THE EFFECT ON THE NATIONAL SECURITY

OF IMPORTS OF CRUDE OIL AND REFINED

PETROLEUM PRODUCTS

An Investigation Conducted Under Section 232 of the

 Trade Expansion Act of 1962, as Amended.

U.S. Department of Commerce

Bureau of Export Administration

November 1999

The Effect on the National Security of

Imports of Crude Oil and 

Refined Petroleum Products

An Investigation Conducted Under Section 232 of the

 Trade Expansion Act of 1962, as Amended

November 1999

Prepared by

U.S. Department of Commerce

Bureau of Export Administration

For further information about this report, please contact

Scott Hubinger, Chemist, Ph.D. 

Phone: 202-482-5223 Fax: 202-482-2190

Bernard Kritzer, Director, Inspection Management Team 

Phone: 703 605-4403 Fax: 703-605-4424

For more information about the Section 232 investigation process and other investigative

reports, please visit the “Programs” area of the website for the Office of Strategic Industries &

Economic Security, at www.doc-bxa.bmpcoe.org

THE EFFECT ON THE NATIONAL SECURITY OF IMPORTS OF

CRUDE OIL AND REFINED PETROLEUM PRODUCTS

An Investigation Conducted under Section 232 of the 

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

Table of Contents

Executive Summary

I: Background

II: Current U.S. Energy Security Assessment

III: Finding and Recommendations

Appendices

– Federal Register Notice: Announcing Initiation of Investigation and

Inviting Public Comments

– Summary of Public Comments

– International Activities of U.S. Majors
EXECUTIVE SUMMARY

Introduction

On March 11, 1999, Senators Domenici, Hutchinson, Inhofe, Nighthorse-Campbell, Roberts,

Sessions, Crapo, Nickels, Murkowski, Craig, Burns, McConnell, DeWine, Brownback, and

Bunning, in a letter to the President, requested that he take immediate action to address the

threat of increasing oil imports to our national security. On March 12, 1999, Senators

Bingaman, Breaux, Landrieu, Conrad, Enzi, Lincoln, Lott, Dorgan, Baucus, Murkowski, and

Burns, in a letter to Secretary Daley, raised similar concerns and directly requested that the

Department of Commerce initiate an expedited review and investigation into the impact of

low oil prices and ever increasing oil imports on the United States national security under the

authority of Section 232 of the Trade Expansion Act of 1962, as amended. Representative

Istook made a similar request.

In their letter to Secretary Daley, the Senators quoted from a 1999 survey by the Independent

Petroleum Association of America, which alleged that, since November of 1997, 193,000

marginal oil and gas wells have been shut down with a loss in oil production of 360,000

barrels per day. The Senators stated that 24,000 domestic jobs have already been lost in the

oil industry and another 17,000 job cuts are expected. Finally, the Senators addressed the

concern that low priced crude oil imports could lead to the permanent loss of a significant

portion of the United States domestic oil production capacity and resource base.

On April 28, 1999, the Department of Commerce self-initiated an investigation under Section

232 of the Trade Expansion Act of 1962, as amended, to determine the effects on the national

security of imports of crude oil and petroleum products. The investigation focused on two

issues. One, are imports of oil and petroleum products threatening to impair the national

security of the United States? Two, if a positive finding is found that imports of crude oil and

petroleum products do threaten the national security, is a trade adjustment, as provided for

under section 232, the appropriate means to address the threat?

Under Section 232, The Department has 270 days from the date of initiation of an

investigation to submit a report of findings and recommendations to the President. Based

upon an initiation date of April 28, 1999, the Department has until January 29, 2000 to

complete its investigation and submit its report to the President.

Methodology

The Department chaired an interagency working group that included the Departments of

Energy, Interior, State, Treasury, and Defense, the Office of Management and Budget, and the

Council of Economic Advisers. This report is based on a number of agreed-upon economic

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

production rates, economic growth rates, and inflation.
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In determining whether petroleum imports threaten to impair the national security, the

Department reviewed key factors from the 1994 investigation as a starting point to determine

whether they improved or deteriorated. These factors include: 1). Domestic oil reserves; 

2). Domestic oil production; 3). Exploration and industry employment; 4). Impact of low oil

prices on the economy; 5). Current status of the domestic oil industry; 6). Oil import

dependence; 7). Vulnerability to a supply disruption; 8). Foreign policy flexibility; 9). U.S.

military requirements; 10). Status of OPEC; 11). Transparency of oil markets; 12); Breakup of

the Soviet Union. The Department also reviewed new factors that have emerged since the

1994 investigation, including: 1) Temporary economic decline in East Asia; 2). Iraqi oil

exports; and 3). Non-OPEC offshore drilling.

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 addition, the Department reviewed the Department of Energy’s Comprehensive

National Energy Strategy, which, issued in April 1998, outlines five major energy goals of the

Administration. 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 solicited from and provided by interested parties in response to a Federal Register

notice published on May 4, 1999 (attached).

Review of Key Factors from the 1994 Investigation

1. Domestic Oil Reserves

o Since the 1994 investigation, U.S. proven crude oil reserves declined by an estimated

0.5 billion barrels from 23.0 billion barrels in 1993 to 22.5 billion barrels in 1998. 

The underlying physical reality is that the United States has already developed the bulk

of its known and easily accessible low cost deposits and has decided against

developing other geological prospects such as the Arctic National Wildlife Refuge and

certain portions of the Outer Continental Shelf . The reserves base reflects the

structural geological and geophysical reality, given present technology and economics.

2. Domestic Oil Production

o The production outlook remains essentially the same as in the 1994 investigation. The

United States is a high cost producer compared to other countries because it has

already depleted its known low cost reserves. U.S. production of crude oil declined by

0.42 million barrels per day (MMB/D) between 1994 and 1998 (from 6.66 to 6.24

MMB/D) and fell below 6 MMB/D in early 1999. To offset this decline in production

and increasing consumption, imports have increased dramatically since 1994, rising by

1.64 MMB/D (1998 basis).

3. Exploration and Industry Employment
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o The Department did find some change in U.S. drilling and in oil and gas industry

employment between 1994 and early 1999. Levels of employment in the extraction

industry varied from a high of 337,000 in 1994 and a low in 1995 of 320,000, but

increased again to 339,000 in 1997 and 338,000 in early 1998. Industry commenters

provided anecdotal information showing additional steep drops in employment and

drilling activity during 1998 and early 1999 due to the oil price decline. In addition,

Department of Labor statistics indicate a decrease in extraction industry employment

starting in the last half of 1998 (falling from 325,000 to 308,000) and continuing into

1999 (229,000 in January and 291,000 in February). However, the total footage of

exploratory drilling, the number of well completions, and the number of rotary rigs in

use for oil and gas exploration increased between 1994 and 1998, albeit with

significant variations from year to year.

o Low oil prices are not the only reason for the long term historical decline in industry

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

less because they have made substantial gains in total productivity by employing new

exploration and drilling technology and by focusing on the most promising geological

sites based upon improved geological science and technology. In addition, the high

cost of off-shore exploration and drilling, where most of the domestic exploratory

activity is occurring today, strongly favors the development and use of advanced

seismic mapping and analysis techniques in order to maximize drilling productivity. 

Companies are also continuing to realize productivity gains due to improvements in

operations management.

4. Impact of Low Oil Prices on the Economy

o The Department found that the economic consequences of low prices resulted in

positive benefits to the U.S. economy. Because the United States is 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.

5. Current Status of the Domestic Oil Industry

o Low oil prices starting in November of 1997 and continuing through early 1999

exacerbated the chronic cost-price squeeze problems faced by independent producers

who account for the largest share of lower 48 states oil production (40 percent). 

Consequences for the 7000 independents who operate in the U.S. include: assuming

more debt; scaling-down exploration activities; reducing their work force of skilled

labor; and shutting-in temporarily or abandoning certain oil and gas producing wells. 
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o The impact of low oil prices is particularly hard on small producers operating stripper

or marginal wells with an average production of 15 barrels per day or less. These

wells, which represent over 300 million barrels of annual production, could be

permanently lost during a sustained period of low oil prices and high operating costs. 

o The Department’s efforts to analyze the impact of the 1998 price decline on the

smaller producers was complicated by the commenters’ failure to provide specific

economic and technical information. Various commenters argued strongly for the U.S.

Government to provide financial incentives to smaller producers, but no company or

trade association submitted economic and financial data regarding levels of

profitability and tax burden under various oil price scenarios. Nevertheless, the 1998

through early 1999 price drop, although temporary, did have a severe impact on

marginal oil and gas wells and raised concerns about the ability of the United States to

stabilize domestic oil production and to achieve its natural gas expansion goals. Since

the November 1997 price collapse, 136,000 oil wells are believed to have been shut-in

(non-producing), representing about 24 percent of all producing oil wells. In addition,

57,000 gas wells are believed to have been shut-in, about 19 percent of all gas wells. 

This data is based on anecdotal information provided by industry (Independent

Petroleum Association of America). Note: About 20 percent of U.S. gas supply

(“associated gas”) is associated with oil production and is therefore also impacted by

low oil prices. 

6. Oil Import Dependence

o The Department found that net U.S. imports have grown from 8.1 MMB/D in 1994 to

9.7 MMB/D in 1998 and currently account for 51 percent of domestic consumption

compared to 45 percent in 1994. Imports from Persian Gulf countries, which

increased from 1.7 MMB/D in 1994 to 2.1 MMB/D in 1998, currently account for 22

percent of all U.S. petroleum imports. The majority of U.S. imports, over 50 percent,

are sourced from reliable Western Hemispheric countries such as Canada, Mexico, and

Venezuela.

o The Department found that the energy provisions of the recent trade agreements

between the United States and Canada have enhanced U.S. energy security. 

Specifically, Article 605 of the North American Free Trade Agreement (NAFTA)

provides a number of reciprocal benefits that provide for energy security in the event

of a supply interruption. These mutual benefits include: 1) each country will not

impose restrictions on the delivery of energy and basic petrochemical supplies during a

supply interruption; 2) any shortfall in supply will be shared equally among U.S. and

Canadian markets based on historical percentages; 3) each party will not impose

higher export prices than those charged domestically; and 4) there will not be a

disruption of the prevailing proportion of energy goods supplied, such as, for example,

between crude oil and refined products and among different categories of crude oil and

refined products. This unprecedented energy cooperation provides significant security
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benefits for both nations, and clearly demonstrates that the United States and Canada

are developing an integrated and secure North American energy market.

o U.S. demand for imported oil is expected to continue growing because of declining

production by high cost small producers, who account for the largest share of lower 48

states oil production, and continued economic growth. The Energy Information

Administration of the U.S. Department of Energy (EIA/DOE) projects that, based on

current forecasts, net imports should increase to 12.2 MMB/D by 2005 and account for

approximately 58 percent of domestic consumption.

o To the extent that 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 have the largest amount of known low cost reserves and excess

production capacity. The OPEC producers in the Persian Gulf region, representing 42

percent of world crude oil exports in 1994, will account for approximately 49 percent

by 2010.

7. Vulnerability to a Supply Disruption

o The Department found that unresolved socio-political and economic issues in some

Persian Gulf countries increase the probability of future supply disruptions in the

Persian Gulf region. However, the Persian Gulf’s largest producer, Saudi Arabia, has

pursued oil policies, including diversification of export routes and maintenance of

considerable excess production capacity, that serve to mitigate some of these risks. 

Disruptions are possible in other regions, but the risks to the United States and other

importing countries are comparatively less severe given the magnitude of Persian Gulf

production and because oil production facilities elsewhere are not as concentrated as

they are in the Persian Gulf. 

o The capability of the United States and the OECD countries to offset a major oil

supply disruption has not improved since 1994. The U.S. is still vulnerable because:

1). Most of the spare production capacity is still in the Persian Gulf region; 2). U.S.

and OECD government oil stocks today provide less protection from an interruption

than was the case in 1988 or 1994; 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 a hardship for the U.S. economy.

8. Foreign Policy Flexibility

o In both the 1988 and 1994 investigations, the Department found that the dependence

of our allies and trading partners on potentially insecure sources of oil might affect

their willingness to cooperate with the United States during a major supply disruption. 
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Some of these concerns are mitigated by the participation of the United States in the

International Energy Agency (IEA), which groups together 24 members of the

Organization for Economic Cooperation and Development (OECD). The principle

purpose of the IEA is to fashion a collective response to energy emergencies, which

may include the coordinated release of the emergency oil stocks that all IEA members

are required to maintain. However, increased market share forecasted for some OPEC

countries, and some Persian Gulf States, over the next 20 years, could make

cooperation by some oil consumers more difficult.

9. U.S. Military Requirements

o The Department of Defense advises the Department that, under current planning

scenarios, the United States will be able to meet both its direct and indirect military

requirements for petroleum products in the event of two nearly simultaneous major

regional conflicts or a major peacetime supply disruption.

10. Status of OPEC

o Low world oil prices are only partially due to the fact that OPEC members have been

unable, until very recently, to coordinate production levels among themselves. The

urgent financial requirements of some OPEC members has led them to compete for

revenue and market share even if this has meant accepting a lower per-unit price for

their oil. However, by mid-1998, declining prices set in motion renewed OPEC efforts

to reduce excess oil supplies. For the remaining months of 1998, announced and

realized production cuts were not clearly synchronized, and efforts to reduce

production had only modest success. More recently, OPEC members have been more

effective at reducing world production to increase prices. Ten members of OPEC,

excluding Iraq, pledged in March 1999 to cut production by 2.1 MMB/D. The

compliance of these ten OPEC members with announced production cuts was about 89

percent in July 1999. Oil prices have steadily increased since then due to these

production cuts and stronger overall worldwide demand. The Department of Energy’s

Energy Information Administration projects that the cost for imported oil (Refiner

Acquisition Cost) will be $22.50 and $23.50 per barrel, respectively, for November

and December of 1999 and average $21.85 per barrel in 2000.

11. Transparency of Oil Markets

o The growth of the futures market into a full-fledged commodity market has made

crude oil prices more transparent and less subject to manipulation by foreign

governments or OPEC. Prices are now determined by the New York Mercantile

Exchange (NYMEX), the International Petroleum Exchange (IPE), the Singapore

Mercantile Exchange (SIMEX), and other commodity markets. The use of

computerized trading, options, and forward contracts has connected crude oil and

refined product markets and suppliers more closely than was the case in 1988 or 1994. 
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However, commodity markets, like all markets, are subject to volatility and have the

potential to react in ways which can harm U.S. oil production.

12. Breakup of the Soviet Union

o The end of the Cold War and the breakup of the Soviet Union has reduced tensions

around the world, including the Middle East. The advancement of the Middle East

Peace Process has also contributed to a reduction of tensions in the region. Both of

these developments have reduced the probability of a conventional war that could have

jeopardized access to Middle East oil. In addition, oil production in the former Soviet

Union, primarily in the Caspian Sea area, is expected to reach 7.6 MMB/D by 2005

and 13 MMB/D by 2020. Based on projected demand, the region could become a net

exporter of oil at approximately 7.9 MMB/D by 2020. These additions to the world oil

supply and as well as reduced tensions in the Persian Gulf region help to assure that

there will be stable supplies of oil and reasonable oil prices into the future.

Review of New Factors since the 1994 Investigation

The Department also evaluated several new factors which have or will significantly affect

worldwide petroleum supply and demand since the 1994 investigation. Foremost among these

factors are the following:

1. Economic Decline in East Asia

o An economic crisis in East Asia started in the summer of 1997 and continued to

deepen throughout 1998. This, in combination with the already weak economy in

Japan, significantly reduced worldwide demand for crude oil and petroleum products. 

The economic decline in turn led to sharply reduced worldwide oil prices in 1998 and

early 1999 and a significant oversupply of crude. These factors contributed to the

decrease in U.S. production seen during the same time period.

2. Iraqi Oil Exports

o As of August 1, 1999, the United Nations Security Council, within the framework of

UN-imposed sanctions on Iraq (mandated by UNSCR 661, August 1990), has

established the “Oil-for-Food” program “as a temporary measure to provide for the

humanitarian needs of the Iraqi people” (UNSCR 986, April 1995). Thus, the United

Nations Security Council, within the framework of UN-imposed sanctions on Iraq,

allows, since February 1998, Iraq to export up to $5.256 billion worth of oil in a six

month period, up from $2 billion per six month period prior to that date. Increased

Iraqi oil exports, in total on the order of 2.0 MMB/D, were among the supply and

demand variables which led to appreciably lower oil prices for much of 1998 and early

1999. However, the U.S. supports UN efforts to meet the identified humanitarian
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needs of the Iraqi people and neither the U.S. nor the UN attempt to influence world

oil prices or markets via sanctions regimes.

