Summary of Secretarial Report Under Section 232 of the Trade Expansion Act of 1962, as Amended

DEPARTMENT OF COMMERCE

Bureau of Export Administration

[Docket No. 950510133-5133-01]

Summary of Secretarial Report Under Section 232 of the Trade

Expansion Act of 1962, as Amended

AGENCY: Bureau of Export Administration, Commerce.

ACTION: Notice.

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SUMMARY: On February 16, 1995, President William J. Clinton concurred

in the Secretary of Commerce's finding that oil imports threaten to

impair the national security. The President determined that no action

is necessary to adjust imports of petroleum under Section 232 of the

Trade Expansion Act of 1962, as amended, because on balance the costs

to the economy of an import adjustment outweigh the benefits. Included

herein is the Executive Summary of the Department of Commerce's Section

232 report to the President dated December 29, 1994.

ADDRESSES: A copy of the report is available for public review and

duplication in the Bureau of Export Administration's Freedom of

Information Facility, Room 4525, U.S. Department of Commerce,

Washington, DC 20230, (202) 482-5653.

FOR FURTHER INFORMATION CONTACT: John A. Richards, Deputy Assistant

Secretary for Strategic Industries and Economic Security, Bureau of

Export Administration, U.S. Department of Commerce, Washington, DC

20230 (202) 482-4506.

SUPPLEMENTARY INFORMATION: On March 11, 1994, the Independent Petroleum

Association of America (IPAA) and various other industry associations,

companies, and individuals filed a petition under Section 232 of the

Trade Expansion Act of 1962, as amended (19 U.S.C. Section 1862 (1988))

requesting the Department to initiate an investigation of the impact on

the national security of imports of crude oil and refined petroleum

products.

On April 5, 1994, the Department initiated the investigation and

invited public comment. The Department held three public hearings in

New York, New York; Dallas, Texas; and Santa Clara, California. During

the comment period, 69 people presented comments reflecting both

support for and opposition to the allegations made by the petitioner.

The Department also chaired an interagency working group that included

the Departments of Energy, Interior, Defense, Labor, State, and

Treasury, the Office of Management and Budget, the Council of Economic

Advisors, and the U.S. Trade Representative to assist in the

investigation.

On December 29, 1994, Secretary Ronald H. Brown submitted his

investigation report to President Clinton. The Department found that

since the previous Section 232 petroleum finding in 1988, there have

been some improvements in U.S. energy security. The breakup of the

Soviet Union and the apparent disarray within OPEC have enhanced U.S.

energy security. However, the reduction in exploration, dwindling

reserves, falling production, and the relatively high cost of U.S.

production all point toward increasing imports from OPEC sources.

Growing import dependence increases U.S. vulnerability to a supply

disruption because non-OPEC sources lack surge production capacity, and

there are at present no substitutes for oil-based transportation fuels.

Given the above factors, the Secretary found that petroleum imports

threaten to impair the national security.

The Secretary recommended, however, that the President not use his

authority under Section 232 of the Trade Expansion Act to adjust oil

imports through the imposition of tariffs because the economic costs of

such a move outweigh the benefits, and because current Clinton

Administration energy policies will limit the growth of

[[Page 30515]] imports. On February 16, 1995, President Clinton

approved Secretary Brown's finding and determined that no action to

adjust oil imports under Section 232 need be taken.

The Executive Summary of the December 29, 1994, U.S. Department of

Commerce Section 232 Study is reproduced below.

Dated: June 5, 1995.

Sue E. Eckert,

Assistant Secretary for Export Administration.

Executive Summary

Introduction

On March 11, 1994, the Independent Petroleum Association of America

(IPAA) and various other industry associations, companies, and

individuals filed a petition under Section 232 of the Trade Expansion

Act of 1962, as amended (19 U.S.C. Section 1862 (1988)) requesting the

Department to initiate an investigation of the impact on the national

security of imports of crude oil and refined petroleum products.

The IPAA petition alleged that U.S. energy security worsened since

the Department's last Section 232 oil import investigation in 1988

because oil imports grew both in absolute terms and as a percentage of

U.S. oil consumption, leaving the United States further subject to an

oil supply disruption with the resultant economic costs. The petition

also alleged that imports of low-priced oil are weakening the domestic

petroleum industry to such an extent that it will not be able to

support U.S. security needs in the event of a major conventional war.

