Import Policy and Shale Oil

Abstract

Abstract To assess the impact that tile oil import policy may have on the development of the shale oil industry, one must consider the following characteristic differences between shale oil and commercial oil production:minimum investment costs for shale oil production are considerably larger than for conventional oil exploration and development:total investment in shale oil production must be completed before profit can be realized while development of conventional oil fields of similar capacity can be amortized over a number of years:land costs are lower for shale oil than for conventional oil:average operating costs (out-of-pocket) are expected to be higher for shale oil than for conventional crude oil: andshale oil is essentially a new industry and decisions regarding future production must be on a full-cost basis. Introduction At the Western Resources Conference held in July, 1964, in Boulder, Colo., John Kelly, Assistant Secretary of Interior at that time, stated that the federal government's role in connection with the development of the shale oil industry will be considerably greater than the "hands off" policy being followed in respect to other energy sources. While there are those who might be inclined to question whether "hands off" is really the most appropriate description of current government policy towards fuels, there is little doubt that government policy will be decisive in determining the fate of the shale oil industry. Of the four major categories of federal and state government policy affecting shale oil-leasing policies for government lands;tax policies, particularly the question of percentage depletion;policies having to do with prorationing of oil production; andimport policy-my comments will be confined solely to the last. However, I think it important to indicate at the outset that misguided policies followed in other of the areas mentioned could prove to be as great or greater obstacles to efficient development of our enormous oil shale resources as inappropriate policy with respect to imports. It might be well to begin by taking a brief look at present policy with respect to the limitation of oil imports into the United States and its justification. Justification for Limiting Oil Imports For the past 32 years the U.S. government has followed a general policy of seeking a gradual reduction of barriers to international trade to be accomplished among nations on a non-discriminatory, multilateral basis. The current manifestation of this policy is the negotiations which have as their objective a reduction of remaining duties by 50 per cent across the board-the so-called Kennedy Round of tariff negotiations. As a result of the liberal trade policy followed over the past three decades, U. S. tariffs today on imports subject to duty average only 12 per cent as compared to 53 per cent in 1930. The movement to reduce barriers to world trade has been supported by most economists since Adam Smith on the grounds that by having each nation concentrate on what it can produce most efficiently, resources are allocated better on a world-wide basis with greater production and welfare than would be the case under a policy of trade restriction. Over the years most economists have opposed tariffs because they are believed to result in a misallocation of resources and quotas because, in addition, they necessitate an overriding of the market price system in determining who can import and export and in what amounts. However, the mandatory policy restricting imports of oil from abroad, followed in this country since 1959, is not as inconsistent with either our general trade policy or theoretical economics as may appear at first glance. From Adam Smith's day to the present, economists have recognized that there are valid grounds for limiting imports. Smith himself gave two justifications for imposing trade restrictions which appear to be particularly applicable to an appropriate import policy as far as shale oil development is concerned. These were the need for protectionismwhen some particular industry is necessary to the defense of the country, i.e., the national security rationale; andto enable a new industry to be developed to the point where it can compete with foreign production-the so-called infant industry argument. Among the industrial countries of the Free World, there is general reluctance to depend entirely on free market forces in respect to fuels, largely because of the validity of Smith's national security argument. JPT P. 798ˆ