This would require some modification in operating concepts and capability, but may offer some potential cost advantages.

The steps that we have taken with the Department of Defense are spelled out, Madam Chairman, in my testimony. In order to dispense with reading this transcript and save time, I would like to submit my comments for the record and proceed to page 14 of my prepared text.

or

[The information follows:]

EMERGENCY MEASURES AVAILABLE

On the joint initiative of the Navy and the Maritime Administration, the Center for Naval Analysis (CNA) performed a study to determine 1) whether not merchant ships could effectively perform wartime Naval logistic support missions, such as underway replenishment, and 2) the cost effectiveness of substituting tankers for Navy oilers. The study concluded that potential savings from using merchant ships for some underway replenishment in wartime were large enough to justify further analysis and fleet testing. Accordingly, in coordination with the Maritime Administration, a policy decision was made by the Navy to test the ability of commercial tankers to perform in a fleet support role. This was to be a first step in determining whether some Navy oilers could eventually be replaced by merchant tankers. Since January 1972, two tests have been conducted by the Navy and MarAd. These are part of a series of ongoing tests nicknamed CHARGER LÖG.

The first of these tests, CHARGER LOG I, was conducted from February 7-April 4, 1972 to determine the suitability of merchant tankers for emergency underway replenishment. The merchant tanker ERNA ELIZABETH earned the praise of all participating Naval commanders for "exceptional professionalism" in the performance of an underway replenishment support role with NATO and U.S. naval forces in the Caribbean, Atlantic, and the Mediterranean. It is significant that the ERNA ELIZABETH is a typical U.S. merchant tanker manned with a union hall crew with virtually no additional training, and with only minor augmentation of normal hardware to provide a replenishment capability. Although not the fully capable oiler that the Navy would use for frontline support, the ERNA ELIZABETH demonstrated an ability that could be most useful in low threat environments.

The second of these tests is currently ongoing and utilizes the USNS TALUGA, a former Navy oiler. adapted for civilian manning. under the Military Sealift Command. The TALUGA also has performed well, providing, in the words of a Navy message, “services to Seventh Fleet units the same as any other fleet oiler." Both this test and the completed one involving the ERNA ELIZABETH have provided positive evidence of the economic and operational feasibility of using merchant tankers and civilian crews in certain Navy logistic support missions.

As a result of these tests, the Navy is now in the process of converting eight fleet support ships to civilian manning this year. These ships consist of three oilers. three cable layers and two fleet tugs. Consideration is being given to expanding this approach to additional ships in future years. This conversion to civilian manning will expand the role of the Merchant Marine, thereby strengthening the U.S.-flag tanker fleet and providing significant additional employment opportunities for seagoing personnel.

Mr. BLACKWELL. The immediate prospects for tanker construction. Tanker applications in hand:

As of September 25, 1973, there were construction differential subsidy (CDS) applications for 98 tank ships totalling 19.3 million dwt and costing in excess of $6.1 billion. The average size of these ships is approximately 197,000 dwt but, in fact, there are two principal size groupings within these applications.

One group consists of vessels in the 70 to 124.9 thousand dwt bracket, where CDS applications for 41 ships, averaging 85.4 thou

sand dwt, have been received. These ships will serve requirements for shorter international runs.

At the other end of the spectrum, the second group is in the 250,000 dwt class and over. Here, CDS applications for 40 ships, averaging 362,000 dwt have been received.

It should be pointed out that if the building of these ships became a reality today, the size of our tanker fleet would be increased by approximately 200 percent. In addition, we also have applications for Federal ship financing guarantees for ships to be used in the domestic trade only.

Current shipyard capacity is probably not adequate to support a continued high level of demand for U.S.-flag tanker tonnage that is implied by the CDS applications that we now hold, and the growing U.S. demand for oil imports. As a result of the new maritime program, however, important capacity expansions are taking place in shipbuilding. The Newport News Shipbuilding and Drydock Co. and Todd Shipyards at Galveston are among the yards that are currently planning for such expansions. The Newport News Yard contemplates a building position 1,600 feet by 230 feet in size, large enough to construct a tanker in the 600,000 dwt ton range. The facility planned for Todd Galveston will be 1,375 feet by 194 feet, capable of building tankers of up to 400,000 dwt. I anticipate that the Maritime Administration will be awarding shipbuilding contracts for ships in this size range during the current fiscal year. I want to emphasize that our new or modernized shipbuilding facilities are capable of making an important contribution to the development of a substantial U.S.-flag tanker fleet. By the use of just three yards to construct VLCC's, the United States could have enough tanker capacity to meet the 20 percent carriage level in 1985, and would only be about four VLCC's short of this level by 1980. Since we now have VLCC's under construction at two yards, this would require starting a VLCC series in a third yard, a program which I have just indicated could be initiated this year. Construction subsidy costs for the VLCC's would be about $193 million per year.

