Oil imports : a range of policy options : a study

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Material Information

Title:
Oil imports : a range of policy options : a study
Physical Description:
vii, 31 p. : ; 24 cm.
Language:
English
Creator:
Library of Congress -- Congressional Research Service
Davis, David Howard
Mark, Clyde R
United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce. -- Subcommittee on Energy and Power
Publisher:
U.S. Govt. Print. Off.
Place of Publication:
Washington
Publication Date:

Subjects

Subjects / Keywords:
Energy policy -- United States   ( lcsh )
Petroleum industry and trade   ( lcsh )
Petroleum industry and trade -- United States   ( lcsh )
Genre:
federal government publication   ( marcgt )
non-fiction   ( marcgt )

Notes

Bibliography:
Includes bibliographical references.
General Note:
CIS Microfiche Accession Numbers: CIS 79 H502-52
General Note:
At head of title: 96th Congress, 1st session. Committee print. Committee print 96-IFC 36.
General Note:
Nov. 1979.
General Note:
Reuse of record except for individual research requires license from LexisNexis Academic & Library Solutions.
Statement of Responsibility:
prepared at the request of the Subcommittee on Energy and Power, Committee on Interstate and Foreign Commerce, United States House of Representatives, by the Congressional Research Service, Library of Congress ; by David Howard Davis and Clyde Mark.

Record Information

Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 024871908
oclc - 06331674
Classification:
lcc - KF49
System ID:
AA00024821:00001

Full Text





96th Congress COMMITTEE PRINT i e:
1st Session I'mll r 9I INl T,,






OIL IMPORTS: A RANG
POLICY OPTI 00-4





A STUD\

PREPARED AT TLE REQUEST

SUBCOMMITTEE ON ENERGY AN WER

COMMITTEE ON
INTERSTATE AND FOREIGN COMMERCE UNITED STATES HOUSE OF REPRESENTATIVES
BY TIE

CONGRESSIONAL RESEARCH SERVICE
LIBRARY OF CONGRESS









NOVEMBER 1979




U.S. GOVERNMENT PRINTING OFFICE 54-3340 WASHINGTON : 1979

For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402
















COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
HARLEY 0. STAGGERS, West Virginia, Chairman
JOHN D. DINGELL, Michigan JAMES T. BROYHILL, North Carolina
LIONEL VAN DEERLIN, California SAMUEL L. DEVINE, Ohio
JOHN M. MURPHY, New York TIM LEE CARTER, Kentucky
DAVID E. SATTERFIELD III, Virginia CLARENCE J. BROWN, Ohio BOB ECKHARDT, Texas JAMES M. COLLINS, Texas
RICHARDSON PREYER, North Carolina NORMAN F. LENT, New York JAMES H. SCHEUER, New York EDWARD R. MADIGAN, Illinois
RICHARD L. OTTINGER, New York CARLOS J. MOORHEAD, California
HENRY A. WAXMAN, California MATTHEW J. RINALDO, New Jersey
TIMOTHY E. WIRTH, Colorado DAVE STOCKMAN, Michigan
PHILIP R. SHARP, Indiana MARC L. MARKS, Pennsylvania
JAMES J. FLORIO, New Jersey TOM CORCORAN, Illinois
ANTHONY TOBY MOFFETT, Connectiicut GARY A. LEE, New York JIM SANTINI, Nevada TOM LOEFFLER, Texas
ANDREW MAGUIRE, New Jersey WILLIAM E. DANNEMEYER, California
EDWARD J. MARKEY, Massachusetts THOMAS A. LUKEN, Ohio DOUG WALGREN, Pennsylvania ALBERT GORE, Jn., Tennessee BARBARA A. MIKULSKI, Maryland RONALD M. MOTTL, Ohio PHIL GRAMM, Texas
AL SWIFT, Washington
MICKEY LELAND, Texas RICHARD C. SHELBY, Alabama ROBERT T. MATSUI, California KENNETII J. PAINTER, Acting Clerk ELEANOR A. DINKINS, Assistant Clerk W\I. MICIIAEL KITZMILLER, Professional Staff
RANDALL E. DAVIS, Professional Staff (Mfinority)



SUBCO-MMITTEE ON ENERGY AND POWER

JOHN D. DINGELL, Michigan, Chairman RICHARD L. OTTINGER, New York CLARENCE J. BROWN, Ohio
PHILIP R. SHARP, Indiana CARLOS J. MOORHEAD, California
ANTHONY TOBY MOFFETT, Connecticut JAMES M. COLLINS, Texas DAVID E. SATTERFIELD III, Virginia DAVE STOCKMAN, Michigan TIMOTHY E. WIRTH, Colorado TOM CORCORAN, Illinois
EDWARD J. MARKEY, Massachusetts TOM LOEFFLER, Texas PHIL GRAMM. Texas JAMES T. BROYHILL, North Carolina
AL SWIFT, Washington (Ex Officio)
RICHARD C. SHELBY, Alabama ANDREW MAGUIRE, New Jersey ALBERT GORE, JR., Tennessee MICKEY LELAND, Texas HARLEY 0. STAGGERS, West Virginia
(Ex Officio)
FRANK M. POTTER, Jr., Staff Director and Counsel DAVID S'SCHOOLER, Counsel IICIIAEL J. P. BOLAND, Minority Staff Assistant

(II)









LETTER OF TRANSMITTAL



CONGRESS OF THE UNITED STATES,
HOUSE OF REPRESENTATIVES SUBCOMMIEE ON ENERGY AND POWER
COMMITTEE ON INTIERSTATFE AND FOREIGN COMMERCE,
Washington, D.C., Novemnber 27, 1979
Hon. HARLEY 0. STAGGERS,
Chairman, Committee on Interstate and Foreign Commerce, U.S. House of Representatives, Washington, D.C.
DEAR MR. CHAIRMAN: Attached is a study performed by the
Congressional Research Service for the Subcommittee on Energy and Power entitled: Oil Imports: A Range of Policy Options. I believe that it would be useful if this study were to be published as a committee print.
The study, done by Mr. David Howard Davis and Mr. Clyde Mark, examines the various policy options confronting the nation with respect to oil imports. It evaluates the advantages and disadvantages of the numerous options facing the Nation. Although it is clear that we all share an interest in reducing our dependence upon foreign oil supplies and their cost to our economy, there are many possible ways to achieve th oal. The study examines these options in a clear manner.
I elieve all Members of the House will find the study to be of interest.
Sincerely,
JOHN D. DINGELL, Chairman
Attachment



















Digitized by the Internet Archive
in 2013













http://archive.org/details/oilimporoOOlibr









LETTER OF SUBMITTAL


THE LIBRARY OF CONGRESS, CONGRESSIONAL RESEARCH SERVICE,
Washington, D.C., October 19, 1979
Hon. JOHN D. DINGELL, Chairman, Subcommittee on Energy and Power, Committee on Interstate and Foreign Commerce, U.S. House of Representatives,
Wash ington, D.C.
DEAR MR. CHAIRMAN: In response to your request, I am
transmitting herewith a manuscript entitled: Oil Imports: A Range of Policy Options. This background paper was prepared by David Howard avis of the Environment and Natural Resources Policy Division and Clyde Mark of the Foreign Affairs and National Defense Division.
Sincerely,
GILBERT GUDR
Director, Congressional Research Service
(V)














CONTENTS


Pap
Letter of transm ittal ................................. U1
Letter of subm ittal .................................. *, V
Introduction .......................................................................................................................... 1
I. W ater's Edge ................................................................................................................... 2
11. M arkets: C om petitive or R egulated ........................................................................ 10
111. Expanding Supply at H om e and Abroad .............................................................. is
IV. A C onsum er's Cartel .................................................................................................. 18
V Bilateral A rrangem ents ............................................... I ................................................. 20
V I. M ilitary Seizure of Foreign O il Fields ................................................................... 23
V II. N atural G as and Coal Im ports ............................................................................... 26
R eview ................................................................................................................................... 29

(VII)









OIL IMPORTS: A RANGE OF POLICY OPTIONS

INTRODucTION
The United States currently imports over 40 percent of its petroleum~which presents dual problems of high, uncertain prices and insecure sources. The latter engenders foreign policy and national security vulnerabilities. In addressing the problems Congress can consider a spectrum of proposals, ranging from accepting the import dependence as the least injurious alternative, to military action. Among the more moderate import modification plans are quotas, fees, auctions, reform of the Rotterdamn spot market, consumer cartels and barter. The proportion of oil imports climbed as high as 48 percent in 1977. Since then Alaskan oil, high prices, conservation and foreign revolutions have reduced the proportion to 43 percent.


Total mptsPercent
1973 17.3 MMB/D 6.4 MMB/D 36%
1974 16.7 6.1 37
1975 16.3 6.0 37
1976 17.5 7.3. 42
1977 18.4 8.8 48
1978 18.8 8.1 43
1979 19.0 8.1 43
Source: Monthlv Energy Review, Department of Energy
Of total petroleum imports, now running over 8 million barrels a day, three-quarters enter in the form of crude oil and one quarter enters already refined. Of the latter, virtually all is refined in the Carribean or Canada.
The United States sustains this import rate because, in current circumstances, importing is the most economical way to fill the gap between domestic production and demand. Insecure supply and high, unstable prices are the two problems of America's dependence on imported oil. The 1973-74 Arab embargo and the 1979 Iranian revolution are examples of the former. The OPEC price is an example of the latter. While the two problems often occur together, they may call for distinct solutions.
The reasons for supply insecurity are usually political. In 1973, Arab nations wanted to punish the United States and the Netherlands for supporting Israel in the Yom Kippur War. In the mid-1970's, Canada reduced oil exports in order to become more self-sufficient; the previous distribution pattern was actually more economical. In 1978-79, Iranian oil workers struck partly in support of the effort to overthrow the Shah.






