An Assessment of Alternative Economic

Stockpiling Policies

August 1976

NTIS order #PB-273191
OFFICE OF TECHNOLOGY ASSESSMENT

DIRECTOR’S OFFICE

Emilio Q. Daddario, Director

Daniel V, De Simone, Deputy Director

MATERIALS ADVISORY COMMITTEE

James Boyd, Chairman

Materials Associates

Earl H. Beistline

University of Alaska

Seymour L, B1um

The MITRE Corp.

Lloyd M, Cooke*

Union Carbide Corp.

Frank Fernbach

United Steelworkers of America

Edwin A. Gee*

E, I. du Pent de Nemours & Co., Inc.

N. Bruce Hannay

Bell Laboratories

Julius J. Harwood

Ford Motor Co.

James A, Kent

Michigan Technological University

Hans H. Landsberg

Resources for the Future, Inc.

Elburt Osborn

Carnegie Institution of Washington

R. Talbot Page

Resources for the Future, Inc.

N. E. Promisel

Independent Consultant

Lois Sharpe

League of Women Voters

Bruce M. Hannon George A. Watson*

University of Illinois at Urbana-Champaign Ferroalloys Association

William J. Harris, Jr, J, H. Westbrook

Association of American Railroads General Electric Co.

* Members of Subcommittee on Economic Stockpile Policy.

MATERIALS PROGRAM STAF F

John B, Wachtman, Jr., Program Manager Richard Wright, Staff

Albert E. Paladino, Program Manager Patricia Poulton, Staff

Harry H. Herman, Jr,, Project Leader Spencer M. Beresford, Staff

James L. Holt, Project Leader Gary L. Thomas, Staff

Frank Huddle, Consultant (Congressional Research Service)

CONTRACTORS

Ultrasystems, Inc. . Robert R. Nathan Associates . The Futures Group

CONSULTANTS

Leonard Fischman, Resources for the Future, Inc. Max Osias, Materials Specialist

Earl Hayes, Materials Associates Jonathan Rintels, Attorney at Law

Jacob Levin, Materials Specialist John Tilton, Pennsylvania State University

. . . 111
T ECHNOLOGY ASSESSMENT B O AR D Congress of the United States EMILIO Q. DADDARIO

DIRECTOR

OLIN E. TEAGUE, TEXAS, CHAIRMAN

CLIFFORD P. CASE. N. J., VICE CHAIRMAN OFFICE OF TECHNOLOGY ASSESSMEN T DANIEL V. DE SIMONE

EDWARD M. KENNEDY, MASS. MORRIS K. UDALL, ARIZ. WASHINGTON , D.C. 20510 DEPUTY DIRECTOR

ERNEST F. HOLLINGS, S.C. GEORGE E. BROWN, JR., CALIF.

HUBERT H. HUMPHREY, MINN. CHARLES A. MOSHER, OHIO

RICHARD S. SCHWEIKER. PA. MARVIN L. ESCH, MICH.

TED STEVENS. ALASKA MARJORIE S. HOLT, MD.

EMILIO Q. DADDARIO

AUG 23 1976

Committee on Science and Technology

U. S. House of Representatives

Washington, D. C. 20515

Gentlemen:

On behalf of the Board of the Office of Technology Assessment, we are

pleased to forward a report: An Assessment of Alternative Economic

Stockpiling Policies.

The report concludes OTA’S assessment of the attributes and ramifications of a national program to acquire, hold and dispose of materials

for selected economic (nondefense) purposes.

This assessment was performed in accordance with your request to the

Office of Technology Assessment dated December 13, 1974. An earlier

summary of this report was transmitted to the Committee in February

1976.

0lin E. Teague

Chairman

- Sincerely,

.

ice Chairman

Enclosure

iv
T ECHNOLOGY A SSESSMENT B OAR D Congress of the United States EMILIO Q. DADDARIO

OLIN E. TEAGUE, TEXAS, CHAIRMAN

DIRECTOR

CLIFFORD P. CASE, N. J., VICE CHAIRMAN OFFICE OF TECHNOLOGY ASSESSMENT DANIEL V. DE S1MONE

EDWARD M. KENNEDY, MASS. MORRIS K. UDALL, ARIZ. W ASHINGTO N , D.C. 20510

DEPUTY DIRECTOR

ERNEST F. HOLLINGS , S.C. GEORGE E. BROWN, JR , CALIF.

HUBERT H. HUMPHREY, MINN. CHARLES A. MOSHER, OHIO

RICHARD S. SCHWEIKER. PA. MARVIN L. ESCH. MICH.

TED STEVENS, ALASKA MARJORIE S. HOLT, MD. AUG 19,1975 EMILIO Q. DADDARIO

The Honorable 01 i n E. Teague

Chairman of the Board

Office of Technology Assessment

Congress of the United States

Washington, D. C. 20515

Dear Mr. Chairman:

The enclosed report, “An Assessment of Alternative Economic Stockpiling

Policies, ” presents OTA’S analysis of the impacts of implementing one

or a combination of several alternative materials stockpiling policies

for economic (nondefense) purposes.

The assessment was requested by the Chairman and the Ranking Minority

Member of the House Science and Technology Committee, and was prepared

by the Materials Program staff, under the supervision of Dr. A. E.

Paladino, with the assistance of the OTA Materials Advisory Committee,

personnel from three major contractors, and several consultants.

The report specifically: (1) delineates the possible legislative options

which the Congress may want to consider in deliberating the issue of

economic stockpiling; (2) presents the economic, political, social,

institutional, and legal impacts of five economic stockpiling policies;

and (3) suggests possible management and operational guidelines for

establishing and operating an economic stockpile.

While the request for the assessment originated in the House Committee

on Science and Technology, it has been extensively used by the National

Commission on Supplies and Shortages (NCSS) and the Joint Committee on

Defense Production, Subcommittee on Materials Availability. In separate

briefings of both staff and the Commissioners, OTA project personnel have

made concerted efforts to assist the Commission in evaluating the complex

nature and impact of economic stockpiling--including coordinating with

NCSS staff presentations for the August 1976 Engineering Foundation

Conference in Henniker, New Hampshire, on the “Engineering Implications

of Chronic Materials Scarcity. ”

v
—

- 2 -

OTA project personnel also have assisted the staff of the Joint Committee

on Defense Production, Subcommittee on Materials Availability through

several detailed briefings and discussions, as well as during the planning

of their hearings conducted June 8-9, 1976 on the “Purposes and Organization of Economic Stockpiling. ”

EMILIO Q. DADDARIO

Director

Enclosure

v i
PREFACE

This assessment is an analysis of the attributes and consequences of a

national economic stockpile program to acquire, hold, and dispose of

materials for various public purposes. The assessment is one element of a

broad consideration of materials-related problems being undertaken by the

Office of Technology Assessment (OTA) in support of the policymaking activities of Congress. Related projects in the OTA Materials Program concern

materials information systems, recycling and resource recovery, conservation, and minerals accessibility on Federal lands.

The present assessment was requested by the House Committee on

Science and Technology which asked for an analysis of the “legislative options in the uses of a national stockpile to assist in the development and use

of materials technology for public purposes. ” The principal objective of the

assessment is to provide data and information for Congress to use in considering, first, the attributes and consequences of an economic stockpile implemented as a possible national strategy for discouraging or counteracting

materials supply and price problems, and second, what methods are required

to establish and operate such a stockpile. While the assessment is in response

to the House Committee on Science and Technology, the results will also

provide information and analyses useful to Congress at large, as well as to the

National Commission on Supplies and Shortages.

The assessment focuses primarily on materials problems related to sudden discontinuities in the long-range supply/demand of a given material,

resulting in complete or partial disruptions and abrupt price changes. The

study specifically excludes an analysis of food commodities, which are being

analyzed in another OTA assessment, and concentrates on metals and

minerals.

One of the major propositions of the study is that economic stockpiling

policy can and should be made independently of specific materials properties

or characteristics. In contrast, the usual approach for analyzing materials

stockpiling has been to start with specific materials and then develop public

policies to satisify their individual requirements. Furthermore, economic

stockpiling policy should be made and implemented in full consideration of

the expected benefits and costs of such action.

This Final Report was prepared by the Office of Technology Assessment

materials program staff, with contributions from: (1) an Advisory Committee

comprised of individuals drawn from the materials field, academia, labor,

vii
public interest groups, and private industry; (2) several private contractors; as

well as (3) numerous other private and public agencies. The Advisory Committee provided advice and critique throughout the assessment, but does not

necessarily approve, disapprove, or endorse the report, for which OTA

assumes full responsibility.

.,, Vlll
CONTENTS

PREFACE . . . . . . . . . . . . . . .

SUMMARY . . . . . . . . . . . . .

I. INTRODUCTION . . . .

A, Past and Current

1. Background.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . ,,,,,, ,...., . . . . . . . . . . . . ,,.,,, . . . . . . . . . . . . . . . . . . . ,,

Congressional Actions . . . . . . . . . . . . . . . . . . . . . . ... ... .$.....

$$,,.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. The National Commission on Supplies and Shortages . . . . . . . . . . . . . . . . . . .

3. The Energy Policy and Conservation Act of 1975. . . . . . . . . . . . . . . . . . . . . . .

4. Status of Proposed Stockpile Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B. Assessment Scope and Purpose . . . . . . . . ., .;....... . . . . . . . . . . . . . . . . . . . . . . . .

1. Definition of Economic Stockpiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Materials Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Definition of Technology Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Seven Steps in the Generalized Assessment Methodology . . . . . . . . . . . . . . .

5. Functional Logic of Assessment Methodology . . . . . . . . . . . . . . . . . . . . . . . . . .

11 NATIONAL MATERIALS ISSUES RELATED TO ECONOMIC STOCKPILING .,..

A. Increasing U.S. Import Dependence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B, International Cartel Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Conditions Necessary for Successful Cartelization . . . . . . . . . . . . . . . . . . . . . .

2. Materials Cartels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Response of U.S. Market System to Material Problems . . . . . . . . . . . . . . . . . . . . . .

D. Use of U.S. Stockpiles for Economic Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Economic Use of the Strategic Stockpile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Defense Production Act Inventory.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Interaction Among Federal Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

E. Economic Stockpiling in Foreign Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Japan .........,.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4, European Common Market (EEL). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Other Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

III SPECIFIC PURPOSES OF ECONOMIC STOCKPILING . . . . . . . . . . . . . . . . . . . . . . . . . .

A. Conceptual Logic of Economic Stockpiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1, Possible Functions of an Economic Stockpile.. . . . . . . . . . . . . . . . . . . . . . . . . .

2. Economic Trends and Cycles of Stockpiling. . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Types of Benefits and Costs Involved in Economic Stockpiling . . . . . . . . . . .

4. Rationale for Federal Government Support of Economic Stockpiling. . . . . .

5. Total Net Benefits of Economic Stockpiling . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B. Development of Economic Stockpiling Policies for Initial Consideration. . ,,..,

1, National Policy Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Eleven Stockpiling Policies (SP) Studied. .,,.,,.,,,. . . . . . . . . . . . . . . . . . . .

ix

Page

vii

1

11

12

12

13

13

14

16

16

17

17

19

21

25

25

26

27

27

32

33

33

34

35

36

36

36

37

37

37

41

41

41

43

44

45

46

46

46

47
c. Interviews with U.S. Business, Labor, Government, and Civic Action Groups . .

D, Classification of Stockpiling policies for Detailed Analysis . . . . . . . . . . . . . . . . . . .

1. Problem Origin, Function, and Principal Impact Mode of Eleven Policies. .

2, Five Stockpiling Policies Selected for Detailed Analysis . . . . . . . . . . . . . . . . .

E, Decision Criteria—A Model for Developing and Implementing Economic

Stockpiling Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Components of the Decision Criteria Model. . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Materials Selection Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Modified Delphi Technique Used To Identify Problem-Related Materials .

IV. APPROACHES USED TO ASSESS IMPACTS OF ECONOMIC STOCKPILING . . . . .

A. Methods of Analyzing Economic Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. General Description of Economic Welfare Model . . . . . . . . . . . . . . . . . . . . . . .

2. Three Steps in Using the Economic Welfare Model . . . . . . . . . . . . . . . . . . . . .

3. Discussion of Computer Program Developed to Estimate Economic Impacts

of Stockpiling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Economic Damage Not Averted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Economic Impact of Not Establishing a Stockpile . . . . . . . . . . . . . . . . . . . . . . .

B, Methods of Analyzing Noneconomic Impacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Discussion of Relevance Tree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Impacts Relevance Matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

V. POSSIBLE IMPACTS OF ECONOMIC STOCKPILING . . . . . . . . . . . . . . . . . . . . . . . . . . .

A. General Impacts of Economic Stockpiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Political Impacts of Economic Stockpiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Social Impacts of Economic Stockpiling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Market Operations Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B. Economic Impacts of Stockpiling to Discourage or Counteract Cartel or Unilateral

Political Actions Affecting Price or Supply (SP-1). . . . . . . . . . . . . . . . . . . . . . . . . .

1. Derivation of Benefit Function for SP–1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2, Types of Economic Impacts Associated With SP-1... . . . . . . . . . . . . . . . . . . .

3. Estimation of Economic Net Benefits for SP–1 . ..................0).. . .

4. Discussion of Partial Economic Benefits and Costs for Each Phase of

Stockpile Operation for SP–l. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Summary of Economic Net Benefits and Partial Benefits for SP–l. . . . . . . .

c. Economic Impacts of Stockpiling to Cushion the Impacts of Nonpolitical Import

Disruptions (SP–2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Derivation of Benefit Function for SP–2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2, Estimation of Economic Net Benefits for SP–2 . . . . . . . . . . . . . . . . . . . . . . . . .

3. Discussion of Partial Benefits and Costs for Each Phase of Stockpile Operation for SP–2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. 6

. .$ ...........06.

4. Summary of Economic Net Benefits and Partial Benefits for SP–2. . . . . . . .

D. Economic Impacts of Stockpiling to Assist in International Materials Market

Stabilization (SP–3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Derivation of Benefit Function for SP–3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2, Estimation of Economic Net Benefits for SP–3 . . . . . . . . . . . . . . . . . . . . . . . . .

3. Discussion of Partial Benefits and Costs for Each Phase of Stockpile Operation for SP–3.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. ... ..00 ..$...

4. Summary of Economic Net Benefits and Partial Benefits for SP–3. . . . . . . .

48

50

50

51

51

51

52

54

61

61

61

64

69

70

70

70

71

72

77

78

78

81

84

87

87

92

93

99

102

104

104

106

111

113

115

115

118

122

124

x
E. Economic Impacts of Stockpiling to Conserve Scarce Domestic Materials (SP–4)

1. Derivation of the Benefit Function for SP–4 , , ., . . . . . . , . . . . . . , , , , . . . . . .

2. Estimation of Net Benefits for SP–4, , , , , , , , , , . . . , , . . . . . . . . . . . . . . . . , . . .

3. Discussion of Partial Benefits and Costs for Each Phase of Stockpile Operation for SP–4. . . . . . . , . . . ., ... , , , , , , . . . . . , , , , , , , , , , , . . . . . . . . . . . . . . . . .

4. Summary of Economic Net Benefits and Partial Benefits for SP–4. . . . . . . .

F, Economic Impacts of Stockpiling to Provide a Market for Temporary Surpluses

and Ease Temporary Shortages (SP–5) . . . . . . . . . . . . . . . , , . . . . . , , , , , . . . . . . . . .

1. Derivation of the Benefit Function for SP–5 ., . . . . . . . . . . . . . . . . . . . , , ., . .

2. Estimation of Net Benefits for SP–5, . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . .

3. Discussion of Partial Benefits and Costs for Each Phase of Stockpile Operation for SP–5. . . . . . . . . . . . . . . . ., . . . . . . . . . . . . . . . . . . . . ... , , . . . . . . . . . ., ,

4! Summary of Economic Net Benefits and Partial Benefits for SP–5, , . . . . . ,

VI, MANAGEMENT AND INSTITUTIONAL CONSIDERATIONS FOR IMPLEMENTING AND OPERATING AN ECONOMIC STOCKPILE , , , . . . . . , , , . . . . . . . . . . . . . . .

A. Decision Criteria—A Model for Developing and Implementing Economic

Stockpile Policy . . . . . . . . . ... , ., . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . .

1. Components of Decision Criteria Model ., . . . . . . . . . . . . , . . . . . . . . . . . . . . . .

2. Specification of Functional Nature of Stockpile. . . . . . . . . . . . . . . . . . . . . . . . .

B. Information Requirements for an Economic Stockpile ., , . . . . . . . . . . . . . . . . . . . .

1. General Information Requirements. ., . . . . . , , . . . . . . . . . . . . , ., , , , , , . . . . . .

2. Unique Information Requirements ... , . . . . . . ... , . . . , . . . . . . . . . . . . . . . . . .

3. Requirements for a Materials Information System . . . . . . . . . . . . . , , . . . . . . .

4. Conclusions Regarding Information Requirements . . . . . . . . . . . . . . . . . . . . . .

c. Organizational Options for Establishing an Economic Stockpile. . . . . . . . . . . . . . .

1. Safeguards Against Stockpile Abuse. . . . . . , , . . . . . . . . . . . . ., . . . ., . . . . . . . ,

2. Control of Economic Stockpile, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,.

3. Organizational Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

D. Interrelationship of an Economic Stockpile with other Materials Policies, . . . . .

1. Implementing Multiple Stockpile Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Existing U.S. National Stockpiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Foreign National Stockpiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4, International Stockpiles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Other U.S. Materials Policies .......,., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

E. Budget Implications of an Economic Stockpile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Method of Financing an Economic Stockpile . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Discussion of Operating Cost Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Estimation of Operating Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

VII ALTERNATIVES TO ECONOMIC STOCKPILING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A. Reasons for Considering Alternatives to Stockpiling. . . . . . . . . . . . . . . . . . . . . . . ,,

B. Alternative Methods to Increase Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,

1. Direct Subsidies to Producers Working Marginal Resources . . . . . . . . . . . . . .

2. Tax Incentives to Encourage Production From Marginal Resources. ,,,.. .

3. Research and Development To Increase Production From Marginal

Resources or To Process Substitute Materials . . . . . . . . . . . . . . . . . . . . . . . . . .

4, Low Interest Loans and Investment Guarantees To Encourage Exploration

and Production . . . . . . . . , . , . . . . , , , . . . . . . . . . . , . . . , . . . . , . .: , , , . . , , , , , , ,

125

125

127

130

133

134

134

136

140

141

145

146

146

146

148

149

151

151

155

156

156

156

157

158

158

159

160

160

160

161

161

162

163

169

169

170

171

172

173

176

xi
5. Tariff Concessions to Countries Producing Raw Materials. . . . . . . . . . . . . . .

6. Increased Recycling of Secondary Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7. Role of Public Lands in Increasing Domestic Supply. . . . . . . . . . . . . . . . . . . .

c. Alternatives to Maintain Stable Levels of Supply . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Inventory Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Futures Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 Standby Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. International Commodity Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

D, Alternative Methods to Restrict Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10 Conservation .. .. .. .. .. .. . . $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...0.....

2. Substitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Export Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

E, Summary of Alternatives and Impacted Sector Groups . . . . . . . . . . . . . . . . . . . . . .

1. Alternatives to Economic Stockpiling Policies . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Sectors Impacted by Alternatives to Economic Stockpiling . . . . . . . . . . . . . . .

VIII LEGISLATIVE CONSIDERATIONS REGARDING ECONOMIC STOCKPILING . . . .

A. Options for Considering Economic Stockpile Legislation . . . . . . . . . . . . . . . . . . . . .

1. Evolution of Current Public and Private Systems Without Enacting New

Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Congressional Options Without Enacting New Legislation . . . . . . . . . . . . . . .

3. Executive Options Without Enacting New Legislation . . . . . . . . . . . . . . . . .

4. Options Through Enacting New Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . . .

B. Institutional Considerations for Establishing an Economic Stockpile . . . . . . . . . . .

1. Management Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2, Institutional Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Public Policy Issues Related to Establishing an Economic Stockpile . . . . . . . . . . .

IX. GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A, Organizations and Terms—Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

X. REFERENCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A. Stockpiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B. Materials Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Technology Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

D. Cartels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

E. Input-Output Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

APPENDICES

Appendix A—History, Management, and Problems of Stockpiling in the United States

A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B, Legislative History of Stockpiling .........,.. . . . . . . . . . . . . . . . . . . . . . . . . .

C. Legislative and Executive Authority for Stockpiling Programs . . . . . . . . . . .

D. Selection of Stockpiled Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

E. Mobilization Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F. The Stockpile Policy Controversy. .,,.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

G. The Mobilization Readiness Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. .

176

177

178

179

179

181

182

182

185

185

186

187

187

187

187

191

191

191

192

192

192

198

198

198

201

205

205

206

211

211

213

215

216

217

217

221

221

221

223

226

228

229

235

xli
Appendix B—Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A. Long-Term Program for Disposal of Government Stockpiles of Aluminum

B. Titanium Stockpile Program, 1972-75. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Expansion of Copper Producing Capacities: The Defense Production Act of

1950, as Amended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

D. Releases of Copper From the Stockpile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

E. Second Expansion Program, Duval Sierrita Mine . . . . . . . . . . . . . . . . . . . . . . .

F. The Nickel Loan of 1970–71 . . . . . . . . . . . . . . . . . . . . . . ,,, , . .,, , . ..,,,....

G. International Tin Council. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

H. International Cartels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,.

Appendix C—Economic Stockpiling in Foreign Countries . . .,, ., . .,, ,,, . .,.,,..,,

A. The European Economic Community Stockpiling Program. ......,...,.. .

B. Stockpiling in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Stockpiling in France. ....,.,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

D. Stockpiling Incentives in Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendix D—Relevance Trees and Weighting Matrices . . . . . . . . . . . . . . . . . . . . . . . . . .

A. Introduction . . . . . . . . . . ...,,.,,,,,,,,,.,,,, . . . . . . . . . . . . . . . . . . . . . . . . . .

B. Relevance Trees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

c. Impacts Evaluation Matrices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .,...,,.,.,.,,,, . . . . . . . . . . . . . . . . . .

241

241

245

249

251

255

257

260

264

283

283

285

289

291

295

295

296

314

323

. . . Xlll
SUMMARY

Stockpiling critical materials has long been

practiced by the United States to insure a

minimal supply in the event of war, with the

marketplace being relied upon as the primary

means of correcting temporary shortages and

price fluctuations. However, increasing U.S.

dependence on materials imports, together

with increasing competition for materials

among other nations, pose new dangers to the

supply required by a healthy economy—

dangers which neither the strategic stockpile

nor the normal operations of the marketplace

have effectively averted or counteracted.

Stockpiling for economic purposes ha s

therefore been examined by the Office of

Technology Assessment (OTA) as a possible

component of a national strategy for insuring

materials supply during peacetime.

The OTA assessment includes an analysis

of the attributes and consequences, both quantitative and qualitative, of stockpiling nonfood

commodities for selected economic purposes.

The objective of the study was not to develop

economic stockpiling policy, but rather to provide information regarding the options available to Congress in considering such policy.

The economic stockpile assessment was requested by the House Committee on Science

and Technology which asked for an analysis of

the “legislative options in the uses of a national stockpile to assist in the development

and use of materials technology for public purposes. ”

While the assessment was in response to the

House Committee on Science and Technology,

the results also provide information and

analyses useful to the House Committee on

Banking and Currency, the Joint Committee on

Defense Production, the Senate Commerce

Committee, the Senate Committee on Government Operations, the House Armed Services

Committee, and the National Commission on

Supplies and Shortages. The results of this

study are particularly relevant to the work of

the National Commission on Supplies and

Shortages, which is charged with drafting the

“necessary legislative and administrative actions to develop a comprehensive strategic and

economic stockpiling and inventories policy

which facilitates the availability of essential

resources. ”

ASSESSMENT SCOPE

Economic stockpiling is defined in the

assessment as the accumulation and storage of

materials for the express intention of being

able to effect their distribution to accomplish

public purposes other than the wartime

emergency conditions stipulated in the

strategic stockpile. An economic stockpile is

similar to insurance in that acquisition and

holding costs are paid in anticipation of reducing the costs of possible future problems. A

decision to establish an economic stockpile depends on the belief that there will be eventual

net benefits either through deterrence of a

problem or through relief if a problem occurs.

Because an economic stockpile necessarily involves some intervention in the marketplace,

it is of great importance that estimates of the

benefits and costs—including direct market

impacts, as well as other, less direct impacts—

be considered and estimated to the extent

possible. The assessment addresses the following questions:

1
SUMMARY

Should the United States consider ●

establishing an economic stockpile?

What possible economic stockpiling ●

policies might be established?

What possible impacts might result ●

What are the alternatives to an

economic stockpile?

What options and institutional arrangements are available to Congress

in considering possible legislation?

What considerations require further

from implementing these policies? analysis?

ASSESSMENT FINDINGS

Findings Regarding Current or

Anticipated Materials Problems

There is a real potential for shortages of

materials critical to the U.S. economy to occur

suddenly and unexpectedly. This stems

largely from the increasing degree of U.S. dependence upon imported materials, as well as

from the increasing international competition

for materials. Shortages could occur as a result

of one

●

●

●

●

●

or more of the following:

Cartel or unilateral political actions

affecting price or supply,

Nonpolitical import disruptions,

Dwindling U.S. sources of scarce

materials,

Fluctuating domestic markets, and

Fluctuating international markets.

The nature of these materials problems requires that the U.S. Government evaluate

several policies which might compliment normal industry operations.

Findings Regarding the Feasibility of Economic

Stockpiling as a Response to Materials Supply or

Price Problems

Economic stockpiling can be considered one

means of responding quickly over the shortterm to the materials problems identified

above, but it should not be considered a means

of effecting long-term solutions to those

problems. On the other hand, an economic

stockpile could have value in providing the

time required for the United States to imple2

ment such long-term solutions as substitution,

conservation, or the development of alternative supply sources.

Economic stockpiling is inherently a process

of market intervention and will creat e

economic impacts (i. e., benefits and costs)

which are distributed unequally throughout

the U.S. economy. These economic benefits

and costs (i. e., gains or losses in domestic

economic welfare) must be estimated for the

economy in general, as well as for specifically

impacted groups. An economic mode l

developed in the assessment (Economic

Welfare Model) permits the stockpil e

managers to estimate economic benefits and

costs in terms of an assumed future which includes probabilities of supply interruptions

and elasticities of supply and demand.

The Economic Welfare Model has been

used to estimate the economic impacts of implementing five selected stockpiling policies.

These estimates indicate that some policies

will have positive economic net benefits and

some will have negative economic ne t

benefits. It should be emphasized that the estimates apply only to the specific materials examined and within the scenario assumptions

described, and should therefore not be taken to

indicate that precise quantities of specific

materials should or should not be stockpiled.

Nevertheless, the nature and magnitude of the

estimates are sufficient to indicate that an

economic stockpile should be given detailed

consideration as one component of a more

comprehensive national materials policy and
SUMMARY

that measuring the benefits or costs of a supply

disruption in terms of its probability, rather

than its certainty, will significantly reduce the

quantity of material to be stockpiled.

Economic stockpiling will create social and

political impacts which need to be considered

together with the economic impacts. The implementation of an economic stockpile will

also create legal and institutional impacts

which are contingent upon the nature of any

stockpiling agency established and the oversight mechanisms exercised by Congress.

Because a U.S. economic stockpile can have

strong impacts on other countries, and because

several foreign countries are either planning

or have already established economi c

stockpiles, the United States should consider

economic stockpiling in terms of foreign policy

as well as domestic affairs. The policy objectives of a particular stockpile should be clearly

delineated. Analysis of the Strategic and Critical Materials Stockpile indicates, for example,

that it has been used in a limited manner to

achieve selected economic purposes, Further,

the operation of an economic stockpile will

create enough problems and pressures to warrant its being sufficiently insulated from the

political process that it may act in the public

interest, yet remain responsive to congressional scrutiny.

The benefits and costs of an economic

stockpile depend upon specific future actions

outside the control of the United States, If undertaken, economic stockpiling should

therefore be done on the basis of forecasts of

trends and possible events, but in a manner

flexible enough to permit adjustments to

changes. The decisions relating to the

establishment and operation of an economic

stockpile-specifically, the acquisition and

disposal of materials—should b e

systematically made and documented using an

approach similar to the decisionmaking process developed in this assessment (Decision

Criteria Model). Specific materials which

should be considered prime candidates for an

economic stockpile have been identified with

a set of materials selection criteria which

directly relate to the supply or price problem

the stockpiling policy is designed to alleviate.

Two or more stockpiling policies could be

implemented simultaneously in order to solve

more than one materials problem. In fact, such

a program could provide a high degree of commonality of purpose and operation. Similarly,

an economic stockpile containing more than

one material could be operated in conjunction

with other existing stockpiles, either domestic

or international.

Findings Regarding Alternatives to

Economic Stockpiling

Alternatives exist which may offer equal or

greater benefits than economic stockpiling,

These alternatives may require either more or

less intervention in the marketplace than

economic stockpiling. Many of these alternatives have been utilized for some time, and

this experience should be drawn upon in

assessing their possible usefulness, Several of

the alternatives to economic stockpiling are

long-term solutions to materials problems, and

as such could be implemented in conjunction

with a short-term economic stockpile as an

overall strategy of combating such problems,

In any case, alternatives to economic stockpiling should be considered, and the Economic

Welfare Model can be used to determine

whether or not the alternatives would provide

benefits equal to or greater than economic

stockpiling,

Findings Regarding Economic Stockpiling in the

Context of a Developing National Materials

Strategy

Economic stockpiling could have value as a

response to certain materials problems;

however, it should be considered as one component of a more comprehensive national

materials strategy which is developing from its

present ad hoc status. Further, such an

economic stockpile policy should be developed

in coordination with appropriate Government,

industrial, and public agencies,

3

77-119 O -76-2
SUMMARY

LEGISLATIVE OPTIONS

Evolution of Current Public and Private

Systems Without Enacting

New Legislation

The first option is for Congress and the

President to forgo establishing an economic

stockpile, letting the current market system,

with its existing support mechanisms, attempt

to prevent or correct the impacts of supply disruptions and price increases,

Congressional Options

Without Enacting New Legislation

The second option is for Congress to act

without drafting new legislation. It could initiate such action by providing information

regarding economic stockpiling within the

legislative branch, the executive branch, or the

private sector.

Executive Options

Without Enacting New Legislation

The third option is for the President to take

action, within the limits of his existing

authority, without proposing new legislation.

Such action could be accomplished in several

ways: (a) issue a Presidential proclamation to

set overall policy direction, (b) issue an executive or agency order, or (c) make research and

development grants available for analysis of

materials problems.

Options Through Enacting

New Legislation

The fourth option presumes that, for one or

more reasons, the first three options will not

be sufficiently effective in dealing with current or anticipated materials supply and price

problems and that authorizing legislation is required. Such legislation, if required, should

entail consideration of the 10 components

listed below:

●

●

●

●

●

Definition and distribution o f

authority,

Acquisition of information,

Stockpile management,

Control of domestic distribution,

Control of exports,

Control of imports and access to

foreign supplies,

International trade,

Domestic economic impact,

Fiscal incentives, and

Public access and participation.

INSTITUTIONAL ARRANGEMENTS

Arrangement 1:

Economic Stockpile Controlled and

Operated by the U.S. Government

A unilateral U.S. economic stockpile might

be established as another component of the

present strategic stockpile, or it could be

established as an independent stockpile whose

operations are carefully coordinated with

those of the strategic stockpile.

Arrangement 2:

Economic Stockpile Controlled by the U.S.

Government, but Operated by U.S. industry

The advantage of this arrangement would

be twofold: first, it would forgo some of the acquisition and initialization costs required for

the Federal Government to establish and operate its own economic stockpile; and second, it

would strengthen the working relations be4
tween the Federal Government and U.S. industry, thereby demonstrating that an

economic stockpile is intended to be an adjunct to, not a replacement of, normal industry

operations. A disadvantage of such a policy

might be that its operations would give

preference to the interests of powerful industry groups.

Arrangement 3:

Establish Unilateral Economic

Stockpile Controlled and Operated

by a Public-Private Corporation

Such a corporation could be funded by the

Federal Government, vested by Congress with

a mandate and guidelines on U.S. stockpile

purposes, and given independent authority to

acquire and maintain national stockpiles without direct Executive control but with provisions for Executive consolation. Since annual

appropriations for operating expenses and the

stockpile corporation requests for any needed

additions to the revolving capital fund would

be reviewed only once a year by the President

and Congress, the corporation would be able to

maintain a certain degree of political independence comparable to the Federal Reserve

System on monetary matters.

Arrangement 4:

U.S. Participation in Multinational or

International Economic Stockpile

An economic stockpile operated by two or

more nations, either multinational or international in nature, could be formed along such

existing political or organizational lines as the

Organization of American States (OAS), the

European Economic Community (Common

Market), the United Nations, or just with

allied nations having materials requirements similar to those of the United States. At

present the United States is conducting several

discussions/negotiations which do consider

this arrangement: the United Nations Conference on Trade and Developmen t

(UNCTAD) discussions within the United Nations and the International Energy Agency.

The cost of establishing and maintaining such

a collective stockpile would be spread among

SUMMARY

the participants and would thus be less for any

one government. The stockpile would not take

as much material out of the world supply as

would separate national economic stockpiles.

The stockpile might have less effect upon

specific materials prices than separat e

unilateral actions. And, finally, the participating nations would have to work closely

together in order to make the stockpile work

successfully. The greatest disadvantage would

be the possible loss of control and sovereignty

over U.S. resources and actions.

Arrangement 5:

U.S. Participation in

Producer/Consumer Council Economic Stockpile

Another form of collective stockpiling could

be achieved by the creation or expansion of

producer/consumer councils like the International Tin Council which is run by both producers and consumers and maintains its own

buffer stock to help stabilize the supply and

price of tin, The benefits and costs of arrangement 5 are the same as for arrangement 4, but

in addition to these there is another important

benefit; an economic stockpile operated by a

producer/consumer council attacks the basic

cause of the materials availability problem and

thereby could provide a long-term solution to

specific materials problems by developing

policies which are acceptable to producers and

c ons u m ers, exporters and importers,

developed countries and lesser developed

countries. In this sense, arrangement 5 requires even stronger cooperation among international participants than arrangement 4,

Also, like arrangement 4, though, such agreements could take a considerable amount of

time to implement,

Arrangement 6:

Economic Stockpile Controlled by U.S. Government, but Operated According to International

Guidelines

This arrangement could combine the advan -

tages of the first three arrangements. As with

arrangement 1, the only time constraints in

implementing this option would be those required to create the legislation and acquire the

5
SUMMARY

optimal quantity of materials. Moreover, certain elements of arrangement 2 and 4 could be

introduced by specifically defining the use of

the economic stockpile in the form of an “international code of operations for economic

stockpiles. ” This code could be introduced as

the announced policy of the United States and

expanded on an international basis as needed.

Arrangement 6 would recognize the fact that

The publ

some national economic stockpiles are being

created, but that some countries like West Germany have not implemented them because of

serious concern regarding their impact on

domestic and world market systems. An international code of operations might help reduce

this concern, as well as develop effective

mechanisms for alleviating U.S. supply problems without increasing the world shortage.

PUBLIC POLICY ISSUES

c policy issues summarized below,

which either have been or should be studied,

suggest both the diversity and the intensity of

conflict which could be aroused and which

would have to be considered if an economic

stockpile were implemented, established, and

operated.

1. Should an economic stockpile be implemented in concert or in conflict with other

U.S. materials policies? For example, how

should the planning for an economic stockpile

be coordinated with the current discussions

regarding whether or not the United States

should join the International Tin Council, or

with the long-term grain agreements with the

U. S. S. R., or with the UNCTAD discussions

now underway with the less-developed nations regarding materials supply and prices?

2. What agreements with other in -

dustrialized, as well as less-developed nations,

will be required in order for an economic

stockpile to provide the greatest benefit to U.S.

citizens?

3. How can an economic stockpile be

designed and operated so that it will not be

misused for financial advantage by special-interest groups? How can it be sufficiently insulated from the political process to prevent its

misuse, yet insure that it will achieve the

public benefits for which it was established?

4. What measures can be taken to insure

that an economic stockpile will not be used to

6

accomplish public policy objectives other than

those for which it was established?

5. Under what conditions, and to what

degree, is it justifiable for the Federal Government to intervene in the marketplace in the

form of an economic stockpile? Should such

intervention be used to require that industry

disclose private, proprietary information to the

Federal stockpile managers? And if so, what

assurances will be taken to protect the confidentiality of such information?

6. What is the real potential for future supply disruptions and price increases? What is

the expected impact (i.e., benefits and costs) of

such economic dislocations upon the U.S.

economy in general and sectors of U.S. society

in particular? What is the cost of insuring

against such dislocations? For example, will

the acquisition of large amounts of materials

like petroleum or chromium reduce such

shortages and produce a more healthy

economy, or will it stimulate the already

spiraling inflationary rate? Second, are the expected benefits of an economic stockpile sufficiently greater than the costs to warrant the

expenditure of large amounts of public money,

and if so, how will this money be obtained?

7, What measures will be taken to insure

public participation in the planning of an

economic stockpile? Is such involvement

necessary? Further, if the public is involved,

what measures will be taken to maintain the
SUMMARY

confidentiality of U.S. strategic economic in- United States maintain, increase, or decrease

formation ? its present consumption patterns? How will

future supply disruptions affect these con8. What is the long-term outlook for growth sumption patterns, and vice versa? How will

in the United States? For example, will the they affect the environment?

7
Chapter I

INTRODUCTION
U.S. industry is heavily dependent upon

foreign sources for more than a dozen key

materials, without which the economy could

be severely jeopardized. The lack o f

manganese, for example, could bring a halt to

steel production , with repercussion s

throughout the United States. Even for

materials like petroleum on which the United

States is not totally dependent, the loss of even

part of the normal supply from abroad has

resulted in serious economic disruptions.

When drastic price increases by foreign suppliers become an additional element—as in the

aftermath of the Organization of Petroleum

Exporting Countries (OPEC) embargo—these

disruptions are compounded,

U.S. experience with petroleum has dramatically emphasized the dangers of import

dependence when political and economic motives are joined as they were in the OPEC embargo and price increases during the winter of

1973–74. These actions contributed not only to

the inflationary problems already facing the

United States, but they were also factors in the

downturn in economic activity in the last half

of 1974. For other industrialized countries,

most of which are more heavily dependent on

OPEC oil than the United States, the impact of

the OPEC action was proportionately more

serious and far reaching.

The concern over developments i n

materials supply and price has not been

limited to petroleum, of course. A surge in

worldwide demand for all types of materials in

1972 and 1973, augmented by a need to build

inventories, resulted in tight supply situations

in a number of commodities, The lack of productive capacity, plant closures stemming

from environmental constraints, and the fact

Chapter I

INTRODUCTION

that some raw-material-producing countries

took advantage of the high demand situation

by raising prices--all these factors contributed

to worldwide materials problems.

Although the economic recession which

began in late 1974 reduced the immediate

pressure, the fundamental concern over the

long-term adequacy of raw materials supply

has continued unabated. Insofar as domestic

supplies are concerned, the price mechanism

should provide some corrective action under

inadequate supply conditions by dampening

demand, encouraging the exploitation of lower

grade resources, and creating incentives to

develop alternate or substitute materials.

Further, long-term outlook for growth in demand should encourage investment in new

mining and processing capacity. Technological

progress in both production and usage should

likewise be a positive factor. Nevertheless,

there are limitations to each of these avenues,

particularly where they involve declining or

inaccessible resources.

The ultimate answer for some raw materials

then is directly related to the degree of U.S. dependence on foreign sources for materials and

the extent to which U.S. industry can cope

with this dependence. The OPEC experience

makes it abundantly clear that U.S. industry

alone is unable to counteract the operations of

foreign countries engaged in deliberate

manipulations which affect the national

economy. Not only OPEC, but the potential for

cartel action in bauxite, the actions of the International Tin Council, the potential for price

increases or political intervention in the

platinum market by South Africa and Russia,

worldwide industrial competition fo r

materials supplies, as well as the shrinking

11
CHAPTER I

world supply of some material reserves—these

are all situations which could have significant

adverse effects throughout the U.S. economy.

Furthermore, it is not unreasonable to suggest that the U.S. policy of detente with the

U. S. S. R., especially when coupled with the increasing demands expressed by the developing

countries in the United Nations Conference on

Trade and Development IV (UNCTAD IV)

negotiations for more control of their natural

resources, has had and will continue to have a

significant effect on the U.S. and world

economies. It likewise appears evident that

since the U.S. strategic stockpile cannot, by

law, be used to alleviate economic disruptions

caused by cartels and unilateral political actions, analysis of the desirability of stockpiling

for economic purposes involves considering a

type of institution or capability quite different

from the present strategic and supplemental

stockpiles,

In addition to problems of foreign origin,

several domestic trends and problems in

materials supply raise the question as to

whether or not economic stockpiling would

benefit the public welfare. The need to find

new reserves, extract from leaner ores, and invest in new productive capacity require risk

taking which might be minimized, or at least

shared, by new public policies which might include economic stockpiling as a useful component, Also, the growing public awareness of

environmental and social problems highlights

such issues as recycling and the development

of new technology to improve the overall conditions under which materials are extracted

and produced.

Each of the materials problems discussed

above—whether actual or potential-an have

significant impacts upon the U.S. economy,

especially if more than one problem occurs

simultaneously. Moreover, each of these

problems may be reflected in shortages and

hardships upon the American consumer,

possibly severe enough to change his basic

lifestyle. It is for these reasons that the United

States should immediately and carefully

reassess economic stockpiling as one component of a national materials strategy.

A. PAST AND CURRENT CONGRESSIONAL ACTIONS

1. Background

The need for an overall materials policy was

recognized in 1952 when President Truman

appointed a President’s Materials Policy Commission (Paley Commission) which recommended that a Federal agency look at the

materials problems as a whole, keeping abreast

of the changing situations and the interrelation

of policies and programs. The Paley report

proposed that the materials agency concern itself with the entire energy and materials field

and the relationship of separate programs such

as coal, gas, and petroleum to one another; the

dimensions of foreign production of materials

and its relationship to domestic programs; and

the development of a production plan to meet

long-term materials requirements. These

12

recommendations were not implemented, and

in recent years, materials problems have

become widespread and acute.