3. Non-OPEC Offshore Drilling

o Offshore oil exploration and production projects off the coasts of the United States,

South America, Mexico, Eastern Canada, and Western Africa, and in the Gulf of

Mexico, the Caspian Sea, and the South China Sea are expected to produce significant

volumes of oil and natural gas early in the next century. Because drilling platforms are

reserved so far in advance, most of the worldwide projects are proceeding on schedule

even at relatively low oil prices. These increased sources, while harmful to U.S.

domestic production to the extent that they increase world supplies and therefore

possibly lower worldwide oil prices, increase U.S. energy security by broadening the

mix of possible exporters beyond the control of individual countries or coalitions.

Conclusion

o Since the previous Section 232 petroleum finding in 1994, there have been some

improvements in U.S. energy security. The continued erosion of external threats to the

Middle East and the continued increase in non-OPEC production have enhanced U.S.

energy security. Additional discoveries of both inland and offshore oil reserves

outside of the Persian Gulf region have at least slowed OPEC’s market share growth.

o Lower oil prices on balance benefit the U.S. economy. However, reduced oil reserves,

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

toward a contraction in the U.S. oil extraction industry and increasing dependence on

foreign imports. Growing import dependence, in turn, increases U.S. and OECD

vulnerability to a supply disruption because non-OPEC non-Persian Gulf sources lack

significant excess production capacity. Furthermore, there are at present no substitutes

for oil-based transportation fuels.

Finding

The Department finds that petroleum imports threaten to impair the national security.

Recommendations

The Department does not recommend that the President use his authority under Section 232 to

adjust oil imports. Ongoing programs and activities crafted by the Administration to improve

U.S. energy security based upon other statutes and executive authorities are more appropriate

and cost effective than an import adjustment.
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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 affects the economic welfare of the United States, energy security must be

considered in determining the effects on the national security of petroleum imports.

The Department concurs with the conclusions of the 1994 and 1988 studies 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 could result in the loss of a significant

number of jobs in many non-petroleum sectors. This, in turn, would reduce real Gross

Domestic Product (GDP). An import adjustment would also diminish the competitiveness of

our energy-intensive export companies and strain relations with our close trading partners who

would most likely seek relief under North America Free Trade Agreement (NAFTA) or World

Trade Organization (WTO) rules. 

The Clinton Administration recognizes the importance of U.S. energy security. Since 1993, it

has pursued the energy policy of reliance on markets to allocate resources with selective

government intervention to ensure that certain highly valued societal needs--including the

need for energy security, environmental quality, and energy research--are met. The policy

recognizes that no cost-effective government action could eliminate U.S. dependence on

foreign oil entirely, but that the following supply enhancement, energy conservation, and

critical research policies help to preserve our current oil and gas productive capacity and limit

that dependence. Accordingly, the Department recommends continuing the policy goals set

forth in the Department of Energy’s April 1998 Comprehensive National Energy Strategy as

described below.

Goal #1 -- Improve the efficiency of the national energy system by making the most

productive use of energy resources, enhance overall economic performance, and protect the

environment. The Administration is working to achieve a more productive and efficient use

of energy resources, including electricity infrastructure, fossil fuel reserves, and productive

capacity for clean alternative fuels. The twin goals of comprehensive electricity reform, as

detailed in the Comprehensive Electricity Competition Act (CECA) submitted to Congress on

April 15, 1999, and increasing energy efficiencies in the transportation, industrial, and

housing sectors and in the generation and distribution of electric power maximize the

productive use of energy through market competition and technological innovation. When

implemented, these measures will result in a more productive and efficient use of energy and a

decreased U.S. consumption of oil.

Goal #2 -- Prevent the disruption or decline of world energy supplies and protect the U.S.

economy from the harmful effects of a short-term supply interruption or infrastructure failure:

The Administration is continuing its strong emphasis on emergency preparedness efforts and

the need to stabilize domestic oil production, including: arresting the decline in domestic oil

production by 2005; maintaining the readiness of the Strategic Petroleum Reserve (SPR) to

respond to threats of disruption in world oil supplies; making unutilized SPR storage capacity
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available for the mid- to long-term storage of commercial oil; coordinating responses to

supply disruptions through continued cooperation with the member countries of the

International Energy Agency (IEA); diversifying sources of oil by working with industry to

increase the supplies of oil available to the world market; and ensuring the integrity of the oil

and natural gas supply infrastructure with respect to emergency response capabilities. 

Goal #3 -- Promote U.S. domestic energy production and use in ways that respect national

health & environmental values and improve public health and local, regional, and global

environments. The Administration has pursued a balanced program to increase domestic

energy production in an environmentally responsible manner by: supporting policies to allow

the annual domestic natural gas supply to increase by as much as 6 trillion cubic feet (2.9

MMB/D oil equivalent) by 2010; supporting research, design, and development to promote

the use of advanced technologies to recover more oil and gas from existing reservoirs without

environmental degradation; supporting the suspension, by the Department of the Interior, of

production requirements for stripper wells producing less than 15 barrels per day on federal

onshore lands when oil prices are extremely low (this suspension temporarily expired on July

26, 1999, when West Texas Intermediate (WTI) crude stayed above $15/bbl for 90 days);

supporting the Petroleum Technology Transfer Council’s ten regional centers and their

December 1998 Industry Crisis Action Plan to teach independent operators strategies for

improving cost efficiencies and identifying best practices; and accelerating the development

and market adoption of environmentally friendly technologies through a combination of

increased investments in research, development, and early deployment programs. 

The combination of increased natural gas utilization, the increased use of renewable electrical

technologies, the accelerated development of biomass liquids fuel technology, and the

recovery of more oil and gas from existing reservoirs and the preservation of those reservoirs

will collectively reduce oil consumption and limit our dependence on imported oil.

Goal #4 -- Expand future energy choices by pursuing continued progress in science and

technology to provide future generations with a portfolio of clean and reasonably priced

energy sources. Advances in science and technology are essential in terms of the United

States achieving its economic, environmental and energy security objectives. Technological

innovation can significantly decrease the domestic finding and development costs for natural

gas and oil, thereby preserving and expanding the domestic resource base and improving the

economics of extraction. These programs include: accelerating the advanced oil recovery

program; increased support for the natural gas supply program, especially for the new

emerging resource program in methane hydrates; conducting basic research to provide the

foundation for technological breakthroughs that are beneficial to energy development and

environmental protection; and continued budgetary increases over current levels for

technology partnerships with the private sector.

Goal #5 -- Cooperate internationally on global issues and develop the means to address global

economic, security, and environmental concerns. The United States should continue its

active and sustained participation in multilateral and regional forums as well as bilateral
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contacts with key suppliers, such as our NAFTA partners Canada and Mexico, Norway,

Nigeria, Venezuela, Saudi Arabia, and other major oil producers. Achievement of this

objective requires: promoting the development of open, competitive international energy

markets through U.S. participation in multilateral groups such as the International Energy

Agency, the Summit of the America’s Hemispheric Energy Initiative, and the Asian Pacific

Economic Council (APEC) energy working group; working with our reliable neighbors in

Canada and Mexico to establish an efficient and integrated North American natural gas and

electricity system; promoting the development of worldwide crude oil and natural gas

transportation networks to move South American, Caspian Basin, and Central Asian oil and

natural gas, for example, to world markets to further diversify world energy supplies; and

emphasize free trade and the promotion of American exports to help develop the world's free

market economy and prevent over reliance on any single region of the world.

Other Issues

Regulatory Reform

The Department of Commerce’s Bureau of Export Administration (BXA) is in the process of

reviewing its crude oil short supply regulations and identifying reforms that would allow U.S.

firms to be on equal footing with their foreign competitors. BXA is reviewing a number of

changes, including: 1) creating a license exception to allow the export of crude oil to Canada

and Mexico without an individual license; and 2) establishing a license exception to allow the

export of California heavy crude oil sold, as part of bunker fuel oil mixtures, to foreign ships

visiting U.S. ports. The interagency group recommends that BXA proceed expeditiously with

its short supply reform package.

Industry Proposals

During the review, the Department received comments from oil companies and trade

associations about several possible modifications to the Federal Tax Code that the

commenters believe would provide support for the domestic oil industry. The Department did

not evaluate these proposals as part of its Section 232 investigation. Instead, the Department

recommends that the National Economic Council evaluate the industry proposals.

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SECTION I. BACKGROUND

D. Introduction

On March 11, 1999, Senators Domenici, Hutchinson, Inhofe, Nighthorse-Campbell, Roberts,

Sessions, Crapo, Nickels, Murkowski, Craig, Burns, McConnell, DeWine, Brownback, and

Bunning, in a letter to the President, requested that he take immediate action to address the

threat of increasing oil imports to our national security. On March 12, 1999, Senators

Bingaman, Breaux, Landrieu, Conrad, Enzi, Lincoln, Lott, Dorgan, Baucus, Murkowski, and

Burns, in a letter to Secretary Daley, raised similar concerns and directly requested that the

Department of Commerce initiate an expedited review and investigation into the impact of

low oil prices and ever increasing oil imports on the United States national security under the

authority of Section 232 of the Trade Expansion Act of 1962, as amended. Representative

Istook made a similar request.

In their letter to Secretary Daley, the Senators quoted from a 1999 survey by the Independent

Petroleum Association of America which alleged that, since November of 1997, 193,000

marginal oil and gas wells have been shut down with a loss in oil production of 360,000

barrels per day. The Senators stated that 24,000 domestic jobs have already been lost in the

oil industry and another 17,000 job cuts are expected. Finally, the Senators addressed the

concern that low priced crude oil imports could lead to the permanent loss of a significant

portion of the United States domestic oil production capacity and resource base.

On April 28, 1999, the Department of Commerce self-initiated an investigation under Section

232 of the Trade Expansion Act of 1962, as amended, to determine the effects on the national

security of imports of crude oil and petroleum products. The investigation focused on two

issues. One, are imports of oil and petroleum products threatening to impair the national

security of the United States? Two, if a positive finding is found that imports of crude oil and

petroleum products do threaten the national security, is a trade adjustment, as provided for

under Section 232, the appropriate means to address the threat?

To solicit public comments, the Department published a notice in the Federal Register on May

4, 1999, announcing its investigation, and requested that public comments be provided to the

Department, in writing, by interested parties by June 3, 1999. A copy of the Federal Register

notice is provided in Appendix A and a summary of the comments received is provided in

Appendix B.

Under Section 232, the Department of Commerce has 270 days from the date of initiation of

an investigation to submit a report of findings and recommendations to the President. Based

upon an initiation date of April 28, 1999, the Department has until January 29, 2000 to

complete its investigation and submit its report to the President.

E. Criteria for Evaluating National Security Threat
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Pursuant to Section 705.4 of the National Security Industrial Base Regulations (15 C.F.R.

Section 705.4 (1994)), the Department considered the following regulatory criteria in

determining the effect of imports on the national security:

(1) domestic production needed for projected national defense requirements;

(2) the capacity of domestic industries to meet projected national defense requirements;

(3) the existing and anticipated availabilities of human resources, products, raw materials,

production, equipment and facilities, and other supplies and services essential to the

national defense;

(4) the growth requirements of domestic industries to meet national defense requirements

and the supplies and services including the investment, exploration and development

necessary to assure such growth;

(5) the impact of foreign competition on the economic welfare of any domestic industry

essential to our national security;

(6) the displacement of any domestic products causing substantial unemployment,

decrease in the revenues to government, loss of investment or specialized skills and

productive capacity, or other serious effects; and 

(7) any other relevant factors causing or will cause a weakening of our national economy.

F. Methodology for Interagency Study Process

The Department chaired an interagency working group that included the Departments of

Energy, Interior, State, Treasury, and Defense, the Office of Management and Budget, and the

Council of Economic Advisers. This report is based on a number of agreed-upon economic

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

production rates, economic growth rates, and inflation.

To determine whether imports of crude oil and refined petroleum products threaten to impair

the national security, the Department reviewed the factors examined in the 1994 investigation

to determine whether they had improved or deteriorated (see Section II for in-depth analysis). 

This provided benchmarks against which to assess the relative economic health of the

domestic oil industry and our national security. These benchmarks included: 1). Domestic oil

reserves; 2). Domestic oil production; 3). Exploration and industry employment; 4). Impact

of low oil prices on the economy; 5). Current status of the domestic oil industry; 6). Oil

import dependence; 7). Vulnerability to a supply disruption; 8). Foreign policy flexibility; 

9). U.S. military requirements; 10). Status of OPEC; 11). Transparency of oil markets; 12).

Breakup of the Soviet Union.
I-4

The Department then identified and evaluated three new factors that emerged since the 1994

investigation: 1) Temporary economic decline in East Asia; 2). Iraqi oil exports; and 3). 

Non-OPEC offshore drilling.

In conducting this assessment, the Department relied upon the extensive body of data

available on the world oil market and on the U.S. petroleum industry. Specifically, the

Department drew heavily from data in the Annual Energy Outlook and other energy related

publications and data provided by the Energy Information Administration of the U.S.

Department of Energy. In addition, the Department reviewed the Department of Energy’s

Comprehensive National Energy Strategy, which, issued in April 1998, outlines five major

energy goals of the Administration. In view of this extensive body of available data, the

Department determined that an industry survey was not necessary. The Department also drew

upon written comments by interested parties.

G. Commodities Investigated

The commodities investigated for this study included crude oil and refined petroleum

products. Crude oil is listed in the Harmonized Tariff Schedule (HTS) of the United States

under HTS classification numbers 27100005-0 (crude oil testing under

25 degrees API) and 27100010-0 (crude oil testing 25 degrees API or more).1

The following refined petroleum products are listed under these HTS classification numbers:

27100015-0 Motor fuel, including both leaded and unleaded gasoline; naphtha-type

jet fuel, and kerosene-type jet fuel.

27100020-0 Kerosene derived from petroleum, shale oil, or both (except motor

fuel).

27100025-0 Naphthas derived from petroleum, shale oil,

36061000-1 natural gas, or combinations thereof (except motor fuel).

27100045-2 Mineral oil or medicinal-grade derived from petroleum, shale oil, or

both.

 27100030-0 Lubricating oils and greases derived from

34031110-3 petroleum, shale oil, or both, with or

34031150-3 without additives.

34031910-0

34031110-3

34031150-3

34031950-1

27100040-0
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34031110-3

34031150-3

34031950-1

27100045-2 Mixtures of hydrocarbons not specifically

27121000-0 provided for, derived wholly from petroleum,

27132000-0 shale oil, natural gas, or combinations

27139000-0 thereof, which contain by weight not over

50 percent of any single hydrocarbon compound.

27122000-0 Paraffin and other petroleum waxes.

27129020-0

34049050-0

27040000-2 Petroleum coke.

27131200-0

38011050-0 Asphaltum, bitumen, and limestone rock asphalt.

American Petroleum Institute (API) gravity is a scale expressing the density of liquid 1

 petroleum products. The measuring scale is calibrated in terms of degrees API and

 decreases as liquid density increases. It is an accepted standard in the petroleum industry.

SECTION II. CURRENT U.S. ENERGY ASSESSMENT

This section evaluates the national security implications of U.S. dependence on imported oil. 

As noted in Section I, a multi-step methodology is employed which first reviews the factors

the Department examined in 1994 as a starting point to determine whether they improved or

deteriorated and then evaluates any new factors which might have emerged since 1994. The

Department also drew upon written comments from interested parties and from analyses and

data provided by the interagency working group.

Review of Key Factors From the 1994 Investigation

1. Domestic Oil Reserves

United States proven reserves of crude oil declined from 23.0 billion barrels in 1993 to an

estimated 22.5 billion barrels in 1998. Imports, however, are not directly responsible for 1-4,8

the declining resource base. Rather, as the world oil price goes up or down, the economics of

U.S. domestic exploration and production become more or less favorable, respectively. 