2

The reasons for high prices are usually economic. Quite naturally, sellers want to earn as much as possible. While prior to October 1973, seller competition kept the price low, since then, the OPEC cartel has exercised near monopoly power. OPEC's cohesiveness surprised most observers who had expected the 13 members would soon fall to quarreling and cheating. Reasons for its success include the unity of its Arab core and OPEC's Saudi pivot. Saudi Arabia has reserves of 160 billion barrels, low production costs and a small population. Hence it can reduce production with little sacrifice. The Saudis can easily balance increased production by poorer OPEC members who -need more revenue.
Some observers maintain that the structure of the international oil industry and government regulation exacerbate OPEC power. They charge that the major international oil companies have no incentive to bargain for lower prices, that the American entitlements program favors imported oil, and that Department of Energy (DOE) market intervention, is clumsy and coincides with oil industry desire for high prices, though with different reasons.
For convenience the import proposals are grouped into a six part typology:
1. water's edge, including quota, fees and permit tickets
2. markets, competitive or regulated
3. supply expansion at home and abroad
4. consumer's cartels, including IEA, COIN, and a wheat cartel
5. bilateral arrangements
6. military seizure of foreign oil fields

1. WATER'S EDGE
In a televisd spech, July 15, President Carter announced a quota on the amnoun't of oil imported into the United States. For 1979 the limit would be 8.2 MMB/D. Other import control options would also occur at the water's edge -- fees, the Adelman plan and the Safer plan.

Quola
Under provisions of Sec. 232 (b) of the Trade Expansion Act of 1962 President Carter established a quota of 8.2 MMB/D D.His authority re quired that the Secretary of the Treasury find that oil imports impair national security. On March 29, 1979 Secretary Blumenthal made such a finding.1
On October 5, 1979, the Departments of Energy and Treasury announced hearings for reinforcement of the President's oil import quota. It suggested three alternative approaches.
1. an auction
2. a licence fee
3. a no charge allocation
1. Alternauive No. 1: Auction Systemn. Under an auction system, a fixed quantity of oil import rights would be distributed by periodic sale to the highest bidders. Interested parties would submit to the designated agency an offer stating the prices they would pay for various

I F(ootiotef apparoi d'N1). 31~ ~.






3

quantities of import rights (i.e. multiple bids would be accepted). Bids would be filled down to the quanta which exhausts the quota. The nce paid by successful bidders Wou d be the price bid. Rights would ge transferable, assuring that those who subscribed in excess of their needs could dispose of their excess rights, while at the same time providing an opportunity for those desiring additional rights to purchase them.
Auctions would occur on a periodic basis, possibly quarterly, with a seasonally weighted percentage of the annual quota available at each sale. Licenses would be valid for a specific four month period. These
F criods would overlap to provide continuity in the availability of licenses, while lessening the potential for market manipulation.
2 Alternative No. 2: License T'ee. Under the license fee system, imports would be limited by imposing a sufficient fee on im orts to reduce demand to the quota level. DOE would calculate the
appropriate per barrel fee which would be necessary to reduce imports to the quota level.
'Me tee system would operate in a manner similar to the Mandatory Oil Import Program (MOIP), except that the program would be simplified. If requests for import licenses exceeded the quota because of unexpected demand, the fee would be increased in subsequent
F ods. If a fee system were adopted, there would probably be one fee evrc'l for all petroleum im ports and there would be no restriction on eligibility or transferability. Licenses would be sold on a periodic basis, possibly quarterly, and they would be valid for a specific four month period, the periods overlapping. Bonds could be posted in lieu of prepayment of fees in a manner similar to the MOIP except that pcr ons posting bonds would be liable for the unused balance of any expired licenses. Similarly no refunds would be available for pre-paid licenses which were not fully utilized.
3. Alternative No. 3: No Charge Allocation. Under the no charge allocation system, imports would be limited by distributing, without charge, licenses which would confer the right to import a fixed Quantity of crude oil and finished or unfinished products. If historical
precedents arc followed, import licenses for crude oil and unfinished oils would be distributed among all those with capacity to process such petroleum. The volume of import rights confer J_ could be determined by the refiner's crude runs to stills or by certified crude distilling capacity. Import licenses would be transferable which would enable those refiners who are more dependent on foreign feedstocks to acquire Import rights from those refiners less able to use them.
The United States had an oil import quota from 1959 to 1973. The Mandatory Oil Import Program (MOIP) restricted Imports to 12 percent of total consumption. Although widely criticized as a scheme to maintain the high price of domestic oil faced with competition from cheap imports, the MOIP did make the United States less dependent on foreign supplies. But the program, ended in April, 1973, after prices of foreign oil landed in the &ite'd States rose above domestic prices.
Under the MOIP, rights to import some finished products were allocated to historic importers, suc as deepwater terminal operators, marketers, and large volume consumers, and they could be distributed under the quota on a similar basis. Finished products would be






4

allocated on an annually adjusted historical basis and the licenses would be transferable.
If all licenses arc made freely transferable, new entrants will be able to enter the market, but possibly at a substantial competitive disadvantage compared to existing allocation holders.2
The chief advantage of a quota is that it aims directly at reducing dependence on foreign sources that have proven unreliable in the past six years. So far as it limits imports to x MMB/D or a certain percentage or whatever, it sets an upper limit on the damage a boycott or a price rise can do. On the other hand within those limits a boycott or price rise can still do a lot of damage. Worldwide, the 1974 supply cut was only 7 percent compared to the previous year and the spring of 1979 Iranian cutoff brought only a 2 percent shortfall yet both disrupted the American economy and life style.
The chief disadvantage of a quota is its expense. Restricting the amount of oil imported raises the domestic price. This, of course, was the unofficial objective of the MOIP. The MOIP allocated import license tickets to all rcflners based on their crude runs. Small refiners were allocated a disproportionately large share of these tickets, effectively providing them with a subsidy. The tickets were either used directly by the refiner to import oil or, more often, sold to other refiners who were dependent on imported oil, and needed import tickets. Each ticket took on a market value equal to the difference between domestic crude prices and the landed cost of foreign oil. The benefits of lower priced forep crude were shared amon& refiners as tickets were sold and their value used to offset the acquisition cost of domestic crude. At the same time, the crude producers realized higher prices. The American consumer paid those higher prices. In 1970 the average family in New York paid an extra $102 per year for gasoline and fuel oil. A Ven-nont family paid $196, and a Wyoming fardily paid a $258 premium.3
The costs of an import quota today would depend on its specific pro visions. The key variables here are:
the size of the shortfall measured relative to what oil demand would otherwise be,
the way in which price;.; respond to a supply shortfall, in otherwords, the elasticity of demand.
Of the two variables elasticity is less understood. The range of opinion on what long run price response might be covers a large interval. Most estimates of long run elasticity cluster in the -.2 to -.5 area. This means that, for example, a 10 percent quota imposed
shortfall measured on a fraction of total U S. Demand, would result in 20 percent to 50 percent increase in the price of refined fuels. Note that fuel prices are the key variable, rather than crude prices. This results from the underlying economics by which the elasticity phenomena works. The effect depends on the rice perceived by
ultimate consumers. If, for example, gasoline se Fling, for $1.00 per gallon suffers a long run supply short fall of 10 percent, its price will rise to $1.20 or $1.50, depending on the elasticity.
For the nation as a whole, using $250 billion worth of refined products during the early 1980's, these hypothetical ex p es could mean price increases aggregating $50 to $125 billion nually. Not






5

only would large amounts of money be involved, but Americans would wind up paying fuel prices which are above world market levels (exclusive of any taxes imposed at the retail level).
A quota is tantamount to a self imposed embargo. The United States suffered from the 1973-74 Arab embargo and the 1979 shortfall due to the Iranian revolution. Why would it want to inflict artificial shortage? Proponents argue that a quota disciplines the United States gradually to wean itself from OPEC: Small adjustments made at America's own schedule are preferable to lar p, sudden adjustments at OPECs schedule. Opponents rebut that Europe and Japan would be the chief beneficiary of American sacrifice. For comparison the United States absorbed twice its share of the Iranian shortfall according to a New York Times analysis.
According to Theodore Eck of Standard Oil (Indiana), the U.S. shortfall was 0.8 MMB/D whereas in terms of its historical share the
4
decrease would have been only 0.4 MMB/D. Oil foregone b the
United States would be available to other importing nations at ower prices. Only if all major importing nations establish a coordinated set of quotas would the sacrifice be equitable. On the other hand proponents of the quota maintain that (1) the American share of the world market is large enough to have a significant impact on OPEC, 2) the benefits of less dependence is worth the costs, and (3) hclpinp Europe and Japan helps the United States. Professor Edward 1.
Mitchell of the University of Michigan opposes a quota because it leads either to a shortage or to higher prices.5
Suppose, for example, it reduces im. orts by one million
barrels per day at some future date. Ipthere arc still price controls on oil at that time, domestic supplies will not expand and we would have a domestic oil shortage of exactly one million barrels per day. But we all thought that was what the
import program was supposed to "insulate' us from.
Suppose instead that domestic oil prices are free, as they
are supposed to be after 1981. Then a one million barrel per day shortage would result in a domestic price increase large enough to choke off a million barrels per day of consumption.
How big will that price increase be? Is that domestic price increase better for us than importing the extra one million barrels cr day? Again wasn't that what we were being
protects from?
Since a quota does not yield lower price or more reliable supplies, Professor Mitchell asks rhetorically if there are any benefits from a quota. He finds no benefits; rather he finds that in order to avoid occasional, temporary supply interruptions the United States accepts a permanent deprivation.
Critics of the quota sometimes allege that its burden falls hardest on oil consumers as opposed to coal, natural gas or nuclear consumers. In the first instance this is correct. In fact, one goal of a quota is to have oil consumers switch to other fuels. But economists point out, as the price of oil goes up it pulls up the prices of competing fuels. This is desirable insofar as it stimulates production of those alternative fuels. For example higher oil prices might cause a factory to switch to coal






