As this committee knows, the development of an adequate and modern U.S.-flag tanker fleet has been a major maritime goal of this administration. The reasons for this goal include such considerations as the balance of payments, seagoing and shipyard employment, and national security. These reasons become even more compelling as the quantity of petroleum and petroleum products required to be imported from distant foreign sources rapidly in

creases.

While I do agree with the objective of an expanded U.S. tanker fleet. I am opposed to H.R. 8193.

The new maritime program, which was enacted with the support. of this committee by the Congress in 1970, is working to create a new U.S.-flag tanker fleet. We are committed to continue the impressive progress that has been made thus far.

The enactment of mandatory oil cargo preference would be an admission that the administration's new maritime program has failed. Such an admission, in my view, is not warranted for it is not supported by the facts. On the contrary, the program has been far more successful in generating construction contracts for new U.S.-flag tankers than ever envisioned by its sponsors.

Even more important than indicating that the new maritime program has failed, a statutory requirement that commercial oil import cargoes be carried in U.S.-flag bottoms would be direct recognition that the U.S. Merchant Marine can never become competitive in the international marketplace. This would be the most serious admission of failure of the Merchant Marine that we could make. Again, I am not willing to make that admission for it would require overlooking the progress that has been made in constructing highly productive ships at reduced subsidy rates.

In my testimony this morning, I intend to illustrate how the new maritime program is working to bring about an adequate and competitive U.S.-flag tanker fleet. I will cover the following areas: The achievement of the maritime program in constructing tankers. The immediate prospects for tanker construction.

Problems with cargo preference.

Information requested by the committee.

The achievement of the maritime program in constructing tankers: Let me begin with the progress that has been achieved under the administration's maritime program to date. In order to appreciate fully the gains that have been made, it is instructive to review the status of the U.S.-flag tanker fleet prior to the passage of the Merchant Marine Act of 1970.

The U.S.-flag tanker fleet suffered a long period of decline after World War II. The active U.S. tanker fleet was reduced from 904 ships, aggregating some 12.7 million deadweight tons at the end of 1946, to 262 ships totaling 7.4 million dwt at the end of 1970, when the current maritime program came into effect. This program, of course, is the first to provide full Federal support for the construction and operation of bulk carriers, including liquid bulk carriers.. Without adequate Government support, in recent years the U.S. tanker fleet has been limited almost exclusively to the carriage of Government cargoes and to the coastal trades, largely between gulf

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coast and Atlantic ports. Moreover, the U.S.-flag tanker fleet did not participate in the movement toward very large tanker sizes that developed throughout the world in the 1960's.

The maritime program has begun to contribute significantly to correcting these weaknesses in the U.S.-flag tanker fleet and, if continued at its present level, will produce even greater gains in the next several years. The Maritime Administration has contracted to build 28 tankers under its subsidy program since the 1970 act was signed. Nine of these are very large crude carriers (VLCC's) of 225,000 dwt or larger, and seven are of approximately 90,000 dwt. In the next several weeks, Madam Chairman, we expect to sign contracts for seven ships in the 90,000 dwt class, which will bring the level of new tanker buildings up to approximately 4 million dwt, or some 40 percent of our fleet.

All of these ships are appropriate for carrying oil imports to the United States, but the VLCC's will require deepwater ports. As this committee knows, the Administration has sent a legislative proposal to the Congress to provide for the licensing and regulation of deepwater ports so that their development can proceed without delay.

The 1970 act provides that the maximum subsidy rate for ship construction decline by 2 percentage points per year, from 45 percent in fiscal 1971 to 35 percent in fiscal 1976. This represents a marked drop from the average subsidy rate of some 53.6 percent which prevailed before the new program was enacted. The contracts awarded to date have either met or surpassed these goals. A contract was signed in June of this year to build four tankers at a subsidy rate of 36.46 percent, as opposed to the maximum subsidy of 41 percent allowable during fiscal 1973. Just last Friday, I signed a contract for the construction of three tankers at a subsidy rate of 35.18 percent, which is the lowest ever achieved for a conventional ship in the history of the maritime program since 1936. These subsidy rates express the difference between ship construction costs in the United States and major foreign shipyards. This difference is the result of several factors, such as foreign and United States rates of inflation, productivity gains, pricing policies and currency exchange rates. While it is true that devaluation of the dollar in recent years and months has contributed to closing these cost differentials, foreign shipyards, most notably those in Japan, which is by far the world's largest builder of tankers, have absorbed much of the devaluation by narrowing their profit margins. This is particularly true for VLCC's. In other words, the cost differences between Untied States and foreign yards have been reduced by much less than the realignment of current values would ordinarily suggest.

