APPENDIX 2-C.-PRESIDENT'S STATEMENT OF FEBRUARY 20, 1970, RE

CABINET TASK FORCE ON OIL IMPORT POLICY

THE WHITE HOUSE

STATEMENT BY THE PRESIDENT

In March of last year I created a Cabinet Task Force, headed by the Secretary of Labor and including the Secretaries of State, Treasury, Defense, Interior and Commerce, and the Director of the Office of Emergency Preparedness, to study the Federal government's oil import policy. The Task Force Report— the first Cabinet-level study of the oil import quota system since its inception in 1959-was submitted to me by Chairman Shultz on February 9th.

Reasonable men can and will differ about the information, premises and conclusions contained in the report. None, however, can fail to be impressed by the depth and breadth of this study. The wide response from the oil industry and other interested parties, running to 10,000 pages of testimony, is evidence of the broad interest in this endeavor. I compliment all members of the Task Force and the staff for their devoted and discerning effort. Their report substantially increases our understanding of this complex problem.

It is not surprising that the members of the Task Force did not reach unanimous agreement on a set of recommendations. The conclusions reached by the Secretary of Commerce and the Secretary of Interior differ sharply from those reached by the remaining five members of the Task Force. Among the majority there is also a divergence of views with the Secretaries of State and Defense expressing particular concern over the implications of the Report's conclusions for the nation's security and our international relationships.

There are, however, areas of agreement concerning actions that can be taken immediately. All Task Force members agree on the need for a new management system to set policy for the oil import program. After considering the views set forth in the Report, I am directing the Director of the Office of Emergency Preparedness to chair an interdepartmental panel which will initially include the Secretaries of State, Treasury, Defense, Interior, and Commerce, the Attorney General and the Chairman of the Economic Advisors. While most day-to-day administrative functions will continue to be performed by the Oil Import Administration of the Department of Interior, the policy direction, coordination and surveillance of the program will be provided by the Director of the Office of Emergency Preparedness, acting with the advice of this permanent Oil Policy Committee.

All members also agree that a unique degree of security can be afforded by moving toward an integrated North American energy market. I have directed the Department of State to continue to examine with Canada measures looking toward a freer exchange of petroleum, natural gas and other energy resources between the two countries.

The State Department has already discussed informally with Mexico the possibility of entering into arrangements with that country on energy exchange and I am instructing the State Department to explore more fully the possibility of reaching an agreement with Mexico to this end.

While generally agreeing with the recommendations of the majority of the Task Force, the Secretary of State indicates a concern that changes in the oil import program might provoke adverse international reactions which could have a bearing on national security. He therefore conditions his agreement on consultations with other governments before any final decisions are reached. The Secretary of Defense also recommends that the security implications of the program proposed by the majority be brought to the attention of our allies and affected nations at the earliest possible moment.

Accordingly, I direct the Secretary if State to continue our consultations on petroleum matters with Venezuela and our other Latin American suppliers, who have proven to be secure and dependable sources of oil during the crises we have experienced since the Second World War.

The State Department will also review with producing nations of the Eastern Hempishere and with our NATO allies and Japan the findings and recommendations of the Report. I further direct the Secretary of Defense to join in these discussions when they include our NATO allies and Japan.

The Congress properly 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 Representatives and the Senate have indicated interest in holding hearings on the oil import program and any recommended changes in it. I expect that much additional valuable information will result from these Congressional hearings, and I direct the Oil Policy Committee to carefully review all such information.

I expect the Oil Policy Committee to consider both interim and long-term adjustments that will increase the effectiveness and enhance the equity of the oil import program. While major long-term adjustments must necessarily await the outcome of discussions with Canada, Mexico, Venezuela and other allies and affected nations, as well as the information developed in the proposed Congressional hearings, I will direct the new Committee to begin its work immediately. An Executive Order for this purpose will be issued shortly.

APPENDIX 2-D.-WHITE HOUSE PRESS RELEASE OF FEBRUARY 20, 1970, "SUMMARY GUIDE TO TASK FORCE REPORT ON OIL IMPORT CONTROL"

THE WHITE HOUSE

SUMMARY GUIDE TO TASK FORCE REPORT ON OIL IMPORT CONTROL

Since 1959 oil imports have been subject to mandatory quota restrictions under a statute authorizing the President to limit imports that threaten to impair the national security. (See Part I, Sections 106-113, 117-130 for a detailed description of the statutory framework and the existing program.) The principal results have been these: (a) The delivered price of domestic crude oil within the U.S. is higher than the delivered price of foreign crude (Section 202, n. 1); (b) long-term domestic exploration and production are forecast to be higher than they would be at world market prices (Section 228 and Appendix D); (c) to that extent, the U.S. is less dependent on foreign oil than it might otherwise be (Table C, p. 41).

