cost resulting from the use of United States-flag tankers. Then you go on to say "while this proposal might ameliorate some of the direct cost impact to the immediate importer or consumer, it would of course have a substantial budgetary impact, eventually reaching the taxpayer, and would have an indirect inflationary effect." On what facts do you base this rather comprehensive statement? What would be the overall cost effect, if any? Also, is that not exactly what the President did with respect to oil imported from the Virgin Islands? Answer. A rebate, by definition, means the return of a portion of a payment. A rebate in this instance would involve a payment by the government to the importer for the costs in curred because of the additional expense for importing the petroleum or petroleum products on U.S.-flag vessels. Such a payment would lessen the extra transportation costs to the importer but would have a substantial budgetary effect because the U.S. Government rebate would come from the federal treasury, thus resulting in additional federal spending, and indirectly adding inflationary pressures to the economy. A fee system has replaced the former quota system for the volume of oil imported into the United States. Presidential Proclamation 4227 provides for the inclusion of refineries and petrochemical plants located in the territories of American Samoa, Guam, the Virgin Islands, and foreign trade zones in the oil import program on an equitable basis insofar as possible with refiners and petrochemical plants located within the customs territory. Accordingly, the regulation was modified to provide that refiners in the territories and free trade zone will earn fee exempt allocations on the same basis as the onshore refiners. Imports of products from the territories and the free trade zone over and above the fee exempt allocations will require a payment of a fee. The fee will be assessed at the rate applicable to the feedstock from which the product is made. Puerto Rico, the territories of American Samoa, Guam and the free trade zone are covered by the Jones Act. Therefore, to avoid giving refiners in the Virgin Islands a long range economic advantage over refiners in Puerto Rico and on the mainland a proviso was included in the Presidential Proclamation that in order for a Virgin Islands refiner to qualify for the lower import fee he must ship the product to the mainland (or Puerto Rico) in vessels of US-registry. This requirement can be waived by the Director of the fee system if no vessels of U.S.-registry are available at the time the shipment is made. Thus in the case of the Virgin Islands a rebate system has not been adopted. Rather, existing law has been changed to prevent refiners on the Virgin Islands from having an economci advantage over mainland refiners and refiners on other territories. Question 5. On what facts do you base your statement that "US shipyards now have a 3-year backlog and are fully employing shipyard workers."? Answer. As of September 1, 1973 Maritime Administration statistics show that there were 91 merchant vessels of 1,000 gross tons and over on order or under construction, totaling 5.5 million dwt. in American shipyards. Of these, 48 represented tanker construction_totaling 4.3 million dwt. Four tankers are scheduled for delivery in 1973, 17 in 1974, 12 in 1975, 9 in 1976, and 6 in 1977. Thus at least for the next three years-1974, 1975, and 1976, there are orders of such magnitude as to virtually assure fully employing American shipyard workers. Question 6. I understand that one of the basic principles of International law is that only the state of registry has the right to requisition and control vessels flying its own flag. I also understand that so-called "Effective U.S. Control" vessels are subject to requisition under Section 902 of the Merchant Marine Act of 1936. The Maritime Administration is of the opinion that this creates a conflict between U.S. domestic law and international law concerning the doctrine of effective control. How serious is this conflict? Answer. Since the concept of "(Effective United States Control" has never been tested it is difficult to measure the seriousness of this conflict between U.S. domestic law and international law. It is worth noting, however, that while it is generally accepted in international law that only the state of registry has the right to requisition and control vessels flying its own flag, the vessels cited by the Maritime Administration as being under effective United States control are vessels in which the owners have signed contracts with the Maritime Administration bringing these foreign registered but U.S. owned vessels within the scope of Section 902 of the Merchant Marine Act, 1936. 31-583-74- -12 Question 7. On what facts do you base your belief that passage of these bills would impose higher costs to the American economy and consumer? Notwithstanding the number of variables in this area, what is your best estimate of the increased costs to which you refer? Answer. The Department considers of paramount importance the principle that increased petroleum costs would result from the adoption of cargo preference measures. Such an increase would be due to both the higher costs of building ships in this country and to operating U.S. flag ships as compared to foreign flag vessels. There are a number of factors—including the reliability of sources of petroleum imports originating in the Middle Eastwhich would affect any precise costs estimates as to the potential costs of this legislation. However, the Department defers to the operating agencies directly concerned-the Department of Interior and the Maritime Administration of the Department of Commerce-as to their views on the approximate magnitudes in costs resulting from the adoption of H.R. 8193. The Department of Interior's cost estimates by 1985 approximate $1 billion. The Maritime Administration's cost estimates approximate $573 million. Although these figures differ since several alternative variables are taken into account, what the Department considers important is that these costs would be unnecessary additional costs to the American consumer already burdened by increased costs resulting from the increase in the price of petroleum at the point of origin. Question 8. You have stated that “it is because of your support for a strong US merchant fleet and national economy" that your Department cannot support H.R. 8193. In what specific respects do you believe that the purpose of these bills is incompatible with the building and maintenance of a viable US merchant fleet? Answer. The Department considers H.R. 8193 incompatible with the building and maintenance of a viable US merchant fleet because a statutory requirement that imports of petroleum and petroleum products be carried on American vessels would make United States shipping more costly and hence relatively less competitive in world shipping markets to the detriment of a viable US merchant marine. Question 9. Other than the increase in the number of tankers under construction, what facts can you supply in support of your contention that the Merchant Marine Act of 1970 is producing