6

but then in the short run less coal is available, so the price goes up. Economists note that this causes someone to open a new coal mine so the p ieof coal then goes down. The energy supply returns to
equilibrium but the equilibrium is at 'a higher price.
Critics of a quota also allege that its burden falls hardest on the regions most dependent on imported oil such as New England. It app cars that this is true only with respect to transportation costs. The effect of a quota is to raise the price of oil nationwide inasmuch as it increases demand for domestic crude oil. Oil is highly fungible and easily transported so the effect of a quota would extend throughout the economy quickly. New England would pay a higher price only to the extent that its geographic location makes transportation costs higher. Aside from this the effect of a quota is neutral among regions.
Fees
Rather than set a quota the government could charge a fee to discou rage use of imported oil. In 1976 the Supreme Court upheld the
p rsdent's authority to impose a fee under provisions of the Trade Expansion Act, Sec. 232 (b). President Ford had imposed a fee of $1 a barrel, later raised to $2, in an effort to encourage Congress quickly to pass the Energy Policy and Conservation Act of 1975. The fee was in effect for only a few months.
SiOne. rationale for a fee on imported oil is an analogy to insurance. Since imports are risky, the price should reflect the cost of meeting the risk. The revenue from the fees might be dedicated to a device for reducing the risk (such as the Strategic Petroleum Reserve) but even if they are not earmarked, the higher price is a signal to consumers to reduce consumption.
The advantages and disadvantages of fees are similar to those for a quota. Fees would aim directly at the problem of dependence on foreign sources with their risks of embargo and unpredictable price. Fees are simple, indeed much simpler than the import tickets of the MOIP. Fees send a clear signal to consumers.
As with a quota, the disadvantage of an import fee is its expense. Because imported oil sets the price for domestic oil, market forces will drive the price of domestic oil up to the import price (including the fee), producing several effects. (1) All consumers will pay more. (2) Domestic producers will gain a "windfall," which may lead to greater production. (3) Products refined abroad in Canada and the Caribbean will bccome relatively cheaper unless the government places equivalent fees on them.
For the same reasons as explained in the previous section on a quota, the impact of a fee will be neutral among regions, except for transportation costs. And like a quota, a fee will cause te prices of competing fuels to rise sympathetically. For example coal prices will, rise as factories switch from oil to coal.
Imposing a fee will raise the cost of energy relative to other factors such as lab or or capital, causing Americans to consume less oil and leaving more for oter importing nations, overwhelmingly in Europe and Japan. The United States will have to balance less Teendence on foreign sources against a reduction in standard of living. The arguments against fees are threefold. (1) Imports are so high at present (43






7

percent) that even with fees the Nation would remain vulnerable. (2) Prices are so high at present that adding a fee of $3 or so would not have much effect (3) If American consumer demand continued to be strong after a fee was added, OPEC would be encouraged to raise its prices again.
One import fee proposal sets the amount according to the security of the source. For example, Libya has been fickle -- leading price increases, embargoing shipments and nationalizing oil companies. Its Sovermcent is considered politically insecure. Therefore the United tates might add an import fee of $5 a barrel. In contrast, Canada is a stable neighbor whose prosperity depends on the American economy. Therefore, its risk based import fee might be zero. Venezuela, Nigeria, Saudi Arabia, Iran and other sources would be graded in between. Assuming Europe and Japan did not establish similar schedules, the effect of such fees in this hypothetical case would be that American buyers would p refer Canadian oil and eschew Libyan oil. This would be the desired result; Americans would import from secure sources. Europe and Japan would bear the brunt of Libya's u ndependability.
Yet this scheme has several problems. (11) The United States already buys virtually all the oil Canada will sell. T-o get more oil it must buy from less dependable producers (though not necessarily Libya). (2) If a fickle producer boycotts Europe and Japan or raises the price steeply, the United States will receive a secondary effect insofar as these countries are major trading partners and military allies.. (3 )The symbolic foreign policy imp cations would be obvious. Whether
deserved or not, a high fee would be insulting to the exporting country. Moreover, a diplomatic desire not to offend an exporter might mean that unreliable countries might not have high fees assigned. (4) Since oil is fungible and easily transported, major disruptions dissipate worldwide rather than being targeted at a particular country. In his post-mortem of the 1973-74 Arab. boycott Robert B. Stobaugh concludes the boycott failed accurately to hit its targets, the United States and the Netherlands. Cheating and redirection of oil from nonArab countries supplied the intended victims approximately as much oil as non boycotted countries. American supplies decreased 7 percent and Dutch supplies decrease 17 percent, but German supplies decreased even more, 20 percent.6
In its 1979 study Resources for the Future favors a fee for reasons of economic security.
The effect of a "security fee" on imports is to raise the
price of energy relative to other goods and services. Imported oil is the incremental source of energy, and when its cost rises, domestic substitutes previously priced out of the market can be produced and sold. More expensive domestic oil and natural gas (from deeper or smaller pools, for instance) can profitably be produced, and installation of solar space and water heting is encouraged. Higher-cost substitutes are brought closer to economic production. Higher prices for energy also make it worthwhile to under take conservation efforts that were not economically justified before. Thus, by lowering overall energ demand, by lessening the proportion of that demand met by 01, and by increasing domestic energy supply, the effect of an






8

import fee itself is to reduce imports. Ile fee, then, tends to reinforce the effects of the risk-reducing instruments for which
its application pays. .
A security fee may have other advantages as well. By
reducing total demand for the product of oil-export ing countries, a fee could encourage stabilization or reduction of the world oil price. From another point of view, the reduction in demand would diminish the disruptive power of those countries within the oil cartel which bear the major burden of restraining current pro auction in order to keep prices above competitive levels. In any cutback, an exporter surrenders part of its old market share to those who insist on maintaining (or even increasing) normal production-, but in a market diminished by the security fee, exporters who may be tempted to reduce sales for international political purposes are closer to the lower limit of production they can tolerate economically. As that limit is approached, each additional reduction in output becomes more harmful to an exporter 1) s economic interest. As it is made more costly to exporters, use of the it oil weapon" may become less
likely.7
The economics of import reduction by fees are iuite similar, at least in theory, to those of import quotas. With fees, a evy is chosen such that its size will be great enough to diminish demand by the desired level of import reduction. Choice of the fee I s magnitude is based on estimated demand elasticity, given the fact that a fee will not only raise the (perceived) cost of imports but will raise the price of domestic oil as well. Hence, a fee will raise the price of domestic liquid hydrocarbons by the fee amount, unless domestic prices are regulated. 0
A $5.00 per barrel fee is often discussed as a starting point for implementing an import reduction program. Here, the $5.00, which would raisc oil prices by about $35 billion per year during the early 1980's, would result in a price increase computed roughly at about 15 percent. Flowing from this would be in aggregate demand reductions on the order of 3 to 7 percent, or reducing imports by 600,000 to 1,300,000 barrels per day.
While it is possible that a $5 fee could balance s pl and demand in such a way that imports were limited to 8.5 MMBZ ior 1981 or 1982, it is likely that higher fees would be in order thereafter, because of an increase in underlying demand. Nevertheless, a fee system remains a viable economic option for controlling import levels.
Adelman Plan
In a 1976 article in Challenge., Professor M.A. Adelman- of the Massachusetts Institute of Technology asserted that "the United States, acting alone, can disrupt the (OPEC) cartel and brin down the price it pays for crude oil to. Adelman proposed to limit U1 oil imports, then sell import tickets at a public auction by sealed bids. Limiting im,Ports would assure domestic producers that if they increased production, OPEC could not undercut their price. Adelman believed OPECs weak point to be excess capacity. He estimated it to be 12 MMB/D when he wrote. Therefore the cartel had #I to solve the classic problem of






9

limiting production and dividing markets'. Adelman believed OPEC divided the market by continuing the preexisting shares of multinational oil companies, a system he calls "somewhat haphazard" but effective. Others point to the pivotal role of Saudi Arabia. Because this desert kingdom has much oil and few needs, it can raise or lower production by one or even two million barrels per day in order to balance production by other cartel members. For example, in July 1979 Saudi Arabia raised production by I MMB/D because it believed the June OPEC Krice hike had been too big, thus.risking a world wide recession. Other audi concerns were financing its internal development plan without interruption and curbing the influence of Libya.
A "soft" market is a precondition for the Adelman Plan to succeed. Adelman wrote in 1976 of 18 MMB/D available to the United States, three times the 6 MMB/D the United States then imported. At that time the Monthly Energy Review estimated OPEC's excess capacity to be 10 MMB/D, 3.3 MMB/D in Saudi Arabia, and 4.4 MMB/D in other Arab members. In 1979 the situation was far different. The market was tight. OPEC's excess capacity was nearly 8 MMB/D but 6.3 MMB/D was shut in by the Iranian revolution. Excessive supTly had dropped from 10 MMB/D to 1.7 MMB/D. This suggested at Adelman's plan could not be implemented due to a tight market, a concern Adelman himself has admitted.
The Emergency Petroleum Allocation Act, Sec. 13, gives the President authority to establish the Adelman Plan. Congress granted this authority in 1975 when it amended EPAA. The legislative history of Section 456 of the Energy Policy and Conservation Act (whic amended EPAA) specifically mentions the Adelman Plan (p. 1834, House Report 94-340, p. 72).
In July 1979, the Trade Subcommittee of the Ways and Means Committee held hearings on various bills aimed at establishing a Federal oil purchase authority along the lines drawn out by EPCA. Favorable testimony ran along the line that something affirmative needed to be done to to erode the dominance of the OPEC cartel.
Industry testimony fell mostly on the negative side. 1"he tight supply situation was repeatedly cited as well as the fear that government intervention would undo the industry's efforts undertaken this year to stabilize, at least partially, a very chaotic world market. Of further concern is the fact that the government would have great difficulty in ensuring that the required type of oil reaches the right refinery when it is needed. This is a very complex undertaking. There arc many varieties of crude, which are not completely fungible. Seeing that the crudes and refineries arc properly matched is a task that no government employee has ever undertaken. Given the lack of governmental expertise, refiners are concerned about severe crude supply blockages occurring.
Safer Plan
In a 1979 book, International Oil Policy, Arnold Safer proposed a plan sometimes described as "the Adelman Plan stood on its head". The U.S. Government would set the price of oil at the water's edge then pay the OPEC governments directly an amount equal to the difference between the price OPEC wanted and the price the






10

government determined the American consumers should pay. For
example, if OPEC wanted $20 a barrel and the government wanted the price to be $15, the government would pay OPEC $5 for every barrel imported. To be more specific, Safer recommended that the
government should: (1) Set a quota on the physical volume of crude oil imports. (2) Announce at monthly auctions that the Government will permit imports up to that quota amount-, lowest bidders getting the sales. (3) Establish a floor price on delivered crude oil below which no Government payments would be required. Above that price, the
United States would make payments directly to the selling governments. These payments would be kept out of the private oil market, so that imported oil would not exceed the predetermined American price. (4) Decontrol all American crude oil production immediately. That would mean that domestic oil prices would rise to the Federal Government's predetermined level, but no more. (5) Exempt Canadian and Mexican oil from the quota and bidding system, thereby creating a vast North American free-trade zone in oil and gas.
Safer would use the import price differential ($5 in the hypothetical example) to reward those OPEC nations that wish to sell more at lower prices, and to penalize those OPEC nations that wish to sell less at higher prices.
Safer claims that the advantage of this plan over the Adelman Plan is that his would keep the domestic price lower. Under the Adelman Plan domestic prices would rise to the world price whereas under the Safer Plan they would only rise to the o crnment set domestic pnce.
Gaining acceptance for the Safer Plaii might be difficult. Many Americans would find unpalatable the prospect of sending money to OPEC. It could be made cosmetically more acceptable by referring to the funds as foreign aid to be used in developing new petroleum reserves or as equity investment in new technologies.
In an environment where the landed cost of imports entering the country is $25 a barrel (a likely price in 1980) and the target domestic price is $15, a subsidy of $10 per barrel would be called for. If 1980 imports are in the 8.2 MMB/D area, a subsidy of about $30 billion would be required to administer the Safer plan.
Beyond the high initial cost, this approach runs the danger of directly subsidizing oil consumption. To the extent that demand rises as a result of the subsidy, more oil will be imported and higher paymenM both for the subsidy and to foreign oil producers, wit be required. Inherent in this is the danger that that the United States might dig itself into an increasingly deeper oil import, balance of payments, and budget deficit hole.

