIUM NITROGEN SULFUR BERKELIUM GERMANIUM NOBELIUM TANTALUM BERYLLIUM GOLD OSMIUM TECHNETIUM BISMUTH HAFNIUM OXYGEN TELLURIUM BORON HELIUM PALLADIUM TERBIUM BROMINE HOLMIUM PHOSPHORUS THALLIUM CADMIUM HYDROGEN PLATINUM THORIUM CESIUM INDIUM PLUTONIUM THULIUM CALCIUM IODINE POLONIUM TIN CALIFORNIUM IRI DIUM POTASSIUM 1 ITANIUM CARBON IRON PRASEODYMIUM TUNGSTEN CERIUM KRYPTON PROMETHIUM URANIUM CHLORI NE LANTHANUM PROTACTINIUM VANADIUM CHROMIUM LAWRENCIUM RADIUM XENON COBALT LEAD RADON YTTERBIUM COLUMBIUM LITHIUM RHENIUM YTTRIUM COPPER LUTETIUM RHODIUM ZINC CURIUM MAGNESIUM RUBIDIUM ZIRCONIUM DYSPROSIUM MANGANESE RUTHENIUM THESE "ELEMENTS" ARE THE FUNDAMENTAL BUILDING BLOCKS OF ALL LIFE AND ALL MATERIAL THINGS'. THEY OCCUR IN NATURE ALMOST ALWAYS IN CHEMICAL COMBINATIONS OF TWO OR MORE ELEMENTS. IN THE EARTH'S CRUST - THE TOP FEW MILES - OXIDES OF SILICON, ALUMINUM, IRON, AND CALCIUM ARE MOST COMMON, BUT MOST ELEMENTS ARE SO RARE THAT THEIR AVERAGE CONCENTRATION IN THE CRUST CAN BE MEASURED ONLY IN SMALL FRACTIONS OF A PERCENT OR IN PARTS PER MILLION! FOR EXAMPLE: COPPER = 50 PARTS PER MILLION GOLD = 0.004 PARTS PER MILLION CONCENTRATDJ DEPOSITS OF MINERALS MUST BE FOUND BY D 0 0 0 Fig. 17 U.S. SUPPLIES AND USES OF MAJOR FERTILIZERS NITROGEN 15 10 NET EXPORTS USES 20 H FERTILIZERS & IESTIC NITROGEN/ CHEMICALS I FIXATION PLANT~~~ D~~~L] 52 54 56 58 60 62 64 66 68 70 72 1950 CURRENT EST, PHOSPHATE ROCK NET EXPORTS 1950 62 54 56 58 60 62 64 66 68 70 20 n FERTILIZERS & CHEMICALS El 72 1950 CURRENT EST POTASH 15 - NET IMPORTS ERTILIZERS& HEMICALS ~ , .MARKAB~PROcTION C 1950 52 54 56 58 60 62 64 66 66 70 72 1950 CURRENT EST 48 PAGENO="0404" 39S $2.0 BILLION FERTILIZER MATERIALS L 34~50O EMPLOYEES] Figure 17 shows the continued increase over the past two decades of the three major fertilizer ingredients nitrogen, phosphorus, and potash (N-P-K). Our increased agricultural productivity results in significant degree from the intensive application of N-P-K, along with many other trace elements. In 1972, 7,000 people produced $455 million worth of crude fertilizer materials which were processed by 27,500 people into $1.9 billion worth of fertilizers. Both production and consumption of nitrogen (fixed) increased slightly in 1972. Nitrogen is recovered from the atmosphere; therefore, reserves are unlimited. In 1972, the U.S. domestic nitrogen industry became more efficient as numerous small and inefficient plants were closed. Demand for nitrogen as a refrigerant in food processing and preservation increased. The production of phosphate rock and the consumption of phosphates continued to increase in 1972. Larger quantities of phosphates were consumed as a result of the continued increase in the use of high-analysis products, such as triple superphosphate rather than the normal super- phosphates. Export demand also continued strong both for paosphate rock and chemical fertilizers. Domestic reserves of phosphate are large but problems of waste disposal, pollution control, land reclamation, and trans- portation must be solved in order to maintain the domestic industries export markets. Waste phosphate slime disposal is a major problem in Florida. The Department of the Interior is giving high priority to research intended to help solve the phosphate slime disposal problem. Consumption of potash in 1972 increased slightly to 4.9 million short tons compared with 4.8 million in 1971. About 95 percent of the potash consumed in the United States is used in fertilizers. United States dependence on imports continued as imports increased and were larger than domestic production for the second consecutive year. Exports also increased, and as a result net imports were virtually unchanged. The United States reserves of potash are large, but currently only a small quantity of these can be economically mined due to competition from vast high-grade deposits in Canada. 49 PAGENO="0405" 399 Fig. 18 DEVELOPING DEFICITS U.S. PRIMARY MINERAL DEMAND VS. U.S. PRIMARY MINERAL SUPPLIES 0 I 50 96 10 (IN BILLIONS OF 1971 DOLLARS) WITH: 1950 AT 1950 PRICES 1971 AT 1971 PRICES 1985 AT 1985 PRICES 2000 AT 2000 PRICES (DOTTED LINES SHOW DEMAND AND SUPPLY BEYOND 1971 AT 1971 PRICES) DEFICIT DOMESTIC SUPPLY ,~ I, 37-143 0 - 74 - 27 PAGENO="0406" 400 A LOOK TO TEE FUTURE: When future use patterns are forecast, with consideration of technological and other changes, significant increases in demand for energy, metals, and minerals appear inevitable. 1950 - the U.S. used 2 billion tons of new minerals. 1972 - THE U.S. USED 24 BILLION TONS OF NEW MINERALS. 2000 - THE U,S. WILL NEED 11 BILLION TONS OF NEW MINERALS, When domestic mineral production patterns of the past decades are projected into the future, increases are indicated. But the forecast demands increase at a greater rate than the projected domestic supplies, so that, as shown by Fig. 18 THE 1985 DEFICIT WOULD BE $240 BILLION, AND THE 2000 DEFICIT WOULD BE NEARLY $100 BILLION However, the U.S. resource base is sufficiently large for many important materials to justify the hope that domestic production could be increased beyond the projections of Fig. 18 51 PAGENO="0407" INCREASING ECONOMIC VIABILITY OF DEPOSITS 0- C) <- I,,,, CI z-< 0u 0I 0 r~i cn 0 ~C) cn> p~1 I-j. tO t.o C Om ~c) 0'~ m 1< PAGENO="0408" 402 RESERVES AND RESOURCES The mineral resource position of the United States is basically sound, but continually developing mineral tech- nology, successful exploration, and a sound economic climate are needed to convert natural resources to usable reserves. In appraisals of mineral resources, a distinction must be made between the limited category called "Reserves" and the much broader designation of "Resources." "Reserves" are mineral deposits that have been reasonably well identified and that are sufficiently rich in grade to be worked profitably under existing economic conditions. "Re- serves" are a small portion of total "Resources" as shown in the dark upper left area of Fig. 19. Reserves generally constitute only a working inventory. For most commodities sufficient exploratory work is done to establish a 10-year to 20-year reserve. Consequently, data on reserves bears virtually no relationship to total mineral resources in the ground, or to amounts of mineral resources that may ultimately be recovered. Thus, reserve data are important only for the near future. Reserve data on each important mineral are included in Items 6 of the Appendix I. "Resources" include "Reserves," and also "Identified Subeconomic Resources," "Hypothetical Resources," and "Spec- ulative Resources," as shown in the lighter areas of Fig. 19. "Identified Subeconomic Resources" are those that are known, but are too low in grade to be economic now. However, improvements in mineral technology can move them into the reserve category. "Hypothetical Resources" have not yet been discovered, but are geologically predictable in known mineral districts. Increased exploration activity and new earth science theory and methods can move these resources into identified categories. A further category of undiscovered resources - "Speculative Resources" - occurs in other than known mineral districts. The possibility that speculative resources exist in a given region must be judged by broad geologic similarities or by statistical relationships with known mineral districts. The lack of known deposits in such regions thought to have resource potential limits our ability to estimate specific volumes of speculative resources. The area of speculative resources lies to the right of hypothetical resources in Fig. 19. Looking to the future, for the middle and long-term, "Resource" data are vastly more significant than "Reserve" data. The great bulk of undiscovered mineral re- sources from which future supplies will be drawn are the "Hypothetical Resources." The table on the next page is a summary of our current knowledge, and additional details are provided in Appendix II. 53 PAGENO="0409" 403 Table 1. Resources of Selected Mineral Commodities 1' IDENTIFIED REIOURCEI are defieed as inclodln g rene roes and materials other than rese roes whIch are reason ably well knnwe as to lncatinn, entent and grade and ohioh nay be enyloitable in the fotore onder enre favnrabl e econneic cnndlElnns or cith Inyroneneets in tochnologo. 2/ IVPITIETICAL REIOURCII are ondi scocered hot geologically are predictable deposits of materials similar te identified renoorces. 1/ 2/ RRIIIRCE APPRAISAL TERMI tinge - Domestic r0000rcen toE the nate gorn emcee) are greater than ten tines the einincoanticiyated comolotine doeard (MACI) betceeen tie yearn - 1968 and 2555. Very Large - Domestic resoornes are two to tee tines the MACI. Large - Domestic renoorces are appron ieately 75 pernest to twine the MACI. Moderate - Donesti c r0000rcen are opproni- mately 35 percent to 75 percent of the MACI. SMALL - Domestic rencorcen are approei- mately 10 pornent to 3) percent of the MACS. INSIGNIFICANT - Domestic renoorceo are leon than 15 percent of the MACI. Kill - (Known data tnnofficieet)--Sesoorcen not en timated becaooe of innofficient geologic knowledge of aorfane or oobnorf ace areas. Mineral Commodity Identified 1/ Renoorcen - HypothetIcal,, gesoorceot Mineral 550(5/API Identified 1/ Seecorcen - l'npothetical2, Sencorcen - Ainminom Very Large 101 Memory SMALL 101 Antinony Asbestos garite Berylliom Boron Bromine Calctoe Chloride (grine) SMALL SMALL Very Large Very Large Very Large loge Very large SMALL IISIGNIPICAIiT Sery Large loge loge loge loge Mica Sheet Scrap & Flahe Molybdenoe latoral Gao Nickel Nitrogen Feat INISGNIFICA71T loge loge Moderate Large loge loge Sery Large loge loge Large lOt loge 101 Chlorine Chromiom Clay Coal Constroc tton Stone: Cmoshed Dimension Copper Diatomite loge INSIGNIFICANT Large loge Large Large Large loge loge INSiGNIFICANT Very Large loge III CII Large 105 Petroleon Lilotdn Phosphate Platinom Croop Potash Rare Earths Salt Sand iiranel Giber Large Very Large loderote Very Large loge loge large Moderate Large loge Large loge 101 loge 101 Large Feldspar Fboorime Gold Graphite Gypsom Iodine Iron Kyanite Lead Limestone & Dolomite Lithiom Magnnenlom Manganese loge SMALL Large Very Large loge Very Large Very Large loge Large Large loge loge Large loge SMALL 101 KIT loge loge loge loge Moderate 101 loge loge 101 Iodine Carbonate & Solfate Strontion Solfor Talc Thoriom Tin Titanion Tongnten Vraniom Vanadkom ZeoLiten Zinc Zirconlom loge loge loge Very Lorge Very Large INSIGNIFICANT Very Large Moderate Large Very Large loge Very Large Large loge loge loge loge CII INIIGNIPSCINT Very Large Moderate Large KIT loge Very Large 101 54 PAGENO="0410" 404 MAJOR PROBLEMS WHICH PRESENTLY CONFRONT THE MINING, MINERALS, METAL, MINERAL RECLAMATION, AND ENERGY INDUSTRIES AND THE U.S. GOVERNMENT 55 PAGENO="0411" 405 Fig. 20 U.S. IMPORTS EXCEED EXPORTS OF RAW AND PROCESSED MINERALS COPPER~X~XX*XX~SO.3_BILLI BAUXITE x~x~~$o2 BILLI ~LUMINA~.X»=XXXXX$O.2 BILLI ALUMINUM . X~Xxso.3 BILLI IRON ORE $04 BILLS ~ IMPORTS ($14 BILLION) IN 1972 ESTIMATED U.S. DEFICiT i~Fi T11E BALANCE OF TRADE FOR MINERA'S ~ND PROCESSED MATERIALS~OF MINERAL ORIGIN WAS $6 BILLION EXPORTS ($8 BILLION) ~T~LL*~HE~ MINERAL RAW MATERIALS~ AND PROCESSED MATERIAL O~R~O~}N ~ILLION ~ ~LIO~ ~ BILLIO IRON AND STEEL ~jLION\ ~ ~PETROLEUM~*~ $2.0 BILL~9~ CRUDE `~`IL~~ X~*2~X2~\~ $2.3 BILLIONS ~(L'O(R'M~'E'R~L~> /RAW MATERIALS AND PROCESSED~ ~MATERIALS OF MINERAL ORIGIN/ ~ 7C HEM IC AL 5/> //////z//////// // >~`$2.7 BILLION/ PLASTICS /~>>"SO.7 BILLION cOPPER///////,so3BiL~LiqN IRON AND STEEL SCRAP SO 3 BILLION IRON AND STEEL $1.0 BILLION PETROLEUM PRODUCTS $05 BILLION 56 PAGENO="0412" 406 PROBLEM: Mineral imports have an unfavorable impact upon the U.S. balance of trade and upon the U.S. balance of payments. Fig. 20 details the $6 billion deficit in the 1972 mineral balance of trade. (Item 9 in each mineral profile in Appendix I gives details.) It is difficult to estimate the balance of payments impact, as distinct from the balance of trade, because an adequate statistical base does not c~xist. For example: profits from foreign operations are difficult to determine. Nevertheless, an unfavorable balance of trade is a factor which may tend toward an unfavorable balance of payments. SOLUTION: A combination of: orderly development of domestic mineral resources, vigorous promotion of exports of minerals and mineral-based products, and, in certain cases, temporary limitation of excessive imports may help to ameliorate the balance of trade problem. 