Mr. SYNAR. Our next witness will be Jeffrey A. Jones, Deputy Director of Energy Programs in the Office of the Secretary of Defense.

Mr. JONES. Thank you, Mr. Chairman.

Mr. SYNAR. Do you have any objection to being sworn in?

Mr. JONES. No objection.

Mr. SYNAR. Do you solemnly swear the testimony you are about to give is the truth, the whole truth, and nothing but the truth? Mr. JONES. I do.

Mr. SYNAR. Thank you.

As you know, your entire testimony will be made part of the record. We look forward to hearing from you today. If you will summarize your statement, it allows us to ask more questions. Thank you.

STATEMENT OF JEFFREY A. JONES, DEPUTY DIRECTOR, ENERGY PROGRAMS, OFFICE OF THE SECRETARY OF DEFENSE, DEPARTMENT OF DEFENSE

Mr. JONES. Thank you very much, Mr. Chairman. It is a pleasure to be here. We don't often get a chance to appear before this committee.

I think what I will do, if there is no problem, I will take your suggestion and I will summarize my rather lengthy statement, which ranges all over the place, and get down to some points that I think are a little bit more of concern to the Department of Defense. DOD is very close to the industry because we are the largest buyer of petroleum products in the world, as far as we know. That doesn't mean we consume that much; we only consume about 2 percent of the U.S. demand, 2 to 3 percent. But it is still significant for one buyer to have that much business. As a result of this relationship we have with the industry, we have a fairly close working relationship, and when either one of us gets into trouble, we look to the other for help. This creates some problems and some positive things.

One of them is that, in this current situation we find ourselves in, the Department of Defense tends to be called upon to look at industry data with respect to questions like imports, the effect of the tax proposals this administration has made, and to join industry in calling for some type of policy action. We have been in this position several times, and it is a very difficult position to be in, but we do have some observations.

The other side of the coin is that the Department of Defense has been through two crises during the 1970's, and I was peripherally involved in both of those. And Ed Biddle from the Defense Fuel Supply Center, who is with me, went through both of those in the procurement business. So we have a great deal of direct hands-on experience in what happens in the Government when a supply crisis occurs.

That said, I need to point out that today's situation is somewhat different from anything we have seen before. We see that imports of light products definitely are up. They are going up rather sharply in the last year and a half. Refineries are closing. Some 120 to 150 refiners have closed in the last couple years. And we do see

that productivity or operating capacity has dropped from 18 to 14 million barrels per day in the last couple years.

All of that said, also, if you look beyond that figure you look at the types of refinery closures, and these are usually largely small units or companies with one or two refineries, and we don't see the same effect on the large companies. Even the large independents with several refineries are not experiencing quite the same problem. Certainly, the large international companies are not.

One of the reasons that this comes up in this hearing from my point of view is that the industry is divided; they are not unified on what this problem really means. We have companies coming to my office and will drop papers off telling me the sky is falling, but they won't put their corporate name on the paper. I think you may

have seen some of those.

Mr. SYNAR. We have had that problem for a long time with this industry.

Mr. JONES. So, anyway, what I guess-to make it short-that it is real easy to simplify this problem and say that the sky is falling, but I don't think the sky is falling, and we can talk more about that as time goes on.

On the question of imports, again we are not really qualified to talk very much about this. We see the statistics, analyze the market, because we think we need to be prepared for potential problems and we don't want to get caught short. But generally the problem is very complicated, as we see it.

We hear accusations continuously by the industry that people are importing product, importing feedstock and mislabeling it as feedstock when it is really product, and we hear these things. We really don't know how to sort them out. There is probably a little truth in all of that. Again, the implications are that the people who are not doing the importing are crying; the people who are doing the importing are not objecting.

On the issue of emergency supply and response, the SPR, you have certainly heard the administration's views on the fiscal side of it. You pointed out several different views. We look at the SPR or any other petroleum reserve as an insurance policy. And from a program manager's point of view, or point of view of just the readiness implications of these reserves, we think that there probably isn't any one number that is the right number. You could calculate a number based on such a wide variety of assumptions; you could go anywhere from the current size to 1 billion barrels, and probably more.

To give you a quick example, if you make an assumption on imports at 6 million barrels a day and add the DOD wartime surge on top of that and perhaps an industrial base surge, that SPR may not last you more than 50 to 55 days. But if, on the other hand, you make assumptions about domestic consumption dropping in association with prices going up, it might well completely offset that. Again, we can't really predict that or make those judgments; and it is a very complicated but important issue.

As you know, the DOD has no claim to the SPR-and we can probably talk a little about that if you have questions on that issue later on. The Department has had several agreements, one of them now with the Department of Energy to use naval petroleum re