Compared to the rest of the world, the United States has only a modest amount of proven

reserves (see Table II-1) and has to rely more on secondary and tertiary recovery (more

expensive) methods while other producers can rely on just primary and secondary methods

and thus have a cost advantage over the United States to develop more reserves.5-6

OPEC, on the other hand, accounts for 77.4 percent of the total world reserves of 1,034 billion

barrels. The six Persian Gulf countries have proven oil reserves of 657.9 billion barrels. 

While proven U.S. reserves declined by approximately 0.5 billion barrels since 1993, OPEC's

reserves have increased by 34.3 billion barrels and OPEC reserves in the Persian Gulf area

have increased by 9.4 billion barrels.

The reserves situation in the U.S. is not surprising when one considers that the United States

was one of the first countries to produce oil; and for many years, was the world's largest

producer. Based upon Department of Energy figures, U.S. companies have produced over 181

billion barrels of oil through 1998. The United States is also the most heavily explored

petroleum-bearing region in the world. In 1994, approximately 74 percent of all wells drilled

worldwide to date were drilled in the United States. Most additions to the U.S. oil reserve 7

come in the form of adjustments, revisions and extensions of existing oil fields (~ 72 percent)

and new reservoir discoveries in old fields (~ 4 percent) rather than from the discovery of new

fields (~ 24 percent).8

In conclusion, low oil prices contribute to, but are not totally responsible for, the erosion of

the U.S. oil reserves base. The underlying physical reality is that the United States has already

developed the bulk of its easily accessible low cost reserves and has decided against
II-2

developing other geological prospects such as the Arctic National Wildlife Refuge and certain

portions of the Outer Continental Shelf. Because the reserves base reflects the structural

geological reality, given present technology, oil price increases can at best slow this trend but

not reverse it.

2. Domestic Oil Production

The Department finds that the United States is a high cost producer compared to other

countries because we have already extracted the bulk of our low cost easily accessible reserves

from the most favorable geologic formations. Consequently, U.S. crude oil production has

been falling since 1970. Table II-2 shows that crude oil production declined by 3.4 million

barrels per day (MMB/D), over the past 28 years, and by 0.42 MMB/D between 1994 and

1998.4,9,10

Consistent with established natural resource extraction practices, U.S. companies exploited

the bulk of the known large reserves and then began to develop the smaller and more costly oil

deposits. During the last decade, U.S. companies made use of productivity gains resulting

from advances in drilling technology and recovery methods, but could not offset the higher

per barrel costs associated with smaller, more complex fields and more expensive extraction

techniques. The following factors explain why oil production in the U.S. is decreasing:

o U.S. total production cost (including finding costs, development, lifting, and taxes) of $9.00

per barrel is high compared with average Middle East costs of $6.00 per barrel. 6,7,14

o U.S. direct lifting cost of $3.42 per barrel is also high compared to average Persian Gulf

direct lifting costs of $2.23 per barrel.6, 11, 14

o U.S. cost to increase production capacity by 1 barrel per day is twice that in the Persian Gulf

($10,000-$12,000 in the United States versus $5,500 in the Persian Gulf).6, 11, 14

o U.S. per well production rates are extremely low by world standards, averaging 12 barrels

per day per well. Middle East production rates are 2,000 to 6,000 barrels of oil per day per

well while Mexico and Indonesia are producing at 600 and 200 barrels of oil per day per

well, respectively.7

o U.S. proven reserves of 22.5 billion barrels (1998) are very small compared with the 657.9

billion barrels of proven reserves located in the Persian Gulf countries and the 354.3 billion

barrels of proven reserves located in other non-Persian Gulf OPEC and non-OPEC

countries. The bulk of these newer discoveries are in easily accessible, large fields whereas 1

the remaining U.S. reserves are mostly found in small onshore deposits, expensive offshore

deposits, and in Arctic frontier areas.1-6
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o Although the United States is estimated to have 162 billion barrels of technically

recoverable oil which could be potentially recovered via the application of primary,

secondary, and enhanced recovery techniques in existing fields and new wells, a significant

portion of this is at risk and may disappear when oil prices decline and well abandonments

increase, thereby permanently shutting off access to the resource.11

These circumstances place U.S. producers in a classic "cost-price squeeze" whenever world

oil prices decline. Table II-3 shows that the cost of imported crude oil to refiners dropped by

nearly 50 percent, from $26.99 per barrel to $14.00 per barrel, between 1985 and 1986. The

price climbed back to $21.75 in 1990, largely in response to the Iraq-Kuwait conflict; but fell

again to $15.52 by 1994. Again, after relatively high prices in 1996 averaging $20.61 per

barrel and in 1997 averaging $18.50 per barrel, in 1998, the price fell to $12.13, because of

decreased demand in Asia during its economic downturn, the increased supply of oil from Iraq

under the United Nation’s Oil for Food Program, an unusually mild winter, and higher

worldwide production. Given the recent positive growth in Asian demand and production 4,9,11

cutbacks by OPEC and other producers, world oil prices are now forecasted to keep increasing

throughout 1999 to a high of $23.50/barrel in December and to average of $21.85/barrel in

2000.

This price volatility poses a serious problem for current and projected U.S. production. First,

when world oil prices are relatively high (above $20 per barrel), production by costly marginal

wells, which represent a significant portion of the U.S. resource, is profitable. However, as

prices dip below this level, more and more U.S. wells become non-economic and are either

shut-in temporarily or are abandoned and/or permanently plugged. Low prices also constrain

the exploration and development of new reserves. Second, small companies may cut back on

operations or go out of business because low profitability makes it difficult for them to attract

capital funds for exploration and development. Third, the firms that remain in business are

likely to suffer because they lack the cash flow to maintain existing wells, conduct new

exploration, or to develop small producing properties.

In addition, because of the high finding and lifting costs in the lower 48 states and because

they have the financial strength to go where the economics are best - with lower finding and

lifting costs coupled with a greater likelihood of finding large reserves and a lower regulatory

and/or tax burden, major integrated firms have continued to shift exploration and development

operations to Alaska, Federal offshore, and foreign prospects, sell most of their lower-48

onshore fields to non-integrated independent operators, and rely more heavily on refinery,

distribution, and marketing operations for revenues. In its comments, the Independent

Petroleum Association of America (IPAA) and the National Stripper Well Association

(NSWA) noted that:
II-4

“Currently, about 20 percent of domestic production comes from Alaska; about 20 percent

comes from the offshore Gulf of Mexico; and about 60 percent comes from the lower 48

onshore -- one third of this from “marginal wells” producing less than 15 barrels per day. 

Since 1986, investment by major oil companies has shifted to exploration and development

targets outside the United States. Within the U.S. majors are now primarily interested in

developing Alaska and the deep water offshore. As a result the lower 48 onshore has

increasingly become the province of the independents.”12

Independent companies, being the high cost producers, may lack access to investment capital

and depend entirely on delivered oil prices for revenues. As a result of these changes, U.S.

companies are increasingly unable to replace proven oil reserves and domestic production

continues to decline. Since 1985, domestic production has declined by 2.73 MMB/D and net

imports of all petroleum products have increased by 5.4 MMB/D.

In conclusion, the production outlook remains essentially the same as in the 1994

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, changes in the world oil

market leading to temporary periods of low oil prices have repeatedly placed U.S. producers

in a cost price squeeze. U.S. production declined substantially and net imports increased. 

These price fluctuations, in light of the fact that U.S. lower 48 onshore production is high

cost, have also 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

Based on Department of Labor and Energy Information Administration statistics as well as

anecdotal evidence provided by several commenters, the Department found some change in

U.S. drilling and employment between 1993 and 1999 (see Table II-4):

o exploratory drilling for oil and gas declined from 135.1 million feet in 1993 to 134.9 million

feet in 1998;

o total oil and gas wells drilled (including dry wells) dropped from 24,736 in 1993 to 22,843

in 1998;

o the number of rotary rigs in use for oil and gas exploration increased from 754 in 1993 to a

high of 1,007 in early 1998; however, rig count decreased by 50 percent to a low of 488 in

early 1999 and increased again to 602 in mid-1999; and,

o total employment for oil and gas extraction fell from 350,000 in 1993 to approximately

338,000 in 1998 and ranged from 229,000 to 291,000 in early 1999.11,20
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According to the Department of Energy’s EIA, recent low oil prices also had an impact on

worldwide exploration and development activity. Only Persian Gulf OPEC nations, with

direct lifting costs less than $2.23 per barrel and development costs (to increase production by

one barrel per day) less than $5,500, saw no decline in activity during this period. In general,

onshore drilling fell more sharply than offshore drilling. Offshore rig utilization rates were

generally better than 80% of capacity on a worldwide basis despite low prices.14

The North Texas Oil and Gas Association stated that:

“The drilling rig count, which is probably the most watched barometer of oil and gas

activity, hit all-time lows on April 30, 1999, when only 494 rigs were operating. When

Commerce made its finding in December 1994, there were 791 rigs operating.” 15

Nevertheless, low oil prices are not the only reason for the decline in exploratory drilling

activity and well completions. U.S. companies are drilling less because they find more oil per

foot drilled than they did in the past. For example, between 1980 and 1997, the U.S. oil

industry achieved productivity gains that increased the finding rate from 12.8 barrels of oil

and gas per foot drilled to approximately 32 barrels per foot drilled. This same trend is

observed in oil equivalents discovered per rotary rig in operation, per well drilled, and per

employee (Table II-5). Although notable variations in efficiency occurred between 1980 and

1997, most particularly in 1991 and 1992, the trend is still upward as would be expected as

technology improves with time. The U.S. oil and gas industry continue to make substantial

gains in total productivity because they employ new exploration, drilling, and production

technology and focus on the most promising areas based upon improved geological science

and 3D seismic imaging. In conclusion, the Department finds that advances in technology,

improvements in operations management efficiency, and low oil price cycles have all

contributed to the historical drop in industry employment and, more recently, in drilling

activity.19

Finally, the continuing loss of jobs in the petroleum industry impacts on the university

enrollments in geology, petroleum engineering, and related science. The American Petroleum

Institute found:

“For example, in 1983 there were 11,000 undergraduates in petroleum engineering in the

U.S. By 1996, that number was down to 1,300, and serious personnel shortages reduced the

industry’s capacity to increase drilling in 1996 and 1997. Likewise, today’s cutbacks will

generate future personnel shortages when markets begin to recover.”16

4. The Impact of Low Oil Prices on the Economy
II-6

The Department found that the economic consequences of low prices resulted in positive

benefits to the U.S. economy. Because the United States is 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, these lower prices contributed to a

reduction in inflation, a rise in real disposable income, and an increase in the Gross Domestic

Product (GDP).

The Department of Energy’s Energy Information Administration found that although energy

intensity (energy consumed per dollar GDP) is projected to decrease over the next 20 years,

total energy consumption is projected to increase 1.1 percent annually for an increase in GDP

of 2.1 percent annually. Lower oil and gas prices decrease the cost to the economy of this 4

growth in energy consumption and gross domestic product. In conclusion, the Department

finds that since 1994, low oil prices have yielded large positive benefits to the U.S. economy.

5. Current Status of the Domestic Oil Industry

The Department concluded in its 1994 investigation that low oil prices exacerbated the

chronic cost squeeze problem faced by small producers. Since 1994, this market driven

situation has continued and it became acute during 1998. 

The oil price collapse of late 1997 and 1998 was triggered by a number of factors. The

Asian financial crisis, warmer than normal weather, market share competition among OPEC

members, and Iraq’s re-entry into the oil market resulted in oversupplies of oil at a time of

softening demand. The market, in turn, reacted by suppressing prices. This market

development placed extreme pressure on domestic oil production, particularly the smaller

producers. The 1997/1998 event was unique because it was triggered by supply and demand

disequilibrium as opposed to the situation during the 1970s which had its roots in political

upheavals and military conflict in the Middle East and the U.S. oil and price allocations

system.

The price drop had a serious financial impact on the U.S. oil industry. In its comments, the

Petroleum Industry Research Foundation (PIRINC) estimated that the 1998 integrated majors’

and independent producers’ net income from domestic oil and gas production declined by

63% and 96%, respectively, as compared to 1997. The majors, however, have the requisite 17

refining and related assets such as petrochemicals to help them during periods of low oil

prices.

The U.S. integrated majors responded by continuing to reduce the level of their activities in

the United States and continued reorienting their scarce capital into foreign exploration. The

majors now focus their U.S. activities primarily in developing Alaska and the offshore Gulf of

Mexico (Central and Western). As noted in the 1994 investigation, the integrated majors

spend well over half of their exploration and development budgets overseas in such areas as
II-7

Central Asia, the North Sea, Russia, Latin America, and East Asia. Appendix C contains a

review of the U.S. majors foreign petroleum exploration and development activities.

Unlike the major integrated companies, the independent producers’ income is directly

dependent on the price they receive for their crude oil and natural gas. While major companies

have investments in refineries and chemicals to buffet them during periods of low prices,

small companies lack such resources and generally lack the capital and technical expertise to

engage in large scale offshore and foreign ventures where the economics of extraction are

more favorable and hence less susceptible to price fluctuations. 

The impact of low oil prices has been especially difficult on the independents who account for

the largest share of the lower 48 states oil production (40 percent) and 66 percent of our

natural gas production. Production shut-ins are also more likely to occur here because the

U.S. contains more marginal wells with high lifting costs, such as those associated with

enhanced recovery techniques, heavy oil production, and small volume wells. Consequences

for the independents include: assuming more debt; scaling-down exploration activities;

reducing their work force of skilled labor; and shutting-in temporarily or abandoning certain

producing wells. 

As the Department noted in its 1994 investigation, the impact of low oil prices is particularly

hard on small marginal producers operating stripper wells. Oil wells with an average

production of 15 barrels per day or less are called stripper wells. According to the National

Petroleum Council’s July 1994 Marginal Well Study (reference 7) and more recent data from

the American Petroleum Institute (1998), the U.S. has approximately 436,000 oil wells which

produce 15 barrels or less of oil equivalent per day per well. In 1998, these wells were

responsible for a total annual production of over 300 million barrels of oil equivalent,

representing 25 percent of the total U.S. production for the lower 48 states onshore, and

helped to defer the importation of an equivalent amount of oil valued at $3.6 billion (1998

Importer Acquisition Price). 6, 7, 11

The Department agrees with the National Petroleum Council’s finding that lower oil prices do

potentially endanger these marginal wells and risk the loss of the resource they represent. A

variety of operational and market factors can cause these marginal wells to become

uneconomic and cause their shut-in or abandonment. These factors are not the same for all

regions and in some cases the factors differ within the same region. In 1994, the Council

estimated that almost two-thirds of these wells, representing over 200 million barrels of

annual production and a considerable portion of the U.S. reserves, could be permanently lost

during a sustained period of low oil prices and high operating costs. 

The Department’s efforts to analyze the impact of the 1998 price decline on the marginal

producers were complicated by the commenters’ failure to provide specific information on the

issue of how many wells are shut-in, but not abandoned, when prices decline and subsequently

reopened when prices increase. In this regard, we received no historical data indicating the
II-8

number of wells shut-in during the 1986 price drop that were later reopened when prices

increased. Although various commenters argued strongly for the U.S. Government to provide 

financial incentives to small producers, no company or trade association submitted economic

and financial data regarding levels of profitability and tax burden under various oil price

scenarios. 

Low oil prices have two additional impacts on oil and gas production in the lower 48 states:

o Reduced drilling and well shut-ins jeopardize the goal of stabilizing the decline in domestic

oil production. One of the key goals of the Department of Energy’s Comprehensive

National Energy Strategy is to stabilize domestic oil production and maintain it at 6.0

MMB/D or higher. 

o Reduced drilling limits the opportunity to expand domestic natural gas utilization, a key

energy and environmental policy objective. 

The inability to stabilize domestic oil production is significant because it would figure heavily

in U.S. oil import dependence increasing from 51% in 1998 to 58% by 2005. 

The Department’s review of developments since 1994 confirms that low oil prices continue to

exacerbate the chronic cost-price squeeze problem faced by small producers. In 1998, this

problem turned acute for a short period of time and resulted in the shut-in of many wells, both

oil and gas, and reduced drilling activity. Although the price drop was temporary, it had a

severe impact on marginal oil and gas wells and raised issues concerning the ability of the

United States to stabilize domestic oil production and achieve its natural gas expansion goals. 