57 PAGENO="0413" 407 EXPROPRIATIONS, CONFISCATIONS, AND FORCED MODIFICATIONS OF AGREEMENTS HAVE SEVERED THE FLOW TO U.S. OF SOME FOREIGN MATERIALS PRODUCED BY U.S. FIRMS OPERATING ABROAD, AND HAVE MADE OTHER MATERIALS MORE COSTLY. Oil TalkS Set to ~egifl On Persian Nati0~ Bid Por Part O~vnets~~P~ Nations oc~ delC ~ V ~ Negot;a~~ `Takeover~ I~i'u iv~ it \ViIl ~\Iine `I'i nt~tv;t ( ~1 ~ )t'F I ~ Foini~rIv I kid i)V ~ 58 PAGENO="0414" 408 PROBLEM: Expropriations, confiscations, and forced modifications of agreements have severely modified the flow to the United States of some foreign mineral materials produced by U.S. firms operating abroad, and have made other materials more costly. Foreign nations naturally wish to receive the maximum possible benefits from their raw materials. Foreign nations wish to create additional employment possibilities and to earn the "value added by manufacturing" wherever possible. (Examples: selling steel instead of iron ore, aluminum instead of bauxite, and refined petroleum instead of crude oil.) Underdeveloped nations and nations hoping to industrialize are becoming increasingly conscious that mineral resources may be more valuable in the future. Therefore, some are limiting exports. For political reasons sometimes impossible to evaluate on an economic basis, some foreign countries express their displeasure with the policies of others by cutting off the flow of materials. SOLUTION: Orderly development of domestic mineral resources may reduce dependence upon potentially unreliable foreign materials. 59 PAGENO="0415" 409 MAJOR MINERAL EXPORTING BLOCS: OPEC = ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES: VENEZUELA, INDONESIA, LIBYA, ALGERIA, NIGERIA, SAUDI ARABIA, KUWAIT, OUATAR, ABU DHABI, IRAN, IRAQ. CIPEC = INTERGOVERNMENTAL COUNCIL OF COPPER EXPORTING COUNTRIES: CHILE, PERU, ZAMBIA, ZAIRE. ITC = INTERNATIONAL TIN COUNCIL: PRODUCERS: MALAYSIA, BOLIVIA, INDONESIA, NIGERIA, ZAIRE, AUSTRALIA. CONSUMERS: JAPAN, UNITED KINGDOM, FRANCE, WEST GERMANY, U.S.S.R., ITALY, NETHERLANDS, INDIA, CANADA, POLAND, CZECHOSLOVAKIA, BELGIUM, SPAIN, YUGOSLAVIA, HUNGARY, DENMARK, BULGARIA. AUSTRIA, REPUBLIC S. KOREA. MAJOR SUPRA-NATIONAL INDUSTRIAL BLOCS: COMMON FRANCE, WEST GERMANY. ITALY, BELGIUM, MARK ET = NETHERLANDS, LUXEMBOURG, UNITED KINGDOM. DENMARK, IRELAND. COMECON = COUNCIL FOR MUTUAL ECONOMIC ASSISTANCE: BULGARIA, CZECHOSLOVAKIA, EAST GERMANY, HUNGARY, ROMANIA, POLAND, U.S.S.R., MONGOLIA. 60 PAGENO="0416" 410 PROBLEM: U.S. industry is encountering greater competition from foreign nations and supranational groups in developing new foreign mineral supplies and in assuring the long-term flow of minerals to the United States. U.S. firms operate in foreign nations on a private basis, whereas many other foreign nations have mechanisms for government assistance as exemplified by the Ministry of International Trade and Industry of Japan, the Bureau de Recherches Geologiques et Minieres of France, and the State Trading Organizations of the U.S.S.R. Appendix VIII provides additional details. Nations with centrally planned economies, such as those in the COMECON, often make barter deals and country- to-country trade agreements, both with each other and with outside nations. Thus, normal competition by individual U.S. firms is more difficult or impossible. Moreover, as listed on the opposite page, several supranational groups are involved with minerals and have agreements which impede normal competition by U.S. firms. SOLUTION: Orderly development of domestic mineral resources may reduce dependence upon potentially unreliable foreign materials. Also, new mechanisms to permit U.S. firms to operate more effectively in the foreign field should be explored. 61 PAGENO="0417" 411 Fig. 21 MINERALS ARE MAJOR TRANSPORTATION USERS MODERNIZATION OF THE U.S. TRANSPORTATION NET IS ESSENTIAL TO IMPROVEMENT OF OUR MINERAL POSTURE MINERALS AND PROCESSED MATERIALS OF MINERAL ORIGIN ACCOUNT FOR: 60% OF ALL U.S. WATERBORNE EXPORTS 85% OF ALL DOMESTIC WATERBORNE COMMERCE ~~ff~JIL.Lf 1.1 ~: oo c°:~ cx* c~ 60% OF ALL DOMESTIC RAIL SHIPMENTS 90% OF ALL U.S. WATERBORNE IMPORTS 100% OF ALL DOMESTIC PIPELINE MOVEMENTS 62 PAGENO="0418" 412 PROBLEM: Development of the U.S. transportation net is not keeping pace with demand, thus seriously affecting the energy and minerals industries. Fig.21 shows the dependence of the U.S. mineral industry upon transportation. The 4 billion tons of minerals mined annually must be moved to processing plants and to ultimate consumers. Needed are improved: Deepwater ports for large oil-ore-grain bulk carriers; Railroad roadbeds and specialized railroad cars; Pipeline systems; Inland waterways; and Storage facilities. Most transportation is currently under Government regulation, and much is subsidized. SOLUTION: To provide reliable transportation at reasonable costs for the mining, minerals, metal, mineral reclamation, and energy industries, industry and government must intensify development of coordinated plans for efficient handling of large volumes of low-value materials such as mineral fuels and ores. Deep-water ocean ports for deepdraft ore-oil-grain bulk carriers, and improved domestic rail, barge, and pipeline systems are needed. 63 PAGENO="0419" 413 RECLAMATION OF MINED LAND DAMAGE FROM MINE SUBSIDENCE * _ BACKFILLING TO PREVENT MINE SUBSIDENCE SURFACE MINING ABANDONED QUARRY RECLAIMED GRAVEL PIT 64 PAGENO="0420" 414 PROBLEM: Removal of billions of tons of minerals annually from the earth contributes to a variety of disturbances. Surface mining - accounting for nearly 90 percent of total mineral production - normally requires disturbance of top soil, removal of overlying strata, and creation of spoil banks. In areas of moderate to heavy rainfall disturbed land is more easily percolated by water, resulting in ground- water and surface-water contamination. Underground caving in deep mines may eventually reach to the surface and cause subsidence. Withdrawal of fluids such as oil and water can also cause subsidence. Restored mined lands can have better contours and may be more valuable for agricultural, recreational, or building purposes than the original virgin land. SOLUTION: The Administration recently proposed legislation, 5. 923 and H.R. 4863, to provide for cooperation between the Federal Government and the States with respect to environmental regulations for mining operations, and for other purposes. In addition, the Government is sponsoring several pilot projects intended to restore mined lands for recreational purposes, and it has a number of other active projects related to mine subsidence, mine fires, culm, etc., as described in Appendix VI. 65 PAGENO="0421" 415 140- A ~` ~ ~ ALUMINUM 70 Fig. 22 OVER THE PAST DECADE STEEL, COPPER, CHEMICALS, AND CEMENT STOCK PRICES HAVE LAGGED THE STANDARD & POOR'S "500" INDEX (NUMBERS ARE INDEXES BASED ON 1941 - 43 = 10) 140- 140- 70- `UI ~,OO 70 - 140 - 70- 140 - 70 - M~S .1. I 1950 1960 140 - 70 II .1. 197072 1950 1960 66 `us. .1~~lII~4 EM ENT 197072 37-143 0 - 74 - 28 PAGENO="0422" 416 PROBLEM: The U.S. mining, minerals, metal, and mineral reclamation industries are encountering increasing difficulty in financing needed expansion of capacity and the introduction of new or improved technology. In our free enterprise society the stock market is a major barometer of the economic soundness and stability of industries. Fig. 22 shows that major segments of the minerals industry do not appear to have kept pace with the economy, and that other fields appear to offer more opportunities for profits. Over the past decade, debt-equity ratios have increased, liquidity has dropped, and expenditures for new plant and equipment in some major segments of the minerals industry have not kept pace with demand for minerals and mineral products. Major segments of the domestic mineral industries are encountering increasing difficulty in financing new developments through stock sales, while, at the same time, financing by borrowing has become more costly. SOLUTION: Productivity must be increased by developing new and improved technology, and the rapid int~oduction thereof into industrial practice must be facilitated. 67 PAGENO="0423" 417 THE U.S. HAS ONLY FRAGMENTARY KNOWLEDGE OF ITS MINERAL RESOURCES, INCLUDING THOSE ON THE PUBLIC LANDS AND OUTER CONTINENTAL SHELVES. CONTINENTAL SHELF - * PUBI.IC LANDS OUTER SHELF CONTINENTAL SHELF 68 PAGENO="0424" 418 PROBLEM: Management of the resources of the public lands, including the continental shelves, must be improved. Despite extensive responsibilities, the Congress has never clearly defined the mission of the Bureau of Land Management or the Bureau's authority to accomplish its mission. Unlike the National Park Service and the National Forest Service, the mission and authority of the Bureau of Land Management must be gleaned from some 3,000 land laws which have accumulated over some 170 years. This piecemeal collection of laws is sometimes conflicting and is grossly inadequate. The Bureau does not have essential administra- tive authority enjoyed by other Federal agencies such as a working capital fund, authority to enforc its rules and regulations and authority to contract with State and local law enforcement agencies for protection of lands under its jurisdiction. Pressure to reform the Mining Law of 1872 has been growing for many years, both within the mining industry as well as the public at large. Increasing conflicts between mineral activity and other uses of the land, concern for abuses of the mining law to obtain vacation home-sites, concern for environmental protection and the frustration and uncertainty to mineral developers of a complex system of overlapping and archaic location requirements, have contributed to this pressure. SOLUTION: On February 27, 1973, the Department submitted two bills to improve the management of the public lands: (1) A bill to provide for the management, protection, development and sale of the natural resource lands, and (2) A bill to reform the mineral leasing laws. 69 PAGENO="0425" 419 IN AIR, FOR PLANTS, LAND, AND WATER ANIMALS, AND MAN ACTINIUM ALUMINUM AMERICIUM ANTIMONY ARGON ARSENIC ASTATINE BARIUM BERKELIUM BERYLLIUM BISMUTH BORON BROMINE CA DM1 UM CESIUM CALCIUM CALIFORNIUM CARBON CERIUM CHLORINE CHROMIUM COBALT COLUMBIUM COPPER CURIUM DYSPROSIUM EINSTEINIUM ERBIUM EUROPIUM FERMIUM FLUORINE FRANCIUM GADOLINIUM GALLIUM GERMANIUM GOLD HAFNIUM HELIUM HOLMIUM HYDROGEN INDIUM IODINE IRIDIUM IRON KRYPTON LANTHANUM LAWRENCIUM LEAD LITHIUM LUTETIUM MAGNESIUM MANGANESE MENDELEVIUM MERCURY MOLYBDENUM NEODYMIUM NEON NEPTUNIUM NICKEL NITROGEN NOBELIUM OSMIUM OXYGEN PALLADIUM PHOSPHORUS PLATINUM PLUTONIUM POLONIUM POTASSIUM PRASEODYMIUM PROMETHIUM PROTACTINIUM RADIUM RADON RHENIUM RHODIUM RUBIDIUM RUTHENIUM SAMARIUM SCANDIUM SELENIUM SI LICON SILVER SODIUM STRONTIUM SULFUR TANTALUM TECHNETIUM TELLURIUM TERBIUM THALLIUM THORIUM THULIUM TIN ITMNIUM TUNGSTEN URANIUM VANAOIUM XE NON YTTERBIUM YTTRIUM ZINC ZIRCONIUM 70 PAGENO="0426" 420 PROBLEM: The factual basis for the formulation and implementation of environmental regulations must be improved, so that man and nature are properly protected with minimum dislocation of important economic activities. There are more than 100 "elements." However, science has fragmentary knowledge about only 25 of them insofar as: minimum quantities needed by plants, animals, and man for proper growth and to sustain life, and maximum quantities that can be tolerated by plants, animals,and man under different circumstances. While there are more than 100 elements, there are also literally millions of known compounds containing these elements. Also the background content of air, land, and water must be known, as must patterns of dispersal and assimilation of elements and compounds. Environmental regulations are being promulgated, often based on only fragmentary evidence, that can have the effect of significantly altering economic activities. The mining, mineral, metal, mineral reclamation, and energy industries, being major emitters of fumes and pollutants, are thus particularly subject to economic disruption. SOLUTION: To provide accurate information on the possible harmful effects of elements and compounds, scientific agencies should give high priority to the determination of the minimum quantities essential for life and the maximum levels that can be safely tolerated by plants, animals, and man, as well as normal backgrounds and details of emission and absorption mechanisms. 