The current maritime program has stimulated considerable private investment in new and improved shipyard capacity to improve productivity in the construction of modern tankers and other bulk carriers. These improvements have centered primarily on the introduction of automated equipment and mechanized production systems. Emphasis has been given to prefabrication of large subassemblies, and preoutfitting of components, using modular techniques to form the ship. Nine shipyards have committed approxi

mately $100 million to these efforts. Among these projects are improvements in the former Brooklyn Navy Yard, undertaken by Seatrain Building Corp., amounting to some $30 million; a new graving dock at the Sparrows Point, Md., yard of Bethlehem Steel, costing $18 million; and $10 million spent to upgrade the Todd Shipyard at San Pedro, Calif.

Additional improvements are contemplated for several shipyards, and if the market for tankers remains strong, new yards will likely be built. We estimate these potential investments at over $300 million, most of it in facilities for tanker construction.

Other stimulants to tanker construction:

In addition to the Federal subsidies that have been provided for the construction of U.S.-flag tankers, the administration has taken four other important steps which will stimulate U.S.-flag tanker construction. On April 18 of this year, President Nixon, by proclamation, instituted a fee system for licenses covering oil imports in excess of annual quota allocations. These license fees are scheduled to reach 21 cents per barrel for crude and 63 cents per barrel for refined products by November 1975. The license fees are designed to further basic energy policy by discouraging oil imports and encouraging expanded domestic oil production and refining.

However, on June 19 of this year, a second proclamation was issued that contained important implications for U.S.-flag shipping. This proclamation provided that license fees for imports manufactured in American Samoa, Guam, the Virgin Islands, or a foreign trade zone, would be only those fees applicable to the refinery feedstock, or crude, if the products were transported to the customs territory of the United States either over land or by U.S.-flag vessels, if available. The intent of this provision was to make refineries located in U.S. territories and foreign trade zones competitive with domestic refineries. It does not reflect a general administration position on reducing license fees when U.S.-flag ships are used to carry petroleum from foreign sources.

The effect of these proclamations can be best demonstrated, I believe, through an example. A refinery in the Virgin Islands can obtain crude oil from a foreign source without payment of fees because the Virgin Islands are outside the customs territory of the United States. Under the first proclamation, its output would be subject to a license fee of 63 cents per barrel by November 1975 when imported into the United States. The impact of the second proclamation is to treat this Virgin Islands refinery as if it were a domestic refinery so that a fee of only 21 cents per barrel would be charged. This makes the Virgin Islands refinery competitive with a domestic refinery using foreign crude oil. However, the 42 cents per barrel advantage can only be gained if U.S.-flag ships are used if available. If it is established that U.S.-flag ships are not available, the same 42 cents per barrel advantage can then be gained when shipment is made by foreign flag ships. The extra cost of using an unsubsidized U.S.-flag tanker on this route is from 5 to 10 cents per barrel, depending upon the size of the ship used. The importer gains at 32 to 37 cents cost advantage through the use of U.S.-flag ships. Thus, a positive incentive has been provided by the admin

istration for the construction and use of additional U.S.-flag tankers. Table A contains our estimates of U.S.-flag tankers that will be required just for the Virgin Islands trade under these proclamations. The table follows:]

TABLE 1. ESTIMATE OF U.S.-FLAG TANKERS REQUIRED TO TRANSPORT PETROLEUM PRODUCTS TO THE UNITED STATES FROM THE VIRGIN ISLANDS

Note. The growth shown in the table is due to planned refinery expansion and steadily decreasing amounts of petroleum imports subject to fee exemption. By 1980, either 22 tankers of 52,000 dwt or 34 tankers of 35,000 dwt will be needed.

Mr. BLACKWELL. As the Chairman knows, by 1980 either 22 tankers of 52,000 deadweight tons or 34 tankers of 35,000 deadweight tons will be needed.