On April 5, 1994, the Department initiated the investigation and

invited public comment. The Department held three public hearings in

New York, New York; Dallas, Texas; and Santa Clara, California. During

the comment period, 69 people presented comments reflecting both

support for and opposition to the allegations made by the petitioner.

Under Section 232, the Department had 270 days, until December 31,

1994, from the date of initiation of an investigation to submit a

report of findings and recommendations to the President.

Methodology

The Department chaired an interagency working group that included

the Departments of Energy, Interior, Defense, Labor, State, and

Treasury, the Office of Management and Budget, the Council of Economic

Advisors, and the U.S. Trade Representative to assist in the

investigation.

The Department used a two-step process to evaluate the petition. In

the first step, the Department reviewed key factors from the 1988

investigation to determine whether they improved or deteriorated. These

factors included: (1) domestic oil reserves; (2) domestic oil

production; (3) industry employment; (4) the impact of low oil prices

on the economy; (5) the status of the domestic oil industry; (6) oil

import dependence; (7) import vulnerability, including measures to

offset an oil supply disruption; (8) foreign policy flexibility; and

(9) U.S. military requirements. The second step involved review of new

factors that emerged since the last investigation, including: (1) the

status of OPEC; (2) oil price transparency due to the emergence of a

futures market; and (3) the demise of the Soviet Union.

The Department made use of the extensive data and analyses that

were already available regarding the current and prospective status of

the domestic petroleum industry and the world oil market. In view of

this extensive body of available data, the Department determined that

an industry survey was not necessary. The Department also drew upon the

written comments and testimony from interested parties who participated

in the public hearings.

This report is based on a number of agreed-upon economic

assumptions including, inter alia, crude oil price levels, U.S. crude

oil production, economic growth rates, and inflation.

Review of Key Factors From the 1988 Investigation

1. Domestic Oil Reserves

Petition: Low-priced oil imports (hereinafter referred to as low

oil prices) were largely responsible for the decline in domestic oil

reserves.

DOC Analysis and Conclusion: Since the 1988 investigation, U.S.

proved crude oil reserves declined by 3.8 billion barrels. Low oil

prices contributed to, but are not totally responsible for, the erosion

of the U.S. oil reserves base. The underlying physical reality is that

the U.S. already developed the bulk of its known and easily accessible

low cost deposits and decided against developing other geological

prospects such as the Arctic National Wildlife Refuge and the Outer

Continental Shelf. Since the reserves base reflects the structural

geological reality, given present technology, oil price increases at

best can arrest, but not reverse this trend.

2. Domestic Oil Production

Petition: Low oil prices are responsible for the decline in U.S.

production.

DOC Analysis and Conclusion: The production outlook remains

essentially the same as in the 1988 investigation. The United States is

a high-cost producer compared to other countries because we have

already depleted our known low-cost reserves. Since 1986, low oil

prices have exacerbated the cost-price squeeze facing U.S. producers.

U.S. production declined by 1.7 million barrels per day (MB/D) and net

imports increased. The dislocation undercut U.S. exploration activities

and impaired the development of competing energy sources, thereby

enabling OPEC to recapture part of the market it lost after the price

shocks of the late 1970s.

3. Exploration and Industry Employment

Petition: Low oil prices are responsible for the massive falloff in

drilling and in industry employment.

DOC Analysis and Conclusion: The Department found a sharp reduction

in U.S. drilling and oil and gas industry employment between 1985 and

1993. The level of exploratory drilling, well completions, and rotary

rigs in use for oil and gas exploration declined since 1988. Employment

fell from 582,000 in 1985 to 351,000 in 1993. A large share of the lost

jobs occurred in petroleum exploration and development sectors.

However, oil imports are not the only reason for the decline in

exploratory drilling and well completions. U.S. companies are drilling

less because they made substantial gains in total productivity by

employing new exploration and drilling technology and focussing on the

most productive geological opportunities.

4. The Impact on the Economy of Low Oil Prices

Petition: The petitioner did not specifically address the benefits

to the economy of low oil prices.

DOC Analysis and Conclusion: The Department found that the economic

consequences of low prices resulted in positive benefits to the U.S.

economy. Because the United States is now a net importer of oil, lower

prices on balance helped the economy. The public benefitted from lower

prices for transportation fuels and heating oil. For the economy as a

whole, low oil prices contributed to a reduction in inflation, a rise

in real disposable income, and an increase in the Gross Domestic

Product. [[Page 30516]]

5. Current Status of the Domestic Oil Industry

Petition: Low oil prices and the uncertainty concerning future

price drops were forcing small producers to abandon many fields

prematurely. The possible loss of these reserves and production would

result in increased dependence on foreign oil.