71 PAGENO="0427" 421 ~ the Minerals Yearbookab~o~s 72 PAGENO="0428" 422 PROBLEM: The U.S. Government information base for the conduct of its mineral responsibilities is grossly inadequate. To an ever accelerating degree our government must act promptly on questions of national and international concern involving mineral resources, reserves, production, use, and technology. Government policies and programs are no better than the data upon which they are based. In a free society government does not have detailed knowledge of many aspects of research, mineral reserves in private hands, investment plans, process details, etc. Information on foreign mineral operations is even more fragmentary. Currently information is scattered among a number of agencies: Interior, Commerce, Treasury, Securities and Exchange Commission, Federal Power Commission, Atomic Energy Commission, etc. SOLUTION: Government organization must be improved and streamlined, and cooperative measures must be developed so that information available in the public and private sectors can be brought to bear properly upon questions of concern to all. 73 PAGENO="0429" 423 Chairman PRoxMuiE. Xow~ iii your prepared statement you indi- cate, "For domestic oil and gas reserves the Bureau relies on the an- nual studies of the American Petroleum Institute (API) and Ameri- can Gas Association (AGA)." Mr. RIGG. That is right. Chairman PROXMIRE. That is the only source of your information is that right? Mr. RIGG. That is right; those are the industry sources. We also use sources from regional associations and State agencies and from the Internal Revenue Service and various other sources, and then the key to our figures is the capability of our l)eople in the Bureau of Mines to analyze all of these figures and to come up with this best estimate. Chairman PROXMIRE. The data itself does come from the ir 1u~ ry; you do not have any independent way really of gathering except as the industry voluntarily submits it? Mr. Ri~. That is right. Chairman PRox~rIRE. The extent itself in error, and we had an in- dication from Senator Nelson earlier of at least one submission was in error by 1.000 percent. There is no way that you can check that? Mr. RIGG. Well. historically our commodities specialists in the Bu- reau of Mines have been amazingly accurate. Chairman PRox3ITnE. How do you know? Mr. RIGG. Because in the final analysis of the figures of preceding years that actually show you what the production and consumption are. they are accurate when you finally check them out to the last decimal point. Chairman PROXMIRE. You mean right on consumption and produc- tion. I do not know how you can tell on reserves. Mr. RIGG. On reserves, what is the time schedule? WTe normally use in our Bureau 20 years as the farthest projected in the future for supply. WTe have a new definition of resources and reserves that Geological Survey and Bureau of Mines have recently completed. I have a copy of it with me. And in this one under measured reserves the statement is said to be accurate within limits which are stated, and no such limit judged to l)e different from a computed tonnage or grade by more than 20 pem~cent. That is. accuracy within which we can comfortably operate. Chairman PROXMIRE. Mr. Sliiskin. in your prepared statement you continuously stress the difficulty that your agency has in getting vol- untary compliance from the industry in providing data. You say in your prepared statement. "In addition, some compa- nies were reluctant to report because they had reservations about the use of these data to compute average unit prices." Further on down you say. ~`BLS options in this situation were limited because of the needs of the sponsoring agency, the attitude of the companies~" and then you go on to sa. "The BLS tried to re- duce the reporting burden and to provide more time for companies to adjust their accounting systems." indicating that you tried to co- operate but it was difficult to get it from them. Then you say. most alarming of all. "At the present time only about half of the companies selected for the probability sample of producers have agreed to furnish the national data required." PAGENO="0430" 424 You are one of the most experienced men we ever had in Govern- ment. in your position. You have worked with industry, all kinds of industry. How do you compare the cooperation of the petroleum in- diistrv with the rest of American industry; is it about average or not as good or better? Mr. ~HISKIx. Well. I really cannot answer that, Senator Prox- mire. Chairman PnoxMInE. The indications are from your prepared statement it is a whale of a lot worse, but I do not want to be un- fair. Mr. SHTsKTN. Let me say my experience in the BLS is limited. However. I have had a great deal of experience at the Bureau of Census. I spent ~4 years at the Bureau ~f the Census. Now. my impression is that at th ~e :eau of the Census the re- porting was much better than here in tIe oil industry. The Bureau of Cemzus has both mandatory and voluntary reports. The manda- tory reports are the censuses and the annual surveys; the voluntary reports are the monthly and quarterly surveys. Mv general impres- sion is that reporting to the Census Bureau is far better than report- ing to the BLS in this particular in(lustrv. However, if you would like to have au answer to your question about reporting prices to the BLS. the oil industry compared to others, I would like to have Mrs. Norwood answer that. Chairman PIiOXMIRE. Mrs. Norwood. Mrs. Nonwoon. I do not think that that is a very easy question to answer. \Ve do in the wholesale price index have a great deal of co- operation from a large number of companies in many areas. We also have several areas in \vhieh we have had difficulty in developing co- operative arrangements. I think that we have been impressed with the difficulties in the petroleum area over the past several years as we have been trying to develop this. Chairman PROxMIRE. ~\Vell. when you say impressed with diffi- culty. is there some technological reason for this, some technical rea- son. or simply they feel they just do not have to give the Govern- ment this information Mrs. NoRwooD. I think there have been a series of difficulties. One difficulty has involved the kind of data that has been required. We started off with an extremely ambitious program. We attempted to get not only data for the country as a whole but for several regions. We attempted not only to get data on price changes but for average prices as well audi I think that the companies found that this was quite a burden in reporting. Chairman PnOxMIRE. Quite a burden in reporting? Will you give us some notion of this? The statement here is that about half, only about half of the companies selected for the probable sample, have agreed to furnish the data required. These are not little companies; this is not a Mom andi Pop filling station operation; these are some of the biggest corporations in the world with enormous resources. So I would think that the burden of reporting the statistics which they have wouldi not be very great. Mrs. NonwooD. I think the problem is that. our sample has to cover both large and small companies. PAGENO="0431" 425 Chairman PRox~rIRE. What is that? Mrs. NoRwooD. The sample has to cover the entire universe in our probability selection so we have both small and large companies. Some companies have better computerized facilities, better record- keeping than others. Some of them were more willing to cooperate and provide the data to the Bureau than others. Mr. Srnsiix. May I add simply that the fact is that we have only half of the returns we need. The second fact is that most of these re- turns. nearly all of them. in fact. are coming in with a 2-rnonth lag. Now, as Commissioner of Labor Statistics, and an experienced stat- istician, and I do not feel I can publish statistics with that kind of coverage and with that kind of timing. Chairman PRox~rmE. That is a good response. Let me ask you. You indicated that this may be partly because some of the compa- nies are not equipped to give you a response and they do not have the computers. Now, do you find that large companies are cooperative and small companies are. not cooperative. or does it not break down by size? You are shaking your head. Mr. SrnsKIN. I think you ought to allow the companies to answer that question. Chairman PROXMIRE. You are the ones that are gathering the in- formation. Mr. SHISKIN. The fact is we have half of the returns we need. Most of them are coming in very late. Chairman PRox~[IRE. Now, it would seem to this Senator that the answer is to mandate by law that this response be required. Under the Census, much of which you handled under the Census this was required by law, is it not true? Mr. Siiisi~ix. May I amplify that? I said a few minutes ago that at the Census Bureau they are all required by law. The monthl and quarterly surveys with very few exceptions- Chairman PRox~rInE. I missed that. Mr. SrnsKIx. What. I said. I want to clarify the facts before I re- spond to the question but I can assure you I will respond very fully. The facts are at the Bureau of the Census. the census and the an- nual surveys are required by law, but. with very few exceptions, the monthly and quarterly surveys are not required by law. At the Bu- reau of Labor Statistics only one survey is required by law, that is the annual survey of occupational safety and health, all the monthly and quarterly surveys are voluntary. That is the fact. Now, what. should be done, first of all, I think that. we should view mandatory reporting as a general statistical policy issue rather than as an issue concerned with the oil industry alone. Today we have problems with the oil industry, tomorrow it may be another area and 2 months from now it may be still another. So I think we have to view this in a general sense. Also we have got to take a look at the household surveys. For ex- ample, w-e get. our unemployment surve from our household survey. In the case of household surveys you have the issue of privacy. In the case of the business surve s you have the burden of reporting. PAGENO="0432" 426 that is a major issue. and the issue of confidentiality. This is kind of backgrOund. I would like to add one other point, to the background. There is no uniform view among Federal statisticians, to the best of my knowledge. Chairman PIiOXMUiE. You can certainly distinguish between households and corporations `? ~ ~ v~. Chairman Pnoxi~rIIiE. Privacy and so on. Mr. SIIISIiTN. Iii some of the household surveys I consider report- ing ver essential, and I will come to my general proposition in a miimte. There is not a single view among Federal statisticians. I went to a meeting in one of our re~ional offices just last week at this very time and I asked them this (juestion and most of them favored voluntary reporting of current surveys. Let me make it clear, however. I do not. favor volunta rv reporting. Chairman PlxMInE. You favor mandatory ? Mr. Sirisi~ix. T favor mandatory. I want. to amplify that also. While I respect the ~reat impoitance of ~rivacy and I recognize the burden on respondents. I feel that certain surveys are indispensable to sound policymaking, and in these the public interest outweighs the disadvantages to individuals or private firms. Hence, provided that every effort is made to protect ~)1ivacy and minimize the report- ing burden. I would designate perhaps 10 monthly or quarterly sur- vevs as crucial to policy and subject them to mandatory reportmg. Let me say I do not think it would be enough for Congress and any administration to designate the surveys as mandatory. They also should require the respondent to submit their reports within a spe- cific time limit. The reports we ire getting from petroleum companies are coming in too late to be very useful. I think that is the other element which needs to be added. Chairman Pr~ox~ririr. how late are they coming? Mr. SITISKIX. ~ ~ of the reports that we have gotten today come with a ~-montli tirnelag. Chairman PnoxMInE. ~-month timela~ or more? Mrs. ~\onwoon. Yes. - Mis. STOTZ. Generally. 