eyes of the oil company public relations men. The report points out that even the wholly unreal assumption that the United States and Canada receive no oil at all from any foreign country for 1 year, they would be able to meet all demand for oil by only moderate rationing of passenger car gasoline. The report points out that this contingency-total stoppage of all United States and Canadian imports of oil-is difficult to even imagine, short of nuclear war, at which point we would face problems far more serious than lack of gasoline for a Sunday drive.

There are other inconsistencies which makes evident that the real purpose of the program is to protect the incomes of U.S. oil men. For example, oil from Canada is heavily restricted by hitherto secret agreement, even though no one seriously argues that the Canadians, who are equal partners in our air defense system, are a threat to our national security. The managers of the program have found it possible to make even less rational distinctions: Canadian oil is allowed to come in overland, but may not be shipped over the Great Lakes nor, until this year, to Chicago.

The carefully reasoned conclusion of the task force, that the present system is unnecessary for national defense, has not to my knowledge been coherently challenged. I suggest that if one takes seriously the requirement of the Trade Expansion Act of 1962 that the national defense be found to be endangered before import restrictions can be levied, the present program should be considered illegal.

It seems clear, however, that outright elimination of oil quotas is not a realistic goal for this political year. Indeed, even the Cabinet task force's proposal that tariffs be substituted for quotas seems unlikely to occur.

Hence, I suggest a further compromise: the extension, in the present District I (which is the Atlantic States) of the present exemption of residual fuel oil to No. 2 fuel oil. As a compromise, it has several advantages. First, No. 2 oil is most widely used in the North, for home heating, and its exemption will therefore benefit the area which is hardest hit by the program. Areas further south and in the Midwest and Northwest have natural gas available, and the South has in any event less severe weather.

Second, the exemption would not be so large a hole in the dike as to significantly reduce the present level of subsidy to the owners of oil lands. If the additional exemption has any general price effect, it would only offset the gasoline price increases currently being instituted by the industry, following the price leadership of Texaco in this case.

The third benefit of this compromise is that, unlike subsidies to only a part of the distribution chain, that is, increased quota allocations to independent marine terminals or to Machiasport refiners, it will not simply end up in the pockets of the favored segment. This disappearance of the subsidy occurs when those who effectively set the price, usually the large, integrated oil companies, do not receive any subsidy, and therefore cannot force the price down.

The present program adds to inflation, imposes an illegally discriminatory tax on consumers especially in the Northern two-thirds of the Nation, and abets monopoly. At the least, we insist on decontrol of No. 2 fuel oil. By continuing oil import quotas in the face of irrefutable evidence that they serve only to fatten the profits of oil inter

ests, the administration has applied its special version of the Southern strategy to the cause of economic justice.

Mr. Chairman, the oil import quota system is a $5 billion annual drain on the American economy. While billions ooze into the taxsheltered pockets of the oil industry, the average consumer pays an extra $100 each winter to heat his home. Unfortunately the President is stuck in the primordial politics of petroleum, and Congress is our only hope to clean up the slick.

I hope, Mr. Chairman, that you and the members of your committee will be able to inform the public and to persuade your colleagues, so that we can begin to turn the tide of pressure and power, and to free this historic chamber of democracy from the domination of Big Oil.

Senator MCINTYRE. Mrs. Grant, do you feel that the average home owner is aware of the fact that he or she is paying these excessive prices? What do you hear as Commissioner of Consumer Affairs when it comes to the question of heating homes in New York City?

Mrs. GRANT. I think that because of the spiraling costs of living in New York City as in every city, people are aware that they pay a great deal for a great many things. Actually not many of the consumers, in complaining about the cost of living and spiraling inflation have horned in on the cost of fuel and the cost of heating their homes. But I do feel, and that is why I have come here and that is why we conducted the Commission on Inflation and particularly worried about the import quota, I do think that by investigating and by exposing, by educating the consumer, he will become much more aware of the inequities that victimize him.