President Nixon’s Government reorganization plan called for the development of a

Department of Natural Resources to include

the present Interior and Agriculture Departments and related activities. This proposal was

later changed to read that a Department of

Energy and Natural Resources should be

developed , and the Department o f

Agriculture’s functions were omitted. Currently, there are a number of bills before the

94th Congress calling for the establishment of

a “Department of Natural Resources and Environment” or a “Department of Social,

Economic and Natural Resources Planning. ”

So far, this legislation has not been acted upon.
Congress established the National Commission on Materials Policy in 1970 and charged it

with making recommendations on the supply,

use, recovery, and disposal of materials. The

Commission’s June 1973 report recommended

that a comprehensive Cabinet-level agency be

established for materials, energy, and the environment. It also called for the creation of a

temporary high-level Natural Resources Coordinating Committee for materials policy and

the organization of a computerized national

minerals inventory system within the Department of the Interior until a new department

was formed,

2. The National Commission on

Supplies and Shortages

Congress already recognizes the need for

coordinated materials planning, having passed

in September 1974 Public Law 93–426

establishing the National Commission on Supplies and Shortages and charging it with drafting the “necessary legislative and administrative actions to develop a comprehensive

strategic and economic stockpiling and inventories policy which facilitates the availability

of essential resources. ” Specifically, Congress

pinpointed five items in the act which underscore our materials vulnerability and suggest a

possible direction of stockpiling policy

development:

a.

b.

c.

d

The United States is increasingly dependent on the importation from foreign nations of certain natural resources vital to

commerce and the national defense;

Nations that export such resources can

alone or in association with other nations

arbitrarily raise the prices of such

resources to levels which are unreasonable and disruptive of domestic and

foreign economics;

Shortages of resources and commodities

are becoming increasingly frequent in the

United States, and such shortages cause

undue inconvenience and expense to

consumers and a burden on interstate

commerce and the Nation’s economy;

Existing institutions do not adequately

e.

CHAPTER I

identify and anticipate such shortages

and do not adequately monitor, study,

and analyze other market adversities involving specific industries and specific

sectors of the economy; and

Data with respect to such shortages and

adversities is collected for various purposes, but is not systematically coordinated and disseminated to the appropriate agencies and to Congress.

3. The Energy Policy and

Conservation Act of 1975

The Energy Policy and Conservation Act,

Public Law 94–163, which was signed into law

on December 22, 1975, has the following purposes:

a.

b.

c.

d.

e.

f.

g.

To grant specific standby authority to the

President, subject to congressional

review, to impose rationing, to reduce demand for energy through the implementation of energy conservation plans, and

to fulfill obligations of the United States

under the international energy program;

To provide for the creation of a Strategic

Petroleum Reserve capable of reducing

the impact of severe energy supply interruptions;

To increase the supply of fossil fuels in

the United States, through price incentives and production requirements;

To conserve energy supplies through

energy conservation programs, and,

where necessary, the regulation of certain

energy uses;

To provide for improved energy efficiency of motor vehicles, major appliances,

and certain other consumer products;

To reduce the demand for petroleum products and natural gas through programs

designed to provide greater availability

and use of this Nation’s abundant coal

resources; and

To provide a means for verification of

energy data to assure the reliability of

energy data.

Each of these purposes is relevant to national

stockpiling policy relating to energy materials.

13
CHAPTER I

Several of the purposes, together with the

authority granted to implement those purposes, directly relate to legal and policy issues

discussed in this assessment.

4. Status of Proposed Stockpile

Legislation

Congress is presently considering proposed

materials legislation for a broad variety of purposes, The issues related to national stockpile

policy involve considerations of both military

and economic security, as well as other social

purposes, Military security has been the major

purpose of the Strategic and Critical Stockpile,

the Supplemental Stockpile, and the Defense

Production Act Inventory. A future war might

cause difficulties if it were coupled with concerted actions to cut off U.S. imports of

,

manganese, chromium, cobalt, platinum, and

other critical materials. As a result, the

strategic stockpile was analyzed to provide the

background necessary to understand how it

has been operated and the problems which

have been encountered. However, no other

specific assessment of the current strategic

stockpile has been conducted in this study.

The analysis of strategic stockpiles and the

current materials problems outlined in chapter

II illustrate the fact that stockpiling may also

be useful in accomplishing national economic

policy. The issue of economic stockpiling is

complex and probably should be addressed as

a component of the evolving nationa l

materials strategy.

The status of bills relating to economic and

strategic stockpiling, before the 94th Congress,

is listed in table 1–1,

Table 1–1.—Review of pending stockpile-related legislation of the 94th Congress

Bill Identification

General

To amend the Defense Production Act of 1950 to provide for national stockpiles

to protect the economic

security of the United

States

To extend by 90 days (until

Sept. 30, 1975) the expiration date of the Defense

Production Act of 1950,

To extend the Defense Production Act of 1950 until

Mar. 31, 1976. (U.S. Congress. House Committee on

Armed Services. Subcommittee on Seapower and

Strategic and Critical

Materials. Hearings on

ship transfers, Navy

programmings, and

stockpiles,)

Provides for a 1 -yea r

moratorium on the sale, or

other disposition from

stockpiles of strategic and

critical materials

Identification No.

H.J. Res.

487

S.1869

S.J. Res 94

S.2767

Sponsor

Williams

Proxmire et al.

Rees

Domenici

Date

June 4, 1975

June 10, 1975

June 5, 1975

Dec. 10, 1975

(as of Feb 23 , 1976)

Referred to Senate Committee

on Banking Housing and

Urban Affairs June 4, 1975

Passed both House and Senate

signed by President June

28, 1975. Became law—P. L.

94-42 June 28, 1975,

Pending in Senate Committee

on Government Operations.

14
CHAPTER I

Table 1–1.—Review of pending stockpile-related legislation of the 94th Congress—continued

Bill Identification

Amends the Defense Production Act of 1950 to create a

National Economic

Stockpile Association that

shall operate under rules

promulgated by the Secretary of the Treasury to

facilitate the availability y of

essential natural resources

and to prevent disruption

of the domestic economy.

Establishes a Strategic Energy

Reserve Office in the

Federal Energy Administration, and creates

strategic energy reserves

in storage capable of

replacing energy imports

for at least 90 days in order

to minimize the impact of

interruptions or reductions

of energy imports. Passed

the Senate on July 8, 1975,

as amended. Text inserted

in S. 622 (see above) on

Sept. 26, 1975,

Creates a National Strategic

Petroleum Reserve of up to

1,300 million barrels of

petroleum consisting of

300 million barrels in the

military National Strategic

Petroleum Reserve, and up

to 1 billion barrels for the

civilian National Strategic

Petroleum Reserve (as

authorized by this act),

capable of reducing the

impact of disruptions of oil

imports.

Amends the Strategic and Critical Materials Stockpiling

Act in order to establish a

fund that shall be used for

the procurement of, and

the carrying out of other

functions related to, such

materials.

Disposal of Specific

Materials

Authorizes the release of

1,553,500 pounds of cadmium from national

stockpiles.

Identification No.

House

H.R.9597

H.R. 10526

H.R.129

(H.R.3397)

Senate

S.677

s. 618

Sponsor

Rees

Jackson

Jackson

Bennett

Broomfield

Date

Sept. 15, 1975

Feb. 12, 1975

Feb. 7, 1975

Nov. 4, 1975

Jan. 14, 1975

Status

(as of Feb. 23, 1976)

Referred to House Committee

on Banking, Currency and

Housing, Oct. 15, 1975.

Receiving executive comments.

S. 622 passed in lieu of S.677

as P.L. 94–163, Dec. 22,

1975

Referred to Senate Interior

and Insular Affairs Committee, Feb. 7. 1975. 1st day

Committee hearings, Mar.

11, 1975.

Referred Armed Services

Committee. Nov. 4, 1975,

Referred to Subcommittee on

Seapower and Strategic

and Critical Materials,

Mar. 6, 1975.

15
—

CHAPTER I

Table 1-1.—Review of pending stockpile-related legislation of the 94th Congress—continued

Bill Identification

A bill to authorize the disposal

of silver from the national

stockpiles.

A bill to authorize the disposal

of beryl ore from the national stockpiles and the

supplemental stockpiles.

Authorizes the disposal by the

US. Government of certain Spermoil from the national stockpile and the

subsequent regulated commercial disposal.

Authorizes the disposal of

tantalus materials from the

national stockpile.

Authorizes the disposal of approximately 100,000 tons

of tin from the national

and sup plemental

stockpiles.

Authorizes the disposal of approximately 241,600 tons

of c hem ical -grade

chromite from the national

stockpile.

Authorizes the release of

9,000 short tons of asbestos

chrysotile from the national stockpile.

Identification N o .

House Senate

H.R. 306

H.R. 400

H.R. 3465

H.R. 1598

H.R. 4535

H.R. 4802

H.R.5683

(H.R.6663)

(H.R.7026)

(H.R.691O)

(H.R.7927)

,’

Sponsor

Conte

Flood

Mosher

Drinan

Mollohan

Rose

Fenwick

Jan. 14, 1975

Jan. 14, 1975

Feb. 30, 1975

Jan, 17, 1975

Mar. 10, 1975

Apr. 8, 1975

Referred to Subcommittee on

Seapower and Strategic

and Critical Materials Mar.

6, 1975. 1st day of hearings,

Mar. 25.1975.

Referred to Subcommittee on

SSCM* Mar. 6, 1975. 1st

day of hearings 3/35/75

Referred to Subcommittee on

Fisheries and Wildlife,

Mar. 27, 1975. 1st day hearings, June 9, 1975.

Subcommittee on SSCM*,

Mar. 6, 1975.

Subcommittee on SSCM, Mar.

21, 1975. 1st day hearings,

Mar. 25, 1975.

Subcommittee on SSCM*,

Apr. 11, 1975.

Subcommittee on SSCM*,

Apr. 11, 1975. Favorable

excomment from GSA,

Aug. 11, 1975.

● Seapower and Strategic and Critical Materials.

B. ASSESSMENT SCOPE AND PURPOSE

While the basic objective of this assessment

was to examine the attributes and consequences of economic stockpiling, another primary goal was to develop a generalized

methodology which Congress, or any other

organization, could use to investigate and provide input in the development of future

stockpiling policy. It is in this context, and for

this reason, that the step-by-step process used

in the assessment is detailed as follows. Prior

to describing this methodology, however, it is

16

appropriate to discuss briefly the nature and

development of technology assessment, suggesting in that manner a perspective for understanding the nature, scope, and purpose of this

assessment.

1. Definition of Economic Stockpiling

For purposes of this assessment, economic

stockpiling is defined as

storage of materials for

the accumulation and

the express intention
of being able to effect their distribution to accomplish public purposes other than the wartime emergency conditions stipulated in the

Strategic Stockpile Act of 1946.1 While a discussion of economic stockpiling might include

an analysis of national, international, private,

and public stockpiles, interest centers in this

study on those purposes which the American

market system does not adequately perform

under the constraints, either foreign or

domestic, which exist or may be imposed. For

this reason, the stockpiling policies studied

here concentrate primarily, though not exclusively, on the use of a public (i.e., Federal

Government) economic stockpile to achieve

various policy objectives. It is possible that an

economic stockpile might best be achieved by

U.S. participation in an internationally controlled stockpile, or through governmental

cooperation with U.S. industry to operate privately held stockpiles, For that matter, how to

implement an economic stockpile might be

IThe three definitions ]Isted be]ow reveal much about the

evolution of the stockpiling concept in the United States over

the past half century:

(a) Webster’s Unabridged—1922: No listing.

(b) Webster’s New Collegiate-1951: Stockpile, n. A

storage pile; specifically, a reserve supply of an essential raw material, processed food, or the like accumulated within a country for use during a war-induced

shortage.

(c) Webster’s Unabridged—1973: Stockpile, n. a reserve

supply of something essential (as processed food or a

raw material) accumulated within a country for use

during a shortage caused by emergency conditions (as

war).

The stockpiling of strategic materials to help meet wartime

shortages was discussed in 1921, evidently not in time to make

the 1922 edition of Webster.

The 1951 version is the essence of the language in the

Stockpiling Act of 1946. Materials must be essential, i.e., critical

or strategic, and releasable only to meet shortages generated by

war conditions. Even the reference to food seems to be to the

civil defense shelter stocking program rather than to the Department of Agriculture program (processed food; war-induced

shortage).

The 1973 definition expands the war-induced shortage to one

caused by emergency conditions as the reason for acquisition of

materials above current needs. This definition covers most of

the policy objectives included in the economic stockpiling concepts used in this study. It is interesting to note that the definition was written and adopted before the OPEC oil embargo of

197374.

CHAPTER I

viewed in the final analysis as a choice of the

best management system—i,e., not whether or

not, but to what extent, the Federal Government should become involved in the operation

of the stockpile, Should the U.S. Government,

for example, maintain total control of the

stockpile, or should that control be shared with

industry, with one or more foreign governments, or vested in a public-private corporation? Because of these considerations, an

assessment is herein made of the benefits and

costs to the United States of stockpiling

materials for selected public purposes.

2. Materials Characteristics

An economic stockpile can be composed of

raw materials, such as minerals and ores;

semiprocessed materials, such as concentrates

from mines or metal ingots; or finished

materials, such as medicinal or fabricated

products ready for use. Stockpiling can also involve food products, but these are specifically

excluded from consideration in this assessment. It is recognized that each of the

materials which might be stockpiled has

special physical geographic, technological,

economic, social, and political characteristics

which define its modes of production, processing, transportation, marketing, consumption,

conservation, storage, and disposal. Nevertheless, for this assessment, stockpiling is viewed

initially in terms of a policy objective and only

after that policy objective is defined and understood as a matter of national interest is attention given to the materials which might be

stockpiled to achieve that policy. It should be

noted that “objective” is defined as the goal, or

intended use of a stockpiling policy, not the

quantity of material to be included in a

stockpile.

3. Definition of Technology Assessment

For the purpose of this assessment, technology assessment is defined as a “generalized

process for the generation of reliable, comprehensive information about the chain of

technical, social, economic, environmental,

and political consequences of the substantial

17
CHAPTER I

use of a technology, to enable its effective

social management by decisionmakers." 2 I n

the Working Glossary from which this definition was taken is also a discussion of the

development and types of technology assessments. While the development of technology

assessment is generally well known, it is important to mention here the four types of

assessments, for they bear directly upon understanding the present assessment, The four

types identified are:

Assessments directed to the solution of

identified problems of society which

are usually amenable to systems

analysis for their solution;

Assessments to enable society to cope

with the unfolding chain of cause-andeffect relationships stemming from a

new technology;

Assessments which are policy-oriented

studies; and

Assessments which are studies undertaken (usually in an academic environment) for the purpose of developing an

assessment methodology, rather than

as a input to decisionmaking.

Whether or not one agrees that all four, or

only two, of the types identified above are

really assessments, it is fundamental that the

process of conducting a technology assessment-or for that matter, the assessment itself—not be equated with the policymaking

process, but rather understood as being an input to that process. As the Working Glossary

continues, the process of technology assessment is only one of three elements in society’s

management of technology:

The first is the process of science and technology, producing innovations as solutions to

social problems and needs. These may be

economically attractive, or may require public

zsci~nce policy: A Working Glossary, prepared for the Subcommittee on Science, Research, and Development of the Committee on Science and Astronautics, House of Representatives,

U.S. Congress, July 1973, This document has served as the working glossary for this technology assessment.

18

funding; either way, they may become candidate

claimants for political decisionmaking. The second element is the assessment of these technologies as solutions. The third element is the

political process by which the social benefits and

costs are finally judged and appropriate public

action decided upon, Technology assessment,

then, is the technological information input to

the political decision process.

Because it is merely one of the inputs in the

decisionmaking process, this assessment has

not made any recommendations as to what, if

any, policy Congress should consider implementing. It is also for this same reason that one

of the primary goals of this assessment was to

develop a generalized methodology which

could be used in conducting similar policy

assessments in the future.

a. Systems Approach to the Assessment

of Economic Stockpiling.—The overall approach developed to manage and conduct the

research in this assessment differs from the

approaches used in the past materials stockpiling projects, The scope and purpose of past

studies were limited to specific materials,

classes of materials, or the macroeconomic

effects of materials shortages on a particular

industry or public sector. To date, no materials

or stockpiling study has been found which

uses a systems approach of first defining the

policy objective to be achieved, then investigating materials stockpiling or alternatives to stockpiling as possible means of

satisfying the requirements of that policy objective.

These past studies are understandable

because the policy objective of stockpiling in

the United States has been limited to providing

materials for national emergencies, However,

when related to the possibility of planned intervention in the United States and world

marketplace, the broad spectrum of objectives

which could be achieved by the implementation of a stockpiling policy defies consideration of a single material, a group of materials,

or even one segment of U.S. society,

b. Definition of Systems Approach.—In

general, systems analysis techniques were

used to organize and manage this assessment,
As explained in the Working Glossary,

systems analysis can be defined as an—

inquiry to aid a decisionmaker in choosing a

course of action by systematically investigating

his proper objectives, and risks associated with

the alternative policies or strategies for achieving

them, and formulating additional alternatives if

those examined are found wanting. Systems

analysis represents an approach to, or way of

looking at, complex problems of choice under

uncertainty . . . In such problems, objectives are

usually multiple, and possibly conflicting, and

analysis designed to assist the decision maker

must necessarily involve a large element of judgment,

4. Seven Steps in the Generalized

Assessment Methodology

Using the systems approach, it was possible

to organize the assessment requirements into a

series of sequential tasks. These seven steps

are listed and discussed below. The exact

methods to be used in completing each of the

seven steps listed will vary as a function of the

complexity of the stockpiling policy being

assessed. However, certain tasks must be accomplished during each of these steps, as explained below.

Step 1: Identify the Major Issues Related

to Economic Stockpiling.—The major issues

related to economic stockpiling and associated

materials problems which might require some

national policy development were examined

in a series of literature searches, interviews,

case studies, and relevance trees. The major

issues identified in this task, which formed the

nucleus of information to be used as inputs to

the impacts analysis, are discussed in

chapter II.

Step 2: Develop Stockpiling Policies to

Address the Major Issues.—The stockpiling

policies developed here define the policy objectives which are designed to alleviate the national materials problems identified in step 1.

In developing these policies, care was taken to

insure, with one exception, that each one

would achieve only one objective. Selection

criteria were developed to identify which

materials were directly related to the national

materials issues. These materials are then used

CHAPTER I

as proxies in the impacts analysis, This task is

discussed in chapter III.

Step 3: Assess the Impacts (Benefits and

Costs) of Implementing the Stockpiling

Policies.—The impacts related to implementing specific stockpiling policies are assessed in

relation to the sectors of U.S. society which

they could affect, As a minimum, consideration is given to the possible economic, political, and social impacts, These impacts are

analyzed in chapters IV and V.

Economic stockpiling policies are considered in two categories: those relating to

foreign actions and those relating to domestic

actions. An example of the former would be

one whose objective is to cushion temporary

import disruptions, while an example of the

latter would stabilize the long-term trend of

fluctuating domestic materials prices. In either

event, it is necessary to construct a probable

future in which the stockpile would be operated. The complexity of the probable future

could vary from the creation of a straightforward set of scenarios, based upon “what if”

types of questions, to the extrapolation of the

environment using sophisticated forecasting

techniques, The nature of the future to be used

should be determined as a function of the

stockpiling objective and in anticipation of the

impacts related to its implementation.

Step 4: Identify Alternatives to Economic

Stockpiling. —A stockpiling policy may be

only one of several means to satisfy the requirements of the national materials objectives. Accordingly, possible alternatives to

economic stockpiling which may achieve the

same or similar policy objectives have been

identified. These alternatives are presented in

chapter VII.

Step 5: Assess the Impacts (Benefits and

Costs) of Implementing Alternatives to

Economic Stockpiling.—In order to ascertain

the true value of economic stockpiling

policies, it is necessary to evaluate the impacts

of alternatives in much the same way as was

done for the stockpiling policies. It should be

pointed out, however, that such a quantitative

19

77-119 0 -76-3
——

CHAPTER I

cost/benefit analysis was beyond the scope of

this assessment and was therefore not performed. What was accomplished is a qualitative analysis of the alternatives in terms of

their possible impacts, advantages, and disadvantages.

Step 6: Compare the Impacts (Benefits

and Costs) of Economic Stockpiling With

Those of Alternatives.-Once the information is collected and the analysis related to the

first five steps has been completed, it should

be possible to arrive at supportable conclusions regarding whether or not economic

stockpiling is sufficiently worthy for the Congress to consider in drafting enabling legislation. However, this detailed cost/benefit

analysis was beyond the scope of this assessment and was not performed.

Step 7: Legislative Consideration s

Regarding Economic Stockpiling.—Because

no analysis other than qualitative judgments is

offered regarding whether stockpiling offers

greater net benefits than alternatives, and

because no recommendation is offered regarding whether or not an economic stockpiling

policy should be implemented, the final step of

Figure 1-1.

Functional Logic of Generalized Assessment of Methodology

f

1 Identify Major Issues 3 Develop Stockpltlng Policies

Related to Economic Stockpiling

2 Identify or Define

to Achieve National Materials

● Literature Search ObjectIves

● Interviews & National Materials b

. Identify Single-Level

● Case Studies Objectives

; + .

ObjectIves

● Relevance Trees . Identify Materials to

Use in Impacts Analysis

----- J

‘--”---- Y

/

5 Identify Alternatives to

Stockpiling Which Achieve /

the Same, or Similar Policy

Objectives

I

I -

6 Assess Impacts of Implementing

Alternatives

. Economic

● Political

. Social

● Environmental

● Legal

4 Assess Impacts of Implementing

the Stock piling Policies

● Economic

. Politlcal

. Social

. Environmental

● Legal

~ i+_- ----- 7 Compare Total Net Benefits

of Stock piling and Alternatives

I B

I

f

I

I

1+ -- 99 -------- -

1

8 Describe Management and

Institutional Requirements

to Consider in Drafting

Enabling Legislation

20
————

this generalized methodology is to identify the

possible legislative options and institutional

arrangements which are available in considering possible legislation. These considerations

are included in chapters VI and VIII.

5. Functional Logic of Assessment

Methodology

Figure 1-1 is a graphic display of the functional logic of the generalized methodology

developed and generally used to assess

economic stockpiling, While the steps in the

methodology as outlined in the previous section are presented as a sequential process, in

actual practice the assessment process is iterative and requires a constant feedback of information from one task to another.

a. Discussion of Decision Criteria Model

Development.—Figure I-2 is a display of the

development of the decision and computer

models surveyed and developed during this

assessment. Several existing models were surveyed; one was selected, used, and found to be

unsatisfactory. Therefore another mode l

(Decision Criteria) was developed to assess the

benefits and costs to society of implementing

Figure 1-2.

Decision Criteria Model Development

A Model

Was Needed

The Following Models Were Surveyed

. DRI Macro

● Chas e

, IN FORUM

● Wharton

● B E A

● R F F

I

1 Selected INFORUM

. Reasonable Cost

● Most Disaggregate

Found To Be Unsatisfactory

Ž No Price Elasticities

of Demand

● Must Run Price Submodel

● Cost to Modify High

. Results for Supply

Restrictions Questionable

E

CHAPTER 1

Did Not Select

● DRI

. Chase

. Wharton

. BEA

. RFF

Reasons Such As

. High Cost

. No Disaggregation

● Inappropriate

Chose To Develop Our Own

Decision

Criteria

Model (DCM)

DCM Consists Of

. Materials Select [on

Criteria

● Economic Welfare Model

● Functional Specification

. Operating Cost Model

21
CHAPTER I

an economic stockpiling policy. It was with the

four components of this Decision Criteria

Model that the basic assessment was made and

the findings were drawn.

b. Discussion of Decision Criteri a

Model.—The Decision Criteria Model, which

is discussed in chapter 111 consists of four components:

● A Set of Materials Selection Criteria,

. An Economic Welfare Model,

● A Functional Specification Checklist,

and

● An Operating Cost Model.

The Economic Welfare Model and the Operating Cost Model were completely implemented

for five stockpile policies using a computer

program developed in the study.

22
Chapter II

NATIONAL MATERIALS ISSUES

RELATED TO ECONOMIC STOCKPILING .

23
Chapter II

NATIONAL MATERIALS ISSUES

RELATED TO ECONOMIC STOCKPILING

Chapter II addresses the question, “Should the United States consider implementing an economic stockpile?” The major issues which necessitate such consideration are discussed from five vantage points:

●

●

●

Increasing U.S. import depen- .

dence,

International cartel actions, ●

Response of U.S. market system to

Use of U.S. stockpiles for economic

purposes, and

Economic stockpiling in selected

foreign countries.

materials problems,

A. INCREASING U.S. IMPORT DEPENDENCE

In 1970, the United States, which has only

one-twentieth of the world’s population, consumed approximately one-third of the world’s

raw material supply. Although the United

States is a major producer of both energy and

raw materials, it has become increasingly dependent on imports from other countries to

supply its industrial economy. As a result, the

country is vulnerable to supply cutoffs or price

increases, particularly for several key

materials. Figure II–1 dramatizes this import

dependence for 16 selected materials.

Although the percent import dependence for

zinc, petroleum, and iron ore is reasonably

small, three factors alone—the degree of dependence, the importance of these materials in

the U.S. economy, and the existence of a potent cartel in the case of petroleum—are cause

enough for concern about the future supply

and price of these materials.

The dependence on imports is increasing

either because such supplies are cheaper than

using indigenous U.S. sources (e.g., bauxite

ore), or the material is not indigenous to the

United States but has performance characteristics uniquely suited to specific and desired

technological needs (e.g., platinum for use as a

catalyst in chemical reactions and chromium

for resistance to corrosion and oxidation).

Most of the other industrialized nations are

even more dependent on importing raw

materials than the United States and are

therefore more vulnerable to future supply

disruptions and price increases, Furthermore,

many of these nations depend upon the United

States as a reliable source of major commodities essential to their economies, a dependence recognized in bilateral or multilateral

agreements. As a result, the economies of the

United States, and its allies, the less-developed

countries, and the Communist countries are

mutually interdependent upon each other for

continuing prosperity. For those countries like

Japan and West Germany which rely almost

totally upon imported raw materials, the situation is even more precarious. While freedom

from dependence on imports may be desirable

for the United States, it may not be a practical

reality.

25
CHAPTER II

Figure 11-1.

U.S. Import Dependence for Selected Materials

Material Percentage Imported

0°0 50% 100”/.3

Chromium

Cobalt

Columbium

Manganese

Platinum Group

Rubber, Natural

Tantalum

Tin

Mercury

Asbestos

Bauxite

Fluorspar

Nickel

Zinc

Petroleum

Iron Ore

100

100

100

100

100

100

100

100

95

90

90

90

90

56

38

30

Source Derived by comparison between U S Imports and usaqc over a number of years

Ilmpor! data from Department of Commerce usaqe dala from Bureau of M(nes and Rubber

Manufacturers Assoc!atlon )

In addition to concern regarding price and

supply of imports over the next several

decades, there is an immediate and serious

problem of the present actual shortages in

many processed materials such as steel,

aluminum, and copper. These particular shortages appear to be the result of an undercapacity in the United States and world

materials producing industries which occurred for several reasons: (1) a long period of underinvestment in new capacity, (2) unprecedented period of high rate of economic growth

which has occurred simultaneously in most of

the developed countries, (3) large reductions

of inventories, and (4) the recent economic

slump. The resulting higher prices for

materials, which are also impacted by energy

price increases, are stimulating some cautious

expansion in production capacity and some

improved efficiency of materials use or

substitution in the materials and manufacturing industries. While such changes can be expected to alleviate this particular source of

shortages, they will not resolve the questions

of vulnerability due to U.S. dependence on imported raw materials.

B. INTERNATIONAL CARTEL ACTIONS

The emergence of the Organization of of the potential which this type of organization

Petroleum Exporting Countries (OPEC) cartel can have on both producing and consuming

as a force powerful enough to manipulate the countries. Although OPEC has been in exisnormal flow of petroleum to the international tence since 1960, its action in October 1973 was

economy has made the world painfully aware the first instance in which its members used

26
their joint strength as a political weapon

against petroleum-consuming countries, many

of which are completely dependent on imports

for this indispensable material. While the

United States is far from being completely dependent on OPEC’s oil, the effects of the temporary embargo and the quadrupling of prices

have been of the most serious nature ,

Whatever may come of a long-range program

for energy independence in this country, the

more immediate concern requires, among

other approaches, the consideration of an

economic stockpile for materials other than

petroleum included in the new strategic

petroleum reserve to avert or counteract

future cartel actions which may either restrict

supply or impose monopolistic prices to the

detriment of the U.S. economy. It should be

emphasized, too, that because of the interdependence of the economies of the world industrial nations, U.S. policy in this important

area will also have repercussions on nations

other than the members of a cartel,

1. Conditions Necessary for Successful

Cartelization

OPEC’s example has undoubtedly stirred

the hopes of other producers of raw materials,

especially where the “climate” for successful

cartels is favorable. If such a cartel action is to

be successful, however, several conditions

must exist:

● The supply of materials must be concentrated in a relatively small number

of countries;

● The material must be traded internationally on a fairly large scale;

c. Substitute materials must not be too

readily available to the consumer, forcing him to continue paying higher

prices for a period of time before seeking a substitute;

. The material must be one in which U.S.

Government stocks do not exist in significant quantity;

CHAPTER 11

● The producers, or at least their

organ i z a t ion, must be able t o

simultaneously forgo export earnings

from sale of the material for some

period of time, and withstand retaliatory import restrictions on othe r

economic fronts, as well as overcome

the possible internal labor problems

which deprivation would cause;

. Consumer demand must be somewhat

unresponsive to price changes; and

● The members of the producer group

must have compatible objectives which

could be either political or economic.

Even though all of these conditions were not

present in the OPEC action, the political advantage was the deciding factor in that

organization’s determination to act as it did.

2. Materials Cartels

Given these conditions, one question dominates the analysis of materials planning: Is

there a probability of a materials cartel like the

petroleum OPEC, and if so what can be done

about it? To the first part of the question, one

can respond only with informed judgment. To

the second, however, there is a history of

scientific and technological solutions which

can be assessed and--contingent upon their

economic, social, and political ramifications—

applied in an effort to avert or counteract

cartel action.

Many producing countries are showing increasing interest in changing present terms of

trade to their benefit.1 Hence, many of these

countries have either discussed or attempted

market intervention to raise or at least in

fluence raw materials prices. First, seven major bauxite-exporting countries met in March

1974 and formed an organization to coordinate

their future policies. while some of the members opposed using the International Bauxite

Association (IBA) as a cartel, Jamaica in-

: In terna tjonaj Economic; Report of the President, transmitted

to the Congress March 1975.

27
CHAPTER II

creased its taxes and royalties on bauxite by

500 percent in June 1974. Second, the four

countries which make up the International

Council of Copper Exporting Countries

(CIPEC) met several times throughout 1974 to

discuss setting minimum copper prices. They

finally agreed to reduce exports of copper in

all forms by 10 percent in an attempt to stop

the downward price movement. Third, Morocco raised the price of phosphate rock by nearly

60 percent during 1974. Finally, a number of

iron-ore-exporting countries—mostly lessdeveloped countries are currently discussing

plans to create a formal collective organization.

In general, it must be pointed out that the

price multiplication of raw materials should

affect product prices much less than has been

the case for energy. Bauxite, for example, has

been close to $12 per ton, whereas the price of

aluminum ingot is about $600 per ton.

Although it takes about 4 tons of bauxite to

produce 1 ton of aluminum, it is clear that

doubling the bauxite price should not influence the price of aluminum as strongly as

the changes in crude oil prices increased the

resulting price s for energy fuels an d

petrochemical products, However, there is a

trend for the producing countries to seek price

increases for their raw materials, as well as to

develop their own industries for materials processing and fabrication rather than simply exporting raw materials. Such changes in industrial emphasis could not only result in significant changes in the economic development

of producing countries, but it could also

damage the U.S. materials processing industry,

The prospect of a “Materials OPEC” is currently the subject of serious examination, both

inside and outside the Federal Government,

and such consideration has already changed

the character of discussions in international

trade relations from the focus of the past

several decades on “access to markets” toward

one of “access to supply, ” The statement by

U.S. Ambassador William Eberle (Special

Representative for Trade Negotiation) at the

recent Hearings on Materials Shortages before

28

the Joint Economic Committee of Congress

pointed to such an administration view on the

development of a stable and equitable framework for international trade in raw materials.

Further, developments in the negotiations

recently concluded in the United Nations Conference on Trade and Development (UNCTAD

IV) suggest new considerations for U.S.

materials policy, A group of 77 countries have

been pressing for the creation of a $3 billion

Common Fund to finance buffer stocks as a

means of stabilizing world prices for various

raw materials, Buying and selling these buffer

stocks would permit countries, they argue, to

keep prices within specified ranges and thus

avoid price fluctuations. Initially, the U. S.,

Japan, West Germany, France, and Britain opposed this suggestion, offering instead to

negotiate commodity agreements on a case-bycase basis, then at some future date to discuss

the issue of stockpile financing, A compromise

was reached during the last week of the conference which would permit negotiations to

begin on certain commodities before the end of

1976, Moreover, the conference urged quick

review of the debts of 20 very poor nations,

and authorized various studies on world

economic problems, z

The second part of the question regarding a

materials cartel is concerned with what might

be done if the threat of an OPEC-like action

becomes reality. Both increases in price and

uncertainty of supply are likely to stimulate

the following technical responses:

●

●

●

Materials substitution (i.e., the use of a

different material, to perform the same

function, such as copper or aluminum

in conductors);

Process substitution (i.e., the use of a

different raw material, such as other

alumina clays in place of bauxite);

System modification or substitution

(

i.e., reduce or avoid the need for a

specific

~Washington Post,

material by changing the

june 1, 1976.
engineering system, such as the use of

a magnetic circuit breaker in a car ignition system in place

tional electrical circuit

. Stockpiling either of

technology. s

of the convenbreaker); and

materials or of

The first three of these responses will require

relatively long leadtimes to develop the

substitute technologies and will be very expensive if heavy investments in new facilities

are required. For example, the substantial

substitution of natural fibers by sythetic fibers

has taken some 40 years; the replacement of

open-hearth steelmaking technology by the

basic-oxygen process, some 10 years. Historical experience indicates that the substitution

of a material or a new process for another

generally takes about 20 years. While it is

true that crash programs like the development of the atomic bomb or the manned

spacecraft program can result in unusually

rapid change, the investment in resources to

achieve such change is extremely large.

Table II–1 sets forth the cartel outlook for 16

materials, along with related information on

U.S. imports, major import sources, the U.S.

Government stockpile situation, and the trend

of U.S. demand over the next 5 years. Further

details on cartels and potential cartels are contained in appendix B.4

~Requ; remf;n ts for Fu]f;]ling a National MO teriols Policy,

Proceedings of an Engineering Foundation Conference held at

Henniker, NH., August 1974. Note.—All other references to articles from these proceedings will be cited as the Henniker

Report.

%ee also the Council on International Economic Policy

Speciul Report: Critical Imported Materials for an analysis of

the potential for materials cartelization, and Eight Mineral Cartels; The New Challenge To Industrialized Nations, published

by Metals W[!f?k, 1975.

CHAPTER II

a. Copper Cartel.—The Internationa l

Council of Copper Exporting Countries

(CIPEC) has been less successful than OPEC,

due in part to the fact that the four countries in

CIPEC control only about one-third of the

world production. In any event, CIPEC poses

little threat in terms of supply disruptions to

the United States, which is almost independent of foreign sources for copper. However, a

successful action by CIPEC will certainly

affect domestic copper prices.

b. Bauxite Cartel.--Other than OPEC, this

is probably the most serious cartel threat to the

United States. Ten countries which produce

over 65 percent of the world’s output and account for 80 percent of the bauxite/alumina

trade are members of the International Bauxite

Association. The IBA’s purposes are to coordinate information on bauxite production and

increase revenues from bauxite operations in

member countries. Unilateral action by

Jamaica, which accounts for about 20 percent

of world production, increased revenue from

the sale of bauxite through higher taxes.

Although that country may press other members of the IBA to attempt joint restrictions of

supply, no firm pricing and taxing policies

have yet been established. The U.S. response

to supply or further price actions could be a

shift to substitute materials and, in the long

run, the domestic development of aluminumbearing clays and other aluminum bearing

materials,

c. Mercury Cartel.—A mercury cartel has

had an intermittent existence over the last 50

years. During the early 1970’s a group of mercury producers met informally to exchange

market views and try to formulate a price

policy. A producers’ organization, formed in

May 1974 to maintain high prices, has been

unsuccessful and is likely to remain so because

of the existing U.S. mercury stockpile and the

decrease in world demand.

29
CHAPTER II

-m.c

z

i 0 0

N In

o 0

0 0

+ e

0

0

-

m

o

0

0-

G.- J

30
CHAPTER 11

Ii

- 0

c

m

d

N

-r

o 0

a) OY

o

0? o

c-o

‘z

-c

c

5

8.

cc

c

c

0

31
CHAPTER 11

C. RESPONSE OF US MARKET SYSTEM TO

In mid-1973, the Secretary of the Interior

issued his “Second Annual Report Under the

Mining and Minerals Policy Act of 1970. ” Stating that “development of domestic mineral

resources is not keeping pace with domestic

demand, ” he cited nine major problem areas

confronting the mining, minerals, metal,

mineral reclamation, and energy industries. Of

the nine areas cited, two are of particular importance in relation to how the U.S. market

system

●

●

responds to materials problems;

Expropriate ions, confiscations, and

forced modifications of agreements

have severely modified the flow to the

United States of some foreign mineral

materials produced by U.S. firms

operating abroad, and have made other

materials more costly; and

U.S. industry is encountering greater

competition ‘from foreign nations and

supranational groups in developing

new foreign mineral supplies and in

assuring the long-term flow o f

minerals to the United States.

The Secretary made a number of corrective

legislative recommendations, including the

creation of a Department of Energy and

Natural Resources, provision of an organic act

for the Bureau of Land Management, revision

of the mineral leasing laws, regulation of surface mining activities, amendment of the

Natural Gas Act, construction of deepwater

ports, and modifications of right-of-way

limitations. Only the latter recommendation,

defined as the Alaska pipeline bill, was

enacted into law in 1973; the other recommendations were carried forward as considerations

for the 94th Congress.

Also in mid-1973, the National Commission

on Materials Policy (NCMP) issued its Final

Report which made 177 detailed recommendations, those affecting minerals being in close

agreement with the Interior Minerals Policy

32

MATERIAL PROBLEMS

Report. Perhaps the most significant recommendation of the NCMP was that

it should be the policy of the United States to

rely on market forces as a prime determinant of

the mix of imports and domestic production in

the field of materials but at the same time

decrease and prevent wherever necessary a

dangerous or costly dependence on imports.5

Under the extraordinary conditions now

facing the United States, however, the

American market system may be unable to

respond quickly and effectively to the variety

of supply problems now occurring. One major

reason is the system’s dependence for much of

its raw materials upon purchases in international markets which are undergoing rapid

changes and do not operate in the same manner as the U.S. system. Whereas in the past

many U.S. firms had subsidiaries abroad

which provided much of their raw materials,

now the situation is complicated by direct

foreign government involvement in many industrial phases of raw materials supply. In the

United States the political and social ramifications involving raw materials producers or

consumers may override economic factors.

Furthermore, legal and constitutional barriers

may be deterrents to the production and flow

of raw materials. Aside from the significant

impact of the raw materials problems stemming from import dependence, the U.S.

economy is faced with problems of quick and

effective response to domestic supply/demand

changes.

For these reasons, analysis of a certain

limited form of Government action to complement the market may be necessary. It must be

clearly recognized, however, that an economic

stockpile is subject to political as well as

economic manipulation. Its mere existence

constitutes a threat overhanging the market,

sNational Commission on Materials Policy, Material Needs

and the Environment, June 1973,
CHAPTER II

unless acquisitions, holdings, and disposals are amine how national stockpiling policy can be

carefully disciplined with respect to the poten- used to assist, not replace, private industry’s

tial dangers of market management. It is management and operations in the American

therefore the purpose of this assessment to ex- market system.

D. USE OF U.S. STOCKPILES FOR ECONOMIC PURPOSES

The only direct U.S. experience with

stockpiling has been the handling of materials

in the agricultural and strategic stockpiles and

Defense Production Act inventories.6 Despite

their statutory limitation to military purposes,

these stockpiles have in actual practive been

used as a de facto economic stockpile,

especially through disposals after the termination of national emergencies. Moreover, recent

disposals from both the strategic stockpile and

Defense Production Act inventories have

depleted U.S. materials resources to the extent

that our capabilities to discourage or counteract foreign disruptions of materials required

by the economy have been seriously compromised.

1. Economic Use of the Strategic Stockpile

The Stockpiling Act of 1946 specifically,

albeit unintentionally, included some aspects

of an economic stockpile when it provided in

section 3 that purchases of strategic and critical materials be made, so far as practicable,

from supplies of materials in excess of the current industrial demand. In the same Section,

the matter of disposals provides for the protection of producers, processors, and consumers

against avoidable disruption of their usual

markets.

Acquisition and sale of materials from the

strategic stockpile were governed by the imbalance between objectives and inventories.7

~For further elabora t ion of the events discussed here, see

app. A.

7As exp]a]ned in ch, 1, stockpiling objective in this study

refers to the goal (or use) of a given stockpiling policy, not to the

amount of material to be stockpiled, as defined here by the

strategic stockpile.

The objectives were governed by an everchanging set of assumptions relating to the

length of war, accessibility of foreign supply,

size of the Armed Forces, degree of civilian

austerity, and similar considerations which

had a profound effect on either demand or

supply or both, and consequently on the size of

the stockpile objective, This, in turn, determined whether or not Congress could be asked

for money to buy or authorization to sell. Not

surprisingly, the record shows that when there

was a disposition toward acquisition of

materials, for whatever reason, the assumptions tended to result in reduced supply estimates and/or increased demand estimates.

When disposal became a policy objective,

whether to fight inflation or simply to add to

Treasury receipts, changes in the assumption

produced a totally opposite supply/demand

effect.

Evidence of the foregoing abounds in the

case studies and other materials developed

from the literature search conducted during

this assessment. Specifically, the post-Korean

war acquisition period in the fifties, the disposals during the peak of the Vietnam war

production effort in the sixties, and the inflation fight of the early seventies provide highlights over a period of several decades. One

item of interest is the total independence of

the stockpile program and actions from political-party persuasion. Managing a stockpile has

many political aspects, but orientation to one

party or the other has not been one of them.

In addition to the effect of changing

assumptions or objectives, one other aspect of

the management of the strategic stockpile

should be mentioned. Under section 5a of the

33
CHAPTER 11

Stockpiling Act, the President can order

releases of material when, in his judgment,

such release is “required for purposes of the

common defense. ” Thus, the released material

was allocated by the Commerce Department

largely to contractors and subcontractors based

on their defense-rated orders for programs of

the Department of Defense, the Energy

Research and Development Administration,

the Nuclear Regulatory Commission, and

the National Aeronautics and Space Administration. The rules were followed to the

letter and beyond in the sense that “common

defense” was given the broadest possible interpretation.

The net effect, however, was essentially the

opposite of what appeared on the surface. As

pointed out earlier, defense production and

construction operated under the rules of the

Defense Materials System (DMS). Under those

rules, purchase orders of defense contractors

had an absolute priority over purchase orders

of nondefense contractors. After defense

needs were met from available supply, the remainder was sold to meet nondefense needs.

To the extent that defense needs were met by

a stockpile release, an equivalent amount of

material was made available from regular supply for sale to nondefense users.

