The General Services Administration has established a technical committee composed of representatives of the Department of the Interior, Department of Commerce, Office of Emergency Planning, and GSA to review and evaluate all proposals presented to the Government.

No programs were developed to the point of being financially certified for execution by the close of fiscal year 1966. Two proposals have been submitted to GSA which could substantially increase domestic production of copper in future years. Both proposals would require extensive Federal financing. One proposal with a potential production of 100,000 tons per year has not been actively negotiated since the financial requirements are greater than the availability of DPA funds and could not quickly be brought into production. The other proposal which appears to be within current financing and contracting authority may culminate in a contract in early fiscal year 1968. The latter proposal projects production in 2 years at a 58,000-ton rate; increasing thereafter to 68,000 tons per annum.

Use of borrowing authority.-The Defense Production Act of 1950, as amended, authorized designated agencies, with the approval of OEP under delegation of authority from the President, to borrow from the Treasury to carry out the purposes specified in the act. Sections 302 and 303 authorize responsible agencies: (1) to provide loans to private industry for expanding capacity, developing technical processes, or producing essential materials, including exploration, development, and mining of strategic and critical metals and minerals; (2) to provide for purchases of, or commitments to purchase, metals, minerals, or other materials for Government use or resale, and to encourage the exploration, development, and mining of strategic and critical metals and minerals; (3) to transport, store, and have processed and refined, any material procured; and (4) to install additional equipment in Government-owned facilities and to install Government-owned equipment in privately owned plants, factories, or other industrial facilities.

From the inception of the Defense Production Act programs in 1950 through June 30, 1967, the total gross transactions contracted for amounted to approximately $8.5 billion; and the probable ultimate net cost was estimated to be about $1.7 billion, of which $1.1 billion represented the losses realized to that date and $0.6 million additional losses estimated on the basis of ultimate disposal of inventories.

Availability of funds.-On June 30, 1967, the Treasury held notes from the Departments of Agriculture and Interior and the General Services Administration in the amount of $1,850 million. The balance of available borrowing authority under the $2.1 billion revolving fund was about $250 million. Additionally, the cash balance of these agencies was $53 million. A total of $303 million was, therefore, available to meet program expenses in fiscal year 1968. (See table 7, p. 141).

The $303 million in cash and borrowing authority on June 30, 1967, is the highest amount estimated to be available through June 30, 1973. The long-range forecast of cash availability, assuming continued payment of interest on borrowings and excluding the projected financing of the copper expansion program for fiscal year 1968 through fiscal year 1973 is as follows:

Production equipment.-The machine tool industry, as a result of a falloff in net new orders and increased production, began to cut into its backlog of orders in the last half of fiscal year 1967. The estimated backlog of 11.1 months for metal cutting tools reached in November 1966 had been reduced to 9.7 months by May 1967. Similarly, the backlog for metal forming tools was reduced from 10.2 months in February 1966 to 6.3 months in May 1967. Since the major portion of these reductions were the result of a falloff in new orders, this trend may be reversed in fiscal year 1968 as a result of reinstatement of the investment tax credit.

In January 1967, extension for 6 months of the nondefense leases for items included in the Air Force heavy press program was authorized to allow additional time for completion of the Air Force study on possible revisions in the program.

TABLE 7.-ALLOCATION AND USE OF FUNDS AUTHORIZED UNDER THE DEFENSE PRODUCTION ACT AS OF JUNE 30,

A. Allocation by OEP to delegate agencies:

(1) Purchase programs, exploration assistance and working capital advances under sec. 303:
General Services Administration..

Borrowing authority..

Appropriations...

Department of the Interior: Defense Minerals Exploration Administration.

Department of Agriculture..

Department of Treasury (RFC tin program)....

Subtotal, sec. 303..

2,067, 000 1,959, 000 108,000

35,800

93, 265 0

2, 196, 065

IV. Use of DPA funds in agency programs (see "Report on Borrowing Authority," June 30, 1967, submitted to the Congress, pursuant to sec. 304(b) of the Defense Production Act of 1950, as amended)

A lease of production equipment to the Dana Corp. by the Army was approved. This equipment will be used for both defense and nondefense purposes and will result in increased production capabilities for military heavy-duty truck transmissions, power takeoffs and shifts.

Under policies established by OEP early in 1966, additional items of production equipment from the National Industrial Equipment Reserve were leased to companies producing materiel for the Department of Defense.

Amendments to the machine tool "trigger order" contracts to update the items specified in them continued to be processed in fiscal year 1967.

At the end of the fiscal year, OEP, at the request of the Department of Defense, was engaged in reviewing a draft report of the Comptroller General relating, in part, to the nondefense leasing of Government-owned production equipment.

Discussions were held with DOD on the desirability of reevaluating in fiscal year 1968 the standard rental rates set by OEP for use in leases of production equipment for nondefense purposes.

Components production.-Additional authorizations for the production of jewel bearings for the national stockpile at the William Langer Jewel Bearing Plant, Rolla, N. Dak., were issued in fiscal year 1967.

