If the crude oil is shipped to the Virgin Islands for refining, additional transportation costs would be expected. However, by diverting oil to the Virgin Islands, the prospects of lower cost foreign tankers are greater in this case. Additionally, the expected savings in resources from using foreign tankers would more than compensate for the additional distance and handling costs required.

Using the estimates shown in Table 7, this savings would range from $.41 to $.89 per barrel for the Central American and Cape Horn routes respectively. Therefore, the socially uneconomic decision of diverting oil to the Virgin Islands would probably be selected, if the restrictions of the Jones Act could only be circumvented by this action.

All of these plans will only be acceptable to the oil companies if the domestic price rather than the world price is expected on the East Coast. At the same time, in the Virgin Island examples, if the world price was used to determine wellhead prices in Alaska, the higher costs (even in the foreign flagship case) would result in royalty and severance taxes to the State of Alaska of only about $.10 per barrel. This is about $.35 per barrel less than the expected royalty and severance tax, if that same oil were sold in California at the current price. Should the oil after refining then be permitted to enter the East Coast market outside the import quota system, this saving in taxes would represent additional profits to the oil companies with no accompanying loss in revenue. The State of Alaska could protect itself from both of the preceding marketing plans by passing a law similar to those used by Middle East countries, which use a posted price for calculating taxes regardless of where the oil is marketed and therefore it is net back. Such decisions are transfers between oil companies and the state and indicate an equity issue but will not affect economic efficiency.

One case is particularly interesting to consider. In that case oil is transported: (1) to the Virgin Islands, (2) in foreign tankers (outside the Jones Act), (3) through Central America, (4) sold at the world price, and (5) then refined and sent to the East Coast in addition to the import quota levels. Under such a scenario, the profits before taxes are $2.42 per barrel, with the additional tax savings of about $.35 per barrel; equivalent oil company profits are about $2.77 per barrel. At the same time, state taxes would be their lowest per barrel and the additional social costs of this plan are about $.13 to $.32 per barrel greater than the average direct Canadian pipeline transportation systems.40

In summary, marketing North Slope oil in either Japan or on the East Coast of the United States is likely to be profitable. However, in most cases Alaska's taxes and net benefits will be lower than the estimates calculated above, when it was assumed that North Slope oil would be sold on the West Coast of the United States at the current price. Accordingly, the values used for these parameters when they were compared for the TAP, MVP and AHP alternatives should be adjusted downward in the case of TAP, thus increasing further the relative advantages of a direct North Slope to Midwest transportation system even if it was furher delayed.

Finally, without quantifying the environmental savings expected for a Canadian route, and possible economic savings if a joint gas pipeline is built in Canada, it can be concluded that national and state interests require the development of the economically superior and more urgently needed Trans Canadian pipeline even with delays up to 5 years when such factors are considered as: (1) West Coast oversupply and the various plans for dealing with it, and (2) higher economic benefits per barrel in the Midwest and East Coast compared to the West Coast. Contrary to this conclusion is the position of the oil companies, who it seems intend to do business as usual and to utilize existing, often irrational industry regulations to increase profits at the expense of oil consumers, taxpayers, the State of Alaska, the U.S. Maritime Industry and doubtless others. Accordingly, the issue represented in this current controversy and discussed above is more than a question of relative economic or environmental superiority. It is in compact form: which interest, oil profits or national well-being, will dominate major decisions of this nature?

1 See Table IV-1, Alaska Pipeline Report prepared for the USDI by Tussing, A.R., Rogers, G.W., Fischer, V., Norgaard R. and Erickson, G., of the Institute of Social, Economic and Government Research, University of Alaska, 1971, p. 72. Note: R. Nehring, "Future Developments of Arctic Oil and Gas: An Analysis of the Economic Implications of the Possibilities and Alternatives," U.S. Dept. of the Interior, Office of Economic Analysis, May 10, 1972, reports a more rapid 3-year buildup has been described by Alyeska. Under this schedule the first three years would average 0.6, 1.2, and 1.6 billion barrels per day respectively. This schedule falls between the two used in the remainder of this monograph and will therefore not be referred to below, since it is bracketed by the schedules utilized.

