REVIEW OF LONG-TERM WORLD OIL OUTLOOK; PETROLEUM PRODUCT IMPORTS; AND ENERGY-RELATED TAX REFORM PROPOSALS MONDAY, APRIL 1, 1985 HOUSE OF REPRESENTATIVES, ENVIRONMENT, ENERGY, AND NATURAL RESOURCES SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS, Washington, DC. The subcommittee met, pursuant to notice, at 1 p.m., in room 2154, Rayburn House Office Building, Hon. Mike Synar (chairman of the subcommittee) presiding. Present: Representatives Mike Synar, Albert G. Bustamante, William F. Clinger, Jr., Thomas D. (Tom) DeLay, and John R. Miller. Also present: Sandra Z. Harris, staff director; Lynn Stevens, professional staff member; Heidi I. Irgens, staff assistant; and James Tapper, minority professional staff, Committee on Government Operations. OPENING STATEMENT OF CHAIRMAN SYNAR Mr. SYNAR. The subcommittee will come to order. Today, the subcommittee begins 2 days of hearings on the longterm world oil outlook and U.S. energy security vulnerability, and two related, but more specific, issues: oil product imports, and oil and gas related tax reform proposals. Being from Oklahoma, these issues are of particular concern to me and certainly to our subcommittee members from Texas. But they are of concern to our entire subcommittee, as well, in light of our considerable interest in energy security issues in the past. Energy Secretary John Herrington said recently, "**it is clear that the Nation's energy situation has improved significantly in recent years." This is true. Total U.S. net oil imports last year were about 4.5 million barrels a day-not counting imports for the strategic petroleum reserve-or roughly 29 percent of U.S. oil consumption for the year. Today's numbers look good in comparison to many years during the 1970's. But there are some alarming trends on the horizon. Last year, oil imports ended a several-year decline and, instead, jumped 8 percent-the first annual increase since 1979. Domestic oil consumption rose 3 percent. Oil prices are relatively low, and this, no doubt, is one reason why our consumption and import levels are once again creeping upward. The oil price shocks of the seventies have been forgotten. Some oil experts predict oil prices will remain stable or decline in the next few years. If this proves to be true, then I suggest our oil outlook may be more perilous than it appears today. Indeed, some industry officials are warning that we are now at a crossroads and that we soon could find ourselves back in an energy situation very similar to what we faced in 1977 and 1978. Most oil experts predict that U.S. oil production will continue to fall as U.S. oil consumption increases over the next two decades. It is in this context that we should look at some undeniable, yet not too pleasant, facts about the world oil picture. The Soviet Union, which currently has a 17-percent edge over the United States in terms of oil production, will increase that margin in the coming years because proven Soviet oil reserves are more than twice that of U.S. oil reserves; Soviet gas reserves are seven times as large. Seventy-four percent of the world's proven oil reserves are in the Middle East and North Africa. In fact, proven reserves in the Middle East alone exceed the reserves of all of the world's other areas combined. It is with these statistics in mind that I turn to two more specific issues that may affect our domestic energy picture: Recent dramatic increases in oil product imports and proposed oil, and gas-related tax reforms which would reduce domestic exploration and production. Our dependence on oil imports-about one-third of U.S. oil demand-is now higher than it was before the Arab oil embargo of 1983. Between 1981 and 1984, the number of operating refineries in this Nation declined 35 percent-from over 300 to just over 200 in number. About 2 million barrels per day of capacity was permanently shut down in that period, and 1 million more was idled. I am told that since January of this year, another 1 million barrels per day of refining capacity has been closed down. Independent refiners accounted for almost 90 percent of the shutdowns, accounting for about 82 percent of the lost capacity. Government and industry officials say that the Treasury Department's tax simplification plan could cause oil production to fall 1⁄2 to 12 million barrels a day from 1987 to 1995. These tax reforms would most affect independent oil companies, who accounted for about 87 percent of all exploratory oil and gas drilling from 1974 to 1983, and who were responsible for 17 percent to 38 percent of the additions to U.S. oil reserves, and 33 percent to 68 percent additions to our natural gas reserves. The number of drilling rigs operating already has fallen dramatically because of current market conditions. Today, we will hear testimony on the broad issue of long-term world oil supplies, product imports and energy-related tax reform proposals generally. Tomorrow, we will focus specifically on oil product imports and the tax reform proposals as they relate to the oil and gas industry. I would like to mention that, in addition to the testimony from our witnesses today, the subcommittee also has received written testimony for today's session from Mr. Charles DiBona, president of the American Petroleum Institute; Mr. Edwin Rothschild, assistant director of the Citizen/Labor Energy Coalition; and