The quantities of jewel bearings to be produced for the national stockpile and for defense contractors were insufficient to permit the modernized plant to operate at full capacity. It was necessary, therefore, to limit the output to 3 million bearings per year. The Defense Department has initiated a survey to determine whether increased orders can be placed on the plant by defense contractors to permit a higher operating rate.

At the end of the fiscal year, a new pricing formula developed by the Bulova Watch Co. was being evaluated. This will more closely relate prices to the cost of production than the present system does and will result in a general reduction in prices.

Herbicides and medical supplies and equipment.—During the year, OEP in conjunction with other agencies, conducted special analyses to determine whether problems might arise in the future in meeting both military and civilian demands for materials, products and components. Two major analyses involved herbicides and medical supplies and equipment.

The increased requirements for herbicides for the defoliation program in Vietnam have had a major impact on the supply of these materials for agricultural and industrial uses. It was necessary to set aside 100 percent of the capacity to produce the herbicide 2,4,5-T for use on military orders through December 31, 1967. The Department of Defense undertook a program to establish additional capacity to produce the herbicides 2,4,5-T and 2,4-D and their intermediates. This would have provided sufficient capacity to meet both military and civilian requirements. The program has been delayed, and at the end of the fiscal year consideration was being given to reducing the set-aside of 2,4,5-T for military orders in order to make available in 1968 additional quantities of herbicides to meet essential civilian need.

The increased requirements for medical supplies and equipment for support of Vietnam operations, coupled with the requirements for the medicare program, foreign aid, and normal civilian requirements, indicated that the future supply of these items might not be sufficient to meet all requirements.

ECONOMIC IMPACT STUDIES

In July 1966, OEP established a small staff unit to study the impact on the economy of various levels of defense expenditures. The effort was coordinated with the Council of Economic Advisers, the Office of Business Economics of the Department of Commerce, the Office of the Secretary of Defense, and other Federal agencies and non-Government offices where appropriate.

The unit used available computer techniques and data to obtain estimates of the effect on various sectors of the economy of hypothesized levels of defense expenditures. The basic procedure for the study involved: (1) the development of alternative levels of economic activity related to a step-up of the Vietnam situation or a return to peace; (2) an analysis of the implications of these levels, in terms of their impact on specific industries, through the use of the strength model which takes into account interindustry relationships; and (3) the use of OEP electronic computers to test alternatives.

Tables have been prepared indicating, in terms of gross national product estimates, three possible levels of defense spending based on the Vietnam situation. These levels are 12, 14, and 172 percent of GNP.

Work has now been completed on the calculation of the economic effects of defense expenditures at the 172-percent level. The results reflect the multiplier effect of this level of consumer buying power and capital investment. The results were first expressed under an assumption of no governmental restraints through economic controls and, secondly, to show how the economy might be kept in bounds with the application of various types of controls. Results and proposals were checked with other Federal agencies to insure their validity. A comparison of the results suggested a number of alternative courses of action the Government might take to insure that defense needs are met in an expanded mobilization situation.

A number of special studies were made, including capital capacity, effects of fuel rationing, and phasing of defense contracts. The impact study group is now making other analyses designed to pinpoint such matters as: (1) at what level and time will monetary and fiscal policy be insufficient to restrain economic excesses such as panic buying and inflationary pressures; (2) what mix of direct and indirect controls would best suffice to meet national goals should they be required by a major defense adjustment in the economy; and (3) at what levels of defense expenditures is the economy sensitive to the effects of military buying in terms of the necessity for control measures. From such studies, problems involving production, distribution, consumption, and other economic conditions under various contingencies can be identified. Once these problems have been clearly set forth, decisions can be made with respect to the best combination of direct and indirect economic stabilization measures that can be developed to meet a given situation.

MIDDLE EAST PETROLEUM CRISIS

The Middle East crisis resulted in closing of the Suez Canal, a shutdown of pipelines to the Mediterranean, a considerable reduction in the level of Middle East oil production, and an embargo on oil shipments from the Middle East to selected countries of the free world. Cumulatively, the entire situation threatened the national security interests of the United States. While U.S. demands on Middle East oil are not large, a failure to maintain the flow of oil to Western Europe could have serious adverse effects on our national security. Accordingly, coordinated policies and decisions were needed to insure that essential needs of the free world could be met at reasonable prices with minimum adverse effects on our balance-of-payments position.

Available Measures

Section 708 of the Defense Production Act of 1950, as amended, authorizes a voluntary agreement relating to foreign petroleum supply for the purpose of meeting worldwide petroleum emergencies. This agreement allows the Government to form a committee of persons and companies engaged in foreign petroleum operations to work together in taking actions to prevent, eliminate, or alleviate critical petroleum shortages in the free world where such shortages threaten to or do adversely affect national security interests. Immunity from antitrust laws and provisions of the Federal Trade Commission Act is provided to enable individuals and companies to work together in this manner. Such immunity is extended, however, only with respect to actions taken in accordance with a plan of action which must be approved by the Director of OEP and the Attorney General in consultation with the Chairman of the Federal Trade Commission, and accepted by each of the participating individuals and companies.