Since the November 1997 price collapse, 136,000 oil wells, representing about 24 percent of

all U.S. producing wells, and 57,000 gas wells, representing about 19 percent of all U.S. gas

wells, are believed to have been shut-in. This is based on anecdotal information provided by

industry (Independent Petroleum Association of America). The downturn in the oil industry,

during a price collapse, also undermines the U.S.’s ability to meet rising demands for natural

gas due to the strong linkage between oil and gas production. Nearly 20 percent of the

Nation’s gas production is linked directly to the production of oil (“associated gas”). 

Therefore, for most producers, investment decisions to produce new resources are made on

the basis of both oil and gas potential. 

6. Oil Import Dependence

The Department found that net U.S. imports of oil have grown from 8.1 MMB/D in 1994 to

9.7 MMB/D in 1998. Table II-6 shows that net oil imports (both crude oil and refined

petroleum products) currently account for 51 percent of domestic consumption compared to

45 percent in 1994. Imports from Persian Gulf countries, which increased from 1.73 MMB/D

in 1994 to 2.10 MMB/D in 1998, currently account for about 22 percent of U.S. imports.4,9
II-9

However, the majority of U.S. imports, over 50 percent, are sourced from reliable Western

Hemispheric countries such as Canada, Mexico, and Venezuela. Furthermore, energy

provisions of recent trade agreements between the United States and Canada have enhanced

U.S. energy security. Specifically, Article 605 of the North American Free Trade Agreement

(NAFTA) provides a number of reciprocal benefits that provide for energy security in the

event of a supply interruption. These mutual benefits include: 1) each country will not impose

restrictions on the delivery of energy and basic petrochemical supplies during a supply

interruption; 2) any shortfall in supply will be shared equally among U.S. and Canadian

markets based on historical percentages; 3) each party will not impose higher export prices

than those charged domestically; and 4) there will not be a disruption of the prevailing

proportion of energy goods supplied, such as, for example, between crude oil and refined

products and among different categories of crude oil and refined products. This

unprecedented energy cooperation provides significant security benefits for both nations, and

clearly demonstrates that the United States and Canada are developing an integrated and

secure North American energy market.

Based on forecasts by the U.S. Department of Energy’s Energy Information Administration,

U.S. oil imports can be expected to increase over the next six years. Between 1998 and 2005, 4

EIA estimates that U.S. production of crude oil will decline by 0.42 MMB/D while

consumption of crude oil and refined petroleum products will grow at an annual rate of

approximately 1.2% and reach 21.16 MMB/D by 2005. Although natural gas plant liquids,

refinery processing gains, and other inputs will replace some of this loss (Table 7), the bulk of

it will have to be made up with increased imports. Net imports are expected to increase by

2.48 MMB/D (compared to a 1998 level of 9.69 MMB/D) and reach 12.17 MMB/D by 2005. 

Imports will account for 58 percent of U.S. petroleum consumption by 2005, up from the

present 51%.

1998 2005 % Change

(MMB/D) (MMB/D)

Domestic Production of Crude Oil 6.24 5.82 S 6.78%

Domestic Consumption of Crude 18.77 21.16 12.95%

Oil and Petroleum Products

Net Imports of Crude Oil and 9.69 12.17 25.59%

Petroleum Products

In addition to the above long-term decline in U.S. production and corresponding increase in

U.S. imports, the world crude oil market experienced a sharp fluctuation in prices during 1998

and 1999, as prices initially fell in 1998 to levels one-third below 1997 levels and then
II-10

increased again in early 1999 back to 1997 levels. The extremely low prices were caused by

an unexpected slowdown in the growth of energy demand worldwide and by increases in

supply. Consumption failed to meet producer expectations because of the continued recession

in Southeast Asia which was much more severe than had been anticipated. Significant

reductions in gross domestic product were experienced in Korea, Thailand, and Malaysia. 

Depression and political chaos struck Indonesia. Japan, Asia’s biggest economy, moved from

slow or no growth to actual decline. China, although continuing to grow, was hampered by a

reduction in trade with its neighbors. As a consequence of these factors, Asian oil demand

fell by 100,000 barrels per day in absolute terms and by more than 1 million barrels per day

relative to expectations.

Oversupply in the world oil market was further strengthened by a mild winter and lower

weather-related demand as well as by Iraq’s return to the market as a significant supplier

under the United Nation’s Oil for Food program. By late 1998 and early 1999, this

oversupply was at least partly corrected by increased OPEC and non-OPEC efforts to reduce

supply and by a continued decline in U.S. marginal well production.

Although the possibility exists that price declines and recoveries similar to what is described

in this report could be repeated in the future, with resulting additional losses in U.S. marginal

well production levels, the Department of Energy’s Energy Information Administration is

projecting that this will not happen and that oil prices will recover over the next several years

as oil demand growth in Asia resumes and contributes to a worldwide demand of 84.8

MMB/D by 2005. Although OPEC producers are anticipated to pick up much of this

additional demand, non-OPEC sources are expected to remain competitive, especially in the

Western Hemisphere and West Africa. Although significant supply disruptions, leading to

price shocks as experienced in the early and mid-1970's, are not anticipated over the next two

decades, such volatility could still nevertheless occur due to unforeseen political and/or

economic events.

In conclusion, demand for oil in the United States is anticipated to increase only moderately

over the next twenty years. U.S. production is expected to continue its decline and lead to

ever increasing levels of imports. Although the world oil situation appears to be favorable

and should still allow the United States to meet its oil requirements, the possibility of

significant disruptions to this supply cannot be eliminated.

7. Vulnerability to a Supply Disruption

The Department found that the security of the United States as well as that of the other energy

consuming countries depends on its free access to oil at reasonable and predictable prices. 

Although oil prices are predicted to increase only moderately over the next 20 years at an

average rate of 0.9% per year, this depends on the absence of any significant disruptions to 4

supply. In addition, as can be seen from Table II-8, projected excess production capacity for
II-11

the world during the next 20 years, defined as projected production capacity minus projected

production, will reside almost entirely within the Persian Gulf (~ 2.8 million barrels per day).

a. Supply Disruptions

The interagency working group reviewed the post-World War II period and found that

significant supply disruptions in excess of 1 million barrels per day occurred seven times and

lesser disruptions ranging from 100,000 B/D to 700,000 B/D occurred at least six additional

times since 1951. Production losses ranged from as little as 300,000 B/D to as much as 4.6

MMB/D. 

Types: Table II-9 shows that nine out of thirteen disruptions occurred as a direct result of

wars or internal revolutions or power struggles in the Middle East area. The remaining four

disruptions occurred due to internal events such as the nationalization of the Iranian oil fields

or the Syrian dispute over transit fees or due to damage to production and/or distribution

systems in the area.

Location: All significant disruptions occurred in the Middle East/Persian Gulf region. 

Magnitude: Over half of the disruptions amounted to 1 million barrels per day or more and

lasted from two to nine months. The smallest disruption was 300,000 barrels per day and the

largest was 4.6 million barrels per day.

Duration: Only one disruption lasted longer than one year. Most were from two months to

six months in duration.

The impact of supply interruptions have varied. Most have not significantly disrupted world

markets; however, three interruptions did have major economic implications:

o The Arab oil embargo following the October 1973 Arab-Israeli War caused a loss of 2.6

MMB/D in world supplies, more than tripled crude oil prices, and contributed to the abrupt

reversal in the economies of OECD countries from about 6 percent growth in their Gross

Domestic Product (GDP) in 1973 to a GDP decline in 1975.

o The Iranian Revolution caused losses of 3.5 MMB/D and more than doubled the price of

crude oil between late 1978 and early 1980, and OECD members' GDP growth declined

from 3.6 percent in 1979 to 1.3 percent in 1980.

o Iraq's invasion of Kuwait removed 4.6 MMB/D from world production (the largest

disruption in history) and caused a more than 170-percent increase in prices between June

and October of 1990, but the price increase was short lived because of the availability of

surplus crude production capacity in Saudi Arabia and other key producing countries. In

contrast to previous disruptions, OECD countries had over 1 billion barrels in strategic
II-12

stocks which helped to keep prices in check. Some oil was also released in 1991 at the

beginning of the UN-sponsored offensive against Iraq.

There are a number of unresolved regional conflicts in the Persian Gulf which could lead to

war. A number of these countries are developing enhanced military capabilities that could

again be targeted against regional oil facilities during a conflict. An outbreak of hostilities

could result in the destruction of oil production and transportation facilities (e.g., as happened

in Kuwait during 1991). These developments, in turn, would eliminate production capacity,

tighten supplies, and result in higher prices for consuming countries.

b. Offsets to Supply Disruptions

The risk of a disruption to the United States oil supply is determined by the military, political,

and economic situations facing our sources of supply. The level of vulnerability, however, is

determined by the degree to which we depend on the imported oil, our ability to find

alternative sources of supply to offset the disruption, and sensitivity of domestic economic

activity to severe price fluctuations. Potential offsets include the amount of available surplus

global oil production capacity and oil inventories (e.g., private and government strategic

stocks). 

Surplus world production capacity, defined as projected world production capacity minus

projected world production, has increased from approximately 2.8 MMB/D in 1990 to 3.2

MMB/D in 1997 and is estimated to be 3.8 MMB/D in 2000. This short-term increase

resulted from slower than expected growth in Asia and from unanticipated supplies from Iraq

due to the United Nation’s Oil for Food program. However, surplus capacity is projected to

decrease again by 2010 to approximately 1.8 MMB/D. Furthermore, almost all excess 14 

capacity, both currently and projected, resides in the Persian Gulf area and is subject

considerable military, political, and economic risk. Other producers have either declining

production capacities or can barely maintain their production levels.

Government-owned or controlled oil stocks in the United States declined slightly since the

1994 Commerce investigation. In 1994, the U.S. Strategic Petroleum Reserve's (SPR)

inventory of 580 million barrels provided 77 days of protection based on 1993 net imports of

7.5 MMB/D. The current U.S. Strategic Petroleum Reserve inventory is approximately 564

million barrels providing 58 days of supply at the 1998 import rate of 9.69 MMB/D. In

addition, the U.S. economy can also draw on inventories held by the private sector, estimated

to provide around 30 days of import replacement. Finally, the Department of Energy has

recently decided to increase the SPR by 28 million barrels (i.e., approximately three days of

import replacement) under its Royalty Exchange Program.

It is necessary to consider U.S. oil requirements within the wider context of the civilian

economy during a major oil supply disruption. For example, the transportation sector would

experience many hardships because there are no substitutes for gasoline, diesel, and jet fuel. 
II-13

Despite conservation and reduced consumption resulting from higher prices, less oil would be

available, in the short term, for civilian end uses during a major supply disruption. This, in

turn, would pose a hardship for the U.S. economy.

In conclusion, unresolved socio-political and economic problems in some Persian Gulf

countries make supply disruptions, especially those of a short duration, a possibility in both

the short and long term. Thus, following the 1973 oil embargo, the diversity of supply was

enhanced by investments in the North Sea, Alaska, and other less volatile regions. Although

disruptions are still possible in these other regions, risks are lower because oil reserves,

production, and transportation facilities are less concentrated. In addition, the Persian Gulf’s

largest producer of oil, Saudi Arabia, has pursued oil policies, including diversification of

export routes and maintenance of a considerable excess production capacity, that serve to

mitigate some of the inherent risks otherwise found in the region.

Fuel substitution offers only a limited prospect to moderate a supply interruption because oil

based gasoline and other transportation products, currently consumed at 12.2 MMB/D, have

no substitutes and account for two-thirds of the oil consumed in the United States. During a

major oil supply disruption, less oil would be available for civilian end uses and the

transportation section, almost entirely dependent on oil based products, would be severely

impaired. The resulting price increase, required to balance supply and demand, would then,

in the short term, create a major difficulty for the U.S. economy.

Finally, the development of the North Sea gas fields, the Canadian gas pipeline, as well as

liquefied natural gas, offers some additional reliable options for substitution in the consumer

heating and industrial boiler fuel markets. The availability of excess natural gas

production/transportation capacities could facilitate fuel substitution during a supply

disruption.

Also, the Administration’s recently submitted Comprehensive Electricity Competition Plan

should help to further diversify the electricity based energy market and promote the use of

alternative and renewable fuels. On the other hand, the substitution prospects for coal and

nuclear electric power are limited because of demand, environmental, and regulatory

concerns.

8. Foreign Policy Flexibility

In both the 1988 and 1994 investigations, the Department found that the dependence of our

allies and trading partners on potentially insecure sources of oil might affect their willingness

to cooperate with the United States during a major supply disruption. Some of these concerns

are mitigated by the participation of the United States in the International Energy Agency

(IEA), which groups together 24 members of the Organization for Economic Cooperation and

Development (OECD). The principle purpose of the IEA is to fashion a collective response to

energy emergencies, which may include the coordinated release of the emergency oil stocks
II-14

that all IEA members are required to maintain. However, increased market share forecasted

for some OPEC countries, and some Persian Gulf states, over the next 20 years, could make

cooperation by some oil consumers more difficult.

9. U.S. Military Requirements

In both the 1988 and 1994 investigations, the Department of Defense advised the Department

that the United States would be able to meet both its direct and indirect military requirements

for petroleum during a major conventional war. However, it was noted that significant

civilian austerity would be necessary to respond to the decreased availability of oil. 

Information for 1998 from the Department of Defense (DoD) indicates that direct military

consumption of petroleum worldwide is equivalent to 1.6 percent of U.S. domestic

consumption. Consumption of aviation fuels represent approximately 12 percent of the U.S.

usage.

For comparison, at the height of the cold war, direct consumption for direct military

requirements averaged three percent of U.S. consumption. Of this three percent, one-third

was procured and consumed overseas in Europe, the Middle East, and Asia where DoD had

substantial military forces. Based on input-output analysis completed in the 1980’s, indirect

consumption, that is energy embedded in weapon systems and other products procured by

DoD, approximately equals direct consumption.

Based on this information, the Department of Defense again advises the Department that,

based on current planning scenarios, the United States will be able to meet both its direct and

indirect military requirements for petroleum products in the event of two nearly simultaneous

major regional conflicts or a major peacetime supply disruption.

10. Status of OPEC

Low world oil prices are partially due to fact that OPEC members have been unable, until

recently, to coordinate production levels among themselves. The urgent financial

requirements of some OPEC members has led them to compete for revenue and market share

even if this has meant that they have had to accept lower per-unit prices for their oil. 

However, by mid-1998, declining prices set in motion renewed OPEC efforts to reduce excess

oil supplies. For the remaining months of 1998, announced and realized production cuts were

not clearly synchronized, and efforts to reduce production had only modest success. More

recently, OPEC members have been more effective at reducing world production to increase

prices. Ten members of OPEC, excluding Iraq, pledged in March 1999 to cut production by

2.1 MMB/D. The compliance of these ten OPEC members with announced production cuts

was about 89 percent in July 1999. Oil prices have steadily increased since then due to these

production cuts and stronger overall worldwide demand. The Department of Energy’s Energy

Information Administration projects that the cost for imported oil (Refiner Acquisition Cost)
II-15

will be $22.50 and $23.50 per barrel, respectively, for November and December of 1999 and

average $21.85 per barrel in 2000.

11. Transparency of Oil Markets

The growth in crude oil futures trading has become an increasingly important factor for large

scale industrial and utility fuel users who buy futures to augment open-market purchases and

as a means of cost averaging. Further, futures trading allows producers a degree of

“insurance” against future volatility by selling their product 6-12 months into the future during

periods of rising oil prices. Producers tend to sell oil futures as a hedge against the possible

short-term low spot market and when crude oil futures prices appear unsustainable. When

futures prices go well above a producer’s marginal cost of production, it can guarantee a

profitable sale.

On July 15, 1999, the New York Mercantile Exchange (NYMEX) set an exchange record in

trading 244,742 oil futures contracts surpassing the record of 244,714 contracts made on May

12, 1999. According to NYMEX, volume on crude oil futures contracts is about 17% higher

than one year ago, and substantially higher than the very small volume existing in the 1994

market. The growth in NYMEX oil futures trading activity (based on West Texas

Intermediate crude prices) has spurred interest in developing crude futures contracts outside

the U.S. As such, the NYMEX is proposing a Middle East sour crude futures contracts

market based on average daily price swings in Oman and Dubai crudes. To date, this is still in

the review process.