2. Defense Production Act Inventory

The above discussion relates primarily to

the strategic and critical materials stockpile,

for which statutory language was relatively

tight. However, purchasing and disposal actions under the Defense Production Act (DPA)

inventory took place under a much more flexible set of rules.

Under the Defense Production Act of 1950,

congressional approval of individual actions

was not required. As a matter of fact, the

program was managed by the Director of

Emergency Preparedness and predecessor

agencies. He could accept deliveries into the

DPA inventory, divert them to private industry, or accept them and transfer them to the

strategic stockpile to remove the threat of their

sale from the market.

34

The DPA inventory was not originally envisaged as a stockpile. As is pointed out

several times in the literature search, floor

price purchase contracts represented an inducement to help persuade private investors to

expand productive capacity. e In some cases

deliveries were small in relation to the potential expectations (or fears) of the DPA program

managers of the 1950’s. As time went on, the

huge amounts of materials made it possible to

use the DPA inventory as an economic balance

wheel, and it was so used.

Table II–2 presents a summary of stockpile

disposals (as of March 31, 1975) from the

various types of inventories, comparing sales

values with acquisition costs. Total sales value

of all disposals is about 3 percent above acquisition costs. A somewhat different comparison between national stockpile inventory

acquisition costs and market values (which do

not necessarily reflect the amount that would

be realized at time of sale) shows the result of

inflationary rises, especially in 1973 and 1974.

At the end of 1966, these two figures were

fairly close—$4.7 billion in inventory, against

a market value of $4.8 billion. By June 30, 1975,

as a result of large amounts of disposals, inventories had been reduced to $2.6 billion,

while their market value was calculated at

more than $5.4 billion.

In these program actions, there is not the

slightest suggestion that any law was violated

or any action of questionable legality taken.

Nevertheless, the history of U.S. stockpiling

makes it abundantly clear that any legislation

establishing an economic stockpile and

delegating operational authority to the executive branch should be designed to include congressional review and approval. 9 In March

1975, the General Accounting Office (GAO)

recommended in a report to Congress that

“until the Nation’s critical resource requirements are clarified, the Congress may” wish to

consider halting future disposals currently

Wee the case study, “Releases of Copper from the Stockpile, ”

App. B.

~See, for example, S. 1869, a bill to provide for national

stockpiles to protect the economic security of the United States.
CHAPTER II

Table II–2.—Summary of stockpile disposals as of Mar. 31, 1975

Saks commitments

Nature of disposal

Sales value I Acquisition cost

Cumulative to date:

National and supplemental stockpiles. . . . . . ., . . . . . . . . . . . . . . , .

Defense Production Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Presidential releases. . . . . . . . . . . . . . . . . . . . . . . . ~ . . . . . . . . . . . . . . . . . . . . . . . . .

Total disposals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Purchase and resale: Defense Production Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Grand total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,.. ..,O.

$4,823,872,570

1,347,293,393

212,170,670

487,955,000

6,871,291,633

1,749,646,112

8,620,937,745

$4450,789,238

1,589,238,982

94,007,911

389,119,000

6,523,155,131

1,808,406,671

8,331,561,802

NOTE:-Acquisition cost is based on the average unit price of inventory on hand at time of sale. This unit price is established

without regard for (I

) the grade, type, or quality of the commodity in inventory, and (2) the varying purchase prices or appraisal value

that have accumulated in inventory records since the inception of the program.

Source: General Services Administration DM-80 Quarterly Report, Mar. 31.1975.

authorized under specific legislation and grant

no further requests to dispose of strategic and

critical materials. ”10 The report also suggested

that Congress might want to “study the advisability of broadening the strategic and critical materials stockpile concept to release

material to meet short-term economic as well

as national defense emergencies. ” In addition

to the GAO report, the House Armed Services

Committee has requested a complete reevaluation of the requirements of the strategic

stockpile in terms of materials and the length

of a potential conflict requiring their use.

Further, Senator Domenici introduced a bill,

S.2767, which calls for a moratorium of 1 year

on all sales from the strategic stockpile, including those previously authorized but not sold.

This bill was introduced to enable a reevaluation of the strategic stockpile, permit the question of an economic stockpile to be resolved,

and insure that no materials would be sold

which might have to be purchased in the

future at an increased price.

3. Interaction Among Federal Agencies

Another useful product of the literature

search is the insight provided into the actions

and interactions among Congress, the execu -

IOGenera] Accounting office,

Strategic and Critical Materials

Because of Shortages,” March 1975.

“Stockpile Objectives of

Should Be Reconsidered

tive branch, private industry, and persons

responsible for other Government programs

such as national security, economic stabilization, industrial growth, and budget deficits.

On the one hand, no amount of literature

can ever adequately convey the strength of the

pressures, the degree of abrasion, or the intensity of program conflicts. These are not committed to paper. Yet the literature search did

illustrate that powerful forces and pressures

were commonplace for many stockpile transactions. The significance of this is simply that

if a defense-oriented stockpile is susceptible to

external forces, it can certainly be expected

that similar pressures will rise exponentially

for an economic stockpile.

Given these pressures and potential conflicts, any piece of economic stockpiling

legislation will have to be both more flexible

and less flexible than the strategic stockpiling

legislation: more flexible in the sense that disposals under present legislation take so long

that the optimal selling time frequently disappears by the time action can be taken, and less

flexible in addressing the question of the

policy assumptions which underlie individual

actions. Perhaps the process could be speeded

up by having the President submit a proposed

transaction to Congress which

10-day period for disapproval.

would have a

35

77-119 0 -76-4
CHAPTER II

E. ECONOMIC STOCKPILING IN FOREIGN COUNTRIES

The same threats of supply disruptions

which could seriously affect the United States

could also damage the economies of other nations, many of which are more import dependent than the United States. Several of these

countries have established or are planning to

establish economic stockpiles as a form of selfprotection against supply disruptions or price

increases, It is extremely important for the

United States to pay close attention to the

materials which these countries may stockpile.

Inherently, economic stockpiling is a process

of market intervention and will creat e

economic as well as social and political impacts,

One country which maintains both a

government-owned stockpile and grants incentives to private industry to insure supply

and price stability is Sweden. Sweden is now

ranked fourth in the world in the production

of iron ore and is still discovering new

deposits. The major importers of Swedish iron

ore are West Germany, the United Kingdom,

and Belgium-Luxembourg. If Sweden decided

to cut back on its exportation of iron ore, for

either price or strategic reasons, the importing

nations could be adversely affected, creating

foreign policy implications for the United

States. For example, if West Germany were

unable to receive its needed iron ore supply, it

might very well turn to the United States to

supply some of its needs. These stockpiling

programs are summarized in the following sections; a more detailed analysis is included in

appendix C,

1. Japan

The Japanese Government is considering

several forms of economic stockpiling. In 1974,

the Mining Industry Council, an advisory

group to the Ministry of International Trade in

Industry (MITI), recommended that the

Japanese Government immediately subsidize

the stockpiling of nine nonferrous metals:

●

●

●

The

Immediate stockpiling of copper,

nickel, chromium, and tungsten;

Stockpiling held desirable but not currently appropriate for zinc, cobalt, and

molybdenum; and

Supplies considered stable but in need

of continuing observation for tin and

antimony.

stockpiling program will be carried out

by a private corporation financed by Government-guaranteed funds and partially subsidized by the Government. The corporation—

Japan Metal Mining Public Corporation-controlled by MITI is supervising the issuance of

bonds.

“Scrap Steel Stockpiling” was created in

1975 by MITI with the formation of a nonprofit foundation composed of steel manufacturers, scrap wholesalers, and scrap collectors.

It will stockpile steel to stabilize domestic

prices of scrap and to encourage recycling of

steel. In addition to this, a special recycling

association was created to promote utilization

of iron resources, It will generate loans for

new equipment and develop new technology

for utilization of scrap.

2. France

In 1972, the French Government decided to

establish a natural stockpile of critical

materials to meet economic rather than

strategic supply crises. The French economic

stockpile has four purposes:

●

●

●

●

Serve political and economic defense

needs,

Reduce the excessive vulnerability of

certain processing industries,

Allow France to participate in international agreements to stabilize prices of

raw materials, and

Provide a basis for regulating prices of

materials.

36
The stockpile management is under the

“Groupment d’Importation et de Repartition

des Meteoux” (GIRM). GIRM specifically will

assist French mining companies beyond their

traditional efforts in French Africa and oversea territories. It will help French companies

extend endeavors into developed countries

with mineral resources such as Canada and

Australia and oil-rich countries such as Iran,

Indonesia, Zaire, Yugoslavia, and Brazil.

The economic stockpile will contain 2

months’ average input supply of each category

of materials. One hundred million francs (approximately $23 million) were provided for

1975. Appropriations are expected to double in

1976 and remain there for the level build up of

3 to 4 years.

3. Sweden

The Swedish inventory managemen t

system provides incentives to private industry

to maintain stockpiles. This is done through

taxation of corporate income in three areas:

●

●

●

Inventory valuation,

Depreciation, and

Reserves for future investment.

In reality these will not create a national

stockpile but rather a healthy industry with inventories large enough to meet emergency

situations.

CHAPTER 11

4. European Common Market (EEC)

The Common Market Study currently underway is oriented toward a policy /

management system. The policy objectives include the growth and stabilization of the

economics of less-developed countries now

dependent on revenue from exports of particular materials.

To support these objectives, the EEC nations would enter long-term agreements for

purchase of such materials and agree upon

prices. This would presumably work independently of the world market prices being either

higher or lower. West Germany is very concerned about any EEC program which could

interfere with the operation of the free enterprise system.

The EEC study consideration is an alternative to economic stockpiling. A big question is

how it could work without affecting world

market prices and/or other nations.

5. Other Countries

The United Kingdom is also creating an

economic stockpile, and unconfirmed reports

indicate that this is the case in several other

countries, including Brazil. Of considerable

importance is the question of how various national economic stockpiles will relate to one

another, and of their tremendous potential for

abuse and use beyond the intended policy objectives.

37
Chapter Ill

SPECIFIC PURPOSES

OF ECONOMIC STOCKPILING

39
Chapter Ill

SPECIFIC PURPOSES

OF ECONOMIC STOCKPILING

This chapter is a discussion of the overall operation of an economic stockpile

and the rationale used in selecting specific policies and materials for detailed

assessment. The following information is presented:

●

●

●

Conceptual logic of economic .

stockpiling;

Development of economic stockpil- .

ing policies for initial consideration;

Interviews with U.S. business, labor,

Classification of stockpilin g

policies for detailed analysis; and

Decision Criteria—a model fo r

developing and implementin g

economic stockpiling.

government , and civic actio n

groups;

A. CONCEPTUAL LOGIC OF ECONOMIC STOCKPILING

From the point of view of economic policy,

any materials stockpile involves three basic

considerations: first, the possible national purposes which the stockpile might achieve; second, the economic trends and cycles anticipated during the overall stockpiling operation

of buying, holding, and selling to achieve the

policy objective; and third, the types of

benefits and costs which accrue to the country

in general as a result of stockpiling.

1. Possible Functions of an Economic Stockpile

A stockpile is an inventory of supplies

whether maintained by private individuals

and business enterprises or by the Federal

Government. Inventories maintained for private purposes are held for convenience, for

continuity of supply under a variety of conditions of supply disruptions, for anticipation of

price increases, and for several other reasons.

Stockpiles maintained by the Federal Government can also serve a variety of purposes, as

the following list indicates:

●

●

●

●

Provide source of supply for shortterm national shortages,

Deter monopolistic control of supply,

Stabilize supply/demand through

buffer stock, and

Provide support to price support

programs,

a. Provide Source of Supply for ShortTerm National Short ages.—Nationa l

stockpiles have been established to provide the

supply of critical materials for use during wartime and other national emergencies.

Stockpiles established under the Strategic

Stockpile Act of 1946 still exist, but are limited

to use during wartime emergency conditions.

41
CIIAPTER 111

Economic stockpiles can serve similar roles in

providing continuity of supply for foreign

source materials; for other emergency disruptions of supply such as natural disasters,

prolonged labor strikes in the source country,

or transportation bottlenecks; and for embargoes as in the recent petroleum restriction

by the OPEC countries.

Inventories are customarily maintained by

the private sector to provide continuity of supply between orders and are based on cost considerations which could include potential disruptions. However, industrial and commercial

users may not individually account for remote

possibilities or may not have information to

adequately guard against the possibilities. The

function of a national economic stockpile

would be to serve as insurance against remote,

but disastrous occurrences, and the stock

would supplement the protection customarily

maintained by the private sector.

b. Deter Monopolistic Control of Supply.—Where material producers might form

cartels to impose monopolistic pricing and

where the United States is a major consumer,

the existence of an adequate stockpile could

provide the competitive source to restrain

monopolistic control. This stockpile would be

most effective where the producer countries’

economics are highly dependent upon the production of the material, as the economies may

not be able to sustain reduced production

while attempting to organize and impose

monopolistic controls. Many of the source

countries in which cartelization is possible are

developing countries whose economies are dependent upon their mineral resources. Thus,

where cartelization is a significant threat, the

formation of a U.S. economic stockpile could

serve as an effective counterthreat. The size of

the economic stockpile would be an important

element in the effectiveness of this stockpile

function, as the stockpile must exceed the

committed resources of the potential cartel.

c. Stabilize Supply or Demand Through

Buffer Stock. —Many raw materials are subject to wide variations in demand which are

42

nonseasonal, resulting in wide variations in

both prices and production of raw material.

These variations in production disrupt

revenues and employment and can create major social hardships, if not inefficiencies in

production, due to idle capacities during low

production periods and use of inefficient

facilities and equipment during periods of

peak production. Wide variations in prices

and availabilities of raw materials also create

inefficiencies in the consuming industries for

similar reasons. A national economi c

stockpile could serve as a buffer stock to

cushion these impacts by absorbing some of

the production during periods of low demand

and dispensing stocks during times of

unusually high demand, Such use of the

stockpile could help stabilize production and

material availability, and result in more efficient resources utilization for both the producers and the consumers. For internationally

traded commodities, a stockpile serving this

function in the principal consuming and producing countries could result in a more equitable distribution of stockpile resources and

could probably result in more effective

moderation of price and production variations.

More specialized versions of this buffer

stock function can be served by a stockpile

which is designed to accommodate special

needs. For example, a “stockpile” for recycled

materials generated by municipal waste

management programs could provide a constant market so that municipal waste recycling

programs would not be subject to widely fluctuating revenues. The purpose of this

“’stockpile” would not be to influence market

prices for scrap material, but rather to stabilize

the revenue for public interest ventures,

d. Provide Support to Price Support

Programs. —Government price-support

programs to encourage marginal and submarginal producers of critical materials can

result in stockpiling if the program involves

outright purchase by the Government. There

are many reasons why the Government might

provide support to marginal and submarginal
producers: maintain minimal domestic production, support the development of new technology such as the production of synthetic

fuel, achieve welfare purposes such as maintaining employment levels in economically

depressed areas. Government purchases leading to a stockpile may have certain advantages over direct production subsidies, depending upon the particular circumstances. A

stockpile generated through a price-support

program can be used for any of the functions

served by a stockpile created from direct

market purchases of commodities o f

equivalent specification,

2. Economic Trends and Cycles of Stockpiling

Any stockpiling operation has three phases:

(1) buying, or otherwise acquiring, commodities; (2) holding these commodities; and

(3) selling or threatening to sell these commodities to achieve some benefit. 1 Becaus e

holding costs may continue throughout all

three of these phases in the operation of a

stockpile, the decision to continue holding

stocks, or to buy or sell, must be periodically

reviewed in terms of an assumed future time

of operation, and the net benefits (i. e., benefits

minus costs, which may be either positive or

negative) must be estimated by assuming a

particular economic scenario.

Within these operational phases, it is useful

to consider stockpiling in terms of the factors

of anticipated economic conditions during a

cycle of use, and the purpose of stockpiling

under these conditions. Over the anticipated

lifetime of a stockpile, the policy can be

designed in anticipation of (1) fluctuating

commodity prices superimposed on a longtime, constant average price; (2) a general

trend toward increasing prices; or (3) a

general trend toward decreasing prices. For

each of these conditions, a stockpile might

conceivably be designed either to minimize the

deviation from a constant price or accept the

I%e chs. IV and V for a discussion of how the conceptual

logic of economic stockpiling provides the framework for the

economic impact a na Iys is,

CHAPTER 111

deviations and attempt to use them to benefit

some segment of producers or consumers. Five

types of economic stockpiles for these conditions are discussed as follows:

a. Stockpile: Type 1.—A stockpil e

designed to minimize the extent of these fluctuations is the case usually considered in discussions of economic stockpiling. Such fluctuations include the situation in which a cartel

is formed to raise the price of a mineral product—not only to the price of potential production from alternate, undeveloped sources, but

above this price in the expectation that the

high price can be maintained until the alternate sources are brought into production and

the latter can then be slightly undercut. A

stockpile could provide a deterrent to this action by forcing the cartel to sustain a loss of

sales until the stockpile is exhausted, Using a

stockpile to deter market fluctuation is the

most commonly considered example ;

however, cartels are not the only cause of

relatively sudden changes in commodity

prices. Other causes and the resulting stockpile

possibilities can be considered as well.

b. Stockpile: Type 2 .—In contrast to Type

1, this stockpile could involve accepting the

fluctuation price for the general market but

providing a stockpile to shelter a particular

group of producers or consumers from the full

extent of fluctuations. For example, scrap

prices may undergo wide variations. A recycling facility for urban waste which depends on

the sale of scrap at near-average prices for

economic feasibility y might be greatly benefited

by a stockpile which bought only the recycled

output during times of low prices and sold

scrap during times of high price. This stockpile

would be intended not to reduce price fluctua -

tions, but to minimize adverse loss (or even extract net benefit) for a particular industry in

the public interest. Such a stockpile would require much less investment than one which

would require a sufficient volume of stocks to

affect market prices.

c. Stockpile: Type 3.—A generally rising

price might eventually bring presently

marginal sources into production. It may

43
———— --—

CHAPTER II

therefore be in the public interest to hasten

production from such sources through a third

type of stockpile—a publicly supported

stockpile which purchases only from such

marginal sources. For example, oil prices seem

likely to rise as world supplies are slowly exhausted. The desirability of a U.S. oil stockpile

to discourage another oil embargo is therefore

being implemented, Purchasing oil for this

stockpile on the open market may tend to increase the already high prices. If instead, the

stockpile were slowly built up by purchasing

only U.S. made synthetic oil, double purposes

would be served of creating a synthetic fuel

and of deterring cartel actions. The alternative

of direct subsidy for the synthetic-fuel industry and direct purchase of petroleum for the

stockpile may be preferable, but the policy of

stockpiling synthetic oil needs to be examined.

If carried out successfully, it might actually

reduce the rate of price increase through the

development of a synthetic-fuel industry,

d. Stockpile: Type 4.—This stockpile

offers the potential for making money by holding commodities in anticipation of higher

prices. There may be reason to take measures,

including stockpiling of selected materials or

commodities, for which one may be able to anticipate a future technology and use or demand that may be difficult or inefficient to

fulfill in the future in the absence of present

preparation, Stockpiling in the present to meet

a future use or demand may be compared with

saving or, more importantly, if it stimulates

technology and the economy, with investment,

A federally-supported stockpile for this purpose would be in competition with private

speculators and would achieve any profits at

the expense of producers and consumers. This

type of stockpile does not appear likely to be in

the public interest on first examination,

e. Stockpile: Type 5.—A fifth type of

stockpile could sustain otherwise declining

prices for a while through massive purchases

but would eventually suffer heavy losses. Like

type 4, this stockpile was not considered

further because it does not appear to offer any

net benefits.

44

3. Types of Benefits and Costs

Economic Stockpiling

Involved in

There are four types of benefits and costs

involved in the life-cycle operation of an

economic stockpile, These include:

●

●

●

●

The

The direct benefits and costs to

materials producers,

The direct benefits and costs to

materials consumers,

The benefits and costs borne by the

stockpile investor, and

The external benefits and costs to the

economy in general.

first two types of benefits and costs

cited above are directly related to the two

general interest groups impacted by economic

stockpiling: materials producers and materials

consumers. To assess the real impact of a

public policy on economic stockpiling, one

must identify the relative benefits and costs

which accrue to each of these interest groups

as a result of stockpiling. Other parties which

are impacted must also be considered, but an

analysis can begin with these two directly impacted groups. In special situations, an

economic stockpile might benefit only one party and produce a cost (loss) to the other party.

Even so, however, stockpiling might still be

considered in the national interest if the

benefits are large, or if political considerations

override economic costs.

The two parties concerned with stockpiling

a particular commodity can be further divided

into three categories, depending on whether

the impacted party is predominantly domestic,

foreign, or mixed to a significant extent, In

considering benefits and losses expected to accrue to the United States from a particular

stockpiling policy, this distinction is important, Benefits or costs to parties outside the

United States may be omitted from an estimate

of the benefits to the United States, but should

still be considered as an aspect of foreign

policy.

In addition to the parties directly impacted,

an economic stockpile will also have indirect
CHAPTER 11

economic impacts upon the stockpile investor

and create external benefits or costs to the

economy in general. The investor might be the

Federal Government which would be responsible for allocating the funds required to initiate

and operate the stockpile. External costs or

benefits would not be to direct consumers of

the commodity, but to consumers of products

made from the commodity. These indirect impacts on the general economy must be addressed separately from the gains or losses of

the principal interest groups so that the relative economic impacts of a materials stockpile

can be determined.

4. Rationale for Federal Government Support of

Economic Stockpiling

The justification for strategic stockpiles to

provide materials critical to national survival

during wartime is evident. Under less critical

conditions, the question of whether the public

interest will be served by an economic

stockpile must be carefully assessed. The private-sector producers and consumers maintain their own inventory to serve their particular needs. Since continuity of their own operations is a major motivation for their stockpiling practices, self-interest compels their action

to include consideration of the functions

which a Government economic stockpile

might serve. Clearly, however, the adequacy

of the protection provided will depend upon

the perceived threats, availability of capital

and allocation to competitive uses, and the

management attitudes and policies concerning

risks.

There are a number of reasons why private

inventories will not be adequate. Industrial

and commercial inventories are generally

based on “normal” uncertainties arising from

past experiences, while potential supply disruptions due to politically motivated embargoes, natural disasters, and other reasons

for which a national stockpile might be maintained are long-shot risks and are highly erratic occurrences, Even if industrial managers

do foresee possible supply disruptions due to

these occurrences, their assessment of the

risks may be inaccurate with respect to the

timing or the magnitude. Furthermore, and

perhaps most important, private investments

do not account for the secondary costs or

negative externalities arising from a shortage—possible unemployment in both the

consuming industry and their customers, as

well as the impact of higher prices on the

material and its products. A further consideration includes the fact that, even though some

private inventories may be adequate to accommodate the disruptions, the smaller firms and

the marginal firms may be severely handicapped.

It is unlikely that private inventories.

however conscious of potential cartelization of

the material supply, will be adequate to deter

the formation of cartels and their consequent

monopolistic controls for most materials. Private resources and efforts for combating cartelization are unlikely to be successful without

the support of the Federal Government. Should

the threat of monopolistic control be great

enough, there appears to be justification for

considering a national economic stockpile as

one means of deterring such possibilities. This

point of view is supported by the overwhelming approval given to an economic stockpile

for insuring materials supply by industry

representatives interviewed for this assessment.

The justification of Federal Government

maintenance of buffer stocks to stabilize

material supply and demand is much more

controversial and depends upon the extent and

nature of governmental involvement. The case

for governmental involvement depends upon

whether or not it can be demonstrated that the

Government can impartially and equitably

moderate market forces without impairing the

American market mechanisms and whether

the achievable stabilization is worth the costs

of the Government enterprise. Buffer stocks

maintained in support of international commodity agreements constitute a form of

Government involvement which may be

beneficial. Also, the justification for a

45
CHAPTER III

specialized stockpile—like that, for example,

in support of a waste material recycle program

where the intent is to assist municipal governments without attempting to influence the

general market—is a worthwhile consideration.

The justification for an economic stockpile

developed as an integral part of price-support

programs will depend upon the feasibility of

the price-support program and upon the function to be served by the stockpile.

5. Total Net Benefits of Economic

The task of this assessment is

B. DEVELOPMENT

FOR

The socio-politico-economic

Stockpiling

to ascertain

whether or not an economic stockpile will

yield total net benefits to society. The total net

benefits to society of an economic stockpile

can be determined as a function of separate

economic, political, and social, net benefits. If

these separate benefits could be quantified in

dollars, the total net benefits to society could

then be determined. However, this is not easily

accomplished, since only the economic net

benefits (in dollars) can be fully determined

using quantitative methods, and even these conta in qualitative variables. The remaining

political and social benefits can only be determined using qualitative methods. For a further

analysis of these benefits see chapters IV

and V.

OF ECONOMIC STOCKPILING POLICIES

INITIAL CONSIDERATION

system in

which the materials production and distribution activities exist is a complex mechanism

which is difficult to understand. Often good

solutions to problems turn out to be poor ones

in the light of broader overviews, and attempts

to institute controls in one sector can produce

unwanted impacts in other sectors because of

unknown and unanticipated relationships

among the system elements. Because critical

materials, almost by definition, have many

trails into the economic system, investigation

of problems for which stockpiling might be a

suitable option requires a systematic, problemoriented analysis. In general, this means embedding the problem within the largest tractable network of influences, constraints, and

controls; consideration of all reasonable alternatives; and careful assessment of the impacts

of potential actions under clearly defined criteria.

1. National Policy Objectives

It is especially important to select for

analysis stockpiling policies which can be related to a set of higher national objectives, such

46

as those listed below from the National Commission on Materials Policy:

●

●

●

●

●

Provide adequate energy and materials

supplies to satisfy not only the basic

needs of nutrition, shelter, and health,

but a dynamic economy, without indulgence in waste;

Rely on market forces as a prime determinant of the mix of imports and

domestic production in the field of

materials but at the same time decrease

and prevent wherever necessary a

dangerous and costly dependence on

imports;

Accomplish the foregoing objectives

while protecting or enhancing the environment in which we live;

Conserve our natural resources and environment by treating waste materials

as resources and returning them either

to use or, in a harmless condition, to

the eco-system; and

Institute coordinated resource policy

planning which recognizes the inter-
relationships among materials, energy,

and the environment. z

The identification of such national policies,

however directly or indirectly stated, should

be considered in order to assess, first, whether

or not a set of stockpiling policies is sufficiently comprehensive to address today’s

materials problems, and second, to allow identification of alternatives to stockpiling in relation to a higher level policy objective.

For practical purposes, this assessment considered the multitude of various impacts and

issues surrounding each stockpiling policy as

separate and independent from the complexities of any other policy. It is possible,

however, that several policies could be implemented simultaneously. This suggests that

stockpiling policies can be considered in terms

of their interrelationships. The simultaneous

operation of two or more stockpiling policies

would not necessarily add further difficulty,

since there may be a great degree of commonality between them. One stockpiling

policy may, for example, achieve objectives

similar to those of other policies, or two

different policies may require the same

materials.

2. Eleven Stockpiling Policies (SP) Studied

The various functions which might be

served by economic stockpiling can be further

specified to achieve particular policy objectives. Eleven such purposes have been identified and are defined below.

a. Discourage or Counteract Cartel or

Unilateral Political Actions Affecting Price

or Supply .—This stockpiling policy would be

directed to a foreign country or combination of

countries with the power to affect the price

and supply of materials to the United States.

The recent multiplying of prices by the oil

cartel is an example of the type of situation to

which this stockpiling policy could be directed.

zNCMp, MfJteria/ Nee(~s and the Envjronmen t. The Na tiona ]

Commission on Materials Policy, June 1973.

CHPTER III

Recent actions on bauxite, copper, and iron ore

are other examples of such concerns.

b. Cushion the Impact of Nonpolitical Import Disruption.—This stockpiling policy

would support the maintenance of operations

which depend on foreign source materials.

Disruption of imports could result from strikes,

shipping problems, disasters, business actions,

or any number of nonpolitical events which

could not be overcome by the adjustment of

prices.

c. Assist in International Materials

Market Stabilization.—This stockpiling

policy is designed to help stabilize world

prices. Since many prices are more volatile

abroad than in the United States and have a

secondary effect on U.S. prices, it would be advisable to counteract such wide price movements when they first gain impetus. This

could include stockpiling in cooperation with

other nations or international organizations.

d. Conserve Scarce Domestic Materials.—

This stockpiling policy would discourage current consumption of a scarce material by raising the price of the material through stockpile

purchases. This policy is worth considering

only if a scarce material is thought to have a

greater social value in the future.

e. Provide a Market for Temporar y

Surpluses and Ease Temporary Shortages.—

This stockpiling policy would reduce the undesirable economic and societal consequences

of temporary surpluses or shortages of selected

materials. Dampening wide swings in prices,

reducing or eliminating the shortage/surplus

caused by unemployment stoppages, and

reducing the necessity for increased capital

outlays are possible benefits from implementation.

f. Support Domestic Production o f

Selected Foreign Source Materials.—This

stockpiling policy would provide a market to

encourage domestic production of materials

not competitive with foreign sources regardless of price. It could also be used to decrease

and prevent, whenever possible, a dangerous

47
CHAPTER III

and costly dependence of the United States

upon foreign nations for supplies of these

materials in times of national emergency.

Purchases in the 1950’s of chrome, manganese,

and tungsten are examples of maintaining or

encouraging domestic production of foreign

source material.

g. Support Friendly Nations in the Event

of Temporary Materials Shortages in Those

Countries. —This stockpiling policy would

supply friendly nations in the event of

materials shortages.

h. Increase and/or Maintain Foreign

Country Production of Materials.—This

stockpiling policy would maintain the flow of

materials from foreign countries, espe

during depressed economic times

purchases by U.S. industry might be m

or even cut off completely,

cially

when

inimal

i. Commodity Trading Between th e

United States and Foreign Countries.—This

stockpiling policy would implement barter arrangements between the United States and

foreign countries. Barter arrangements could

include the trading of perishable commodities,

usually expensive to store, for nonperishable

industrial materials, An example of this was

the United States’ trading of wheat to India for

manganese. An attempt might also be made to

obtain a quid pro quo in terms of needed

materials for military or economic aid to

foreign countries. A possibility might be the

exchange of wheat for chromite ore or

petroleum from the U.S.S.R.

j. Advance New Technology for Materials

Supply.—This stockpiling policy would provide an assured market to stimulate the private development of new technology for

materials production which might otherwise

lie dormant for lack of urgency or financial

support, The purchase of titanium sponge in

recent times is a prime example, Purchase contracts utilizing such technologies could provide

materials for the stockpile without interfering

with industrial demands for raw materials,

enhance domestic capacity for continued production, and reduce dependency on foreign

sources of supply.

k. Encourage Recycling.—This stockpiling

policy would support the domestic recycling of

selected materials by providing a temporary

market pending the development of a continuous market based on new technology or

improved economics.

C. INTERVIEWS WITH U.S. BUSINESS,

LABOR, GOVERNMENT, AND CIVIC ACTION GROUPS

Selected interviews were conducted with

individuals in American business, labor,

government, and civic action agencies. The objectives of the interviews were twofold: (1) to

ascertain the views of people with materials

expertise regarding the feasibility of the 11

stockpiling policies and the criteria by which

one decides what materials should be included

in an economic stockpile; and (2) to obtain information relative to the impacts and issues

which bear directly upon implementing one or

more of the stockpiling policies. The findings

of the interviews are grouped below in seven

categories.

48

(1) Use of an economic stockpile by the

Government to support prices or ease price

pressure is considered risk laden, susceptible

to powerful political pressure, and likely to

cause substantial disruption in domestic and

international markets, s

(2) There is general support among the interviewees of the policies which deal with cartels and nonpolitical import disruptions,

tTh is includes the political actions affecting price included in the first stockpiling policy to deter or counteract

cartels.
although some individuals did express reservations about price elements. There were also

reservations with regard to the SP’s which

directly imply market and price intervention.

Where it existed, the intensity of feeling expressed in opposition to other SP’s was much

less than it was toward price-directed Government actions, As a matter of fact, reservations

made to policy objectives other than price

manipulation tend to be less philosophic and

more pragmatic, with reservations frequently

based upon the contention that an economic

stockpiling program is not the best method of

attaining stated policy objective.

(3) In only three cases out of 18 was the concept of an economic stockpile rejected

categorically as unsuitable for any of the 11

policy objectives. In two other cases, acceptance was limited and hedged. In each of the

remaining 13 interviews, there was complete

acceptance of an economic stockpiling

program as a feasible means for achieving one

or more of the 11 policy objectives.

(4) Except for those interviewed who expressed a fundamental philosophical objection

to economic stockpiling, a stockpile to lessen

the impact of a supply interruption (whether

politically inspired or not) received wide support. To those who have been heavily involved

in stockpiling problems over a period of years,

the foregoing conclusions are significant. If the

same people had been queried prior to the”

OPEC oil embargo in the fall of 1973, the maximum number of affirmative responses might

not have exceeded two, and might well have

been zero instead of 13.

(5) The interviews make it quite clear that

over the past 2 years a radical change has occurred in the way informed people think about

economic stockpiling. Now only a small number oppose the concept on philosophical

grounds. While the use of a stockpiling

program to manipulate prices has virtually no

support, expressions regarding the remaining

policies are mixed. Much of the negative

response reflects a belief that some alternative

approaches (e.g., Government loans or loan

CHAPTER III

guarantees, direct subsidies, tax incentives,

and the like) represent a more direct and effective way to achieve the objective of the

stockpiling policy.

With respect to the feasibility of an

economic stockpile, the implication of the interviews is self-evident. The creation of a

stockpile to reduce the impact of supply interruption would tend to be well received by virtually all segments of our economic structure

and social institutions. This presumes, of

course, a high degree of dependence on a

material critical to U.S. economic welfare for

which a supply interruption, whether for

political or nonpolitical reasons, is a significant possibility. Conversely, creation of a

stockpile to manage prices is likely to face an

opposite reception. For the remaining policies,

reception would be mixed, depending in the

final analysis upon a comparison with alternative means to achieving the same objective.

(6) A final word with respect to the interviews should be mentioned. Everyone addressing the subject stressed the degree of import dependence as a factor of domestic supply

and availability. Consequently, it is clear that

the greater the dependence, the greater the impact of a supply interruption and the more

serious the economic injury to the Nation.

On the other hand, the actual distribution of

a given shortage between the house -

hold/commercial sector and the industrial sectors can have a profound effect on the severity

of the economic impact of a supply interruption. This raises two questions: (1) Is it possible to effect a degree of redistribution? and (2)

Does the Government have the authority and

the means to effect the distribution?

Both points were well illustrated in the

1973–74 OPEC oil embargo. It was possible to

alter the distribution between the household/commercial sector and the industrial sectors; the Government had the authority to do

so and an agency was available to do it.

Through the oil allocation program, a disproportionate share of the shortage was distributed among the final consumers. Reduced

49
CHAPTER III

gasoline supply resulted in long lines at service stations, some increase in carpooling,

some increased use of public transportation,

some decrease in pleasure driving, and a substantial rise in public indignation. The

economic effects of the OPEC embargo were

discernible in reduced sales of large cars,

lower demand for motel rooms, curtailed

markets for recreational vehicles, and similar

economic activities associated with automotive travel. While those effects may not be

negligible and were especially severe to the

businesses directly involved, they represent

but a fraction of the economic injury which

could have been anticipated if a greater share

of the shortage had to be borne by the

petrochemical industry, or any other industry

for which the (energy) input-output ratio is

relatively rigid, at least in the short term.

At any rate, it is clear that in some cases the

degree-of-dependence rule has to be modified

to reflect the responsibility of reducing adverse economic effects by Government allocation actions, This would contemplate a tradeoff between reduced unemployment and

loss in GNP, on the one hand, and public indignation and/or rationing at the consumer level,

on the other,

(7) Great concern was expressed in the interviews about the possible political use of an

economic stockpile and the need to insulate

the management of an economic stockpile

from political pressure.

D. CLASSIFICATION OF STOCKPILING POLICIES

FOR DETAILED ANALYSIS

The 11 stockpiling policies developed above

were analyzed further to determine which

ones should be treated in depth. While some

degree of judgment is inherent in such a procedure, the technological and economic information background does exist and permitted a

reasoned choice without undertaking a lengthy analysis of alternatives.

1. Problem Origin, Function, and Principal

Impact Mode of Eleven Policies

Based upon the problem origin, function,

and principal impact mode, the 11 policies

defined earlier were organized in five categories, One stockpiling policy judged most important from each of the categories was

selected for detailed analysis, Those policies,

which are marked with an asterisk, have been

numbered SP 1–5 and given an abbreviated title for easy reference,

a. Foreign—Cartel Response

* SP–1: Discourage or Counteract Cartel

or Unilateral Political Actions Affecting Price or Supply (Political Disruptions).

b. Foreign—Nonpolitical Interruption

* SP–2: Cushion the impact of Nonpolitical Import Disruptions (Nonpolitical

Disruptions).

c. Foreign-General

* SP–3: Assist in International Materials

Market Stabilization (International

Market),

Support Friendly Nations in the Event

of Temporary Materials Shortages in

Those Countries.

Increase and/or Maintain Foreign

Country Production of Materials,

Commodity Trading Between the

United States and Foreign Countries.

d. Domestic—Supply Oriented

* SP–4: Conserve Scarce Domestic

Materials by Reducing Current Consumption (Conservation).

Support Domestic Production of

50
Selected Foreign Source Materials.

Advance New Technology fo r

Materials Supply.

Encourage Recycling.

e. Domestic—Price Oriented

* SP–5: Provide a Market for Temporary

Surpluses and Ease Temporary Shortages (Domestic Market).

2. Five Stockpiling Policies Selected for

Detailed Analysis

The five selected policies can be considered

in two main categories: (1) those dealing with

problems of foreign origin, and (2) those dealing with domestic situations which might aggravate problems of foreign origin,

a. Category 1. —Stockpiling options in this

category have three purposes: (1) discourage

or counteract cartels; (2) insure temporary

supply to U.S. consumers during nonpolitical,

foreign supply interruptions; and (3) assist in

international materials market stabilization.

CHAPTER III

An additional, secondary stockpiling function

associated with the third option would be to

assist other countries by providing supply during temporary shortages, by maintaining

foreign production during temporar y

surpluses, or by using stocks in commodity

trading.

b. Category 2.—Stockpiling options in this

category include (1) conserving scarce domestic

materials, and (2) reducing domestic price

variations through transactions only with

domestic producer and producers. Additional

functions which could be associated with the

first option are stockpiling to support substantially uneconomic domestic sources of imported materials at a minimal level to provide

standby capacity, to provide a market for promising new production technologies during

early development, and to develop or stabilize

the market for production from a recycling

center.

Table III–1 is a conceptual display of how

the policies in these two categories might be

used over the lifetime of an economi c

stockpile.

Em DECISION CRITERIA—A MODEL FOR DEVELOPING AND

IMPLEMENTING ECONOMIC STOCKPILING POLICY

A fundamental proposition of this assessment is that the materials to be stockpiled

must be directly related to the problem which

the stockpiling policy is designed to alleviate.

It is also clear that the materials will vary from

one stockpile to another, both in number and

in kind. For example, relatively few materials

of certain types may be needed for a stockpile

designed to overcome cartel actions which are

limited in potential scope. On the other hand, a

considerably larger number of materials of

various kinds may be required for a stockpile

aimed at compensating for temporar y

surpluses and temporary shortages in the

economy as a whole.

Since there is no direct U.S. experience with

stockpiling to achieve economic goals, there is

a need to consider the entire decision making

process related to developing, implementing,

and operating an economic stockpile. The

decisionmaking model developed in the

assessment (hereafter termed “Decision Criteria Model”) provides guidelines for determining, first, whether or not to stockpile for

economic reasons and, second, how to determine the optimal quantity of materials to acquire and disperse from the stockpile once it is

established.

1. Components of the Decision Criteria Model

The Decision Criteria Model is composed of

four components: (1) Materials Selection Criteria, (2) Economic Welfare Model, (3)

Specification of Functional Nature o f

51

77-119 0 -76- 5
CHAPTER 111

Table 111–1.—Matrix of stockpiling policies and possible operational actions

“Stockpilig Policies

SP–1: Discourage or Counteract Cartel or

Unilateral Political Actions Affecting

Price or Supply.

SP–2: Cushion the Impact of Nonpolitical

Import Disruptions.

SP–3: Assist in International Materials

Market Stabilization.

SP–4: Conserve Scarce Materials

Reducing Current Consumption.

by

SP-5: Provide a Market for Temporary

Surpluses and Ease Temporary Shortages,

Acquisition

Buy primarily from foreign

sources, preferably in

periods of excess supply; or transfer from

s tra teg i c/c r i t ica 1

stockpile if available;

or barter for surplus

agricultural products.

Buy from domestic and

foreign sources or

transfer from strategic/

critical stockpile if

available; or barter for

surplus agricultural

products

Buy from domestic or

foreign producers in

periods of low world

demand.

Buy from domestic sources

even when no excess

supply exists; to raise

prices in order to discourage consumption

and possibly to encourage domestic output from low-grade

resources.

Buy from domestic producers in periods of

low domestic demand.

Stockpile, and (4) Operating Cost Model. The

Materials Selection Criteria, which are

developed and explained in this chapter, are

basic considerations or guidelines to use in

identifying the materials most directly related

to the supply or price problem which the

stockpiling policy is designed to alleviate. The

Economic Welfare Model is a set o f

econometric equations which are based on the

theory of welfare economics and which can be

used to determine the benefits and costs to the

United States of implementing an economic

stockpile. The Functional Specification is a set

of guidelines which can be followed in determining such factors as stockpile location and

storage, the form of the materials, and the time

52

Operational actions

Holding

For purposes of discouraging actions, hold indefinitely.

Hold until emergency conditions occur.

Hold during period of normal world demand, until shortages develop.

Hold until disposal is appropriate as shown.

Hold during period of normal domestic demand,

until shortages develop,

Disposal

Sell or threaten to sell

when supply restriction or price increase

action occurs or appears imminent,

Sell to overcome temporary shortage conditions, for current use or

addition to depleted industry inventory,

Sell to domestic or foreign

consumers during

periods of high world

demand.

Sell when future social

value exceeds current

value.

Sell to domestic consumers

in periods of high

domestic demand,

factors implicit in stockpiling decisions.

Finally, the Operating Cost Model is a means

of quantitatively estimating the direct, out-ofpocket costs to the U.S. Government of operat-~

ing an economic stockpile. The Materials

Selection Criteria are developed and explained

immediately below; the Economic Welfare

Model, in chapters IV and V; and the Functional Specification and the Operating Cost

Model, in chapter VI.

