Senator LONG. So you don't find much to be enthusiastic about that the independents be exempted, but that the majors be left under controls and that those controls be extended to oil as well as gas?

Mr. MILLER. No, sir.

Senator LONG. And the same would apply, I take it, with regard to the proposal that intrastate gas be regulated insofar as all major producers are concerned?

Mr. MILLER. I am opposed to the idea
Senator STEVENSON. Senator Tunney?

very much.

Senator TUNNEY. Thank you very much, Mr. Chairman.

One of the novel situations over the past 20 years as far as I am concerned has been that we had a quota system which was Federal regulation of the oil industry, and it is my understanding that the reason for that decision by President Eisenhower was that the independents of this country basically wanted protection, and he set up a double mechanism of control.

On the one hand, we controlled the flows of foreign crude into this country, and at the same time, through our tax policy, we encouraged the majors to go overseas and explore for a foreign group. The tax credit for royalties paid to foreign countries was one way of doing it. The carry forward and carry backward provisions of the tax law also helped sustain this effort on the part of the majors to go overseas.

The depletion allowance that was allowed to apply to the production of foreign crude, and the carry forward and carry back provisions of those tax laws all stimulated that movement overseas of the investment dollar.

It was almost as though we had two Government policies that were conflicting, operating in direct conflict, one with the other.

Now, let us assume that we didn't have, we had not had. those substantial tax benefits that accrued to a company to make the investment oversease, and let us assume that we didn't have a quota system, either.

What do you think would have happened with the independent oil companies in this country?

Mr. MILLER. Those are to difficult areas for me to answer in. Senator, to answer with any degree of expertise, insofar as knowing what the major companies would have done with respect to accelerating their activities in a foreign country with respect to their tax situation. I really couldn't comment on that.

With respect to the restriction of imports into the country, if those had been brought in without any regard for cost, naturally we could have been flooded with a cheaper oil. But two things worked together.

One was the availability of the oil as it came on stream in the foreign countries. The other thing working. I think, against the development of domestic production, of course, was the controlled price. In effect, while the import control was important, and it did play a part, I think equally as important was the fact that we were sitting right here freezing the price of oil for some 17 years while the cost was going out of sight, the cost of operation.

Senator TUNNEY. Isn't that one, the problems with Federal control of any kind? Once the Federal Government decided they were going to control the amount of imports, then the Federal Government felt it was necessary to control the domestic price as well, with these various techniques they used.

In a sense, weren't you subject to that Federal regulation of price as a direct outgrowth of the Federal control of imports?

Mr. UNSELL. Yes, in that program it was written specifically into the regulations that there would be surveillance of domestic crude oil prices, and that surveillance was very rigid under President Johnson, and has been under President Nixon.

It was an irony of the program, really, because for 15 years, we came before Congress and before the administrative agencies and showed in a period of what you would call-I think Mr. Miller termed it in his speech, administered prices by the Federal Government-which is what we had on domestic crude oil.

That went on and got the price of crude oil leveled for a period of 12 or 14 years up until the last year or so. It was level in terms of real prices, but in terms of constant dollars, in a declining situation during a period when the cost of drilling for oil in this country more than doubled.

So they provided a mechanism, but for the benefit of having a quota system that really didn't work because the imports more than tripled during the period of the quota system.

So we had an effective quota system, and we paid the price of having our prices administered on domestic fuel production. So it was a faulty system.

Senator TUNNEY. What I am suggesting is that we began to tamper with the free market mechanism when (1) we gave substantial tax incentives to the major companies to go overseas and invest, and second, when we established quota systems, and I suppose that what we see now is if you believe in free market mechanisms, as I do, a result that is not working because the left hand didn't know what the right hand was doing, and it was because of the controls. that were established on import of foreign crude that there had to be those controls on the domestic prices.

I, for one, feel very strongly that the tax incentives to go overseas and produce overseas ought to be eliminated, and so generally have a free market predeliction on these matters, but I think in the case of old oil, I can't see how we can just free the price to the tally and allow those prices to skyrocket, because I think it would be a windfall profit.