At the current rate of funding, the Maritime Administration program, which is realistically sized to both the requirement for U.S.flag tankers and to the available and planned ship construction capacity, will take U.S.-flag tanker penetration close to the 20 percent level by both 1980 and 1985. We have been using 59 percent of our CDS appropriations for tanker construction. This equates to an average annual funding rate of $176 million. The greater portion of the balance of our funds has been committed for liquefied natural gas tankers, another important energy import program. This is very positive evidence that creating an adequate tanker fleet has received the principal emphasis in our efforts to revitalize the American Merchant Marine. The Administration's interest in entering into these construction subsidy contracts, coupled with the current demand for tankers, has resulted, we believe, in solid prog

ress.

If I may, Madam Chairman, I would like to turn now to the problems that we see with cargo preference.

The strong demand for ships is reflected in the current high charter rates. In fact, these rates are higher than ever imagined. In order to give some insights into the level of these rates, I have assembled a table, found in the appendix, comparing the cost of transportation per barrel with fixed time charter rates for tank ships traveling from North Africa, the Persian Gulf and the Caribbean to the U.S. gulf coast. For these voyages, the price-cost ratio ranges from 1.21 to 1.85. The existence of this unusually high pricecost ratio, coupled with the high volume of trade performed, makes shipping today a very attractive venture at the present time. It is even possible for an unsubsidized U.S.-flag tanker to enter the foreign trade on a profitable basis, and this is occurring with increasing frequency.

These current high world charter rates, which do offer compensatory employment to U.S.-flag ships built and operated without subsidy, may be interpreted by some as an indication that there would be no additional cost resulting from cargo preference provisions. However, this would be incorrect. When the supply of tankers gets back into balance with demand, as it inevitably will, unsubsidized U.S.-flag bulk carriers will once again be unable to operate profitably in international trade since they will only receive normal world charter rates.

In order to present to this committee a report on the shipping cost differential per barrel between U.S.-flag tankers and foreignflag tankers from the major crude oil sources throughout the world, we have simulated voyages from Venezuela, North Africa, and the Persian Gulf to the U.S. gulf coast, and from Indonesia to the west coast for the years 1975 and 1980. The results are interesting. Starting in 1975, the average shipping cost per barrel on U.S. ships built without CDS is about 13 percent higher than on those built with the subsidy, and approximately 23 percent higher than on foreign-flag ships. By 1980, the relationship changes to the point where average shipping cost per barrel is only 18 percent higher on U.S.-flag ships with CDS than on foreign-flag ships.

I would like to remind you that tables reflecting the actual cost projections appear in the appendix complete with a listing of relevant assumptions that we have made.

[The table follows:]

Mr. BLACKWELL. It is useful to consider these facts concerning additional costs in the context of the proposed legislation. Since the bill is silent on the method of financing the extra construction

and operating costs of U.S.-flag ships required under the cargo preference provisions, it appears that this is a consideration that must be addressed. There are three major approaches to paying these extra costs:

Direct subsidy by the Federal Government under the existing provisions of the Merchant Marine Act of 1970.

Indirect subsidy, such as through tax incentives or a remission of petroleum import license fees.

Higher costs of delivered products, paid by consumers.

This is an important issue, since the method of financing the construction and operation of a U.S.-flag tanker fleet of a given capability can affect the overall costs, the timing of the costs, and the particular group of consumers or taxpayers who will bear these costs. Overall costs could increase under a cargo preference requirement, since U.S. shipowners will be provided with a restricted market, protected from the effects of full competition. Under these conditions, inefficiencies may be tolerated and total costs driven above those that would result under the direct subsidy system.