2. Materials Selection Criteria

The selection of materials for each stockpiling policy involves a series of criteria directly

related to the particular policy under con-
sideration. Some of these criteria are common

to more than one policy. In fact, one criterion

may be considered as common to all policies,

i.e., the consideration as to whether the

material is significant to the U.S. economy as a

whole or technologically significant in the

manufacture of components important to the

U.S. economy. Petroleum and iron ore could

qualify for the former, while platinum used in

antipollution control devices in automobiles

could qualify for the latter. It is apparent that

definitions of “significant,” “important,” and

the other terms mentioned will be needed,

preferably in quantitative terms to the extent

possible. This would be a proper function for

the agency involved in stockpiling and would

require a considerable amount of statistical

computations and measurements. For the present assessment, selections were based on

judgmental decisions by a limited group of

persons knowledgeable in the materials field.

These selections will therefore be illustrative

rather than definitive.

Having determined that a material meets

the first criterion applicable to each of the

policies, one must then consider whether or

not it also meets other criteria related to the

policy under review. These Materials Selection Criteria are listed below, with brief

descriptions of how each one is applicable to

the five stockpiling policies considered in

detail,

a. SP–1: Discourage or Counteract Cartel

or Unilateral Political Actions Affecting

Price or Supply.

(1) Economic or technological significance:

Materials of economic significance are those

which are basic to manufacturing, construction, and ancillary industries, and without

which these industries would be unable to

operate. Petroleum and iron ore are examples.

Materials of technological significance are

those possessing specific inherent qualities or

properties (often unique) which are critical to

insure the functioning of industrial operations

or technological processes. Platinum used in

antipollution control devices in automobiles is

an example.

CHAPTER III ,

(2) High degree of import dependence: This

criterion need not refer to total or almost total

dependence on imports. For petroleum, for example, the 30- to 40-percent import dependence

is high enough to create supply and price

concern. On the other hand, setting the degree

of dependence too low would tend to blanket in

an inordinate number of materials. The potential for substitution should be taken into account in measuring import dependence, but

this becomes a difficult problem from at least

two standpoints: the extent to whic h

substitute materials can meet the performance

standards of the original material, and the new

intermaterial supply effects resulting from the

substitution.

(3) High potential for political control of

supply and price: This is the basic screening

criterion for this stockpile, Materials with little

or no potential for cartel or unilateral actions

could be excluded from consideration at the

time the stockpile is established, regardless of

the other two elements described above.

However, since the creation and effectiveness

of cartels are subject to change, a continuing

review of developments would be essential.

b. SP–2: Cushion the Impact of Nonpolitical Import Disruptions.

(1) Economic or technological significance:

Same as (1) under a, above.

(2) High degree of import dependence:

Same as (2) under a, above.

(3) High degree of concentration of supply:

This is the basic screening criterion for this

stockpile. The total uncertainty of physical

disasters, such as earthquakes, fires, explosions, and shipwrecks, could make every

material vulnerable to nonpolitical import disruptions. Strikes either at producing installations or on shipping or distribution lines may

be partially anticipated and must be monitored

continually where periodic labor negotiations

are involved, although wildcat strikes are

wholly unpredictable. In any event, the

seriousness of disruptions would follow from

the degree to which supply is concentrated

53
CHAPTER 111

geographically, through industrial combinations, or because of labor union relationships,

c. SP–3: Assist in International Materials

Market Stabilization.

(I) Economic or technological significance :

Same as (I) under a, above.

(2) High degree of international trade: International materials market stabilization involves those commodities in which international trade is a significant enough factor to influence stability in foreign markets and

therefore in U.S. domestic markets.

(3) Significant volatility of international

prices: Significant price volatility of commodities which are traded on an international

basis often show wide degrees of fluctuation

over short periods of time. As in the case of

domestic price volatility, the degree and frequency of fluctuation provide indications of

the extent to which stability is needed. These

variations can be measured in import and export values or in such markets as the London

Metal Exchange, in terms of departures from

average price levels in a base period or of

spreads between high and low prices over

time.

d. SP–4: Conserve Scarce Domesti c

Materials.

(1) Economic or technological significance:

Same as (1) under a, above.

(2) High degree of import dependence:

Same as (2) under a, above.

(3) Significant lack of domesti c

availability: This is the basic screening criterion for this stockpile. The relative

unavailability of domestic resources from

which production can be pursued without

recourse to governmental assistance will

determine the extent to which a stockpile is

necessary to achieve the policy objective set

forth. The elements to be considered include

the quality of the resources, present and

future, their accessibility, and the potential for

technological breakthroughs.

e. SP–5: Provide a Market for Temporary

Surpluses and Ease Temporary Shortages.

(1) Economic or technological significance:

Same as (1) under a, above.

(2) Significant volatility of domestic

prices: Since domestic price stability is the

basic objective of this stockpile, estimates of

price volatility as a measure of instability provide indications of the extent to which

stability needs to be achieved. Price volatility

as a reflection of supply/demand relationships

during various phases of the business cycle

could be measured, for example, in terms of

variations from average price levels or of

spreads between high and low prices for each

material,

(3) Wide fluctuations in domestic demand/supply: This criterion supplements the

price volatility measurements under (2). It

could help delineate the extent to which supply surpluses or shortages are responsible for

price variations and thus help determine those

materials in which governmental intervention

in the market place is likely to be most effective.

3. Modified Delphi Technique Used To Identify

Problem-Related Materials

For the present assessment, materials have

been selected based upon the judgments of a

small group of people knowledgeable in the

materials field. The primary goal “of these experts was to identify those materials which are

directly related to the national problems which

the stockpiling policies are designed to alleviate, In this way, a list of Problem-Related

Materials was constructed: first, as a means of

testing the economic and noneconomic impacts of implementing a stockpile to achieve

economic purposes; and second, as illustrations of classes of materials which should be

analyzed in more depth by the agency responsible for economic stockpiling. For these

reasons, the materials selected in the assessment should be considered illustrative, rather

than exhaustive,

54
CHAPTER III

The starting point for the materials experts from Material Needs and the Environment (tain selecting materials for each of the five ble 111–2). From this list, which is not intended

stockpiling policies was the list of materials to be a comprehensive catalog of all materials,

Table III–2.—Classifications of materials

MINERALS

Iron and Ferroalloy Ores

Iron Cobalt

Manganese Molybdenum

Tungsten Nickel

Chromium

Other Metal Ores

Gold

Silver

Copper

Lead

Zinc

Bauxite

Titanium

Uranium-radium-vanadium

Mineral

Anthracite

Bituminous coal and

lignite

Crude petroleum

Antimony

Cadmium

Magnesium

Platinum-group metals

Selenium

Tellurium

Tin

Fuels

Natural gas

Natural gasoline

Liquefied petroleum gases

Construction Minerals

Dimension stone:

Limestone

Granite

Slate

Marble

Basalt

Sandstone

Miscellaneous stone

Crushed and broken stone:

For cement manufacture

For lime manufacture

Other limestone

Granite

Slate

Marble

Basalt

Sandstone

Sand and gravel:

Construction sand

Gravel

Glass sand

Other industrial sand

except for abrasives

Fire clay

Magnesite

Common clay and shale

Gypsum

Native asphalt and

bitumens

Asbestos

Perlite

Shell

Chemical and Fertilizer Minerals

Barite Bromine

Fluorspar Calcium and calciumPotash magnesium chloride

Berates Magnesium compounds

Phosphate rock Sodium carbonate

Sodium chloride Sodium sulfate

Sulfur and pyrites Iodine

Arsenious oxide

Abrasives and Miscellaneous Minerals

Fuller’s earth Grinding pebbles and

High-grade clay: tube-mill liners

Bantonite Grindstone, pulpstones,

Kaolin and other special silica

Ball clay stone products

Miscellaneous high- Quartz, ground sand, and

grade clay sandstone for abrasive

Feldspar purposes

Mica sheet Tripoli and rottenstone

Mica scrap Peat

Pumice and pumicite Diatomite

Talc and soapstone Graphite

Emery and garnet Greensand

Vermiculite

FOREST PRODUCTS

saw logs Pulpwood

Veneer logs Miscellaneous products

Fuel wood

PAPER MATERIALS

Paper Paperboard

NONFOOD AGRICULTURAL PRODUCTS

Cotton Oil crops and others

wool Rubber

Fish products

PLASTICS

Polymers Synthetic fibers

Elastomers Other plastic materials

CERAMICS

Construction Ceramics

Glass

Brick

Clay products

Glass containers

China

Pottery

Pigments

Refractories

Consumer

Cement

Tile

Mineral wool

Ceramics

Pressed glass

Earthenware

Porcelain materials

industrial Ceramics

Oxides

Asbestos products

Abrasive products

Electronic Ceramics

Transistors Semiconductors

Capacitors Ferrites and magnets

Source: “Material Needs and the Environment Today and Tomorrow, ” The National Commission on Materials Policy, June

1973.

55
CHAPTER III

two other lists were developed: first, a Key

Materials List (table III–3) to be used in the

computer simulations; and second, (table

III-4), a list of identified materials which

directly relate to the problems which the

stockpiling policies are designed to alleviate.

Having determined that a material meets

the first criterion of economic significance, the

materials experts then considered whether or

not it met the other selection criteria directly

related to each of the five stockpiling policies

being analyzed. To be included in the set of

Problem-Related Materials for a particular

policy, a commodity had to meet all of the

selection criteria for that policy. Table III-4

displays the Problem-Related Materials for

each of the five policies considered in detail.

One material for each of the five policies

being studied was then selected from the list of

Problem-Related Materials for use in the impacts analysis. These materials are:

SP-1:

SP-2:

SP-3:

SP4 :

SP-5:

Discourage or counteract cartels—

petroleum;

Cushion the impact of nonpolitical

import disruptions—zinc;

Assist in international materials

market stabilization—tin;

Conserve scarce domestic material— .

tungsten;

Provide a market for temporary

surplus and ease temporary shortages--copper.

Table III-3.—Key materials

Energy materials:

Fossil fuels:

Petroleum

coal

Natural gas

Uranium-thorium

Ferrous metals and minerals:

Iron ore-steel

Chromium

cobalt

Manganese

Nickel

Tungsten

Nonferrous metals and minerals:

Bauxite-alumina-aluminum

Copper

Lead

Platinum

Tin

Nonmetallic minerals:

Asbestos

Fluorspar

Helium

Industrial Diamond

Potash

Fibers: 

cotton

wool

Petrochemicals--Plastics

Forest Products

Rubber

Pharmaceuticals

56
CHAPTER III

Table III–4.—Problem-related materials for Stockpile Policies 1–5

Material

Aluminum. . . . . . . . . . . . . . . . . . .

Antimony . . . . . . . . . . . . . . . . .

Asbestos . . . . . . . . . . . . . .

Bauxite. . ., . . . . . . . . . . . . . . . . . . .

Chromate . . . . . . . . . . . . . . . . . . . . .

Cobalt. .,....... . . . . . . .

Columbium. . . . . . . . . . . . . . . . . . .

Copper . . . . . . . . . . . . . . . . . . . . . . .

Fluorspar. . . . . . . . . . . . . . . . . . . . .

Calcium ., . . . .,,,..... . .

Ilmenite. ..,. . . . . . . . . . .

Lead . . . . . . . . . . . . . . . . . . . . . . . . .

Manganese . . . . . .

Mercury, ..,.. . . . . . . . . . .

Natural gas. . . . . . . . . .

Nickel ..,...,,..,,,, ,, .,..,.

Petroleum ., . . . . . . . . . . . . . . . . .

Platinum group . . . . . . . . . . .

Potash . . . . . . . . . . . . . . . . . . . . . . .

Futile . .,, ,, . . . . . . . . . . . . . . . . . .

Selenium. . . . . . . . . . . . . . . . . .

Sliver, .,,.... ,,, ....,,.,,,,..

Sulfur . . . . . . . . . . . . . . . . . . . . . . . .

Tantalum. . . . . . . . . . . . . ,..,

Tellurium . . . . . . . . . . . . . . . . . . . .

Tin . . . . . . . . . . . . . . . . . . . . . . . . . .

Titanium, ., . . . . . . . . . .

Tungsten. ., . . . . ., . . . .

Uranium ., ..., ., ...,

Vanadium . . ..., ., . . . . . . .

Zinc . . . . . . . . . . . . . . . . . . . . . . . . .

Zirconium. .,., . . . . . . . . . . .

Natural rubber .,,....., .,,....

SP-1

,.,,

..,.

. . . .

x

x

x

. . . .

,...

x

. . . .

. . . .

. . . .

. . . .

x

...,

...,

x

x

.,..

. . . .

. . . .

..,.

,.,.

. . . .

,.,,

x

..,.

. . . .

. . . .

. . . .

...,

.,..

x

SP-2

x

. . . .

x

x

x

. .

x

. . . .

,x

x

x

,...

. . .

. . .

,...

x

,...

x

x

x

. .

x

. . . .

x

x

x

,...

x

,...

x

x

x

SP-3

,...

. . .

. . . .

x

. . . .

. . . .

! . . .

. . . .

. . . .

. . .

, . . .

x

x

. . . .

. . . .

. . . .

,,.,

. . . .

. . .

..,.

. . . .

. . . .

,...

. . . .

.,.,

k

. . . .

x

. . . .

,...

x

. . . .

x

SP-4

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

x

. . . .

. . . .

..,.

. . . .

. . . .

x

x

x

. . . .

. . . .

. . . .

..,.

..,.

. . . .

. . . .

. . . .

.,..

.,..

x

.,.,

. . . .

.,..

..,.

. .

SP-5

x

x

. . . .

. . . .

x

..,.

x

x

. . .

.,,.

,...

x

x

x

. . . .

. . . .

. . . .

x

. . . .

,...

,.,.

x

x

x

. . . .

.,..

. . . .

x

,...

x

. . . .

. .

x

57
Chapter IV

APPROACHES USED TO ASSESS IMPACTS

OF ECONOMIC STOCKPILING

59
Chapter IV

APPROACHES USED TO ASSESS IMPACTS

OF ECONOMIC STOCKPILING

The approaches used to assess the impacts of implementing five selected

economic stockpile policies encompass both economic and noneconomic considerations. While a distinction has been drawn between economic and noneconomic impacts in order to simplify the analysis, it should be understood that such a precise

distinction is not possible. Most of the impacts discussed in this assessment cannot

in fact readily be expressed in dollar costs and require a type of analysis other than

economic. Therefore, the noneconomic impacts include political, social, and market

operation considerations as separate and distinct from the economic impacts

analysis.

The possible impacts identified and analyzed with these approaches are presented in detail in chapter V as (1) impacts general to all five stockpile policies, and

(2) as particular impacts associated with individual policies. In this chapter the

methods used in the impacts analysis are presented for two categories:

● Methods of analyzing noneconomic . Methods of analyzing economic imimpacts. pacts,

A. METHODS OF ANALYZING ECONOMIC IMPACTS

Economic impacts have been analyzed in

two ways: (1) using a model developing and

based on welfare economical to determine the

gains or losses in domestic economic welfare,

and (2) using an existing input-output model

to determine the economic sector impacts created during the acquisition phase of stockpiling.

In the welfare model, economic impacts are

estimated by developing generalized cost functions applicable to all five stockpiling policies

and separate benefit functions particular to

each of the five policies. Once the benefits and

IH~re ‘“welfare economics’ is used in the strict sense of

economic theory and should not be confused with the popular

use of the term “welfare,”

costs are ascertained with these two functions,

the overall net benefits of an economic

stockpile—which may be either positive or

negative--can be determined. The estimates

of economic impacts provided by input-output

calculations were not entirely successful, primarily because there was no method to

restrain supply in the selected model;

however, the calculations did point the way to

more extensive use of input-output modeling

in the assessment of economic stockpile

policy.

1. General Description of Economic

Welfare Model

The Economic Welfare Model developed in

this study proposes that a country such as the

61
CH/\PTER IV

United States should stockpile or continue to

stockpile (i. e., continue to increase the size of

the stockpile of any particular material) as

long as the additional benefits derived by the

country from adding one more unit of the

material to the stockpile exceed the costs.

These benefits and costs which accrue to the

public should be differentiated from the private benefits and costs which accrue to firms

or individuals which might motivate them,

rather than the Government, to hold stocks.

This distinction implies that the level of stocks

which should be held is that quantity which

maximizes the total net benefits to the country, as explained in chapter 111. It also follows

that the Government need hold only sufficient

stocks in excess of the private buffer stocks (if

any) to make up the optimum quantity, provided coordination of actions can be arranged.

The Economic Welfare Model does not explicitly incorporate the change in economic

welfare which may result from a distribution

of income within the economy. The optimal

stockpile size is that which maximizes the

total net benefits to the country, even though

this may involve a substantial redistribution of

income among groups within the country. In

theory, the effects of such a redistribution

could either be alleviated or eliminated

altogether by countervailing fiscal policies. In

practice, however, history indicates this rarely

happens. An estimate has been made of the

benefits and costs to two general interest

groups, materials producers and materials consumers, as well as to the stockpile investor;

however, no attempt has been made to estimate the private stockpile as it would affect

the public stockpile.

The economic net benefits of stockpiling do

not change linearly with the amount of

material stockpiled. In principle, the Economic

Welfare Model allows calculation of the optimal size of an economic stockpile. In the

study, however, economic net benefits—

which are a function of stockpile size—were

calculated for only three quantities so that the

optimal size for the conditions used was not

precisely determined. The Economic Welfare

62

Model specifies a period of time for which

calculations are made and requires estimates

for various quantities such as prices,

elasticities, and probabilities of actions affecting supply during this time interval. Estimation of economic net benefits over an assumed

lifetime of the stockpile would require repetition of this calculation for a sufficient number

of time intervals to cover the assumed lifetime.

In the present report, however, attention is

focused on calculations for a single time interval to illustrate the decision process and give

typical results.

It should be clearly recognized (1) that these

results are only estimates based on an approximation, (2) that the illustrative process here is

necessarily simpler than the complex combination of real events, and (3) that this approximation requires input data which are

based partly on judgment. Nevertheless, the

results are believed to be valuable in indicating the nature (benefits and costs) and magnitude of the economic impacts for the circumstances assumed.

Other models for estimating economic impacts could probably be developed to give

somewhat different numerical results. And

while other calculations might differ in detail

from those performed here, they must build

upon the same basic requirements to consider

the impacts of stockpiling on various parties,

as well as estimate probabilities and price

elasticities. Their general conclusions should

therefore be similar. In any case, the Economic

Welfare Model is one tool which the stockpile

operator could use in making decisions regarding whether or not to increase, hold, or

decrease the stock of each material.

The Economic Welfare Model estimates the

economic benefits and costs of stockpiling

which may be either positive or negative. It is

important that not only the overall economic

benefits and cost be estimated, but also that

the degree to which different parties are impacted be identified. The terms making up the

Economic Welfare Model have accordingly

been structured into two categories to provide

separate estimates of benefits and costs to
(CHAPTER IV

materials producers and materials consumers.

Two additional categories of benefits and costs

borne ultimately by producers and consumers

but not to either alone are also separately estimated. These are the direct benefits and costs

to the stockpile operator and the external costs

borne by the economy in general. It is also important to recognize that impacts on various.

parties vary depending on whether the

stockpile is acquiring. holding, or disposing of

materials. The terms in the Economic Welfare

Model have thus been structured to provide

separate estimates of economic impacts associated with acquisition, holding, and disposal for

each of the four categories of benefits and

costs discussed above. These estimates are

called partial benefits and costs.

In order to determine the optimal quantity

of a material to be stockpiled, two functions

within the Economic Welfare Model should be

determined for a specified period of time:

● The benefit function, which shows

how public benefits increase with the

quantity of material stockpiled; and

● The cost function, which shows how

public costs increase with the quantity

of material stockpiled.

Figure IV–1 conceptually illustrates how to

determine the optimal stockpile size using the

benefit and cost functions. The optimal quantity of stocks occurs at the point where the

difference between the benefit and cost functions is maximum, i.e., the economic net

benefit curve is at the maximum positive

value. Economic net benefits are only positive,

of course, when the benefit function is above

(or greater than) the cost function. If this is not

the case, then the particular material in question should not be stockpiled unless other,

overriding noneconomic reasons exist.

In certain cases, it is readily apparent that

the public benefits of stockpiling are zero or

close to zero. For example, if an economic

stockpile were established by the United

States for the sole purpose of counteracting

possible cartel actions, the benefits to the

country of stockpiling materials which the

Figure N-1.

Economic Net Benefits

4 Benefits

He

/ ?

0, 0 ,

0

/ ....1..... Economic Net Benefits ● . . I ● .

~

(costs)

m /’..”””””” ! ““*”**,

= I

6 /;.””””””

.

i

,.*”””costs

/:””””

I

/..”” ● L*”””” **WT ● *..

i

<;;...”””””””””””” I

c, I

s,, Stockpiled Quantities

C,= Fixed initialization cost

St, = Optimal stockpile size

United States does not import (such as molybdenum or coal) or which are highly unlikely to

be cartelized (such as iron ore) are obviously

nil. This is the theoretical justification for the

set of Materials Selection Criteria outlined in

chapter III which were used to determine the

Problem-Related Materials which should be

acquired to achieve the stockpiling policy objective.

In figure IV–1 the benefit function is shown

passing through the origin, since the benefits

associated with a stockpile of zero size are

zero. It then rises with the quantity of material

stockpiled but at a decreasing rate, on the

assumption that those needs which generate

the largest public benefits would have priority

in the allocation of stockpiled material, Those

needs which contribute little in the way of

public benefits would receive stockpiled

material only if stocks were still available after

other, higher priority needs were met.

The cost function is assumed to intersect the

vertical axis above the origin since there are

certain fixed costs (equal to Cf in figure IV–1)

associated with stockpiling which do not vary

with the size of the stockpile. As the cost function is drawn in figure IV–1, the variable costs

increase with the size of the stockpile. The

63
CHAPTER IV

rate of this increase is greater as the quantity

becomes larger due to the effects of stockpile

acquisition, a point discussed in the following

section concerning the generalized cost function.

The Economic Welfare Model has two time

dimensions. The first concerns the time period

over which the economic net benefits of

stockpiling action should be estimated. If, for

example, the benefits and costs associated

with a particular stockpiling program are

reassessed once a year and changes in the

desired level of stocks made, the coming time

period is 1 year. It could, of course, be a month,

6 months, or 5 years. The review period is dependent upon the leadtime to establish a

stockpile, the frequency with which an event

is expected to occur, and the perishability of

the material to be stockpiled.

The other time dimension concerns the

period over which costs and benefits are estimated. It may be, for example, that the

analysis of a prospective stockpiling action indicates that no action should be taken next

year, but that a stockpile of a certain size

should be established in 5 years. In such cases,

both costs and benefits should be discounted to

their present value. Also, with a longer time

horizon, alternative rates of stock acquisition

can be considered. The costs of acquiring all of

this material in the year just before it is needed

may be higher than if the stocks were accumulated more slowly over a longer period of

time. Associated with each time path of accumulation is a stream of costs. The optimal

timing of accumulation is that which has the

stream of costs with the lowest present value.

The disposal of stocks can also be timed

using the Economic Welfare Model. A

stockpile will be accumulated to solve a

specific problem such as an import disruption.

When such an interruption occurs, the

Economic Welfare Model can be calculated to

determine, based on the probability of continued or more severe disruptions, the amount

,of stocks to be released to counteract the disruption. Likewise, after an interruption the

level of the stockpile can be reevaluated and

64

its effectiveness reexamined. The continual

review of costs and benefits accrued through

stockpiling can further refine the timing factors influencing accumulation and disposal of

optimal quantities of materials.

2. Three Steps in Using the

Economic Welfare Model

The Economic Welfare Model is a tool

developed for use in quantitatively analyzing

the economic impacts of stockpiling. The

Economic Welfare Model provides a guide for

determining actions to be taken by an

economic stockpile: first, by estimating the net

benefits to the country of stockpiling a particular material which is or should be stockpiled;

second, by providing guidance on the timing of

acquisition and disposal of that material; and

third, by identifying the benefits and costs to

particular impacted sectors of the country,

There are three steps involved in using the

Economic Welfare Model, each of which is

discussed immediately following the general

description of the model:

. Step I—Estimate the costs of stockpiling;

. Step 2—Estimate the benefits of stockpiling as a function of the

quantity for materia l

stockpiled; and

. Step 3—Determine the net benefits as

a result of stockpiling, net

benefits being benefits minus

costs.

Development of the Economic Welfare

Model in terms of cost/benefit relationships

has required the use of parameters for which,

in some cases, materials information is not

available, This, in turn, has required using a

panel of experts to provide subjective estimates for these parameters. While estimates

provided by experts are sufficient to ascertain

the feasibility of stockpiling, implementation

of one or more of the stockpiling options by an

agency of the Federal Government would require establishing, a materials information
system to supply inputs for use in calculating

the economic welfare parameters. z

a. Step 1: Estimate the Costs of Economic

Stockpiling. —In order to apply the Economic

Welfare Model, the benefits and costs of

stockpiling a particular material as a function

of the quantity put into the stockpile must be

estimated, It should be emphasized that there

are two distinct types of costs associated with

economic stockpiling: (1) the costs to various

impacted interest groups and to the economy

in general which accrue as a result of implementing a stockpile and which are derived

using the Economic Welfare Model (impact

costs); and (2) the direct costs, including acquisition, for a stockpile operator to run the

stockpile (operating costs). Since the derivation of the impact costs in the first category

will not change significantly with the different

stockpiling policies, a general discussion of the

cost function as it applies to all five stockpiling

policies is presented here. Analysis of the

operating cost function is presented in chapter

VI.

The costs of an economic stockpile occur

during the entire operation of the economic

stockpile: the acquisition phase, the holding

phase, and the disposal phase. During acquisition, the costs of a stockpile are incurred

through initialization of the stockpile and

through acquisition of the commodity. The

holding phase of the economic stockpile’s

operation generates storage, administrative,

and interest costs for stockpiling operations,

while costs for releasing stockpiled materials

accrue in the disposal phase. These costs are

discussed as follows in three categories.

(1) Acquisition phase costs.—The capital

required to acquire stocks—as opposed to the

interest on that capital—should not be counted

as a cost of economic stockpiling, since the

purchase of materials merely involves exchanging one type of asset for another. It does

~“(; rit ical Materials: Commmf ity Action Analysis,’” [J, S,

Department of Interior, May 1975. See also a recently completed

OTA assessm~nt. “Materials Information Systems” for a more

definitive treatment of this point,

CHAPTER IV

not generate real costs for society in the sense

that resources are consumed or lost.

While acquisition costs are not considered

economic costs, they are nevertheless real

costs to those who must consider outlays from

the U.. budget. The Semiannual Stockpile

Reports of the General Services Administration (GSA) to the Congress, covering all types

of stockpiles of strategic and critical materials,

show accumulated acquisition costs upward of

$6 billion through 1962,f which more than

$2.5 billion at acquisition costs (valued at

about $6 billion at market prices) remained in

these stockpiles at the end of 1974 after a long

period of accumulation. The costs of acquiring

and keeping materials for an economic

stockpile are therefore of some importance in

deciding whether or not such a stockpile

should be established. Even if the calculations

of economic benefits and costs indicate positive economic net benefits for a stockpile of a

certain quantity of material, and even if the

stockpile may be otherwise considered desirable from a policy standpoint, the overall costs

of implementing such a stockpile may be so

large as to be judged prohibitive in terms of the

U.S. budget. The financing of acquisition costs

and other budget costs to the stockpile operator are discussed in chapter VII. Acquisition

costs are considered here to the extent of

determining interest costs in the economic net

benefits.

Acquisition costs are dependent upon the

size of the stockpile and the unit costs of commodity purchase, so that:

AC= CUQ (1)

where

AC = acquisition cost

C u = unit cost of stocks

Q = stockpile size

Initialization of an econmic stockpile requires the development or acquisition of

storage facilities, the establishment or augmentation of a cognizant stockpiling authority,

and the implementation of systems for

monitoring the stockpile activities. Initialization costs may vary with stockpile size and in65
CHAPTER IV

elude the fixed costs incurred in establishing

the stockpile, so that:

where

IC =

cf =

Ci =

Q =

IC =cf+ ciQ (2)

initialization cost

fixed cost of initialization

variable unit cost of initialization

stockpile size

The act of accumulating stocks increases the

relevant demand for a commodity, and the increased demand will tend to raise the

equilibrium price for the commodity. When

the acquisition of stocks shifts the relevant

(world) demand curve for a material rightward

and the relevant (world) supply curve is not

infinitely elastic, a rise in price on the world

market will occur, as illustrated in figure IV–Z

which also shows the effect this price increase

has on the U.S. market. This price increase

will generate two costs: (1) a net loss in

domestic consumer surplus, and (2) external

or second-order costs. Each of these costs is

discussed in the following paragraphs.

The loss in domestic economic welfare

resulting from the acquisition of materials for

a stockpile introduces a net cost in that the loss

in domestic consumer surplus is not offset by

Figure IV-2.

I

.

TERMS:

DDw = World Demand Curve

DD'W = New World Demand Curve

SS w World Supply Curve

DDUB = U.S. Demand Curve

SS[,S = U.S. Supply Curve

p = Equilibrium Price (World)

P‘ = New Equilibrium Price (World)

the increase in domestic producer surplus. s

This net cost is indicated in figure IV-3 by the

trapezoid abcf and is composed of the following three elements:

●

●

●

The loss in consumer surplus which

arises because the higher price drives

some consumers out of the market—

represented by the triangle bed;

The loss caused by the incremental increase in real resources required to expand domestic production from s us t o

s'

us—represented by the triangle aef;

and

The loss of real income by domestic

consumers because they must pay

higher prices for imported materials—

represented by the rectangle abde.

Some of this latter loss merely represents a transfer payment reflecting an

increase in foreign producer surplus.

From the U.S. point of view, however,

Figure IV-3.

$

P’

P

+

I

I I

I I

I I DDrg

I I

I I I

S(.S S’1 s d’, h d~ u Quantity

TERMS:

Urn = U.S. supply at price p

a’ua = U.S. supply at price p’

drn = U.S. demand at price p

d’~11 = U.S. demand at price p’

3

There is a loss of domestic consumer surplus accompanied

by the increase in domestic producer surplus—represented by

the trapezoid p’afp, Since this is merely a transfer payment from

one group within the United States to another, it does not represent a loss to the country as a whole. It is, however, a good illustration of how stockpiling can effect a redistribution of income.

66
it is a loss in control over real resources

and should be considered a cost of

stockpiling.

Figure IV–3 demonstrates that the net loss

in domestic economic welfare can be estimated from the loss in domestic consumer

surplus and the gain in domestic producer

surplus, so that:

LEW = CL-PG (3)

where

LEW= net loss in economic welfare

CL = loss in domestic consumer surplus

PG = gain in domestic producer surplus

The terms in equation (3) are derived from—

yielding:

(4C)

where

p = Equilibrium price (world)

p’= New equilibrium price (world)

Equation (4) assumes that the U.S. supply and

demand curves are approximately linear in the

price range p to p’, thus the coefficient of I/2 is

used.

External or second-order costs to society

may be generated by the net loss in domestic

consumer surplus which occurs because some

consumers are driven out of the market by the

higher price. Firms may find it unprofitable to

continue producing certain products and lay off

workers. If alternative employment is not

readily available for such workers and if other

factors of production are idled, there are external costs (EC) imposed on society which must be

added to the net loss in domestic consumer

surplus.

CHAPTER IV

It is important to note that these costs—the

net loss in domestic economic welfare and the

associated external costs-arise only when

stockpiles are being accumulated, since the

mere maintenance of an existing stockpile

does not shift the demand curve and raise

prices, Thus, the cost function will be steeper

during acquisition periods than during holding

periods. The rise in prices will be a function of

the size of the stocks acquired during a given

time period. That is, the greater the shift in the

demand curve due to stockpiling, the larger

the impact on market prices and the greater

the loss in domestic consumer surplus and the

external costs.

(2) Holding phase costs.—The budget for

stockpiling operations will have to cover

storage and administrative cost. According to

the GSA, storage of the materials in the

strategic stockpile fell overall from about 27 to

18 cents per ton per year between 1960 and

1964, and has remained in the range of 14 to 16

cents since then.

Reports from GSA to Congress indicate that

annual administrative costs for the strategic

stockpile are currently equivalent to under 3

percent of the acquisition cost of materials in

the stockpile during the year; however, administrative costs will vary widely according

to the materials and the kinds of activities

(buying, selling, holding) required to administer the stockpile. An important cost component during the holding phase is the interest

cost associated with the value of stocks

originally acquired. For the cost function, this

interest rate should be equivalent to the opportunity cost of capital.

In addition to storage and administrative

costs and the interest costs on the capital required to acquire and hold stocks, a third holding cost of a materials stockpile is the loss arising from damage and spoilage of stocks in

storage.

The costs of holding a material are a function of the size of the stockpile and the unit

value of the material stored. For the present

development of the cost function, it has been

67

77-119 0- 76- 6
CHAPTER IV

assumed that these holding costs vary linearly

with the stockpile size, so that:

(5)

where

s = storage and administrative cost in

$/unit

d = quantity of stock loss

i = interest rate

C u = unit cost of stocks

Q = stockpile size

(3) Disposal phase costs. -costs will be incurred for disposing of materials from an

economic stockpile. For example, the use of a

petroleum stockpile to counteract an OPEC

cartel action will require the lifting of oil from

storage (e.g., salt domes or capped wells) and

into bulk terminals or refineries. The disposal

costs will be dependent upon the quantity of

material disposed and the expense of the disposal operation, so that:

DC =ddQ d

where

DC = disposal cost

C d = unit cost of disposal

Qd = stockpile disposal

(6)

In sum, the cost function of the Economic

Welfare Model for stockpiling developed

above can be expressed as—

(7)

where

IC = calculated from equation (2)

LEW = calculated from equation (3)

EC = the external cost

HC = calculated from equation (5)

DC = calculated from equation (6)

This basic cost function is applicable to all five

stockpile policies studied in this assessment,

though minor modifications have been made

in subsequent descriptions of three of the

policies.

b. Step 2: Estimate the Benefits of

Economic Stockpiling.—The form of the cost

function does not depend on the objective for

which stockpiling is undertaken, and so is similar for each stockpiling policy. However, the

benefit functions do vary with the objective of

each stockpiling policy and are developed

based solely on the purpose (or policy objective) of the five stockpiling policies in chapter

v.

(1) Definition of benefits of economic

stockpiling.—The benefits of an economic

stockpile are equal to the expected damages

which are either averted or counteracted

through the operation of the stockpile. The

benefits thus consist of the possible damage

which could result from a disruption (change)

in the normal materials supply or price, times

the probability that such a disruption will occur.

The benefits of economic stockpiling will

not be realized only through the utilization of

the stockpile. On the one hand, holding

materials will produce benefits for the U.S.

economy by discouraging cartel or unilateral

actions, On the other hand, the benefits of

either counteracting a cartel or unilateral action or cushioning an import disruption will be

realized only through the disposal of materials

from the stockpile.

Calculation of the benefits of economic

stockpiling thus assumes that a given quantity

of materials will either be held or disposed at a

particular point in time. Knowledge of the disposal price enables the determination of

capital gains or losses resulting from stockpile

disposal. The expected capital gains or losses,

which are included in the benefits of the

stockpile, serve to decrease or increase the cost

of the stockpile to the operator.

(2) Interest groups.—Disposal from a

stockpile directly influences two general interest groups: materials producers and

materials consumers. The difference between

the loss in domestic producer surplus and the

gain in domestic consumer surplus yields the

net gain in domestic consumer surplus, a

benefit of economic stockpiling. There are also

benefits and costs to third parties in the form

of external costs which are offset or avoided

through stockpiling holding and disposal.

68
c. Step 3: Determine the Economic Net

Benefits of Stockpiling.—The difference between the benefits and costs yields the

economic net benefits (ENB) derived from a

stockpile, so that:

ENB =B-C (8)

where

B = the benefits calculated from the

benefit function

C = the costs calculated from the cost

function

The Economic Welfare Model, thus used, can

provide the tool by which the optima l

stockpile size is calculated and the timing of

stockpile acquisition and disposal are determined, Specific estimates of the economic impacts are presented in chapter V,

3. Discussion of Computer Program

Developed To Estimate Economic

Impacts of Stockpiling

The Economic Welfare Model has been

developed specifically to estimate the

economic net benefits of implementing SP-1,

–2, –3, -4, and –5. To facilitate calculations, the

model has been developed into a computer

program. ,

Inputs to the program include stockpile

sizes, unit costs, fixed initialization costs, interest rates, etc. Output from the program consists of the economic costs, benefits, and net

benefits for various stockpile sizes.

The advantage of the program is that it permits the rapid calculation and analysis of a

large number of stockpiling policies and the

perturbation of variables with their resultant

impacts on the costs and benefits. A range of

optimal stockpile sizes can be estimated, then

the sensitivity to parametric variations can be

assessed.

The Operating Cost Model, which can be

used to estimate the direct operating costs of

an economic stockpile, has also been included

in the computer program. For a discussion of

the operating cost model, see the appropriate

section of chapter VI.

CHAPTER IV

The calculated results using the equations

in the Economic Welfare Model and the

Operating Cost Model are dependent on the

magnitude and the relationship (relative magnitude) of all the input (independent) variables chosen for the calculations. These input

variables are chosen from a variety of sources

(e.g., graphs, tables, subjective reasoning, projections, etc. ) by persons possessing the

knowledge and training to allow this process

to be accomplished with an acceptable probability of success.

The Economic Welfare Model and the

Operating Cost Model have been used to

calculate a “baseline” case, where the set of

input variables have been carefully chosen as

the most accurate and probable values. For

each stockpiling policy (SP–1, –2, –3, –4, –5),

one baseline case has been calculated for one

material, The results are presented in chapter

V under the sections dealing with each policy,

Whenever an analysis like that described

above is performed, certain questions related

to the validity of the calculated results always

arise. Two primary questions can be listed: (1)

what input variables are the most sensitive?

(e.g., for small changes in input, the output

changes are large); and (2) what input variables are the least sensitive? (e.g., for small

changes in input, the output changes are small

or zero).

It is important that an analysis be performed

which seeks to answer these questions to permit validation of the models and to gain insight into the validity of the results. In doing

this, it is important for the stockpile analyst to

attempt answering certain corollary questions

such as the ones listed below:

● For the sensitive input variables, what is

the degree of certainty in the data which

have been used?

. If these input data have an unacceptable degree of uncertainty, what additional data or analysis is required to

narrow this range of uncertainty?

69
CHAPTER IV

. What is the cost of obtaining the additional information required?

● What is the tradeoff (break even) between the increased cost to improve

the certainty and the cost of the impact

of the uncertain y remaining?

. Conversely, are we spending too much

time and money to determine the

values of the least sensitive input

variables?

The scope of this assessment did not allow

for exhaustive analysis of the type discussed

above, as the primary intent was the development of the methodology and not the analysis

of all specific cases. The development of the

computer program did, however, allow for

some first-order sensitivity analyses to be performed using the digital computer to save time

and money over manual analyses.

The sensitivity analysis chosen for this

study consisted of determining the relative importance of each input variable in the benefit,

cost, and net benefit functions. The sensitivity

of the cost and benefit functions to changes in

the formulation parameters was computed.

The sensitivity of the net benefits and optimal

stockpile size to changes in the cost function

and the benefit function was also computed.

These sensitivity y computations were made for

each stockpile policy.

To effect this sensitivity analysis, the computer program automatically modifies an input

parameter by a specified percentage (+10 percent in this study) and recalculates the output

parameters. Each input parameter is individually modified and the

the output calculations for

B. METHODS

program repeats

all parameters.

Each stockpiling policy is then recalculated

using this automatic feature.

4. Economic Damage Not Averted

The establishment and use of an economic

stockpile is intended to ameliorate the

economic damage which particular events—

import interruptions, price fluctuations, etc,—

would cause, However, the optimal stockpile

as estimated with the Economic Welfare

Model will seldom, if ever, be large enough to

completely offset the damage inflicted on the

economy. The difference between the total

economic damage and that portion offset by

the stockpile is defined as damage not averted.

Estimation of damage not averted becomes important when policy makers assess the tradeoffs between incurring some damage which

the optimal stockpile cannot offset and the additional costs incurred for a larger stockpile

size. The Economic Welfare Model incorporates equations to estimate the economic

damage not averted,

5. Economic Impact of Not Establishing a

Stockpile

Even under conditions when the economic

net benefits for a particular stockpile are positive, policy makers may not want to establish

the stockpile, or at minimum may want to

know what the costs and benefits of not

establishing a stockpile would be. The

economic costs of no stockpile are obviously

zero, but at the same time the economy will incur the expected damage which the optimal

stockpile would offset if it were established.

Or put differently, the economy will forgo

benefits which it otherwise would have.

Hence, the adverse economic impact of not

establishing a stockpile is equivalent to the

benefits calculated with the benefit function,

OF ANALYZING NONECONOMIC IMPACTS

The range of possible political and social amined to identify those which promised to be

impacts was derived through the use of rele- the most important and therefore worthy of

vance trees. These impacts were then ex- further analysis, A discussion of the relevance

70
CHAPTER IV

tree and

sented as

impact relevance matrix are prefollows, and specific political and

social impacts are discussed in chapter V.

1. Discussion of Relevance Tree

In concept, a relevance tree is a hierarchic

structure in which the entries at each successive level, in the aggregate, describe completely the next immediate level above. A relevance tree describes a domain and ,

theoretically at least, describes it completely.

In this study, four relevance trees were constructed in order to synthesize material collected during the interviews and literature

search tasks. The relevance trees were then

used to subdivide particular stockpiling subjects into their constituent building blocks in

order to identify important areas which would

later be included in analyses of stockpiling impacts and alternatives to stockpiling.

There are two advantages in using a relevance tree to examine the fine-grained structure of a problem. First, it provides a means of

systematically searching for omissions. For example, insights about possible impacts of the

stockpiling policies were discussed during the

interviews and foreshadowed by experiences

described in the case studies. However, even

after tabulating the impacts derived from these

sources, the question remained: What other

impacts might occur in the future? While

there is no absolute assurance that a relevance-tree analysis will provide the entire

universe of impacts, the systematic approach

required provides a higher degree of assurance

that important impacts are indeed discovered.

