per cent of all remaining reserves would have to be found and proved in the 1980's. Figure 45 shows these implications of projected demand for domestic oil, assuming a continuing 20 per cent import quota.

Ragardless of cost considerations, reserve additions would be likely to slow down and reverse direction long before the year 2000. So would production. Beyond 1980, things would become difficult.

This estimate jibes with a recent one by Paul Torrey of the Interstate Oil Compact Commission, a geologist whose judgment is widely respected in the industry. He ventures the estimate that of the original oil content of known U.S. reservoirs-which in 1960 he put at 328 billion barrels almost 30 per cent, or 90 billion barrels, are either in proved reserves or are recoverable by secondary methods. When compared with the demand estimates made here, production of this supply would take us safely through the next two decades. Moreover, when past production, equal to 20 per cent of the original content, is added, the resulting recovery factor is 50 per cent.

FIGURE 45.-How projected demand for domestic oil compares with estimated recoverable supplies in the United States.

Adequacy of resources and expected advances in techniques of exploration and recovery suggest no reason why, from a resource point of view, the price of domestic crude should not stay in line with the general price level for the next fifteen or twenty years. After 1975 or 1980, however, stringent domestic resource conditions might more than offset technological advances, with consequent pressures on price. Much will depend on the ingenuity of the industry in finding and recovering domestic oil resources, the sufficiency of the financial rewards, and the outlook for competing sources.

Domestic oil has vigorous competition-both from other fuels and from foreign production. Should costs of oil-finding increase and not be offset by cost-saving in other phases of the industry, and the price of domestic oil be thus pushed ahead of competing energy sources, such a development would force growing competition from lower-priced imported crude; from coal, either directly or by way of electricity; from new conversion methods in transportation, such as efficient batteries; and from domestic and Canadian shale or tar sands.

Senator HART. Doctor, thank you very much. Those six questions took a lot of time.

Dr. NETSCHERT. Thank you, sir.

Senator HART. We will recess at this point, making apology first to Professor Steele that we will have to delay him until 2:30, at which

time we will hear from Prof. Henry Steele of the Department of Economics of Houston University.

(Whereupon, at 12:45 p.m., the subcommittee recessed, to resume at 2:30 p.m. the same day.)

AFTERNOON SESSION

Present: Senators Hart (presiding), and Hansen.
Senator HART. The committee will be in order.

As I indicated at the recess, we resume this afternoon to hear from Dr. Henry Steele. Dr. Steele is professor of economics at the University of Houston, and I will not elaborate further now because in the paper I think there will be very clear indication of the background against which he draws, and I am sure the committee will be the better for hearing him.

Doctor?

STATEMENT OF DR. HENRY STEELE, ASSOCIATE PROFESSOR OF ECONOMICS, UNIVERSITY OF HOUSTON, HOUSTON, TEX.

Dr. STEELE. I greatly appreciate being invited to make this statement before the Senate Subcommittee on Antitrust and Monopoly. I am an academic economist with major interests in the area of industrial organization and public policy toward business. In presenting this statement, I represent no one but myself.

Since 1955, I have been engaged in academic research and consulting work concerning the economics of both the petroleum industry and shale oil developments. In 1957, I completed my Ph. D. dissertation at MIT on the economics of synthetic liquid fuels from oil shales and since then I have devoted a good deal of my research to a study of cost trends over time in finding, developing, and producing crude oil, and to the estimated costs of producing shale oil. It is my view that in all likelihood shale oil costs are at present low enough to allow crude shale oil to be produced profitably at current crude petroleum price levels.

There may be many obstacles to entry of firms into shale oil production on a commercial scale, but the present level of production costs relative to prices does not appear to be among them. Relatively low current processing costs in themselves constitute a necessary but perhaps not a sufficient condition for entry of firms into this new industry. Nevertheless, if it is now possible for firms profitably to produce shale oil, the problems of promoting as great a degree of competition as possible among firms in a prospective shale oil industryand hence between firms in crude oil and shale oil industries-become rather more immediate.

But beyond this, the precise nature of the possible benefits of such competition should be clearly understood. Competition is beneficial when it stimulates more efficient practices, resulting in cost reductions, which are of necessity passed forward to buyers in the form of price reductions. True competition is more or less synonymous with price competition, while other varieties of interaction among producers would more appropriately be referred to simply as rivalry, which does not provide a commensurate stimulus to increased efficiency. Other things being equal, the introduction of more firms into the liquid

fuels market would increase the potential for price competition, but under present institutional arrangements, crude oil prices are stabilized very effectively by State conservation commission regulation limiting domestic production in the major producing States, and by Federal import controls limiting the availability of foreign oil.

Under these circumstances, there are actually two public policy problems in connection with the development of an oil shale industry: 1. How can the terms of Federal oil shale leasing arrangements be devised so as to insure competitive market performance in the shale oil industry; and

2. How can the potential for greater price competition inherent in a suitably structured and developing shale oil industry actually be realized in the presence of price-stabilizing regulation in the crude oil industry?

These are the policy problems with which this statement is concerned.

My educational background is in economics, and I have no formal training in engineering or technology. My cost estimates have, however, been based upon fundamental technical studies made by technologists. I cannot claim that my cost data are either precise to the last cent per barrel or that they are up to the moment. Candidly, they are neither. However, for those components of cost which they include, I am of the opinion that the costs are not underestimated, and that, if anything, they are perhaps higher than the costs which could be achieved by efficient large-scale methods today.

Table I shows estimated costs of producing crude shale oil and transporting it to the Four Corners area as of 1962, that is, to southeastern Utah.

