U.S. SECURITY THREAT FROM OIL IMPORTS AT ISSUE

The U.S. government has received conflicting advice on whether oil imports pose a threat to national security.

On the one hand, independent producers say the government should declare that the increase in oil and petroleum products imports threatens to impair national security.

On the other, the Petroleum Industry Research Foundation Inc. (Pirinc), New York, says the current and projected level of U.S. oil imports does not present a demonstrable threat to national security.

The sharply opposing views surfaced during a Commerce Department hearing in New, York. It was one of a series of hearings conducted by Commerce in response to independents' petition under Section 232 of the Trade Expansion Act (OGJ, Feb. 14, p. 40).

Meantime, the New England Fuel Institute (NEFI), an association of 1,300 independent retail and wholesale home heating oil distributors in six states, warned Commerce not to recommend oil import fees, tariffs, floor prices, or mandatory adjustments to imports.

Imports supplied 43% of U.S. petroleum demand last year, and all forecasts point to a rising volume of imports as U.S. oil production declines.

INDEPENDENTS' VIEW

Roy Willis, government relations vice-president of the Independent Petroleum Association of America, told Commerce dire results lie ahead if the federal government does not act to stem the high level of imports. Lack of action could leave the U.S. with an oil supply shortfall in either a national military emergency or a peacetime supply disruption "with severe detrimental consequences for the nation's economy and other vital interests."

Willis said government investigations repeatedly have found oil imports threaten domestic security, and the government has intervened several times in oil markets to ensure supplies.

He pointed out that IPAA has not asked for an oil import fee or any other specific remedy.

"We are well aware that key officials in the Clinton administration oppose import fees," Willis said.

"We nonetheless urge the administration to look at all options. If the ultimate decision is not to employ import fees, we request that the administration tell the nation, in detailed legal and economic terms, why it took that decision."

He said the government could take other actions that have an indirect effect on imports-the course recommended in a 1989 national security finding-such as legislative and regulatory moves to increase oil and gas production.

A third alternative would be to employ a combination of direct and indirect action.

"For instance," Willis said, "a small increase in existing fees on imported crude oil and refined petroleum products can be made without anticompetitive impacts and those revenues used to fund a wide array of domestic energy initiatives."

PIRINC'S REBUTTAL

Although Pirinc rejected the view that imports pose a security threat, it warned that imposing import controls could jolt the U.S. economy.

Pirinc Chairman John Lichtblau told the Commerce hearing, "Our analysis shows that any measure imposed to achieve a significant reduction in oil imports from their current or projected level under existing market conditions would raise the price of oil to the point where it would cause measurable damage to the U.S. economy."

Lichtblau said since 1970 the U.S. domestic crude production has nearly always been virtually at capacity, and any government imposed import reduction could not be offset by drawing on additional domestic supplies.

He observed other major nations have a high dependence on imported oil and future oil supply disruptions will be limited in scope and duration.

"Our current level of oil import dependence is structurally irreversible and will, in fact, rise for the foreseeable future under any realistic scenarios," he said.

But acceptance of the argument that oil imports do not present a threat to U.S. security does not mean the government should be unconcerned with the domestic oil producing industry.

Lichtblau said, "A proactive policy to stimulate additional oil and gas drilling through tax incentives and royalty waivers for specifically defined new wells, as well as removal of existing federal and state offshore acreage restrictions, could be viewed as being in the national interest-not because of its potential impact on oil imports but because of its significant real economic impact on a core regional industry.

"If properly designed, these actions would not represent a cost to the U.S. taxpayer over time since the additional production would generate additional taxable revenues. It would also mean that the policy would only reward actual drilling.

"In the case of a price increase through import restrictions, the amounts allocated for drilling remain at the discretion of the producer. The only certain thing would be that prices for all consumers would rise."

NEFI'S POSITION

New England fuel dealers have no objection to measures designed to improve opportunities for U.S. oil producers. After all, they said, petroleum marketers rely upon strong domestic producers and refiners for supply.

"NEFI would support tax code incentives, for example, as well as the opening of frontier areas to production," the group said. "However, NEFI strongly opposes efforts to control petroleum prices.

"The experience in the 1970s illustrated that the government was ineffective at controlling maximum petroleum prices. There is no evidence that it will be any more successful at controlling minimum prices today. We should expect similar distortions and dislocations."

The group pointed out that the U.S. exports a considerable amount of distillate fuel oil-80 million bbl in 1992.

"An oil import fee will jeopardize the country's position as a net exporter of distillate fuel," it said. "When the cost of imports rises as a result of the imposition of an import fee, U.S. exporters will be rendered noncompetitive."