Second, since the organization of a relevance

tree is hierarchic, the researcher must ask at

each level whether or not his description is

complete. This induces a process of self-learning and discovery, which further insures that

the field under study will be effectively

described,

As might be expected, the relevance trees

themselves underwent an evolution during the

study. The content of the four trees is illustrated below, and the complete trees are included as appendix D.

a. Stockpiling Policy Tree.—The stockpiling policy tree (Level 1) begins with the question: Why stockpile? Level 2 shows two

general reasons for initiating stockpiling: to

maintain a supply in case of cutoff from primary sources, and to provide protection against

economic pressures. Level 3 identifies that

material resource problem area as being either

domestic or foreign. The problems which may

be alleviated by stockpiling are detailed in

Level 4 (e.g., increasing labor and production

costs in producer countries, sociopolitical disruptions, etc.). The lowest level (Level 5)

shows the interest groups which are likely to

be affected by the problems. An illustrative

segment of this relevance tree is shown in

figure IV-4,

b. Stockpiling Procedure Tree.—The

stockpiling procedure tree (Level 1) deals with

the question: “How can stockpiling be accomplished?” Level 2 shows the two areas of

concern: domestic and foreign. On Level 3,

general stockpiling approaches are identified

(e.g., stockpile in proven reserves, stockpile as

raw ore, etc.). Specific storage procedures are

shown on Level 4 (e.g., purchases of land and

mineral rights, etc.). Level 5 (the lowest level)

again identifies the interest groups which may

be affected by the stockpiling procedures.

c. Alternatives to Stockpiling Tree.—The

alternative to stockpiling tree (Level 1) derives

from the question: “What alternatives to

stockpiling exist?” The general policies which

may be identified as a result of stockpiling are

given on Level 2 (e.g., influence consumption,

encourage recycling, etc.), Level 3 specifies

policies sufficiently (e.g., limit production,

materials R&D, etc. ) so that the programs

derived from these policies can be identified

on Level 4 (e.g., taxation, incentives, etc.), The

lowest level (Level 5) shows interest groups

which would be directly affected by those

programs.

d. Stockpiling Impact Tree.—Th e

stockpiling impact tree (Level 1) begins asking

where, throughout the world, the impacts

might be felt. The major divisions recognized

71
CIIAPTER IV

Figure IV-4.

Illustrative Segment of Relevance Tree

1.01

Materials of

Concern

Reason for

Initiating

Stockpiling Policy

Nature of Problem

Which generates

Stockpiling Policy

Why Stockpile

Materials

I

2.011

To Cushion To Assure

Against lnter- Supply at a

ruption in Supply Given Cost

3.0111 3.0121

Domestic Foreign Domestic Foreign

Interruption Interruption Issues Issues

4

I■

4.01111 More Specific 1 I Problem

Definition

F

Interest Groups

Affected

by Specific

Problem Areas

*

Exhaustion of

Materials at

Acceptable

Economic Levels

l-l J

5.01111

Geological Explorers

~Environmentalists

t

Land Owners

(Public, Private)

~ Resource Investors

Monopolistlc

Practices

5.01112

Producers

~Transporters

l-Processors

~ Material Suppliers

are the United States, other countries which

import the material, countries which export

the material, countries which could export the

material or substitutes, and countries which

have secondary dependence on the material

(e.g., countries which import products

manufactured from the material). At Level 2,

the relevance tree centers on the question:

“How might the impact be felt?” Here, the

divisions are social, economic, political, legal,

and other. The domain of the impact is next

addressed at Level 3: the impacts can be felt

internally, or in relations between the country

and others. Level 4 consists of a further subdivision of the domain, and Level 5 addressed

Lack of

Available Labor

5.01113

- Unions

- Producers

- Transporters

- Processors

- Warehouses

- Material Suppliers

Lack of

Adequate

Producing

Capacity

t

5.01114

Extraction Equipment

Manufacturers

t

Process Equipment

Manufacturers

~Financiers

‘Environmentalists

the impacts themselves (e.g., institutional

feasibility, political stability between nations,

and trade alliances).

2. Impacts Relevance Matrix

After the five stockpiling policies were

designated, the most important social, political, and legal impacts for each policy were

identified. A matrix was constructed to accomplish this task. The five policies were

deployed on one axis; the potential impact

areas (derived from the fourth relevance tree)

were deployed on the other. Figure IV–5 is a

sample of the political impacts portion of this

matrix.

72
The numbers entered into the matrix depict

judgments as to the relevance and weight (importance) of a particular impact of a stated

policy, Judgments about weight were made

first. Here, the task was to identify those impacts which, in and of themselves, appeared to

be most important to the future of the United

States. Looking at figure IV–5, for example,

one sees impact area No. 66 (Political Stability

Between Nations) was given a weight of 5—

much higher than the weight of 2 given impact

No. 62 (Cultural Alliances and Agreements).

Second, judgments were made about how relevant each impact was within the context of the

assumed stockpiling policies, i.e., whether the

stated impacts were relevant to the stated

policies. These judgments are depicted in

figure IV–5 as the numbers entered in the

(CHAPTER IV

matrix cells. Finally, the data contained in the

matrix were used to rank-order the impacts in

terms of their importance for each stockpiling

policy. The rank order was determined by taking the product of the weight and the relevance number contained in the matrix cell.

Thus, for SP–1, impact No. 53 (Internal Political Stability) rated a “score” of 25.

Using the above technique, it was possible

to rank-order the impacts for each of the

policies, and to designate a subset of impact

area for further study. The impacts designated

by this weighting matrix operation served as

the basis for the detailed discussion of political

and social impacts in chapter V. A further discussion of impacts evaluation matrices can be

found in appendix D.

Figure IV-5.

Political Impacts Portion of Impacts Relevance Matrix

—

I

Impact Areas

k —- – —- —— — - —. .—. . ...———

I 52 Levels of Satisfaction with Government

L -- — —– — . .- _—

I 53 Internal Political Stability

L– -— –- — —

I 54 Laws and Regulations

-.——.— .

55

56

57

l-=

58

59

60

Regulatory Structure —— —.—. -—

Institutional Viability ‘-

.—— —-- —

Int’l Relations Trade Agreements & Alliances —

Buyers’ and Sellers’ Consortia

Aspirations of Other Potential Consortia Members

Aspirations of Consortia in- Other–Materials

L—— -—— -- —

~ 61 perception About U.S. Intent

L.- -–– -— — – - -– -

I 62 CuHural Alliances and Agreements

6-——-.—.— .— —.- –.

L—— .——. — — — ——.——

I 64 impacts on Other lnternational institutions

L——. — —. — ——— -—.-——.

I 65 Military Alliances and Agreements

I

/ 68 Political Stability Between Nations

I 67 Political Aspirations of Others

1- —— –—–- —..

I 68 National Boundaries

L.-–—— — — - - ————. .-—.. — ...— –.. . ----

I 69 Political Pressures on Third Parties 1

Relevance Key Weight Key

.-

5~ 31513141 4 I — . . . L..- l.— 1 .—-l –-—-A

5;2 4 ! 2 2 ‘ I

.— — i –. . – .—. 5A

4 i i4(4 4 4

—. L.. J ~——— — 1

. . 1 I - --l– -—--

I 31

4 t ‘3

1

0;4

——

 o 0 1

5 -o ! 4 t“ o 0 4 -

5 = Great Relevance 5 = Extremely Important

3 = Moderate Relevance Impact Area

1 = Little Relevance 3 = Important Impact

O = No Relevance Area

1 = Of Little

Importance

O = No Importance

73
Chapter V

POSSIBLE IMPAcTs

OF ECONOMIC STOCKPILING
Chapter V

POSSIBLE IMPACTS

OF ECONOMIC STOCKPILING

The impact analysis encompasses both economic and noneconomic considerations. Under the latter category, the political, social, and market-operations impacts which might result from implementing an economic stockpile are considered. It should be emphasized, however, that because the economic factors

associated with an economic stockpile are far more important than the noneconomic factors, the analysis concentrates on economic impacts. Two distinct

techniques were used to examine the economic impacts: the University of Maryland’s INFORUM model, and the Economic Welfare Model developed in the

assessment.

For purposes of this assessment, economic impacts have been separated into

two types; first, the benefits and costs which accrue to the United States, either

directly or indirectly, as a result of the impact which stockpiling has on the

domestic economic welfare; and second, the direct, out-of-pocket costs to the

stockpile investor for operating the stockpile, costs which include the acquisition

and disposal of materials.

The term impacts defines changes in the circumstances of individuals, groups,

or nations which occur as the result of implementing a particular stockpile policy.

Impacts may occur as a result of the activity associated with building a stockpile,

as a result of operating it, or as a result of dispersing from it. Impacts may be real

(changes in employment levels) or perceived (fear that an economic stockpile

would be used to reduce the power of a strike); local (environmental effects of

mining marginal ores) or global (creation of new trading alliances); social (improvement in the choice of products or range of lifestyles available); political

(frustration of cartel action); or economic (stabilization of prices). In short, impacts encompass a vast range of consequences which maybe of significance to the

United States and its citizens.

The impact analysis here is organized into two basic categories: (1) first, the

general impacts considered applicable to all five stockpiling policies (the political,

social, and market operations impacts); (2) the impacts specifically applicable to

each of the five stockpiling policies (the economic impacts), Accordingly, the

following sections are included in chapter V:

77
●

●

●

General impacts of economi c ●

stockpiling;

SP–1: Economic impacts of stockpiling to discourage or counterac t ●

cartel or unilateral political actions

affecting price or supply;

SP–2: Economic impacts of stockpil- ●

ing to cushion the impacts of nonpolitical import disruptions;

SP–3: Economic

ing to assist

impacts of stockpiling internationa l

materials market stabilization;

SP-4: Economic impacts of stockpiling to conserve scarce domesti c

materials; and

SP–5: Economic impacts of stockpiling to provide

ary surpluses

shortages,

a market for temporand ease temporary

A. GENERAL IMPACTS OF ECONOMIC STOCKPILING

The general impacts which may result from

implementing any form of an economic

stockpile can be considered in three areas:

political, social, and market operations, Each

of these general impact areas will be discussed

in this section, followed by an analysis of the

economic impacts which may result from implementing stockpile policies (SP) 1–5.

1. Political Impacts of Economic Stockpiling

Building a stockpile to guard against supply

interruptions or to help stabilize prices can

have important political significance. Both exporting and importing nations can be affected.

Internally, many organizations will be

politically involved in supporting or opposing

the creation of stockpiles.

a. Effects on International Relations,

Trade Alliances, and Agreements.—

Economic stockpiling will influence international relations, creating an environment for

new alliances and new means of demonstrating support and solidarity among nations.

Even when an economic stockpile is designed

primarily for domestic reasons, it will have international implications. There are at least

three ways international relations might be

affected:

(1) Exporting nations might call on allies to

support their action to raise prices or

(2)

(3)

divert or withhold supplies

United States;

The creation of an economic

from the

stockpile

within the United States might deter the

formation of cartels in other materials or

affect aspirations of other potential consortia members; and

An economic stockpile could reduce the

risk of serious confrontation between

the United States and materials controlling nations.

The International Energy Agency (IEA) is

an example of a defensive stockpile formed

among importing nations with a common need

for a material controlled by a cartel. The

program of IEA is designed to allocate supplies

to member nations and to reduce competitive

bidding for scarce supplies of petroleum. The

program is enacted when there is a general

supply emergency or when an embargo is

aimed selectively at one or more of the member nations. Shortages are shared among the

nations when they exceed 7 percent of previous consumption. Less severe shortages are

managed by conservation. Rules for using

stockpiles enable countries to share the risk of

supply shortfalls. These rules avoid the “selftargeting” problem which arises when only

one member, e.g., the United States, has and

releases large stockpiles. Thus, under the IEA

the United States does not become a “prime

78
target” for an embargo because it possesses

stockpiles. 1

The size of an economic stockpile like SP-1,

which is designed to withstand a politically inspired embargo, might well be based on the

contribution which the material makes to the

economy of the exporting nation. For example,

an exporting nation which relies heavily on

revenues derived from the export of a particular material could itself survive only a

relatively short interruption; therefore, a

stockpile designed to guard against this interruption could be small. However, third-party

nations, allied with the exporting nation, could

change this balance by offering the exporting

nation loans, subsidies, or alternate markets,

A stockpiling policy like SP–3, which is

aimed toward regularizing the international

flow of materials, might be viewed as defensive (guarding against the eventuality of high

prices) or offensive (forcing prices down when

market conditions would dictate otherwise).

Thus, the political impacts of SP–3 depend on

how the policy is conceived, perceived, and

implemented. As in the case of SP–1, this

policy could well result in consuming nations’

forming joint stockpiling arrangements other

than the IEA so that the collective risk to any

member is sharply reduced. To the degree that

such an effort is successful in stabilizing

markets, long-range policies based on the interests of both producing and importing nations may well be easier to arrange. For many

commodities, the existence of a stockpile

would be a modest guarantee of stability, both

of the international market, and through this

leverage, the capital flow to the producers.

Thus, if a stockpile is not seen as a threat

which induces immediate, negative reaction

from producer nations, it may well enhance

the possibility for cooperation among nations

with common interests in stabilizing material

flows.

lsee Federal Energy Administration, Project Independence

Report (Washington, D. C., U.S. Government Printing Office,

1974), pp. 369-377.

The creation of an

in the United States

mation of cartels

CHAPTER v

economic stockpile withmight also deter the forin the material being

stockpiled or in other materials. The increasing dependence of the United States on imported materials, discussed in chapter II, suggests that by the year 2000 imports may account for more than 90 percent of all

chromium, tin, titanium, platinum, beryllium,

aluminum, and fluorine which the U.S. consumes. In this situation, supply interruptions

may become increasingly common, To the extent that stockpiles of important materials exist, potential cartels will see them as a deterrent, an obstacle which would have to be overcome before their actions could be effective.

Hence, the formation of cartels and/or the

effectiveness of their actions could be constrained by the creation of a U.S. stockpile.

An economic stockpile could also reduce

the risk of serious confrontation between the

United States and materials-controlling nations during an embargo or a trade action. If,

during an embargo, serious economic dislocations occurred in the United States due to

scarce supplies, the pressure to give up previous foreign policy objectives or to take aggressive action could be substantial. The tension created by possible confrontation of world

powers could thereby be increased. The

difficulty of the situation is compounded by

the need for quick a&ion. If there were no

stockpile, or if only a token amount of material

existed in the stockpile, the acquisition of additional material could become an issue in itself. If an essential ingredient in diplomacy is

time, then the existence of the stockpile may

be politically valuable insofar as it helps provide that time.

On the other hand, the creation of an

economic stockpile might bring about counterproductive results. It could, for example, be

viewed as a threat by foreign producer countries, triggering the imposition of embargoes or

adverse pricing policies. Indeed, stockpiling

may be perceived by exporting nations as an

implicit act of aggression, since it suggests distrust of those foreign nations who control

79
CHAPTER V

needed U.S. materials. While the timing of

stockpile implementation may provide the

leverage to weaken a cartel at a moment when

the relations between the members ar e

strained, it could likewise coalesce the cartel

and elicit threatening responses in terms of

price escalations.

The involvement of third-party nations in a

manner which could be adverse to U.S. interests is also a possibility, particularly in the

case of SP–1. In general two possibilities appear plausible: (1) third-party nations might

intervene by supporting exporting nations

through direct subsidies, grants, favorable

trade arrangements, or the provision of new

markets; or (2) other importing nations could

become involved by entering into agreements

with the United States to form a cooperative

effort for emergency sharing of reserves.

The success of the Organization o f

Petroleum Exporting Countries (OPEC) has

been instructive to other producer groups and

may affect the formation of other materials

cartels. Jamaica, for example, recently took the

step of raising the bauxite ore tax by 700 percent, despite its exceptionally vulnerable

economic position. Jamaica has an adverse

(and worsening) balance of trade, and could

benefit from foreign-aid program assistance

provided by nations such as the United States.

However, Jamaica was convinced that its interests were better served by actions which in

no sense appeased or accommodated the

United States or other consumer nations. An

important, perhaps crucial, factor in such

situations may be the willingness of OPEC nations to abet other nations in these desires, z

The existence of a stockpile within the United

States could have an effect on such activities

and could probably affect the creation and

operation of consortia in materials being

stockpiled, The stockpile would set the

minimum level of embargo which a consortium would have to impose to be effective, If

the exporters’ economies were not strong

enough to endure the embargo period implied

Zwall Street journal, Aug. 13, 1975, p. 9.

80

by the stockpile size, the stockpile would

clearly be a deterrent to the formation or

operation of a new consortium.

b. Effects on U.S. Domestic Politics.—

Economic stockpiling designed to keep the

economy strong will probably be welcomed by

labor and business in general, because both

benefit from high levels of economic activity.

However, business or labor directly involved

in primary materials production or consumption are more strongly connected to materials

supply and price and therefore may have

specific, short-term interests which may conflict with each other or with the broader business or labor community. In general, a

stockpile may be seen by labor as a means of

maintaining jobs in the presence of a supply

interruption. In general, a stockpile may be

seen by business as a means of stabilizing international price fluctuations. However, labor,

business, and other groups will be concerned

over the eventual or potential use of the

stockpile, regardless of its announced purpose.

For labor in the materials production sector,

the possibility exists that a stockpile could

blunt the threat of strikes. For business in the

materials production sector, a stockpile could

represent an intervention into the marketplace

and the possibility of governmental action adverse to its interest. For these reasons, some

sectors of labor and the business community

are likely to be wary of the Government’s

efforts to build and operate an economic

stockpile. The interviews conducted in this

assessment certainly corroborate such a

watchful point of view, and were used as inputs to this impact analysis.

To the extent that the operation of an

economic stockpile tends to stabilize cyclic

market performance, opposition may be anticipated from producers and consumers who see

cyclic market performance contrary to their

interests, whereas support may be anticipated

from those who find cyclic performance

useful. The intended purpose of a stockpile

like SP–5, for example, is to insure that

materials flows are adequate. This means that

the price of the stocked commodity will not be
.

influenced by “panic” buying or hoarding

when supplies appear short. As price and supply fluctuate, so do employment, loading of

transportation resources, capital investment in

new plants and facilities, and consumer product prices.

Raw material consumption and prices are

cyclic, closely following general economic

trends, The cycle is evidenced more significantly in some extractive and production industries than others, in which increasing demand can lead to the construction of new

capacity which, when available, provides excessive capacity. Prices then fall and new

capacity additions become infrequent. When

these facilities are taxed because of rising demand, prices again rise and the cycl e

reestablishes itself,

Public attitudes with respect to a stockpile

like SP–5 could be expected to vary, depending

on the phase of the stockpile cycle involved. In

general, a stockpile used to alleviate shortages

in materials which are produced domestically

may be resisted by domestic producers, who

could expect to benefit from such shortages.

But the stockpile would also, through

purchases during periods of oversupply, protect domestic producers from the effects of

declining prices. Producers would presumably

favor such protection, considered by itself,

while consumers would worry about subsidized production resulting in artificially high

price levels. The stockpile could be used to

prevent unhealthy surges to nonmaintainable

price levels during periods of shortage and

declines in production during periods of

surplus, thereby protecting both consumers

and producers in the long run. Nevertheless,

many producers and consumers would fear

that inadequate information, administrative

lethargy and inefficiency, and political

pressures would all combine to make an

economic stockpile less attractive. On principle, some would also object to the paternalistic

and controlled-market aspects of the stockpile.

To implement SP–5, data on materials supply and demand would probably be required

from industry in even greater detail than

CHAPTER V

might be required for some of the other four

stockpiling policies analyzed. Industry may

object to the Government’s gathering of such

data. A comprehensive stockpiling system

could be politically sensitive in this way and

could generate strong opposition,

On the other hand, U.S. Government

purchases of scarce raw materials (SP-4) could

stimulate resource development by minimizing the unsettling effects of temporary

declines in discovery rates or variations in

prices. Sales from the stockpile at the

stabilized higher price might protect domestic

industry from the eroding effects of price fluctuations of foreign imports. The stockpile

would provide a constant market which could

encourage capital formation to support

domestic extraction industries and insure

minimum and continuing production levels,

The assured high price level could encourage

the development of new technology, both to

enhance production of scarce domesti c

materials through mining or processing

breakthroughs and to provide lower cost and

more plentiful substitute materials. It could

also be a strategy for preserving within the

United States a minimal amount of technical

expertise concerning the extraction and production of such scarce materials. For all of

these reasons, a stockpile like SP-4 might be

favorably received by the relevant producing

industries, However, unless a clear, overriding

national need were demonstrated for such

favored governmental treatment, individual

consumers and consuming industries could be

expected to object strongly to this market interference which, conceivably, could restrict

supply and raise prices.

2. Social Impacts of Economic Stockpiling

Social impacts are difficult to analyze

because they are diffuse and vague. These impacts can affect the individual (e.g., mobility

and leisure) or society as a whole (perceptions

about the world role of the United States); they

can relate to institutional or regulatory

changes (rationing or allocation programs); or

they can bring about social changes of world

81
CHAPTER V

scope (new patterns of migration and changing

social aspirations of other nations),

It is assumed that the United States would

remain a consuming society, heavily dependent on the use of resources to achieve what

most of its citizens now consider to be a desirable standard of living. This premise naturally

leads to policies which help assure uninterrupted flows of materials. Stockpiling may be

seen, for example, as an instrument not only

for maintaining economic stability, but for encouraging such desirable actions as energy

conservation and the development of new

material technologies. Yet, the situation leading to the need for an economic stockpile, and

the discussions surrounding the implementation and use of such a stockpile, ma y

ultimately contribute to a much more profound impact than any considered explicitly

here—i.e., a change in values and expectations

with respect to consumption in the United

States and around the world.

It is also important to note that some social

impacts vary with each phase of stockpiling

operation. For example, if petroleum wer e

diverted from imports in significant quantities

to help provide a stockpile inventory, mobility

could be adversely affected; however if a

stockpile were already in place, it could help

assure mobility in the presence of an embargo.

Social impacts, in particular, have a quality of

requiring adverse current or near-term impacts in order to reduce risk or uncertainty in

the future.

Of the five stockpiling policies considered,

SP–1 could have the most important social impacts. This is true for four reasons:

. The need for, and effort to build, a

stockpile is apt to gain national attention, and thus stimulate debate because

the quantity of material required for

this stockpile policy could be massive;

. The amount of material which would

have to be diverted into the stockpile

could affect consumption patterns and

may require establishing new laws and

regulations to allocate or ration

materials;

The stockpiling action itself could

change national and international perceptions about the role of the United

States on the world scene; and

The stockpile may be seen either as a

valuable concrete action in an otherwise frustrating world situation, or a s

an attempt to preserve an inefficient

lifestyle.

In particular, SP–1 demonstrates the need to

weigh potential short-term adverse effects

during the stockpile acquisition period against

the potential long-term beneficial effects after

acquisition has been completed, Acquisition of

sufficient stocks to discourage or counteract

politically motivated supply interruptions may

require temporary domestic allocation or rationing and thereby result in diminished

mobility and restricted patterns of leisure activity. However, such acquisition is intended

precisely to avoid adverse consequences in the

long-term future. Used in anticipation of a

unilateral political action or cartel, this policy

would divert imported materials o r

domestically produced materials into a

stockpile. The effect of this diversion during

the acquisition period could be to raise prices

of products utilizing the material and perhaps

to limit the availability of the material in some

applications. But assurance of the future

availability of essential resources could result

in stabilized supplies of fabricated goods, so

that anticipation of the security offered by the

stockpile may be accepted as the justification

for diverting material from current consumption. Moreover, as discussed above, the adverse impacts incurred during the acquisition

stage can be mitigated or even eliminated by

implementing a gradual, rather than a oneshot, acquisition program or by filling the

stockpile needs from nonmarket sources, such

as existing excess stocks in the strategic

stockpile or in defense reserves.

Since the stockpile required by SP–1 would

have to be quite large to have a deterrent

82
effect, its operation

appreciable public

would probably

discussion and

result in

possibly

economic dislocations, The question which

would naturally follow would be: “Why are

consumption and dependency on foreign supplies so high?” Discussions about desirability

of growth, utilization of economically

marginal domestic supplies, and manipulation

of our destiny by foreign powers would be

stimulated, The response to such discussions

is difficult to forecast and depends on other

factors which exist at the time, including in

particular the stance of the media, economic

conditions, as well as domestic and international political stability.

a. Effects on Prices and Consumer Choice

of Products.—The range of choice of products

available to the public could be affected as a

result of price changes and the differential

effect of these changes on variou s

socioeconomic groups. During the creation of a

stockpile, the flow of material into the market

could be restricted, and its price would probably rise. If this occurred, the price of certain

products would also increase, making it more

difficult for people in lower socioeconomic

levels to purchase the more expensive products. During the disposal phase of the

stockpile, however, the effect could be

reversed. Of course, it is possible to introduce

compensatory legislation which would minimize the regressive effects of stockpiling acquisition.

The major social impact of SP–5, for example, would be to reduce the regressive effects

of price changes in society. As pointed out

earlier, when prices rise, certain sectors of

society are least able to afford more expensive

goods and services; therefore, as prices rise,

there is a regressive effect on lower socioeconomic groups. This stockpiling policy

would help minimize that effect. Furthermore,

consumers in general would have a more stable supply of goods, both from the standpoints

of price and availability.

However, as mentioned previously in the

discussion of political impacts, inadequate information, lethargic or inefficient administration, and political pressure may result in the

stockpile’s exacerbating problems rather than

solving them. Price-support actions during

periods of surplus might result in artificially

high prices being maintained over the longrun, Conversely, sales from the stockpile during periods of shortage might be excessive and

damage the productive capacity and competitive posture of the producing industry. The potential for intentional or unintentional misuse

of a stockpile for SP–5 seems appreciable.

Furthermore, if the stockpile were large

enough, diversion of materials into the

stockpile could cause temporary shortages and

price changes. Such a diversion could have

direct adverse impacts on the consumption

and personal lifestyles of U.S. citizens for the

duration of the acquisition program. However,

the temporary adverse impacts potentially attributable to stockpile acquisition could be

mitigated or even eliminated by a planned,

phased program of acquisition which purposely avoids a large immediate impact on the

market. Furthermore, for at least some of the

materials considered for stockpiling, nonmarket sources for acquiring materials exist,

although it may be desirable to open these

sources to the market rather than funneling

them directly to a stockpile.

In the case of oil, for example, one plan calls

for using the Elk Hills Naval Petroleum

Reserve for stockpile purposes. 3 Elk Hills is

estimated to contain close to 1 billion barrels of

reserves, which can be produced at the rate of

approximately 400,000 barrels per day,

Similarly, the zinc required for an economic

stockpile could be obtained from the 171,955

short tons currently held in excess of the

stated objective of the strategic stockpile administered by the General Services Administration (GSA).4

~Senate Report Z27% 94th Cong., Ist sess. 2-4 (197S). ~aval

Petroleum Reserve No. 4 in Alaska is estimated to contain 10 to

33 billion barrels of oil, but unlike Elk Hills the capability for

immediate production does not exist in NPR 4.

~Inventory of Stockpile Material as of Oct. 31, 1975, office of

Stockpile Disposal, GSA.

83

77-119 0- 7’6 -7
CHAPTER V

b. Effects on Perceptions of United States

in World Affairs.--One subtle social impact

of SP–3, which concerns internationa l

materials market stabilization, would be to

promote changes in perceptions about the

abilities and role of the United States on the

world scene. This policy would likely be part

of an international commodity agreement;

however, in some instances, it could be implemented as a unilateral stockpile. Ideally, it

would involve both producing and consuming

countries, and the stockpile would serve as a

buffer stock to be built when prices are low

and supply is high and utilized in the reverse

circumstances. The exact nature of this impact

will depend on many external factors which

exist at the time, including in particular foreign nations’ perceptions of the intent of the

stockpile. Within the United States, if the

stockpile is seen as a responsible and effective

means of exerting control over national policy,

it could help promote political cohesiveness.

3. Market Operations Impacts

Economic stockpiling entails acquisition

and disposal of materials in excess of normal

demand and supply at the time of purchase

and sales. At the very least, an economic

stockpile overhangs the market as a force in

being which cannot but affect marke t

behavior. Insofar as its object is to prevent or

counteract supply interruptions, the stockpile

alters the risks and rewards of normal market

actors. Insofar as its object is to alter terms between buyers and sellers, it constitutes direct,

purposeful intervention to change the consequences of normal market operations to bring

about results more compatible with the policy

objectives.

Stockpiling operations are likely to be invoked in circumstances of shortage or threat of

shortage, surplus or threat of surplus, or wide

price fluctuations. These are the very circumstances in which the normal actors in the

marketplace are most likely to be big gainers

or big losers. This inherent ability of the

stockpile to affect winnings and losings not

only alters the patterns of private risk deci84

sions (to invest, produce, buy, sell, inventory,

etc.); it makes the stockpile administration the

object of extreme pressures from private risktakers to influence the buy/sell decisions.

Stockpiling may also have an adverse effect on

investment, insofar as the overhanging stocks

threaten to truncate the upper end of the price

range and thereby add arbitrary, nonmarket

risks to investment.

Discouraging investment is one consequence of the unpredictability of market

behavior which, in the presence of relatively

large stocks subject to administrative control,

can result in “excessive accumulation in the

first instance and subsequent massive dismantling in the second, disrupting the minerals

economy in both phases. ”5 Of course, what is

“excessive” or “massive” depends on the purposes to be served and the quantities to be

bought, sold, or held to achieve them. What is

suitable as the amount of material to be

stockpiled may be “excessive” to those who

are dealing commercially in the market for

materials. Indeed, such stockpile amounts,

which are themselves often a matter of dispute

within the Government, may change with circumstances (or administrations), leaving the

market to cope with run-up or liquidation of

stocks, which may be sudden by market standards. 6 The American Mining Congress contends that an economic stockpile should be

surrounded by strict safeguards to avoid

effects which will “obstruct the natural function of a free market. ”7

The markets for stockpiled materials are

generally worldwide. For many, the demand

fluctuates cyclically, as do the corresponding

price fluctuations. Market intervention in the

form of stockpiling might either moderate or

exaggerate the market behavior, depending on

the purpose, the timing, and the management

of the stockpile, In any case, the overhanging

stockpile could depress the price level

5AnleriCan Mining Congress journal, “A- Declaration of

Policy, 1974-1975” (Oct. 6, 1974), p. 7.

Osee Case Study, “Release of Copper from the Stockpile” Appendix B.

TAmerican Mining (hlgl’ess.
throughout the market cycle even where that

was not its intent.

These market impacts obviously affect the

distribution of risks and rewards between producers and consumers, both intra- and international. The impacts on less-developed countries can be particularly felt. In many cases,

such countries have seen themselves as exploited suppliers of raw materials at low prices

and importers of high-priced manufactured

goods.

8 They perceive the periods of high

prices as their only opportunities for equitable

treatment, and in this view, a U.S. economic

stockpile would appear as a threat which

would diminish their market power in periods

of heavy demand or interruptions in supply.

But in many countries and materials, time and

events have overtaken this view: the growing

demands and diminishing supplies of certain

minerals are changing the terms of trade and

have led to demands from less-developed

countries for a more positive role in the decisions governing supply and price. The United

States is now having to reckon with these

changing relationships.9

The growth of world demand, coupled with

the spectacular success of OPEC, has encouraged the less-developed countries to demand both higher prices for their exports and

protection against continued inflation of the

prices for their imports. While it has traditionally resisted these demands, the United

States appears to be moderating somewhat in

the direction of accommodation with the positions of the less-developed countries.10

The economically weak suppliers of

mineral raw materials in the past have pressed

for international “stabilization” agreements

which would have the effect of regulating supply and setting floor and ceiling prices. As a

BThiS View was formulated systematically by Raoul Prebisch

in a series of papers issued by the U.N. Economic Commission

for Latin America, and is currently being voiced at the

UNCTAD IV discussions in Nairobi.

%ee, for instance, the speeches of the U.S. Secretary of State

to the Kansas City international Relations Council, May 18,

1975, and to the U.N. General Assembly, Sept. 1, 1975.

l@ee New York Times (Aug. 27, 1975), p. 1.

CHAPTER V

principal importer, the United States has been

reluctant to enter into such agreements,

professing a preference for competitive

markets and in any case resisting output

restrictions which it regards as too high,

However, the United States has recently

signed the Fifth International Tin Agreement

(ITA) which is now before the U.S. Senate

awaiting consent and ratification. The ITA is

the only operational international commodity

agreement for a metal.

Many of the materials which are candidates

for stockpiling are actively traded in nationwide or worldwide markets which mediate

between producers and users. Stockpiling, as

an explicit mode of government intervention

in the market for public purposes, can

markedly affect market and price behavior by

upsetting the expectations of buyers and

sellers. 11 Sometimes, in cases where markets

are sensitive and prices volatile, these effects

can be quite out of proportion to the quantities

acquired or sold,

When current or forward market prices are

built into production or pricing decisions of

suppliers or users of important materials, as

may be the case with aluminum or copper,

market intervention may have a destabilizing

effect. One such effect may be felt if the result

of the stockpiling is to activate high-cost

domestic suppliers who may find themselves

unable to compete commercially when the

stockpiling objective is achieved. This can

happen in the commercial market also, of

course, but it is then the result of market

forces and market risks, not necessarily public

policy decisions. These actions add to uncertainties and may upset competitive relationships, perhaps even the locus of production

and employment.

On the other hand, successfully executed

stockpiling operations in support of public obllFor example, the decision of the International Monetary

Fund to dispose of so million ounces (about $7.5 billion) of the

gold from its “stockpile” drove down not only the price of gold

but sympathetically the price of silver. New York Times, Sept. 3,

1975, p. 49.

85
CHAPTER V

jectives could, if pursued steadfastly and consistently over time, reduce uncertainty by

bounding risks and the consequent market

behavior. In this respect, stockpiling might

have an effect analogous to that of the currency support operations of central banks in a

system of floating exchange rates, by putting

all parties on notice that the permissible range

of fluctuations would be limited by government action. A comparatively small stockpile

of raw sugar, for example, might have moderated the runaway sugar market in the latter

part of 1974. Once suppliers, users, and intermediaries become convinced and accustomed

to the stockpiling operations, such operations

could reduce the risks on all sides and permit

production and consumption decisions on the

basis of efficiency within those bounds.

Under these conditions, the operators of the

stockpile undertake the burden of performing

the functions of the market in allocating scarce

resources, many of which are becoming

scarcer and more costly, as well as differentiating between market manipulation and real

changes in the supply prices for the quantities

demanded. This is far more difficult than

short-term supply or price stabilization.

Because public policy objectives may be incompatible with economic efficiency, public

management may have adverse and difficultto-forecast economic effects on the allocation

and use of resources. The history of regulation

of natural gas is perhaps an inexact but

nevertheless useful analogy. These incompatibilities can generate both economic and

political impacts: the economic impacts arising

from the changes in the burden o f

risks/rewards and the distortion of the normal

market incentive effects on supply/demand;

the political impacts of interests, regions; and

nations trying to influence management decisions to their advantage.

SP-4, for example, could have a significant

impact on the evolution of domestic industry

since it would, in effect, establish a “floor”

price for various materials in short supply.

Known economic objectives for development

of substitute materials would be set. In addition, as cost levels change, the economic incentive to develop indigenous marginal

resources and substitute materials could also

change.

A U.S. economic stockpile could provide a

floor price for a particular material as a means

of stimulating industries which are now

economically “submarginal” but which have a

potential for becoming stable industries in the

near future. Furthermore, providing a floor

price would encourage investment in research

to develop substitute materials, since the

federally backed price would provide an

economic goal for the new technological

development. Within the social domain, the

consequences of shaping technology in this

way include reducing dependency on imports,

losing other technological opportunities as a

result of diversion of manpower and skills,

changing future product mix and costs,

stimulating opportunities for spinoff technologies, and creating technologies which may

be well suited for export.

In achieving these policy objectives, SP–4

could also affect the domestic environment.

Extractive industries would be encouraged to

develop marginal resources so that the

materials extracted could be used at a later

date. Planning for this policy must therefore

include careful consideration of such environmental factors as land use (including questions

relating to the use of Federal lands),

availability of water, and land restoration and

runoff.

The impacts of an economic stockpile on

market operations can be summarized in four

major points:

(1) The operation of an economic stockpile

is an intervention into the market and as

such it could obstruct the natural functioning of the market. This interference

could pose certain elements of risk to

consumers, producers, and stockpile investors;

(2) If the stockpiling objectives were pursued in a constant and consistent

fashion, the market uncertainty and risk

86
.

CHAPTER V

created could be bounded, most likely (4) There may well arise possible conflicts

within acceptable levels; between economic efficiency and policy

(3) Some of the possible problems which objectives due to political objectives in a

may occur could be short-run and tran- spacific stockpiling situation. This could

be a crucial issue in ultimate acceptance sitory in nature and do not appear to be

significant impediments to policy imple- of stockpiling as a policy alternative.

mentation; and

B. ECONOMIC IMPACTS OF STOCKPILING TO DISCOURAGE OR

COUNTERACT CARTEL OR UNILATERAL POLITICAL ACTIONS

AFFECTING PRICE OR SUPPLY (SP-1)

The Economic Welfare Model as presented

in chapter IV is a method for assessing, in

specifically estimated dollar amounts, the

possible economic impacts of a stockpile to

discourage or counteract cartels or unilateral

political actions affecting price or supply. The

derivation of the Economic Welfare Model for

SP-1 is logically divided into two steps: (1)

creating a decision tree to identify the

spectrum of events which can possibly occur,

and (2) developing the cost and benefit functions related to the policy objectives in order to

estimate the probable economic net benefits.

The decision tree for SP–1 is shown in

figure V–1, As in game theory, the tree identifies the possible damages, costs, and damages

averted (consequences) as a result of cartel

events occurring when a stockpile does not exist, or when a stockpile does exist, The probability associated with each event is noted on

the branches of the tree.

The cost function used to estimate the possible costs of implementing SP–1 is explained in

chapter IV; the benefit function used to estimate the possible benefits of SP–1 is explained

immediately below. In evaluating the benefit

function, one should note the difference between the possibility (certainty) and the probability of an event’s occurring, The Economic

Welfare Model, used to estimate when and

how much of a material should be included in

a particular stockpile, is based on the probability that some event affecting the normal

flow or price of a material will occur. For example, approximately 28 percent of the zinc

presently used in the United States is imported

from Canada (55 percent of the total U.S. zinc

imports), thus there is the possibility that 28

percent of the zinc requirement could be disrupted by an event which cuts off this supply.

However, the probability of such an event

happening is very small. Therefore, to

stockpile a quantity of zinc metal equal to 28

percent of the U.S. requirement assumes that

the event would happen with a probability of

1. That is unrealistic and would lead to a

stockpile far in excess of real requirements.

1. Derivation of Benefit Function for SP–1

The decision tree for SP–1 indicates that a

stockpile for SP–1 will have two inherent

benefits:

● Those derived from the aversion of a

cartel or unilateral political action, and

. Those derived from the counteraction

of such action after it has occurred.

The benefits derived over the coming time

period depend on whether a cartel or

unilateral action artificially restricts supply or

raises prices, If either event occurs, the

benefits are equal to the potential damage to

87
CHAPTER V

Figure V-1.

Decision Tree for SP-1

the United States which the stockpile prevents. If neither action occurs because the existence of the stockpile discouraged them, the

benefits are equal to the damage averted. Since

it is impossible beforehand to know whether

such an action will or will not occur, the optimal level of stocks should be determined on

the basis of the expected benefits. For a

stockpile of a given size, these benefits are

equal to: (1) the damage which the stockpile

could counteract, multiplied by the probability

that a cartel or unilateral action will occur

even though the stockpile is in existence; plus

(2) the damage which the stockpile averts

through discouragement of a cartel or

unilateral action, multiplied by the probability

that the action would occur without a

stockpile.

The damage and probability products are

multiplied by 1 plus a risk aversion factor

(l+r) which reflects society’s reluctance to be

exposed to damaging events. The risk aversion

factor is analogous to an insurance policy

88
CHAPTER V

covering a highly damaging (costly) event

which has a very low likelihood of occurring.

The risk aversion factor is relevant principally

when the economic net benefits are negative

or the damage not averted by the stockpile is

large (presumably due to low probabilities)—

enabling the stockpile managers to consider

whether a value for r exceeding zero would be

appropriate for the specific policy and material

being considered. That is, if the event could be

sufficiently disastrous (regardless of the probability of its occurrence) that expenditures

above those economically justified would be

reasonably committed, some positive value

assigned to r would increase the expected

benefits to the point that economic benefits

become positive. That is,

(9a)

where

B = benefits

r = risk aversion factor

D = damage of the action without

stockpiling

D’= damage counteracted with th e

stockpile

P = probability of the action without

stockpiling

P’ = probability of the action when a

stockpile exists

Equation (9a) implicitly assumes that only

one type of action by a cartel or unilateral action can occur. Of course, this is rarely, if ever,

the case. Conceivably, such actions can embargo anywhere from zero to 100 percent of

imports. They can raise prices so high that all

imports cease or so little that the domestic demand for imports is negligibly affected. They

can last a few weeks or several years. In order

to consider the range of possibilities as

depicted in the decision tree, equation (9a) can

be modified as shown in equation (9b).

i

where

i = the categories representing extent

of import disruption

k = the categories representing duration of

the disruption in months

The expected benefits of a stockpile are equal

to the probability that imports will be

restricted in the time period considered (due

either to an embargo or the imposition of higher prices) multiplied by the damage this would

cause, both with and without the stockpile.

The import disruptions considered must encompass the entire spectrum of possible import disruption with regards to both percent

and duration of interruption. The probability

that any cartel or unilateral action will occur

must be less than or equal to one. Therefore,

the probabilities of possible interruptions can

be developed to encompass the entir e

spectrum of events.

The damage incurred by the United States

in the event of a cartel or unilateral action

which restricts imports by 50 to 75 percent,

for example, depends in part on the net loss of

consumer surplus caused by the rise in price.

Figure V–Z (below) illustrates this loss by the

trapezoid abcf on the assumption that the

cartel or unilateral action in the absence of a

stockpile would raise the price to domestic

consumers from p to p’. Again, it is important

%p + d“ d Quantity

&jon

; no stockpile

~ stockpile

d’ = Demand wifh action, no stockpile

89
CHAPTER v

to point out that the actual loss to domestic

consumers is p’bcp, an amount which could

appreciably exceed abcf. The difference,

however, goes to domestic producers as a

transfer payment and does not represent a loss

of real resources to the country.

If the stockpile is large enough to discourage

a cartel or unilateral action, then the damage

averted (D) includes all of trapezoid abcf, If a

cartel or unilateral action occurs even though a

stockpile exists, then the damage which can be

counteracted depends upon the size of the

stockpile. If the stockpile were large enough to

keep the price of the material in question from

rising above p, the damage counteracted

would include all of the trapezoid abcf. If this

were not the case and the stockpile could only

keep the price from rising from p’, the savings

in consumer surplus would be indicated by the

trapezoid abhg.

Since damages expressed in the benefit

function are expected damages (i.e., dependent on the specified probability of an import

interruption), the optimal stockpile size is

unlikely to avert all damages. In figure V–2

above, the stockpile is sufficient only to reduce

the price to p“. Hence, the damage which the

stockpile is not able to avert is the trapezoid

ghcf. Consequently, estimation of damage not

averted is important if policy makers are to intelligently address the tradeoff between higher

stockpile costs and the damage not averted.

The probability (Pijk) that an action will Occur with a stockpile in existence is dependent

upon the size of the stockpile. Likewise, the

upon stockpile size as reflected in the price

reduction (p”) achieved by release of stocks,

The benefits (B) of a stockpile of size (Qi

) are

given by thefollowing equation: l

k

where j = identifier of a stockpile of size Qj

As pointed out in chapter IV in the discussion of the cost function, a price rise may impose, in addition to the net loss in domestic

consumer surplus, external costs on society

which are not borne by the consumers of the

material. For as the latter cut back their production, their suppliers may be hurt and their

employees laid off. There may be external

costs of a different nature as well. For example, cartel and unilateral actions of the type

considered here tend to aggravate international relations between the United States and

other countries. The benefits which a stockpile

produces by avoiding or reducing these external costs should be counted in the benefit

function.