TABLE I.-Cost summary for production of crude shale oil, 1962 (25,000 barrels

per day)

Process costs may be divided into the five categories of mining, shale preparation, retorting, viscosity-breaking, and pipeline transportation. Costs in each category will be dealt with separately.

Mining costs comprise the largest single component of cost unless retorting in place is contemplated. A wide variety of estimated mining costs have been quoted from time to time. In the summer of 1962, with the aid of the late Ernest Miller of the engineering firm of Cameron & Jones, of Denver, Colo.,_and_financed by a research grant from Resources for the Future, Inc., I made presumably relatively conservative estimates of the cost of mining, crushing, and retorting crude shale oil and transporting it by pipeline to the Four Corners area.

My estimate of mining costs for a 41,000-ton-per-day operation, using the room-and-pillar method and mining from a cliff-face site, amount to $0.764 for a ton of 30-gallon-per-ton oil shale, or $0.98 per barrel of shale oil content, net of byproduct credits. Other mining cost estimates then current ranged as low as the 42 cents per ton quoted by a large mining company, which would amount to only about 70 cents a barrel.

In my 1962 study, I estimated the cost of crushing and conveying 41,000 tons a day of 30-gallon-per-ton oil shale at about 5.4 cents per ton, or 9 cents a barrel, bringing total mining and shale preparation costs to $1.07 per barrel.

Retorting costs probably vary with the method of retorting employed. My 1962 estimates, based on the Bureau of Mines gas combustion retort, as modified by Cameron & Jones, indicated a cost of 26.9 cents per barrel for retorting 25,000 barrels per day of 30-gallonper-ton oil shale. This estimate refers to process facilities embodying a bank of 12 cylindrical modified gas-combustion retorts, each 36 feet in diameter, to which an input of 39,000 tons of crushed shale per day is delivered. (About 2,000 tons of the 41,000 tons of shale mined would be in particles too small to retort.)

The rate at which the retorts handle the input is 300 pounds per hour per square foot of cross-sectional area of the retort. Economies of large-scale production are of considerable importance in retorting, although definitive data are lacking. The 1951 National Petroleum Council shale oil cost study indicated that costs per barrel retorted fell by about 20 percent when comparing a 50,000-barrel-per-day installation with a 250,000-barrel-per-day installation.

The viscosity-breaking cost for crude shale oil as it leaves the modified gas combustion retort was estimated at 12 cents per barrel for a 25,000-barrel-per-day plant. This process is necessary because the pourpoint of the crude shale oil produced by the modified gas combustion retort is high enough to present the danger of the crude oil solidifying in the pipeline while in transit during periods of low temperature.

Thus, my 1962 estimates indicated a total cost of $1.46 per barrel for crude shale oil at the retort. There were few other cost estimates that were available for comparison at that time. In its later application for leasing Federal shale land, the Oil Shale Corp. indicated an ability to produce 23- to 25-degree gravity nonhydrogenated oil at a cost of about $1 per barrel, but the removal of nitrogen and sulfur would raise the cost to $1.60 per barrel for 40-degree gravity oil.

In 1962, I assumed that the initiation of an oil shale industry would be likely to begin with a relatively small prototype commercial plant, the output of which would be too small to justify a pipeline direct to major marketing centers, the most promising of which were the west

coast markets.

Instead, a 200-mile pipeline to an existing trunk pipeline in the Four Corners area then seemed preferable for a 25,000 barrel per day operation. At such time as a large-scale industry would come to be established, a 700-mile, 250,000-barrel-per-day pipeline to Los Angeles would be the most economical means of transportation. Pipeline costs for the smaller line were estimated at 22.7 cents per barrel. But it is in the domain of pipeline transportation that economies of large-scale operation are greatest. It appeared then that the cost of shipment might be no more than 30 cents per barrel for a 250,000-barrel-per-day pipeline direct to Los Angeles.

In October 1965, I undertook to update these 1962 cost estimates to a 1965 basis but was able to do so only in a partial and indirect manner. During the period 1962-65 further progress was no doubt made by many of those who were conducting research on many phases of shale oil production technology, but the only pertinent information containing actual cost data was given in a paper referring to further cost reductions achieved by 1965 in the construction and operation of the modified gas-combustion retort.1

On the basis of information in this paper, the retorting costs shown for 1962 were correspondingly reduced from 26.9 cents per barrel to 21.2 cents per barrel.

Qualitative reports on developments in mining indicated appreciable progress which, however, could not be quantified. In view of the strong likelihood that the 1962 mining costs might actually be some 30 percent below the conservatively estimated figure of roughly a dollar a barrel, an arbitrary decision was made to reduce estimated costs by half of the likely degree of overestimation, or 15 percent.

"Consequently, the cost of mining-net of byproduct credits-was reduced from $0.98 per barrel to $0.832 per barrel. Cost estimates for shale preparation, viscosity breaking, and transportation to the Four Corners area were left unchanged. The estimated cost summary for producing crude shale oil in 1965 is shown in Table II. The net result of adjustments to mining and retorting costs is to reduce total costs per barrel by 20.5 cents, from $1.686 in 1962 to $1.481 in 1965.

The total estimated cost of crude shale oil produced in a 25,000-barrel-per-day plant and shipped via a small pipeline to the Four Corners area was therefore about $1.48 per barrel as of late 1965. Adding 48 cents pipeline charge to Los Angeles, we get a delivered cost of about $1.96 per barrel. Crude oils of comparable quality were selling for about $2.85 per barrel in this market, allowing a net margin of about 89 cents per barrel to be realized.

1 R. J. Cameron. "The Cameron and Jones Vertical Kiln for Oil Shale Retorting." paper presented at the Second Annual Oil Shale Symposium, Denver, Colo., Apr. 22, 1965.