Mr. SMITH. Yes, sir. With respect to the requirement of the phased pullout over a 2-year period, 25 percent and 6 months. This provision may, and oftentimes will act to the disadvantage of the consumers involved in any case where there are willing suppliers who are more efficient in that marketing area, particularly independent marketers, independent suppliers who are anxious to expand their market in that area.

The effect of a requirement for the pullout over a 2-year period could be to delay the efficiencies of the competitive marketplace by the consumers in that particular area. In those cases, it is our view, sir, the key question is the availability of supplies in the area and the particular remedy to any particular situation ought to be, where possible, at the marketplace that will generate the decision and the sequence of events that will result in the lowest prices to consumers. In those exceptional circumstances where there may be the possibility or the portent of the pullout that would leave an actual shortage of products in the marketplace, then the appropriate solution should be tailored to the particular nature of that particular event and a generalized solution automatically requiring 2 years may or may not be appropriate in some cases and could work to the disadvantage of consumers by postponing the time when they could realize the efficiencies of better marketing practices.

Senator LEAHY. Couldn't that be solved by having the legislation allow an escape hatch, to allow a supplier to fill in the gap, and waive the provisions?

Mr. SMITH. Yes, sir. This gets back into the basic question of whether the legislation is necessary and whether the added intrusion of other levels of government into the marketplace is required to achieve the objectives.

If we can achieve these objectives in the overwhelming majority of cases by letting the marketplace operate

Senator LEAHY. Mobil is pulling back drastically in Texas where it has 7.1 percent of the market, in Louisiana with 3.9 percent and New Mexico with 2.6 percent. Conoco is considerably withdrawing its operations in Texas where it has 3.1 percent of the market, in Arkansas with 3.8 percent. Gulf is withdrawing from California where it has 5.6 percent of the market, from Minnesota with 1.9 percent, from South Dakota with 2.3 percent. Atlantic Richfield is withdrawing in Kentucky with 1.5 percent of the market, in Texas and Tennessee with 3.3 percent-a whole list of others.

You can see the concern and the concern I hear echoed in rural areas throughout the country. Is that all of a sudden, whole farming communities, or whatever? I hear it from gasoline dealers who write to me or tell me that as soon as these allocation things change, that is it, good-by. They may be the only gas station for 25 miles around.

Mr. SMITH. My understanding of those market withdrawal practices have differed clearly among the various companies and is that not all of those would be withdrawn at the same time if for no other reason then that the phased termination of contractual arrangements that are usually involved, the physical problems of running out inventories, that kind of thing, that it is normal practice in many of these cases to offer to the particular jobbers especially involved, and some of the dealers, offer them the opportunity to acquire some of the properties on a first refusal basis and that there are other marketers, particularly

eventual Aramco settlement is signed, it will probably call for long-term contracts under which Aramco will lift and market the bulk of Saudi Arabian crude-based on current production figures. But all of the oil outside of those contracts will be sold direct, by Petromin, and that total will gorw as Saudi Arabian oil production grows.

This represents but another small shift in the world of oil rather than something entirely new. For years the Middle Eastern producing states have sold some of their oil directly to independent refiners or government companies from industrial nations. The proportion they will sell in future will increase. In this way the producing states will diversify their outlets and, significantly, insure that control in the oil business remains where it has been for 70 years; with the owners of the crude. Those owners are no longer the big oil companies, about which the U.S. Congress seems so suspicious. They are the oil-producing countries, about which the U.S. Congress appears to know so very little. They are, to be blunt about it, the people and politicians we should be worrying about.

And, as the business is to remain firmly in the hands of their governments, Arab businessmen have begun to invest in the oil-trading business-the small-lot end of oil transport and wholesaling. Today the leading oil-trading companies have their roots in refining or product wholesaling; companies like Koch Oil, with headquarters in Wichita, Kan., or Tampimex, originally a German firm, with barges of oil products traveling the Rhine.

These firms might move only some 200,000 barrels a day in a good year. And their best years recently were in 1973 and 1974, when prices were flexible because assured access to necessary oil was more important than price. The Arab traders are after bigger game. Middle Eastern businessmen like Saudi Arabia's Adnan Khashoggi or the Quraishi family-one of whose members is governor of the Saudi Arabian Monetary Agency-have set up trading firms in Switzerland, with offices in London, Houston and New York and other places where international oil is traded. Denapetrol and Energy Marketing Services are some new, Arab-backed company names.