the desired results and is the most appropriate way to build up our merchant fleet? Are you saying that the 1970 Act should be regarded as the exclusive means of building an adequate US merchant fleet? Answer. The Department considers the Merchant Marine Act of 1970 as the most appropriate mechanism for building an adequate merchant fleet. As of November 1, 1973, 26 tankers are on order or under construction under the 1970 Act. Other vessels on order or under construction under the 1970 Act include 9 LASH barges, 2 ore-bulk-oil carriers, 4 roll on roll off vessels and 9 LNGS. Of the 50 vessels coming under the provisions of the 1970 Act, three have been delivered-two barges and one ore-bulk-oil carrier. Mr. DOWNING. Are there any further questions of the witness? Mr. PRITCHARD. Mr. Downing, I have a statement that I would like to submit for the record. Mr. DOWNING. Very well, your statement will appear in the record at this point. [The statement follows:] STATEMENT OF HON. JOEL PRITCHARD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON Mr. Chairman, legislation requiring that a portion of the nation's oil imports be carried in American-flag tankers should be enacted for reasons of basic national interest. Less than 5 percent of the nation's petroleum imports are now carried in American tankers while approximately 35 percent of our domestic oil needs are met by foreign overseas sources. It is predicted that imports will rise to 50 percent of total U.S. consumption by 1980. No other nation is so dependent upon foreign-controlled shipping for the carriage of its vital oil imports. The U.S. is especially vulnerable because it is so dependent upon the world's sealanes for the transportation of its energy supplies. In terms of national security, this legislation would bring about an expanded U.S.-flag tanker fleet, thereby reducing our nation's vulnerability to "coercion" from foreign interests. At the same time, as a new member of the House Merchant Marine Committee, I am determined to fulfill the mandate given the Congress by the 1936 Act, to maintain a strong U.S. merchant marine in peace so that it can be an auxiliary for the navy in war. Too often this peacetime role of the merchant marine has been neglected, with disastrous consequences in emergencies. This is particularly true of the nation's tanker fleet, which will be required to supply both the civilian and military energy needs of the nation in emergencies. The nation's balance of payments problems would be eased by the proposed bills. By 1980, with American tonnage carrying U.S. oil imports, several billion dollars could be cut from the foreign cash outflow attributable to oil imports. Other economic benefits would result from greater tax revenues along with reduced dollar inflation and instability. An additional long term benefit of the development of a larger U.S.-flag tanker fleet would be to reduce the environmental hazards posed by the threat of oil spills resulting from marine accidents. More than half of the foreign vessels which carry 95 percent of our oil imports are registered under Liberian or Panamanian flags. By contrast with the casual regulation and low crew and safety standards imposed upon these foreign registries, American tankers that would be used as a result of the legislation before this Committee are the most tightly regulated and bestmanned in the world. This legislation would also mean an immediate boom in ship construction, with shipyard employment and seagoing opportunities rising proportionately. Since this bill was debated last year, both the price of oil and tankers have risen sharply, without the participation of U.S.-flag tankers. Had this legislation passed last year, U.S. tankers could be participating in the oil trades in increased numbers, and could save the United States the premium costs of importing oil on foreign tankers. If the current high world tanker rate remains in effect, U.S. vessels will be able to operate profitably on all world trade routes, in direct competition with foreign vessels. Should this rate drop, the use of U.S. tankers would add about 1/10 to 1/3 of a cent to the price of delivered oil, an extremely small figure compared to the recent price increases by the oil producing states and by the foreign-flag tanker operators. While there may be some price fluctuations in the future, it is certain that the cost to the American consumer will no return to its 1972 levels. In any case, the possibility of a fraction of a cent cost increase to the consumer will be more than offset by the benefits to the consumer of a reduction in our balance of payments deficit, in a more stable dollar, in increased U.S. tax income, in increased employment, and most important, this legislation will add immeasurably to our nation's security. Mr. DOWNING. That completes the witnesses for today. At this time the committee will stand in recess to meet tomorrow morning at 10 a.m., in this same room. [Whereupon, at 11:45 a.m., the subcommittee recessed to reconvene at 10 a.m., Thursday, October 11, 1973.] ENERGY TRANSPORTATION SECURITY ACT OF 1974 THURSDAY, OCTOBER 11, 1973 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MERCHANT MARINE OF THE COMMITTEE ON MERCHANT MARINE AND FISHERIES, Washington, D.C. The subcommittee met, pursuant to recess, at 10:25 a.m., in room 1334, Longworth Office Building, Hon. Frank M. Clark, chairman of the subcommittee, presiding. Mr. CLARK. Good morning. The Subcommittee on Merchant Marine will please come to order. This morning the subcommittee continues hearings on H.R. 8193, and looks forward to receiving the views of the Department of Defense on this very important piece of legislation. I am particularly interested in the views of the Department of Defense with respect to the national security implications of relying on foreign-flag vessels for about 95 percent of our oil imports. In this regard, last Tuesday, the Maritime Administration cautioned that too much reliance should not be placed on foreign-flag vessels. Even with respect to the so-called Effective U.S. controlled fleet, the Maritime Administration was of the view that whether these ships are reall yeffectively controlled by the United States is a function of where they are registered, the nature and type of mergency, their location at the time of the emergency, and the nationality of the crew. As I pointed out in my opening statement, a very small sampling of foreign-flag tankers entering our ports showed that 125 vessels were manned by men of 55 different nationalities. I am sure the Defense Department will want to comment on this and the other elements of the problem this vital piece of legislation is attempting to overcome. Our letter of invitation requested the current and projected size of the U.S. tanker fleet required for national security purposes. As the Department of Defense response is set forth in a classified appendix, the subcommittee will consider the information contained in this report at a later date. Our first witness this morning is Mr. Paul H. Riley, Deputy Assistant Secretary of Defense. Mr. Secretary, it is nice to see you again. Mr. Riley, you may proceed as you wish. |