2 months. ~\Ii'. S1IISKTx. Let me summarize. I think I would recommend that both the administrati(~n and the Congress view this question of man- datoiv reporting as a general statistical p011ev issue not limited to the oil industry alone and that my personal recommendation is that we ought to designate about 10 or 12 surveys as essential to the pub- lic interest and make reporting mandatory. Chairman PrioxMInE. Xs I understand. questionnaires were sent to some 200 firms but more than 00 percent of the action is in 15 to 20 firms. Who is liol din~ out Mrs. Siiisi~ix. We do not reveal information about individual corn panics. Chairman PRox~rTnE. I am not asking you to tell me whether it is Exxon or Mobil. I am asking von who is holding out in terms of big PAGENO="0433" 427 or small? You have some. big and some small companies; is that right? Mr. STIIsT~Tx. Tt imist be some bigs because we only have 50 per- cent of the returns. Chairman Pnoxi~1IRE. Well, I think that. certainly is an eloquent argument for mandating reporting by law. Originally the Bureau of Labor Statistics set a standard of 92 percent for publication, then reduced it to TO and then 62 percent. Why not 50 percent Mr. SIIISKIN. Why. I am not. familiar with the figures you cite. I know that. one letter was sent before niv day at BL~. which used a. iuimbei of T5 1)eIcent. If you have a probability sample. which we do have now, and von do not get complete reporting. the missing re- ports have to be distributed on a probah3ihity basis. Now. if 50 percent of reporting would be adequate, if it were dis- tributed properly. w-ith a figure for the industry having a higher sampling error, so would 25. But we have 1)icl~edl a figure which would give us a report that would make the month-to-month cln~nges in the index accurate so when you get much below that. you do not have accurate enough information. Let me also emphasize in an industry like the petioleiim industry. which is dominated by a small number of big companies, it only takes one or two big companies to l)ut von in the position that you cannot issue a report. Chairman PImOXMTRE. W~ell. it would seem that von should report what you have and indicate what the difficulties are and how it does represent a smaller sample that von would like and, therefore, it should be accepted with considerable care. Mr. Siijsi~ix. Senator- Chairman P1~ox~1ImmE. At least then the public is given some no- tion. Mr. Siiisicix. Senator. I have written a great many articles on this subject and what I have learned on the basis of many studies is that very often when statistical agencies publish data of the kind you are describing. the statistical "noise denotes-there is no real information in them. I am not about to issue that kind of data under my aegis as Commissioner of Labor Statistics. (~liaiiniaii Pim xMlImF:. If it is that bad it seenis to iiH' we sinhl)lv have to mandate by law- that you get. this information. This lack of cooperation cannot be accepted. There has been so much serious talk about nationalizing the petro1e~im industry, at least putting it under public utility regulation. I oppose both of those. I think they would be. serious mistakes. but I think the least we should do is require they give mis the data so we know what the story is and make sensi- ble Federal policies. Mr. SiuisKix. I would agree if von also extend that to other in- dustries who report to the BLS. Chairman PROXMIImE. Well. it is not just a matter of the petroleum industry being in time public eve now. it is also a matter of there being. as you indicated, less cool)eratiOll from theni than from the other industries. Mr. SluisKix. I wouldi always add you have to start. somewhere and this may be a good place to start. PAGENO="0434" 428 [The following information was subsequently supplied for the icc- orci by Mi'. Shiskin in the context of the above colloquy and interro- gation by Chairman Proxmire:] MANDATORY REPORTING To begin with. I believe that mandatory reporting should be considered as a Federal statistical policy issue rather than as a requirement for the oil indus- try alone. Further, we should review all types of reporting, including house- hold reports, where the principal issue is privacy, and business reports, where the issues are the burden of reporting and the confidentiality of individual company data. Finally, extensive hearings with data users, producers, and re- spondents should take place iii advance of legislation. At present the Censuses and many annual surveys are mandatory, but al- most all monthly and quarterly surveys are voluntary. At the BLS, only the annual report on occupational safety and health is mandatory. All BLS monthly and quarterly surveys are voluntary. Professional opinion is divided on the advisability of mandatory reporting. Some experienced survey statisticians believe that voluntary reporting tends to yield more comprehensive data. more promptly. In a recent visit to a BLS regional office. I (liscussed this question with a group of field representatives and. w-ith only one exception, they all argued for voluntary reporting. On the other hand, the Census Bureau, which has had a great deal of experience with both mandatory and voluntary reporting, had made efforts in the past to ob- tain legislation providing for mandatory reporting of monthly and quarterly surveys. My own view- is that mandatory reporting for essential monthly and quarterly surveys. My own view- is that mandatory reporting for essential monthly and quarterly surveys is necessary. While I respect the great impor- tance of privacy and recognizes the burden on respondents, I feel that certain surveys are indispensable to sound policymaking. Here the public interest out- weighs the disadvantages to individuals or business firms. Hence, provided that every effort is made to protect privacy and minimizing the reporting bur- den. I would designate perhaps 10 monthly or quarterly surveys as crucial to policy and subject to mandatory reporting. Among these, I would include the principal BLS surveys of wholesale and consumer prices, wages, and employ- ment and unemployment. It w-ould not be enough for Congress and the Administration to designate the surveys as mandatory. They should also require respondents to sul)mit their reports within a specific time limit. Further, they should establish clear and tight law-s w-hich protect the confidentiality of individual reports. As had been the tradition in the F.S. Federal statistical services, all the proposed questions in mandatory as well as voluntary reports should be thor- oughly discussed with public groups and respondents before they are included on a report form. Chairman PrioxMlnr. I am pleased to Ieai-n of the improved BLS program foi' ~)rovi(1ing i-etaii gas information. I oni wish you could i'eport similar progress with respect to the wholesale Price index for petioleuni. I have respect for BLS but I find it difficult to believe that au all-out effort has been macic in this particular case. How many people do you have working on the petroleum p1-ice index and (10 they work on it full time oi' part time? Mi-. Snisicix. I asked that question last week. It is not an easy question to answer l)ecause the 13LS is organized by functions. That is. we have people on a program plan. we have people on operations, we have people in the data ~)I'ocessing center, and we have people 111 the field. ~o I could not get an answer on Friday. but T will get one very shortly. [The following information was subsequently supplied for the record :] PAGENO="0435" 429 During the month of January iii order to improve the existing Wholesale Price Index for 1)etroleuln products the Bureau had 2 full time an(I 19 employ- ees working part time on the project. Chairman Proxmire. You mentioned inadequate funds. Wrhat ef- fort has BLS niade to u~et adclit ional funds ? ITav(' von been turned down by the Congress or by the Office of Management and Budget? Mi. Siiisiiix. WelL you know. very recently I was in the Office of Management and Budget and mabe I shouki Speak to that is that OK? Chairman PR0xMIRE. In the Office of Management and Budget? Mr. Siiisi~ix. From that vantage point. Chairman Pnox~rTnE. All right. Mr. STiIsEJx. Because I am miot there any more. When I came to the Office of Management and Budget in 1969. and first iii conversa- tions with Director Mayo and latem with Director Shultz. it was clear that the malor statistical surveys were developed at a time when the were not being used for the same kind of policy purposes that they are being used today. I l)elieve it was in the 1970 budget there is a statement piiiited that says that a great overhaul in the Federal statistical system is re(lilired to l)ring the various surveys up to time needs of the day. Now. significant efforts have been macic in the last 4 years to achieve that goal. but not all, we are not all the way there. I think that is pa1ti(111~11ly ture of some of our data on wages. on CPT. and on wholesale prices. Chairman PROxMTIIE. What is the money increase? Mr. Siiisi~ix. The money increase? Over what period? Chairman Pi~ox~riiu~. Since 1969. for statistical programs. Mr. Siiisicix. All statistical ? I may have that here. Yes. I (10. Chairman PR0XMTRE. All BLS or all- Mr. S1ITsKIX. Let me cite a few figures. The total increase for sta- tistics from 1966 to 1970 was ~4 peiient. an(l BLS got ~1 percent. In the period1 1970 to 1974 tIme total was 60.6 percent and BLS got ~4 l)erCe~~t~ Now, let me amplify that a little further. Incidentally, this infor- mation appears in the article which I wrote when I was at 0MB and it is published in the October 1071 issue of the "statistical Re- porter.' Now. however. I reduce these figures to constant prices and those figures show in the period from 1966 to 1970. whereas the funds for all statistics rose about 19 peicent. the BLS fund decline. 7.4 per- cent. In the more recent period. 1970 to 1974. whereas constant ciol- lays total rose by ~(i) percent. time ilLS rose ~4 peicem~t. Thus the BLS budget in real dollars declined in the early period and rose less in the latei perio~1. I would also add one final comment on that. and that is not only a question of fund but it is a question of autlloriZe(l positions and there may be problems there too. Chairman Pm~oxMIRr. Problems with whom? Mr. S1IIsKIX. Well, it is a problem of getting the employment ceiling to do the work. Chairman PR0xMIIIE. The ceiling is coming from the Congress or coming form this- Mr. Smsi~ix. It conies frommi the adniiiiistratiun. PAGENO="0436" 430 Chairnian PROXMTRE. OK. Xow. Mr. Hodges. you have been aware of the efforts of the Bureau of Labor Statistics to improve the wholesale price index for petroleum 1)roducts. and you have listened to my colloquy with Mr. Sluskin. Is it your own Opinion that the (lata requested by the BL~ \vould impose unreasonable reporting bur(lens on the oil coin panics? Do the oil companies have any reason to resist disclosure of this information, is there something they are afraid to have uncovered? Mr. HODGES. T (10 not know what the position of the individual cOflhl)anies would he. Mr. (`Ilairinali. I understand that there are real reporting problems because of definitions. I suspect this is part of the delay, that it takes a long time for these figures to get sorted out an(l repolte(I to BLS in the form in which it has been requested. If I could make a suggestioii or recommendation, I think BLS and the companies will need to sit down and find out what is feasible. Chairman PRoxi~[1ur. Do they not recognize the urgency? In the last wholesale price report there was an enormous increase in the wholesale price of Petroleum. I asked I-Toward Shuman. my adminis- trative assistant. I was appalled by the increase, to check with the Bureau of Labor statistics to find out~ where they got their informa- tion. and they said they got if from Platt's Oilgram. It was such a big increase. The impression may be exaggerated. Mr. I-IOI)GES. Those are based on spot prices. Chairman PROXMIRE. The public may get the notion the price in- crease is far greater than it is and we may have a policy actioii on the part of the Congress that is unfair. Why would it not be to your interest, the Petroleum Institute, to provide this information just as accurately and fully as 1)Ossible ? Mr. IIoic,~s. If I can separate myself from the industry, it is my personal opinion it is to their interest to cooperate with the BLS to get the best 1)rice data 1)ertaining to the petroleum industry that can be provided. Chairman PROx~rIriE. We have this record attested to by one of the most respected men we have in Government that there has been Pool cooperation from the industry. W~hv ? Mr. HODGES. Well, I think I have tried to indicate some of the whys and I think the companies themselves will have to answer as to what their individual problems are. Chairman PROXMIRE. Other industries report on time and some of the people in the petroleum industry do report and half of them do not and some of the bigs do not. It is hard to understand how one could have a technical excuse that would not apply to the others. Mr. HonnEs. Well, what little I know about this. there are reasons and there are technical reasons. Different companies keep their books in different ways. they have different areas of setup and that sort of thing: but again. I cannot test if v to the details of this, Mr. Chair- man. Chairman PROXMITIE. T would like to ask each of ~ou gentlemen to comment on the probleni that Senator Nelson spoke about so well this morning. about the great number of agencies that gather mnfor- mation. I think lie said (4 in this field. What need do you see for designation of a single agency to serve as the agency to bring to- PAGENO="0437" 431 gether and index existing energy-related information and gather such additional information as is required ? The Nelson bill would establish a new bureau within the Depart- ment of Commerce to accomplish this i Li1pose~ and would you com- ment on that