The damage (Dik) a stockpile discourages

for a cartel or unilateral action of i percent, k

month is estimated from the following equation, so that:

(lo)

where

Dik= damage without stockpile

CS = consumer surplus without stockpile

PL = producer loss without stockpile

ED = external damage without stockpile

From figure V–2:

(llb )

which gives the damage function of:

where

s = supply without an action

P = price without an action

d = demand without an action

The total damage to the United States is

equivalent to the counteracted damage (Dijk)

of a stockpile of sufficient size ( Qj

) Whic h

completely offsets the cartel or unilateral action—i.e., a quantity large enough to lower the

price (p”) so that it equals the price (p) prior to

the cartel or unilateral action.

Once all of the components of equations

(10) and (11) are estimated, the damage

averted can be calculated. The expected

90
economic benefit of a stockpile of size (Qj

) can

be calculated from equation (llc), given

society’s aversion to risk (r) and the probabilities (Pik and Pijk) associated with cartel

or unilateral actions. It should be noted that

the probabilities of a cartel or unilateral action

effecting a given reduction in imports are

likely to decrease as the size of the stockpile

increases, since the larger the quantity the

smaller and more distant are the benefits of

such an action to exporting countries. To trace

out the entire benefit function, the calculations described above should be repeated for

stockpiles of various sizes,

The foregoing discussion implies that the

damage (D~jk) a stockpile could counteract,

should a cartel or unilateral action cut imports

by i percent fork months, can be estimated by:

(12)

where D’, CS’, PL’, and ED’ are defined in

equation (10) and CGijk capital gains (losses)

accrued by disposal of the stockpile.

From Figure V–2:

(rib)

which give the damage function of:

where

S ik =

Sijk =

Pik =

Pijk=

Cfik =

dijk =

supply when the action occurs without stockpiling

producer supply with

stockpile j

price when the action

stockpiling

price with disposal of

disposal of the

occurs without

the stockpile j

demand when the action occurs without stockpiling

demand with disposal of the stockpile j

The first term on the right-hand side of

equation (13c) estimates the savings in consumer surplus which arise because domestic

producers incur a smaller increase in real incremental costs due to the fact that their outCHAPTER v

put increases only to s“ rather than s’. A s

figure V–2 illustrates, this savings (which is

reflected by the triangle ajg) is equal to onehalf the increase in domestic supply, which

did not occur due to stockpile releases,

multiplied by the increase in price, assuming

the domestic supply curve is approximately

linear in the price range p“ to p’.

The second term in equation (13c) estimates

the savings in consumer surplus which occurs

because fewer consumers of the material are

driven out of the market. This savings is

reflected in figure V–2 by the triangle bhi.

Equation (13c) assumes that the demand curve

over the relevant price range is linear so that

this component of consumer surplus can be

estimated by one-half of the product of the

prevented increase in domestic price and

decrease in domestic demand.

The third term of equation (13c) represents

the savings in consumer surplus which arise

because the price paid to foreign producers is

kept at p“, rather than being permitted to rise

to p’, This savings is reflected in figure V-2 by

the rectangle abij. It can be estimated by the

product of the prevented price increase and

the level of imports which would occur at the

price p’,

The fourth term (ED’) reflects the savings

produced by the stockpile in the external

damages which are not borne by the users of

the material. The first three terms can be approximated on the basis of estimates of the

prevented price increase (p’–p”) and the

elasticities of domestic supply and demand

which apply for the time period and price

range being considered. It is far more difficult

to estimate ED’.

The fifth term, capital gains or losses (CG),

related to disposal of a portion or all of the

stockpile are determined from the difference

between the acquisition and disposal prices.

These gains (or losses) are added to the

damages averted for counteraction of a

specific interruption as given in equation (12).

Capital gains (losses) were explicitly computed for stockpiling policies 3, 4, and 5 in

91
CHAPTER V

order to illustrate its application and test the

sensitivity of this variable. Capital gains

(’losses) were set at zero for policies 1 and 2.

2. Types of Economic Impacts Associated

With SP-1

Four types of economic impacts resulting

from stockpiling under SP–1 can be estimated

using the Economic Welfare Model:

●

●

●

●

These

Direct benefits and costs to materials

producers,

Direct benefits and costs to materials

consumers,

Benefits and costs borne by the

stockpile investor, and

External benefits and costs resulting

from stockpile operation.

benefits and costs occur in each of the

three phases of the operation of an economic

stockpile, Estimates of each of the four types

of economic impacts have been made and are

presented following this discussion.

a. Materials Producers Incur Direct Gains

or Losses in Domestic Producers Surplus.—

Materials producers are impacted during all

three phases of the operation of an economic

stockpile under SP–1. During acquisition, the

materials producers derive a gain from the increased demand for a commodity and the

resulting higher prices. The holding phase of

stockpile operation does not generate actual

losses for materials producers; however, during this phase the existence of the stockpile

will prevent producers from reaping gains as a

result of a cartel or unilateral action. That is,

the producers will not be able to sell the commodity at increased prices and obtain excess

profits.

The direct benefits and costs to materials

producers can be estimated by the gain or loss

in domestic producer surplus. During stockpile

acquisition, the direct producer gain (PG) is

dependent upon the rate of commodity accumulation and the resultant price impact of

the accumulation. The direct producer loss (PL)

92

during the disposal stage can be determined

from the damage function and the probabilities

that an event will occur.

b. Materials Consumers Incur Direc t

Gains or Losses in Domestic Consumer

Surplus.—Materials consumers are impacted

concurrently with materials producers under

SP–1. When the materials producers incur a

direct gain, the materials consumers incur a

direct loss, and vice versa. The difference between the direct consumer loss and the direct

producer gain is the net loss (savings) in

domestic consumer surplus, During the acquisition phase of an economic stockpile

under SP–1, the materials consumers suffer a

direct loss due to the increased price of the

stockpiled commodity. The materials consumers realize a direct savings or gain in the

holding and disposal stages as a result of discouraging or counteracting cartel or unilateral

actions,

The direct benefits and costs to materials

consumers can be estimated by the savings or

loss of domestic consumer surplus. As with

direct benefits and costs to the materials producer, the direct impact on materials consumers is the expected loss or savings.

c. Direct Benefits and Costs Are Borne by

the Government In Operating the Economic

Stockpile. —These costs are the initialization

costs during the acquisition phase, the holding

costs, and the disposal costs, The direct

benefits of the stockpile operation are the

capital gains (or losses which give negative

benefits) realized upon disposal of the material

in the stockpile. Under SP–1, capital gains or

losses can only be realized if the stockpile is

used to counteract a cartel or unilateral action

when it occurs. Therefore, the benefit is the

expected capital gain or loss, which is the

possible capital gain or loss multiplied by the

probability that a cartel or unilateral action

will occur,

d. External Benefits and Costs are the Indirect Economic Costs and Benefits of the

Stockpile.— These externalities are included

in the cost and benefit functions of the
Economic Welfare Model. The external costs

of acquisition and the external costs averted

through holding materials to discourage cartel

or unilateral actions and of disposing materials

to counteract such actions are a major portion

of the economic net benefits of an economic

stockpile,

These externalities, which are caused by

stockpile operation and cartel or unilateral actions, arise from the indirect effects of price

changes or supply interruptions, These indirect costs are not easily attributable to either

materials producers or consumers, but apply

generally to the producers, the consumers

(both immediate, intermediate, and final), as

well as to other parties,

3. Estimation of Economic Net Benefits for SP-1

Calculations are presented for a key

material in order to demonstrate the use of the

Economic Welfare Model as a means of

estimating, on a macroeconomic scale, the

economic net benefits to the United States of

economic stockpiling. For the input variables

specified, the calculated values were produced

by computer program.

Petroleum has been selected as the example

material to demonstrate how the Economic

Welfare Model can be used to determine when

and how much petroleum should be stockpiled

to achieve the two objectives of SP–1. The

calculations related to this example demonstrate that the quantity of a material to be

stockpiled should properly be based upon the

probability of a supply interruption, rather

than on the possibility of such interruption.

a. Background Information.—The values

and assumptions for the key parameters used

in the estimations are summarized below.

. Postembargo U.S. demand fo r

petroleum remains constant at 6,010

million barrels per year, of which 2,000

million is met by imports,

. U.S. domestic supply remains constant

at 4,010 million barrels,

●

●

●

●

CHAPTER V

There is a price response to changes in

the supply which varies with the intensity and duration of import interruption,

All petroleum consumed in the United

States is valued at a post-1973 embargo

price of $10 per barrel.

External costs are estimated indirectly

by establishing a relationship between

changes in GNP and the U.S. demand

for energy. For the period 1950–72,

petroleum accounts for about 46 percent of the gross energy used. This

relationship then permits, based on the

best estimate of experts, an approximate determination of the loss in GNP

resulting from an interruption of imports of petroleum.

The probabilities of varying levels and

durations of import interruption have

been specified for situations with and

without a stockpile. These probabilities

are shown in table V–1.

The estimation of probabilities consists

of two steps: first, to define the range

of possible import interruptions; and

second, to estimate the probability of

an event occurring in each interval of

the range of interruptions. It is important to note that the selected intervals

of interruption span both the percentage and duration of the spectrum of

possible interruptions. The discrete interruptions used in the following

calculations are the median points of

the intervals and represent the interval

in which they occur,

For SP–1 the probability estimates considered the following factors with

respect to the material under review:

the existence or nonexistence of a

carte]; the likelihood. of an effective

cartel 1ike OPEC; and the likelihood of

unilateral political actions,

That other cartels could be formed is

influenced by such actions as are oc93
CHAPTER V

Table V–l.—Probability of cartel action without a stockpile*

I Months of Duration

‘/0 Import Interruption

o 0-2 2-4 4-8 8 Total

No Interruption 0.0

i k 1 2 3 4

0-1o 1 0.0 0.0 0.0 0.0 0.00

10-40 2 0.0 0.36 0.27 0.0 0.63

40-60 3 0.0 0.27 0.1 0.0 0.37

60-100 4 0.0 0.0 0,0 0.0 0.0

Total 0.0 0.63 0.37 0.0 1.00

● Precision on the probability values is due to the averaging of values specified by three or more material specialists.

Probability of cartel action with stockpile Q1*

‘/0 Import Interruption

Months of Duration

o

I o-2 ! 2-4 ! 4-8 ! 8 ! Total

No Interruption 0,70 0.70

i k 1 2 3 4

0-1o 1 0.0 0.0 0.0 0.0 0.0

10-40 2 0.0 0.05 0.10 0.0 0.15

40-60 3 0.0 0.10 0.05 0.0 0.15

60-100 4 0.0 O.0 O.0 0.0 0.0 I I I

- - -

1

- - -

1 I

- - -

Total 0.70 0.0 0.15 0.15 0.0 1.00

● (Q1=250 Mil bbl)

Probability of cartel action with stockpile Q2*

% Import Interruption

Months of Duration

o 0-2 2-4 4-8 8 Total

No Interruption 0.91 0.91

i k 1 2 3 4

0-1o 1 0.0 0.0 0.0 0.0 0.0

10-40 2 0.0 0.0 0.02 0.0 0.02

40-60 3 0,0 0.02 0.05 0.0 0.07

60-100 4 0.0 0.0 0.0 0.0 0.0

Total 0.91 0.0 0.02 0.07 0.0 1.00

● (Q2=500 Mil bbl)

Probability of cartel action with stockpile Q3*

‘/0 Import Interruption I Months of Duration I Total

No Interruption I I 1.0

Total 1.0

*(Q3=1 Bil bbl

curring now with respect to chromite. ship by rail to ocean ports in MozambiShipments of chromite from Rhodesia que. Ships have been known to depart

to the United States have been hin- half loaded with chromite after 70 days

dered more and more by slowdown of loading. This has become more fortactics in neighboring Mozambique. ceful, and sanctions are being invoked

Rhodesia is landlocked and forced to by the United Nations.

94
values for the output variables calculated by

computer program for SP–1 are listed in table

V–3. This table lists the mathematical symbol,

the description of the variable, and the

numeral value of the output variable for each

stockpile j.

b. Input Values.—The values for the input

variables to the computer program for SP–1 are

listed in table V–2. This table lists the

mathematical symbol, the name or description

of the variable, the units of measure, and the

numerical value of the input variable for each.

The calculations for SP-1 were performed by

computer program for the input variables

listed in table V–2.

d. Graphic Representation of the Calculation.—Figure V–3 is a graphic representation

of the calculated costs, benefits, and net

C . Calculated (Output) Values.—The benefits for the SP–1. The values were comTable V–2.—Input Variables SP–1

Units

Million Barrels

$ per Barrel

Million $

$ per Barrel

Percent per year

Percent per year

$ per Barrel per year

$ per Barrel per year

Either not

dependent

on J, or ]=1

250.

10.00

0.5

5.

0.08

0.0

1.0

0.0

10.00

10.0

6010.

6010.

4010.

4010.

0.0

0.0

0.0

0.000

Math

Symbol

Progran

Symbol Description J=3

Qj

c .

c f

c“

d

s

c d

P

P':

1

d’j

s

s’ j

ECj

R

c gj

Q d j

500.

10.30

10.3

5969.

4010.

873.270

0.0

.000

1000,

11.

Q

Cu

CF

CV

XI

SLR

SC

CD

P

PP

D

DP

S

SP

EC

R

CG

QD

Stockpile size

Unit Cost

Fixed initialization cost

Variable initialization cost

Interest rate

Spoilage loss rate

Storage cost

Unit disposal cost

Price

Increased price

U.S. demand at price p

U.S. demand at price p’

U.S. supply at price p

U.S. supply at price p’

External cost

Risk aversion factor

Capital gains

Stockpile disposal

$ per Barrel

$ per Barrel

Million Barrels

Million Barrels

Million Barrels

Million Barrels

Million $

Coefficient

Million $

Million Barrels

11.0

5872.

4010,

2923.5

0.0

.000

—

K – 4

External damage - no stockpile

Price without stockpiling

J=l K=3

1=1

1=2

1=3

1=4

J = l

1=1

1=2

1=3

1=4

J = l

1 = 1

1=2

1=3

1=4

J = l

1=1

1=2

1=3

1=4

K=2

ED

PWOS

SWOS

DWOS

.000

.000

.000

.000

10.0

10.0

10.0

10.0

4010.

4010.

4010.

4010.

0.0

0.0

0.0

0.0

.000

11863.00

23458.00

.000

10.0

12.0

11.75

10.0

4010.

4010.

4010.

4010.

0.0

5885.0

5760.0

0.0

.000

23458.00

47458.00

.000

10.0

14.0

13.3

10.0

4010.

4010.

4010.

4010.

0.0

5760.0

5510.0

0.0

.000

.000

.000

.000

10.0

10.0

10.0

10.0

4010.

4010.

4010.

4010.

0.0

0.0

0.0

0.0

95

EDik

P ’ik

S’ik

d ’ik

Million $

$ per Barrel

Supply without stockpiling Million Barrels

Demand without stockpile Million Barrels
CHAPTER V

Table V–2.—Input Variables SP-1—continued

P ’ik

E Dijk

P ’ijk

S "ijk

d "ijk

P ’ijk

PROB

EDP

PWD

SWD

DWD

PRCBP

Probability of cartel action

without stockpile

External damage - with stockpile

Price with disposal of stockpile j

Producer supply with disposal of

stockpile j

Demand with disposal of stockpile

Probability of cartel action with

stockpile Qj

Percent per year

Million $

$ per Barrel

Million Barrels

Million Barrels

Percent per year

J=l

J=l

1=1

1=2

1=3

1=4

J=1

1=1

1=2

1=3

1=4

J=2

1=1

1=2

1=3

1=4

J=3

1=1

1=2

1=3

1=4

=1,2.3

1=1

1=2

1=3

1=4

=1,2,3

1=1

1=2

1=3

1=4

=1,2,3

1=1

1=2

1=3

1=4

J=l

1=1

1=2

1=3

1=4

J=2

1=1

1=2

1=3

1=4

J=3

1=1

1=2

1=3

1=4

K=l

0.0

040

0.0

0.0

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

10.0

10.0

10.0

10.0

4010.

4010.

4010.

4010.

6010.

6010.

6010.

6010.

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

K=2

0.000

0.364

0.273

0.000

0.000

0.000

0.000

0.000

0.000

0.000

23458,000

0.000

0.000

11863.000

0.000

0.000

10.0

10.0

10.0

10.0

4010.

4010.

4010.

4010.

6010.

6010.

6010.

6010.

0,000

0.050

0.100

0.000

0.000

0.000

0.020

0.000

0.000

0.000

0.000

0.000

K=3

0.000

0.273

0.090

0.000

0.000

0.000

47458.000

0.000

0.000

23458.000

0.000

0.000

0.000

0.000

0.000

0.000

10.0

10.0

11.65

10.0

4010.

4010.

4010.

4010.

6010,

6010.

5980.

6010.

0.000

0.100

0.050

0.000

0.000

0.020

0.050

0.000

0.000

0.000

0.000

0.000

K – 4

0.00

0.00

0.00

0.00

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

10.0

10.0

10.0

10.0

4010.

4010.

4010.

4010.

6010.

6010.

6010.

6010.

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

96
CHAPTER V

Table V-3.—Calculated results for SP–1

Symbol

NBj

B:

C:

E(DN)

E(PL’j

)

E(CS’j

)

E(ED' j)

E(PLj

)

E(CSj

)

E(EDj

)

HCj

LEWj

CLj

PGj

DCj

OCj

ACj

**

Description

Net benefits

Benefits function

Cost function

Expected damage not averted

Benefit variables:

With stockpiling:

Expected producer loss

Expected consumer savings

Expected external damage

Without stockpiling:

Expected producer loss

Expected consumer savings

Expected external damage

Cost variables:

Holding costs

Initialization costs

Loss in economic

Consumer loss

Producer gain

Disposal cost

Operating costs

Acquisition costs

Economic impact

welfare

of no stockpile

J=l

250,000

19.1

20.8

1.7

5.4

3.1

4.44

2.4

7.1

10.3

13.7

.5

1.3

.000

.000

.000

.000

4.2

2.5

20.8

.-

.,

J=2

(Millions of barrels)

500,000

19,0

23.9

4.9

2.4

1.1

1.6

.9

9.3

13.7

18.1

.9

2.5

.6

1.8

1.2

.000

8.6

5.2

23.9

J=3

1,000,000

14.5

26.3

11.7

.000

0.000

.000

.000

10.4

15.3

21.4

1.9

5.0

1.9

5.8

4.0

.000

17.9

11.0

26.3

● All calculations have been rounded for simplicity

““The economic impact of no stockpile is equivalent to the benefits (expected damages averted) attributed to the stockpile which are foregone in the absence of the stockpile,

puted for only three stockpile sizes and zero

stockpile.

e. Optimal Stockpile Size.—The ne t

benefit curve in figure V-3 can be used to indicate the probable optimal stockpile size, where

the curve appears to be at a maximum positive

value (or minimum negative value). Although

this can only be taken as an indication of the

area of an optimal quantity, it illustrates the

desired value of the stockpile size for the

values of the input variables chosen.

The calculations resulted in an optimal

stockpile size of 250-500 million barrels accumulated over a l-year period. The economic

net benefits expected

approximately $19

emphasized that the

for this stockpile will be

billion. It should be

estimates apply only to

the specific materials examined and within

the scenario assumptions described, and

should therefore not be taken to indicate that

precise quantities of specific materials should

or should not be stockpiled. Nevertheless, the

nature and magnitude of the estimates are

sufficient to indicate that an economic

stockpile should be given detailed consideration as one component of a more comprehensive national materials policy and that measuring the benefits or costs of a supply disruption

in terms of the probability, rather than the certainty, of a disruption will significantly reduce

the quantity of material to be stockpiled,

As a measure of scale for the results of these

calculations, two current stockpiling proposals

can be examined. The first proposal, Title II of

97
CHAPTER V

Figure V-3.

Economic Net Benefits of SP-1

Billions of Dollars

26

}

24 -

22 -

20 -

18 —

16 —

14 —

12 —

10 -

8 —

6 r

/19.1

t:*== ””=””””= ””””~::!.*

Ii ...... Net Benefits

/!

“*..%.%.*

l; %.*

“*.. *

l! ● ..* .** 14.5

/; ● *

/!

/: $

11.7

● *

4,

.**

{

● “

● *

● .**

● **” ● * ● *

{

● “

costs ● .”””

E ● “

1# 4.9 -e.”””

.“-

4

-i

● ** ,**

6

● * ● **

2 1.7 ..*”*

E ..**.**” ” ●

● *.** I I I I I I 1 I I

100 200 300 400 500 600 700 800 900 1000

Mllllons of Barrels

the Administration’s Energy Independence

Act (IEP)—the National Strategic Petroleum

Reserve (Civilian) Act of 1975—proposes the

establishment of a strategic petroleum reserve

of 1 billion barrels’ reserve for the military.

The second proposal is part of the requirements for allocation rights under the International Energy Agency which stipulates that

each participating country maintain emergency oil reserves sufficient to sustain consumption for 60 days with no net imports. For the

United States, which presently is importing 5,5

million barrels per day, satisfaction of this

obligation would require a stockpile of 330

million barrels. The IEP also calls for demand

curtailment measures which would reduce

consumption by 7 percent in the event of an

embargo--or 67 1/2 million barrels over a 60-

day period.

In this example, the optimal stockpile size of

250–500 million barrels was based on the probability of four distinct cartel/unilateral actions and the damages which would result

from each action (i.e., a 6-month, 50-percent

import interruption; and a 3-month, 25-percent

import interruption; a 3-month, 50-percent interruption; and a 3-month, 25-percent import

interruption). At the lower end of the scale

this stockpile size falls short of the IEP requirement by a minimum of 10 percent and is

approximately 25 percent the size of the NSPR

act’s proposed stockpile. It is interesting to

note that both the IEP requirement and that

calculated with the Decision Criteria for SP-1

are approximately one-third of the possible

total petroleum import interruption of 1 billion

barrels for a 6-month period,

In summary, the example calculations for

SP–1 indicate that the stockpile size should be

based upon the expected economic ne t

benefits of the stockpile. The example calculations also show that a stockpile based upon the

probability of an interruption is significantly

smaller than one based on the certainty of total

interruption.

These calculations also illustrate the role of

the risk aversion factor. It should be noted, for

example, that the difference in economic net

benefits for stockpile sizes of 250 and 500

million barrels is relatively small ($140

million). Yet the protection provided by the

larger stockpile in the event of a cartel action

is substantially greater, The risk aversion factor has been treated as an unknown, and the

value of r which equates the economic net

benefits for the two stockpile sizes has been

solved. The resulting small value of 1.007 suggests that implementation of the larger

stockpile should be given serious consideration. If the value for r were equal to say, 3,5,

such a high-risk aversion would most likely be

questioned.

f. Sensitivity Analysis for SP–1.—This

section is a discussion of the particular sensitivity analysis of SP–1. An examination of table V-4 indicates the economic net benefits to

be fairly insensitive to any input variable per98
CHAPTER V

Table V--—4.-Percent change based on 10 percent perturbation of variables for SP–1

Perturbed*

variable

CF

Cv

Cu

Sc

EC

ED

PROB

PROBP

PP

D

s

SWD

DWD

EDP

Q1

0.00

.00

.00

.00

.00

6.60

12.61

–2.61

.00

2.53

–1 .69

–.73

1.09

1.14

Benefits

Q2

0.00

.00

.00

.00

.00

7.57

10.99

– .99

.00

2.91

–1.94

– .23

.35

.39

Q3

0.00

.00

.00

.00

.00

8.14

10.00

.00

.00

2.97

–1 .98

.00

,00

.00

Q1

0.00

7,35

1.18

1.47

.00

.00

.00

.00

117.61

.00

.00

.00

.00

.00

cost

Q2

0.00

5.12

.84

1.02

1.79

.00

.00

.00

41.78

1.85

–1.23

.00

.00

.00

Q3

0.00

4.26

.75

.85

2.49

.00

.00

.00

18.10

2.56

–1.71

.00

.00

.00

Net benefits

Q1 I Q2 I Q3

0.00

–.65

–.10

–.13

.00

7.18

13.73

–2,84

–10.45

2.76

–1,84

–.79

1.18

1.24

turbation (a + 10-percent change in probability,

external damage, or increased price result in

changes of only –7 to +18 percent in the

economic net benefits). Using this table as a

guide, the actual computed economic net

benefits for the baseline, probability, and increased price perturbation runs were plotted as

shown in figure V-4, Examination of this

figure shows that the range of stockpile sizes

for achieving maximum benefits still lies in the

250- to 50()-million-barrel range. The figure also

indicates two further conclusions:

● Given an increased probability of a

cartel action without a stockpile, the

optimal stockpile size increases to 600

or 700 million barrels.

. Given an increased price of petroleum,

the optimal stockpile size does

significantly change.

4. Discussion of Partial Economic

Benefits and Costs for Each Phase of

Stockpile Operation for SP-1

So far, the Economic Welfare Model

not

has

been employed to estimate the aggregate

77-119 0 -76- 8

0.00

–1.31

–.22

–.26

–.46

9.51

13.81

–1.25

–10.72

3.18

–2.12

–.30

.44

.49

0.00

–3.44

–.61

–.69

–2.01

14.72

18.07

.00

–14.61

3<30

–2.20

.00

.00

.00

● See table V–2 for definition of variables

. . . . -. .

Figure V-4.

Perturbations for SP-1

Billions of Dollars

28

26

24

22

20

18

16

14

12

10

8

6

4

2

21.7

r

21.6

- - -

- -

\,

I 19.1 \,

/

19.0

I ;“’”’”””O””””””””’ %.. “~,

] ;,::::...-.=.....::.9 “%..,.* -\: 7.1

/

:: ● * “*%● *. ● ***

/

Prob = + 10Yo

::9 ● . %.** ● *

:: ● **

i

● * ● ***

● 8 ● .* .*14.5 ● *.*

/

::”

:: ““**. * Ba~eline ● .**

I

● , ● 0.J2.4 ::*

/

:9:* PP = + 10YO

/

::.

I

:;:

- /$

:;:

-/$’

-~

/$

#

f

b

I I I I 1 I I I I I

100 200 300 400 500 600 700 800 900 1000

Millions of Barrels

99
CHAPTER V

economic benefits and costs to the U.S.

economy (society) as a result of stockpiling

petroleum. However, the model can also be

extended to estimate the economic benefits

and costs for each phase of stockpile operation-acquisition, holding and disposals

well as the distribution of economic benefits

and costs between consumers and producers.

As the examples in this assessment demonstrate, the distributive effects of economic

stockpiling can be significant, and given the

policy concerns within the United States for

the distribution effects of programs and

policies, it is appropriate for the Economic

Welfare Model to address them explicitly.

In this assessment, four categories of distributive effects are identified: consumers,

producers, the stockpile operator (presumably

the Federal Government), and external costs.

In the application of the Economic Welfare

Model, further disaggregation (such as by discrete income classes, employment groups or

regions) may be desirable.

The direct benefits and costs of stockpiling

petroleum associated with each of the categories are presented in four individual tables immediately below. It is important to note that

insofar as transfer payments between consumers and producers are incorporated, these

benefits and costs differ from those estimated

earlier. As will be seen, these transfer payments can be substantial,

a. Direct Benefits and Costs to Materials

Producers. —Direct benefits and costs to

materials producers as a result of a petroleum

stockpile under SP-1 are summarized below:

I I (Billions of dollars)

Acquisition Producer gain (PG) 0.00 1.2 4.0

Holding Producer loss E (PL)* 7.0 9.3 10.4

Disposal Producer loss E (PL’)* 3.0 1.1 0.OO

● These terms are expressed as expected values, i.e., they have been weighted by probabilities,

b. Direct Benefits and Costs to Materials

Consumers. —Direct benefits and costs to

materials consumers as a result of a petroleum

stockpile under SP-1 are summarized below:

,.

,’ . # . ‘

,

(Billions of dollars)

Acquisition Consumer loss (CL) 0.00 1.8 5.9.

Holding Consumer savings E (CS)* 10,3 1.4 15.3

Disposal Consumer savings E (CS’)* 4.4 1.6 .000

● These terms are expressed as expected values, i.e., they have been weighted by probabilities.

100
CHAPTER V

c. Costs and Benefits to the Stockpile Investor.—The costs and benefits to the

stockpile investor for an economic stockpile of

petroleum under SP–1 are summarized below:

acquisition Initialization cost (IC) 1.3 2.5 5.0

Holding Holding cost (HC) .5 .9 1.9

Disposal Disposal cost (DC) .000 .000 .000

Capital gains (CG) .000 .000 .000

d. Estimation of External Costs and

Damages.—The estimation of external costs

and damages can be done in a generalized

first-order approximation, or it can be

rigorously determined. The illustrative

calculations for a petroleum stockpile under

SP-1 utilize the first approach, a general approximation. The resulting external benefits

and costs as given in the petroleum example

are summarized below:

, .$

., . ,

,

!

1

(Billions of dollars)

Acquisition External cost (EC) 0.000 .9 2.9

Holding External damage E (ED)* 13.7 18.1 21.4

Disposal External damage E (ED’)* 2.4 .9 .000

“These terms are expressed as expected values i.e, they have been weigbted by probabilities.

The external damage is the expected external

damage, Therefore:

I k

and (14b)

Estimation techniques for external costs and

damages can be based on proxies or indicators.

A general approximation of external costs

based upon proxy variables or other indicators

provides quantifiable values which can be applied using the Economic Welfare Model. For

an economic stockpile of petroleum under

SP–1, the proxy variable used in the illustrative calculations was gross national product

(GNP). The relationship determined from

historical data was that a percentage change in

the gross energy product (GEP) of the United

States reflected an equivalent percentage

change in the GNP. The base period data for

1973 indicated that 46 percent of the GEP was

attributable to petroleum and the GNP was

$1.3 trillion, while the consumption of

101
CHAPTER V

petroleum was 6.3 billion barrels, Thus, a 10-

percent drop in the annual petroleum consumption (630 million barrels) would cause a

4.6-percent decrease in the GNP, or $59.8

billion.

5. Summary of Economic Net Benefits

and Partial Benefits for SP–1

The operation of an economic stockpile consists of three types of action—acquisition,

holding, and disposal—as discussed in the section on the conceptual logic of stockpiling in

chapter 111. Each of these actions generates

economic benefits and costs to the U.S.

economy which must be identified and

analyzed. Table V–5 is a tableau which relates

the types of economic benefits and costs with

the individual actions in the operation of an

economic stockpile. The tableau may be explained as follows: first, the economic net

Types of economic

benefits and costs

Direct

benefits and

costs to

materials

producers

Direct

benefits and

costs to

materials

consumers

Indirect

benefits and

costs borne

by stockpile

operator*

External

benefits and costs

SP

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

benefits to the United States of a particular

stockpiling policy may be defined as the net

algebraic addition of all the terms in the

tableau related to that policy; second, the

separate terms under each operational phase

indicate the partial economic benefits and

costs for the four categories of economic impacts. The economic benefits and costs to the

materials producers and consumers do not include those portions of the economic benefits

and costs to the stockpile operator and the external costs which are ultimately borne by

these two interest groups.

The results of the calculations for SP-1 are

summarized in table V-6. These results are for

the initial year of operation and include heavy

operating costs for acquisition and substantial

impacts on producers and consumers associated with acquisition and holding,

Table V–5.—Economic benefits and costs of economic

stockpiling arrayed by operational action

Acquisition

Terms

PG

PG

APs

PC

APS

CL

CL

CL

CL

CL

IC

IC

IC

IC

Ic

EC

EC

ED’

EC

ED’

Eq.

3

3

28

19a

26

3

3

29

19b

24

2

2

2

2

2

7

7

28

7

23

Operational actions

Holding

Terms

PL

PL

PL

PL

PL

CS

CS

CS

CS

CS

HC

HC

HC

HC

HC

ED

ED

ED

ED

ED

Eq.

14

14

5

5

5

5

5

13

Disposal

Terms

PL’

PL

APS

PL

APS

CS’

CS’

CS’

CS

CS’

DC

DC

DC+CG

DC+CG

DC+CG

ED’

ED’

ED’

ED

ED’

Eq.

12

13a

28

19e

26

12

13b

29

19d

24

6

6

25

20

25

11

17

28

20

23

102
Table V–6.—Partial benefits and costs of SP–1

[In Billions of dollars]

CHAPTER v

for first year of operation

Type of benefit

or cost

Producers. ., . . . . . . . . . . . .

Consumers. . . . . . . . . . . . . .

Stockpile operator . . . . . . .

External costs (benefits),

Size of stockpile

[Millions of bbl]

250

500

1000

250

500

1000

250

500

1000

250

500

1000

Acquisition

PGj

$0.0

1.2

4.0

CLj

0.0

-1.8

-5.9

I C

–1. 3

–2.5

–5.0

ECj

0.0

-0.9

-2.9

Operational action

Holding

E(PLj)

-$7.0

-9.3

-10.4

E(CSj)

10.3

13,7

15.3

HCj

- 0.4

– 0.9

- 1.9

E (ED j

13.7

18.1

21.4

Disposal

E(PL’j)

-$3.0

– 1.1

-0.0

E(CS' j)

4.4

1.6

(DCj-CGj)

0.0

0.0

0.0

E(ED’j)

2.4

0.9

0.0

Net benefits are 19. I millions, 19.0 millions, and 14.5 millions for 250-, 500-, and 10() -mbbl stockpile, respectively.

In this particular case, the result of stockpiling yields significant gains to consumers and

losses to producers, which can be interpreted

as a transfer of resources from producers to

consumers. The magnitude of transfers from

producers to consumers declines as the size of

the petroleum stockpile increases, explained

in this example principally by changes in the

probabilities of cartel action associated with

each stockpile size. For comparison, table V-7

illustrates the terms in the benefit and cost

functions for the second year under the

assumption that the prices, elasticities, and

cartel probabilities are the same. It should be

noted that economic net benefits are expressed

in their present value. Since these net benefits

are realized in a future time period, it is appropriate that they be discounted to present

value. A discount rate of 8 percent has been

used. The values for all other terms in table

V–7 have not been discounted. In practice, the

stockpile operator would periodically reassess

probabilities (and other data) for cartel operation and recalculate estimated economic net

benefits. The results might cause the operator

to increase or decrease the stockpile size with

attendant economic impacts.

The data in tables V-6 and V–7 provide the

basis for assessing the effects of a petroleum

stockpile as follows, The cost to the Government of establishing a 250-million-barrel

stockpile is estimated to be about $4.20 billion

in the first year, with the major components

being $2.5 billion for purchase of oil plus $1.25

billion for purchase of storage and other

facilities, In each succeeding year the cost of

operation would be about $450 million if the

stockpile size remained unchanged. In return

for this expenditure, the estimated economic

net benefits to the United States would be approximately $19.1 billion in the first year. In

the second year, economic net benefits change

as initialization costs are deducted and the

new net benefits are discounted to their present value at a discount rate of 8 percent.

103
CHAPTER V

Table V–7.—Partial benefits and costs of SP–1 for second year of operation

In millions of dollars

Producers . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . .

Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

External . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

250

500

1000

250

500

1000

250

500

1000

250

500

1000

E(PLj)

-$7.0

-9.3

-10.4

E(CSj)

$10.3

13.7

15.3

-$.04

-0.9

-1.9

E(EDj)

$13.7

18.1

21.4

E(PL'j)

-$3.0

- 1.1

0.0

E(CS' j)

$4.4

1.6

(DCj-CGj

$0.0

0.0

0.0

E(ED' j)

$2.4

0.9

0.0

The present value of net benefits are 18.9 millions, 21.3 millions, and 22.6 millions for 250-, 500-, and 1000-mbbl stockpile, respectively.

C. ECONOMIC IMPACTS OF STOCKPILING TO CUSHION

THE IMPACTS OF NONPOLITICAL IMPORT DISRUPTIONS (SP–2)

The procedure for calculating the benefits

of SP-2 is identical to that developed for the

second benefit component of SP-1, i.e., the

benefits derived from the counteraction of a

supply interruption after it has occurred. The

cost function for SP-2 has been described in

the section in chapter IV on the Economic

Welfare Model, equation (7). The benefit function for SP-2 is developed immediately following subsequent paragraphs, and calculations of

the net benefits are presented thereafter.

1. Derivation of Benefit Function for SP-2

Like SP-1, the benefits derived from SP-2

over the coming time period depend upon the

specific import disruptions which will restrict

supplies of a material. The benefits for SP–2

should be determined on the basis of expected

benefits obtained from a stockpile of a given

size. These benefits are equal to the damage

that the stockpile could offset multiplied by

the probability that the disruption will occur.

These benefits must be determined for each

possible import interruption. The benefit function for SP-2 is given as:

where

Bj

= benefits derived from stockpile j

risk aversion factor

D '

i j k damage offset by stockpile j

(15)

104
Pjk = probability of the interruption occurring

i = the percent import disruption

k = the duration of the disruption in

months

The ‘benefits for each stockpile examined (i.e.,

stockpiles of size Qj

) can be determined from

equation (15), given the risk aversion factor

(1+r) which reflects society’s reluctance to be

exposed to the import disruption, the probability (Pik) that a specified interruption will

occur, and the damages (D~jk) which can be

offset by the stockpile when the interruption

occurs.

The damage which can be offset by a

stockpile depends upon the size of the interruption and the size of the stockpile. Figure

V-5 illustrates the effect of a decrease in imports upon the domestic market. The damage

incurred by the country is twofold: a loss of

consumer surplus and the external costs imposed upon society.

Figure V-5 shows the price rise associated

with an import disruption (i. e., the price rises

from p to p’). The effect of releasing stocks is

to lower the price to p“. If the stockpile is of

sufficient size, the disposal of stocks can comFigure V-5 .

,,. “,. . . ‘ pt a:P@tW with actiml no sto~kpile

.4 P“ a Pfic% with action, stockpile

. . , ‘

. . $.

CHAPTER V

pletely offset the import disruption (i.e., p“=p)

The loss of consumer surplus which is

offset by disposal of the stockpile is shown in

figure V-5 as the trapezoid abhg. As pointed

out in the general discussion of the cost function, the actual loss to domestic consumers

which is offset is p’bhp, an amount which

could appreciably exceed abcf. The difference,

however, goes to domestic producers as a

transfer payment and does not represent a loss

of real resources to the country.

As pointed out in the discussion of the cost

function in chapter IV, a price rise may impose

in addition to the loss in net consumer supplies, external costs on society which are not

borne by the consumers of the material, For as

the latter cut back their production, their suppliers may be hurt and their employees laid

off. The benefits which a stockpile produces

by avoiding or reducing these external costs

should be counted in the benefit function.

Capital gains (or losses) resulting from the disposal of stocks are added to (subtracted from)

the damages in the benefit fulnction.

The damage offset through disposal of a

stockpile of size Q o is calculated from equation

(15) which is simi ar in form to equation (13c) l

of SP–1:

f {

damage offset by the stockpile

supply when the interruption occurs

without stockpiling

producer supply with disposal of the

stockpile j

price when the interruption occurs

without stockpiling

price with disposal of the stockpile j

demand when the interruption occurs without stockpiling

demand with disposal of th e

stockpile j

E Dijk=eXternal damage, the external costs

saved by the disposal of the stockpile j

105
CHAPTER v

The first term on the right-hand side of this

equation estimates the saving in consumer

surplus which arises because domestic producers incur a smaller increase in real incremental costs due to the fact that their output

increases only to s“ rather than s’. As figure

V-5 illustrates, this savings, which is reflected

by the triangle ajg, is equal to one-half the increase in domestic supply which did not take

place due to stockpile releases multiplied by

the increase in domestic price which was prevented. The product of the prevented increase

in domestic supply and price is multiplied by

one-half, on the assumption that the domestic

supply curve is approximately linear in the

price range p“ to p’.

The third term of equation (15) represents

the saving in consumer surplus which arises

because the price paid to foreign producers is

kept at p“ rather than being permitted to rise

to p’. This saving is reflected in figure V-5 by

the rectangle abij, It can be estimated by the

product of the prevented price increase and

the level of imports which would occur at the

price p’,

The fourth term, ED, reflects the saving produced by the stockpile in the external costs

which are not borne by the users of the

material. The first three terms can be approximated on the basis of estimates of the prevented price increase (p’ – p“) and the

elasticities of domestic supply and demand

which apply for the time period and price

range being considered. Estimates for ED must

be based on other relationships.12

The sum of the probabilities that import interruptions will occur cannot exceed 1 and

must encompass the entire spectrum of possible import interruptions. The expected benefit

of a stockpile of a size Qj can then be calculated from equation (15), once the damage

offset by disposal of the stockpile during a

IZThe external costs (and external damages) are frequently a

significant portion of the costs and expected benefits derived

from stockpiling. These external costs are also the most difficult

to determine, Simplified, first-order approximations of the external costs can be made as shown in this section

possible interruption has been estimated, and

society’s risk aversion factor has been

specified. The calculations described above

should be repeated for stockpiles of various

sizes in order to trace out the entire benefit

function,

2. Estimation of Economic Net Benefits for SP-2

The following discussion is a presentation

of the estimated economic net benefits of

stockpiling zinc for SP–2. Although the

reserves of zinc are distributed worldwide, the

supply to the United States is concentrated in a

few countries, Canada and Mexico being

dominant, with these imports constituting

roughly one-half of the total U.S. consumption. A nonpolitical action, such as a strike in

the highly unionized zinc mining industry in

Canada, could temporarily interrupt imports to

the United States which would not be offset

through increased imports from other sources.

a. Background Information.—Several of

the important values and assumptions used in

the estimation of net benefits of stockpiling for

SP–2 are outlined below:

. Based on supply-demand relationships

during the period of 1969–71—when

U.S. production remained relatively

constant, prices rose, and imports and

total demand fell—an implicit price

elasticity of demand for zinc falls in the

range of -0.5 and -0.7, This range of

price responses was retained in the

computation with some reduction for

short-term interruptions (o–3 months).

. U.S. demand of 1,500,000 tons, U.S.

supply of 750,000 tons, U.S. imports of

750,000 tons and a unit price of $720

were retained as the baseline values for

the computations,

. It is assumed that acquisition of zinc

for the stockpile will come solely from

additional imports, which in turn implies no external cost during the acquisition phase,

106
● Probabilities of a temporary interruption of zinc imports were specified for

two durations and four levels, as

shown in the following table.