II. MARKETS: COMPETITIVE OR REGULATED
While the American import market is huge--8 MMB/D--it is only a fraction of the world market. The heart of the world market is Rotterdam, the sprawling Dutch port chockfull with refineries, located in the center of Europe. Rotterdam is a spot market, selling crude oil and refined products not obligated in long term contracts. At present this amounts to 8 percent of the total world export market. While o handling onetwelfth of the world's petroleum, the Rotterdam market is





11

the barometer. Over the years, the market has expanded. Initially, its attraction was low prices in a time of oversupply. In May 1978, for instance, when there was an oil glut, the Rotterdam market offered discounts of 10 to 20 percent on the official OPEC price. A year later when supply was short it was a place for catching up on needed products.
In recent years Rotterdam trading has become the dominant price reference governing spot transactions, regardless of where they take p lace. A cargo of heating oil going from the Gulf of Mexico to Le H avre in France would have nothing to do with Rotterdam, but its worth Nyould bc established in relation to the daily transactions there.
Since limited supply has heightened competition for refined products, Rotterdam prices have gone up over the past year, more than doubling in many cases, and the increase has been employed as a justification by some oil-producing countries for charging special premiums on their contracted deliveries, and eventually, for raising overall prices. Rotterdam prices hit a peak on June 1, 1979 just prior to the OPEC meeting that raised the price of crude oil to an average of $20 a barrel.
Some observers believe that the major oil companies fostered the price rises. The majors' scheme would be that they could dominate the spot market by helping price levels here reach heights at which only a few buyers besides themselves could find financing. The argument against those who see collusion h.y the majors is that increased Rotterdam prices. work against them in the long run, encouraging producing countries to introduce surcharges and withhold oil from ongterm contract for quick profits on the spot market.
In June the French proposed that the Western industrial nations regulate the Rotterdam market. The mechanics of doing so would be difficult if not impossible since the Rotterdam market is so ethereal. Trading for cargoes of big tankers concentrates in the hands of the seven or eight companies, such as Shell, with sufficient financial backing to handle the big sums without scaring the banks.
Besides Shell, British Petroleum (with a company called Anro) and Exxon, (with lmpco) also have offices in Rotterdam watching the market, although they do not trade as actively as Petra, the Shell subsidiary, or Buk Oil, Transol, Vitol and Vanol, the four largest independents in the Dutch port.
Many large oil companies have offices in London that handle trading involving Rotterdam, for example, Northeast, Allied, Anschutz and Coastal States, but the Dutch traders insist that the best way to get a feel for the spot market is by being close at hand. Curiously, there are no regular brokers in Rotterdam. Their offices are concentrated in Paris (Libra and Asmarine), Hamburg (Miske) and Oslo (Feamrley and Eg er). In the Rotterdam offices, there are only telexes and telephones. More than a visible exchange, the Rotterdam market is a tiny secretive community of expertise.
The most likely effect of imposing regulation would be for the market to move or diffuse. WVhile Rotterdam might be the best location, Zurich, Singapore or Caracas would serve nearly as well. More likely the market would go underground. Its successor could well be a multitude of spot contracts signed in London, Paris, New York, and Oslo.






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After the question of the practicality of regulating the spot market comes the question of its desirability. Economists consider a competitive market to be the most efficient way to allocate a commodity. Kenneth Boulding defines it as a large number of buyers and sellers all engaged in the purchase and sale of identically similar commodities, who arc in close contact one with another and who buy and sell freely among themselves. Since the Rotterdam market matches this ideal so closely, why interfere with it? Fear that the major oil companies are colluding to raise prices (as mentioned above) is one reason. Fear of OPE manipulation is another. Yet a competitive market is suVVosed to do just the opposite. It should even out the short term ups aiid downs. The rise and fall of Rotterdam prices over the past year supports this. Prices began to climb in January, reflecting the shut down in the Iranian oil field lus a one to two month lap for shipping. Since it was winter, the e4ct was greatest on fuel oil. 15rices peaked and declined in June, reflecting the resumption of Iranian production plus a one to two month lag for shipping. Since it was then summer, the effect was greatest on gasoline.
In contrast to France's desire to regulate the Rotterdam spot market others suggest improving it. Trading and exchanging information would improve if the market established rules and a headquarters like the New York Stock Exchange or the Chicago Board of Trade. A formal petroleum exchange would permit many buyers and sellers to trade, thereby increasing competition and minimizing manipulation. It would lessen the power of OPEC or major multinational oil companies to set prices artificially.
Another suggested improvement to the Rotterdam market would be to establish a futures market such as those already existing for wheat and foreign currency. Futures markets give buyers and sellers who do not want the risk of carrying inventories the opportunity t ass the risk on to those who do want it and the gains it might entai called speculators. When oil or other complex production is carried on for a world market through a vast industrialized complex, there is an extended period of time between initial production and final use. There is the risk that prices may move adversely at any time during the long period of production, storage, processing, distribution, and final use. Incurring this risk is a normal part of doing business; the futures market is one mechanism by which exposure to this particular business risk can be eliminated. The futures market offers an immediate elimination of price risk to the holder of inventory. By selling a futures contract at a fixed price, the holder of inventory is insulated from future market movements. In addition, in a period of rising inflation the commodity user can build up low-cost inventory by purchasing a futures contract. He can protect the profits from his futures sales against the possibility of higher prices for raw materials. The futures market can also be used to offset currency fluctuations and to increase the turnover of capital through loans on hedged commodities.
Writing in International Oil Arnold Safer notes that
commodity trading is often subjected to the criticism that the futures markets themselves increase price volatility and the speculators cause wild price swings that are unwarranted by underlying economic conditions. In recent years commodity futures trading has grown very






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rapidly; in 1977 an estimated trillion dollars worth of commodity contracts were traded in the United States, up from less than $200 billion just five years before. With that spectacular growth have come charges of scandal, real and imagined, often levied by those who have been hurt by adverse price movements. As a result, a number of government leaders have claimed that commodity markets offer greater opportunities for price manipulation. Executives of some large corporations, whose pricing patterns are heavily influenced by commodity markets in the products that they sell, have often been critical of the unstable nature of the market system. Consumer groups have complained that particular agricultural commodity markets have contributed to inflationary pressures on food prices.
Safer believes that much of this criticism is misdirected and stems either from a lack of understanding or from an attempt to advance the critic's own position. Commodity markets are vulnerable to public criticism because they are highly visible to the public and the pricing process is open to all who care to examine it. Some excesses occur from time to time but, Safer agrees most can be attributed to poor regulatory procedures. The criticism of the corporate executive, however, derives from his desire to better control his own prices and from his own reluctance to use the exchange market for commercial hedging. To the consumer and to the political leaders, the pressure of rising prices, not the volablity per se is what counts. But, Safer argues, that is what free markets are all about, and the fact that organized exchanges provide a central marketplace for buyers and sellers to execute transactions is no reason to damn the process. Open organized commodity exchanges substantially reduce the opportunity for price manipulation by any one party, simply because it is more difficult to employ excessive market leverage in an open and often sophisticated forum. The financial penalties for trying to manipulate a futures market can be severe iFthe attempt is made counter to underlying economic pressures. Every futures contract has an expiration date, at which point its value equals the actual price in the cash market, as determined by supply and demand of hysical transactions at the time. Any speculator who accumulates a long position in a commodity adding to the upward pressure on prices, knows that he must eventuaY liquidate that position and thereby add to the downward pressure on prices. He can make a profit only if he forecasts correctly the overall trend of cash prices as determined by underlying economic conditions. The very size of most futures markets also argues against price manipulation, because these markets reflect the bids and offers of thousands of participants and deal with commodities that are produced and consumed on an international scale.
It is not the increased use of futures markets that causes price instability in Safer's analysis; increased instability has encouraged a greater use of futures markets. That instability has derived from changes in underlying economic and political trends, such as government dismantling of farm support programs, the new roles of China and Russia as large and unpredictable buyers in world
agricultural markets, and a wave of heightened government intervention in worldwide markets, such as the sudden imposition of mining severance fees, export taxes, currency realignments, and export controls.