Senator MCINTYRE. I think that I can say that the average New England consumers have in the past year become more alert to the fact that their fuel bills are unnecessarily high. And we also have further evidence that a message, a consumer message, if you want to call it that, is getting through, because last year the Congress was able to make a modest reduction in the oil depletion allowance, which is one of the tax shelters you speak of in your statement. I believe we were able to reduce that from 2712 percent down to a figure of 22 percent. And the significant thing about this was that it represented the first successful attack. One of the first votes I ever had down here in 1963 or 1964 was on this question of trying to cut into the oil depletion allowance and we were resoundingly defeated. This year we did make some progress.

I think that, as you say, consumers are concerned about many things, what is happening in the supermarket and so on. We are finally getting home to the American people that the oil industry's tax shelter programs such as this one built around the national defense, do not have a great deal of substance to them.

Mrs. GRANT. I do, indeed. I thank you for inviting me here, because you made me very aware of the problem. I was shocked by the things I read and learned. I think that the attempt of producers to talk about national security is a farce, because I think we are buying insurance at very high premiums. I think that is completely fallacious and invalid. To discover that the quota system has almost chocked off the free flow of oil into the United States, to realize it costs the Nation's consumers billions of dollars, to realize that the quota system

shelters gross inefficiencies in the domestic crude oil producing industries, to find out that it was imposed in the name of national security a decade ago, and it has become the object of mounting discontent; and the fact, too, that it has brought about very heavy handed bureaucracy, heavy handed bureaucratic meddling in the marketplace, the constant battle for political favor in Washington, having learned these things, and hopefully spending some time investigating it even deeper and further, my intention is to inform the consumers of my city that they are being taken, if they don't know it.

It really leaves much to be questioned, even the problem of overdependence on foreign oil. I don't quite know how we come to the statistic that we arrived at, how much oil should be imported and still maintain our national security.

Senator MCINTYRE. While this chairman of this subcommittee is being very critical of the Nixon administration, I must go back and say I was very critical of the Johnson administration. Back in December 1968 we had certain favorable circumstances existing that might have enabled us to utilize the device of the foreign trade zone to bring some relief to New England in this import question. But you talk about the bureaucracy; I am telling you it is a pretty frustrating situation and experience down here to try to get your thumb on who is moving the checkers in this game of oil.

I see you have David Anderson here, a staff member of the task force. You have recommended, as have many others-Senator Prouty is moving in this direction also with legislation-that we try to put No. 2 fuel oil into the same situation that was accomplished a year or two ago or three ago under residual oil. As long as David Anderson is here, perhaps I can ask him a few questions.

On page 76, when it discusses No. 2 fuel oil, the task force takes sort of a swipe at the residual oil decision. It says here, and I will quote it to refresh your recollection:

A residual fuel oil type exemption, limited to the Western Hemisphere, does not seem the answer, because the residual exemption is itself open to some question, and cumulative product exemptions of this sort proliferate market distortions and would tend to become tantamount to a full exemption, ignoring the danger of exporting refining capacity.

One of the things we have in mind is we have not taken this task force report and just put it on the shelf; the President has said there is an opportunity here for some interim decisions. And General Lincoln himself has said over on the House side that No. 2 fuel oil would be on the agenda for possibilities of an interim decision.

As a member of the staff, can you tell me a little bit about that reasoning and how strong the task force was in putting thumbs down on the residual oil exemption as we may apply it to No. 2 fuel oil?

Mr. ANDERSON. Yes. I don't think the task force was very interested in removing the residual fuel oil exemption. I think the task force thought if there was any national security problem, it would be exascerbated by admitting only products, increasing the import of products, because when you increase the import of products, naturally it is refined overseas. But the task force went on to recommend the import of crude be greatly liberalized. And I think the amount of export of refining capacity that would be involved in admitting No. 2 fuel oil to the district I would really be minimal. We are so far above

now the national security floor, so to speak, it just doesn't make any difference. But if you were going to design a system, you would want the system to import-if you could design from the beginning and didn't have the political difficulties you would want the system to import crude oil, so if it is refined in Venezuela and there might be some difficulty in Venezuela, you wouldn't have to duplicate both the crude oil and the refineries. That is the only point the task force is making there.