DOC Analysis and Conclusion: The Department found that, as world

crude oil prices declined since 1986, the relatively smaller U.S. oil

fields with higher cost production became uneconomical and the

operators shut-in or abandoned some wells. The impact of low prices has

been especially severe on small producers operating stripper wells with

average production of 15 barrels per day or less. If small producers

continue to shut-in production because of low oil prices, this could

result in reduced cash flow to reinvest in exploration and increased

dependence on lower-cost foreign oil.

6. Oil Import Dependence

Petition: U.S. national security worsened because oil imports have

increased since 1988 both in absolute terms and as a percentage of U.S.

oil consumption and our dependence on imported oil will continue.

DOC Analysis and Conclusion: The Department found that net U.S.

imports have grown from 5.9 MB/D in 1987 to 7.5 MB/D in 1993. Imports

currently account for 44 percent of domestic consumption compared to 37

percent in 1987. Imports from Persian Gulf countries increased from

1.07 MB/D in 1987 to 1.64 MB/D in 1993.

U.S. demand for imported oil is expected to continue growing

because of declining production and increased economic growth. The

Energy Information Administration of the U.S. Department of Energy

(EIA/DOE) projects that net imports will increase to 11 MB/D by 2000

and account for approximately 51.5 percent of domestic consumption.

To the extent the United States and other countries import more oil

in the future, EIA/DOE projects that they will turn increasingly to

OPEC countries located in the Persian Gulf which has the largest amount

of known low-cost reserves and surplus production capacity. The Persian

Gulf producers will account for approximately 55 percent of world crude

oil exports by 2000.

7. Vulnerability to a Supply Disruption

Petition: Increased reliance on low-priced oil imports will leave

the United States subject to a supply disruption and resulting costs to

the economy.

DOC Analysis and Conclusion: The Department found that political

and economic problems in the Persian Gulf region make supply

disruptions a possibility in the near-term. Disruptions are possible in

other regions, but the risks to the U.S. and other importing countries

are lower because oil production facilities elsewhere are not as

concentrated as they are in the Persian Gulf.

The United States and the OECD countries have limited prospects to

offset a major oil supply disruption because: (1) there is little

surplus production outside the Persian Gulf; (2) U.S. and OECD

government oil stocks today provide less protection from an

interruption than was the case in 1988; and, (3) there is currently no

substitute for liquid transportation fuels which account for

approximately two-thirds of all oil consumption in the United States.

During a major oil supply disruption, there could be substantial

economic austerity as a result of the decreased availability of oil.

This, in turn, could pose hardships for the U.S. economy.

8. Foreign Policy Flexibility

Petition: The petitioner did not raise this issue.

DOC Analysis and Conclusion: The Department found that our allies'

and trading partners' dependence on potentially insecure sources of oil

may affect their willingness to cooperate with the United States during

a major oil supply disruption.

9. U.S. Military Requirements

Petition: Low oil prices are weakening the domestic petroleum

industry to such an extent that it will not be able to support U.S.

security needs in the event of a global conventional war.

DOC Analysis and Conclusion: The Department of Defense advised that

the military requirements for petroleum fuels could be satisfied under

current planning scenarios.

10. Other Factors

The Department evaluated several factors that served to improve the

security of U.S. oil supplies since the 1988 investigation. Foremost

among these factors are the following:

Status of OPEC: Low oil prices are in large part a symptom of the

apparent disarray within OPEC. The ability of OPEC to manipulate prices

has been impaired because its members have been unable to coordinate

production levels among themselves.

Transparency of Oil Markets: The growth of the futures market into

a full-fledged commodity market has made crude oil prices more

transparent and less subject to manipulation. Computerized trading,

options, and forward contracts have connected refined products and

crude oil markets more closely than was the case in 1988.

Demise of the Soviet Union: The end of the Cold War and the breakup

of the Soviet Union removed the risk of Middle East oil becoming a pawn

in East-West competition. The demise of the Soviet Union also has

reduced the probability of a conventional war that could jeopardize

Western Europe's and Japan's access to Middle East oil.