With regard to the timing of the costs, under the direct subsidy system, most of the extra cost would occur when ships are built and CDS payments are made. Some operating differential subsidy costs would also be involved over the life of the smaller tankers. If the costs were passed to the consumer, they would be spread over the life of the ships, while many variations in timing would be possible. with indirect subsidies.

It is useful, I believe, to consider what extra costs to the consumer might be involved if the Maritime subsidy program were to continue at the current level of effort while, at the same time, a 30-percent cargo preference requirement was imposed. With a 30-percent requirement, some might think that ships could be built without subsidy in quantities sufficient to close the gap between the ships built under the subsidy program and the 30 percent requirement. However, I do not believe this would happen, particularly in the case of VLCC's. The freight rates of subsidized carriers would be lower than those of unsubsidized carriers. Thus, an importer would always use a subsidized carrier when available. Any operator building a ship without subsidy exclusively for the U.S. international trade would run the long-run risk of being squeezed out by either increased subsidized construction or any decreases in oil movements. I do not think an operator would be willing to take this risk.

It is possible that existing U.S.-flag ships, built without subsidy, to serve the domestic trade might take cargoes in the international oil trade when the domestic market is weak. With the present high charter rates, these unsubsidized ships could, as they do today, carry oil profitably at the same rates as foreign or U.S. subsidized operators. Under these conditions, there would be no extra costs to the consumer. However, when rates return to more normal levels, the use of an unsubsidized carrier would involve some additional cost which would ultimately be passed to the consumer. This cost could be spread unevenly by geographic region, which could be unfair to consumers and could be detrimental to industries in the areas paying the highest cost penalties.

As an alternative to this extra cost to the consumer, the Maritime program could subsidize sufficient construction for 30 percent carriage of oil imports. In the interim period, when ships are being constructed to reach this level, an operating subsidy could be provided to unsubsidized U.S.-flag tanker operators similar to that used in the Russian grain program. As a variation, such subsidy could be provided even if U.S.-flag subsidized construction was held at a 20-percent level. This could reduce or eliminate altogether any extra costs that might be passed on to the consumer.

Under the existing subsidy provisions of the Merchant Marine Act of 1970, the Maritime Administration is limited to subsidizing only cost items so that the costs of U.S. operators will equal those of foreign operators. Therefore, with subsidy, U.S.-flag operators should earn the same rate of return as foreign operators. When charter rates are high, this will equal or exceed an adequate return. Under our subsidy regulations, we do provide for repayment of profits by subsidized operators if excessive. When charter rates are depressed, both United States and foreign operators can and occasionally do lose money.

However, under the terms of the proposed legislation, U.S. operators would always be given "fair and reasonable rates for U.S.-flag commercial vessels," which includes a return on capital. Therefore, when charter rates are low, a rate could be charged by U.S.-flag operators higher than the rate charged by foreign operators. Since subsidy cannot be paid to provide a return on capital, this set of circumstances would again involve some increased cost to the con

sumer.

Both extra consumer costs and direct subsidy costs could be reduced or avoided altogether if some indirect subsidy were designed. While the possibilities are virtually limitless, tax incentives and/or a remission of the petroleum import license fees could be used for this purpose. Such indirect subsidies are undesirable, however, since they are more difficult to adjust to meet new circumstances. This is a significant limitation in a volatile industry such as bulk ocean transportation.

Without question, I believe the direct Federal subsidy system we now use is the preferred method of financing the construction of a fleet of any given capability. It provides for the payment of extra costs by the Government for benefits that are essentially national in character, such as balance of payments, employment, and national security. Direct subsidies are, of course, costs that are borne by all taxpayers, whereas the costs of an indirect subsidy may fall on much narrower groups. Thus, if an enlarged tanker capability is of benefit to our citizens as a group, the direct subsidy system provides the most equitable means of sharing its costs.

The legislation, as proposed, would establish an immediate carriage level of 20 percent, to be increased to 25 percent by 1975 and 30 percent by 1977. However, to carry 25 percent of the projected petroleum imports in 1975 would require additional U.S.-flag shipping capacity equivalent to 28 VLCC's. Because of the leadtime involved in ship construction, the current status of order books, and the fact that June of 1975 is less than 21 months hence, it would be