Declaration of an Emergency

Following the outbreak of the Arab-Israeli conflict, the Director of OEP advised the Secretary of the Interior that an emergency existed in the supply and distribution of petroleum that threatened to affect adversely the national security of the United States. He suggested that the Secretary of the Interior develop a plan of action designed to avoid such adverse effects. The Department of the Interior then determined that events in the Middle East had created a situation requiring emergency action under the voluntary agreement relating to foreign petroleum supply and called upon the Foreign Petroleum Supply Committee (FPSC) to prepare a plan of action to meet the emergency. This was concurred in by the Departments of State and Defense.

Development of Plan of Action

A subcommittee of the Foreign Petroleum Supply Committee drafted a plan of action on June 13. The plan was subsequently modified and endorsed by the FPSC and the Department of the Interior. On June 27, it was sent to the Director of OEP for approval.

The plan of action provides for the creation of an Emergency Petroleum Supply Committee (EPSC) composed of certain American companies engaged in foreign petroleum operations and representatives of oil companies having principally domestic oil operations. All actions of the committee are supervised and directed by the Government. The committee is authorized to make surveys, investigations and analyses and to recommend actions designed to meet shortages and correct dislocations. To insure the maximum transportation and distribution of crude oil and refined products to all areas of the free world, it can prepare schedules which would alter the normal geographic production and supply patterns to allow maximum efficient use of available tankers. The plan provides for all such schedules to be submitted to the Attorney General, the Chairman of the Federal Trade Com mission, and the Director of OEP prior to issuance. Such schedules will not be issued if the Attorney General disapproves.

The Director of OEP agreed that the proposed plan of action was extremely important to the national defense and recommended that the Attorney General approve the plan and the companies' participation in it. On June 30, the Attorney General approved the plan. In doing so, he advised the OEP Director that the adverse competitive effects would be outweighed by the benefits to the national defense. He felt confident that great care would be taken to minimize unwarranted increases in price. The Chairman of the Federal Trade Commission concurred, but advised that if unwarranted increases did occur he would recommend that the Attorney General withdraw his approval.

The Director of OEP then advised the Secretary of the Interior that he approved the plan. He took steps to insure that the views of all appropriate Government agencies were considered. He agreed to continue coordinating activities under the plan with other interested agencies as long as it remained in effect.

Operations under the plan of action

The Director of OEP invited the 21 domestic oil companies comprising the Foreign Petroleum Supply Committee to participate in the plan of action. These companies, upon acceptance of the plan, became the Emergency Petrole. um Supply Committee, and an additional five companies agreed to participate. The Supply and Distribution and Transportation Subcommittees of this committee held continuing meetings in New York to develop required data and schedules. OEP arranged for participation at these meetings of other Government agencies, where appropriate. The Director of OEP will exercise general supervision and interagency coordination of the work of the EPSC as long as the plan of action is in effect.

Other actions

OEP is also assisting in interagency coordination and laying the groundwork for such other actions, if necessary, as: a waiver on the use of foreign-flag tankers for U.S. coastal movements; modification of the U.S. import program; and production from Elk Hills Naval Reserve.

The Department of Defense has entered into standby delivery contracts for petroleum products from various sources in the event normal supplies are disrupted. At the request of the Defense Department, the Department of the Interior issued a regulation on June 15 to allow priority to be given to orders placed under these contingency contracts. This action was taken under the authority of the Defense Production Act of 1950, as amended; Executive Order 10480, as amended; and Defense Mobilization Order 8400. 1.

The Department of the Interior also has a standby Emergency Petroleum and Gas Administration which could be activated or partially activated to meet emergency situations. Individuals, many from industry, have been designated for selected positions and would become Government employees if the agency were created. If necessary, the foreign, domestic, and transportation offices of this agency could be partially activated to work toward the best utilization of the world's petroleum resources and tanker fleet.

INVESTIGATION OF IMPORTS

Objective

To conduct investigations, as required to determine: (1) whether reductions or eliminations of duties or other import restrictions on any articles would threaten to impair the national security, and (2) whether an article is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security.

Status

Trade Expansion Act of 1962 (sec. 232 (a))

Under section 232 (a) of the Trade Expansion Act, duties or other import restrictions on any article may not be decreased or eliminated, if the President determines that such reduction or elimination would threaten to impair the national security. OEP acts in an advisory capacity to the President's special representative for trade negotiations in cases where domestic industries seek removal of their products from the negotiations list on grounds, among others, of a threat to national security.

During the Kennedy round negotiations conducted in Geneva during 1964-67 under the auspices of the General Agreement on Tariffs and Trade (GATT), OEP reviewed and reported to the special representative on a large number of cases where national security implications were alleged by industry. OEP will continue in this role, as required.

Investigations under section 232 (b)

Under section 232 (b) of the act, the Director of OEP has specific responsibility for conducting investigations of articles that are allegedly being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security. This authority was carried