idea? First, Mr. Rigg. Mr. RmG. Mr. Chairman. on Senator Nelson's bill. S. 2782. we have not estal)lished a position vet within the Department. I would say though. that one thing that I hope (Toes not become paramount in the discussions on this is the accumulation of the data versus the capability of our commodity specialists to analyze the information and do something with it. Therefore. that is the key thing in every- thing we are talking about here. The figures that are compiled by somebody that (Toes not understand them, whether it is in industry or Govermnent. if there is no interpretation, we are iii worse trouble thaii we are now. \Ve have to have l)eOI)le that are capable of ana- lvzing these figures and giving to the Congress and to the aciminis- tration- Chairman Pnox~rIRE. I agree with that because I understand what the bill would do is simply provide a 1 ibrarv of information on which von would have three categories. l)ubhic. confidential, and se- cret. and this would mean that there would be one place for those who want to use the information could go to get it. at least it would be gathered in one place where it could l)e secured b the public or b the Government agencies. Mr. Ri(;;. I think that our data-gathering capability, and we have submitted to you copies of the forms we use. are lust as good as any- where in the Government, and T think that the Government infoi'- iuation derived from them is meaningful. Whether we should set up a whole new bureau or not 1 do not know. I find that every time you set up a new bureau you have a timehag (h1'ol) of G months or 1 year to get it started. Possibly it would be bet ter to strengthen existing bureaus, both the Bureau of Labor Statistics and Geological Survey and Bureau of Mines. Chairman PiuoxMnn. No reason why it could not be put in the Department of the Tntei'ior. for that matter. in your office. Mr. RmG. That is right. Chairman PRoxMnil:. It is just a matter of finding a place to put it. Mr. RTGG. That is right. Mi'. Sjrjsuix. Senator Proxmire. you may recall in earlier testi- mony we talked about the reorganization plan for Federal statistical agencies. Now, that plan was issue(l by Director George Shultz in the middle of 1971 and it called for the concentration of statistical activities, which are now spread all through the Government, in six oi' eight major statistical centers. Now, two of those centers were the Bureau of Labor Statistics and the Department of Commerce. Social and Economic Statistics in the Department of Commerce. When I was still at 0MB. the reorganization had gone very well. All the statistical activities, or nearly all. all the illiportant ones at any rate. in the Labor Departnient. are now in the BL~. Now since I left I have learned that similar moves have been made in IIIEW where consolidation is also badly needed. Now, the next step in this pro- 37-143 0 - 74 - 29 PAGENO="0438" 432 gram would ic to take these very small agencies and fold them into the ma]or centers. Now. as 1)art of this pi gram. the program authority would all stay where it is. No one has inten(led to move the ~)rOgra1ll author- itv. One of the principal reasons. without going on too long about this, is the tecliiiical know-how exists in the big centers. \Ve have a very fine unit doav in BLS on probai)ilitv sampling and the statisti- cal methodology. ~\Ve have a field organization that can collect data. The same is true of the Census. So that was the basic idea and I think was a good plan niul we ought to stay with it. I have not read Senator Nelson's bill. I would have to read it before I can comment. But it generally seems like a move in the right direct since it~ would he moving the statistical work into the Department of Commerce where one of the big centers will exist and he would l)e leaving the price work in the BLS where the center for that exists. It seems that is a move in the right direction. Mr. I-1 1)(;1:s. I have not analyzed the bill. However, I understand the American Petroleum Institute will testify on February ~S or (3 before Senator Jackson. Chairman Pnox~riuv. T just have a couple more questions. I apolo- gize for detaining you so long. This is such a vital area. Mr. Rigg. one of the things that has concerned this committee very. very nuicli is the failure of the Government to determine in- forniation about its own holdings. Does the Government know as much as private corporations devel- oping the Outer Continental Shelf in terms of information about re- sources and reserves, or would von agree with William Simon who told this committee last week. "That the Government did not know as much as private industry and that the Government's knowledge about its own offshore rights is very slight." Mr. hOG. I will agree with Mr. Simon on that. WTe do not even know how much land the Fnited States owns. %Ve still have not sur- vevecl the whole I nited States and we cam~ot honestly tell you the total acreage of land in the public domain, onshore an(l offshore. Chairman Pi~ox~rirr. Well. I know there is quite a difference be- tween that abysmal ignorance about these fabulously iml)Oi'tant and rich reserves. that we have and that relate to the kind of pol1cy we should follow. For instance, what is the 1~'ese11t approach an(T procedure used by the Triterior Department in requiring. presenting. afl(l assessing geo- logical and geophysical data oii the extent and quality of offshore resources and reserves in undeveloped areas such as the Atlantic coast, and in undeveloped provinces of producing regions and pro- ducing provinces ? Could you give me a brief reply at this time and a more detailed written response to be submitted for the record Mr. RIOG. I will have Mr. McKelvev get a reply in detail. [The following information was subsequently supplied for the record:] RESPONSE OF Ho~. V. E. MCKELVEY. DIRECTOR, F.S. GEoLoGIcAL SURVEY Three phases of information development characterize the Government role in resource assessment on the OCS. Phase I involves broad areal studies to de- fine favorable regions for exploration and to develop the basic data for ade- PAGENO="0439" 433 quate resource evaluations. Most of the data for Phase I is gathered by var- ious geophysical techniques-usually seismic or gravity. The Geological Survey either collects the data itself or contracts for its acquisitions depending on the area, timing, and quality of data required. Data gathered exclusively for the survey is open to the public ; data gathered in concert with industry is re- stricted. Phase I studies also include the literature evaluation of available on- shore and offshore geology as well as the evaluation of new- geological data. The objective of thest studies is to determine the quality and quantity of po- tential oil hearing rock, its distribution, and its coiifiguratioii in space. What- ever the source of the data, its evaluatioii or interpretation is performed by Survey scientists and, in the initial stage of the leasing process, is included in the prelimiinary geological resource evaluation prepared for BLM prior to the Call for Nominations. Phase II involves a detailed study of the targeted basin for purposes of tract selection and further refinement of resource estimates. Geophysical data is still the primary information source in 1)0th developed and undeveloped provinces and is l)rinlarily acquired from industry sources by purchase agree- ment. The (lata are proprietary as are any interpretations therefrom; this means that the Governnieiit has access to the (lata for evaluation purposes but cannot publish the basis for their evaluation. In developed provinces well data is also extensively used. The evaluation and interpretations are carried out by Survey scientists and recommendations are made to BLM as to what tracts to offer for lease. Phase III studies comprise detailed tract evaluation through potential re- serve assessment and the identification and evaluation of economic factors. The data used are proprietary industry data acquired by purchase and through regulation. In Phase III all Survey data are used. The interpretations are made by Survey scientists and are directed tow-ard determining a fair market value to guide BLM leasing decisions. The present regulations and procedures used by the G~logical Survey in ac- quiring, assessing and presenting geological and geophysical data on the extent and quality of offshore resources and reserves in both undeveloped areas and producing provinces for purposes of resource evaluation for public land man- agement are as follows: (1) Existing regulations require industry to supply data on OCS exploration and development. On core drilling programs in wildcat areas we require sJ)lits of the cores, copies of pertinent reports, an(l the supporting geophysical rec- ords. We also have had observers al)oard the exploration vessels. Regulation do not require submittal of geophysical data acquired under non-exclusive per- mit, but proposed regulations requiring such submittals are l)resently being considered w-ithin the I)epartment of Interior. (2) All pertinent data from exploratory and development drilling done on Federal OCS leases are submitted to us in accordance with existing regula- tions. These data include preliminary seismic interpretations of prospective pay and hazardous zones prior to (Irilhing, w-ehl engineering, platform data, dow-nhole electrical logs and all other survyes, monthly production data, well test data, paleontologic data and/or a split of the well cuttings, if necessary, and complete geological and engineering studies of each field necessary to sup- Port Maximum Efficient Recovery (letermillations, comaniinghuig. and unitiza- tion. In short, w-e have access to all pertinent data from lease operations, and have many times more (lata thami any individual operator. This information is supplemented by material w-hiicii we have internally generated since Federal ~urisdictioii over time mineral resources of time Federal OCS w-as established. (3) To supplement these data modern sophuisticated geophysical data cover- ing the areas to be evaluated are acquired. Because normal surface geologic mapping is impossible on submerged lands and the absence of w-ell control in undeveloped areas prevents adequate subsurface geologic mapping, geophiysi- cal data are tIme primary sources of imiformation fc)r the evaluation of these areas. These data (10 miot prove the presemise of oil and gas but are necessary to define the sedimentary section and locate geologic structures favorable for the occurrence of oil or gas in commercial quantitites. Since 1969, w-hmen budg- etary support for acquisition of geophysical data was obtained for resource evaluation programs, tIme Geological Survey has purchased necessary data from seismic service companies. A determinatiomi is made of the amount and pro- PAGENO="0440" 434 pose~l location of the data as well as the technical specifications required, and these and other technical parameters are given to contract specialists within Geological Survey to a(lverrise the Government's intent to acquire the data and to conduct the necessary contractual procedures in acquiring it. This assures that all companies with the capability to provide the data needed have an op- portunity to contract their services. When the data are received in the speci- fled format, they are reviewed by Geologi('al Survey geophysicists for conform- ance with technical specifications. Vsiiig these ac(luisitioli liriceduies. we control the type and quality of data used and obtain the data at the lowest possible cost. For lease sale tract selec- tion lurpse~ Survey geophysicists make a preliminary interpretation of the data and prepare a travel time-structure-coiitour map to determine the most prospective structures. These (lata and maps are used, at this stage, for both environmental impact assessments and statements. Following the final tract selectioiis, which are the "localized" areas to be evaluated for potential re- sources. detailed geophysical interpretations and maps are prepared. (4 Fsing the (letailedi geophysical maps and reports, geologists redraw the maps on depth ( instead of travel time) and, w-ith the aid of stratigraphers and paleont 1 gists. prepare maps showing reservoir thicknesses. This requires knowledge of all related geology from trends. stratigraphy, and Paleontology. (5) Petroleum engineers use the maps and accompanying data to determine the acre-feet of potential hydrocarbon bearing reservoir. Many factors concern- ing reservoir iiiecliaiiisias. and characteristics are determined from the nearest exphi ratory aiid producing wells a,1(l ci mparable J)rodUcing fields. Hydrocarbon recovery factors are estimated from these data and potential resources are es- timated. These estimates are, for the purpose of lease