Finding

Since the previous Section 232 petroleum finding in 1988, there

have been some improvements in U.S. energy security. The breakup of the

Soviet Union and the apparent disarray within OPEC have enhanced U.S.

energy security. Lower oil prices on balance benefitted the U.S.

economy. However, the reduction in exploration, dwindling reserves,

falling production, and the relatively high cost of U.S. production all

point toward a contraction of the U.S. petroleum industry and

increasing imports from OPEC sources. Growing import dependence, in

turn, increases U.S. vulnerability to a supply disruption because non-

OPEC sources lack surge production capacity; and there are at present

no substitutes for oil-based transportation fuels. Given the above

factors, the Department finds that petroleum imports threaten to impair

the national security.

Recommendation

The Department does not recommend that the President use his

authority under Section 232 to adjust imports. The Clinton

Administration's other efforts to improve U.S. energy security are more

appropriate than an import adjustment.

Section 232 requires the Secretary of Commerce and the President to

recognize the close relationship between the economic welfare of the

nation and U.S. national security. As energy security effects the

economic welfare of the U.S., energy security must be considered in

determining the effects on the national security of petroleum imports.

The Department concurs with the conclusions of the 1988 study that,

on balance, the costs to the national security of an oil import

adjustment outweigh the potential benefits. For example, an oil import

adjustment such as a tariff would likely have an inflationary effect on

the economy and would result in the loss of significant jobs in the

non-petroleum sectors. This, in turn, would reduce real Gross

[[Page 30517]] National Product (GNP). An import adjustment would

diminish the competitiveness of energy-intensive export companies and

strain relations with close trading partners who may seek an exemption

from the adjustment.

The Clinton Administration recognizes the importance of U.S. energy

security and is pursuing a series of policies to enhance that security.

It is important to note that no cost-effective government action could

eliminate U.S. dependence on foreign oil entirely, but the following

supply enhancement and energy conservation and efficiency policies help

limit that dependence. Thus, the Department recommends continuing the

policies described below:

Increased Investment in Energy Efficiency--The

Administration increased the budgets substantially over the last two

years to achieve an enhanced energy efficiency level. There are

extensive programs underway ranging from developing new appliance

standards to working on innovative workplace solutions to decrease

long-distance commuting. The goals of these extensive energy efficiency

programs are to decrease consumption of oil.

Increased Investment in Alternative Fuels--The

Administration placed particular emphasis on improving the efficiency

of the transportation sector where oil comprises about 98 percent of

the fuel utilization. The Administration is among other things

initiating a partnership with automobile manufacturers to design more

energy efficient automobiles and developing a program to bring

alternative transportation fuels and vehicles into the marketplace.

These actions will reduce direct consumption of petroleum-based

transportation fuels so that the need for imports will decrease.

Increased Government Investment in Technology--The

Administration more than doubled its investment with American industry

in advanced technologies for the exploration and production of natural

gas and oil. This is important because technological innovation can

significantly decrease the domestic finding costs for natural gas and

oil, thereby maintaining and expanding the domestic resource base and

improving its economics.

Expanded Utilization of Natural Gas--The Administration

aggressively promoted expanded markets for natural gas at the expense

of imported oil. In addition, reliance upon natural gas as one of the

cornerstones of our Climate Change Action Plan provides benefits to our

environment through the reduction of greenhouse gas emissions.

Increased Government Investment in Renewables--The

Administration increased investment in renewable resources because they

offer great hope of replacing imported oil in selected end uses.

Increased Government Regulatory Efficiency--The

Administration is reducing the red tape and regulations that burden

domestic industries. Various government agencies are conducting

sweeping reviews to make their regulatory structures more responsive to

domestic concerns.

Increased Emphasis on Free Trade and U.S. Exports--Free

trade, privatization, and promotion of American exports helps develop

the world's energy resources and prevent over-reliance on any single

region of the world. These actions include: assisting energy

conservation efforts and the development of new energy supplies in this

hemisphere and other areas friendly to the United States.

Maintaining the Strategic Petroleum Reserve--The Strategic

Petroleum Reserve is the nation's stockpile of crude oil available in

the event of an oil supply disruption. The 580 million barrels of crude

oil under government ownership and control provides a bulwark against a

supply disruption.

Coordinating Emergency Cooperation Measures--The United

States is coordinating oil emergency cooperation among the energy

consuming countries through the International Energy Agency.

Discussions are continuing to strengthen the existing market-oriented

coordinated energy response measures for dealing with possible future

disruptions.

[FR Doc. 95-14214 Filed 6-8-95; 8:45 am]

BILLING CODE 3510-DT-P