Notes, Implied total over 25 years times 365 days per year equals approximately 16.7 and 18.3 billion barrels respectively for the Alyeska and accelerated cases.

TABLE 10.-1971 CRUDE OIL PRICES IN VARIOUS MARKETS

All prices are based upon data published in recent editions of Platt's Oilgram Price Service, with U.S. prices based upon Crude Oil Supplement of Aug. 25, 1971, vol. 49, No. 164-B. Costs are based upon the Cabinet Task Force, op. cit., for Chicago and New York and the State of Alaska, op. cit., and Tussing et al., op. cit., for Los Angeles.

FOOTNOTES

1 This consortium is named the Alyeska Pipeline Service Company and is owned by Amerada Hess Corporation, ARCO Pipeline Company, BP Pipe Line Corporation, Humble Pipe Line Company. Mobil Pipe Line Company, Phillips Petroleum Company and Union Oil Company of California. The acknowledged major ownership is in the control of three parent companies which have found the most North Slope oil: Atlantic Richfield Company (ARCO), British Petroleum Company Limited (BP) (its U.S.-owned subsidiary is BP Oil Corporation, which was merged with the Standard Oil Company (Ohio) on January 1, 1970), and the Standard Oil Company of New Jersey (Humble).

2U.S. Department of Interior, Final Environmental Statement..., vol. 1, p. 320. 3 U.S. Department of Interior, Final Environmental Impact Statement vol. 1, Washington: National Technical Information Service, 1972, pp. 320-2. Testimony of J. V. Krutilla and C. J. Cicchetti, In the Matter of: Pacific Northwest Power Company and Washington Public Power Supply System, Projects Nos, 2243/2273, before the Federal Power Commission. See also Krutilla, J. V., and Cicchetti, C. J., "Evaluating Benefits of Environmental Resources with Special Application to the Hells Canyon," Natural Resources Journal, Vol. 12, No. 1, January 1972.

Eckstein, O. and Harberger, A., "Economie Analysis of Public Investment Decisions: Interest Rate Policy and Discount Analysis," Joint Economic Committee (Washington: USGPO, 1968). Seagraves, J. A.. "More on the Social Rate of Discount," Quarterly Journal of Economics, vol. LXXXIV, No. 3, Aug. 1970. Water Resources Council, Proposed Principles and Schedules for Planning Water and Related Land Resources, Federal Register, Dec. 21, 1971, Vol. 36, No. 245, Part II, pp. 24144-94. and Office of Management and Budget. Circular A-94, Discount Rates to be Used in Evaluating Time Distributed Costs and Benefits."

The most recent estimate utilized by the Department of Interior placed the 1973 construction costs at $2.8 billion, converting this back to 1971 for comparability using a 10% discount rate implies a 1971 capital cost estimate of $2.3 billion, which is within the range utilized in this analysis. See Nehing, R. "Future Developments of Arctic Oil

FOOTNOTES Continued

and Gas Analysis of the Implications of the Possibilities and Alternatives," U.S. Department of Interior, Office of Economic Analysis, May 10, 1972.

For a more detailed discussion of the reasons for this confusion, see Cicchetti, C. J., Alaskan Oil: An Economic and Environmental Analysis of Alternative Routes and Markets, Baltimore: Johns Hopkins Press, forthcoming December 1972.

Note that in a recent Department of Interior Analysis, Nehring uses a total system cost of $5.3 billion in 1974 $, converting this to 1971 $ at a 10% discount rate makes his total cost estimate to Chicago $4.0 billion, and splitting this at 66% for the North Slope to Edmonton segment results in his comparable estimate being equal to $2.63 billion in 1971 $. Further, each capital cost case for TCP I and TCP IV is increased below by 10% and 20% for additional sensitivity.

