The Case for a Less-Restrictive Oil Imports Policy

Abstract

LICHTBLAU, JOHN H., PETROLEUM INDUSTRY RESEARCH FOUNDATION, INC. NEW YORK, N. Y. Editor's Note: This paper by John H. Lichtblau and "The Case for a More Restrictive Oil Imports Policy" by Minor S. Jameson were presented on Feb. 19, 1962, at the Council of Economics session during the 91st Annual AIME Meeting, in New York City. Although recognizing that the opinions expressed by Lichtblau are shared by few in the petroleum industry, the Society's General Editorial Committee feels that his paper and the rebuttal by Jameson together constitute an extremely comprehensive and timely analysis of the many issues involved in the oil imports controversy. The ideas and arguments set forth are the authors'; they are published here solely for the purpose of providing the reader with further insight into this problem. Introduction There are three parties to the oil imports controversy the domestic oil producers, the oil importers and the public. Domestic producers and importers are both motivated by their natural and legitimate desire for profit maximization, in their respective positions. Thus, domestic producers rightly regard every barrel of imported crude oil (with the exception of some specialty crudes) as a displacement of a barrel of their own crude. Conversely, U.S. refiners whose plants are located at the seaboard or at certain inland waterways generally welcome a higher level of imports because refiner profits are based primarily on the spread between the crude-oil price and the refined-products price. Therefore, the relatively low cost of foreign oil means higher profits to those refiners. This applies particularly to integrated companies whose own domestic oil production is insufficient to meet their refinery requirements but who have developed ample low-cost foreign oil supplies. The third party to the controversy the public has no such clear position on either side of the issue. Nevertheless, the public will determine the outcome of the controversy, for the public's spokesman is the Federal government whose function of course, is, the protection of the general welfare. Thus, public interest rather than private gain sets the terms of the oil imports debate. Each side must attempt to show convincingly that to paraphrase a famous quotation "What's good for us is good for the country". It cannot hope to win its case on any other basis. Therefore, this paper is an attempt to outline the case for a less-restrictive oil imports policy in terms of the public interest which is the appropriate setting for this issue. Crude-Oil Imports Economic Aspects Crude-oil imports have a direct impact on three areas of legitimate governmental concern economics, politics and national security. Economically, the facts clearly favor the liberal traders, as they do in most import controversies, for the price of crude oil in the major overseas exporting countries is considerably below that of domestic crude. The major reason is the much higher productivity of foreign wells. Thus, in the Middle East crude-oil production per well averages more than 4,000 B/D. In Venezuela yields per well are about 250 B/D, but in the U.S. production averages only 12 B/D/well. Furthermore, foreign tanker rates are much lower than those of U.S. flagships, with the result that U.S. flagships are used only in domestic coastal trade where foreign ships are excluded by law. In 1960, the combined effect of these price differentials resulted in the approximate costs of foreign and domestic oil shown in Table 1. These prices reflect the cost of oil of comparable quality at the U.S. East Coast, where the bulk of all foreign crude is consumed. These figures show that imported crude is approximately from 18 to 32 per cent lower than domestic crude on the U.S. East Coast. However, discounts off the foreign posted price occasionally tend to widen this price differential. Now let it be assumed for a moment that all quantity restrictions on the importation of foreign crude oil are lifted (although this step is not advocated in this paper). What would be the results of such a move?Probably the U.S. East Coast (District I), which has almost no local oil production, would turn to foreign areas for 100 per cent of its crude-oil requirements, instead of 55 per cent as it does now. JPT P. 699^