12. Breakup of the Soviet Union

The end of the Cold War and the breakup of the Soviet Union has reduced tensions around the

world, including the Middle East. The advancement of the Middle East Peace Process has

also contributed to the reduction of tensions. This has reduced the probability of a

conventional war that could jeopardize access to Middle East oil. On the supply side, the

breakup of the Soviet system provides a great opportunity to develop new oil and gas

resources in the region.

According to the Department of Energy’s Energy Information Administration, oil production

in the Former Soviet Union (FSU) is expected to reach 7.6 MMB/D by 2005 and exceed 13

MMB/D by 2020. Much of this growth will occur inside the newly independent states of the

Caspian Basin area where regional political uncertainty, export access, and the need to

develop open, fair, and transparent investment regimes appear to be the only barriers to the

development of vast new sources of oil and gas. In 1999, approximately 650,000 barrels/day

of Caspian oil will be exported to world markets. With upgrades, capacity of early routes

from Azerbaijan could climb much higher by 2004. Similarly, a new route under construction
II-16

from Kazakhstan to the Black Sea coast should be filled to its planned capacity of 1,300,000

barrels/day by 2010. Based on current demand forecasts, by 2020, the FSU will become a net

exporter of oil at rate of approximately 7.9 MMB/D. However, full realization of this

potential will depend on completion of multiple export pipeline routes, including a main

export pipeline to Ceyhan, Turkey.4,14

Review of New Factors since the 1994 Investigation

The Department also evaluated several new factors which have or will significantly affect

world wide petroleum supply and demand. Foremost among these factors are the following:

1. Temporary Economic Decline in East Asia

An economic crisis in East Asia started in the summer of 1997 and continued to deepen

throughout 1998. This, in combination with the already weak economy in Japan, significantly

reduced worldwide demand for crude oil and petroleum products. The economic decline in

turn led to sharply reduced worldwide oil prices in 1998 and early 1999 and a significant

oversupply of crude. These factors contributed to the decrease in U.S. production seen during

the same time period.4

2. Iraqi Oil Exports

As of August 1, 1999, the United Nations Security Council, within the framework of UNimposed sanctions on Iraq (mandated by UNSCR 661, August 1990), has established the “Oilfor-Food” program “as a temporary measure to provide for the humanitarian needs of the Iraqi

people” (UNSCR 986, April 1995). Thus, the United Nations Security Council, within the

framework of UN-imposed sanctions on Iraq, allows, since February 1998, Iraq to export up

to $5.256 billion worth of oil in a six month period, up from $2 billion per six month period

prior to that date.

Under this program, oil exports from Iraq have steadily increased from 0.7 MMB/D initially

to the current rate of approximately 2.0 MMB/D. Recognizing that Iraq would not be able to

meet the increased export ceiling of $5.256 billion permitted under UNSCR 1153 (1998)

without improvements to its dilapidated oil infrastructure, the Security Council authorized the

import by Iraq of $300 million worth of oil spare parts and equipment; that authorization has

been renewed twice. Increased Iraqi oil exports were among the supply and demand variables

which led to appreciably lower oil prices for much of 1998 and early 1999. However, the U.S.

supports UN efforts to meet the identified humanitarian needs of the Iraqi people and neither

the U.S. nor the UN attempt to influence world oil prices or markets via sanctions

regimes.4,14,18
II-17

3. Non-OPEC Offshore Drilling

Offshore oil exploration and production projects off the coasts of the United States, South

America, Mexico, Eastern Canada, and Western Africa, and in the Gulf of Mexico, the

Caspian Sea, and the South China Sea are expected to produce significant volumes of oil and

natural gas early in the next century. Because drilling platforms are reserved so far in

advance, most of the worldwide projects are proceeding on schedule even at relatively low oil

prices. These increased sources, while harmful to U.S. domestic production to the extent that

they increase world supplies and therefore possibly lower worldwide oil prices, increase U.S.

energy security by broadening the mix of possible exporters beyond the control of individual

countries or coalitions.4, 14, C1-6

Conclusions

Since the previous Section 232 petroleum finding in 1994, there have been some

improvements in U.S. energy security. The continued erosion of external threats to the

Middle East and the continued increase in non-OPEC production have enhanced U.S. energy

security. Additional discoveries of both inland and offshore oil reserves outside of the Persian

Gulf region have at least slowed OPEC’s market share growth. In addition, lower oil prices

on balance benefit the U.S. economy. 

However, as shown in Table II-10, other factors have eroded since 1994. Reduced oil

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

toward a continual contraction of the U.S. oil industry in favor of overseas investments where

exploration and production costs are lower and reserves are increasing. Although large U.S.

oil companies have faired fairly well since 1994, small producers continue to show declines. 

Growing import dependence, in turn, increases U.S. vulnerability to a supply disruption

because non-Persian Gulf sources lack excess production capacity; and there are at present no

substitutes for the transportation fuels which account for two-thirds of U.S. petroleum

consumption.

These factors represent a threat to the national security of the United States. Although the

economic decline in East Asia, the unusually warm weather in 1998 and 1999, and the

increased oil exports from Iraq led to a temporary world oil supply surplus and enhanced the

world’s excess production capacity (~ 3 MMB/D), these same factors will tend to drive out

marginal producers in the United States and elsewhere and will in the long-term increase

OPEC and Persian Gulf market shares and thereby increase the threat to U.S. national

security.
II-18

TABLE II-1

WORLD CRUDE OIL PROVEN RESERVES, 1993 AND 1998

(Billion Barrels)

Country 1993 1998 +/- % share of

world

reserves in

1998

North America 79.0 75.3 - 4.5 7.3

of which U.S. 23.0 22.5 - 0.5 2.2

Central/South America 74.1 89.5 15.4 8.6

Western Europe 16.6 18.7 2.1 1.8

FSU/Eastern Europe 59.2 59.1 - 0.1 5.7

Middle East 662.9 673.6 10.7 65.1

Africa 62.0 75.4 13.4 7.3

Far East/Oceania 44.6 43.0 - 0.4 4.2

Total 998.3 1,034.7 35.5

of which is OPEC 766.2 800.5 34.3 77.4

of which is Persian Gulf OPEC 648.5 657.9 9.4 63.6

of which is Middle East OPEC 662.9 661.7 - 1.2 64.0

SOURCES: References 1 and 2. 
II-19

TABLE II-2

PETROLEUM OVERVIEW, 1970-2005 (MILLION BARRELS PER DAY)

YEAR CRUDE OIL NATURAL GAS TOTAL NET NET TOTAL PETROLEUM

PRODUCTION PLANT LIQUID DOMESTIC CRUDE REFINED NET PRODUCTS

PRODUCTION PRODUCTION OIL PRODUCT IMPORTS SUPPLIED

IMPORTS IMPORTS

1970 9.64 1.66 11.30 1.06 2.10 3.16 14.70

1973 9.21 1.74 10.95 3.01 3.01 6.02 17.31

1974 8.77 1.69 10.46 3.26 2.64 5.89 16.65

1975 8.37 1.63 10.00 3.89 1.95 5.84 16.32

1980 8.60 1.57 10.17 4.72 1.65 6.37 17.06

1985 8.97 1.61 10.58 2.42 1.87 4.29 15.73

1987 8.35 1.60 9.95 3.91 2.00 5.91 16.67

1990 7.36 1.56 8.92 5.03 2.12 7.15 16.99

1992 7.17 1.73 8.90 5.13 1.80 6.93 17.03

1993 6.85 1.74 8.58 6.69 0.93 7.62 17.24

1994 6.66 1.73 8.39 6.96 1.09 8.05 17.72

1995 6.56 1.76 8.32 7.14 0.75 7.99 17.72

1996 6.46 1.83 8.29 7.40 1.10 8.50 18.31

1997 6.45 1.82 8.27 8.12 1.04 9.16 18.62

1998 6.24 1.75 7.99 8.63 1.06 9.69 18.77

1999 6.02 1.75 7.77 8.70 1.20 9.90 19.23

2000 5.95 1.77 7.72 9.04 1.26 10.30 19.55

2005 5.82 1.98 7.80 9.86 2.31 12.17 21.16

SOURCE: References 4, 9, and 10.

Note: Totals may not equal sum of components due to minor categories such as other crude oil supplies,

refinery processing gains, and change in stocks as well as rounding differences. Data for the years 1999,

2000, and 2005 were estimated by the Department of Energy’s Energy Information Administration.
II-20

TABLE II-3

Refiner Acquisition Costs for Imported Oil 1973-2000

$ VALUE OF IMPORTS

YEAR $ PER BARREL (US BILLIONS) 

(Current Dollars) (Current Dollars)

1973 4.08 . . .

1974 12.52 24.7

1975 13.93 25.2

1976 13.48 32.2

1977 14.53 42.4

1978 14.57 39.5

1979 21.67 . . . 56.7

1980 33.89 . . . 78.6

1981 37.05 76.7

1982 33.55 60.5

1983 29.30 53.2

1984 28.88 56.9

1985 26.99 . . . 50.5

1986 14.00 . . . 35.1

1987 18.13 . . . 42.3

1988 14.57 . . . 38.8

1989 18.08 . . . 49.7

1990 21.75 . . . 61.6

1991 18.70 . . . 51.4

1992 18.20 . . . 51.2

1993 16.14 . . . 51.0

1994 15.52 50.8

1995 17.14 54.4

1996 20.61 72.0

1997 18.50 71.2

1998 12.13 50.5

1999 15.89

2000 21.85

SOURCES: References 4 and 9 and U.S. Department of Commerce data.

Note: Data for the years 1999 and 2000 were estimated by the Department of Energy’s Energy

Information Administration. $21.85 per barrel value reflects most recent projections.
II-21

TABLE II-4

U.S. OIL AND GAS INDUSTRY INDICATORS

1973-1998

Year Rotary Rigs in Footage Drilled Total Wells Completed Total Discoveries of

Use for Oil & for Oil and Gas (Oil, Natural Gas, Dry Employment Crude Oil, Natural

Gas Exploration (Thousand Feet) Hole Exploratory & (Thousands) Gas, and Natural

Development Wells) Gas Liquids

(MMB oil

equivalent)12

1973 1,194 138,223 27,420 274

1975 1,660 180,494 38,721 329

1980 2,909 314,654 70,610 560 4,014

1981 3,970 413,112 91,553 692 4,977

1982 3,105 378,295 84,397 708 4,189

1983 2,232 317,986 75,837 598 3,443

1984 2,428 371,392 85,413 606 4,039

1985 1,980 313,045 70,342 583 3,433

1986 964 181,856 40,270 450 2,487

1987 936 162,178 35,320 402 2,270

1988 936 156,354 32,232 400 2,768

1989 869 134,439 27,931 381 2,910

1990 1,010 153,701 31,551 395 3,292

1991 860 143,021 28,895 393 2,160

1992 721 121,124 23,084 353 2,007

1993 754 135,118 24,736 350 2,690

1994 775 124,403 21,507 337 3,254

1995 723 117,078 21,039 320 3,451

1996 779 125,177 22,611 322 3,735

1997 943 148,275 26,195 339 4,745

1998 847 134,887 22,843 338 NA

1999 < 500 Jan - Feb NA NA 291 NA

~ 602 July ‘99 (Feb ‘99)

Source: References 3, 4, 8, 11, and 13.
II-22

TABLE II-5

U.S. OIL AND GAS INDUSTRY INDICATORS

1980-1997

Year Discoveries of Oil Equivalents Oil Equivalents Oil Oil

Crude Oil, Discovered per Discovered per Equivalents Equivalents

Natural Gas, and Foot Drilled Rotary Rig in Discovered Discovered

Natural Gas (barrels of oil Operation per Well per

Liquids equivalent) (million barrels Drilled Employee

(million barrels oil equivalent) (thousand (thousand

oil equivalent) barrels oil barrels oil 12

equivalent) equivalent)

1980 4,014 12.8 1.38 56.8 7.17

1981 4,977 12.0 1.25 54.4 7.19

1982 4,189 11.1 1.35 49.6 5.92

1983 3,443 10.8 1.54 45.4 5.76

1984 4,039 10.9 1.66 47.3 6.67

1985 3,433 11.0 1.73 48.8 5.89

1986 2,487 13.7 2.58 61.8 5.53

1987 2,270 14.0 2.43 64.3 5.65

1988 2,768 17.7 2.96 85.9 6.92

1989 2,910 21.6 3.35 104.2 7.64

1990 3,292 21.4 3.26 104.3 8.33

1991 2,160 15.1 2.51 74.8 5.50

1992 2,007 16.6 2.78 86.9 5.69

1993 2,690 19.9 3.57 108.7 7.69

1994 3,254 26.2 4.20 151.3 9.66

1995 3,451 29.5 4.77 164.0 10.78

1996 3,735 29.8 4.79 165.2 11.60

1997 4,745 32.0 5.03 181.1 14.00
II-23

TABLE II-6

U.S. CRUDE OIL AND REFINED PRODUCT IMPORTS 

1973-2005

(Thousand Barrels per Day)

Year Net OPEC Non- OPEC Percent

Imports (Persian Gulf) OPEC (Persian Gulf) Total

Percentage Demand

1973 6,025 2,993 (848) 3,263 47.8% (13.6%) 34.8

1983 4,312 1,862 (442) 3,189 36.9% (8.8%) 28.3

1990 7,161 4,296 (1,966) 3,721 53.6% (24.9%) 42.2

1991 6,626 4,092 (1,845) 3,535 53.7% (24.2%) 39.6

1992 6,938 4,092 (1,778) 3,796 51.9% (22.5%) 40.7

1993 7,618 4,273 (1,782) 4,347 49.6% (20.7%) 44.2

1994 8,054 4,247 (1,728) 4,749 47.2% (19.2%) 45.5

1995 7,886 4,002 (1,573) 4,833 45.3% (17.8%) 44.5

1996 8,498 4,211 (1,604) 5,267 44.4% (16.9%) 46.4

1997 9,158 4,569 (1,755) 5,593 45.0% (17.3%) 49.2

1998 9,690 4,808 (2,095) 5,574 46.3% (20.2%) 51.6

1999 9,900 4,891 (2,248) 5,364 47.7% (21.9%) 52.0

2000 10,300 NA NA NA 52.5

2005 12,170 NA NA NA 57.5

Sources: Reference 4 and 9.

Note: Data for the years 1999, 2000, and 2005 were estimated by the Department of Energy’s

Energy Information Administration.
II-24

TABLE II-7

U.S. OIL OUTLOOK

(Million Barrels Per Day)

OIL OTHER DOMESTIC NET TOTAL PERCENT

ON INPUTS IMPORTS SUPPLY IMPORTED A B

3.35 8.50 18.31 46%3.01 9.16 18.62 49%2.83 9.69 18.77 51%3.32 10.30 19.55 53%3.15 12.17 21.13 58%3.36 13.70 22.65 60%

plant liquids, refinery processing gain, and other inputs. 

 imports. 

e 4.

ars 2000, 2005, and 2010 were estimated by the Department of Energy’s Energy Information Administration.
II-25

TABLE II-8

WORLD OIL CONSUMPTION, PRODUCTION, 

AND PRODUCTION CAPACITY PROJECTIONS 

(MILLION BARRELS PER DAY)

 CONSUMPTION PRODUCTION PRODUCTION CAPACITY1996* 2000 2005 2010 1997 2000 2005 2010 1997 2000 2005 2010

18.3 19.5 21.2 22.7 9.5 9.1 9.0 9.0 9.5 9.1 9.0 9.0 1.8 2.0 2.0 2.1 2.6 2.8 3.0 3.2 2.6 2.8 3.0 3.2 1.9 2.0 2.3 2.6 3.4 3.7 3.7 4.0 3.4 3.7 3.7 4.013.7 14.4 14.8 15.3 7.0 7.6 7.9 7.7 7.0 7.6 7.9 7.7 5.9 5.6 5.7 6.0 1.2 1.2 1.4 1.5 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 4.4 4.4 4.5 4.7 7.1 7.3 7.6 10.1 7.1 7.3 7.6 10.1 1.3 1.6 1.6 1.7 0.3 0.3 0.3 0.4 0.3 0.3 0.3 0.4 3.5 4.6 5.0 6.4 3.2 3.2 3.3 3.5 3.2 3.2 3.3 3.5 1.7 1.9 2.6 3.1 2.2 2.1 2.8 3.4

) 4.5 5.0 5.1 5.7 2.2 2.3 2.4 3.0 2.2 2.3 2.4 3.0

rica 4.0 4.8 6.3 7.4 3.4 3.8 4.0 4.4 3.4 3.8 4.0 4.4

East) 2.4 2.7 3.0 3.5 4.5 4.6 4.8 5.5 4.5 4.6 4.8 5.5

ast) 4.8 5.2 6.5 7.5 19.6 20.3 25.3 28.1 22.8 23.9 28.1 29.6

10.2 10.7 12.3 13.4 10.2 10.9 12.6 13.7

71.5 77.1 84.8 93.5 73.9 76.6 84.5 93.2 77.1 80.4 87.6 95.0

ity 3.2 3.8 3.1 1.8

Capacity 3.2 3.6 2.8 1.5

equal sum of components due to imperfect match between available data and rounding differences. Excess capacity

capacity minus production. Data for the years 2000, 2005, and 2010 were estimated by the Department of Energy’s

dministration. Source: Reference 14. *Consumption data for 1996.
II-26

TABLE II-9

HISTORICAL REVIEW OF OIL SUPPLY DISRUPTIONS IN THE

PERSIAN GULF AND MIDDLE EAST/MEDITERRANEAN AREA

EVENT DATE(S) Oil Supply DURATION

Shortfall (Months)

(Million b/d)

Iranian oilfields nationalized March 1951- 0.7 44

following months of unrest October 1954

and strikes in Abadan area.