Source: Atlantic-Richfield Company, memorandum re Trans Canada Alternative Route submission to U.S. Department of Interior, Sept. 10, 1971, Appendix B, entitled: "Transcontinental Pipeline Project, Transportation of Alaskan Crude Oil, Atlantic, BP, Humble, December 31, 1968. Prudhoe Bay to Chicago Pipeline."

19 See the Oil and Gas Journal, Oet. 18, 1971, "Interprovincial Adds a Quarter Million Horsepower."

11 See the Atlantic-Richfield memorandum re Trans Canada Alternate Route submitted to the Secretary of the Interior, Sept. 1971.

12 Note converting the estimate made by Nehring into 1971 $ in the manner described in footnote 15 shows his estimate to be slightly higher for this segment, namely $1.35 billion. Note, however, that while his total capital costs in 1971 $ are about $.25 billion greater ($3.98 billion minus $3.75 billion) than the high case shown in Table 3, it is well below the capital cost case of $4.5 billion, which is used below when the results in Table 5 are further tested for sensitivity and adjusted upward by 10% and 20%. See Nehring, R., "Future Developments of Arctic Oil and Gas: An Analysis of the Economic Implications of the Possibilities and Alternatives," Office of Economic Analysis, Department of Interior, May 10, 1972. He estimates the costs in 1974 to be $5.3 billion which equal $3.98 billion in 1971 dollars at a 10% discount rate.

13 Comparable is meant to mean, in this discussion and elsewhere in the text, high-cost cases are considered with each other, medium with medium and low with low. Note in Table 5 below, some of these cost comparisons are presented jointly.

In the analysis below the before corporate income tax calculations will be utilized, since the special tax provisions of the crude oil industry make it nearly impossible to estimate the after tax return. Furthermore, as recently as 1968, when the oil depletion analysis was set at 27.5 percent rather than the present 22 percent, the major oilproducing companies in the U.S. paid an average corporate income tax of only 7.1 percent. 15 For a more detailed discussion of approach, see: Steiner, Peter O., "The Role of Alternative Cost in Project Design and Selection," Quarterly Journal of Economics, 79:421-2, 1965,

18 In a recent paper by Richard Nehring of the Office of Economic Analysis, U.S. Department of Interior, the possibility of increased imports from Ecuador, Peru and Indonesia, as well as from domestic sources is discussed. If locational savings from these foreign sources are used to increase the taxes collected by such countries, such alternatives would not affect the benefit-cost calculations, which I base upon a Persian Gulf alternative. However, if some real savings are possible then I have systematically biased my calculations in favor of the proposed pipeline development. See: Nehring, R., "Future Developments of Arctic Oil and Gas," op.cit.

See Cicchetti, C. J., Alaskan Oil. op.cit.

Is These weights slightly exceed the present regulatory limit of % of domestic crude production utilized to determine the amount of foreign crude imports in Districts I to IV. The 1/6 therefore biases the benefit estimate downwards slightly, given present institutional constraints.

19 For a discussion of the Gulf Coast basis of pricing east of the Rockies, see page C-14 of the U.S. Department of Interior, Economic and Security Analysis of the Trans Alaska Pipeline, vol. I (Washington, D.C., National Technical Information Service, December 1971). For an interpretation of this basis as it relates to the present controversy, see public "Comments by Charles J. Cicchetti and John V. Krutilla on the Final Environmental Impact Statement for the Proposed Trans Alaska Pipeline" and the "Complementary Analysis of the Economic and Security Aspects of the Trans Alaska Pipeline," submitted to the Department of Interior May 5, 1972.

I owe a consideration of these differences to personal correspondence dated September 30, 1971, with Mr. E. L. Patton, President of Alyeska Service Company.

21 Platt's Oilgram Price Service, Crude Oil Supplement of August 25, 1971, vol. 49, No. 164-B.

Roselius, R. R. and Steffens, J. H.. "North Slope Oils Score High with Hydroprocessing." Oil and Gas Journal, May 17, 1971.