sales, considered to be "estimated recoverable reserves" and ti'eated accordingly to determine pre-sale values. Using many factors such as exploratory well costs, operating costs, price of products. rate of return on invested capital, etc., the present worth value of each tract is determined by a discounted cash flow calculation. A risk or probability of success factor is applied and the resulting figure is adjusted for dry hole costs. (6) For the December 1972, and later OCS sales. Geological Survey has used an additional technique to obtain an estimation of tract value, which serves as a check on the previously determined pre-sale value. This new- technique is called the Range of Values method and has commercial, industrial, and scien- tific applications where there is great uncertainty. The final outcome or result of a series of interrelated factors, or events each of w-hich is unknown or Un- certain, is predicted by a random selection of values for each parameter, based on the laws of probability. The Range of Values computer program developed by USGS determines a value of each ()CS tract by the discounted cash flow- method, but instead of considerin~ just the ions! reasonable estimate of each significant parameter, the program considers oil reasoii;ihle estimates. As an example, USGAS scientists may agree that the niost reasonable estimate of the thickness of an oil-bearing sand is 100 feet. Tlìey may also agree that the sand may very well be only 20 feet thick, but that it might be as much as 200 feet thick. The computer pro- gram selects one number between 20 and 200. Other critical parameters ,such as permeability of the sand, cost of drilling, etc., are handled in a similar manner, and a value is computed for the tract. For each tract the process is repeated 500 times and 500 different values are obtained. Thus, for each tract a range of values is obtained. The menu or average of the 500 values is what statisticians call the "expected" value. w-hich is an estimate of the resource value. Data obtained from our resource evaluation programs are presented to the Bureau of Lan(l Management for use in (1) preparing lease sale schedules, (2) environmental analyses. (3 tract selections for sales and (4) evaluation of bid acceptance or rejection. Evaluation data are also used in programs involv- ing management and supervision of operations on leased OCS lands. The Survey has compiled the most complete well log file of the outer conti- niental shelf in existence with more than 25,000 hogs of the more than 9,500 producible oil and gas completions and 5,000 nonproducing holes. with their corresponding tests reports. conipletiomi reports, production records, directional surveys. etc. Othmem' data include alniost 2.000 detailed paleontology reports, several hundred palecntologic surnma ries. and paleohathymetric maps covering PAGENO="0441" 435 all determinable paleoecological zones l)ased on correlations, hiostratigraphic markers, and assemblages indicateing a plane or time line, more than 140,000 line miles of CDI' seismic coverage and thousands of line miles of sea gravity. magnetics, sparker and high resolution geophysics, computerized sand/shale ratio studies, computerized reservoir stu(lies. etc. The total budget for our OCS resource evaluation prograni was about 7.0 million dollars in fiscal year 1974. This supprted a staff of about 100 people, a 2.5 million dollar geophysical data acquisition program and computer pro- gramming time. Offices involved iii resource evaluation functions on OCS lands are located in Metairie, Louisiana Washington, D. C. ; Menlo Park and Los Angeles, California Wood 1-lole. Massachusetts ; Corpus Christi. Texas ; and Anchorage. Alaska. These offices are staffed with geologists, geophysicists. pa- leontologists and engineers. Ancillary coniputer expertise is provided through our System Analysis and Development Section iii Denver, Colorado. Adniimiis- (ration of the program and economic analysis is provided through our Yational Center headquarters in Reston, Vi I'ginia. Mr. hOG. I would like to have him a(l(lress himself to this situa- tion because lie is probably tite Nation's greatest expert on this prob- lent. Mi'. M'IvELVEV. ~enatoi'. if T understand the question. von are asking about reserves in ~)rodlleing legions and also in vet unex- plore(l regions. With I'eSJ)ect to ~)1o(lucing legions. we (10 not require presently the companies to fui'nisii information oii reserves and we do not have the capacity to calculate accurately proved reserves ourselves. WTe are beginning to develol) that capacity on the Outer Continental Shelf. Chairman Pw)x MfliE. Is it not appalling we (10 not have the capa- bility of (letermining what we have. in view of tite great importance of these resources? Mi'. Mi'KELvEY. Yes. sii'. T fully agree with that. I have been con- cel'ne(l about it myself for some time. Tt is not a matter of the capa- 1)ihity. we have the competence iii the sense of competence. but we simply (10 not have the (al)acitv an(l funds and manpower. Chaii'nian PRox~IhRE. 1-Tave tile funds been requested ? Mr. MCKELvI:v. Well- Chairman PiloxI~IiuE. At any level Mi'. ~\ICkELVEV. We have been requesting authorization for expan- sion in both the area of tile Outer Continental Shelf management and assessment, and genei'allv the increase that we have come to Congress with ill the last several years have beeii substantial in both these areas and have been fully fiutded. Chairman Pllox~rInE. They have been fully funded but apparently the requests have not been adequate. is that right Mr. MCTvEL\TY. have not been ailequtate to develop tile capacity I am i'eferring to foi' the estimation of ciude reserves. Now, with respect to unexplore(l regions. Of course. no one can see in the ground and 110 one knows for certain until there is (Trilling whether oi' not oil is J)l'esent. W'e have atteml)te(l ourselves to estimate what I might call poten- tial reserves, how much oil could exist, even though it has not yet been discovered. WTe do this on the basis of various procedures: for example, esti- mating the volume of sediment that might l)e present in a given PAGENO="0442" 436 area. and then by analogy with areas in which exploration has been undertaken, how niucli oil might be present in that volume of sedi- ment. These estimates are really very crude and we are attempting to improve the methods by which they can be made. We do attempt such estimates for unexplored regions. Chairman PROXMTRE. Maybe you can enlighten us on what. effect the increase in the pci' barrel price of crude oil from $2.25 to $5.25 has on reserves ? I am not asking for any kiwi of a rough estimate, I am just asking for what kind of increase would be within the ball- I)ark-100 percent. 50 percent Mr. MCKELVEY. I would doubt very much that it would be 100 l)eicelit. but- Chairman PROXMTRE. Tt would be less than 100 perceiit? Mr. McKrr~vrv. I would think so. This is with respect to crude oil. But the point is a very signifi- cant one and I might. to give sonic perspective, say that presently on the average we recover only about 31 perceift or some of the oil that is actually in place in the reservoir. That means over history, I be- I ieve- Chairman PnOXMIRE. And you recover only 31 percent because at the price we had up until the beginning of last year, that was all that was economically feasible. Obviously if the pi'i~ had been higher, we would have recovered more is that right ? Mr. McKELvl:v. It is both price and technology. Chairman PraxMTRE. I understand. Technology is something that has increased enormously hut has not technology been increasing in the last few months as price has ? You said less than 100 percent; would von say more than 50 percent Mi. MCKELVEV. No-let me go through some arithmetic. I think that the total of past production and present proved reserves-per- haps the APT representative can check my memory on this-is about 140 l)illion barrels. Now, if two-thirds of the oil that is actually present. in the reser- voirs is till in the ground. that means that still in place and not pre- viously recoverable woul(l be about l~() billion barrels. Suppose that through a combination of price and the technological improvement that price incentive might have. suppose we were able to just in- crease that, just increase our recovery by 1 percent, that. would be ~ billion barrels. If we are able to do it by 10 percent. that would be 2~ billion barrels. Twenty-eight billion barrels certainly would be more than 50 pei'ceiit of preseiit proved reserves. I can only speculate-T am not a petroleum engineer, and this is not in my area-1 could only speculate as to what the effect of price would be actually in increasing the availability through secondary and tertiary recovery acceleration. but I am rather confident that it would. It would take some time for any significant increase to come from this direction. certainly a perioti of several months, and it might be a perio(l of several years. But if prices were to go to the levels that- Chairman PnoxMniE. S7? PAGENO="0443" 437 Mr. I~ICKELVEY. SI. $10. something like that. I would think there would be a significant effect in this area. I might point out also if prices went to ~ or 510 a barrel it would seem to me at least, and again this is iiot my area of conipet- ence. but it would seem to me there would be little question that that \V0Ul(l niake available oil from shale on an economic. basis, not in the form of crude oil. but in the form of hydrocarbons that can be made into petroleum products. here we are looking at. a tremendous po- tent ial. Chairman Pnox~IIRE. W~elT. thank you very much. This is most helpful. I would like to ask Mr. T~igg when and under what conditions are private companies require(l to submit exploratory production data to the Government regar(ling underdevelol)ment regions. Mr. RTGG. They are not re(tlIire(l to give us this information. WTe buy a lot of information from geo~)h1vsical service organizations. Chairman Pnox~rnu~. So they are not required to submit that kind of data to the Government Mr. RIGG. No, sir. Chairman PRoxMnn:. Is it correct the Interior Department has under consideration a system which would require private companies and mdi viduals conducting geo~)hvsical and geological exploration in the Outer Continental Shelf to submit all raw data to the Gov- ernment as a condition for obtaining exploration J)ermitS Mr. I~I(;G. Yes. that is right. Chairman P1~ox~rIR1:. You (10 not know what disposition the Gov- ernment will make of that reconiineiidatioii. hlo\vevel Mr. RIGG. That is right, it is still under discussion. Chairman PROxMTRE. Is it true that such proposals have been con- si(lered by the Government for several years and that you. Mr. Rigg, have Personally opposed this idea Mr. RIOG. Not that I know of. Chairman PRoxMnn:. You have no objection to it Mr. IIIGG. Well. I just want to know what the information is we are going to get and T want to know what u~ ilization it is going to be nia(le to. I l)el ieve your 1)rOh)IenI there. Mr. (. 