Import Quotas, Prices and Profits in the Oil Industry

Abstract

Since early 1959, mandatory import controls have been imposed on imports of foreign crude oil into the U. S. A key issue the infighting over the Kennedy Administration's foreign trade policy has been the twofold question of how much crude oil is to be imported, and how import quotas are to be allocated among users of crude oil. Under intense political pressure from domestic oil producers, the Administration has only recently given several turns to the screw and further tightened the system of oil import controls.' Neither the public general nor economists particular can be expected to understand the intricacies or consequences of particular quota schemes. In what follows, therefore, a simple graphic supply-and-demand analysis will be shown adequate to lay down some general conclusions: (1) that market equilibrium (price and actual consumption) is affected by the total volume of import quotas authorized; (2) that the allocation of quotas is a matter of indifference to consumers, since prices and consumption are unaffacted by the nature of the allocation scheme; (3) that the nature of the quota allocation schemes is to bring about a reallocation of profits (at least $60 million 1960) among refiners; and (4) that this redistribution, while the aggregate small (2 percent of total industry profits over the period) may be important to some companies. In 1950 substantially all foreign oil available for import to the U. S. was produced by seven major oil firms,2 five of which were American. Imports into the U. S. were controlled under a system of self-discipline.3 Throughout the decade of the 1950's powerful forces (depletion allowances, intangible cost write-offs, local state prorationing and the countervailing efforts of underdeveloped foreign, oil-producing lands) were at work driving other U. S. firms abroad to search for and to find new sources of crude oil. During the 1950's over 200 firms4 went overseas, many of them incurring very high capital costs so doing. By 1961 over 30 of them had been successful establishing foreign reserves of crude. Most of these 30 new foreign producers, however, had no overseas markets for this new oil and were forced to import their own foreign crude order to recover their investments. An extended, government-endorsed program of voluntary controls on these imports from 1955 through 1958 failed and March 1959 President Eisenhower, through the office of the Secretary of the Interior, imposed mandatory controls on imports of crude oil. The legal basis for controls rests on the national security clauses of the 1958 Trade Extension Act, oil imports having been certified by the OCDM as being in such quantities as to threaten to impair national security.5 From March 9, 1959, to Dec. 31, 1962, for the area known as PAW Districts I-IV (all of the U. S. except the West Coast) imports were limited to 9% of the Bureau * Research for this paper was done under a Ford Foundation Fellowship. I am also much indebted to R. K. Davidson, of the Rockefeller Foundation and to Professors E. Ames and V. L. Smith, both of Purdue University, for their valuable comments on an earlier draft of this work. 1 Presidential proclamation 3509, Dated Nov. 30, 1962 (27 F. R. 11985) amending Proclamation 3279 and implemented by Oil Import Regulation 1-Rev. 3 released Dec. 17, 1962. 2 The International Petroleum Cartel, Federal Trade Commission, 1952. 3 New York Times, May 21, 1950, p. 1, Section III. 4 L. M. Fanning, The Story of the American Petroleum Institute (New York, 1959), p. 128. 6 Trade Agreements Extension Act of 1958, Section 8.