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CHAPTER VII. MORE CRUDE OIL IMPORTS NEEDED

In the summer of 1972, August gave way to September amid growing concern in government and industry that crude oil levels were dangerously low and that crude oil imports had not been increased enough.

The Oil and Gas Journal, whose opinions were reflective of the views of the industry, had been warning for some time that crude oil imports were falling rapidly because oil companies had already used up their import quotas.

INDUSTRY SEERs ADDITIONAL IMPORTs

As early as July 28, 1972, industry was indicating to the OEP that the May 23 supplemental import allocation would be insufficient to meet the demand for crude oil. On that date Glen Willis of Clark Oil & Refining Company told OEP officials that his company expected to suffer a large shortage of crude by December.

At an August 18 meeting with OEP officials, Sohio described its crude oil situation in this way:

Today the short term outlook for crude supply is even
more grave than it was this past winter. i...o. we have
experienced abrupt cancellations of traditional evergreen
crude supply contracts by major companies. These cancella-
tions affect significant volumes of crude we have been count-
ing on for the balance of this year and an indefinite period
beyond. We are also aware that, owing to this outlook for
tight supply, a number of companies are putting tight clamps
on their sales of products to reseller customers. . . .
Sohio, itself, now needs some combination of 5 million
barrels of crude oil and access to imported oil to cover its
needs for the rest of 1972. Chances of our being able to buy
any additional domestic crude are very slim. If anything, we
see other evergreen domestic supply contracts cancelled. Other
major companioc whom we have been canvassing repeatedly
for domestic supplies, assert that they themselves are short of
crude for the remainder of 1972.
This bottom-of-the-barrel sickness will always occur—and
it will always affect many—when there is just no more flex-
ibility in the supply system. We are already at that point in
Districts I–IV, probably past it....
We urge that the Oil Policy Committee consider the is-
suance of at least 200,000 b/d of additional crude oil alloca-
tions on an annual average. Also, the decision to issue more
allocations needs to be made very soon, before Labor Day. A
determination made and announced any later than that

would result in much of the quota being unusable because of lead times required in negotiating for added supplies, lining

up transportation and adjusting refining operations. An August 16, 1972, OEP memo of a meeting with Coastal States August 12 carried the report that Coastal had utilized practically all of its 1972 import allocation and had

notified all customers by letter that across-the-board prorationing at about 23rds of demand will be in effect for

the remainder of the year. . According to a memo of August 31, 1972, Coastal informed OEP officials that crude shortages had forced it to reduce refinery runs significantly and that two petitions to the Oil Import Appeals Board had resulted in no relief. As a solution to the crude shortage in PAD Districts I-IV, Coastal recommended :

1. Level in District I-IV should be based on Supply/De mand gap as in District V, Plus an additional 400,000 or 500,000 barrels per day. This will permit allowable system in Texas and Louisiana to reassert itself and provide a surge

tank for unanticipated increases in demand. In a September 1, 1972, telegram to the OEP. Standard Oil of Indiana predicted an overall shortage of about 600.000 B/D of crude oil for the period September through December 1972. Standard was experiencing strong demand for petroleum products and additional imports would be required to permit refineries to operate at sufficient levels to meet demand.

Crude oil stocks were at their lowest point since the end of World War II.

Federal action was called for and the industry waited. A clue as to what the government intended to do came September 13, 1972, when another industry periodical, the Oil Daily, reported that one step federal authorities were considering was to increase import quotas by allowing companies to bring in up to 10 percent of their quotas next year.

The industry was, in effect, being encouraged to borrow on its 1973 allocation of foreign oil and oil products.

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ASHLAND ATTACKS BORROWING CONCEPT

The Ashland Oil, Inc., the largest of the independent oil corporations, thought the proposal was not good and its president, Robert E. Yancey, fired off telegrams September 15, 1972, saving so.

In identical wires to General Lincoln: Hollis Dole, the Assistant Secretary of the Interior for Mineral Resources; and Presidential Assistant Peter Flanigan, Mr. Yancey said the President's plan, as reported in the Oil Daily, came as a "great shock."

Mr. Yancey said the proposal was another easy, short term out for a problem that required a long range solution.”

"Refiners," Mr. Yancey said, "definitely need long range stability in (import] program, not quick action, ill-conceived notions which slide by one crisis to create another."

Saying he hoped the Oil Daily article was only a rumor with no basis in fact, the Ashland executive said the borrowing proposal would “squeeze” the independents because the majors would have no incentive to trade with the small companies.

Mr. Yancey concluded:

If additional 1972 allocations are needed immediately, they should be merely added to the level and allocated as were the previous quantities.

The Ashland misgivings came too late as the decision on the supplemental import allocation had been reached. The discussions leading to that decision revealed diverse opinions among government policymakers.

THE OPC WorkING GROUP Assessment

At the August 24, 1972 meeting of the QPQ Working Group, Wil: liam Truppner said he was soliciting professional advice as opposed to agency positions. Truppner expressed concern with the precision in supply-demand estimates.

The Department of Interior position at the August 24 meeting was expressed by David Oliver and Barry Saunders. They said that Interior's April projection was sound and that the petroleum industry was in balance and would remain in balance through the remainder of the year. Saunders and Oliver recommended that the import level increase be no more than 50,000 barrels per day on an annual basis.

A memorandum recounting the meeting noted:

Mr. Chapman of Justice asked why the allocation should not be made large enough to push back domestic production enough to allow Texas and Louisiana to proration again and provide a surge capacity. Mr. Oliver said that this should be considered but that there were problems associated with doing so.