The second measure, and perhaps the most significant one taken in the past year to aid the U.S.-flag tanker fleet, was the maritime agreement between the United States and the Soviet Union. The maritime agreement, which was signed in October 1972, seeks to open the channels of maritime commerce between the two nations and to afford U.S.-flag vessels and Soviet-flag vessels the opportunity to participate equally and substantially in the carriage of all oceanborne cargoes moving in the Soviet-U.S. trade. The agreement provides that the U.S.-flag vessels and Soviet-flag vessels will each have the opportunity to carry not less than one-third of all cargoes moving by sea between the two nations. Recognizing the policy of both the United States and U.S.S.R. with respect to third-flag participation in their trade, the agreement provides for the balance of the cargo to be open for competition by all flags.

The arrangements for sharing commercial cargoes under the terms of this bilateral agreement are unique among our maritime policies, but it is generally recognized that special circumstances were involved. First, shipping arrangements had to be worked out before the improved trading relations sought by the administration could, in fact, be implemented. Second, this agreement was a step toward establishing new trade where none existed before. Third, the agreement does have provisions for the carriage of trade by the vessels of other countries, which represents new business for these ships. I should note that the carriage of grain under this agreement by thirdflag vessels over the past year has been substantial.

The agreement immediately provided American-flag ships with access to one-third of approximately 19.2 million tons of United States grain purchased by the Soviet Union in the past year. To facilitate the participation of American-flag vessels in this movement, we at the Maritime Administration developed a special operating subsidy formula for ships engaged in this grain trade and negotiated a satisfactory rate structure with the Soviet Union.

The significant contribution of this agreement to the economic health of the U.S. tanker industry is evidenced by the fact that in April 1972, during the negotiations for the maritime agreement, 43 U.S.-flag tankers,, or over 1.4 million deadweight tons, were laid up essentially for lack of cargo. Since the signing of the maritime agreement and the strengthening of demand for tankers to move oil, ships have steadily been withdrawn from layup, and none is currently in that status for lack of employment.

During the recent shipment of Soviet purchased grain, the Soviet Union chartered 51 U.S.-flag vessels for a total of 94 voyages to move over 3.2 million tons of grain. As of August 31, 1973, U.S.-flag vessels have achieved a participation level of 17.5 percent, which is more than any other national flag fleet. The Soviet-flag vessels have accounted for 14.4 percent of the carriage. Further, U.S.-flag vessels have returned to the United States with over 2.2 million tons of import oil and oil products from the Black Sea and Mediterranean areas. U.S.-flag tanker participation in this import oil movement was made possible by payment of the special operating-differential subsidies devised for the Russian grain program.

The unusually high worldwide demand for tanker tonnage has created more profitable employment opportunities in trades other than the carriage of grain to the Soviet Union. One of the principal objectives of the program was to provide needed employment for U.S. tankers. This, we are happy to report, has been accomplished even though the number of ships presently carrying Soviet purchased grain has diminished, despite the fact that the rate for U.S. tankers carrying grain from U.S. Gulf ports to the Black Sea is currently $17.24 per ton, with a scheduled increase to $18.88 per ton tomorrow, compared to $9.20 per ton in December of last year.

On the basis of recent fixtures for the movement of grain from the Gulf to the Continent, which is our base index for this trade, I expect the Soviet grain rates in the next month-that is the period commencing November 20-to be over $20 a ton.

This program will be available to U.S.-flag tanker operators for employment of their vessels if market conditions in the oil industry change.

The third stimulant to U.S.-flag tanker construction is the administration's support of the Alaska pipeline. The pipeline, when in full operation, is expected to deliver 2 million barrels per day of crude oil to the Port of Valdez, Alaska. Shipping that oil to the west coast will require a fleet of approximately 32 tankers of 90,000 deadweight tons each-assuming that 50 percent goes to Long Beach, 35 percent to the San Francisco Bay area, and 15 percent to Puget Sound. Since this trade will all be between U.S. ports, only U.S.flag tankers will participate. The final step towards strengthening the U.S.-flag tanker fleet has been taken with the cooperation of the Department of Defense. To improve the readiness of the Merchant Marine to support the military in time of war or national emergency, as provided in the Merchant Marine Act of 1936, we have been exploring various alternatives with the Navy since 1970. One such alternative involves the greater use of merchant seamen and merchant tankers to provide logistic support for the Navy.