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Safer believes that given the degree of disruption since 1973, recent commodity price fluctuations have been relatively modest.
Thus far this discussion of markets has considered reforming the foreign markets, but the domestic market could be reformed as well. Decontroling the price of crude oil, dismembering the entitlements program and decontrolling prices of gasoline would lead to more efficient allocation within the United States. On June 1 President Carter began a phased decontrol of crude oil. The Con ressional Bud et Office estimated that crude oil decontrol and a world price of $20. 2 would result in a reduction of oil imports of 1.2 MMB/D in 1985. Half of this would come from increased domestic supplies.
The report foresaw decontrol would have benefits of reducing demand, stimulating supplies, reducing imports and improved relations with both OPEC and industrialized nations. Increasing domestic oil prices to the world level would encourage consumers to reduce their demand for oil through both the substitution of alternative fuels and outright conservation. The price increase for oil would also encourage investment in solar and synthetic fuels, but it would probably not be sufficient to make unconventional fuels such as liquefied coal or shale oil economical. CBO expected potential savings to be substantially greater during the late 1980s and early 1990s since energy is used primarily in connection with capital goods such as industrial boilers and automobiles which take 5 to 20 years to replace. Decontrol would stimulate additional supply from tertiary recovery, new discoveries, and existing oil from proven reserves.
Demand reductions and supply increases would decrease oil imports
U b approximately 1.2 MMB/D by 1985, or about 10 percent of total .S. oil imports in that year. This would represent a shift of approximately $12 billion in the 1985 U.S. balance of payments. In later years, as demand reductions continue to grow, the magnitude of the oil import relief would continue to increase. Decontrol would have disadvantages of increasing inflation, placing a burden on the poor and shifting income from consumers to producers. The price increases for domestic oil would increase inflation, and they might slow economic activity and increase unemployment. The effects on real Gross National Product (GNP) and unemployment are relatively minor and generally occur after 1982.
Refonning Foreign Tax Credits
The Treasury allows multinational oil companies to credit taxes paid in one foreign country against taxes in another country when repatriating profits. Because different countries have different taxes this permits an oil company to shift tax liabilities in order to minimize its American tax. Objections to the foreign tax credit include: J1 net loss of revenue to the U.S. Treasury estimated between $1 to 2 bil ion a year7 (2) a bias in favor of foreign exploration and production and (3) a bias in favor of foreign shipping and refining at a time when American ships and refineries have excess capacity.
Professor Paul Davidson, a Rutgers University economist, believes that reforming the Internal Revenue Service regulations can mitigate these problems. He maintains that it is a well established principle of economic theory that when a producer is earning monopoly rents, a








government may tax away all of these rents via a per unit tax equal to the monopoly rent per unit without affection the production decision of the producer. In the pTesent case the 01.)f--,'C governments arc merely utilizing the oil companies as a "tax collector" ffir what is essentially a sales tax (equalled to their estimate of available monopoly rents) levied against consumers who are facing a cartel controlled market. The OPEC nations have, in Davidson's analysis merely put into practice this well known economic principle. If, however, the oil producer in a' foreign country is a U.S. corporation or a subsidiary of a U.S. corporation, then the home country (the U.S.) can, if it wishes, attempt to share in the monopoly rents generated by the artificially high market price by also taxing the revenues of the producer. If, on the other hand, the home country
to t crmits a tax credit on any payments made by the producing firm e host (OPEC) country, then in effect, the home country (the U.S.) has given the OPEC nations exclusive privilege to keep all the monopoly rents, if these countries desire to do so.8
Yet if IRS were to change its regulations to proscribe a foreign tax credit, the oil companies would still be entitled to deduct these expenses. In 1977 the IRS estimated this change would increase revenues by over one billion dollars a year.9
Some reformers suggest that the United States use the distinction between tax credits and deductions to penalize OPEC. The IRS would tax OPEC oil by allowing only deductions and non-OPEC foreign oil allowing credits. Advocates maintain this would foster development and production in non-OPEC countries and divorce the OPEC governments from the multinational oil companies.
The case in favor of continuing the foreign tax credit is as follows.
(1) The amount is small relative to the total government revenues. One or two billion dollars arc insignificant compared to a total budget of $500 billion. (2) Oil companies have a right to negotiate mutually beneficial contracts and agreements with sovereign nations and landowners. (3) Consumers in general benefit from more and cheaper oil.
In June 1979 the Treasury proposed three technical amendments to the tax code in order to limit credits for petroleum. Secretary Blumenthal said the benefits would be (1) to remove the artificial incentive to explore abroad rather than at home and (2) to remove a tax subsidy to foreign shipping and refining? Blumenthal estimated the amendments would increase tax revenues by $500 million. The proposal did not provide for playing off OPEC against other producers.

III. EXPANDING SUPPLY AT HOME AND ABROAD

Expanding supplies at home would reduce the need for imports; so would reducing c1cmand. President Carter took the fori-ner approach in his televised speech on July 15, 1979 and the latter approach in the 1977 National Energy Plan. Expanding supply and reducing demand abroad would also benefit the United States by making imported oil cheaper and more available.






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Domestic Supply and Demand
In his July address President Carter proposed to:
1. Develop alternative fuels -- coal, oil shale, gasohol, unconventional gas, and solar. Create an Energy Security Corporation to spend $88 billion to develop synthetic fuels. Create a Solar Bank to help meet a goal of supplying 20 percent of energy consumed by the year
2000.
2. Ask Congress for a law requiring electric utilities to
cut their use of oil by 50 percent in a decade.
3. Establish conservation programs including
congressional authority for mandatory conservation ang standby gasoline rationing. Spend $10 billion over the next decade for public transportation. Increase aid to
the needy to mitigate the impact of high energy prices.
The President estimated that with his program 1990 oil imports would be lower by 8.5 MMB/D than if imports continued to grow at the present rate. He proposed a major program to develop synthetic fuels and unconventional gas. He illustrated a total savings of 2.5 MMB/D for 1990:
coal liquids, coal gases 1.0 to 1.5 MMB/D
oil shale 4 MMB/D
biomass 1 MMB/D
unconventional gas 5 to 1.0 MMB/D
Reducing demand was the other half of the Administration's plan for reducing imports. Higher prices were to be the chief incentive to dampen demand. The 1978 Natural Gas Policy Act and 1979 crude oil decontrol made those fuels more expensive, hence less desirable. Regulation was also to reduce demand. The 1978 Fuel Use Act, the 1978 Conservation Act, the 1979 proposal for utilities to cut oil consumption in half, mass transit, auto efficiency and other conservation regulation was to reduce demand for imported oil.
Foreign Supply and Demand
Either increasing the total supply of oil in the world or reducing world demand would help the United States. The greater quantity of oil does not have to be domestic to help the United States. Greater production even in politically unfriendly countries such as the Soviet Union could help since the world market is highly integrated. The USSR sells limited quantities of petroleum to Western Europe. Perhaps more important, it supplies Eastern Euro e. If Eastern Europe were to buy OPEC oil in large amounts or if the SSR were to become a net importer, OPEC would be in an even stronger position. Greater production in the range of a few million barrels a day in some OPEC members like Ecuador or Gabon would strain the cartel. These countries need revenue and have no excess capacity. This is not the case for members like Saudi Arabia and Kuwait that do not need increased revenue.






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To spur petroleum development the World Bank has expanded loans. During 1979-81 the Bank plans to spend $70 million on oil and gas. The bank's total energy program, including coal as well as oil and gas, will rise to $1.2 billion a year by 1983, making this the bank's most rapidly growing prorm, By 1983, energy projects are expected to account for about 10 percent of the bank's lending, compared with 1 percent today. The bank decided to step up its lending for energy Primarily because of the explosion in oil prices in this decade, which as placed an almost intolerable financial burden on the poorer nations. By one estimate, by the Morgan Guaranty Trust Company, the latest price rise alone will add $9 billion to the oil import bill of the non-oilproducing developing countries between 1978 and 1980.12
Estimates of the oil potential of less developed countries not members of OPEC range from 500 billion barrels to nearly two trillion according to Bernado Grossling of the United States Geological Survey (USGS). The low estimate is as much as all the current proven reserves in the world.

OIL POTENTIAL OF NON-OPEC DEVELOPING COUNTRIES
RegonLow Estimate High Estimate
(Billion barrels) (Billion barrels)
Latin America 215 790
Africa (including Madagascar) 160 625
South and Southeast Asia 90 .300
China 27 172
Total 492 1,887

Were the World Bank or some other development program to
succeed, would this help the United States? Would not the fortunate new oil exporter promptly join OPEC? This, of course, is a risk. Aid migpht be conditioned on a pledge not to join the cartel. Other incentives might be used such as most favored nation status with respect to trade. Yet even if more nations joined OPEC the world supply would increase, thereby easing the market. And as OPEC gained more numbers, unity should prove more difficult. More members would mean more conflicting interests to reconcile.
Reducing foreign demand would also aid the United States since the United States must compete with other industrialized nations. Japan, for example, imports approximately 5 MMB/D, an amount that approaches that of the United States. For Japan or Europe to conserve is in the American interest. How to stimulate this is a difficult problem. American energy consumptilon. per capita is greater than for any other country except Canada. in view of -the large geographical distances and suburbanism of North America this rank seems unlikely to change. On the other hand, choice of fuel may be more flexible. Only in the past decde or two has Europe become so dependent on oil. In the past coal was the chief fuel. I may be that coal will enjoy a resurgence and nuclear power will grow as well.






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IV. A CONSUMER'S CARTEL
The success of OPEC in establishing and maintaining a cartel quickly suggested to the consuming nations that they should form. a counter cartel. In November 1974 Secretary of State Henry Kissinger joined the foreign ministers of 15 other industrialized nations in Paris to set up the International Energy Agency. To date the IEA has not become the tightly knit counter cartel to OPEC that was sought in 1974.
Other anti-OPEC groups have been proposed. One is the Council of Oil Importing Nations (COIN). Forming a wheat cartel is a third way to counter at least some economic impacts of OPEC prices.
The International Energy Agency (jEA)
The International Energy Agency is an autonomous body established within the framework of the Organization for Economic Co-operation and Development (OECD), to implement the International Energy Program (IFP) adopted by the participating countries on November 18, 1974. It carries out a comprehensive program of energy co-operation among 20 countries and works to promote cooperative relations with oil producing nations and other oil consuming countries. The lEA includes virtually all Western industrial countries except France. Members use over half the world's energy and over 90 percent of the energy of the "First World".
The lEA seeks to fulfill four objectives:
1. Co-operation among IEA Participating countries to reduce excessive dependence on oil through energy conservation, development of alternative energy sources and energy
research and development.
2. An information system on the international oil market as
well as consultation with oil companies
3. Cooperation with oil producing and other oil consuming countries with a view to developing a stable international energy trade as well as rational management and use of world
energy resources in the interests of all countries.
4. A plan to prepare participating countries against the risk of a major disruption of oil supplies and to share available oil
in the event of an emergency.
1EA's contingency plan for a supply interruption calls for mutual planning and aid. Each member is to maintain emergency reserves equivalent to at least 70 days net imports of oil (this will be increased to a minimum of 90 days by 1980) to be drawn upon during an oil supply disruption. Each member is also to maintain an effective demand restraint program which can be activated promptly in an emergency to reduce oil consumption by 7 percent if supplies are cut by at least 7 erccnt and by 10 percent if the cut is greater than 12
f erccnt. An FEA emergency oil sharing system is intended to ensure air and equitable allocation of available oil supplies among the members. Finally, each member is to maintain an effective national emergency oil sharing organization which is usually but not necessarily
joint government-industry body.