A report, attached to the memorandum of the August 24 meeting, entitled “Outlook—Petroleum Supply and Demand,” provided the joint estimate of the Department of Interior and the Office of Emergency Preparedness. That joint estimate was that: (1) Additional allowable in 1972 imports must take place in Districts I–IV to meet demand. (2) The supplemental authorization should be sufficient to permit reestablishment of petroleum stocks by the end of 1972 by levels at least as high as at the end of 1971. (3) That fulfillment of the above listed goals could be attained through an additional import allocation of about 72,000 barrels per day for Districts I–IV.

The Interior–OEP report also noted the severity of the tight inventory situation. It reported that the August 21, 1972 issue of the Oil and Gas Journal carried a Texas Railroad Commission report that industry-wide crude and product stocks were 55.1 million barrels below the August 4, 1971 level. The report also noted that, as of August 11, 1972, distillate stocks in District I were 25% below the 1971 level at that time—a decrease from 85.2 million barrels in 1971 to 66.4 million barrels in 1972. The report attributed this situation to the price ceilings on heating oil and fewer incentives to buy in the summer.

THE OPC REACHEs ITs DECISION

At the August 31 meeting of the OPC, General Lincoln briefed the Committee on the crude ois supply-demand situation, noting that recent events (the decline in domestic production coupled with the surge in demand for crude) had transferred the responsibility for maintaining adequate crude supply from Texas and Louisiana to the Federal Government.

Lincoln then proposed the form of the additional allocation as indicated in a memorandum of that meeting written by Howard Roberts:

. . . He [General Lincoln] also proposed that all eligible overseas importers . . . be allowed to draw up to 10% of their 1972 regular allocations as an advance on 1973 allocations. These advances would be made available on October 1, 1972 for use as needed and would provide the MOIP with a degree of flexibility which it previously lacked.

The Chairman emphasized that any advance would be deducted from the importer's 1973 quota level and that the 10% applied only to regular 1972 quotas in effect as of September 1, 1972.

The Chairman requested that the Committee express its opinion of the recommended course of action. He received a unanimous and enthusiastic endorsement. Dr. Solomon [CEA] commented that the 10% idea was an extremely good one which would add needed flexibility to the program. Mr. Armstrong [State Department] characterized the 10% program as “very astute.” Mr. Nehmer [Commerce] said that it was “quite imaginative.”

PRESIDENT Issues PROCLAMATION

On September 18, 1972, five days after the Oil Daily article, President Nixon issued a statement setting forth Federal response to the crude oil situation. Citing rapid changes in supply and demand and the need for “additional flexibility,” . President amended the Mandatory Oil Import Program. He allowed all importers of foreign oil and oil products in Districts I-IV to draw on their 1973 calendar year allocations by up to 10%. The 1973 allocation was a projected figure based on an importer's o quotas in 1972 through the end of August of that year. n addition, the President made a special allocation of 5,000 barrels per day to independent deepwater terminal operators on the East Coast. This was in addition to the 45,000 barrels per day regular allocation of No. 2 fuel oil imports. Also part of the September 18 decision was distribution of the remainder of overseas crude oil held for emergencies—about 25,000 ol a day—and an increase in Canadian imports of 12,250 barrels a ay. The net effect of these changes in the oil import quota system was to bring the level of imports up to 600,000 barrels per day in the last three months of 1972.

However, the new authorizations themselves totalled 155,650 barrels

day.

o of that figure, 113.200 barrels a day could be imported only if the oil companies borrowed on their projected 1973 quota.

Absolute import quota increases, then, came to about 42,000 barrels a day, according to the September 18 proclamation.

REACTIONs ARE MIXED

Not everyone reacted as Ashland's Yancey had to the borrowing concept.

In a September 7 memo to Peter Flanigan of the White House, Lincoln reported on a conversation with Frank Ikard, president of the American Petroleum Institute. The memo indicated Ikard liked the new import program.

Lincoln continued:

We discussed the No. 2 oil situation briefly, including the apparent reluctance of the major producers because of the

rice situation. Frank knew of my comment to the Wall Street Journal reporter on the responsibility of industry and said that he thought these things needed to be said once in a while. He said that, while the industry would undoubtedly continue to complain, he felt they would meet the requirements, and promised to keep the No. 2 oil problem in mind in his discussions with industry.

The Oil and Gas Journal of September 25, 1972 said that because crude oil production had peaked at home, the balance had to be made up through imports and the Oil Policy Committee was “performing the balancing function formerly carried out by market-demand pro: ration agencies in the producing states when surplus capacity existed.”

General Lincoln discussed the new quota system with Randall Meyer of Humble, September 25, 1972.

General Lincoln, in a September 25 memorandum for the record about the conversation, said that Mr. Meyer

... was certainly glad to see the way we handled additional allocations for 1972. One reason he gave was it left more flexi. in case we decided to change the allocation method for 1973.

He said that of course he could not speak for the remainder of the industry but he felt in a tight situation the industry would do its best including going beyond its contract commitmentsif it were capable of doing so.

But the opinion of Humble's Meyer may not have been typical of his fellow oil executives. The Oil and Gas Journal of September 25, 1972 reported that the oil producing states and the industry in gen: eral felt “the latest increase reflected the failure of present oil policy” and that “the import program no longer has any meaningful standards or objectives.”

For his part, General Lincoln was optimistic about the future. He told a Senate Banking Subcommittee that the increase in quotas would enable the oil industry to meet the nation's winter needs.

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