Probabilities

Duration I Percent interruption

in months I O I 0-10 I 10-25 I 25-50 I 50-100

0

o–3

3–12

0.58

0.25 0.10 0.05 0

0.02 0 0.05 0

Total 0.58 0.27 0.1 0.1 0

For SP–2 the probability estimates considered the following factors with respect to

the material under review: (1) as it pertains to

strikes, the nature and history of labor union

organization in producing countries and in

transportation lines—railroad and ocean shipping; as it pertains to natural disasters, the

concentration of supply in various geographical areas particularly subject to such events;

and (2) as it pertains to nonnatural (manmade)

disasters, the concentration of supply in industrial organizations.

Math

symbol

Qj

CUj

Cf

c “

d

s

Cd

P

P!

d

l

d!

s

]

sj

EC

R

CGj

Q dj

Program

symbol

Q

CU

CF

CV

XI

SLR

SC

CD

P

PP

D

DP

s

SP

EC

R

CG

QD

CHAPTER V

Two illustrations will clarify the history of

materials problems which might be alleviated

with SP–2, A fire at the U.S. ’S largest silver

mine, the Sunshine Mine at Kellogg, Idaho, in

May 1972 killed 91 men. The mine was closed

for 7 months and this resulted in a drop of 10

percent of the U.S. mine output that year. A

strike lasting almost 6 months at the largest

nickel mine in the world at Sudbury, Canada,

in 1969 resulted in loss of production of about

one-third Canadian output for the year. This

was somewhere between 7–10 percent of the

world’s supply.

b. Input Values.—The-values for the input

variables to the computer program for SP–2 are

listed in table V–8. This table lists the

mathematical symbol, the name or description,

of the variable, the units of measure, and the

value of the input variable for each I, J, and K.

The calculations for SP–2 were performed by

the computer program using the input variables listed in table V–8.

c. Calculated (Output) Values.—The

values for the output variables calculation by

the computer program for SP–2 are listed in table V-9. This table lists the mathematical symTable V–8.—Input variables SP–2

Description

Stockpile size

Unit cost

Fixed initialization cost

Variable initialization cost

Interest rate

Spoilage loss rate

Storage cost

Unit disposal cost

Price

Increased price

U.S. demand at price p

U.S. demand at price p’

U.S. supply at price p

U.S. supply at price p’

External cost

Risk aversion factor

Capital gains

Stockpile disposal

Unit

Million tons

$ per ton

Million $

$ per ton

Percent per year

Percent per year

$ per ton per year

$ per ton per year

$ per ton

$ per ton

Million tons

Million tons

Million tons

Million tons

Million $

Coefficient

Millions $

Million tons

Either not

dependent

on J, or J=l

0.05

720.

0.5

0.0

0.00

0.0

0.1

0.0

720.

720.

1.5

1.5

0.75

0.75

0.0

0.0

0.0

0.0

J=2

0.10

720.

720.

1.5

0.75

J=3

0.15

792,

792.

1.0815

0.75

107
CHAPTER V

Table V–8.—Input variables SP–2— continued

E Dik

P ik

S'ik

d'

ik

P.lk

ED'.qk

P’..ijk

ED

PWOS

SWOS

DWOS

PROB

EDP

PWD

External damage-no stockpile

Price without stockpiling

Supply without stockpiling

Demand without stockpile

Probability of interruption

without stockpile

External damage-with stockpile

Price with disposal of stockpile j

Million $

$ per ton

Million tons

Million tons

Percent per year

Million $

$ per ton

!, . . .. . , ,..,

$ $ “. .,,

1=1

1=2

1=3

1=4

J=l

1=1

1=2

1=3

1=4

J=l

1=1

1=2

1=3

1=4

J=l

1=1

1=2

1=3

1=4

J=1,2,3

1=1

1=2

1=3

1=4

J=l

1=1

1=2

1=3

1=4

J=2

I=1

I=2

I=3

I=4

J=3

1=1

1=2

1=3

1=4

J=l

1=1

1=2

1=3

1=4

J=2,3

1=1

1=2

1=3

1=4

h --”‘ , ~

.! .< ,*A

, ..7 . .> -~,: .

,$ -

0.000

0.000

0.000

0.000

756,000

792.000

720.000

720.000

0.750

0.750

0.750

0.750

1.481

1.425

0.000

0.000

0.250

0.020

0.000

0.000

7,484

39.854

0.000

0.000

7,484

58.934

0.000

0.000

7.484

58.984

0.000

0.000

720.000

743.360

720.000

720.000

720.000

720.000

720.000

720.000

, ... ’ ~.,.,. .:,; !

$ . . . .

-

0.000

0.000

0.000

0.000

864.000

720.000

720.000

720.000

0.750

0.750

0.750

0.750

1.454

0.000

0.000

0.000

0,100

0.000

0.000

0,000

21.646

0.000

0.000

0.000

21.645

0.000

0.000

O.000

21.646

0.000

0.000

0.000

720.000

720.000

720.000

720.000

720.000

720.000

720.000

720.000

:;;*:’4

-, ”,. * +.k y 7 -3 ,. . . . . , .-

-

0.000

0.000

0.000

0.000

1008.000

720.000

720.000

720.000

0.750

0.750

0.750

0.750

1.407

0.000

0.000

0.000

0.050

0.000

O.000

0.000

45.338

0.000

0.000

0.000

83,878

0.000

0.000

O.000

83.876

0.000

0.000

0.000

852.340

720.000

720.000

720,000

720.000

720.000

720.000

720,000

!I!$4

‘,

$ :?,,+, . . . ,

‘ *, ‘ .

~ ,-

0.000

0.000

0.000

0.000

720.000

720.000

720.000

720.000

0.750

0.750

0.750

0.750

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

720,000

720.000

720.000

720.000

720.000

720.000

720.000

720.000

108
CHAPTER V

Table V-8.—Input variables SP-2 —continued

J=1 K=l K=3 symbol Description K=2 K–4

J=1,2,3

1=1

1=2

1=3

1=4

J=l

1=1

1=2

1=3

1=4

J=2

1=1

1=2

1=3

1=4

J=3

1=1

1=2

1=3

1=4

s ' ,

i]k

d’!.i]k

SWD

DWD

Producer supply with disposal of

stockpile j

Million tons

Million tons

0.750

0.750

0.750

0.750

1,500

1.476

0.000

0,000

1.500

1.500

0.000

0.000

1.500

1.500

0.000

0.000

0,750

0.750

0.750

0.750

1.500

0.000

0.000

0.000

1.500

0.000

0.000

0.000

1.500

0.000

0.000

0.000

U.750

0.750

0.750

0.750

1.458

0.000

0.000

0.000

1.500

0.000

0.000

0.000

1.500

0.000

0.000

0.000

0.750

0.750

0.750

0.750

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

Demand with disposal of stockpile

Table V–9.—Calculated results for SP-2

-

‘Symbol .

NBj

B

c

E(DN)

E(CS'j)

E(PL’j).~ E(Edl

j)

HCj

LEWj

CS.

PG

DCj

OCj

ACj

● *

J=2 

Millions of tons]

J=3 ,

0.100 0.160

Net benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Benefits function. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Damage not averted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Benefit variables:

Expected consumer savings . . . . . . . . . . . . . . . . . . . . . . .

Expected producer loss . . . . . . . . . . . . . . . . . . . . . . . . . . .

External damage

Cost variables:

Holding costs

Initialization costs.... . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss uneconomic welfare . . . . . . . . . . . . . . . . . . . . . . . . .

Consumer loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Producer gain.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Disposal cost... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Economic impact of no stockpile

$26.2

29.6

3.4

5.5

78.8

56.3

7.1

2,9

0.5

0.0

0.0

0.0

0.0

39.4

36.0

29.6

30.3

36.6

6.3

0.000

–12.4

36.7

48.9

0.0

95.8

68.7

9.4

95.8

68.7

9.4

5.8

0.5

0.0

0.0

0.0

0.0

9.519

0.5

38.9

92.9

54.0

0.0

78.3

72.0

128.8

118.0

36.7 36.6

“All calculations have been rounded for simplicity

““The economic impact of no stockpile lsequivalent to the benefits (expected damages averted) attributed to the stockpile which are foregone mtheabsence of the stockpile.

109
CHAPTER V

bol, the description of the variable, an d

numerical value of the output variabl e

each stockpile, j.

the

for

d. Graphic Representation of the Calculations.—Figure V-6 is a graphic representation

of the calculated costs, benefits, and net

benefits (benefits minus costs) for SP–2,

Values were computed for only three stockpile

sizes and zero stockpile,

e. Optimal Stockpile Size.—The ne t

benefit curve in figure V–6 can be used to indicate the probable optimal stockpile size, where

the curve appears to be at a maximum positive

value (or minimum negative value). This can

only be taken as an indication of the area

where the optimal size stockpile occurs;

however, it will serve to illustrate the desired

value of the stockpile size for the values of the

input variables chosen.

Figure V 6.

Economic Net Benefits of SP-2

M IIllons of Dollars

50

I

~ 48.9

I .

45 l- -

.

.

0

I

40

35

30

25

20

15

10

5

0

5

10

costs :-

.

36.6

Benefits #

 -

-

0

OM

29.6/0° 30.3

● ..-,

. . . . , ~.. ‘* ,/,,,.....””” ‘.

I >“ 26.2 ‘, .

‘.. ”

;.”“* .“ “*●,*.”

2. .

::*

.“”.

. ; Net Benefits

.

.

.

‘*

:

.“ .

.

.“

.“ 36.7

--& -

.

.“

.

.“

.

.

0

.- .*

.“

1 # - 6.3 ~

“.●.

p,

f

-0

3.4

.* ...* ● ●

.*.* ● .,*.. :

● ***.. ‘* ● *,... ● .**.*. I I I l’i.~

1

.025 .050 .075 .100 .125 ‘; 150

●

Thousands of Tons ●*

.

●*

●

‘.

“.

*

‘.

; 12.4

15

t

The calculations resulted in an optimal

stockpile size in the area of 100,000 tons accumulated over a l-year period. The expected

economic net benefits for this stockpile are

estimated at $30 million. It should b e

emphasized that the estimates apply only to

the specific materials examined and within

the scenario assumptions described, and

should therefore not be taken to indicate that

precise quantities of specific materials should

or should not be stockpiled. Nevertheless, the

nature and magnitude of the estimates are

sufficient to indicate that an economic

stockpile should be given detailed consideration as one component of a more comprehensive national materials policy and that measuring the benefits or costs of a supply disruption

in terms of the probability, rather than the certainty, of a disruption will significantly reduce

the quantity of material to be stockpiled.

The U.S. stockpile of zinc in late 1974 was

373,000 short tons, while the stockpile objective is 203,000 short tons, The optimal

stockpile range was based on the probability of

our distinct possible interruptions and the

damages that they would cause. The optimal

stockpile is a minimum of 11 percent of the

total annual imports of zinc.

The methodology illustrated by the example

calculations for a zinc stockpile show that the

stockpile size should be based upon the expected net benefits of the stockpile, The example calculations also show that a stockpile

based upon the probability of an interruption

is smaller than that required to offset every

possible interruption in its entirety,

f. Sensitivity Analysis,—The computer

program performs the “baseline” calculations

and then automatically perturbs an input

variable by +10 percent and reruns the

calculations, The new costs, benefits, and net

benefits are compared to the base calculations

and the percentage change is computed. This

process is repeated for each input variable.

The resulting percent changes in net

benefits from a +10 percent change in each input variable for SP–2 are listed in table V–10,

110
Perturbed

variable

CE

Cu

SV

PROB

PP

D

s

DWD

SWD

EDP

CHAP’I’ER v

Table V–10.—Percent change on 10 percent perturbation of variables SP–2

Benefits

Q1

0.00

0.00

0.00

10.00

0.00

0.00

0.00

.11

–.05

2.40

Q2

0.00

0.00

0.00

10.00

0.00

0.00

0.00

.09

–.04

2.57

Q3

0.00

0.00

0.00

10.00

0.00

0.00

0.00

.09

–.04

2.57

Q1

1.48

8.51

.01

0.00

1595.27

0.00

0.00

0.00

0.00

0.00

An examination of table V–10 shows the net

benefits to be fairly insensitive to any input

variable perturbation except for PP, increased

price, While the net benefits for the baseline

case show a peak in the range of 80,000 to

100,000 tons, this analysis shows that a IO-percent increase in price will result in a negative

net benefit for this economic stockpile. This

result is dramatically illustrated in Figure V–7.

3. Discussion of Partial Benefits and Costs

for Each Phase of Stockpile Operation

for SP–2

The above presentation of economic net

benefits is supplemented by a discussion of the

four categories of impacts. The economic impacts of a stockpile for SP–2 can be determined

with the Economic Welfare Model for four

types of impacts: direct benefits and costs to

materials producers, direct benefits and costs

to materials consumers, benefits and costs

borne by the stockpile operator, and external

benefits and costs. Calculations have been

made to estimate each of these four types of

economic impacts.

cost

Q2

0.80

9.19

0.2

0.00

861.24

0.00

0.00

0.00

0.00

0.00

Q3

0.10

1.94

.00

0.00

87.49

11.03

–5.52

0.00

0.00

0.00

Q1

–0.19

–1.10

.00

11.29

–206.06

0.00

0.00

.12

–.06

2.71

Net benefits

Figure V-7.

Q2

–0.17

–1.90

.00

12.07

–178.23

0.00

0.00

.10

–0,5

3.11

Q3

0.40

7.67

.01

–29.52

345.79

43.60

–21.80

– .25

.13

–7.60

Perturbations of SP-2

M IiIl!ons of DolIars

35 // q 339

\

30 291 ● \

● .

25

:*\

20 :*\

:*\

.

:*\

15 :*\

: \

10 l \

~.\

;.\

‘ “*\

I I I I

:.\

o L I I

.025 .050 .075 .100 \ 175

Thousands of Tons

– 5 : \

– 10

– 1 5

– 2 0

– 2 5

– 3 0

– 35

– 4 0

– 4 5

– 5 0

– 5 5

– 12.4 :

Base Line

. . . . . . — 23 7

.,. . “s .*. .

‘$

– 27.8 ‘.‘.

●

“.●

“.●

‘.‘.

.

“.“.

● .

‘.

●

“.“.

*.“.“.“*“.“.

“* 55.2

111
—

CHAPTER V

a. Direct Benefits and Costs to Materials

Producers. —The direct benefits and costs to

materials producers of a zinc stockpile under

SP–2 are summarized below:

:,

,, ,, . . ,

Acquisition Producer gain (PGj

) 0.0 0.0 54.0

Holding Producer savings/loss 0.0 0.0 0.0

Disposal Producer loss E (pL’ijk)* 56.3 68.7 68.7

● This term is expressed as an expected value (E).

b. Direct Benefits and Costs to Materials

Consumers. —Direct benefits and costs to

materials consumers of zinc as a result of a

zinc stockpile under SP–2 are summarized

below:

Acquisition

Holding

Disposal

Loss in consumer surplus (CLj)

Consumer savings/loss

Consumer savings E (Cs’ijk)”

0.0 0.0

0.0 0.0

78.8 95.8

92.9

0.0

95.8

● This term is expressed as an expected value (E).

c. Costs and Benefits to the Stockpile

Operator. -Costs and benefits to the stockpile

operator for zinc stockpile under SP–2 are

summarized below:

t ,. ,

‘-

. . . .

Operatoinal action

Acquisition

Holding

Disposal

Initialization cost (IC) 0.5 0.5

Holding cost (HC) 2.9 5.8

Disposal cost (DC) 0.0 0.0

Capital gains (CG) 0.0 0.0

0.5

9.5

0.0

0.0

112
CHAPTER V

d. Estimation of External Costs and

Damages.—Estimation of external costs and

damages can be done in a generalized firstorder approximation, or it can be rigorously

determined. The illustrative calculations. for a

zinc stockpile under SP–2 utilize the first approach, a general approximation. The resulting external benefits and costs as given in the

petroleum example are summarized below:

External costs and damages , Stockpile size

(Millions of tons)

Operational action Type of benefit or cost 0.1 0.1 0.2

Acquisition External cost (EC) 0.0 0.0 0.0

Holding External damage (ED) 0.0 0.0 0.0

Disposal External damage (ED’)* 7.1 9.4 9.4

● The External Damage is the expected external damage (E).

Therefore:

(18)

4. Summary of Economic Net Benefits

and Partial Benefits for SP–2

The results of the calculations for SP–2 are

summarized in table V-11, These results are

for the initial year of operation and include

heavy operating costs for acquisition and substantial impacts on producer and consumers

associated with acquisition. During disposal,

large savings accrue to consumers, while producers incur substantial losses. For comparison, table V–12 shows the terms in the net

benefit function for the second year under the

assumption that the prices, elasticities, and

probabilities are the same. The costs to the

stockpile operator fall significantly. The gains

and losses to producers and consumers during

acquisition and disposal are the same as in

year 1. Expected net benefits are lower since

they are expressed in present value terms,

using a discount rate of 8 percent. For the second year, the optimal stockpile size remains

in the area of 100,000 tons. In practice, the

stockpile operation would periodically

reassess probabilities and other data and

recalculate net benefits. The results might indicate that the stockpile size should be increased or decreased with attendant economic

impacts,

The cost to the Government of establishing

a 100,000-ton stockpile is estimated to be about

$78 million in the first year, with the major

components being $72 million for purchase of

zinc plus $0.5 million for purchase of storage

and other facilities. In each succeeding year

the cost of operation would be about $5.7

million if the stockpile size remained

unchanged.

113
CHAPTER V

Table V-11.—Partial economic benefits and costs of SP–2 for first year of operation

(In Millions of dollars)

Type of benefit or cost

Producers. . . . . . . . . . . . . . .

Consumers. . . . . . . . . . . . . .

Stockpile operators . . . . . .

External costs. . . . . . . . . . .

Size of stockpile

millions of tons

0.050

0.100

0.150

0.050

0.100

0.150

0.050

0.100

0.150

0.050

0.100

0.150

Acquisition

PGj

0.0

0.0

54.0

CLj

-0.0

-0.0

-92.9

ICj

-0.5

-0.5

-0.5

EC

-0.0

-0.0

-0.0

Operational action*

Holding**

E(PLj)

-0.0

-0.0

-0.0

E(CSj

)

0.0

0.0

0.0

HCj

-2.9

–5.8

-9.5

E(EDj)

0.0

0.0

0.0

Disposal**

E(PL'j)

–56.3

-68.7

-68.7

E(CS’ j)

78.8

95.8

95.8

(DC+CG)

-0.0

-0.0

-0.0

E(ED’j

)

7.1

9.4

9.4

Economic net benefits are 26.8 millions, 31.4 millions, and –11.2 millions for 0.050, 0.100, and 0.150 million tons of stockpile, respectively.

“Signs Indicate the sign which each term should have when summing to indicaty net Iwnef)ts

● “Values In these columns are expected values I e they have hwn welghtwi by prohahllltws

Estimated economic net benefits and operating costs for three sizes of zinc stockpile for SP–2 under assumed conditions described

in the text. Results are for the second year (or later years) and are illustrative only.

Table V–12.—Partial benefits and costs of SP–2 for second year of operation

(In Millions of dollars)

Type of benefit or cost

Producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

External , . . . ., , . . . . . . . . . . . . . . . . . . . . . . . .

Size of stockpile

millions of tons

0.050

0.100

0.150

0.050

0.100

0.150

0.050

0.100

0.150

0.050

0.150

0.150

Operational action*

r

Holding**

E(PLj)

-0.0

-0.0

4 . 0

E(CSj)

0.0

0.0

0.0

HCj

–2.4

–5.8

4.5

E(EDj)

0.0

0.0

0.0

Disposal**

E(PL’ j)

–56.3

48.7

-68.7

E(CS’ j)

78.8

95.8

95.8

(DCj-CGj)

-0.0

-0.0

4.0

E(ED’j)

7.1

9.4

9.4

The present value of economic net benefits are 23.0 millions, and –9.6 millions for 0.050, 0.100, and 0.150 million tons of stockpile,

respectively

“S!gns indicate the sign which each term should have when summing to indlcatt, net bsweflts

“*Values in these columns are expected values. ie . they halve been weighted by probability

114
CHAPTER v

D. ECONOMIC IMPACTS OF STOCKPILING TO ASSIST IN

INTERNATIONAL MATERIALS MARKET STABILIZATION (SP-3)

The procedure for calculating the benefits

of SP–3 is discussed immediately below, and

the calculations of the net benefits are presented thereafter. The cost function for SP–3

has been described in the section in chapter IV

on the Economic Welfare Model, equation

1. Derivation of Benefit Function for SP-3

The benefits derived from SP–3 ove r

(7),

the

coming time period depend upon the degree of

stabilization obtained in the international

market and the effect upon the U.S. domestic

market that such stabilization will produce.

Four types of benefits result from the impact

of this stockpile upon the domestic economy:

an increase in domestic consumer-producer

surplus, a decrease in production costs, a

reduction in the external costs associated with

instability, and the realization of capital gains.

A fifth type of benefit is gained as a result of

international market stabilization: political

benefits that result from the United States entering commodity agreements with other

countries.

The benefits from a stockpile of a given size

over the entire surplus-shortage cycle should

be estimated to calculate the benefit function

of this type of stockpile over the coming time

period. Since these benefits are derived over

the entire surplus-shortage cycle, only a portion of these benefits should be credited to the

coming time period, This portion (t) is defined

as the ratio of the length of the coming period

to the expected length of the surplus-shortage

cycle. Thus, the benefits associated with a

stockpile of size Qj can be calculated by:

B j = t(CSj +p Sj +E Dj +C Gj+ pBj) (17)

where

Bj = Benefits expected for stockpile Qj

t = Portion of surplus-shortage cycle occurring in the coming time period

C Sj = Increase in consumer-producer

surplus

P Sj = Decrease in average production costs

E Dj = External damage, external costs

saved

C Gj = Capital gains

PBj = Political benefits

It is important to note, however, that the

benefits to be measured for this policy are only

those captured by the U.S. economy, with

these benefits most likely being a small share

of the aggregate benefits enjoyed by all participating countries.

The domestic increase in consumer-producer surplus over the surplus-shortage cycle

can be estimated using the following procedure. Let ph be the highest price and pi the

lowest price over the surplus-shortage cycle in

the absence of stockpiling, as illustrated in

figure V-8. Then p' h and p'i are the high and

low prices at which all the material is sold

when stockpiling takes place. If over the cycle

all of the material were sold at p'h and in the

absence of stockpiling all material would have

been sold at ph

, the increase in consumer

surplus for the United States would be equal in

figure V-8 to the trapezoid phcdp'h. and the

loss in producer surplus (assuming there are

U.S. producers) would be equal to the trapezoid phabph. Of course, in practice the price

would vary over the range pi to ph in the absence of a stockpile and over the range pi to ph

with a stockpile, so the increase in consumer

surplus and the decrease in producer surplus

would be only some fraction of the above

amounts. Specifically, these amounts should

be multiplied by the coefficient h, which

reflects the proportion of total output over the

cycle whose price would be higher than p'h

without a stockpile, and the coefficient g,

which reduces the estimates of consumer gain

and producer loss to account for the fact that

115

77-119 O -76-9
— .

CHAPTER V

I

I

Figure V-8. s,?”

\ v/ VI’”

-,.

in the absence of a stockpile the price which

would prevail above p'h would vary over the

range p'h to ph and would not be continually

maintained at ph

.

Similarly, during the accumulation phase of

a stockpile program, the decrease in consumer

surplus and increase in producer surplus can

be estimated by multiplying the trapezoids

p'hghpl and p'iefpi times the coefficient g and

the coefficient m, where the latter is the proportion of total output over the cycle whose

price would be lower than P'

i without a

stockpile.

Thus, the net gain in consumer-producer

surplus over the cycle can be estimated by the

following equation on the assumption that the

U.S. supply and demand curves are approximately linear over the price ranges ph– ph and

The external damage can be estimated as

the reduction in external cost attributable to

stockpiling. The estimates of these benefits

may be made through judgmental estimates of

the stabilizing impact of the stockpile to the

total domestic economy. Capital gains (losses)

must be added to the benefit function. They

are defined in equation (19) as:

116
(19)

where

Pl 

= Price at which Qj iS acquired

ph = Price at which Qj iS Sold

Q * i

j =quantity of stocks accumulated and

disposed of over the cycle

Significant capital gains may be realized from

this stockpiling policy. While making a financial profit is not the objective of SP–5, the accrual of capital gains will be an additional

benefit.

The reduction in production costs that

greater cyclical stability produces can be estimated by those familiar with the production

technology and past production behavior of

materials. The total reduction will depend on

the quantity produced as well as the reductionin the average cost of production, as shown in

equation (20):

(20)

where

PSj = decrease in production costs resulting

from stockpile j

c pj = unit cost of production saved by

stabilization due to stockpiling

s a = domestic production of material over

the entire cycle

The cost function for SP–5 varies slightly

from the general cost function (equation 7 in

chapter IV) in that it does not incorporate

values for loss in domestic consumer surplus

(LCSj

) or external cost (ECj) when the acquisition of the stockpile occurs during the surplus

portion of the surplus-shortage cycle. These

factors are included in the benefit function as

negative benefits during the surplus portion of

the cycle as it normally occurs. However, if

the initiation of stockpile acquisition does not

occur at the beginning of the surplus cycle, the

quantity required by the stockpile to alleviate

the shortage portion of the cycle would have to

be accumulated over a shorter time period

than planned, An accelerated acquisition of

the stockpile increases both the loss of consumer surplus and external costs,

CHAPTER V

The political benefits (PB) derived by th e

United States from participating in an international stockpiling program must be estimate d

in order to determine the total benefits. Th e

value of political benefits is normative an d

will be dependent upon such factors as the importance of the material internationally, th e

countries affected by the stabilization of fluctuations (both producers and consumers), an d

the prestige attributed to the United States by

its leadership in promoting the commodit y

agreement . These political benefits are ex -

pressed as PBj in equation (17).

Even though the political benefits variable

is a normative value, its reasonableness can

still be determined. For example, the economic

net benefits can be estimated for an international stockpile by setting the political benefits

equal to zero. If, in considering a fixed U.S.

share of the stockpiling costs, the net benefits

for the stockpile are negative, the political

benefit variable can be increased to the point

where net benefits are positive. This new

value can then be examined for its reasonableness in light of the international environment.

The cost function for SP–5 will not have

values for loss in domestic consumer surplus

 LCSj or external costs (ECj

) when the acquisition of the stockpile occurs during the entire surplus portion of the surplus-shortage cycle. These factors are included in the benefit

function as negative benefits during the

surplus portion of the cycle as it normally occurs. However, if the initiation of stockpile

acquisition does not occur at the beginning of

the surplus cycle, the quantity required by the

stockpile to alleviate the shortage portion of

the cycle would have to be accumulated over a

shorter time period than planned, resulting in

a greater loss of consumer surplus and increased external costs.

As equation (7) indicates, the remaining

terms in the cost equation, aside from the fixed

initialization cost (C F), are functions of

stockpile size. The cost of the international

stockpile is based upon the total stockpile size,

only part of which need be borne by the

United States. International commodity agree117
CHAPTER V

ments such as the International” Energy

Program (IEP) will establish procedures for

sharing the burdens of materials shortages and

surpluses. Therefore, only a portion of the

total cost of stockpiling will be an obligation of

the United States, as given by equation (21):

(21)

where

Cj = cost of stockpile j

f = fraction of stockpile costs for which

United States is obligated

C'

j = cost of stockpile j for which United

States is obligated

The net benefits for SP–3 are calculated for

each stockpile size, Q”, from the benefits determined in equation (17) and the costs from

equation (21). The calculations described

above should be repeated for stockpiles of

various sizes to trace out the entire benefit

function, The cost function can be calculated

for various size stockpiles and for varying

values of f as shown in figure V– 9.

Figure V-9.

/

f = 1.0

) f=o.75

1

I

I 0

0

I

/

i

I I

Qt. Q. Q,, Stockpile Size

TERMS:

f = fraction—U.S. share Q11 = high stockpile size

of stockpile costs where net benefits

Q, = low stockpile size are positive for f =0.50

where net benefits Q. = optimal stockpile

are positive for f =0.50 size for f = 0.50

The family of cost curves shown in figure

V–9 can be used to determine the “critical”

value of f (i. e., the maximum fraction of cost

incurred by the United States which will insure that net benefits to the United States are

positive). The “critical” f occurs for that curve

in the family of cost curves tangent to the U.S.

benefit function curve. If one wished to determine the optimal stockpile size for a given f,

then the slope of that cost function would be

equal to the slope of the benefit function.

2. Estimation of Economic Net Benefits

for SP–3

Tin has been selected as the material for the

application of the Economic Welfare Model to

SP–3, World resources of tin are located primarily in Southeast Asia, Bolivia, Brazil,

Nigeria, China, U. S. S.R., and Zaire, U.S. imports of tin are mainly from Malaysia (62 percent) and Thailand (25 percent). Between 1966

and 1972, the price of tin on the London Metal

Exchange fluctuated between $1,296 and

$1,506 per ton. This fluctuation is expected to

continue.

a. Background Information.—The important values and assumptions employed in this

calculation are summarized here:

●

●

●

●

Future prices are assumed to be

equal to the prices occurring during

the last 6-year cycle. Under this

assumption the high, low, and

average prices in dollars per ton are

respectively $8,250, $7,227, and

$7,739.

The reduction in average production

cost due to reduced price fluctuation

is set at zero, since U.S. production

of tin is negligible.

Increases and decreases in producer

surplus are assumed to be zero since

U.S. tin production is negligible.

External damage averted is again

measured in terms of the value of

unemployment benefits saved, Savings are estimated below:

118
CHAPTER V

Stockpile size The coefficient f (fraction of costs

(in tons) incurred by the United States) is inJ=l I J=2 [ J=3 itiallv set at 1 and then adjusted

I 5,000 i 10,OOO I 20,000

Unemployment benefits 0.062 0.124 0.124 saved ($ millions)

●

Math

symbol

Qj

Qj

Cu

C f

c “

i

d

s

t

C pj

‘a

C n

c ’n

CJ

c’,

PB

f

E Dik

m

h

under alternative assumptions.’

b. Input Values.—The values for the input

The political benefit variable is set at variables to the computer program for SP–3 are

zero. Later, in the “political tradeoff listed in table V–13, This table lists the

analysis, ” the value of this variable mathematical symbol, the name or description

required to make the net benefits for of the variable, the units of measure, and the

the United States just equal to zero is numerical value of the input variable for each

calculated. I, J, and K. The calculations for the SP–3 were

Program

symbol

QS

Cu

CF

CV

XI

SLR

SC

T

CP

SA

G

PH

PHP

PM

PMP

CH

CHP

CL

CLP

PB

F

ED

M

H

Table V-13.—Input variables SP–3

Description

Stockpile size

Stockpile accumulations and

disposals

Unit cost

Fixed initialization cost

Variable initialization cost

Interest rate

Spoilage loss rate

Storage cost

Portion of surplus-shortage cycle

occurring in the coming time period

Unit cost of domestic production

saved by stabilizing due to stockpiling

Domestic production of material

over the entire cycle

Fraction reflecting distribution of

prices

High price without

stockpiling

High price with disposal of stockpile j

Low price without stockpile

Low price with acquisition of

stockpile j

High U.S. consumption without

stockpile over cycle

High U.S. consumption with

stockpile over cycle

Low U.S. consumption without

stockpile over cycle

Low U.S. consumption with

stockpile over cycle

Political benefits of stockpiling

Fraction of stockpile costs obligated

to by U.S.

External damage-no stockpile

Fraction of total output over the

cycle whose price would be lower

than p’l without a stockpile

Fraction of total output over the

cycle whose price would be higher

than p’h without a stockpile

Units

Million ton

Million ton

$ per ton

Million $

$ per ton

Percent per year

Percent per year

$ per ton per year

Million tons

$ per ton per year

Million tons

Coefficient

$ per ton

$ per ton

$ per ton

$ per ton

Million tons

Million tons

Million tons

Million tons

Million $

Coefficient

Million $

Coefficient

Coefficient

Dependent

Either/

on J, or J=l

0.005

0.005

7588.0

0.5

0.0

0.08

0.0

0.29

0.166866

0.0

0.0

0.5

8250.0

7838.0

7227.0

7588.0

0.336378

0.341418

0.328740

0.323814

0.0

1.0

0.062

.38

.38

J=2

0.01

0.006

7700.0

0.0

7778.0

7700.0

0.342151

0.342151

0.322285

0.124

.5

.5

J=3

0.02

0.006

7700.0

0.0

7778.0

7700,0

0.342151

0.342151

0.322285

0.124

.5

.5

119
CHAPTER V

performed by computer program for the input

variables listed in table V-13.

c. Calculated (Output) Values.—Th e

values for the output variables calculated b y

the computer program for SP–5 are listed in table V–14. This table lists the mathematica l

symbol, the description of the variable, th e

units of measure, and the numerical value o f

the output variable for each stockpile j

d. Graphic Representation of the Calcula -

tions. —Figure V-10 is a graphic representation of the calculated costs, benefits, and net

benefits (benefits minus costs) for SP–3.

Values are computed for only the known three

chosen stockpile sizes and zero stockpile.

e. Optimal Stockpile Size.—The ne t

benefit curve in figure V-10 can be used to indicate the probable optimal stockpile size,

where the curve appears to be at a maximum

positive value (or minimum negative value).

This can only be taken as an indication of the

Figure V 10.

Economic Net Benefits of SP-3

Millions of Dollars

15

10

5

0

– 5

1 0

- 1 5

I 12.8

I

– 12.5

Table V–l4.—Calculated results for SP-3

symbol

NBj

B

Cj

DN*

CSj

PROD STj

CGj

EDj

CjF

HCj

IC

DCj

OCj

ACj

Economic impacts of stockpiling tin

[Millions of dollars] -

Description

Net benefits

Benefits function

Cost function

Damage not averted

Benefit variables:

Increase in consumer surplus

Production costs saved

Capital gains

External damage

Cost variables:

Cost obligated to United States

Holding costs

Initialization costs

Disposal costs

Operating costs

Acquisition costs

Economic impact of no stockpile

J = l I J=2 1 J=3

.005

–2.6

0.9

3.5

4.2

0.0

1.3

0.1

3.5

3.0

0.5

0.0

40.2

37.9

0.9

(Millions of tons)

0.10

–6.3

0.4

6.7

1.5

0.0

0.5

0.1

6.7

6.2

0.5

0.0

83.2

77.0

0.4

0.20

–12.5

0.4

12.8

1.5

0.0

0.5

0.1

12.8

12.3

0.5

0.0

166.4

154.0

0.4

● Damage not averted for SP-3 has not heen calculated for reasons described on page

Note: All calculahons have been rounded off for simphclty

120
area where the optimal size occurs; however,

it will serve to illustrate the desired value of

the stockpile size for the values of the input

variables chosen, It should be noted that the

benefits (increase in consumer surplus and external damage averted) for stockpile size Q 2

and Q3 are the same. The reason for this is that

full price stabilization-defined as 1 percent

fluctuation— is accomplished with a stockpile

size equal to about 6,000.

It should be emphasized that the estimates

apply only to the specific materials examined

and with in the scenario assumptions

described, and should therefore not be taken to

indicate that precise quantities of specific

materials should or should not be stockpiled.

Nevertheless, the nature and magnitude of the

estimates are sufficient to indicate that an

economic stockpile should be given detailed

consideration as one component of a more

comprehensive national materials policy and

that measuring the benefits or costs of a supply

disruption in terms of the probability, rather

than the certainty, of a disruption will significantly reduce the quantity of material to be

stockpiled,

Net benefits are negative for all three

stockpile sizes. There are, however, several

important factors which have not yet been discussed and which could change the net benefit

estimates. First, net benefits could be positive

for a stockpile size which is less than 5,000

tons; costs and benefits for smaller stockpile

sizes have not been computed in this illustration. Second, it will be recalled that the coefficient f was set at 1.0 which assumes that the

United States bears the full cost of the international tin stockpile. Under a more realistic

value for f of 0.25, net benefits to the United

States increase substantially, resulting in positive net benefits of $0,026 million for Jl

.

Finally, the base case illustration assumed the

political benefits variable (PB) to be zero. For

J]—retaining f at I, O-the PB variable would

have to be $2.63 million before net benefits

became positive.

As a measure of scale for the results of these

calculations, the proposed actions of the 1nterCHAPTER V

national Tin Council can be considered. Pre -

sently, the ITC maintains a stockpile of ap -

proximately 20,000 tons. The ITC is con -

templating an increase of this buffer stock to

40,000 tons. The U.S. stockpile (as of Nov. 30,

1974) had 207,478 tons of pig tin, while the objective for the stockpile is 40,500 tons of pig

tin.

Assuming that the ITC proposes an incre -

mental stockpile of 20,000 tons and that th e

benefits to the United States and the tota l

stockpile costs are as shown in table V–14, it

would be useful to determine the critica l

values of f and PB under which U.S. participation would be justified. Maintaining PB equal

to zero, the fraction of U.S. participatio n

would be only 2,8 percent, or 560 tons. Alternatively, if the U.S. share were set at a more

realistic level, say, 10 percent or 2,000 tons, the

political benefits (PB) would have to equal or

exceed $0.927 million for the net benefits of

participation to be positive for the Unite d

States. These example calculations demon -

strate the utility of the Economic Welfar e

Model—and particularly the political benefits

variable and the U.S. cost fraction—in assessing U.S. participation in an internationa l

stockpile.

f. Sensitivity analysis for SP–5. -The computer program performs the “baseline ”

calculations and then automatically perturb s

an input variable by +10 percent and rerun s

the calculations, The new costs, benefits, and

net benefits are compared to the baselin e

calculations and the percentage change is computed. This process is repeated for each input

variable .

The resulting percent changes in ne t

benefits from a +10-percent change in each input variable for SP-3 are listed in table V–15.

An examination of table V–15 shows tha t

the net benefits for SP–5 are fairly sensitive to

changes in most of the input variables with the

maximum changes occurring with a perturba -

tion of (a) high price without stockpiling (PH)

and (b) low price with disposal of stockpile

(PMP).

121
CHAPTER V

Table V–15.—Percent change on 10 percent perturbation of variables of SP–3

Benefits cost Net Benefits Perturbed

variables Q1 Q2 Q3 QI Q2 Q3 Q1 Q2 Q3

0.00

0.00

0.00

0.58

10.00

7.23

3279.97

–2873.56

2756.79

–3153.78

93.03

94.63

–91.11

–89.32

2.19

0.00

–180.43

187.65

CF

Cu

SC

ED

T

G

PH

PHP

PM

PMP

CH

CHP

CL

CLP

QS

XI

M

H

0.00

0.00

0.00

0.11

10.00

7.60

972.65

–852.32

820.31

–930.76

24.11

24.47

–20.64

–20.33

2.28

0.00

–40.96

48.57

0.00

0.00

0.00

0.56

10.00

7.23

3279.97

–2873.56

2756.79

–3153.78

93.03

94.63

–91.11

–69.32

2.19

0.00

–160.43

187.65

1.41

8.58

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

8.58

0.00

0.00

0.75

9.25

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

9.25

0.00

0.00

0.39

9.61

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

9.61

0.00

0.00

1.90

11.56

0.1

–0.04

–3.47

–2.63

–337.11

295.40

–264.31

322.59

–8.35

–8.48

7.15

7.05

–0.79

11.56

14.20

–16.83

0.79

9.77

0.00

–0.03

–0.56

–0.41

–184.90

161.99

–155.41

177.79

–5.24

–5.33

5.14

5.04

–0.12

9.77

10.17

–10.58

0.40

9.86

0.00

–0.02

–0.29

–0.21

–93.52

81.93

-76.60

89.92

–2.65

–2.70

2.60

2.55

–0.06

9.88

5.14

–5.35

The net benefit functions for the baseline

and the extreme perturbation cases are plotted

in figure V-11. The conclusions will change to

an optimum stockpile size of about 5.000 tons

if PH increases by +10 percent.

Figure V-1 1.

Perturbations for SP-3

Millions of Dollars

10

5

c

– 5

– 10

– 15

– 2 0

-25

6.2

3. Discussion of Partial Benefits and Costs

for Each Phase of Stockpile Operation for SP-3

The above presentation of net benefits can

be supplemented by a discussion of how the

total is made up of the categories of impacts.

The economic impacts of a tin stockpile for

SP–3 can be determined with the Economic

Welfare Model for three types of impacts:

direct benefits and costs to materials consumers, benefits and costs borne by the

stockpile investor, and external benefits and

costs. Calculations have been made to estimate

each of these three types of economic impacts.

The costs and benefits shown below by phase

of stockpile operation are those expected for

the coming time period (i.e., a year) rather

than over the full 6-year cycle.

● *e● **

\ ● ☛✎-*.● **. . . Baseline

.

1

‘\ -11.1 ● .

‘** ● *

● **-

“*. ● ** ..: 12.5

\

. ● ✼

““\

-17,5 ● X

PHP

\

-
CHAPTER V

a. The Direct Benefits and Costs to

Materials Consumers .—The direct benefits

and costs to materials consumers of tin as a

result of a tin economic stockpile under SP–3

are summarized below:

Benefits and costs to consumers I

Stockpile size

(Millions of tons)

(Millions of dollars)

Operational action Type of benefit or cost 0.005 0.010 0.020

Acquisition Consumer loss (CL) –3.7 –6.4 –6.4

Holding Consumer loss (CL’) .000 .000 .000

Disposal Consumer Savings (CS) 4.4 6.7 6.7

b. The Costs and Benefits to the Stockpile

Investor.—The costs and benefits to the

stockpile investor for an economic stockpile of

tin under SP–3 are summarized below:

Revenues ● nd costs to stockpile operators Stockpile size

(Millions of tons)

(Millions of dollars)

Operational ● ction Type of benefit or cost 0.005 0.010 0.020

Acquisition Initialization cost (IC) 0.5 0.5 0.5

Holding Holding cost (HC) 3.0 6.2 12.3

Disposal Disposal cost (DC) 0.0 0.0 0.0

Capital gains (CG) 0.2 0.1 0.1

c. The Estimation of External Costs and

Damages.—The estimation of external costs

and damages can be done in a generalized,

first-order approximation, or it can be

rigorously determined. No external costs and

benefits were estimated for SP–3. The illustrative calculations for a tin stockpile under SP–3

utilize the first approach, a general approximation. The resulting external benefits and costs

as given in the tin example are summarized

below:

External costs and damages I

Stockpile size

(Millions of tons)

(Millions of dollars)

Operational action Type of benefit or cost 0.005 0.010 0.020

Acquisition External cost (EC) 0.0 0.0 0.0

Holding External damage E(ED)* 0.0 0.0 0.0

Disposal External damage E(ED’)* 0.0 0.0 0.0

“Beneflfs dre allocated evenly to the acqulsitmn and disposal stages

123
CHAPTER V

4. Summary of Economic Net Benefits and

Partial Benefits for SP-3

The results of the calculations for SP-3 are

summarized for years one and two in tables

V–16 and V–17, respectively. It is assumed that

the expected benefits and costs of stockpiling

are the same for each year, though the present

value of these benefits and costs will differ. As

discussed previously, the net benefits of an international tin stockpile are negative for all

three specified stockpile sizes when the value

of f is set equal to 1 and the value of PB to zero.