Timenes, N.. Appendix C, vol. I, "An Analysis of Transportation Alternatives," An Analysis of the Economic and Security. op.cit.

Vogeley, W., "Comments on Trans Alaska Pipeline and Alternatives" submitted by the Environmental Defense Fund, and Cicchetti-Krutilla "memo to the Undersecretary," U.S. Department of Interior, May 8, 1972.

For a complete discussion of the prices used for reference purposes in each market by various analysts, see "Comments by Charles J. Cicchetti and John V. Krutilla on the Final Environmental Impact Statement for the Proposed Trans Alaska Pipeline . . .,” submitted to the Department of Interior, May 5, 1972.

Parker, W., A Comparison of Prudhoe Oil Costs Via Valdez or Via a Mid-Canada Pipeline, op.cit."

These adjustments would amount to higher costs or taxes paid to the Canadian government of approximately $.10 to $.25 per barrel.

The $.18 per barrel adjustment for possible lighter North Slope crudes and sulfur content differences would have a small percentage effect on the wellhead prices and therefore the taxes and profits. However, since this adjustment is both uncertain and perhaps an overestimate of any adjustment of this kind, it will not be used.

97-839-73-pt. II- -6

FOOTNOTES-Continued

29 This assumes that the full throughput of the TAP is oversupplied for 15 years and the discount rate is 10%, thus reducing the present value of benefits to approximately 24% of those which were utilized above. While this might be an outside estimate many of the cases considered in Table VII-1 would imply that the benefits which were used for TAP would fall to between 24% and 50% of those values, which were used previously for TAP.

30 See Corrigan. R., "Resources Report/Japan May Get Some Alaskan Oil; Foreign Flag Shipping of Exports is Likely," The National Journal, July 31, 1971.

31 See United States Code 861 et seq. (1964), Common Name, "The Jones Act."

Mr. Eckis is an executive with Atlantic-Richfield Company and a former president of Richfield Oil before its merger with Atlantic Refining Company. He discussed the Japanese market in his paper, Alaska Oil in Domestic and World Markets, which appeared in Change in Alaska, ed. by George W. Rodgers, College, Alaska, University of Alaska Press, 1970.

Oil Import Controls, Hearings before the Subcommittee on Mines and Minerals. House Interior and Insular Affairs Committee. March-April 1970. It should be noted that, at the present time, Phillips is not a holder of major proved-up reserves on the North Slope. However, it does have reserves in Cook Inlet which is both closer to Japan and more likely to be backed out of District V by North Slope oil.

34 This interview, as well as others with U.S. and Japanese government officials is reported by Richard Corrigan. "Resources/Japan May Get Some Alaskan Oil; Foreign Flag Shipping of Exports is Likely," National Journal, July 31, 1971.

The $1.83 per barrel is based upon averages for the first quarter of 1970 found in the May 10, 1971, issue of Platt's Oilgram Price Service.

30 This is calculated by subtracting production costs (8.25), transportation costs for a pipeline ($.60) and tanker ($.20) from a price of $2.00 per barrel.

It should be noted further that, if the imported oil is produced by the same company that exports Alaskan oil. the royalties paid to the producing country may be credited against U.S. corporate income taxes. Such a tax advantage has not been included in the analysis of benefits and costs, since it is a transfer payment. However, it will affect profitability and must therefore be included when private decisions are analyzed. This is especially true when the company producing North Slope oil will also be the producer of foreign oil that will enter under an "import for export" program. as See Corrigan, R., "Resources Report . . op.cit.

Note the values shown above for transporting oil to Chicago must be increased by two factors to determine these costs: $.25 per barrel production costs and $.25 per barrel for transportation between Chicago and New York.

40 This is based upon an average total cost on the East Coast of a TCP alternative of $1.51 per barrel compared to $1.64 per barrel for a Central American system and $1.83 per barrel for a Cape Horn system. If the Midwest is the principal North Slope market, these extra costs would be approximately $.63 and $.82 respectively.