1 i rman. is whether you are going to want to make this information opeii to the public. Chairman PRox~rTR1:. Why iiot make it open to the public the 1)ublic owns it. Mr. 11mG. Then who will (10 the work Chairman PHox~ITRE. The public is part of the two contractors, the public owns the land on tlìe Outer Continental Shelf it is nego- I kiting with the companies : the comj)anies know, get the informa- tion : whi should the lessor of the land not know what he, is leasing. what lie is getting for it Mr. 11m;. Who will (10 the work out there if tlìev have to make it public ? The private sector does it. Chairman PnoxMlnI:. Why shouldn't the private sector (10 it if they can make money Mr. 11mG. They will wait for the next fellow to (10 it. I would not go out there and (10 any informational activity as a private person if I knew someone else was going to (10 it and it would have to be PAGENO="0444" 438 made availal)le to anyone that wants it. I think that a lot of this ac- tivity would come to a complete stop. Chairman Pricx~rrnv. Wait a minute. there is no reason why the Government should not have it in the first instance and I would agree maybe it is a matter of time before it is macic available to the 1)111)1 ~C. But why shouldut the Government have it? And at the pres- ent tinie the Government does not have that information. Mr. Rim;. We have all the information available to us on land that we have leased out. On lands that are not leased on the Outer Continental shelf- Chairman Pnox~run:. You only give the information after you lease it: you (Tout give it before von lease it: is that right? Mr. Rjcu;. That is on leased areas : that is right. Chairman Piiox~riiw. W~hv shouldn't you have au advance so you know what von are leasing, so von know whether you are making good bargains. What do von have Mr. Rn;;. W~e have a lot of information. I will ask Mr. McKelvev to give von some figures. Chairman Piiox~riiir. You just told us they are not required to provide the information to the Government before the lease. Mr. ~\Ic'Kvr.vrv. Mr. Chairman- Chairman PRoXMTI~F. If the Government wants it they have to buy it. Mr. MCKELVEY. We buy the geophysical data under present regu- lations. As von pointed out earlier, under consideration in the Dc- partineut is a change that would require mandatory submittal. Chairman Proxi~ruiii:. Do you favor that Mr. MCKrI.vEY. Yes. I do. ci inc PnoxMIm:. I-las the Interior Department ever conducted 41 v at the cost incurred in dollars. manpower. and time for a ~n1Ct eNploratorv system sufficient to bring the Government's ioiecsr1iin~ of resources and reserves in the Outer Continental Si~i f a; host up to the level of private industry? If such a study its act been performe(l. I would like to request one be cione by your De~ cirtment and would like to have it submitted to this committee witliin ~ weeks. ~ Riac;. Yes. sir. Chairman PROXMTIiE. Can von do that Mr. MCKELVEY. Let's go back and take a look at what we have. Chairman PROXMIRE. All right, fine. do that and then tell us what would have to go into such a study. Mr. MCKELVEY. Yes. Chairman PRox~riRE. All right, sir. [The fall owin information was subsequently supplied for the 1 `eec rt 1 :1 REsPo~csc or T-T0N. V. E. MCKELVEY. DIRECTOR, U.S. GEOLOGICAL SL'RVEY Prior to lease, industry collects geophysical data on OCS lands under per- mits. Industry is presently not required to submit these data to the Federal Government as a condition of issuance of the permit. Under consideration in the Department of Interior is a change that would require mandatory submit- PAGENO="0445" 439 tal of pre-lease geophysical data. An alternative to acquisition of geophysical data from industry, either through purchase, or mandatory submittal of data, would be to provide for a Government exploratory system that would inde- pendently acquire and process geophysical data to the extent necessary to l)ring the Government to a position equivalent to that of industry. Studies have been made with regard to the feasibility of acquiring geophysical data through use of various alternatives in the past. In 1968, the U. S. Geological Survey initiated a program of geophysical data acquisition to effectively support resource evaluation functions on unleased acreage of the Outer Continental Shelf (OSC). At that time it was necessary to make a determination as to how the geophysical data needed could most ef- ficiently be acquired. We concluded that an in-house system of utilizing geo- physical survey ships; common depth point (CDP) seismic data collection, computer processing, etc., would lag behind industry in overall quality because of staffing and funding problems. In addition, it was considered too early to attempt to obtain the grid control needed for detailed geophysical interpreta- tions required for resource evaluation in conjunctioii with research surveys. We ascertained at that time that the resource evaluation mission would be ex- pedited by acquiring the best process geophysical data available through con- tract. When a legal opinion allowed that the Government could participate in group seismic surveys as a late participant. data became available at costs 1/20th of those normally required to conduct a survey on an exclusive basis. An alternative to acquiring data from geophysical contracting companies is fo establish an independent government exploration system. The cost of estab- lishing such a system would require massive increases in both funding arid manpower. A recent preliminary analysis prepared by industry representatives of the cost of geophysical surveys and their complete interpretation and pub- lishing on an average five by five mile grid covering the entire OCS and sup- plemented by one hundred deep stratigraphic tests show such a program would cost on the order of two billion dollars. They assumed a complete and highest quality program. In the past several months the Survey has compiled its own estimates of the necessary monies, manpower, and time to evaluate the entire OCS. It is not possible to say whether or not these proposed funding levels and efforts would give Government "an understanding of resources and reserves in the OCS at least up to the level of private industry" because industry is in no sense mono- lithic in its OCS understanding. The estimates were made, however, with a mind to developing the necessary non-proprietary data to 1) permit an orderly development of the OCS, 2) determine a fair market value for potential leases, and 3) proved data necessary for adequate environmental assessment. The at- tachied table itemizes our initial estimation of costs fo an adequate Govern- ment evaluation of the OCS. These estimates w-ere prepared without benefit of detailed cost. studies. Such a detailed cost appraisal and assessment of neces- sary additional for the entire OCS is underway and will he completed by March 15. The recommended expenditure level would give government a thor- ough understanding of the OCS and permit it to more effectively perform its functions in evaluation, tract selection. amid lease management. TABLE 1.-COST ESTIMATES FOR OCS RESOURCE EVALUATION IDollar amounts in thousands] 1975 1976 1977 1978 1979 Phase I (area selection) Personnel Phase II (tract selection) Personnel Phase Ill (tract evaluation) Personnel Total Total personnel $43, 000 125 $58, 169 173 $7, 728 167 $47, 200 125 $59, 200 215 $9, 400 245 $40, 200 125 $59, 200 215 $9, 400 245 $40, 200 125 $59, 200 215 $9, 400 245 $33, 200 125 $59, 200 215 $9, 400 245 $111,897 465 $115,800 585 $108,800 585 $108,800 585 $101,800 585 PAGENO="0446" 440 Five-year breakdown of major expenditnres Phase I: 1 Exclusive seismic reflection (200,000 mi at S350 per mile) $70, 000 Exclusive seismic refraction (50 traverses at S200,000 each) 10, 000 Exclusive aeromagnetics and gravity (4.4,000 mi at $12 per mile) 5,000 Stratigraphic tests (about 20) 100, 000 Environmental studies 16, 800 Total 186,800 Phase 11:2 Exclusive seismic reflection (150,000 ml at $500 per mile) 75, 000 Stratigraphic tests (about 20) 100, 000 Environmental studies 50,000 Industr seismic reflection contracts (500,000 mi at $30 per mile)~ 15, 000 Phase III: Industry seismic reflection contracts (500,000 mi at $30 per mile) 15, 000 In(1ucle~ OCS evaluation out to 4.500 1111 water depth 20-50 ml spacing of data. lu(ludes ()CS evaluation only on shelf and upper slope 4-5 ml spacing of data. NoTu.~All data purchased or generated will he used for all 3 phases of the program. The total seismic data hank will include more than 140.000 line mile sof reflection data already loirehased. The effect if mandatory submitted of geophysical data acquired uncer umophysical exploration permits has not been fully assessed. significant variables in expenditures are possible depending on final decision as to necessary level of Govern- bent 11 miderstanding. Chairman Pnox~riiir. In all these areas I would a(lvise you to strike while the iron is hot. It is never hotter than it is now and it lflhl.V cool oft considerably in the next year or two. Now is the time to move in and get the kind of information that will provide for an in- formed public and a far better equipped negotiating government. To what extent does the Interior Department have exploratory data on 1ublicly owned coal sufficient to judge tile amount. of re- sources and reserves in place : the quality of tile reserves, including sulfur content. ash content. and Btu value, and whether there is suf- ficient quantity of public-owned coal to warrant subjecting them to competitive leasing? Mr. Rico. On tile first. one, we released in 1971 an information circular 5531 from the Bureau of Mines. on stripable reserves of coal in the T.nited States and that contains stripable reserves data by State. coimtv. seam. and sulfur content. In early 1974 we will release another which is availability of bituminous and subbituminous coal :111(1 anthracite for underground milling ill the United States. Both of these are the most up-to-date and informative data we have. But, Senator. I would say that when you ask whether the data is accurate or not, it would clepelld on who wants to use it. whether these tons of coal and quality and content of the coal are identified accurately enough for specific mining operations in specific areas is a matter of conj ecture. Chairman PROXMIRE. Let me ask you this: Is it correct that much of the Government coal and mineral rights are preSelltly leased on a noncompetitive basis. and isn't it also true that prospecting groups often sell the rights they obtain from the Government Oil a noncom- petitive basis to brokers who often sit on the holdings for specula- tive 1)il11)OseS Mr. Rico. That is what happened in the past. Tn December 197~. the Secretary canceled all unacte,d upon pros- pecting permits and announced at that time that leasing would be PAGENO="0447" 441 done on a competive basis for coal, based also on the need to keep current operations going, to close environmental scrutiny of what was going on in the area, and the need regionally and nationally for the coal in the area, but the only sale we have had since then has been oii a competitive basis. Chairman PR0XMIRE. W~ell, then, perhaps I know the answer to the next question. Let me ask it an way. Is it true there are more coal reserves presently under lease than are or can be developed under pl'eseilt projections, that most of the deposits simply are being sat. on for private speculative purposes and are not being developed, awl that if we continue to sell coal under ie(leral land we will be just putting more in the hands of the pi'ivate speculators? Mr. RIGG. I don't think so. Our figures indicate to a great degree that we have. insufficient coal leased to meet the demands that coal will have to have in the next 10 or 15 years. Chairmaii Pl~ox~nRE. The question is. How much coal that is being sold from goveriiment land is being developed now ? Do You have fig- ures on that? Mr. RIGG. We have annual figures on the amount. Chairman P1~ox~rIRE. What do they show? Mr. RIGG. Coal is being produced off the Federal lands. I thought I had a~ Chairman PROXMIRE. I am talking about the percentage of land, not the amount, the percent. Mr. RIGG. The percentage of land? Chairman Pnox~rini~. The percentage of the land that has been sold that is actually under development. and the pei'ceiit that is held for speculative purposes. Mr. RTGG. I cannot break it clown whether it is being held for speculative p~ii'poses or whether it is being held for coal gasification plants or committed to powerplants already, but not in production can I give the figures. The total amount under lease acreage, which is also the amount of the land that is under production- Chairman PRox~rIRE. Would you deny that about. 