THE REAL PAYOFF

The capital cost of entry is negligible—telephones, office furniture and the salary of a good, experienced English, French or American trader. More important is the credit standing to support a shipment of oil-generally around $20 million. A little oil brokerage business pays the upkeep—commissions at 1 cent to 2 cents a barrel-and the real payoff comes if the market is active and customers are bidding for oil.

The big state oil companies in the Middle East-Petromin or National Iranian— won't shade prices for their own businessmen. To seem to be favoring anybody, as one oil consultant who works for Petromin puts it, would be "political suicide." The Arab businessmen will offer nothing more than a slightly better chance of access to crude oil. But that is likely to become very important very soon.

Senator HASKELL. Mr. Chairman, I am going to have to leave for a while, but it does not indicate any lack of interest. It just indicates a sudden crisis in the office.

I would like to congratulate you for your legislation. I will be back. Senator LEAHY. I am aware of your schedule. I appreciate your taking the time.

Senator STONE. The burden of your bill is more notice than it is restriction.

Senator LEAHY. That is right. I wish there was some way to state it, but I do have a great deal of concern about heavy government involvement in the corporate decisionmaking areas. This bill does not require that. What it does do is give us notice, give us enough leadtime so that, each State, especially the rural States, can try to find somebody to fill in the gaps.

For example, if a State had notice that several of its suppliers were going to pull out, then they make at least a pitch to a large supplier to take up the slack.

Senator STONE. Senator, would you like to join us as we take the testimony of the next witnesses? The committee would be pleased to have you interrogate as well.

Senator LEAHY. I appreciate the courtesy.

Senator STONE. The next witness is Mr. Gorman C. Smith, Assistant Administrator for Regulatory Programs at the Federal Energy Administration.

STATEMENT OF HON. GORMAN C. SMITH, ASSISTANT ADMINISTRATOR, OFFICE OF REGULATORY PROGRAMS, FEDERAL ENERGY ADMINISTRATION

Mr. SMITH. Good morning, Mr. Chairman. I am Gorman Smith, Assistant Administrator, Office of Regulatory Programs, Federal Energy Administration.

Thank you for the opportunity to appear today to outline the Federal Energy Administration's views on S. 3486. Provisions have already been described by the distinguished Senator who was the former witness and has now changed sides at the table, so I won't repeat them.

With the chairman's permission, I would like to request that my written statement be inserted in the record. I will try to summarize the main issues.

Senator STONE. Thank you for that. It will be included in the record. Mr. SMITH. Mr. Chairman, I would like to make clear that the Federal Energy Administration has no problem with the objectives of S. 3486 whatsoever in that we already feel we have a legislative responsibility to assure the continued availability of continued supplies of products to all classes of consumers in all regions of the country. That specific charge is already contained in the Emergency Petroleum Allocation Act.

During the period of the embargo, we discharged that responsibility by imposing and enforcing a set of mandatory petroleum allocation regulations with which I am sure the subcommittee is generally familiar. However, it is our view, S. 3486, while its objective is wonderful, it really is not necessary in order to accomplish those objectives for two fundamental reasons.

First, it is our requirement, before we submit any proposal for exemption of any product from the mandatory pricing regulations under the Energy Policy and Conservation Act, that we do an extensive analysis of the impact including State and regional impacts of the proposed exemptions, that we publish that analysis and receive comment from all interested parties on it and we must make a finding based on that record, that there will be no adverse State or regional impacts on the imposed exemption before we can propose it.

For example, in the proposed exemption for motor gasoline we now have near completion at staff level, and hope to publish soon for public comment. This specific issue has been addressed, based on the information available to us, and that will be further addressed in the public hearings and we will request specific comments at those hearings on any plans for market withdrawal and the time of such plans to be sure that the kinds of concerns, the understandable concerns as expressed by the distinguished Senator, are taken into

all consumers in all segments of the country before we propose an exemption.

Basically, sir, it is our view, before there were such things as allocation controls, the operation of the marketplace served in a period of adequate supplies to make plentiful supplies available to consumers in all segments of the country.

This rests, we think, on the often concerned presumption that where there is a buck to be make, somebody is going to move into that market and do his best to make it.

Senator STONE. What about the Senator's suggestion that notice is important, the notice called for in this bill?