The quota program has been administered over the past decade with a combination of rigidity and special exceptions which together have brought the program under increasing criticism. (See generally Part III, Sections 302-321). Valuable import rights have had to be allocated by government officials among rival segments of the industry, with distorting effects on market structure and competition. Last March the President created a Cabinet Task Force to conduct the first comprehensive review of oil import controls since the inception of the program (Sections 101-105, 107). This is a summary of the majority's final reports to the President.

The governing statute authorizes import controls for the purpose of protecting the national security in two senses: (a) the protection of military and essential civilian demand against reasonably possible foreign supply interruptions that could not be overcome by feasble replacement steps in an amergency; and (b) the prevention of damage to domestic industry from excessive imports that would so weaken the national economy as to impair the national security. The question before the President, in the language of the statute, is whether and to what extent and for what time oil import restrictions should be considered "necessary. so that such imports will not so threaten to impair the national security."

...

Taking the present program as a form of insurance against actual or threatened foreign supply interruptions, the report seeks in the first instance to assess (a) the cost of the premium for insuring against the risk, (b) the nature and likelihood of significant interruptions in imports, (c) the degree by which imports would change if import controls were relaxed, abandoned, or continued in their present form, (d) the loss of investment and employment occasioned by increased imports, (e) the balance of payments implications of increased imports, (f) the sources of imports under various policy assumptions, (g) the alternative means of meeting or insuring against a supply deficit, and (h) the consequences of various significant import interruptions.

The "cost" of the existing program is made up of approximately $3.0-$3.5 billion per year of transfer payments from one sector of the economy to another plus efficiency losses in production and transportation of about $1.5-2.0 billion per year, including losses caused by "market-demand prorationing" as practiced by the principal producing states. (Sections 207-208).

The risks to security for which these costs are incurred do not in the main concern any danger to the functioning of the nation's armed forces. Incremental military demand in a conventional war would be relatively minor as compared with the World War II experience, because our military establishment is now maintained at closer to wartime levels. There is some risk of tanker destruction by a hostile superpower, although this would be less likely to affect shipments within the Western Hemisphere and there is some question of whether such a naval engagement could continue for more than a few months without being settled or escalated. At all events both the probability and severity of wartime risks are considered to be subsumed within the risks of politically inspired export interruptions. (Sections 220-224).

Of these the most serious concerns the possibility of renewed regional hostilities or a "group boycott" involving the oil-rich Arab states in the Middle East and North Africa. There are factors of self-interest at work in this region to limit the duration of any such supply interruption, but the risk of a prolonged and wide-scale denial of oil from the Arab states cannot be written off. The Task Force Report adopts such a hypothetical denial as its model for analyzing the implications of a supply interruption. (Sections 214–219, 225).

To appraise the effect of import controls on domestic production and hence on the level of imports the Task Force hypothesized three domestic price levels for a representative crude oil at the wellhead: $3.30 per barrel (present controls); $2.50 (substantially relaxed controls); and $2.00 (no controls). It is projected that in the short term the abandonment of controls would lead to increased production and reduced imports, as present "market-demand prorationing" restraints on efficient production would become pointless; the excess capacity thus released for production would more than offset the decline in high-cost "stripper well" production. By 1975 production would decline in both the $2.50 and $2.00 cases, but by relatively small volumes. The significant effects would be felt by 1980: a 4.0 million barrels per day (MMb/d) decline in the $2.00 case and 2.5 MMb/d decline in the $2.50 case. Imports as a percentage of demand would have to increase even at current prices, and by 1980 could amount to about 27% of demand-rising to 42% in the $2.50 case and 51% in the $2.00 case. No attempt was made to project levels of production on imports beyond 1980. (Sections 226-228 & Table C, p. 41.)

Employment in the domestic industry would decline at world prices by somewhat more than the industry has experienced over the past decade; at $2.50 price, the decline would roughly match the 1957-1967 rate of about 7,000 jobs a year. (Total employment in oil and gas production is less than 300,000). Profits for many companies would of course be smaller at the lower price until a new equilibrium output level was reached. Some investment in leases and facilities would be lost, and future "rents" (lease bonuses, taxes, and royalties) would be reduced. Localized dislocations could be quite severe and certain segments of the industry would undoubtedly be injured, with consequent loss of state and local revenues. Given the mobility of investment and employment in the economy as a whole, however, the weakening of the national economy-the statutory criterion—would not be severe. (Sections 230-231).

There would be little short-run impact on our balance of payments. Incremental imports attributable to the relaxation of import controls would become significant only after 1975. The overall 1980 balance of payments position will be affected by numerous factors not now predictable; other important considerations must in any event be weighed in devising an oil import policy. (Section 232 & Appendix H.)

The sources of imports are of course more subject to management by way of preference arrangements if import controls are retained than if they are abandoned. At world market prices about 40% of all imports or 20% of domestic demand-would come from Arab sources. At an intermediate level of import controls the bulk of U.S. imports could be drawn from Western Hemisphere sources, restricting imports from the Eastern Hemisphere to 10% or less of U.S. demand. (Sections 235-237 & Tables D-1 to D-3).