Dr. Elihu Bergman, executive director of Americans for Energy Independence. At this time, I will call on our ranking minority member, Mr. Clinger, for any opening statement he may have. Mr. CLINGER. Thank you very much, Mr. Chairman. As you indicated, today we begin 2 days of hearings on long-term world petroleum outlook. I want to commend you for holding these hearings because I cannot stress enough the importance of the information we hope to gather in these 2 days. The energy security of the United States is intricately connected to world oil and oil import markets. Our dependence on imports is a major consideration in crafting a responsible energy policy, and we can gain valuable input from our inquiries in assessing the energy vulnerability of the United States. Most of us are aware that crude oil imports are down from a decade ago when Congress first began wrestling with policies to meet the energy situation. Consumption is down, as well. We also know markets are not static. In some figures we have, petroleum imports are on the rise over the last year. Others show a recent downward trend. One of the thrusts of these hearings, will be to attempt to discern the trends in U.S. energy supply so Congress can act from an informed and responsible foundation. Among the issues that I hope to gain insight into-and I am sure the entire subcommittee does are; the current status of petroleum product imports, their implications for U.S. energy independence, the appropriateness of import fees or tariffs in light of import trends, U.S. refinery capacity and our reliance on foreign refiners, and implications of tax reform proposals on domestic production. This is, by no means, an exhaustive list, and I am sure we will learn a great deal from the witnesses scheduled to testify before the subcommittee. I join my colleagues in welcoming our witnesses and look forward to their testimony. In addition, Mr. Chairman, I would point out that our colleague, Mr. Dick Armey, could not be here today because of some business in his district. And I would ask unanimous consent that his statement be included in the record at this point. Mr. SYNAR. Without objection. [The introductory statement of Mr. Armey follows:] INTRODUCTORY STATEMENT RICHARD K. ARMEY APRIL 1, 1985 Thank you, Mr. Chairman. I'm pleased that the subcommittee is holding these hearings on the world oil outlook, and more specifically, on the subjects of oil product imports and tax reform proposals relating to the energy industry. These are most important subjects, and it is important that we in the Congress adequately understand the full extent of the problems before us- as well as the implications of any alternatives we might enact. In general, I think the overall energy outlook for our nation is encouraging. We import less oil today then we did during the supply disruptions of the 1970's. We import less OPEC oil and we import less Arab OPEC oil. Over the years, our supply sources have shifted to more stable, non-OPEC suppliers. And finally, there is currently a tremendous amount of unused productive capability around the world. I know many of our witnesses are concerned with the increasing amounts of oil product imports we are seeing being delivered in the United States. I, too, am concerned with this subject, and I am pleased that we will be gathering more information on a subject which we don't know a lot about. As concerned as I am about oil product imports, I must say upfront that I am extremely reluctant to support import fees, tariffs, quotas, or other restrictionist trade practices. As an economist, I am a strong believer in free trade, and in the benefits which free trade bestows upon consumers. I also believe free trade helps build and maintain healthy and competitive industries in the United States. But I am also well aware of the strategic importance of oil--and of the strategic importance of having enough refining capacity to process this oil. Having sufficient quantities of oil products is vital for our national security. I also welcome the opportunity to hear from our witnesses on the subject of the Treasury Department's tax proposal, and the implications it carries for the energy industry. I must say that I do not like Treasury's plan. I am a firm believer in a low, flat rate tax. It would simplify and reduce taxes for Americans and for American corporations. But Treasury's plan is neither simple nor flat. It repeals the expensing of intangible drilling costs, percentage depletion, investment tax credits, and a number of other features of our current tax system, and replaces these with a flat rate tax which I believe is too high. I don't think this plan would be good tax policy. It would wreak havoc on our domestic oil and gas industry, and it would be particularly devastating for many independents. I see a certain degree of irony in the two specific subjects we will be discussing. We will be hearing that it is vitally important for national security reasons to increase domestic oil and gas exploration and production; in the same hearings, we will be discussing a tax proposal which would in all likelihood result in decreased domestic exploration and thus greater dependence on foreign oil imports. I look forward to the testimony which we will receive; it should give us valuable insights into these important subjects. |