Mr. SMITH. The question of formal notice, sir, is one that is inherent in the process in that the leases and contractual supply arrangements of a particular supplier are usually run for a series of terms. In fact most of the notices we have, have come from notices of intent served by the major refiner on his suppliers or distributors in a particular area.

Senator STONE. Are you saying the FEA gets what amounts to that kind of notice?

Mr. SMITH. Yes, sir. Of course, while we are under the regulations, we get not only notice, we have to give anybody permission to withdraw from a market area and make sure alternate supply arrangements are made.

Senator STONE. Do you notify the Governor's of the States when that process is in progress?

Mr. SMITH. Yes, we notify the State energy offices concerned through our regional offices, of pullouts. But again, while the mandatory allocation regulations are in effect, nobody pulls out until we give him permission to and we don't give him permission to until he has made satisfactory supply arrangements.

In effect, what we are doing now, Mr. Chairman, is ratifying a three-way deal put together between the old supplier, the new supplier, and the customers involved. These are the normal kinds of business arrangements that would be made in those cases anyway. We now have to sit down and put a stamp on those.

Senator STONE. What about after deregulation, have you provided alternate requirements for notice?

Mr. SMITH. Not in terms of-although the specific terms of the deregulation proposal have not yet been formulated, sir. We have not proposed to require notification to the FEA prior to a market withdrawal, but rather we expected to collect this information in the same way we do not in terms of our earlier notice, that is, through monitoring the supply situations not only from the national but through our regional offices.

That is when a supplier sends out to his distributors and dealers notice of intent to curtail his operations in a particular area, we hear about it very quickly thereafter.

Senator STONE. Do you have anything further to say or may I turn the questioning over to Senator Leahy?

Mr. SMITH. Just one more basic point. We think the marketplace will take care of the overwhelming concerns expressed by Senator Leahy and the Emergency Petroleum Allocation Act contains not

Energy Administration to reimpose such controls as may be required in any case where we see a potential shortage developing.

So, S. 3486 in our judgment, is duplicative of part of the powers and, in fact, has fewer powers to preclude the kind of conditions the Senator expressed concerns about than the Emergency Petroleum Allocation Act. When we make one of these we are not really decontrolling at all to the extent our existing regulations go on standby status and the Administrator of the FEA has the authority and the responsibility to reimpose such of those controls as may be necessary to insure the objectives of the EPAA are attained.

Senator STONE. For example, after a pullout, the rural area will not be served. That is one of those cases.

Mr. SMITH. Not only that, but on notice they were going to pullout and there were no alternative satisfactory arrangements for that area, then it would be our responsibility to take action to continue those supplies.

Senator STONE. You think you would still receive the notice after deregulation?

Mr. SMITH. We would find out about it very quickly.

Senator LEAHY. Once you have gone to deregulation, you no longer have the allocation system, so what are you going to be able to do with it? Suppose, for example, you got notice through whatever channel-once you no longer have regulation or an allocation systemthat 15 percent of the oil supply in a State was pulling out? Now let's say it is a State where one area is predominantly urban, one area predominantly rural, as many States are, and that 15 percent was all coming out of the rural area, what could you do about it?

Mr. SMITH. We can do anything required up to and including the reimposition of allocation controls over the companies concerned for that State or for whatever part of their marketing area is required. What we would in fact do, Senator, is first, try to use our persuasive powers to see those were delayed. We would hold a public hearing, for example, to inquire into the alternate supply arrangements because under the Emergency Petroleum Allocation Act, we cannot sit by and watch this happen, that is a failure to assure adequate supply of the product for all consumers and we would take whatever steps short of reimposition of controls, see if those could solve the problem, see if we could help brokers on alternate supply arrangements, and if not in order to preclude this kind of condition, we have to reimpose such aspects of the controls required to prevent it.

Senator LEAHY. If you are willing to do that, why would this bill interfere with you in any way? Why wouldn't this bill do no more than just guarantee to the States that they would get that kind of notice and that there would not be any possibility of FEA making a mistake, or deciding that this particular instance does not require public hearing. At least they could still have a club, even if they have public hearings which FEA might consider adequate.

We all know of instances where major oil companies have not been influenced by a lot but public hearings.

Mr. SMITH. Yes, sir. The point, Senator, as I indicated initially, there is no disagreement with the objective of S. 3486, but our position is, it simply is not required. The FEA has already in it, in the EPAA, all of the authority required to do anything that would be