Dr. CICCHETTI. I am a visiting Associate Professor of Economics and Environmental Studies at the University of Wisconsin. I would like to speak about four things.

First, I would like to review some of my previous findings.

Second. I would like to review some of the recent comments and uses of my testimony, my previous testimony and my analysis, by various spokesmen for government and oil company officials.

Third, I would like to say a little bit about the President's energy message and what it says about the pipeline development issues. Finally. I proposed in my testimony some proposals to plug some of the loopholes I think will still exist if this committee makes it possible to go ahead with the Alaskan pipeline, and I would like the committee to consider those loopholes, although I won't go into them today.

I started my analysis pretty much based upon the notion that environmentally the Trans-Canadian pipeline, whether the Mackenzie Valley pipeline or Alaska Highway pipeline, would be environmentally superior, was environmentally superior to the Trans-Alaska pipeline. That was based upon testimony of public witnesses and I think confirmed quite clearly by the Interior Department's own environmental impact statement, which could only find the Alaska pipeline superior because it was shorter.

And when you add it in, as the Interior Department mentioned in one section, the fact a gas pipeline would also have to be built, the environmental savings of shortness of length, by having an oil and gas pipeline in the same corridor, tilted every factor that Interior

Department considered environmentally in favor of the Canadian pipeline, whether it be Mackenzie Valley or the Alaska Highway. So that is where I began.

I did an economic analysis, and in the analysis I compared several factors. When I looked at the cost of the two, I found using company estimates that when they were put on the same basis in terms of interest rate, group schedules, and what have you, that the difference in the cost of winding a pipeline through Canada and the cost of bringing that same oil to Los Angeles, was no more than 10 or 20 cents. When one added delays and looked at some of the cost estimates that were made, again the difference was around 25 cents to 30 eents per barrel difference in cost of transporting the system. True, the Canadian route would be longer and therefore more costly to construct. There wouldn't be any need to construct tankers, terminal and storage facilities in Valdez. When these costs are added in, that brings the two routes almost in line with one another, from a cost standpoint.

The next thing I did in my analysis, where would Los Angeles get its oil if it didn't get it from Alaska, and where would Chicago get its oil if not from Alaska? I looked at two cases. The first case I looked at, let's suppose if Alaskan oil wasn't delivered to either of those two markets, they would use foreign oil. The second case I said, let's look at the prices in these different markets and let's assume prices reflect domestic cost. Let's see what the difference would be if we assume the present system of domestic prices keeps hold in the Midwest and on the west coast, and let's see what that says about the two routes.

I found out if we looked at the price of foreign oil that the difference in the cost of foreign oil either in the Midwest or on the west coast was between 25 and 30 cents a barrel. That is about what the difference is in the cost of the two systems. So one would say economically there is little difference between the two, if in fact there was a 2-year delay for a Canadian route, and if you had that foreign oil as the alternative source of supply and price setter and price-determining factor in all of U.S. markets.

Mr. Simon, who is with the Treasury Department, Governor Egan of Alaska, and Standard Oil Co. of Ohio have taken that case in my analysis and based most of their recent testimony on that assumption. They have assumed that because of the President changing the quota system, prices in all parts of the country are going to be based upon prices delivered from the Middle East.

That doesn't bear up with the fact, when you look right now at the price for oil. The quality that is found in Alaska is 65 cents a barrel higher in the Midwest, and 90 cents a barrel higher on the east coast than it is on the west coast.

I think the question of anybody who says the Middle East is going to be the price determining factor that has to be asked those witnesses is what do they think is going to happen. Do they think the west coast prices are going to rise to the east coast prices, or do they think east coast prices are going to fall? I think most of them are going to say they don't know, they expect the historic pattern to keep hold. Do they think foreign oil is going to get so expensive that all prices have to go up?

I think if you look at some of the information available, and I have included in my testimony, you find, a couple of surprising