But when an industry accepts Federal regulation in one area, you have got to expect it in another area, and that is just what you got, and maybe we ought to from now on be thinking in terms of not having controls in any area other than programs as it relates to this old oil which I mentioned, and probably that will be phased out over a period of months as well.

But I am very deeply concerned about the fact that you can't have Federal control in one area in an industry without accepting the problems associated with Federal controls in the other.

I know that it is a difficult thing for you to discuss, because you

were very much in favor, of course, of the quota program, because that gave you protection in the market, that is a Federal act.

So when we talk about the Federal Government keeping down the prices of domestic oil, you have to also remember that domestic oil, the domestic oil industry, would be protected.

So it really wasn't a free market system anyway.

Mr. MILLER. We would agree with that, that it certainly was not, and our continuous comment as it had to do with the import quota, was the fact that we were sitting and looking at an industry that was dying, and as we looked at our productive capacity in this country dropping off annually, we were very much concerned about out abilities to then meet any additional requirements that might be thrust upon us as a producing country, and we did see this occur, of course, in 1967 with the Suez Canal crisis.

We had at that time enough productive capacity so that we could go ahead and care for our shortage. But still, as necessary and vital as it should have become at that time, we went right back to the continuation of the same policy that now has us in a position where we have no spare productive capacity, and we are now dependent on foreign crude.

We needed to be doing something along the way in terms of better prices for domestic oil and gas.

Senator TUNNEY. As you look back on the last 25 or 30 years, would you have been better off to have no import quota program and no special tax incentives to the majors to go overseas to produce and that they would have had to pay the same kind of taxes for their foreign production as in effect they have for domestic production.

Mr. MILLER. No regulation of any kind? I suppose undoubtedly that would have been better. I really-that is a very wide area.

Senator TUNNEY. I know, but it is an area that we have to think about when we look at the future.

Mr. MILLER. Yes.

Senator TUNNEY. Hopefully, past is prolog.
Well, thank you very much, Mr. Chairman.
Senator STEVENSON. Thank you, Mr. Miller.

I hope that you will continue to review your position, keeping in mind the possibility of that expanded definition of an indepedent, and in the next few weeks after the earnings reports are announced by the majors and after we have accepted a few more months of 15percent inflation, I think you will see that this is really a question of what kind of controls.

As I say, I hope you will continue to review your position with respect to this act.

Mr. MILLER. We will.

We appreciate the opportunity to appear before you. We appreciate the opportunity for the input.

Senator STEVENSON. Thank you, gentlemen.

We have run into our afternoon session.

I think instead of recessing, we will just keep moving ahead.
We will take a 5-minute recess.

[Recess.]

Senator STEVENSON. The next witnesses are Mr. Thomas J. Devine, of the Celanese Corp., and Mr. Ernest Robson, of Monsanto Chemical Co. on behalf of the Petrochemical Energy Group, and Mr. Bruce Kiely, counsel.

STATEMENT OF ERNEST ROBSON; ACCOMPANIED BY THOMAS J. DEVINE; AND BRUCE KIELY, COUNSEL, ON BEHALF OF THE PETROCHEMICAL ENERGY GROUP

Mr. ROBSON. Thank you, Mr. Chairman. I am Ernest Robson, a corporate vice president of Monsanto, and on my right is Thomas. Devine, a corporate vice president of Celanese Corp. of New York, and our counsel, Bruce Kiely.

We appreciate this opportunity to be heard by this committee and thank you for this privilege.

We represent a group of independent petrochemical companies who have traditionally used and must use natural gas, crude oil liquids and refined petroleum products as a raw material-feedstockin their manufacturing operations which ultimately becomes an ingredient of products for food, shelter, clothing, and health care.

Hydrocarbons are also used as a source of heat and energy to process many products both with and without steam. Natural liquids, a very essential byproduct of natural gas production, are important feedstocks for the petrochemical industry.