10 percent of the pi'esent coal leases are being produced currently and the rest. 90 j)ercent. are held for speculation? Mr. RIGG. I would. Chairman PnoxMIr~. `Well, how would you correct that then? Mr. 11mG. `Well, I would because of the figures of the coal that I know is dedicated. I had a report made up. Chairman PRox~rIn1:. Can I ask Mr. McKelvey to comment? Mr. MCKELVFX. I believe, sir, the percentage is large. I do not know what it- Chairman PmuoxMuiu:. W~hich percentage is large Mr. MCKELvEY. Not being developed. But I do not have it on the tip of my tongue. Chairman PiuoxMIRE. Give us those figui'es for the record. [The following information was subsequently sul)plied for the record :1 As of June 30, 1973, there were 630 coal leases on Federal lands involving 778.440 acres. During FY 73, coal w'as produced from 54 leaseholds einhracing 68,400 acres. Thus the percentage of coal leases currently in production is about 10%. however, coal has been produced in the past from 176, or 33% of the 530 existing leases. PAGENO="0448" 442 FEDERAL COAL LEASEHOLDS WITH CURRENT OR PAST PRODUCTION, BY YEAR OF ISSUANCE AND STATE Number of Number of Percent of leases issued leases having leases with and still produc- praduc- is effect tion tion Year issued: 1920-29 24 24 100 1930-39 28 26 93 1940-49 38 1950-59 86 41 48 1960-64 125 29 23 1965-71 228 18 8 Total 530 176 33 State: Alabama 1 1 100 Alaska 4 4 100 California 1 Colorado 112 40 36 Montana 17 6 35 North Dakota 20 11 55 New Meoico 30 14 47 Ohio 1 1 100 Oklahoma 53 24 45 Oregon i 33 Washington 2 1 50 Wyoming 91 20 22 Utah 195 53 27 Total 530 176 33 Note: Cumulative coal production, value and royalty, 1920-73: Produrtion-293,500,000 tons; value-$1,160,000,000: royalty-$35,500,000. MI'. l~TG(;. Mi'. Chairman. the F~G~ estimates the fiscal year 1973 l)roclTlctiOn of coal from Federal landS wifl total about 14.0 million totis. and they pl'oje('t withm the next decade a total annual produc- tion of 10~ million tons of Federal land coal, of which ~4 million tons 01' ~0 pei'ceiit will be pro(luce(l fi'om surface mines. Chairman PROXMIRE. That comes to 20 perceiit of national produc- tio~i. i~Ir. Rroo. Fourteen million tons is about 2 percent. while 105 mil- lion tons is about 20 pel'cel1t of the current national production. Chairman PrioxMIIuE. T am informed that a massive new coal leas- ing program is being developed by the Interior Department under gi'eat pressure from private industry and Federal energy officials and a decision is scheduled for ,Tune. Fii'st. I want to know if it is true, and if true. can you explain to me why we need a massive new- program to sell coal on public held land inasmuch as 90 percent of the coal rights that have been sold ale beill~ sat on Tot' 5l)e('lllatiVe l)ulI'l)oses? Mr. 1110G. Well, of course. I do not say they are being sat on for speeulati~ purposes. Chairman PRox~rIRE. Are being sat on for some purpose. not being developed now or just being held out of production. Mi'. Rico. ~Vell. now. we prole('t an annual production on the con- tracts we know about of 10~ million tons, that is already under con- tract. We also know that there is over a billion tons of coal that is dedicated for gasification. Chairman PRoxMITIL. As I understand it. under the present pro- gram there is no requirement that the company buying the coal has to produce the coal at all. PAGENO="0449" 443 Mr. RIGG. That was under past policy contracts. Under present contracts that no longer applies. Chairman PR0XMIRE. Under the early ones you can still hold it out, nothing has been done about that ? Mr. RIGG. You cannot make it retroactive on a contract. Chairman P1~oxMIuE. \Vould there be any capability of canceling those rights if they have not developed them Mr. RIGG. They only have to pay their annual rental fees to keel) the leases valid. Chairman PnoxMIRr. Is there a massive new coal leasing program being developed by the Interior Department? Mr. RIGG. We are looking at a new coal leasing I)rogram down there but I do not know whether the term "massive" is indicative. Chairman PRox~[IRE. is that program being puslle(l by the indus- try? Mr. RIGG. It is being pushed by Interior more than anybody else. Chairman PRox~rIrrn. Private industry is interested, too. Mr. RIGG. Certainly private industry is interested. One of the best ways to get the fuel costs down is to get more available and let competition get in there. Chairman PROXMIRE. There will be a requirement when you lease this land a certain amount of it must be produced or developed? Mr. RIGG. There will be some production requirements similar to what we put in the oil shale lease forms. Chairman PRox~rIRE. Has the Government ever done a study of cost in terms of dollars. manpower. and time that would be required for the Government to run an exploratory system sufficient to bring the Government's understanding of coal resource and reserves in the public domain at least up to that of the private industry capability? Mr. RIGG. Well, I kind of think we know as much as private in- dustry does on the public land in coal. Chairman PR0x3IIRE. Is that your impression. Mr. McKelvey? Mr. MCKELVEY. We are doing a certain amount of drilling, Sena- tor, on coal lands in connection with coal land classification. Chairman PROXMIRE. My question was. do you think that the Fed- eral Government~ has a capability and understanding of coal resources and reserves in the Public domain equivalent to that of private industry? Mr. McI~vLvEv. I rather think we do on the plll)lic domain, sir, because we require the companies under lease to turn over their in- formation acquired in the course of drilling and this, of course, is the principal source of that information. Now again we do not have the capacity to analyze and make full use of that information. Chairman PR0xMIRE. That is critical. Private industry has that capacity. of course. Mr. McKELvE'l-. Yes. each company would have capacity for- Chairman Pr~oxMIrn:. So No. 1. we do not know until we sell it what it is worth, and they know because they have (lone the explora- tion, and No. 2, they have the capability of developing and inter- preting and analyzing and using the data which we do not have. PAGENO="0450" 444 ~\Ii'. McKvixv~. I will ask MI. Iflioux to speak up if I am incor- rect on this. l)llt I believe that information that is acquired under a 1)r0specti1~ peiiuit must. be turned over to us so that we have that information but as I say. we may not be able to make the maximum use of it. Clia.irman PuOxMIRE. Why do you do that on coal and not on oil ? Mr. McKI:LvEv. We (10 it on oil. Chairman Pnox~uiui:. Offshore? Mr. MCKELVEY. Offshore. Chairman PR0xMIRI:. I thought you just told us you did not re- quire it. Mr. MCKELVEY. No: that was with resl)ect to the geophysical in- formation on unleased areas. It is a difference in the regulations that exists but the nature of the regulation is that offshore a prospecting permit (an be issued which is nonexclusive in nature. Prospecting and surveys I ~ro1~h1Ysical means can be undertaken on land that has already been lease(l or land that is not leased. Chairman PnoxMrm:. All right. then. for the record, would you submit. Mr. Mekelvey and Mr. Rigg, within a couple of weeks, an indication of what would be required to give the Government the ca- 1)ability of using this data, of interpreting this data. and analyzing the data, and of acquiring the data. I understand you do say the data is now submitted to you with re- spect to the Government's domain : but I also understood you to say we do not have the capability to analyze it. Mr. McKrr.vi:y. Fully utilize it. that is correct. Chairman PiioxrIRE. Will ou give us a notion of what this will take? Mr. MCKELVEY. ~1es. sir. [The following infornìation was subsequently Supplie(l for the record :] RESPONSE or ITox. V. E. MCKELVEY, DIRECTOR, U.S. GEoLooIc.u. SURVEY We have already dealt with the Geological Survey's sources of data and cap- abilities for evaluating for oil and gas. This discussion will be restricted to coal. The Federal Government has a basic capability equivalent to private indus- try for determining the extent of coal resources and reserves in the public do- main inasmuch as 1)0th permittees and lessees niust submit the coal data geti- crated by exploration and development programs under existing regulations. Each company will, of course, have full analyzed the results of their individ- ual exploration aiid development progI~aiI~ and thus be more knowledgeable on their specific leaseholds. Only the Federal Government through the Geological Survey, however, has access to the basic geologic and engineering data of all companies operating on the public domain. This includes data from not only coal operations. but also coal related material from operations of oil and gas and other leasable minerals on public coal lands. We are able under current regulations to acquire basic geologic and engi- neering data from permittees and lessees operating on Federal coal lands. This includes data from core drilling, churn drill or measured section on depth to the coal or coal beds, thickness, detail of 1)eds including splits, or bone, heating value, sulphur content. moisture, and volatiles. This type of information pro- vides the lasic material for determining reserves. We also receive certain in- terpretations of the basic data in form of maps showing the structural config- uration of the coal along with the variations in its thickness. We require access to additional data if needed but do not make a practice of requiring PAGENO="0451" 445 core samples. Warehouse facilities would be necessary if core splits were to be acquired systematically and stored for all core holes drilled oii Federal lands. Increases in both funds and personnel as well as storage facilities would be necessary to maintain these data. A system of requesting core splits for exami- nation, analysis, and return would be preferable. We do not presently require companies to furnish interpretive information such as reserves except in sup- port of specific calculate reserves for all leased minerals on Federal lands. However, we do calculate coal reserves on iiidividual tracts iii advance to issu- ing a lease to determine advance royalty payments. The data submitted by coal permittees and lessees in itself is inadequate for a total evaluation of the coal on public lands. A major part of the Federal coal land is not under coal lease or permit so no information is available from operators. Most coal prospecting Permit areas have not been sufficiently ex- plored to determine reserves. Coal operators generally define those areas and beds which are necessary for their own proposed operation. This often does not include all coal seams in a lease. Additional information is needed to cover those areas that are beyond the immediate interest of the coal companies. Iii recent years the information submitted by coal perniittees and lessees has been supplemented by material gained in operations on Federal oil and gas and other noii coal leases. The data varies with the type of operation. Most of our coal provinces are valuable for oil and gas. Subsurface surveys of the well bore, especially using gamma ray logs have provided us with valuable informa- tion on depth and thickness of coal beds, especially in the powder River and San Juan basins. The information I have just outlined is, in itself, inadequate to determine the coal reserves and resources on Federal lands. In order to fill in the gaps in our knowledge, especially on unleased land, we conduct coring programs, sam- ple outcrops and cuts, and conduct field mapping. At present we have a con- tract with the State of Montana to conduct coring in that state. Field mapping is being conducted iii most of the major western coal areas including Alaska. The proposed budget for Fiscal Year 1975 includes an increase in both staffing and funding to expand the core drilling and other imiforniation gathering ca- pacity specifically for evaluating our Known Coal Leasing Areas on a tract by tract basis. Time Secretary's coal program calls for nunierous lease sales of coal on Fed- eral lands. To nieet this schedule we need ~ur\-ey generated echnical informa- tion for use in definition of Knowii Coal Leasing Areas and in the tract selec- tion-tract evaluation process. Ia order to provide resource and reserve data on all Federal coal land will require eveim greater increases in funding and manpower. Our present staff in- volved in coal resource classificatioii and evaluation and lease management programs on Federal lands could not handle this additional workload. Our en- pabilit.y is to be expanded in FY 1975 to meet a part of these needs, but addi- tional funding and manpower would be required to meet the full workload. The President proposed on January 23, 1974. to submit. legislation shortly, requiring energy producers to provide to the Government a full and constant accounting of their inventories, their production and their reserves. If such legislation were to be enacted and coal reserve information umi Federal lands were received separately, it would be possible to independently verify reserve data w-itli in a rca 5( ~iia lie degree of accuracy I Ii r~ ugh mis of a ra ndomn sampling and verificatioii process utilizing the basic data acquired by Government on Federal lands. This spot check techlimi(luie could operate similar to procedures employed by the Internal Revenue Service in auditing tax returns with the ex- ception that one would not expect. the degree of precision applied to financial data to hold true for the more subjective judgment as to unseen reserves of coal in the ground. Iii summary, the U. S. Geological Survey, as a scientific fact-finding agency, can, and does, utilize industry-derived coal data, supplemented with its own data generating capacities, to provide basic coal information with regard to the public lands for use in public decision-making. To fully utilize these data in terms of our current energy emergency will require substantially greater ca- pacity to provide even greater effort iii the future. Chairman Pnox~riar. Gentlemen. I want to thank you very much for your most helpful testimony. I know we have documented in PAGENO="0452" 446 spades the fact we haVe a whale of a lot of work to do before we have the kind of information we should have about our energy re- sources. production costs. and ~ The subcommittee stands ad3ournecl. [Whereupon. at P2 :~() p.m.. the subcommittee adjourned, subject to call of the Chair.] 0