correct, and there is every reason to believe they are conservative, the United States will use almost as much oil and gas in the next 13 years as it consumed in all previous history. Best present estimates are that by 1980 this country must find between 75 and 80 billion barrels of oil.

It can be readily seen that the vital functions of our country rely heavily upon oil. As a primary source of energy, oil provides about 99 percent of our transportation requirements and 43 percent of our heating needs. Adequate amounts of oil cannot be stockpiled, as can some other minerals, and any interruptions of our source of supply, even for a few days or weeks would paralyze the commercial and industrial life of this Nation.

EMERGENCY ROLE OF PETROLEUM DEMONSTRATED IN 1967

The importance of having excess producing capacity available was demonstrated recently by the ability of the domestic oil industry to respond to requirements at home and abroad following the short Middle East war in June 1967. In the first full month (July 1967) following the disruption in crude supply for the free world, the U.S. oil industry increased its production of crude oil by 8 percent, or 750,000 barrels daily, over May, the last normal month. At the same time, total imports in July were off compared to May by 590,000 barrels daily, or 23 percent. Simultaneously, the industry was able to increase its exports of crude from virtually nothing in May to 274,000 barrels per day in July. These substantial increases in domestic production and exports were sustained as long as required. This was an example of the manner in which sudden demands can be forced upon the domestic industry.

DOMINANT POSITION OF FOREIGN OIL

The overwhelming availability of low-cost foreign oil will continue to threaten the domestic industry for the foreseeable future. At the present time, the United States and Canada together have reserves equal to about 13 years of production at current rates of demand, while the rest of the free world has 50 years of reserves on the same basis. Today, 87 percent of estimated free world recoverable reserves are located outside the United States and Canada. Foreign oil can be produced at per barrel costs that are a fraction of the cost of finding and producing oil in this country. Average per well production in the Middle East is over 5,000 barrels per day compared to average per well production in the United States of only 14 barrels per day. Considering only these relationships, there is little doubt that our own industry must continue to be protected to some degree if it is to remain viable.

EXPLORATORY EFFORTS AND RESULTS IN TERMS OF RESERVES

We can find other indications of the need to continue controls by examining statistics relative to exploratory effort and our Nation's oil reserves. For exploratory effort, there are several indicators, all of which are trending downward seriously, as the following table

indicates:

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Of even more serious portent is the outlook for known petroleum: reserves, the magnitude of which is directly related to exploratory activity. New crude oil reserves found and developed have not kep pace with increasing demand and production, as reflected in the crude oil reserve ratio. This ratio, which expresses the relationship of developed reserves to current demand for crude oil, has declined from approximately 13 years in 1959 to a little under 10 years by 1967. This is a reduction of 23 percent since adoption of mandatory impor controls, without which even greater decreases in the ratio would be expected.

If we project our present finding and exploration rate into 1980, the crude oil reserve ratio could conceivably be as low as 6 or 7 to 1. Simply to keep pace with the increasing demand over the next 15 years, the domestic industry must find and develop 50 percent more oil than it did during the past 15 years.

The volume of crude oil reserves found and developed during the past 7 years has averaged only 2.6 billion barrels per year in contrast to the average of 4.5 billion barrels estimated by the Department of the Interior as needed to meet future demand and maintain a satisfactory ratio of reserves to production.

The concern of this committee is that the United States will be unable to adequately meet this challenge. Consumption of oil is steadily increasing; discovery rates are declining and in recent years new discoveries have not kept abreast of increased production. During the last 10 years, 4 billion barrels more oil was used than in the previous period, but during this same time 4 billion barrels less oil was discovered than in the previous 10-year period. Thus, crude oil discovered during the last 10 years exceeded production by less than 1.1 billion barrels. By contrast during the period 1948-57 new discoveries exceeded production by 8.8 billion barrels. We are in fact presently living on reserves built up years ago. During the last 5 years the production-discovery ratio is even more unfavorable. Although slightly more oil was found in the last 5 years than in the previous 5-year period, the production increased by about 1.5 billion barrels. Čonsequently, in the last 5 years production actually exceeded discoveries by 12.5 million barrels. During the previous 5-year period discoveries exceeded production by 1.1 billion barrels. This trend is alarming and must eventually be reversed. Even more alarming is the fact that proven crude reserves in the United States at the end of 1967 were estimated at 31.4 billion barrels. This is down from a high of 31.7 billion barrels in 1961 and only slightly higher than 30 billion barrels estimated in 1955 when production was at a much lower level.