-0 *%
IV

Should an oil supply emergency arise for whatever reason, the IEA emergency oil sharing system is automatically activated if the disruption surpasses 7 percent of the normal level of supplies. An emergency information system collects operational oil supply data from members and oil companies at regular intervals during a crisis. This permits the IEA Secretariat to ascertain the total quantity of available oil and by application of the allocation formula contained in the IEP Agreement, to determine how the available oil is to be shared. Each member 10 s fair share and equitable share its #I supply right" is compared against scheduled supplies as reported in the emergency information system. Differences between scheduled supplies and supply rights, called "allocation rights" and "obligations' arc balanced out by reallocating corresponding quantities of oil between members. This is achieved through redirection of shjpmen s by oil companies under the guidance and supervision of the 19A within the framework of an Emergency Management Oranization established in the Secretariat (on a stand-by basis in normal times).
In the emergency allocation process, supply and demand for the various oil product groups will be taken into account as far as practicable. The system seeks to avoid any unnecessary disturbances to the normal commercial operations of the oil industry. Oil will continue to be traded at market prices and the IEA will monitor the price situation to make sure that the principles of fair treatment and nondiscrimination are observed. In application of the system the IEA group of countries would not seek to increase its normal share of world oil. supplies.
Council of Oil Importing Nations (COIN)
The Council of Oil Importing Nations proposed in S. 1349 would be more aggressive than IEA. The bill calls on the president to initiate negotiations with the other oil importing nations to establish a Council to negotiate with the Organization of Petroleum Exporting Countries reasonable base prices for oil with elimination or unreasonable or unjustified surcharges. Furthermore it calls on the President to develop and submit to the Council of Oil Importing Nations for its consideration a set of appropriate economic and political sanctions to be used when appropriate by the Councfl's member nations to encourage compliance of any nation that either sells or purchases crude oil on the international market at prices greater than the negotiated oil prices arrived at between the Council and the Organization of Petroleum Exporting Countries.
A Wheat Caitel
The United States and Canada account for approximately 75- percent of the world's grain exports. Other major exporters are Australia, New Zealand, and Argentina. The growing dependence of the world on North American grain and the example of price manipulation by OPEC have given impetus to the idea of international cooperation and market leverage by wheat exporting countries.
Several proposals have been put forward during the past three years. In 1975 Eester Brown of Worldwatch Institute suggested that the United States and Canada establish explicit guidelines for controlling






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access to North American grain supplies. Brown's idea was to limit access to those nations achieving favorable results in their populationfood supply situation.
In February 1977 Secretary of Agriculture Bergland proposed a wheat export agreement with Canada and other wheat exporting nations to set a a minimum price for wheat. The concept drew a mixed reaction from farm groups and commodity traders, and little support from political leaders.
During 1978 the idea of a wheat exporting cartel surfaced once again. On June 30, several U.S. senators met with their Canadian counterparts to discuss a possible Organization of Wheat Exporting Countries (OWE-C). OWEC would include the United States, Canada, Argentina, and Australia but not the Europecan Community. The wheat exports controlled by the OWEC would equal approximatley 85 pe rcent of world exports. Informal talks continued in September in Washington, D.C. Particpants agreed to continue discussions in the future.
Supporters of the OWEC idea claim that it is clearly in the U.S. interest to set a high price for wheat and divide the market. They claim that the cartel would benefit farmers through higher prices, consumers through security of supply, and the national economy through a more favorable balance of payments.
Opponents of the cartel idea claimed that an international wheat agreement to stabilize wheat prices would be more in the U.S. interest. OPEC imports only a small percentage of its food consumption in the form of wheat. If the market price rose dramatically, these nations would find it economically feasible to expand their own production and reduce imports. Other opponents worry that a wheat cartel would lack discipline to limit supply or that non-members would undercut the cartel's price.

V. BILATERAL ARRANGEMENTS

In contrast to approaches that see the world petroleum market as fully integrated, others believe the market to be segme Inted and that this segmentation offers the remedy to America's oil import problem. The remedy is to treat each exporting nation individually. This might mean, for example, direct government to government negotiations rather than the present system of multinational oil companies that owe their loyalty neither fully to the United States nor to the exporting country. Or it might mean bartering Amerian wheat for Iranian oil. Or it might mean the United States would have specail relationships with Saudi Arabia or Mexico.
Government to Government
In the past the American based multinational oil companies bargained individually with the exporters. With the emergence of OPEC ability to raise p rices in 1971-72, the State Department encouraged a coordinated stance. The Department sent its own emissary to the Middle East to urge the exporters to keep prices low. He failed but failure of this negotiatiog tour seemed insignificant soon after in October 1973 when OPEC began its massive price rises. A legal problem was, and remains, that unified bargaining would violate






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anti-trust laws. While in 1975 Congress exempted American companies from some anti-trust violations in the Energy Policy and Conservation Act Section 251, this exemption applied only to the oil sharing agreement under the International Energy Agency.
The benefit of government to government negotiations is that it would allow the American oil companies to concentrate their economic power. While one company may not be strong enough to influence an exporting country, the combination would. The problems are both economic and political. The United States is not the only big buyer in the world. Japan and Europe would Compete for the oil. Europe might form a Common Market bloc representing a buyer larger than the United States.
Linking oil to political issues i's the second problem. In May 1979 Nigeria warned the United States and Britain that it would use oil to retaliate if either country recognized the new Rhodesian government of Bishop Abel Muzorewa. Nigeria believed the Muzorewa government was not sufficiently representative of the Rhodesian black population. It objected to the British supported constitution and election that led to the former colony's transition to a Black majority government. Ni ri %c n a
supplies the United States with 15 percent of its imports, 1.1 MM /D in 1979.
When Saudi Arabia increased its production by 1 MMB/D in July, 1979, it implied the United States could reciprocate by favoring a homeland for the Palestinians and return of the old city of Jerusalem to Arab control. While the Saudis were too diplomatically sophisticated to make the linkage explicit and did have other reasons for boosting production, the fact that they could add 1 MMB/D to the world's supply meant they could subtract it just as quickly.
many other links between oil and politics exist. For Mexico, it is migration-, for Venezuela, it is technology; for China, it is security vis-avis the Soviet Union, and so forth. Government to government negotiations would strip the United States of the insulation of private companies serving as petroleum procurers.
Barter
To some barter seems a good way to obtain oil. The United States, for example, could directly trade 1.2 million tons of wheat for x barrels of oil. This would guarantee the United States an assured supply at an assured price at least as long as neither party reneged.
Wheat is the commodity most frequently suggested for government to government barter. "A bushel for a barrel" has become a popular sloptan. OPEC wheat imports run up to 10 million tons a year. In addition OPEC imports rice, com, barley, and sorghum. As mentioned in the previous section, a mere five countries -- the United States, Canada, Australia, France and Argentina -- produce nearly all wheat exported. Two of them, Canada and the United States, provided three quarters of it, and today these two countries are holding most of the surplus wheat stocks. Whilc this concentration suggests the potential for a wheat cartel, a cartel is not necessary for barter.
At present barter is rarely used outside the Communist bloc. Barter requires a coincidence of demand not often available. OPEC wants grain, but not amounts equal to demand for oil. The United States






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exported 185.5 million bushels of wheat to OPEC in 1978. Of this, 73.8 million bushels went to Mideast OPEC nations and 111.7 million bushels to non-Mideast OPEC countries. For 1978 the value of U.S. wheat exported to OPEC accounted for only 9 percent of the oil imported. This percent for Mideast OPEC nations was 7, and for nonMideast, 11. In order to obtain the amount of crude oil imported last year, on a bushel for a barrel basis, the United States would have to supply eleven times as much wheat as was ported to OPEC in 1978.
Ust year, the United States exported a teoxtal of 1.1 billion bushels of wheat. In order to be able to barter a bushel of wheat for a barrel of oil, the United States would have to increase wheat exports by 900 million bushels. This would require either an increase in wheat production, a decrease in domestic consumption, or a depletion of the wheat available for export to other American customers. Moreover, OPEC does not need this much grain. Thus it is not likely that OPEC countries would agree to any bushel for a barrel proposal given the current supply demand situation for wheat and oil.
"Special Relationships"
Strong bilateral ties between the United States and various oil exporters might assure oil imports. Iran, Saudi Arabia, Canada, Mexico and Venezuela are the most logical partners.
A special relationship can develop from (1) common interests or from
(2) deliberate cultivation. The latter is sometimes compared crudely to buying friendship whereas the former appears more natural. American commonality oF interests with Canada and Mexico begins with geography. Each is the other's natural market; defense of the North American continent must be shared. For Venezuela the commonalities are fewer but still strong. But even with these three Western Hemisphere neighbors the United States must cultivate friend'hi
Iran and Saudi Arabia have less in common with the Unite IT -State, since those nations are geographically and culturally remote. While these profound differences make it seem that their friendship must be bought with a guaranteed market for their oil, modern technology or military support, this is not entirely so. The United States does share common interests with Saudi Arabia and Iran. Anti-communism is a chief one. Iran's overriding foreign olicy goal has long been to protect itself from Soviet incursion and in uence. The USSR occupied the northern half of the country in World War Il and refused to leave until 1946 when Iran promised the Russians a share of its oil and the Americans and British pressured the Soviets. Iraq, Iran's neighbor to the west, receives Soviet arms and training. Afghanistan, its neighbor to the cast, is under Soviet influence. After British withdrawal from the Persian Gulf in the late 1960's the United States saw Iran as the allied power center of the region, bolstering its armed forces with equipment and training. To the north Iran guarded against the USSR while to the south it restrained petty quarrels. Besides supplying military hardware, the United States invested in Iran's economy. Its rowth rate was
henomenal, as much as 20 percent annually. Whife the Ayatollah homeini regime's installation in the spring of 1979 put an end to economic growth as an explicit goal, anticommunism remains. The Ayatollah must defend Iran's territory and sovereignty just as the Shah did.