Suez war November 1956- 2.0 4

March 1957

Syria transit fee dispute December 1966- 0.7 3

March 1967

Six Day War June 1967- 2.0 2

August 1967

Libyan price controversy; May 1970- 1.3 9

damage to Tapline January 1971

Algerian-French April 1971- 0.6 5

nationalization struggle August 1971

Unrest in Lebanon; damage March 1973- 0.5 2

to transit facilities May 1973

October Arab-Israeli War; October 1973- 2.6 6

Arab oil embargo March 1974

Civil war in Lebanon; April 1976- 0.3 2

disruption to Iraqi exports May 1976

Damage to Saudi oil fields May 1977 0.7 1

Iranian revolution November 1978- 3.5 6

April 1979

Outbreak of Iran-Iraq war October 1980- 3.3 3

December 1980

Iraqi invasion of Kuwait; August 1990- 4.6 3

Persian Gulf War October 1990

Source: Reference 11.
II-27

TABLE II-10

OVERVIEW OF KEY FACTORS

CHANGES IN FACTORS AFFECTING U.S. ENERGY SECURITY

BENCHMARKS IMPROVED WORSENED THE SAME

1994 INVESTIGATION

1. Domestic oil reserves . . . q

2. U.S. oil production . . . q

3. Oil infrastructure, employment q

4. Impact of low oil prices on

 the economy q

5. Status of U.S. oil companies q(small firms) q(large firms)

6. Import dependence . . . q

7. Import vulnerability

-world excess production capacity . q

-government owned oil stocks . q

-interfuel substitution q q

(natural gas and electricity) (all other fuels)

-geopolitical risk of

 disruption q

8. Foreign policy flexibility . . . q

9. Military requirements . . . q

10. Status of OPEC q

11. Emergence of energy futures

 market-oil & price transparency q

12. Breakup of the Soviet System q

NEW FACTORS - 1999 INVESTIGATION

1. Decreased Demand East Asia q (short term) q (long term)

2. Iraqi Oil Exports q

3. Offshore Drilling and other

 new sources of supply q
II-28

REFERENCES

` Oil and Gas Journal, December 27, 1993.

` Oil and Gas Journal, December 28, 1998.

` Monthly Energy Review for April 1999, Energy Information Administration, U.S. Department

of Energy.

` Annual Energy Outlook for 1999, December 1998, Energy Information Administration, U.S.

Department of Energy.

` Oil and Gas RD&D Programs, Office of Natural Gas and Petroleum Technology, Office of

Fossil Energy, U.S. Department of Energy, February 1999.

` Interagency Communication, U.S. Department of Energy.

` Marginal Well Study, National Petroleum Council, July 1994.

` U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves, 1997 Annual Report,

December 1998, Energy Information Administration, U.S. Department of Energy.

` Short Term Energy Outlook, August 1999, Energy Information Administration, U.S.

Department of Energy.

` Annual Energy Review 1997, July 1998, Energy Information Administration, U.S. Department

of Energy.

` Interagency Communication, Energy Information Administration, U.S. Department of Energy.

` Written comments provided by George Yates and Danny Biggs on behalf of the Independent

Petroleum Association of America and the National Stripper Well Association, respectively,

June 3, 1999.

` These numbers were calculated using the historical data in reference 8 for crude oil, dry natural

gas, and natural gas liquid reserve additions due to new discoveries (extensions, new field

discoveries, and new reservoir discoveries in old fields). Natural gas reserve additions were

converted to barrels of oil equivalent by using the conversion factors contained in reference 4

for crude oil to btu (production) and dry natural gas to btu. The specific conversion factor used

was 1 billion cubic feet of dry natural gas is equal to 0.177241 million barrels of oil equivalent. 

One barrel of natural gas liquids was assumed to be equal to 1 barrel of oil.
II-29

` International Energy Outlook 1999, Energy Information Administration, U.S. Department of

Energy; Oil Market Outlook, DRI/McGraw Hill, Lexington, MA, July 1995.

` Written comments provided by the North Texas Oil & Gas Association, Wichita Falls, Texas.

` Written comments provided by the American Petroleum Institute, June 3, 1999.

` Written comments provided by the Petroleum Industry Research Foundation, New York, New

York, May 1999.

` www.un.org/depts/oip

` President’s Council of Economic Advisers has noted that while employment in this sector

may have fallen in the past couple of years, aggregate employment has increased. For

example, in the five largest oil producing states, aggregate employment has increased

over the past two years.

` Memorandum for Robert Alvarez from Raymond Bramucci, U.S. Department of Labor, April

8, 1999.
SECTION III. FINDING AND RECOMMENDATIONS

Since the previous Section 232 Petroleum Finding in 1994, there have been some short-term

improvements in U.S. energy security. The continued erosion of Russian economic and military

power and the continued increase in non-OPEC production enhanced U.S. energy security. 

Lower oil prices on balance continue to benefit the U.S. economy. However, continued

reductions in exploration activity, lower reserves, falling levels of production, relatively high

U.S. exploration and production costs, and low rates of return on investments all point toward a

continuing contraction of the U.S. petroleum industry and increasing imports. As the

Department noted in its 1994 report, growing import dependence, in turn, increases U.S.

vulnerability to a supply disruption because non-OPEC sources lack excess oil production

capacity; and there are at present no substitutes for oil-based transportation fuels which account

for two-thirds of U.S. petroleum consumption. 2

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 affects the economic welfare of the United States, energy security must be considered in

determining the effects on the national security of petroleum imports.

A. Finding

The Department finds that petroleum imports threaten to impair the national security.

B. Recommendations

In light of the finding that petroleum imports threaten to impair the national security, the

Department has the following recommendations:

1. Trade Actions

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.

The Department and the interagency group continue to concur with the conclusions of the 1988

and 1994 Section 232 studies 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 3

tariff would likely have an inflationary effect on the economy and could result in the loss of

significant jobs in the non-petroleum sectors. This, in turn, would reduce real GDP. An import
III-31

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. 

2. Clinton Administration Energy Policy

The Clinton Administration recognizes the importance of U.S. energy security. Since 1993, it

has pursued the energy policy of reliance on markets to allocate resources with selective

government intervention to ensure that certain highly valued societal needs--including the need

for energy security, environmental quality, and energy research--are met. The policy recognizes 4

that no cost-effective government action could eliminate U.S. dependence on foreign oil entirely,

but the following supply enhancement, energy conservation, and critical research policies help to

preserve our current oil and gas productive capacity and to limit that dependence. Accordingly,

the Department recommends continuing the policy goals set forth in the Department of Energy’s

April 1998 Comprehensive National Energy Strategy as described below.5

Goal #1 -- Improve the efficiency of the national energy system by making the most productive

use of energy resources, enhance overall economic performance, and protect the environment:

The Administration is working to achieve a more productive and efficient use of energy

resources, including electricity infrastructure, fossil fuel reserves, and productive capacity for

clean alternative fuels. The primary objectives are:

o Supporting competitive and efficient electric systems by enacting legislation to promote the

establishment of a fully competitive electric system with improved energy efficiency, use of

renewable energy sources, and environmental performance.

o On April 15, 1999, the Administration submitted to the Congress the Comprehensive

Electricity Competition Act (CECA). The CECA: 1) encourages States to implement retail

competition in the electric power market; 2) protects consumers by promoting competitive

markets, enhancing information flows, and outlawing various customer abuses; 3) assures

access to a reliable transmission system; 4) removes impediments to competition in areas

served by the Federal Power Marketing Administration and the Tennessee Valley Authority; 5)

protects the interests of rural and remote communities and Indian tribes; and 6) amends and

clarifies existing Federal and State authorities. 

o Developing, by 2010, cost-effective electric power systems which have negligible emissions of

conventional pollutants, significantly reduce emissions of CO , and generate efficiencies 2

greater than 60% using coal, 75% using natural gas, and 85% in combined heat and power

applications (i.e., co-generation).

o Developing, under the Administration’s Partnership for a New Generation of Vehicles, a

prototype 80 mpg family car by 2004 and more efficient trucks by 2002. 
III-32

o Decreasing, by 2010, energy use per unit output by 25% for the most energy-intensive

industries and improving energy efficiencies in new homes and commercial buildings by 50%.

o Decreasing dependence on foreign oil and reducing air pollution by supporting research in the

following critical areas: 1). advanced heat engines; 2). electric and hybrid vehicles; 3). 

alternative fuels and alternative fuel vehicles; 4). fuels cells and advanced turbine systems; and

5). advanced batteries and energy storage systems for electric vehicles and electric power

distribution systems (i.e., demand cycle shifting).

The United States has a critical interest in cutting its reliance on oil imports through improved

efficiency and increasing use of domestic renewable energy sources. The twin goals of

comprehensive electricity reform and increasing energy efficiencies in the transportation,

industrial, and housing sectors and in the generation and distribution of electric power maximize

the productive use of energy through market competition and technological innovation. When

implemented, these measures will result in a more productive and efficient use of energy and a

decreased U.S. consumption of oil imports.

Goal #2 -- Prevent the disruption or decline of world energy supplies and protect U.S. economy

from the harmful effects of a short-term supply interruption or infrastructure failure:

The Administration is continuing its strong emphasis on emergency preparedness efforts and the

need to stabilize domestic oil production, including: 

o Arresting the decline in domestic oil production by 2005 by working with industry to develop

new reservoir imaging and extraction technologies, and supporting environmentally responsible

development of leased Federal lands for oil and gas recovery.

o Maintaining readiness of the Strategic Petroleum Reserve (SPR) to respond to threats of

disruption in world oil supplies by working with the Congress to maintain the SPR in

drawdown ready status and capable of delivering oil to the market at a sustainable rate of 4.2

million barrels per day (MMB/D) within 15 days of a Presidential directive.

o Expanding the SPR by adding an additional 28 million barrels of oil under the Department of

Energy’s Royalty Exchange Program. By law, the U.S. Government owns 12.5% to 16.7% of

all oil produced on federal land. By accepting royalties-in-kind rather than in cash, the

government can add to the SPR during times of low oil prices without a specific appropriation

or budget offset.

o Making unutilized SPR storage capacity available for the mid- to long-term storage of

commercial oil. This Department of Energy program will promote oil stockpiling and increase

the size of the SPR inventory by accepting payment in-kind as a fee for storage used by

commercial entities.
III-33

o Coordinating responses to supply disruptions through continued cooperation with the member

countries of the International Energy Agency (IEA). Acting together, the nations of the IEA

could inject into the market approximately 4 to 5 MMB/D of oil from their reserves into the

market while governments take other actions to address the cause of the disruption.

o Diversifying sources of oil by working with industry to increase the supplies of oil available to

the world market. Developing new sources may reduce the adverse economic impacts that may

be brought on by a cut in supply in any one region. The Administration is currently working to

encourage the newly independent countries of the Caspian Sea area and Central Asia to

develop open, fair, and transparent investment regimes that will create a favorable climate to

develop the area’s large oil and gas resource potential. 

o Ensuring the integrity of the oil and natural gas supply infrastructure with respect to emergency

response capabilities in coordination with the President’s Commission on Critical

Infrastructure and other federal agencies by providing recommendations on how best to

enhance the security of domestic oil refining, transport, and storage infrastructures as well as

the natural gas infrastructures. 

Goal #3 -- Promote U.S. domestic energy production and use in ways that respect national health

& environmental values and improve public health and local, regional, and global environments:

The Administration has pursued a balanced program to increase domestic energy production in

an environmentally responsible manner by:

o Supporting policies to allow the annual domestic natural gas supply to increase by as much as 6

trillion cubic feet (2.9 MMB/D oil equivalent) by 2010. These policies include the

development of improved reservoir imaging and characterization technologies to locate natural

gas in deeper and more complex reservoirs and advanced extraction techniques to increase

recovery from mature reservoirs.

o Promoting RD&D to facilitate the use of advanced technologies to recover more oil and gas

from reservoirs without significant environmental degradation. The Department of Energy has

estimated that the development and use of advanced exploration and extraction technologies

can result in more than 400 million barrels of additional cumulative oil production between

1998 and 2005.6

o Providing as much as $1 million in new federal funding for research and development

specifically targeted to small independent oil operators who are facing problems which might

be overcome by applying innovative field technologies.

o Reopening the Department of Energy’s (DOE) Reservoir Class Program with up to $18 million

for cost-shared projects. Producers operating three geologic classes will be eligible to
III-34

participate in projects applying new technologies such as 4-dimensional seismic modeling,

horizontal drilling, and oil flow enhancements.

o When oil prices drop below $15/barrel, supporting the Department of the Interior in allowing

the suspension of production requirements for stripper wells producing less than 15 barrels per

day on federal onshore lands. In 1999, qualified operators were allowed to suspend operations

(for up to two years) without losing their leases or having to plug their wells. Rental and

minimum royalty payments were also suspended during this time period. This DOI initiative

was to remain in effect until February 4, 2001 or until the average price of benchmark West

Texas Intermediate (WTI) reached or exceeded $15 per barrel for 90 consecutive days. DOI’s

suspension of operations policy ended July 26, 1999, because the WTI had been above

$15/barrel for 90 days.

o Promoting grass roots assistance to independent oil producers on technical, legal, and business

issues by supporting the Petroleum Technology Transfer Council’s ten regional centers and

their December 1998 Industry Crisis Action Plan to teach independent operators strategies for

improving cost efficiencies, identifying best practices, and preventing lease forfeitures. 

o Reducing the cost of the permitting process under DOE’s pilot project with the Texas Railroad

Commission to allow for the electronic filing and approval of drilling and other oil extraction

related permits via the Internet. If the new system is successful in Texas, DOE and the Texas

Railroad Commission will encourage other state regulators to use this model and adopt similar

all electronic systems.

o Developing renewable electrical technologies capable of economically doubling

non-hydroelectric renewable generation capacity to a total of 25,000 megawatts or more by the

year 2010 (a 60% increase over 1997 generation levels), and maintaining the viability of

existing hydroelectric power sources. Development of increased renewable electric power

generating capacity will contribute to the reduction of non-renewable energy demand by

electric utilities.

o Accelerating the development and market adoption of environmentally friendly technologies

through a combination of increased investments in research, development, and early

deployment programs. The Department of Energy has estimated that the accelerated

development of biomass liquids fuel technology, along with voluntary programs that promote

rapid adoption of alternative fuels vehicles, could displace 100 million barrels of oil per year by

2005.

o Reduce red tape and regulatory burden imposed on domestic oil producers and refiners through

federal interagency, state, and industry dialog and action. Provide agencies guidance on how to

streamline laws and regulations to reduce burden while preserving the environment and public

health. 
III-35

The combination of increased natural gas utilization, the increased use of renewable electrical

technologies, the accelerated development of biomass liquids fuel technology, and the recovery

of more oil and gas from existing reservoirs and the preservation of those reservoirs will

collectively reduce oil consumption and limit our dependence on imported oil.