The oil import program raises serious implications for yet another important sector of the domestic fuels economy-coal-and for the Nation's future security as it relates to residual fuel oil.

Residual fuel oil to be used as fuel was included in the original proclamation issued by the President establishing the mandatory oil import control program in 1959. Since then, the proclamation as it relates to residual fuel oil has been repeatedly amended until now only a facade of control has been retained; in reality, imports are virtually unlimited under the "open end" system currently prevailing.

In 1959, imported residual fuel oil accounted for only 51 percent of the total heavy fuel oil consumed in district I, that portion of the United States located on the Atlantic seaboard.

At the present time, imported residual oil accounts for about 82 percent of total consumption in the area.

This growing dependence upon imported fuel in one of the most vital areas of the Nation is cause for concern.

It is cause for concern not only because it makes fuel consumers hostage to political and economic developments in foreign nations over which we can exercise only minimum control, but it emphasizes what appears to be a growing trend to turn over the entire fuel market in the area to foreign sources of supply.

The almost total reliance by district I fuel consumers on imported residual oil is also cause for concern because adequate provision has not been made, by major utilities and large industrial users, for quickly converting plants to use an alternate fuel, such as coal, in time of emergency. Such convertibility is now a requirement in some countries and if adopted here it could reduce the reliance of a vital area on the uncertainty of an imported fuel. It is recognized, however, that at this time and under existing conditions this area must continue to rely heavily upon imported residual oil.

Total imports of residual fuel oil have increased from 172 million barrels in 1959, when the control program was first established on a mandatory basis, to 345 million barrels in 1967. This latter figure represents foreign fuel in an amount equivalent to more than 82 million tons of domestic coal, an amount which is 15 percent of current annual production.

When total oil imports are considered-both crude and residual oil-the implications for the Nation assume alarming proportions.

EXCEPTIONS TO THE PROGRAM AND SPECIAL TREATMENT SITUATIONS

Any restrictive Government program such as import controls which dispenses economic benefit to the participants must be accomplished in the most equitable manner possible; otherwise the integrity of the program is jeopardized, certain participants are severely penalized, and the general effectiveness of the program is reduced.

From the testimony presented to this committee, it appears that the administration of the import program has not met these goals.

THE ORIGINAL PROGRAM

The original control plan contained features that might have been eliminated quickly but instead were continued. One feature that has drawn considerable criticism by much of the oil industry over the years has been the historic guarantee feature, which favors certain

established importers. Such historic guarantees were probably justi fied at the outset because they permitted companies to recover their overseas investments which were made with the expectation of being able to import crude oil products into the United States without limit. The provision was also meant to avoid severe disruption to established supply patterns. The Presidential proclamation governing the program provides for a gradual phasing out of the historic guarantee feature, yet today major historical importers receive allocations as great as 12.3 percent of refinery runs, while the average award for the sliding scale group of refiners is only 6.4 percent. It would appear that after 9 years, the continued need for this feature should be reexamined and the phasing-out process accelerated.

Another unusual provision of the program is the mechanism termed a sliding scale, which governs all refiners except those with historic protection. The sliding scale makes proportionately smaller import allocations as the volume of a refiner's input increases. Thus, the smaller refiners receive a proportionately larger import allocation than do the larger refiners.

When the program was initiated, the smallest refiners in districts I-IV could import 12 percent of their refinery throughput, while refiners with inputs of over 300,000 barrels per day could import only 4 percent of that portion of their total runs.