The U.S. petrochemical industry currently has sales in excess of $20 billion annually, employs more than 300,000 people in 1,900 plants nationwide, and produces a vast number and variety of products which are essential to the manufacturing operations of other industries.

For example, the agricultural industry depends upon fertilizers, herbicides, and insecticides and the automobile industry depends upon paints, plastics, and synthetic rubbers. The textile industry upon synthetic fibers, and the pharmaceutical industry upon organic chemicals and many others.

Studies by Arthur D. Little, Inc., of Cambridge, Mass., show that as little as 15 percent in the reduction in the supply of feedstocks to the petrochemical industry could result in a loss of as many as 1.8 million jobs in industries dependent upon the petrochemical industry, as well as a loss of annual domestic production value in those industries in excess of $60 billion. We have a big stick.

The American petrochemical industry uses about 10 percent of the natural gas and about 4 percent of petroleum consumed in the United States, and the impact of that use is extremely important. The point to be emphasized is that the use of natural gas, natural gas liquids, crude oil, and refined petroleum products as raw materials is a use to be highly valued, and for which there are no substitutes.

PEG companies are, therefore, vitally concerned with supply; Government regulation of natural gas and oil, their production, processing, distribution, and sale will adversely affect that supply.

Our concern is primarily that of a consumer, since our principal relationships with oil and gas companies are as customers and as

competitors of their petrochemical operations. We independent petrochemical companies basically place our heavy investments in plants which process the various hydrocarbons extracted from petroleum, natural gas, and gas liquids rather than in oil and gas exploration, development, and refining.

Although some independent petrochemical companies have some oil and gas operations, we are by far net consumers, and, as consumers, we are concerned first about supply. We are concerned also with cost, for domestic petrochemical plants do not effectively compete with foreign products if our feedstocks and fuel costs are substantially out of line with the world market.

We have concluded that natural gas and crude oil supply will most likely increase, and price will most likely be reasonably stabilized, through deregulation of natural gas from new wells drilled and. conversely, we have concluded that supplies of oil and gas will decrease and costs will increase if the CEA 1974 is enacted.

We, therefore, respectfully urge that title I of the Consumer Energy Act of 1974-Working Paper No. 2, March 11, 1974, and its predecessors be rejected by this committee and the Congress.

FPC cost regulation of the wellhead rate for new gas sold in interstate commerce cannot be defended. We believe that this committee need look no further than to compare title I 2(b) (2) with title II of this bill to reach this conclusion. Title I 2(b) (2) finds that the oil and gas are substitutes for many purposes such as the market for one affects the market of the other.

Title II proposes to roll back the price of crude oil to December 1, 1973, levels. This, we believe, would be approximately $4.25 per barrel. If this represents the judgment as to the fair value of a barrel of crude, a new price of 70 cents per Mef for new sales of natural gas would result, which is the approximate Btu equivalent of pipeline-quality gas.

Yet the average price in interstate commerce is about 25 cents, while the highest certificated rate is 55 cents. While we have the greatest of respect for the FPC in the regulation of interstate natural gas pipelines on a cost of service basis, we search in vain for a good word to say about the result of Federal regulation of the wellhead sales of natural gas.

Our suppliers of gas are in curtailment; our suppliers of liqufied petroleum gases, much of which come from gas wells, have been unable to supply us. Our petroleum products, also in short supply, have been diverted by Federal Government action.

Extending Federal regulation to oil on a cost-of-service basis to intrastate sales, and to refineries, indicates to us that the same disincentive will further discourage supplies. There is no assurance in this bill that supplies will be increased by increasing regulation and imposing rate theories that we cannot defend as consumers. We are not aware of a witness who has proposed a costing methodology to supplant the current FPC theories.

The extension of Federal regulation to the intrastate market seems punitive, since the States who have chosen to rely on the market mechanism appear to fare better than the States who, through the FPC, prefer to try to force sales at low costs in relation to other

fuels.