Goal #4 -- Expand future energy choices by pursuing continued progress in science and

technology to provide future generations with a portfolio of clean and reasonably priced energy

sources:

Advances in science and technology are essential in terms of the United States achieving its

economic, environmental and energy security objectives. Technological innovation can

significantly decrease the domestic finding and development costs for natural gas and oil, thereby

preserving and expanding the domestic resource base and improving the economics. These

programs include:

o Continuing the natural gas supply program, especially for the new emerging resource program

in methane hydrates. 

o Accelerating the advanced oil recovery program, by supporting RD&D to promote the use of

advanced technology by the private sector, to increase the productive capacity of our domestic

resources.

o Conducting applied research to create acceptable alternatives to petroleum-based transportation

fuels including converting cellulose in waste and other materials into liquid fuels and obtaining

hydrogen and other fuels, both gaseous and liquid, from natural gas and coal.

o Conducting basic research to provide the foundation for technological breakthroughs that are

beneficial to energy development and environmental protection.

o Intensifying basic research on global climate change and long-term, innovative systems for

carbon cycle management and carbon dioxide sequestering.

o Continued budgetary increases over current levels for technology partnerships with the private

sector.

Goal #5 -- Cooperate internationally on global issues and develop the means to address global

economic, security, and environmental concerns:

This goal emphasizes the United States development and implementation of appropriate policies

and regulations through active and sustained participation in multilateral international and

regional forums as well as bilateral contacts with key countries. Achievement of this objective

requires:
III-36

o Promoting the development of open, competitive international energy markets through

U.S. participation in multilateral groups such as the International Energy Agency, the

International Atomic Energy Agency, the Asia Pacific Economic Cooperation Group, and

other multilateral institutions. In addition, the United States should continue its existing

dialogue with our neighbors in Canada and Mexico and our evolving relationship with the

countries of the Former Soviet Union:

-- Working with our neighbors in Canada and Mexico, the Administration looks

forward to developing cooperative agreements with the regulatory bodies to

promote an efficient and integrated North American natural gas and electricity

system. 

-- Promoting the development of worldwide crude oil and natural gas transportation

networks to move South American, Caspian, and Central Asian, for example, oil

and natural gas to world markets and further diversify world energy supplies.

o Finally, emphasizing free trade and the promotion of American exports helps develop the

world's free market economy and prevents over reliance on any single region of the

world.

Other issues

Regulatory Reform

The Department of Commerce’s Bureau of Export Administration (BXA) is in the process of

reviewing its crude oil short supply regulations and identifying reforms that would allow U.S.

firms to be on equal footing with their foreign competitors. BXA is reviewing a number of

changes, including: 1) creating a license exception to allow the export of crude oil to Canada

and Mexico without an individual license; and 2) establishing a license exception to allow the

export of California heavy crude oil sold, as part of bunker fuel oil mixtures, to foreign ships

visiting US ports. The interagency group recommends that BXA proceed expeditiously with its

short supply reform package.

Industry Proposals

During the review, the Department received comments from oil companies and trade associations

about several possible modifications to the Federal Tax Code that the commenters believe would

provide support for the domestic oil industry. The Department did not evaluate these proposals

as part of its Section 232 investigation. Instead, the Department recommends that the National

Economic Council evaluate the industry proposals.
III-37
1. Comprehensive National Energy Strategy, United States Department of Energy, April

1998, page 4 (hereafter referred to as Comprehensive National Energy Strategy).

2. 1988 Commerce 232 Report, Section V, pp. 2-5, U.S. Department of Commerce, and

1994 Commerce Section 232 Report, Section III, p. 1, US Department of Commerce. 

3. Comprehensive National Energy Strategy, pp. 9-10. 

4. Comprehensive National Energy Strategy, pp. 9-30.

5. Comprehensive National Energy Strategy, p. 20.

REFERENCES
APPENDIX A

[Federal Register: May 4, 1999 (Volume 64, Number 85)]

[Notices]

[Page 23820-23821]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr04my99-39]

DEPARTMENT OF COMMERCE

Bureau of Export Administration

[Docket No. 990427107-9107-01]

Initiation of National Security Investigation of Imports of Crude Oil and Petroleum Products

AGENCY: Bureau of Export Administration, Commerce.

ACTION: Notice of initiation of national security investigation and request for public comments.

SUMMARY: This notice is to advise the public that an investigation has been initiated under

section 232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1862), to determine the

effects on the national security of imports of crude oil and petroleum products. Interested parties

are invited to submit written comments, opinions, data, information, or advice relative to the

investigation to the Bureau of Export Administration, U.S. Department of Commerce.

DATES: Comments must be received by June 3, 1999.

ADDRESSES: Written comments (three copies) should be sent to Bernard Kritzer, Manager,

Special Projects, Office of Chemical and Biological Controls and Treaty Compliance, Bureau of

Export Administration, U.S. Department of Commerce, Room 2093, Washington, D.C., 20230.

FOR FURTHER INFORMATION CONTACT: Scott Hubinger, Senior Policy Analyst, Office of

Chemical and Biological Controls and Treaty Compliance, Bureau of Export Administration,

U.S. Department of Commerce, (202) 482-3825.

SUPPLEMENTARY INFORMATION:

 Background

On April 28, 1999, the Department of Commerce initiated an investigation under section

232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1862), to determine the effects

on the national security of imports of crude oil and petroleum products. The findings and

recommendations of the investigation are to be reported by the Secretary of Commerce to the

President not later than January 29, 2000.
The imported crude oil and refined petroleum products to be investigated include:

--Crude oil, under 25 degrees API

--Crude oil, 25 degrees API or more

--Motor fuel, including motor gasoline, naphtha-type jet fuel, and kerosene jet fuel

--Motor fuel blending components

--Kerosene derived from petroleum, shale oil, or both, except motor fuel

--Naphthas derived from petroleum, shale oil, natural gas, or combinations thereof, except motor 

 oil 

--Fuel oils, under 25 degrees API --Fuel oils, 25 degrees API or more

--Mineral oil of medicinal grade derived from petroleum, shale oil, or both

--Lubricating oils and greases, derived from petroleum, shale oil, or both, with or without 

additives

--Mixtures of hydrocarbons not specifically provided for, derived wholly from petroleum, shale 

oil, natural gas, or combinations thereof, which contain by weight not over 50% of any single 

hydrocarbon compound

--Paraffin and other petroleum waxes

--Petroleum coke

--Bitumen

--Asphaltum, bitumen, and limestone-rock asphalt

--Petroleum gases (natural gas liquids) and other hydrocarbons

This investigation is being undertaken in accordance with part 705 of the National Security

Industrial Base Regulations (15 CFR parts 700 to 709) (the ``regulations''). Interested parties are

invited to submit written comments, opinions, data, information, or advice relevant to this

investigation to the Office of Chemical and Biological Controls and Treaty Compliance, U.S.

Department of Commerce, no later than June 3, 1999. The Department is particularly interested

in comments and information directed to the criteria listed in Sec. 705.4 of the regulations as they

affect national security, including the following: (a) Quantity of the article in question or other

circumstances related to the importation of the articles subject to the investigation; (b) Domestic

production and productive capacity needed for those articles to meet protected national defense

requirements; (c) Existing and anticipated availability of human resources, products, raw

materials, production equipment, and facilities to produce these items; (d) Growth requirements

of domestic industries to meet national defense requirements and/or requirements to assure such

growth; (e) The impact of foreign competition on the economic welfare of the domestic industry;

and (f) The displacement of any domestic products causing substantial unemployment, decrease

in the revenues of government, loss of investment or specialized skills and productive capacity,

or other serious effects. All materials should be submitted with three copies. Public information

will be made available at the Department of Commerce for public inspection and copying.

Material that is national security classified information or business confidential information will

be exempted from public disclosure as provided for by Sec. 705.6 of the regulations. Anyone

submitting business confidential information should clearly identify the business confidential

portion of the submission.

File a statement justifying nondisclosure and reference to the specific legal authority claimed,

and provide a non-confidential submission which can be placed in the public file. 
Communications from agencies of the United States Government will not be made available for

public inspection. The public record concerning this notice will be maintained in the Bureau of

Export Administration's Records Inspection Facility, room 6883, U.S. Department of Commerce,

14th Street and Constitution Avenue, NW, Washington, DC 20230, telephone (202) 482-5653. 

The records in this facility may be inspected and copied in accordance with the regulations

published in part 4 of title 15 of the Code of Federal Regulations (15 CFR 4.1 et seq.). 

Information about the inspection and copying of records at the facility may be obtained from Mr.

Henry Gaston, the Bureau of Export Administration's Freedom of Information Officer, at the

above address and telephone number.

Dated: April 28, 1999.

R. Roger Majak,

Assistant Secretary for Export Administration.

[FR Doc. 99-11090 Filed 5-3-99; 8:45 am]

BILLING CODE 3510-33-P 
APPENDIX B

SUMMARY OF PUBLIC COMMENTS

In response to the Department’s request for comments as part of its investigation under Section

232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1962), to determine the effects

on the national security of imports of crude oil and petroleum products, the Department received

17 comments. Among those submitting comments were foreign governments, trade and

professional associations (including those representing petroleum producers, refiners, and

distributers of refined petroleum products), companies, research foundations, and individuals. 

This appendix summarizes those comments.

Most commenters acknowledged the decline in U.S. oil production and our growing dependence

on imported oil. The commenters held varying opinions, however, on the significance of this

decline on U.S. national security. Some emphasized the role of inexpensive imported oil in the

decline of U.S. oil production and cited recent increases in the number of marginal well shut-ins

and decreases in industry employment and operating drilling rigs as indicators of this impact. 

They stated that the availability of low cost foreign oil made it difficult for domestic producers to

secure the necessary capital to explore for and develop new reserves. They also stated that

periodic declines in domestic production and exploration were destroying the infrastructure of

the U.S. petroleum industry by making it more difficult to retain and recruit the necessary

technically skilled work force.

However, most commenters opposed the use of import adjustment actions, as provided for under

Section 232 of the Trade Expansion Act. They argued that import fees, quotas, or other

restrictions would help domestic producers only at a steep cost to other sectors of the U.S.

economy. However, most of those who opposed import restrictions were not unsympathetic to

other kinds of assistance such as tax incentives, opening additional areas to exploration, royalty

relief, etc.
SUBMITTERS OF PUBLIC COMMENTS:

Foreign Governments BXA FOIA No. Page No.

Embassy of Canada OIL-022 B-4

Ambassador Raymond Chrétien

Embassy of Mexico OIL-010 B-4

Honorable Javier Mancera, Minister

Embassy of Venezuela OIL-014 B-5

Washington, DC

Province of Alberta, Canada OIL-021 B-5

Honorable Dave Hancock

Minister of Intergovernmental and Aboriginal Affairs

Trade and Service Associations BXA FOIA No. Page No.

Air Transport Association of America OIL-019 B-5

American Petroleum Institute OIL-009 B-6

Independent Fuel Terminal Operators Association OIL-015 B-7

Andrea Grant, Counsel

Independent Petroleum Association of America OIL-017 B-7

National Stripper Well Association

George Yates, Chairman IPAA

Danny Biggs, President NSWA

New England Fuel Institute OIL-011 B-8

John F. Sullivan

Executive Vice President and CEO

North Texas Oil & Gas Association OIL-018 B-9

Society of Independent Gasoline Marketers of America OIL-020 B-9

Collier, Shannon, Rill, & Scott

Attorneys-at-Law

Corporations BXA FOIA No. Page No.

CITGO Petroleum Corporation OIL-013 B-10
David J. Tippeconnic

President & Chief Executive Officer

Irving Oil Corporation OIL-012 B-10

Brian Monkhouse

Research Foundations BXA FOIA No. Page No.

Petroleum Industry Research Foundation, Inc. OIL-008 B-10

John Lichtblau, Larry Goldstein, and Ron Gold

Private Individuals BXA FOIA No. Page No.

Bryan C. M. Chastel De Boinville OIL-016 B-11

Dale W. Steffes OIL-007 B-11

George Mercier OIL-006 B-12
COMMENTS RECEIVED AS PART OF NATIONAL SECURITY

 INVESTIGATION OF IMPORTS OF CRUDE OIL AND

 REFINED PETROLEUM PRODUCTS

Embassy of Canada

Raymond Chrétien, Ambassador

Comments dated May 20, 1999

In his comments, Ambassador Chrétien stressed the importance and size of the U.S.-Canadian

trading relationship and the inherent security and reliability of U.S. energy imports from Canada. 

“Canada has long been properly regarded as the most secure source of imported energy supplies

for the United States. The energy provisions of the Canada-U.S. Free Trade Agreement and the

NAFTA further enhance the reliability and security of the two-way trade in this sector.”

While not wishing to pre-judge the current Section 232 investigation, Ambassador Chrétien also

recalled that “the Department’s 1994 report on the effects of petroleum imports on national

security recommended, inter alia, that the President not use his Section 232 authority to adjust

imports, and that the President address oil import concerns through a variety of initiatives,

including increased emphasis on free trade and the development of new energy supplies in this

hemisphere and other areas friendly to the United States.”

Embassy of Mexico

Javier Mancera, Minister

Comments dated June 3, 1999

Minister Mancera expressed the concern of the Mexican Government about the possibility of a

U.S. import adjustment under Section 232, and stated the belief that such an action would “harm

the economic well being of both countries with long-lasting and unpredictable consequences.”

“Mexico believes that no justification exists for the use of measures that constitute exceptions to

the multilateral rules of trade, furthermore in a manner which would constitute a means of

arbitrary restriction to commercial flows and would inevitably open the door for other Members

of the WTO to apply similar exceptions in other cases.”

Embassy of Venezuela

Washington, DC

Comments dated June 7, 1999

In comments submitted on the behalf of the Government of Venezuela, the Embassy of

Venezuela in Washington, DC, pointed out that “Venezuela and the United States have

developed a strong energy relationship that has engendered increasingly broader economic

development and investment opportunities in both countries.” They emphasized that 

“Venezuela is not an adversary of domestic U.S. producers, large or small. Rather, Venezuela

has a community of interests with U.S. producers in defending oil prices.” They further stated

that “our common goal is to maintain world oil prices at reasonable levels to permit adequate
returns for producers in the United States as well as in Venezuela, and to make possible the

significant investments that will be needed in order to satisfy the growing world-wide demand for

oil.” Finally, the Embassy of Venezuela recalled that “as one of the world’s largest exporters of

oil, and the largest foreign supplier of crude oil and petroleum products to the United States,

Venezuela has never stopped the flow of its oil, for political or any other reasons, to the United

States, or any other market.”

Province of Alberta, Canada

Honorable Dave Hancock

Minister of Intergovernmental and Aboriginal Affairs

Comments dated June 3, 1999

In his comments, Minister Hancock recalled that “Alberta has had a long and productive energy

relationship with the United States and has always advocated an open trade and investment

environment.” He further pointed out that “Canada has long been regarded as the most secure

source of imported energy supplies for the United States” and that “the energy provisions of the

Canada-U.S. Free Trade Agreement and NAFTA further enhance the mutual sense of security

with respect to ensuring a reliable two-way flow of energy between our countries.” Finally, he

recommended that the “investigation focus on national security related to offshore imports only,

and that Canada be excluded.”

Air Transport Association of America (ATA)

James L. Casey

Vice President and Deputy General Counsel

Comments dated June 4, 1999

In his comments, Mr. Casey emphasized the importance the U.S. airline industry places on the

free exercise of the petroleum marketplace and how their ability to serve the flying and shipping

public is dependent on that marketplace.

“The operations of our members, and thus their ability to serve the traveling and shipping public,

are dependent upon their access to economical sources of kerosene jet fuel. They consequently

are vitally interested in any regulatory proceeding that could affect the availability and price of jet

fuel.” Mr. Casey noted that “costs from import quotas or fees inevitably would be reflected in

higher prices to consumers of air transportation services or diminished service, or both. Lowdensity domestic markets, i.e., smaller communities, would be at particular risk.”

American Petroleum Institute (API)

Comments dated June 3, 1999

In their comments, the American Petroleum Institute recognized the gains made by previous

Republican and Democratic Administrations in controlling the risk associated with imported oil.

“First, they have recognized that global oil markets are heavily influenced by a small contingent
of low cost producing nations in the Persian Gulf. Second, they have recognized that the supply

behavior of those countries is the outcome of market, political, and military circumstances which

often give rise to unpredictable supply swings and price volatility, and that explicit energy policy

measures are required to manage the economic vulnerability associated with this volatility. 