But I think the answer to any objection to an exemption of No. 2 fuel oil based on that observation is we are not even close to the national security floor. In other words, we could so easily duplicate or increase refining capacity in the United States to take care of the amount of No. 2 fuel oil that would be let in by the exemption that there is no point in imposing it on that ground.

Senator MCINTYRE. Then you think, Mr. Anderson, that this remains a definite possibility for consideration by the ongoing Oil Policy Committee?

The reason I ask that is that conclusion in that paragraph, after taking a slap at the residual oil situation, it ends up by saying: "The problem in any event appears to consist less in actual physical shortages than in a competitive squeeze upon independent marketers visa-vis their supplier competitors, the forward integrated refiners. That is the vertically integrated, the "biggies" as I call them.

But the task force ends up by saying: "Relaxation of the present very tight limitations on product imports in general would seem a more appropriate way of addressing this structural problem."

So I am a little bit concerned that General Lincoln might consider that this is a guideline and that the thought expressed in Mrs. Grant's statement that we ought to go for an exemption on No. 2 is probably not so high on the list of solutions.

Mr. ANDERSON. I think the task force thought that clearly we ought to increase the import of crude oil, that is far and away the best solution. I think people recognize there will be a political compromise, and probably the best compromise, because it affects chiefly the areas that are most heavily taxed by the program and in part because the export of refining capacity involved in No. 2 fuel oil, which is a fairly easy product to refine, it doesn't make any difference from the point of view of national security.

I think if there was any thought about that among the task force, that is probably one of the best compromises. In other words, if you are not going to do the right thing, that is the second best.

Senator MCINTYRE. Mrs. Grant, I want to thank you for coming here this morning. I hope when you go back to New York you will continue to tell your consumers in New York that they may not realize it, but they are subsidizing other sections of the country, including some of the fine citizens of Texas and Louisiana.

We appreciate very much your being here and giving such a fine statement. Thank you very much.

The subcommittee will stand in recess until tomorrow morning at 10 o'clock.

(Whereupon, at 11:40 a.m., the subcommittee recessed, to reconvene at 10 a.m., on Tuesday, April 7, 1970.)

HIGH COST OF NO. 2 HOME HEATING OIL

TUESDAY, APRIL 7, 1970

U.S. SENATE,

COMMITTEE ON BANKING AND CURRENCY,
SUBCOMMITTEE ON SMALL BUSINESS,

Washington, D.C.

The subcommittee met, pursuant to notice, in room 5402, New Senate Office Building, at 10 a.m., Senator Thomas J. McIntyre, presiding. Present: Senators McIntyre and Muskie.

Senator MCINTYRE. The subcommittee will come to order.

Our first witness this morning will be the distinguished Senator from Massachusetts, Senator Brooke.

Senator Brooke, I am happy to welcome you here.

You may proceed to testify on this matter that is of such interest to us from New England.

STATEMENT OF EDWARD W. BROOKE, U.S. SENATOR FROM THE STATE OF MASSACHUSETTS

Senator BROOKE. I thank you for this opportunity, Mr. Chairman. And I want to commend you, Mr. Chairman, for holding these hearings. You have performed a great service in the past by holding similar hearings and my statement this morning before your committee will be short.

I have made known my views on many occasions and before reading my statement, Mr. Chairman, I would ask permission to place in the record of these hearings a rather lengthy exchange of correspondence between my colleague from Wyoming, Mr. Hansen, and myself concerning New England's heating oil problem.

Senator MCINTYRE. Without objection, that will be made a part of the record at the conclusion of your testimony (see p. 42).

Senator BROOKE. Mr. Chairman, I hope this exchange of letters may be of use to this committee in its deliberations. I am sure the chairman will find the exchange most interesting.

Mr. Chairman, one of the great ironies of the continuing debate over oil imports has been the treatment of the task force and its report by various spokesmen for the oil industry.

In an effort to table the controversial application of the State of Maine for a foreign trade zone at Machiasport, industry representatives proposed to the Nixon administration that the entire issue of oil imports be submitted to intensive study by a panel appointed by the President.

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