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The Saudis share the Iranians" anti-communism for that atheistic, proletarian philoso hy is incompatible with Saudi culture. On the other hand, as Arats the Saudis are concerned with a settlement with Israel favorable to the Palestinians, something difficult to reconcile with American goals. At the same time tile Saudis, numbering only seven million, fear their radical neighbors (like Iraq) as wel as internal revolution, thus their security may depend on American troops, ships and airplanes.
VI. MILITARY SEIZURE OF FOREIGN OIL FIELDS

Defense Secretary Harold Brown, s making a a guest of CBS-TVs "Face the Nation" on February .25, T979, opined that the protection oil flow from the Middle East is clearly part of our vital interest, which warrants Itany action that's appropriate, including the use of force ... Energy Secretary James R. Schlesinger, probed ty NBC-TVs "Meet the Press" that same date, spoke of a possible American military presence" to protect "vital (U.S.) interests in the Persian Gulf'. Secretary of State Cyrus R. Vance and Senator Frank Church, Chairman of the Senate Forgn Relations Committee, expressed similar sentiments on March 18, 197 when they fielded questions for "Face the Nation" and ABC-TV's "Issues and Answers" respectively. Such statements indicate that at least some responsible American leaders consider military seizure of foreign oil fields as a possible o tion.
Military seizure raises moral and legal problems as welFas practical ones. The pacific settlement of international disputes is a long standing tenet of American foreign policy. Force is to be used only as a last resort, for instance, against an aggressor that invades another country. This was the U.S. justification for military operations in both Korea and Vietnam. For the United States to become the aggressor would run counter to this tenet. On the other hand, "reason of state" is also a long standing tenet of international relations. According to this principle, a state is justified in taking any action when its survival is in jeopardy. While some might argue an OPEC embargo that threatened vital national interests would justify military actions, it would be more difficult to prove that an embargo would threaten American survival. A more subtle moral issue arises in a hypothetical case where an oil exporting country requested American military assistance to suppress insurgents or bolster its defenses.
International treaties to which the United States subscribes forbid the use of force. The United Nations Charter, Article 2, specifically states that "all members shall refrain in their international relations from the threat or use of force against the territorial integrity of any state..." The NATO treaty and the 1960 Security Treaty with Japan are defensive only and apply exclusively to territory in Europe and North America or in Japan, respectively. Uilar treaty obligations of nations, however, have not prevented scores of wars over the last three decades.
World o inion is a further constraint on military seizure of foreign oil fields. t is reasonable to expect that the victim and its friends and neighbors would be outraged; so probably would more distant countries, especially developing nations. The response Western Euro e and Japan would depend on their perception of the impact c Te






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action of their interests. If the OPEC cartel were broken, petroleum prices returned to market determination and availability assured, support would probably be forthcoming. If they saw the United States as mono olizing what was previously a shared source, opposition would be force9l.
Assuinin the United States were to conclude either that moral and legal principles and commitments had to be honored or had to be sacrificed, it then would face the practical problems of whether it had the military capability to execute the maneuvers and to produce and transport the oil in the face of probable guerrilla counter attacks, possible Soviet or other intervention, and need to maintain forces sufficient to meet threats elsewhere in the world.
Very few oil producing countries, alone or in practical combinations, have petroleum production capacities and proven reserves that could satisfy United States and allied import requirements. The following survey of prominent prospects stresses production potential, space relationships (location, size, and shape), geographic characteristics, counterintervention threats, and political implications in special cases. Several options would insure sufficient oil imports for the United States, without regard for allies. To also supply Western Europe and Japan would be much more difficult.
Venezuela's major producing fields at Maracaibo, combined with those in Mexico and Nigeria, fall somewhat short of matching U.S. daily import demands, but pump enough petroleum to maintain the U.S. economy at a reduced pace if the United States conserved a million barrels a day. Essential refinery capacities also would be available.
All three countries are comparatively close to the United States. No terrain bottlenecks, such as the Suez Canal and Strait of Hormuz, interfere with traffic flow from either the Carribbean or Ni&eria. NiFeria, Mexico or Venezuela could offer only limited conventional military resistance to an U.S. invasion. Threats by Soviet air and ground forces appear unconvincing.
Liabilities, however, are also impressive. Separate operations 4,500 miles apart would cause force requirements and costs to soar. Wells under water produce most of Maracaibo's petroleum. Such structures would be much more difficult to seize and secure than installations ashore. Mexico's fields include the swamps and rainforests of Chiapas. Nigeria's fields are in mangrove swamps and rain forests similar to those that frustrated U.S. forces in Southeast Asia. Population is dense. Special tactics, tools, and techniques would be essential in both countries. And finally, Latin America would censure the United States if it seized oilfields in Mexico or Venezuela, which are United State's allies in the Organization of American States (OAS).
OPEC's greatest producers, of course, are in the Middle East. Saudi Arabia is the largest by far. Production in 1979 went over 9 MMB/D, and it could go as hiFh as 12 MMB/D. This would more than satisfy U.S. demand. The desert kinRdom would be comparatively easy to invade. The terrain is flat and open -- good for armored maneuvers and aerial surveillance. Its army is small. Guerrilla warfare would be difficult since the population is small and the terrain is open. Oil is found at moderate depts so wells sabotaged or destroyed in the invasion






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could be redrilled with comparative ease. Military liabilities are like those for the rest of the Persian Gulf -- long supply lines, lack of forward bases, and so forth.
There is little to recommend Iran. Its production is only 3 MMB/D. Refineries are not sufficient. Most fields are 400-500 miles from Persian Gulf ports, quite isolated from other Middle East assets. Consequently, Irq pumps petroleum to the Mediterranean. Neither pipelines nor ports could be secured unless U.S. troops were physically deployed over huge portions of Iraq, Syria, and Lebanon.
Counterintervenrion threats would be less crucial in countries at the southern end of the Persian Gulf, where four states straggle along a 600-mile littoral arc from Bahrain and Qatar through the United Arab Emirates (UAE) to Oman. However, their combined production falls 60 percent short of U.S. requirements, and many wells are offshore.
Kuwait, in the center, is more cornpjact. Its fields are within easy reach of the Persian Gulf coast. most installations are onshore. Refinery capacity ranks with the best in the Middle East. Loading facilities are more than adequate. Daily petroleum production potential is about 3.5 million barrels.
Iranian oil fields are scattered for 300 miles north-to-south in rough, arid foothills of the sawtoothed Zagros range. Land routes in the region are poor. Loading facilities at Kharg Island would be easy to defend.
The swampy Tigris- Euphrates delta, together with built-up areas, would afford an infinite number of safe havens from which guerrillas could attack. Most important of all, U.S. intrusions might incite the Soviet Union, which could interfere in force from the Caucasus.
All in all, military seizure of oil fields would strain American capability. "Best case" U.S. contingents could defeat OPEC armed forces in the Persian Gulf, while seizing oil fields and facilities, but that would produce a Pyrrhic victory if the.prize were ruined in the process. Presuming sufficient installations initially remained intact to serve U.S. and allied petroleum interests, constant security against sabotage would be difficult. Two to four army divisions, with support on land, sea, and in the air, would be fully employed for an indefinite period. Day -to-day petroleum operations would be sufficiently large and difficult that U.S. oil workers might have to be drafted to su)Ply manpower.
Direct Soviet intervention could foil an American seizure. Conventional U.S. airborne and amphibious capabilities would be too slight to dislodge Soviet divisions prepositioned in the operational area. Brandishing nuclear weapons to bolster the American position could backfire if the Kremlin called the bluff.
Success thus would de? end predominately on two prerequisties: slight damage to key installations and Soviet abstinence from armed intervention. Since neither essential could be assured, the use of U.S. force to seize OPEC oil fields in the Persian Gulf would combine high costs with high risks. Prospects would be poor;, risks would be great.
To improve the prospects for successful military action in any contingency, including possible action bearing on oil fields, the United States has laid plans to bolster its existing 110,000 man quick-strike force, popularly called the Unilateral Corps. Pentagon planners target two Army airborne divisions, one infantry division, and one Marine






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amphibious force for such contingencies. Navy ships and aircraft and Air Force aircraft would transport and support the Unilateral Force.
Military capability is only part of the equation in deciding whether to seize foreign oil fields, for such action would have grave international consequences. The most serious would be confrontation with the Soviet Union. Russian conventional land and air response has been discussed above, and the USSR might also employ naval measures. Such a confrontation could set off World War 1l1. The next most serious consequence would be strained American relations with Europe and Japan. Europe and Japan depend on Saudi oil far more than the United States does. Saudi capacity in excess of U.S. needs is only a few million barrels a day; most of the oil fields in the world would need to continue normal shipments to supply the Western industrial countries. Finally military seizure would bring the emnity of the Third World. If, for instance, the United States invaded Venezuela, it might soon find the Panama Canal sabotaged or American assets in Brazil confiscated or Mexican oil and gas embargoed. In sum, the option of military intervention is, as always, laden with risks and costs.

VII. NATURAL GAS AND COAL IMPORTS

Two imported fuels besides oil deserve brief consideration -- natural gas and coal. In comparison to oil, their present energy contribution is small. In future years, it may grow. Natural gas imports are half a quad, (quadrillion Btu's) compared to petroleum imports of 7 quads or total gas consumption of 9.5 quads. In September the United States agreed with Mexico to buy gas from its newly discovered giant fields in the south. Potential gas supplies are vast. In contrast, coal imports are miniscule. In fact, the United States is a net exporter. What is significant, however, is that the country imports any coal at all since this suggests domestic production or transportation is not economical. For this fuel also, future use may grow.
Natural Gas and Liquefied Petroleum Gas (LPG)
Huge energy resources in the formn of natural gas and LPG have been identified in many countries. Everywhere there is oil production, there is at least some production of natural gas, and there are many other gas fields where there is no oil poduction. Natural gas in the form of liquefied natural gas (LNG) is already an article of international commerce, although the technologies for producing, transporting, and regasifying LNG are sophisticated, demanding, and expensive. Potential LNG trade is very large. Estimated natural gas reserves in the world as of 1976 were 2,242.4 trillion cubic feet.13 Probable resources are a multiple of the current reserves, estimated at 9090 to 9490 tcf.14 The United States, by far the largest consumer of natural gas, used one fivehundredth of these estimated resources in 1973, the peak year for domestic gas sales. Although much of these reserves could be available to LNG transportation if the economics were right, the Workshop on Alternative E-nergv Stratege estimates that by 1985, world LNF Gtrade will only total the equivalent of 3.16 million barrels of oil per day15 or about 6.3 trillion cubic feet of natural gas per year.