Third, they have recognized that the appropriate strategic energy policy is to rely principally on

market forces to promote the development and security of alternative supplies. Generally, this

policy of primary reliance on markets has been extremely effective in managing what 25 years

ago was seen as growing vulnerability to supply disruption and to the use of oil as a political

weapon by suppliers intent on subverting U.S. foreign policy goals. Massive new supplies have

been developed outside of OPEC, OPEC’s market share has been reduced, and new technology

has greatly expanded the frontiers of non-OPEC supply.”

However, API noted that sharp temporary declines in world oil prices are a threat to U.S.

domestic production and, in the long term, to the U.S. economy and national security.

“First, while the temporary decline confers unambiguous short-term benefits to consumers, it

also increases the market share of the low cost OPEC producers, setting the stage for potentially

higher future prices. Second, the asymmetric response to prices of supply from marginal

petroleum producing properties may cause such loses of market to OPEC to be permanent and

cumulative even if the price decline is short lived. That is, marginal oil and gas wells are often

not easily restarted once the abandonment decision is made. Consequently, a short term price

decline may result in a permanent loss of production capacity, and a fluctuating price may lead to

progressive deterioration of marginal production capacity.”

API does not support the use of a direct trade adjustment to reduce import dependence and in

their words “it is not likely that such measures represent a cost effective means to reduce the

risks associated with such dependence, and some likelihood that they might even increase them. 

Such controls would support U.S. domestic prices and protect domestic production, at least

temporarily. However, they would also raise energy costs to all consumers and industries in the

U.S., while depressing global energy demand and reducing world oil prices, reducing non-OPEC

supplies outside the United States.”

API does recommend a number of actions to support domestic production. Some of their

recommendations are: the provision of low cost emergency loans to smaller independent

producers; the provision of royalty relief on properties made marginal by temporary collapses in

prices; the provision of blanket extensions of term on leases where an exploration well has been

drilled, or where there is a suspension of exploration or production; the provision of temporary

tax credits to prevent abandonment of marginal wells during a temporary price collapse; the

reduction of the cost, complexity and time required in the permitting processes for oil and gas

exploration and development; and the expensing of items such as geological and geophysical

(G&G) and lease delay rentals.

Independent Fuel Terminal Operators Association (IFTOA)

Andrea Grant, Counsel

Comments dated June 3, 1999
The Independent Fuel Terminal Operators Association argued that imports of petroleum do not

threaten to impair the national security, and accordingly, no adjustment of imports is necessary.

“U.S. dependence on foreign sources, under current situations and for the foreseeable future,

does not translate into vulnerability of the United States to disruptions in supply and price

volatility. Diverse, secure sources, coupled with the availability of the Strategic Petroleum

Reserve and a high gross domestic product, protect the national security.”

 

However, the IFTOA supports the adoption of alternative measures to provide effective, targeted

assistance to U.S. producers who have been hurt by low oil prices.

“Such measures should include: tax credits for marginal well production; special tax treatment

for income derived from recovered inactive wells; modification of royalty policies; expansion of

oil recovery credit to cover additional recovery techniques; modification of Alternative Minimum

Tax to allow carry-back for unused credits and to apply regular tax depreciation schedules; and

credit for exploration and development.”

Independent Petroleum Association of America and National Stripper Well Association

George Yates, Chairman IPAA

Danny Biggs, President NSWA

Comments dated June 3, 1999

“In rough terms, U.S. oil production comes from three areas - Alaska, the Gulf of Mexico

offshore, and the onshore lower 48 states. Currently, about 20 percent of domestic production

comes from Alaska, about 20 percent comes from the Gulf of Mexico offshore, and about 60

percent comes from the onshore lower 48 - one-third of this from ‘marginal wells’ producing less

than 15 barrels per day. Since 1986, investment by major oil companies has shifted to

exploration and development targets outside the United States. Within the U.S. majors are now

primarily interested in developing Alaska and the deep water offshore. As a result the lower 48

onshore has increasingly become the province of the independents. The independents’ share of

this production has increased from about 45 percent in the mid-1980s to over 60 percent in

1997.”

The following information submitted by the IPAA and the NSWA in their comments point to the

damage they allege has been done to the U.S. oil and gas extraction industry and in particular to

independent oil producers due to the recent (low) oil prices: (1) domestic production has

dropped below 6 million barrels per day; (2) operating rig counts have hit historic lows - from

November 1997 through April 1999, the domestic rig count dropped 50 percent; (3) over 56,000

jobs have been lost in the industry since November of 1997; (4) more than 136,000 oil wells (25

percent of total U.S. wells) and 57,000 gas wells have been shut down; and (5) capital budgets

for oil and gas development have been savaged - down 25-30 percent with the biggest cuts in the

U.S.

Recommendations by the IPAA and the NSWA to reverse these loses include: (1) a counter

cyclical marginal well tax credit; (2) a countercyclical restructuring of the calculation of

Alternative Minimum Taxable Income (AMTI); (3) to eliminate limitations on using percentage
depletion in excess of 65 percent of net taxable income, and to allow excess percentage depletion

to be carried back against past taxes; (4) to allow for the expensing of geological and

geophysical costs and delayed rental payments; (5) to work with the Small Business

Administration to use existing authority to provide small business administration loans to oil

producers and related industry; (6) to provide a $500 million guaranteed loan program to back

loans provided by private financial institutions to qualified oil and gas producers and the

associated oil and gas service industry; (7) allow marginal oil well operators producing on public

lands to suspend operations for up to two years without losing their leases; and (8) speed up the

processing of permits and applications to operate on public lands.

New England Fuel Institute (NEFI)

John F. Sullivan

Executive Vice President and CEO

Comments dated June 3, 1999

The New England Fuel Institute believes that oil imports do not pose a threat for the following

reasons: (1) oil imports come from diverse and far more stable sources than imports during

earlier Section 232 investigations; (2) the Strategic Petroleum Reserve provides protection to the

economy from a supply disruption; (3) U.S. military requirements in Yugoslavia and elsewhere

in the world are being met adequately; and 4) the U.S. economy is doing exceptionally well.

They believe that a trade adjustment such as a tariff or quota would: (1) harm the U.S. economy,

by slowing growth and reducing employment; (2) make energy-intensive industries less

competitive at home and abroad; and (3) damage the independent home heating industry and

disproportionally damage the New England economy.

However, NEFI supports targeted assistance to independent domestic producers who have

experienced financial difficulties as a result of lower petroleum prices. They stated that “relief

for these companies should not come at the expense of the U.S. economy and other segments of

the industry.”

North Texas Oil & Gas Association

Comments dated June 8, 1999

The North Texas Oil and Gas Association (NTOGA) believes that “every major indicator from

the domestic oil and gas industry has declined since Commerce’s finding in 1994.” They report

that “U.S. crude oil production fell to the lowest level in more than 50 years in January of 1999

when only 5.8 million barrels per day were produced,” that “the drilling rig count, which is

probably the most watched barometer of oil and gas industry activity, hit all-time lows on April

30, 1999, when only 494 rigs were working,” that “more than 137,000 oil wells and 57,000

natural gas wells have shutdown since November of 1997," and an “estimated 41,000 lost jobs in

the oil industry.” They recommend “implementing an environmental equalization fee of $3 to $4

per barrel of imported oil and/or petroleum product” to “level the playing field with domestic

producers.” 

Society of Independent Gasoline Marketers of America
R. Timothy Columbus, Counsel

Comments dated June 3, 1999

The Society of Independent Gasoline Marketers of America stated that “the independent gasoline

marketer’s position in the market is dependent upon the existence of numerous sources of supply,

both foreign and domestic. If any of these sources were eliminated by any means, then the

position of independent marketers would be severely threatened. If independent marketers

disappear, then competition in the wholesale and retail gasoline markets would be restricted and

gasoline prices would increase significantly.”

They also argued that “the U.S. enjoys an extraordinary secure position, both because of its

continued domestic production and its secure sources of supply of crude oil and petroleum

products imports.” And because “there is a significant distinction between reliance and

vulnerability with respect to crude oil import, imports of crude oil do not pose a threat to the

national security of the U.S.” 

CITGO Petroleum Corporation

David J. Tippeconnic

President & Chief Executive Officer

Comments dated June 3, 1999

CITGO, owned by PDV America, Inc., an indirect wholly-owned subsidiary of Petróleos de

Venezuela, S.A., the national oil company of Venezuela, stated that “any actions by the President

to impose artificial restraints on imports are not warranted by current or foreseeable conditions. 

Insulation from world markets will fail and would entail costs that are not sustainable in a

competitive and interdependent global marketplace. CITGO encourages the Department’s

investigation to focus attention on the benefits of reforming U.S. energy, tax, and regulatory

policies to enable the petroleum industry to continue to effectively meet the nation’s energy

needs.”

Irving Oil Corporation

Brian Monkhouse

Comments dated June 3, 1999

“Irving urges the Department to determine that petroleum imports do not threaten to impair the

national security of the United States. Diverse, secure sources of supply, particularly those from

Canada, minimize U.S. vulnerability. However, if the Department finds such a threat, certainly

no restrictions on imports, particularly those from Canada, should be imposed. Such restrictions

would not serve national security objectives, would injure U.S. independent marketers supplied

by Canada, and in turn, their customers, and would potentially violate NAFTA.” 

Petroleum Industry Research Foundation, Inc. (PIRINC)

John Lichtblau, Larry Goldstein, and Ron Gold

Comments dated May 1999.
In their review of prior Section 232 investigations in 1988 and 1995, the Petroleum Industry

Research Foundation noted that “neither investigation recommended any direct presidential

action to adjust imports, concluding that costs would far exceed benefits.” But that in 1988 “the

Commerce Department recommended legislative actions to improve domestic supply and add to

the SPR and was silent on energy conservation” and that “the 1995 investigation highlighted

current Administration policies to promote efficiency and alternatives to oil, but virtually

dismissed the supply-side of the equation.”

PIRINC expressed the belief that “the current investigation would serve the public interest best if

it addressed both supply and demand considerations in formulating its recommendations.” They

further stated that “any such discussion must start with the recognition that a continued, high

level of oil imports is inevitable and not necessarily undesirable. As previous investigations have

pointed out, attempts to significantly curtail imports through tariffs or quotas would impose very

high costs on the U.S. economy. Moreover, there are more efficient ways of improving oil

supply security: diversification of sources, and strategic inventories.”

As noted by PIRINC, “the past year however has highlighted an additional concern; the

vulnerability of the domestic industry to temporary sharp declines in world oil prices.” They go

on to say that “while there are strong arguments against protecting the domestic industry from

long-term low oil prices, there is a case for recognizing the vulnerability of the industry, and

potential, permanent losses of secure supply, from temporary price declines.”

To remedy this problem, PIRINC recommends that “Federal royalty policies could be modified

to incorporate a sliding scale, with lower rates when prices are depressed and normal rates

otherwise.” They also recommend that “while there are still opportunities in the onshore lower

48 states, the least mature, and most promising, areas of the country are to found in the Outer

Continental Shelf and in Alaska.” As they note, although “parts of both, including ANWR, are

currently off-limits to the oil industry, permitting environmentally sound exploration and

development in these areas was a recommendation of the 1988 investigation. The current

prohibitions should not stand in the way of new efforts to reconcile environmental concerns with

access to potential new sources of domestic supply.”

Bryan C. M. Chastel De Boinville

Comments dated June 1, 1999

“The question of whether national security has been harmed by crude oil imports has been

investigated by the Secretary of Commerce again and again. The answer has been made in the

affirmative again and again. The situation today is every bit as threatening as at any time in the

past, even more so. And yet Sec. 232 has yet to be used to provide an effective remedy. 

Sometimes administrations fooled themselves into thinking that their energy policies were

working; at other times overt politics intervened to prevent remediation.”

“It is time to use the statute as Congress intended and protect our nation from even greater danger

by directly managing our dependence on oil imports. Sec. 232 restrictions will not be enough to

solve the underlying problems, but they are a necessary first step. However, this step should only

be taken if the Administration is willing to accept the consequences of this extraordinary remedy,
many of which are harmful, and shows it has the political will to withstand the storm of criticism

that action under Sec. 232 will inevitably produce.” 

Dale W. Steffes

Comments dated May 13, 1999

Mr. Steffes, president of P&FC, an oil consulting group, stated that “Planning & Forecasting

Consultants (P&FC) have designed a National Energy Stability Policy (NESP) for the United

States. This NESP will bring greater price and volume stability to the domestic energy industry. 

This NESP is a ‘market intervention’ to keep the United States from becoming too dependent on

foreign energy sources. This national energy stability policy can be privately administered by a

Private National Energy Stability Agency (PNESA).”

“This NESP would allow the President to limit the amount of energy imported into the United

States to a prescribed percentage. He would set this percentage based on his judgement of the

national security implications, the balance of trade considerations and the international economic

competitiveness. Our initial recommendation is that the President freeze the total energy imports

at today’s current level of 20 percent, with oil being at 50 percent.”

“Limiting the amount of energy imported, will create a dual-price world energy system, one price

for the United States and another, lower price for the rest of the world. The party with the right

to import this cheaper energy into the U.S. would receive an economic benefit.”

“The beneficial rights to import this cheaper energy will be distributed proportionally to the

domestic energy producers on a BTU basis. This policy in effect would subsidize domestic

producers, enhancing domestic production.”
Appendix C

International Activities of U.S. Majors

A large number of U.S. integrated firms have shifted their exploration efforts to offshore

developments and other countries. For example, Chevron is active in Kazakhstan (6 to 9 billion

barrels of crude oil reserves), Angola offshore (projected 1 billion barrels of crude oil),

Newfoundland, Canada offshore (expected 650 million barrels of crude oil), United Kingdom

North Sea (an estimated 3 trillion cubic feet of natural gas reserves and 145 million barrels of

condensate and natural gas liquids), Gulf of Mexico deep water (expected to produce 160 million

barrels of crude oil), Western Australia (an estimated 1.3 trillion cubic feet of natural gas

reserves), and in Nigeria (an estimated 1999 production rate of 295 million cubic feet of natural

gas per day). 1

Phillips Petroleum is replacing its U.S. reserves by conducting exploration operations in 20

countries and is actively producing in Norway, the United Kingdom, Nigeria, Canada, and China

as well as in the United States. Phillips’ strategy is to increase oil and natural gas reserves while

keeping finding and development costs down. They report that their average world-wide finding

and development cost for the period of 1992 to 1996 was $3.79 per barrel of oil equivalent and

that they replaced over 118% of their production with new reserves during this same time

period.2

Mobil is active in eastern Canada, Nigeria, Equatorial Guinea, Kazakhstan, Turkmenistan,

Azerbaijan, Qatar, Venezuela, Peru, Norwegian North Sea, Australia, and in Papua New Guinea. 

They report additions to proved reserves of 936 million barrels of oil equivalent for a total of 7.2

billion barrels of oil, an 11 year supply at current production rates.3

ARCO’s exploration and production activities are focused in the deep water of the Gulf of

Mexico, Indonesia, North Africa, the northwest Atlantic Margin (off western Europe), northern

South America, and the north slope of Alaska. This company’s total international production is

currently at 160,000 barrels of crude oil equivalent per day. 4

Texaco has a highly focused exploration program concentrated in the deep water of the Gulf of

Mexico, Latin America, and in West Africa. They currently produce mainly in the U.S., United

Kingdom North Sea, Middle East, and in the Pacific Rim. Texaco reports that in 1998, they

replaced 166% of their 1998 worldwide oil and gas production with new reserves.5

Finally, Exxon has exploration and/or production activities in the United States, Canada,

Colombia, Peru, Bolivia, Venezuela, Trinidad, the Netherlands, the United Kingdom, France,

Egypt, Niger, Nigeria, the Congo, Angola, Chad, Germany, Norway, Azerbaijan, Kazakhstan,

Abu Dhabi, Yemen, Indonesia, Australia, Papua New Guinea, Malaysia, Vietnam, Thailand,

China, and in Japan. Exxon reports daily worldwide production rates of 1.6 million barrels of oil

and 6.3 billion cubic feet of natural gas.6
REFERENCES

I: www.chevron.com.

II: www.phillips66.com

III: www.mobil.com

IV: www.arco.com

V: www.texaco.com

VI: www.exxon.com