In the intervening years the sliding scale has been changed, and the difference between import allocations of different classes of refiners has increased substantially. This year refiners in districts I-IV with runs less than 10,000 barrels per day are permitted to import about 19 percent of their input, while refiners at the other end of the scale can import only 3.5 to 4 percent of their input.

Another unusual feature arose early in the history of the program when a change in the regulations to exempt overland imports from Canada resulted in several northern tier refiners in Michigan, Wisconsin, and Minnesota being able to receive imported Canadian oil without restriction while still enjoying their historic allocations. This particular feature resulted in a substantial economic advantage to these few refiners. There have been many complaints against retention of this advantage, and although the special historic allocations are being phased out more rapidly than the regular historic quotas this feature is still retained although lately a change in the regulations provides a feature whereby the extent of the phaseout for these remaining northern tier refiners will be lessened.

EXCEPTIONS GRANTED SINCE 1965

From 1959 until late in 1965, the administration of the program was concerned primarily with various means of dividing the total amount of imports among oil companies which were participants in the control plan. Late in 1965, however, and in each subsequent year, there has been injected into the program a series of provisions which appear to be unrelated to the national security objective of import controls and which, incidentally, have resulted in special treatment situations which are of concern to this committee. The more significant ones are listed below:

1. Awards to Puerto Rico and Virgin Island refiners

On December 10, 1965, by Presidential Proclamation 3693, provision was made for a new form of allocation. The Proclamation stipulated that the Secretary of the Interior may make "allocations of imports of crude oil and unfinished oils into Puerto Rico to persons as feedstocks for facilities which will be established or for the operation of facilities which are established and which in the judgment of the Secretary will promote substantial expansion of employment in Puerto Rico through industrial development ***." By this provision, a new criterion was injected as a basis for action on oil imports for purposes that are not clearly related to national security.

Under this new provision, two facilities in Puerto Rico have been approved. These involve the importation of 110,000 barrels daily of feedstocks to the Island, with further permission to ship 54,300 barrels daily of gasoline, jet fuel, and other products to the United States without restriction.

On November 9, 1967, by Presidential Proclamation 3820, the Secretary of the Interior was granted authority to allow up to 15,000 barrels daily of finished products to be shipped to the United States from a new refinery constructed in the Virgin Islands. The award was for a 10-year period.

A further grant occurred on December 15, 1967, when the Secretary of the Interior permitted a Puerto Rican refiner to move an additional 10,000 barrels daily of finished products to the east coast of the United States.

On the same date the Secretary also approved an application that will permit for 10 years the importation into Puerto Rico of up to 45,000 barrels daily of crude oil for use as petrochemical feedstock.

The net result of these allocations to island operations is that three historical refiners can bring approximately 177,000 barrels daily of crude and unfinished oils into Puerto Rico and ship 38,000 barrels per day of finished products to the U.S. mainland, the latter volume being considered outside the 12.2-percent limit on U.S. imports. In addition, new awards for petrochemical facilities in Puerto Rico provide for 185,000 barrels daily of crude that may be brought into Puerto Rico as feedstock. From this input, 64,000 barrels daily of finished products may be shipped to mainland markets. In addition 15,000 barrels per day may be brought in from a new refinery in the Virgin Islands.

When all authorized facilities are operating, the total volume of crude and unfinished oils moving to Puerto Rico may reach 362,000 or more barrels per day. For comparison, this equals 60 percent of all imports of crude and unfinished oils allotted to both sliding scale and historical refiners in districts I-IV in the first half of 1968.

The 79,000 barrels daily of finished products that eventually will move to the mainland will be considered as part of the total imports allowed into the United States, which means that it will be deducted from the total of all imports which otherwise would be divided among other refiners. This volume is in addition to approximately 38,000 barrels a day of finished products that historically have been shipped from Puerto Rico to the United States as an uncontrolled item of imports, outside the 12.2-percent limit.

All of the special awards described above were for the stated purpose of either improving employment opportunities, in the case of Puerto