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The problems with a substantial expansion of LNG trade as an option to reduce oil imports are:
1. Much of the LNG would come from the same countries from which the United States imports oil, and would be subject to the same insecurities of supply.
2. LNG is a potentially explosive cargo requiring special containers, vessels, and handling, and thus potentially en angers public safety near the LNG receiving facilities. As a result, few such facilities have been built. The problems of siting additional LNG ports greatly reduces their likely number.
3. The cost of LNG delivered into natural gas systems would be high even if the natural gas were given away by the producing country because of the expense of the technology. Since it will not be given away, but instead will be priced as high as the producing nation believes it can go without destroying the market, LN w ill not be less expensive than oil, and will probably be delivered at a substantially higher price. Only if imported LNG is strolled in" with domestic natural gas flowing at lower prices, so that the average cost is kept comparable to crude oil costs, would users prefer LNG to oil.
Imports of natural gas through pipelines from Canada and Mexico promise greater volumes, security, and economies. Current imports of Canadian gas amount to about 5 percent of U.S. consumption. Although there have been recent years when the prospects of continuing such sales looked bleak, new Canadian reserves and developing resources in Alberta's deep sands and in the far north may Permit Canada to justify additional long term exports to the United tates. Mexican resources are already enormous and growing with every additional oil discovery. Lengthy negotiations between Mexico and the United States over natural gas imports have been concluded recently. Small scale sales are likely to begin soon. Whether ftrm Canada or Mexico, pipeline imports are more secure than oil imports because of the physical, committed link between seller and buyer, and despite serious differences in some areas, American relations with both Canada and Mexico are good enough that embar~os of energy imports appear less probable than in the case of the Mid-East. The United States cannot expect, however, that Canada and Mexico will ask less for their exported energy than the international energy market will support.
Liquefied petroleum gases (LPG)--primarily propane, butane, and isobutane- -have been imported into the United States for years. Although they bear some of the same safety risks of LNG, they bear none of the mystique and have thus been handled in busy seacoast ports without waiting for construction of remote receiving facilities. The quantities of LPG in world energy resources are but a fraction of the energy in natural gas, estimate at about 65 billion barrels of current reserves (equivalent to approximately 258 trillion cubic feet) and 245 billion barrels of resources.16 Extraction of the LPG from the gas stream, transportation, and application are much cheaper and easier, however, than the same steps with LNG. Many countries with oil production which are forced dto flare their natural gas for lack of a market have started to construct gas processing plants to strip the LPG out of the gas stream for marketing. At p resent the only developed LPG markets are in the United States and Japan, and the prospects are






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fairly good of substantial quantities of LPG competing for entry to these markets durifin the early 1980's. This would cause price competition among, sellers and would aid the security of supplies.
Natural gas and LPG imports have promise as an option for reducing imports of oil. The security risks of reliance on OPEC nations can be spread or mitigated to some extent, because the potentially available supplies could overwhelm the current market, and more individual exporting countries could exercise market influence than in oil, where only Saudi Arabia and a few others are producing at less than full capacity. Because the potential supply is large relative to current demand, the pricing power of the OPEC cartel, so effective in oiL might be weaker with regard to gas exports: Certainly those countries which must produce gas in order to continue oil production would prefer to receive some value for it rather than to flare it, even if that value is below what the cartel establishes. There will be a stronger price cutting incentive than exists in oil trade. It is possible that gas exports over the next decade will begin to threaten the oil pricing power the cartel has demonstrated by expanding sales at a lower price than the Btu equivalent price of crude oil, and increasing substitution of gaseous fuels in applications currently fueled with oil.
Coal
Coal imports are miniscule, less than two million tons a year compared to domestic production of 700 million tons or exports of 50 million tons. Yet the fact that there are any imports at all is of concern. Why is the world's largest coal exporter importing any coal?' Not surprisingly the reason is cost. The Gulf Power Company of Horida maintains that the coal it buys from South Africa is chea er .P
than any low sulfur coal it can buy in the United States. Florida is a particularly suitable site for imported coal. The state air quality laws are strict and water transport is cheap and convenient.
Coal imports might increase. Many sites outside Florida also have good water transportation and stiff air quality laws. Australia sells to Corpus Christi, I exas. South Africa can expand production. Poland is another source of coal imports. The Polish government plans to expand exports and the American East and Gulf Coasts are a logical market. Since Poland needs Western currencies, it is willing. to subsidize coal exports. Poland's other customers include American allies and trading partners. Foremost is West Germany. To the extent to which the United States and Gen-nany depend on Polish coal, they are vulnerable to politically motivated boycott by the Communist bloc. To the United States this would only be a minor inconvenience; for Germany an embargo could be dis tivc. If coordinated with an
OPEC oil interruption, the effect courcd be severe. Thus it is the potential de endence on coal imports rather than any present dependence Tat bears examination.






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REVIEW

Reviewing U.S. options with respect to energy imports helps to focus debate. It points to the fundamental commonality of all controls at the water's edge, whether a quota or a fee, whether the Adelman or the Safer plan. It points to the global scope of the petroleum market and the benefits to all consumers of greater production anywhere. It balances the gains against the dangers and di fficu Ities of counter cartels, bilateral deals, and military invasion. It points to the limited size and the potentials of natural gas imports.
Import controls at the water s edge have the disadvantage of raising cost. While both a quota and a fee reduce American consumption of foreign oil (at least compared to what it would be otherwise), they both drive up the price to consumers. To the extent to which the
government restricts price rises, a quota or fee leads to shortages. To the extent to which the United States sacrifices, Europe, Japan and other importers gain. Adelman proposed that the government monopolize imports as a way to break up or weaken the OPEC cartel. If successful, prices would decline. It seems unlikely, however, that the Govern ment could implement his plan successfully in a tight market.
oreover, the Adelman plan would start with the current tPEC price which sets an equally high domestic price. Safer proposes to gain immediate domestic market relief by negotiating a lower imp ort price in exchange for a direct subsidy to oil exporters. This wou ld lower the domestic price. (See Section 1)
The oil market is truly global. While the French have proposed to regulate the so called Rotterdam market, most consider this to be impractical. Some question its desirability. Rather than constrain it, they suggest improving the market so it may allocate the world's oil most efficiently. This would include a better spot market and developing a futures market. They also maintain that within the United States a more efficient market would enhance efficient allocation so that even if the country has to pay high OPEC prices at least it would use the oil most efficiently. Abolishing foreign tax credits would alter the present bias in favor of foreign exploration, production, shipping and refining at the cost of reducing oil company profits. (See Section 11)
Expanding supply, either at home or abroad, benefits consumers, (providin gth at th production is not subsidized). Many of the Carter Administration plans for synthetic fuels, unconventional gas or biomass are subsidized with tax credits, loan guarantees or government sponsored development and demonstration plants. Such subsidized supply deserves closer scrutiny as to whether a net long term benefit to the whole economy exists. Foreign supply expansion also helps the United States. More oil for Europe and Japan eases price pressure on American importers. This even proves true in practice for greater production in the Communist bloc. Ways to increase foreign
production include World Bank loans, technical assistance and sale of drilling equipment. (See Section 111)
An effective consumer cartel to counter OPEC is beguilling. So far it has proved ellusive. The International Energy Agency, established in 1974, lacks the unity and discipline to match OPEC. This has led to calls for a more aggressive body such as COIN. A wheat cartel is another alternative. (See Section IV)






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Inability to unify Western industrial nations to counter OPEC has also led to proposals for bilateral deals. The advantage is that the United States can concentrate its economic and political power. Difficulties are that oil exporting countries demand political concessions and that the may renege on their agreements. (See Section V)
While mi itary seizure is usually described as a last resort, it is no longer unthinkable' It is, on analysis, a very risky solution. For the United States to seize enough oil fields in Latin America, Africa, or the Persian Gulf to supply the 8 MMB/D it imports would strain its military capabilities. Even if the Soviet Union did not intervene, the damage to American foreign relations would be severe. Obviously, the countries invaded and their neighbors would be hostile. Unless
seriously frightened, other OPEC countries would embargo oil for the United States. European and Japanese reactions would depend on their assessment of the consequences of such a seizure on their petroleum supply interests. (See Section VI)
Finally, analysis of oil imports calls for mention of alternative imported ffiels. At resent the United States imports neither natural gas nor coal in signiFcant quantities. In the future imports of natural gas may grow sharply as Mexico and Canada develop new fields. The potential Mexican supRlies are huge. For both, the United States is the only logical buyer of piped gas. Coal imports are unlikely to become a significant fraction of total consumption. Their importance is in serving as a yardstick by which to measure domestic supply and price. (See Section IV)
In sum, American options bearing on oil imports are diverse but not especially promising at present. None provide a sure, simple, and safe way to lower the quantity imported, nor to lower its price, nor to assure its supply. Yet while no alternative here will resolve the U.S. oil import problem, some promise incremental improvement.






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FOOTNOTES

1 FR Vol. 44, No. 62, pp. 18818-18824.
2 FR Vol. 44, No. 195, pp. 57902-57906, October 5, 1979.
3 David Howard Davis, Energy Politics, 2nd edition (New York: St. Martin's, 1978) p. 80.
4 New York Times, May 29, 1979
5 Wall Street Journal, August 27, 1979.
6 "The Oil Companies in the Crisis" in The Oil Crisis, ed. Raymond Vernon (New York: Norton, 1976.)
7 Sam H. Schurr et al. Energy in America's Future, pp. 435-436.
8 Taxation and Finance Feb. 22, 1978 pp. J-10 J-17; Taxation and Accounting. June 26, 1979 pp. J-1 J-13; June 19, pp. J-7 J-9.
9 Senate Committee on Foreign Relations, Subcommittee on
Multinational Corporations, Hearings, February 22, 1978.
10 House Committee on Government Operations Foreign Tax Credits, November 29, 1977, p. 374.
11 House Ways and Means Committee, June 19, 1979.
12 New York Times, August 22, 1979.
13 American Gas Association. Gas Facts. 1977 edition. 1515 Wilson Blvd., Arlington, VA 22207, p. 17.
14 Institute of Gas Technology. Energy Topics A Periodic Supplement to IGT Highlights. Dec. 5, 1977.
15 Workshop on Alternative Energy Strategies Energv Supply to the Year 2000. MIT Press, 1977, p. 59.
16 Energy Topics: A Periodic Supplement to IGT Highlights, May 7, 1979, p. 2.


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