In addition to these relatively secure sources of production, the U.S. in an emergency could expand available supplies by: (a) drawing down inventories, (b) bringing available excess capacity into production, and (c) stimulating emergency production increases. It could also reduce consumption by means of rationing. While none of these emergency steps would be easy or comfortable, their availability must be considered in the statutory framework of national security; the report also subjects its conclusions to a sensitivity analysis to preclude excessive reliance on possibly optimistic estimates of the volumes of oil that could be replaced by these measures. (Sections 239-242, 252a.)

The report further considers certain pre-crisis investment possibilities for increasing the supply of domestic oil that could be made available in an emergency. These possibilities include conventional and underground storage, subsidization of synthetic sources-chiefly shale and coal-of crude oil, and development of standby reserves. While estimated costs compare favorably with the costs of present import controls, further study is needed and is recommended in the report. (Sections 245-247 & Appendix J).

Taking anticipated normal and emergency production from U.S. and other secure sources, the report analyzes the effects of a 1980 cessation of all shipments from (a) all Arab countries and (b) all Arab countries plus Iran, at three

levels of U.S. import control. The worst hypothesized case is one in which all Latin American oil is diverted to Europe and Japan, leaving the U.S. with nothing but its own and Canadian supplies. In the $2.50 case the U.S. would still be able to meet the resulting deficit with tolerable rationing, if the supply and demand forecasts in the report are reasonably accurate. The free world as a whole would be in poorer shape, since 2.5 MMb/d of U.S. production would not be developed at the lower price. But the free world deficit with or without U.S. import controls would be beyond the reach of tolerable rationing to rectify; and the 2.5 MMb/d of reduced U.S. production may be compared with 4.0 MMb/d (over one year only) that could be provided for themselves by friendly and allied nations with each 45 days additional storage outside the Western Hemisphere. (Sections 249-252 and Tables F-K, pp. 61-68.)

Of course, the forecasts on which these analyses are based are subject to inevitable uncertainties. The projections of Canadian production in particular are somewhat speculative at this time, a hazard that may or may not be fully offset by conservatism in the report's estimates of future Alaskan production. (Sections 228, 235.) For this reason the Task Force majority considered it important to devise a control system susceptible of phased-in adoption and monitoring to assure continuing balanced protection for the national security. The details of the recommended plan are summarized in paragraphs 426–437 of the report. The following brief discussion seeks to highlight its most important features and the reasons for them.

As the basic method of import control, the report recommends phased-in adoption of preferential tariffs with an Eastern Hemisphere security adjustment. This system is consistent with the governing statute as well as our international trade obligations. (Section 426.)

The preference and security-adjustment provisions recommended in the report are explicitly based on a security evaluation of particular sources of supply and are designed to establish firm safeguards for the national security. After a suitable transition period, and if common energy agreements can be arranged with these governments, Canadian and Mexican oil would be entirely exempt from the program. Oil from other Western Hemisphere sources would also be given a preference designed to neutralize the advantages of Eastern Hemisphere oil without exerting undue competitive pressure on U.S. production. If, contrary to the projections in the report, oil from the Eastern Hemisphere should threaten to exceed 10% of domestic demand, import licenses for this maximum ceiling on Eastern Hemisphere imports would be auctioned. In the worst possible case, available emergency measures could overcome denial of supplies of this magnitude. (Sections 335-338 & Table M, Section 427.)

Transition arrangements are recommended over a three-to-five year period to phase in the tariff system and phase out the "special deals"— unrelated to national security-of the quota system. The equilibrium tariff level would be a matter for decision by the new management system, which would be guided by a number of factors including in particular the evidence of recoverable reserves in North American "frontier areas." (Sections 339-343 & Tables N-P, Sections 425, 428-29.)

The management system itself would be revised to create an interdepartmental panel, under the chairmanship of the Director of the Office of Emergency Preparedness, to monitor developments under the revised program, to develop an improved data base for evaluation, and to provide a mechanism for policy adjustment if required by major variations from the report's projections. This should serve to emphasize and keep in focus the national security basis for the program. The interdepartmental panel would undertake another comprehensive review of the entire program no later than 1975. (Sections 344-48, 431, 437.) Supplementary views were stated by several members of the Task Force. (Section 425a.) The Secretary of State conditions his agreement with the Report on consultations with other governments. The Secretary of the Treasury favors a gradual process of tariff liberalization without specific predetermined objectives and subject to continuing management appraisal and control. The Secretary of Defense lists among the criteria that will guide his department's participation in the interdepartmental panel the requirement that domestic exploration be maintained at approximately current rates and that no reduction in reserves be allowed. In addition, he recommends prompt consultation with our allies and affected nations. The Chairman of the Task Force proposes the present adoption of a planning schedule designed to phase in an equilibrium tarff level of approximately $1.00 per barrel over a three- or five-year transition period.