Changes in the values of f and PB, however,

may yield positive net benefits.

For a complete discussion of the Operating

Cost Model and estimates of the costs of implementing and running an economi c

stockpile, refer to the section in chapter VI on

Budget Cost Implications. The operating costs

are indicated here for conceptual understanding, The cost to the Government of establishing a 5,000-ton” tin stockpile is estimated to be

about $40 million in the first year, with the

major components being $37.9 million for

purchase of tin plus $0.500 million for

purchase of storage and other facilities and

$3.0 million for holding costs. Offsetting these

costs are capital gains of $1.3 million. In each

succeeding year the cost of operation would

only be the holding costs minus the capital

gains if the stockpile size remains unchanged.

The distribution effects of this particular

stockpiling policy are not fully illustrated with

the example material. For example, potential

producer gains in the form of production cost

savings have not been estimated. Materials

consumers are modest gainers. The stockpile

operator captures a capital gain, but it does not

completely offset the economic costs of

stockpiling. Costs not covered by capital gains

are borne solely by the operator (taxpayer),

which means that the distributive effects of

the cost function cannot readily be estimated.

Table V–16.—Partial economic benefits and costs of SP–3 for first year of operation

in millions of dollars

Producers. ... , , . . . . . . . . .

Consumers. . . . . . . . . . . . . .

Operators. ., . . . . . . . . . . . .

External. . . . . . . . . . . . . . . .

. , .

0.005

0.010

0,020

0.005

0.010

0.020

0.005

0.010

04020

0.005

0.010

0.020

0.0

0.0

0.0

–3.7

6.4

6.4

–0,6

–0.5

–0.5

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

–3.0

–6.2

–12.3

0.0

0.0

0.0

0.0

0.0

0.0

4.4

6.7

6.7

0.2

0.1

0.1

0.0

0.0

0.0

Net benefits are $–2.6 millions, $-6.3 millions, and $–12.5 millions for 0.005, 0.010, and 0,020 million tons of stockpile, respectively.

“Signs indicate the sign which each term should have when summing to indicate net benefits

124
CHAPTER V

Table V–l7.—Partial economic benefits and costs of SP-5 for second year of operation

Type of benefit or cost I

Size of stockpile

Millions of tons]

Producers, , . . . . . , . . . . . . .

Consumers. . . . . . . . . . . . . .

Operators. ... , . . . . . . . . . .

External. ., . . . . . . . . . . . . .

0.005

0.010

0,020

0.005

0.010

0.020

0.005

0.010

0.020

0.005

0.010

0.020

(In Millions of dollars)

Operational action*

>

Acqiisition ‘

0.0

0.0

0.0

–3.7

–6.4

–6.4

–0.5

–0.5

–0.5

0.0

0.0

0,0

Holding

0.0

0.0

0.0

0.0

0.0

0.0

–3.0

–6.2

–12.8

0.0

0.0

0.0

Disposa l

0.0

0.0

0.0

4.4

6.7

6.7

0.2

0.1

0.1

0.0

0.0

0.0

The present vaIue of net benefits is –$2.4 millions, –$5.8 millions, and –$11.5 millions for 0.005, 0.010, and 0.020 million tons of

stockpile, respectively, assuming a time discount rate of 8 percent.

“Sl~ns indicate the sign which each term should have when summmg to indicate net benefits.

E. ECONOMIC IMPACTS OF STOCKPILING TO CONSERVE SCARCE

DOMESTIC MATERIALS (SP-4)

The benefits derived from SP-4 are a result

of the modification of the production and consumption of a material over time from what

normally would occur without a stockpile. The

cost function has been described in the section

in chapter IV on the Economic Welfare Model,

equation (7). The only modification required

for SP-4 is that holding costs are incurred over

the full-time horizon, and thus must be discounted to present value and summed. The

benefit function for SP-4 is developed in the

subsequent paragraphs. Calculations of the net

benefits are presented immediately thereafter.

1. Derivation of the Benefit Function for SP-4

The benefits derived from SP-4 address a

stockpile designed to assure that the total

available stock of scarce domestic materials is

produced and consumed at a rate which differs

from that achieved in a market without intervention. This type of stockpile would accumulate stocks now and dispose of them during a later time period. The acquisition of

stocks increases prices in the current period,

thus reducing consumption and stimulating

production.

The reasons private stockpiling might fail to

accumulate the optimal level of stocks to

achieve the objectives of this stockpiling

policy include: (1) the time horizon of firms in

the private sector differs from the time horizon

of society; (2) the social and private time rates

of discount differ; (3) expectations held by the

Government and the private sector regarding

125
CHAPTER V

future scarcity and prices differ; (4) the social

benefits associated with this type of stockpile

cannot be entirely appropriated by private

stockpilers because of price controls, taxes on

capital gains, and other factors.

Accumulation of stocks in the coming time

period t. will shift the domestic demand curve

to the right as shown in figure V-l2a, The

price rises from p0 to p’0 if stocks equal to q'o

minus q0 are accumulated, This results in a

loss of consumer surplus equal to the trapezoid

p’odcpo and a gain in producer surplus equal to

the trapezoid p'0a c po for a net welfare gain

equal to triangle dac. This net welfare gain can

be derived from the following equations:

where PG = Producer gain

where CL= Consumer Loss

Net producer surplus (PG – CL) can be derived

from the above equations as:

Figure V-12a.

\

TIME PERIOD to

/

I

I

I

I

I

I

I

I

I \ DO

I

I

I

I

% a. Quantity

(22C)

where q'oj is the size of the stockpile accumulated in the current period.

Disposal of stocks in a future time period tf

will shift the supply curve to the right, causing

a drop in the equilibrium price from pt to p’ t as

illustrated in figure V-12b. This produces an

increase in consumer surplus equal to trapezoid ptefp '

t and a decrease in producer

surplus of ptegp't for a net gain of efg. This net

gain is derived from equations 22d, 22e, and

22f below,

(22d)

(22e)

Where net consumer surplus (CS – PL) is

reduced to the equation:

(22f)

Where q'tj is the size of the stockpile disposed

in the future time period.

$

Figure V-12b.

TIME PERIOD tt

I I

I I

qt q’t Quantity

TERMS:

. p = price D = demand curve

q = quantities S = supply curve

126
External damage saved in the future time

period tf due to the disposal of the stockpile

must be included in the benefit function,

These damages averted will arise from the

availability of the material and the increased

output this availability will maintain, These

external damages must be discounted to their

present value as was the future net consumer

surplus.

Before the total net benefit to society of saving material in a stockpile for some future time

period can be determined, the capital gains (or

losses) realized on the purchase and sale of the

commodity must be added (subtracted) to the

benefits, Since interest costs are included in

the calculation of the total costs of stockpiling,

the capital gain should not be discounted for

time. This implies, however, that society’s

time rate of discount is the appropriate interest

rate to use in the cost function so that the

capital gains apply only to the quantity of

material available for sale in the future time

period (i.e., q't

-qt).

The benefits associated with stockpiling for

SP–4 can be measured by the following equation:

where

Bj =

PO=

Pt =

i =

tf =

Q o j =

Q t j =

Benefits from stockpile j

price in current time period without

stockpile acquisition

price in future time period without

stockpile disposal

discount rate

time horizon; years between current

time and future time

size of stockpile j accumulated in

current time period

size of stockpile j disposed in future

time period

CHAPTER V

price in current time period with acquisitio n

price in future time period with disposa l

External damages saved in futur e

time period with disposal o f

stockpile j

The first term or equation (23) is the net increase in producer surplus in the current time

period, The second term in equation (23) is the

net increase in consumer surplus in the future

time period discounted to its present value.

The third term is the capital gains (or losses) accrued in acquisition and disposal of the

stockpile. The fourth term in equation (23)

gives the external damages saved in the future

time period discounted to its present value.

Under certain conditions, equation (23)

could be modified to reflect more complex

relationships of the current and future market.

One condition would be if the present value of

the price in the future time period is below the

present value of the expected price in any

other time period, tftr. In such situations, the

benefits can be increased by releasing some of

the stocks in the period tftr as well as in period

tf

. The price reached by release of stocks in

time period tftr should be reduced to the point

that the price discounted with time equals the

reduce price in time period t f [i. e., p't 

= 

p '

t+r

(1+i) 4-r]. Equation (23) can be expanded

with this method in order to allocate stockpile

disposals over several future time periods.

The calculation of benefits and costs must

be made for various stockpile sizes to trace out

the entire benefit function and cost function

for SP-4. The expected net benefits can then

be determined for each stockpile size.

2. Estimation of Net Benefits for SP-4

Tungsten was selected as the material for

application of the Economic Welfare Model to

SP–4. While tungsten satisfies the materials

127
CHAPTER V

selection criteria for SP-4, it would have been

more consistent with the intent of this policy

to use a material where domestic production

accounts for the bulk of total supply. As it is,

imports constitute a major portion of total

tungsten supply. Nonetheless, this illustration

is based upon that portion of total demand

satisfied by domestic production. This

assumes that the acquisition of tungsten in a

stockpile for a future period will be used solely

to stimulate domestic production, while its disposal will be used solely to reduce domestic

supply shortages in the future.

a. Background In formation.—Other

values and assumptions used in the analysis

include the following:

● The time period under consideration is

1974 (the current period) to 1980 (the

future period). The year 1980 is taken

for ease of calculation. Normally, the

time horizon of society under this

policy would be on the order of 30, 40,

or more years.

. Domestic supply and demand values

and prices for 1974 and 1980 are presented in the table below. Growth rates

of 7 percent and 2percent are postulated for demand and supply respectively.

I 1 9 4 I 1980

Price ($/tons] 8,500 12,500

Demand (tons) 3,875 5,820

Supply (tons) 3,875 4,364

● The price elasticity of supply is estimated to fall in the range of 0.35 to 0.5

in the current period but to decline by

50 percent in the future period.

. The price elasticity of demand for

tungsten is estimated to be in the area

of -0.9 for both current and future

periods.

. A discount rate of 8 percent has been

used for computing future costs and

benefits of stockpiling tungsten to their

present value.

. External costs and damages averted for

tungsten are estimated by using from

SP–2 the ratio of GNP lost to the value

of zinc imports interrupted (1.008),

which in turn is applied to the value of

tungsten acquired or forgone to derive

losses of GNP. Implicit in this approach

is that interindustry relationships of

the two materials are the same. Admittedly, this approach to estimating external costs and damages averted can

provide only an approximation to the

actual values.

b. Input Values.—The values for the input

variables to the computer program for SP-4 are

listed in table V-18. This table lists the

mathematical symbol, the name, or description, of the variable, the units of measure, and

the numerical value of the input variable for

each stockpile size. The calculations for the

SP-4 were performed by computer program

for the input variables listed in table V–18.

c. Calculated (Output) Values.—The

values for the output variables calculated by

the computer program for SP-4 are listed in table V–19. This table lists the mathematical

symbol, the description of the variable, the

units of measure, and the numerical value of

the output variable for each stockpile j.

d. Graphic Representation of the Calculations.—Figure V-13 is a graphic representation of the calculated costs, benefits, and net

benefits (benefits minus costs) for SP-4.

Values are computed only for three stockpile

sizes and zero stockpile,

e. Optimal Stockpile Size.—The net

benefit curve in figure V-13 can be used to indicate the probable optimal stockpile size,

where the curve appears to be at a maximum

positive value (or minimum negative value).

This can only be taken as an indication of the

area where the optimal occurs; however, it

will serve to illustrate the desired value of the

stockpile size for the values of the input variables chosen. It should be emphasized that the

estimates apply only to the specific materials

examined and within the scenario assump128
CHAPTER V

Table V-18.—Input variables SP-4

Math

symbol

Qj

c

c f

c“

d

s

ECj

Po

P ’0j

P,

P’tj

i

tf

Q0j

Q tj

EDtj

d t

Cd

Q d j

Program

symbol

Q

Cu

CF

CV

XI

SLR

SC

EC

PO

POP

PT

PTP

DR

E

QT

EDT

DT

CD

QD

Description

Stockpile size

Unit cost

Fixed initialization cost

Variable initialization cost

Interest rate

Spoilage loss rate

Storage cost

External cost

Price in current time period

without stockpile acquisition

Price with acquisition of

stockpile j

Price in future without

stockpile disposal

Price in future with disposal of

stockpile j

Discount rate

Time horizon

Size of stockpile j accumulated in

current time period

Size of stockpile j disposed in

future time period

External damages saved in future

time period w/disposal of

stockpile j

Demand in period t without a

stockpile

Unit disposal cost

Stockpile disposal cost

Figure V-13.

Economic Net Benefits of SP-4

Millions of Dollars

Millions tons

$ per ton

Million $

$ per ton

Percent per year

Percent per year

$ per ton per year

Million $

$per ton ,

$ per ton

$ per ton

$ per ton

Percent per year

Years

Millions tons

Million tons

Million $

Million tons

$ per ton

$ per ton

0.0005

8755.5

0.5

0.0

0.08

0.0

2.5

3.529

8500.0

9500.0

12500.0

10900.0

0.08

6.0

.0005

.0005

5.484

.004384

.0

.0

0.001

9011.0

7.284

109OO.O

9300.0

.001

.001

10.676

J=3

0.002

9522.0

15.352

13300.0

6200.0

.002

,002

20.338

tions described, and should therefore not be

taken to indicate that precise quantities of

specific materials should or should not be

stockpiled. Nevertheless, the nature and magnitude of the estimates are sufficient to indicate that an economic stockpile should be

given detailed consideration as one component

of a more comprehensive national materials

policy and that measuring the benefits or costs

of a supply disruption in terms of the probability, rather than the certainty, of a disruption will significantly reduce the quantity of

material to be stockpiled.

In this illustration, net benefits are negative

for all three stockpile sizes, which suggests

that tungsten should not be stockpiled for

1 2 9
CHAPTER V

Table V–lg.—Calculated results for SP-4

Symbol

NBj

‘ j

c j

DN

CSj

PGj

C Fj

EDj

H Cj

DCj

OCj

A Cj

● *

Economic impacts of stockpiling tungsten

(Millions of dollars)

Description

Net benefits ., . . . . . . . . . . . . . . . . . . . . . . . . ... , . . . . . .

Benefits function . . . . . . . ., ... , . . . . . . . . . . , , , . . . .

Cost function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Damage not averted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Benefit variables:

Consumer savings. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Producer loss . . . . . . . . . . . . . . . . . . . . , . . . . . ...,,..

Net consumer savings:

Producer gain. . . . . . . . . . . . . . . . . . .,,..,, . . . . . . . .

Consumer loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net producer gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Capital gains. . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . . . .

External damage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost variables:

Holding costs (discounted) . . . . . . . . . . . . . . . . . . . . .

Initialization costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Disposal costs, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Acquisition costs, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Economic impact of no stockpile

J=l I J=2 I J=3

0.0005

–1.3

4.4

5.7

5.2

6.2

5.0

0.2

4.2

4.0

0.3

0.4

3.4

1.6

0.5

0.0

4.8

4.4

4.4

(Millions of tons)

0.001

–3.2

7.9

11.1

4.5

13.2

12.2

1.0

11.0

9.9

1.2

–1.0

6.7

3.3

0.5

0.0

11.2

9.0

7.9

0.002

–10.3

12.6

22.9

1.5

29.1

25.1

4.0

25.8

21.0

4.8

–8.9

12.8

7.1

0.5

0.0

30.0

19.0

12.6

AH calculations have been rounded off forslmpl~~ty

““The economic tmpactof nostochplle Isequlvalenl tcrthebeneflts (expected ddmagesdverted) dttrlbuted tothestwhplle which are foregone lrrtht. absenceof thestock,pile

SP-4. However, a stockpile size less than 500

tons might yield positive net benefits. A longer

time horizon for holding the stockpile could

yield considerably higher prices of tungsten in

period t though the present value of benefits

(and cost) become increasingly smaller as the

time horizon is extended.

f. Sensitivity Analysis for SP–4.—The

computer program performs the “baseline”

calculations and then automatically perturbs

an input variable by +10 percent and reruns

the calculations. The new costs, benefits, and

net benefits are compared to the baseline

calculations and the percentage change is computed. This process is repeated for each input

variable.

The resulting percent changes in net

benefits from a +10-percent change in each input variable for SP–4 are listed in table V–20,

130

An examination of table V-20shows the net

benefits to be fairly sensitive to most of the input variables, but not exceeding about plus or

minus 90 percent. The maximum changes occur for variations in (a) external damages

saved in future time period with disposal of

stockpile, and (b) external cost.

The net benefit functions for the baseline

case and for perturbations of +10 percent in

EDT and EC are plotted in figure V-14. In both

cases the net benefits are negative for

stockpiles of 0.0005 and 0.001 million tons,

3. Discussion of Partial Benefits and Costs

for Each Phase of Stockpile Operation

for SP-4

The above presentation of net benefits can

be supplemented by a discussion of how the

4
CHAPTER V

Table V–20.-Percent change based on 10 percent perturbation of variables for SP-4

Perturbed

variable

CF

Cu

Sc

EC

Po

POP

PT

PTP

TF

QO

EDT

DT

T F1

TFX

Q1

0.00

0.00

0.00

0.00

–4.84

–1.41

4.49

3.91

0.00

.57

7.85

0.00

0.00

9.43

Benefits

Q2

0.00

0.00

0.00

0.00

–5.36

–1.79

4.97

3.70

0.00

1.51

8.49

0.00

0.00

8.49

Figure V 14.

Q3

0.00

0.00

0.00

0.00

–6.73

–2.74

6.23

3.09

0.00

3.80

10.14

0.00

0.00

6.20

Q1

0.88

2.86

.01

6.24

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

2.87

0.00

Perturbations for SP-4

MilIions of DolIars

o

5

10

15

Millions of Tons

.0005 .0010 .0015 .0020

– 1 3

– 1.6

–3 9

EDT + 10O/.

● .

– 11.8

cost

Q2

0.45

3.00

.01

6.54

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

3.01

0.00

Q3

0.22

3.07

.01

6.70

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

3.08

0,00

Net benefits

Q1

3.95

12.77

.05

27.84

16.77

4.88

–15.54

–13.55

0.00

–1.97

–27.17

0.00

12.82

–32.64

Q2

1.57

10.48

.04

22.84

13.36

4.46

–12.38

–9.21

0.00

–3.77

–21.15

0.00

10.51

–21.15

Q3

0.40

6.85

.02

14.93

8.27

3.37

–7,66

–3.80

0.00

–4.67

–12.47

0.00

6.87

–7.62

total is made up of four categories of impacts.

The economic impacts of a stockpile for SP-4

can be determined with the Economic Welfare

Model for four types of impacts: direct benefits

and costs to materials producers, direct

benefits and costs to materials consumers,

benefits and costs borne by the stockpile investor, and external benefits and costs.

Calculations have been made to estimate each

of these four types of economic impacts. A

tableau arraying the conclusions is presented

below for each phase in the operation of a

stockpile, followed by the supporting derivations,

a. Direct Benefit and Costs to Materials

Producers.—Direct benefits and costs to

materials producers of a tungsten stockpile

under SP-4 are summarized below:

Benefits and costs to producers I

Stockpile size

(Millions of tons)

Operational action Type of benefit or cost (Millions of dollars]

0.0005 0.001 0.002

Acquisition Producer gain (PG) 4.245 11.088 25.776

Holding Producer loss (PL) 0.000 0.000 0.000

Disposal Producer loss (PL’)* 5.993 12.237 25.084

I 1 I I

“This term IS expressed as a present value

131

77-119 0-76-1 0
CHAPTER V

b. Direct Benefits

Consumers.—Direc t

materials consumers

and Costs to Materials

benefits and costs to

of a tungsten stockpile

under SP-4 are summarized below:

.,

Acquisition Consumer loss (CL) 3.995 9.888 20.976

Holding Consumer savings (CS) 0.000 0.000 0.000

Disposal Consumer savings (CS’)* 6.245 13.245 29.053

“This term IS expressed as a present value.

c. Costs and Benefits to the Stockpile Investor.—The cost and benefits to the stockpile

investor for a tungsten stockpile under SP-4

are summarized below:

.

. . . . . , . ..4

- .

!’ , .“ . ; . ‘7

0.0005 0.00l 0.002

Acquisition Initialization cost (IC) 0.500 0.500 0.500

Holding Holding cost (HC)* 1.625 3.344 7.066

Disposal Disposal cost (DC) 0.000 0.000 0.000

Capital gains (CG) 0.441 –1.008 –8.948

“This term IS expressed as a present value

d. Estimation of External Costs and

Damages.—The estimation of external costs

and damages can be done in a generalized,

first-order approximation, or it can be

rigorously determined. The illustrative

calculations for a tungsten stockpile under

SP-4 utilize the first approach, a general approximation. The resulting external benefits

and costs as given in the tungsten example are

summarized below:

stockpile size 

0.0005 0.001 0.002

Acquisition External cost (EC) 3.529 7.264 15.352

Holding External damage (ED) 0.000 0.000 0.000

Disposal External damage (ED’)* 3.443 6.728 12.813

“This term IS expressed as a present value.

132
4. Summary of Economic Net Benefits and

Partial Benefits for SP-4

The results of the calculations for SP–4 are

summarized in table V–21. These results are

for the entire time horizon of the operation of

the stockpile, with acquisition being in year 1,

the holding phase over years 1-6 and disposal

in year 7, In the initial year of operation, large

external consumer costs are incurred. During

disposal, external damages are avoided and

gains in consumer surplus are captured.

For a complete discussion of the Operating

Cost Model and estimates of the costs of implementing and running an economi c

stockpile, refer to the section in chapter VI on

Budget Cost Implications. The operating costs

are indicated here for conceptual understanding, The cost to the Government of establishing a 500-ton” tungsten stockpile is estimated to

be about $4.8 million in the first year, with the

major components being $4.4 million for

CHAPTER V

purchase of tungsten plus $0.5 million for

purchase of storage and other facilities and

$1.6 million for holding costs. Offsetting these

costs are capital gains of $0.4 million. In each

succeeding year the cost of operation would

only be the holding costs minus the capital

gains if the stockpile size remains unchanged,

On balance, materials consumers realize a

small net gain, with materials producers being

approximately even over the full cycle. Consequently, only nominal transfer payments occur in this illustration. Nonetheless, the distributive effects can be significant. External

costs and damages are large, but their distributive effects are unknown. Moreover, because

this policy is concerned with the use of

resources over time, the discount rate used

determines distribution in another sense,

namely, between present and future generations. The lower the discount rate the

greater is the preference given to future users.

Table V–21.—partial economic benefits and costs of SP–4 for the fuIl cycle of operations

(In millions of dollars)

Type of benefit or cost

Producers. ., . . . . . . . . . . . .

Consumers. . . . . . . . , . . . . .

Stockpile operators ... , , .

External costs. ... , . . . . . .

Size of stockpile

[Millions of tons]

0.005

0.001

0.002

0.005

0.001

0.002

0.0005

.001

.002

0.005

0.001

,002

Acquisition

PGj

4.2

11.1

25.8

CLj

4.0

9.9

21.0

ICj

0.5

0.5

0.5

EC

3.5

7.3

15,4

Operational actfon*

Holding

PLj

0.0

0.0

0.0

CSj

0.0

0.0

0.0,

H Cj

1.6

3.3

7.0

EDj

0.0

0.0

0.0

Disposal

PL’j

6. 0

12.2

25.1

CS’ j

6.2

13.2

29.1

(DC+CG)

0.4

–1.0

–8.9

ED’ j

3.4

6.7

12.8

Economic net benefits are –1.3 millions, –3.2 millions, and –10.3 millions for 0.0005, 0.001, and 0.002 million tons of stockpile, respectively.

“Signs indicate the sign which each term should have when summing to indicate net benefits

133
CHAPTER V

F. ECONOMIC IMPACTS OF STOCKPILING TO PROVIDE A

MARKET FOR TEMPORARY SURPLUSES AND EASE

TEMPORARY SHORTAGES (SP-5)

The procedure for calculating the benefits

of SP–5 is similar to that developed for the

benefit function of SP–3. The cost function for

SP–5 also takes the same form as for SP–3, as

discussed in chapter IV on the Economic

Welfare Model, equation (7). The benefit

function for SP–5 is developed in the subsequent paragraphs. Calculations of the net

benefits are presented immediatel y

thereafter.

1. Derivation of the Benefit Function for SP-5

The objective of this stockpiling policy is to

stabilize the price of a material around its

long-run (market clearing) trend. Attempts to

keep the price either above or below the

market clearing level in the long run are inconsistent with the stated objective of SP–5,

and in fact a stockpile used for this purpose is

almost certain to fail. If price is maintained

above the long-run level, stockpiles tend to

grow increasingly larger over time. If price is

maintained below the long-ru n level,

stockpiles are sooner or later depleted.

This stockpiling policy produces four types

of benefits: an increase in consumer-producer

surplus, a decrease in production costs, a

reduction in the external costs associated with

price instability, and the realization of capital.

The increase in consumer-producer surplus, as

shown below in figure V-15, arises because

the gain in consumer surplus exceeds the loss

in producer surplus caused by stockpile accumulations and the gain in producer surplus

exceeds the loss in consumer surplus caused

by the disposal of stockpiles.

The decrease in production costs arises

because both producers and consumers of the

material can, with a stockpile, operate at a

more stable production rate. During periods of

shortages, producers are not forced to put obsolete and expensive equipment into service,

and during periods of surpluses, they do not

134

have to idle production capacity. Therefore,

capital and fixed costs are reduced for the producers of the material. The case is similar,

though to a lesser extent, for the material consumers,

The reduction in external costs reflects the

benefits of greater stability realized by third

parties other than producers or (direct) consumers of the material. For example, the suppliers and workers of producing firms during

periods of surpluses would now be kept more

fully occupied, Similarly, the suppliers and

workers of firms indirectly consuming the

Figure V-15.

1 II i I

Q’, Q, Q,, Q’,, Quantity

TERMS:

S, = low supply curve

S11 = high supply curve

D I = IOW demand curve

D ,l = high demand curve

P = high price without stockpile

P’ = high price with stockpile

P, = low price without stockpile

P’, = low price with stockpile

Q, = high consumption without stockpile

Q’, = high consumption with stockpile

Q, = low consumption without stockpile

Q’ = low consumption with stockpile
material would no longer face

production during periods

interruptions in

of shortages.

Capital gains are realized on the operation of

the stockpile because stocks are accumulated

during periods of surpluses when prices are

low and disposed of during periods of shortages when prices are high.

The benefits from a stockpile of a given size

over the entire surplus-shortage cycle should

be estimated to calculate the benefit function

for this type of stockpile over the coming time

period. Since these benefits are derived over

the entire surplus-shortage cycle, only a portion of these benefits should be credited to the

coming time period. This portion t is given by

the ratio of the length of the coming period to

the expected length of the surplus-shortage cycle. Thus, the benefits associated with a

stockpile of size Qj over the coming time

period can be calculated by:

(24)

where

B j = benefits expected for stockpile of

size Qj

t = portion of surplus-shortage cycle occurring in the coming time period

C Sj = increase in consumer-produce r

surplus

PSj = decrease in average production costs

E Dj = external damage, external costs

saved

C Gj = capital gains

The increase in consumer-producer surplus

over the surplus-shortage cycle can be estimated using the procedure described below,

which is based on the following assumptions:

. The price of the material reflects the

benefits to marginal consumers (i.e.,

consumers who do without if asked to

pay more for the material), as well as

the production costs of the management producer;

● The demand and supply curves are

linear within the range of the price

fluctuations, and

CHAPTER V

● No sharp increase or decrease in the

long term market clearing price occurs

over the surplus-shortage cycle.

Let ph be the highest price and pl the lowest

price at which the material would be sold over

the surplus-shortage cycle in the absence of

stockpiling. This fluctuation in price could be

caused by a shift in the demand curve, a shift

in the supply curve, or shifts in both curves. In

the latter case, demand could increase when

supply was increasing, thereby tending to

reduce price fluctuations, or demand could increase when supply was falling (as illustrated

in fig, V–15), thereby tending to accentuate

price changes. The p'h and p'j are the high and

low prices, respectively, that occur with a

stockpile. If over the cycle half of the material

in the absence of stockpile were sold at ph and

half at pl

, the increase in consumer surplus

during the accumulation of the stockpile

would be given by the trapezoid pha b ph a n d

the loss in producer surplus by the trapezoid

PhacP'

h so that the net gain in welfare would

be represented by the triangle abc. This

triangle can be approximated by 1/ 2

(ph-p'h)Q*j where Q*j

equals the amount of

stocks acquired during the accumulation

phase (cb in fig. V-15) and sold during the disposal phase (de in fig. V-15). It is possible for

Q *j to be smaller than the size of the stockpile

(Qj

) if the latter is not entirely exhausted over

the cycle.

During the disposal phase, the increase in

producer surplus is given by the trapezoid

pldfpl for a net gain in welfare equal to the

triangle def, which can be approximated by 1/2

(P'l-pl) Q*j. Over the entire cycle then, the gain

in consumer-producer welfare would equal

1/2 Q*j(pl –pl +ph–p'h). Of course, it is highly

probably that without a stockpile the price bL

would vary over the range p] to ph so the increase in consumer surplus would be only

some fraction (g) of this amount as indicated

in the following equation:

(25)

where

CSj = increase in consumer-producer

surplus

135
CHAPTER V

g = fraction reflecting distribution o f

price s

Qj quantity of stocks accumulated and

ed of over cycl e

ph = high price without stockpile

ph = high price with disposal of stockpile j

Pl

= low price without stockpile

P'l

= low price with acquisition of

stockpile j

The increase in consumer-producer surplus

is dependent upon the size of the stockpile.

That is, the stockpile size determines the level

to which the high and low price fluctuations

can be dampened, If the stockpile is of sufficient size, all of the price fluctuations will be

dampened and the high and low prices would

equal the average price (i.e., p'h = p'l = Pa).

The formulation of consumer-producer

surplus assumes that the market clearing price

remains constant over the cycle considered. If

the long-run (market clearing) price tends to

change appreciably over the surplus-shortage

cycle, the procedure can be adjusted through

the normalization of prices around the longterm price trend. The conceptual basis of

benefits PS, EDj

, and CGj is the same for SP–3

as that outlined for SP–5 and hence is not repeated here.

The net benefits for SP–5 are calculated for

each stockpile size Qj from the benefits determined in equation t )

24 and the costs from

equation (7). The calculations described above

should be repeated for stockpiles of various

sizes to trace out the entire benefit function

and the entire cost function.

2. Estimation of Net Benefits for SP-5

Copper has been selected as a representative material for the calculation of net benefits

arising from a stockpile intended to moderate

temporary surpluses and shortages. The

domestic price and supply of copper has fluctuated considerably over the last 5 years, with

fluctuations occurring within a given year and

from year to year. For example, the price of

copper increased from 68.6 cents per pound in

136

February 1974 to 86.6 cents in July 1974, and

then fell to 64.2 cents by February 1975. Over

the last 5 years the average annual price has

fluctuated between 51,2 cents and 77.1 cents,

following supply changes with a lag. Continued uncertainties in the copper industry

regarding land restoration, waste disposal, air

quality and water supply, combined with the

large U.S. reserves of copper ore, are expected

to reinforce this price fluctuation,

a. Background Information.—The values

and assumptions used in the calculation of net

benefits for stockpiling copper under SP–5 are

outlined below:

●

●

●

Future copper prices are assumed to be

equal to the prices during the last 5-

year cycle. Under this assumption, the

high, low, and average prices per ton of

copper are respectively $1,542, $1,024,

and $1,283.

It is estimated that complete stabilization of the price of copper would

reduce the average cost of production

by 2 cents per pound, with the actual

cost reduction being proportional to the

percent reduction in price fluctuation.

External damage averted through

reduction of price fluctuations is estimated as the value of unemployment

benefits saved, These values are presented in the following table for each

of three stockpile sizes:

Stockpile size in

thousand tons

., 500 1 2500 5,000

Unemployment benefits

saved ($ million). . . . . . . . , .6 I 3.013.0

b. Input Variables.—The values for the input variables to the computer program for

SP–5 are listed in table V–22. This table lists

the mathematical symbol, the name, or

description of the variable, the units of

measure, and the numerical value of the input

variable for each I, J, and K. The calculations
CHAPTER V

Table V–22.—Input variables SP–5

Math

symbol

Program

symbol

Q

QS

Cu

CF

CV

XI

SLR

SC

T

CP

SA

G

PH

PHP

PM

PMP

QH

QHP

QL

QLP

ED

M

H

Description

Stockpile size

Stockpile accumulations and

disposals

Unit cost

Fixed initialization cost

Variable initialization cost

Interest rate

Spoilage loss rate

Storage cost

Portion of surplus-shortage cycle

occurring in the coming time period

Unit cost of production saved

by stabilization due to

stockpiling

Output of material over the entire

cycle

Fraction reflecting distribution of

prices

High price without stockpiling

High price with disposal of

stockpile j

Low price without stockpile

Low price with acquisition of

stockpile j

High consumption without stockpile

over cycle

High consumption with stockpile

over cycle

Low consumption without stockpile

over cycle

Low consumption with stockpile

over cycle

External damage-no stockpile

Fraction of total output over

the cycle whose price would

be lower than p’l without a stockpile

Fraction of total output over

the cycle whose price would

exceed p’, without a stockpile

Units

Million tons

Million tons

$ per ton

Million $

$ per ton

Percent per year

Percent per year

$ per ton per year

Coefficient

$ per ton

Million tons

Coefficient

$ per ton

$ per ton

$ per ton

$ per ton

Million tons/

5 year cycle

Million tons/

5 year cycle

Million tons/

5 year cycle

Million tons/

5 year cycle

Million $

Coefficient

Coefficient

on , or J=I ?

0.5

0.5

1089.0

0.5

0.0

0.08

0.0

0.39

0.2

14.40

11.46

0.5

1542.0

1448.0

1024.0

1089.0

11.5

12.0

11.195

10.695

.600

.15

15

J=2

2.50

1.94

1276.0”

40.00

1289.0

1276.0

13.432

8.696

3.000

.5

.5

J=3

5.00

1.94

1276.0’

40.00

1289.0

1276.0

13.432

8.696

3.000

.5

.5

These costs would he higher than mdlcated If the entire stockp)le of z 5 or 50 mllllon tons was acqu]red during the per]od under consideration The figures shown assume accumulations of 1.94 millions tons during the period under cons] deratlon

for the SP–5 were performed by the computer

program for the input variables listed in table

v–22.

c. Calculated (Output) Values.—The

values for the output variables calculated by

the computer program for SP-5 are listed in table V–23. This table lists the mathematical

symbol, the description of the variable, the

units of measure, and the numerical value of

the output variable for each stockpile j.

d. Graphic Representation of the Calculations.—Figure V-16 is a graphic representation of the calculated costs, benefits, and net

benefits (benefits minus costs) for the SP-5.

Values are computed only for three stockpile

sizes and zero stockpile.

e. Optimal Stockpile Size.—The ne t

benefit curve in figure V-16 can be used to indicate the probable optimal stockpile size,

where the curve appears to be at a maximum

137
CHAPTER V

Table V–23.—Calculated results for SP–5

symbol

NBj

Bj

c

DN

CSj

PROD CSTj

CGj

EDj

HCj

IC

DCj

OCj

ACj

● *

Economic Impacts of Stockpiling Copper

{Millions of dollars]

Description

Net benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Benefits function. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost function.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Damage not averted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Benefit variables:

Increase in consumer-producer surplus . . . . . . . . . .

Production costs saved. . . . . . . . . . . . . . . . . . . . . . . . .

Capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

External damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost variables:

Holding costs.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Initialization costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Disposal costs.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Economic impact with no stockpile . . . . . . . . . . . . . . .

J=l I J=2 I J=3

(Millions of tons)

0.500

28.7

73.0

44.3

73.3

19.9

165.0

179.5

0.6

43.8

0.5

0.0

409.3

544.5

73.0

2.500

–110.4

146.3

2.56.7

0.0

244.9

458.4

25.2

3.0

256.2

0.5

0.0

3421.5

3190.0

146.3

5.000

–366.5

146.3

512.9

0.0

244.9

458.4

25.2

3.0

512.4

0.5

0.0

6867.6

6380.0

146.3

All calculat~]ns have k:en rounded forslmphclty

● “The economic Impaclof nostochp)le Is equivalent tothe benefits (expected damages averted) attnbutedt othestochplle whlchare foregone lnthe absence of thestockplle

positive value (or minimum negative value).

Though this can only be taken as an indication

of the area where the optimal occurs, it illustrates the desired value of the stockpile size for

the values of the input variables chosen. It

should reemphasized that the estimates apply

only to the specific materials examined and

within the scenario assumptions described,

and should therefore not be taken to indicate

that precise quantities of specific materials

should or should not be stockpiled. Nevertheless, the nature and magnitude of the estimates

are sufficient to indicate that an economic

stockpile should be given detailed consideration as one component of a more comprehensive national materials policy and that measuring the benefits or cost of a supply disruption

in terms of the probability, rather than the certainty, of a disruption will significantly reduce

the quantity of material to be stockpiled.

The calculations resulted in an optimal

stockpile size of about 500,000 tons accumulated during the surplus portion of the surplus138

shortage cycle. The economic net benefits expected for this stockpile are estimated at $28.7

million.

In summary, the example calculations for a

copper stockpile show that the required size of

a stockpile to stabilize prices and supply can be

relatively large. The calculations demonstrate

that the optimal stockpile size is not that required to completely stabilize the fluctuations

of a materials’ supply and price. Stockpile

sizes J2 and J3 yield the same benefits since

both are capable of reducing the price fluctuation close to the average price of $1,283 per ton

of copper. * In practice it is recognized that a

stockpile —regardless of size—would probably

not be able to reduce price fluctuations to the

degree assumed in this illustration.

The quantity of copper required to achieve

full price stabilization is estimated to be 1.9

million tons, which is less than the sizes

*It is assumed

tinue.

that price fluctuations of I percent will con-
Figure V-1 6.

Economic Net Benefits of SP-5

Mllllons of Dollars

550

500

450

400

350

300

250

200

150

100

50

0

–50

– 100

– 150

– 200

– 250

– 300

– 350

– 400

512.9

●✎ ● ✎☛

✎✎☛ ● ✎☛ ● .”

.*

cost ..””’

.“

.“

.’ ● .*

.

.“

.*

256.7 ● “”” ● **

.

.“ .*

.-

.“ .“ 146.3 146.3 .*

.*

/“

e --------- -

.“ Benefits ● .” /“

- 73.0a&@

/:””:8.8

-4”f&.,44.3

F“” I ‘..* j I 1 I I I I I I

0.5 ““”*.C 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 “b+ Millions of Tons “.*

“.*

“**

● .*

‘“+..— 110.4

“+“.*

‘.“.*

●*● * +

“*●*%. Net Benefits t+● **

“.*

%

+6●*%●*+● * Q●**● **●*● .

-366.5-

specified for J2 and J3. The cost of this

stockpile size is $192.3 million, which yields

lower but still negative benefits of $52.9

million. The optimal stockpile size is therefore

less than 1.9 million tons.

f. Sensitivity Analysis for SP–5.—The

computer program performs the “baseline”

calculations and then automatically perturbs

an input variable by +10 percent and reruns

the calculations. The new costs, benefits, and

net benefits are compared to the baseline

CHAPTER v

Figure V-1 7.

Perturbations for SP-5

Millions of Dollars

50

0

–50

--100

– 150

– 200

– 250

– 300

– 350

– 400

– 450

-39.6

f- *

. I 1 1 I

● j.5 2.0 2.5 4.0 4.5 5.0 5.5 6.0

Millions of Tons

-

\

\ “**.* j.

~. % \ \ ‘“*. 1---– 110.4

.

\ ‘“ : ‘,

\ “:

: ~ PHP

\-”* -329. 0

\

t

–403.7

calculations and the percentage change is com -

puted. This process is repeated for each input

variable.

The resulting percent changes in net

benefits from a +10-percent change in each

variable for SP–5 are listed in table V–24.

An examination of table V–24 shows the net

benefits are fairly sensitive to changes in

many of the input variables. The maximum

changes are caused by perturbation of (a) high

139
- —

CHAPTER V

Table V–24.—Percent change based on 10 percent perturbation of variables SP–5

Perturbed

variable

CF

Cu

Sc

ED

T

CP

SA

G

PH

PHP

PM

PMP

QS

Q1

0.00

0.00

0.00

0.02

10.00

4.52

4.52

0.54

5.28

14.88

–3.51

–11.19

0.00

5.46

-

Q2

0.00

0.00

0.00

0.04

10.00

6.27

6.27

3.35

10.22

25.64

–6.79

–25.38

0.00

3.69

Q3

0.00

0.00

0.00

0.04

10.00

6.27

6.27

3.35

10.22

25.64

–6.79

–25.38

0.00

3.69

QI

0.11

9.84

0.04

0.00

0.00

0,00

0.00

0.00

0.00

0.00

0.00

0.00

9.84

0,00

price with stockpiling (PHP) and (b) low price

with stockpiling (PMP).

The net benefit functions for the baseline

case and for perturbations of +10 percent in

PHP and PMP are plotted in figure V-17. In

both cases the net benefits remain positive for

a stockpile of 0.5 million tons and negative for

stockpiles of 2.5 and 5.0 million tons.

3. Discussion of Partial Benefits and Costs for

Each Phase of Stockpile Operation for SP-5

The above derivation of net benefits can be

supplemented by a presentation of the component parts of the net benefit function: direct

benefits and costs to materials producers,

direct benefits and costs to materials consumers, benefits and costs borne by the

stockpile investor, and external benefits and

costs. Calculations have been made to estimate

each of these four types of economic impacts.

The costs and benefits shown below by phase

of stockpile operation are those expected for

the coming time period (i.e., a year) and are

equal to one-fifth the costs and benefits

realized over the full 5-year cycle.

a. Direct Benefits and Costs to Materials

Producers. —Direct benefits and costs to

materials producers of a copper stockpile

under SP–5 are summarized below.

cost

0.02

9.94

0.04

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

9.94

0.00

0.01

0.95

0.04

0.00

0.00

0.00

0.00

0.00

0.00

0,00

0.00

0.00

9.95

0.00

Q1

–0.17

–15.15

–0.07

0.04

25.40

11.48

11.48

1.38

13.41

37.78

–8.91

–28.41

–15.15

13.87

Benefits and costs to consumers

Operational

action

Acquisition

Holding

Disposal

Type of benefit

or cost

Producer cost saved

Change” in producer

surplus**

None***

Producer cost saved’

Change in producer

surplus**

Q2

0.05

23.12

0.09

–0.05

–13.26

–8.31

–8.31

–4.44

–13.55

–33.99

9.00

33.64

23.12

–4.89

Q3

0.01

13.92

0.05

–0.02

–3.99

–2.50

–2.50

–1.34

–4.08

–10.23

2.71

10.13

13.92

–’1.47

Stockpile size

(Millions of tons)

,

(Millions of dollars)

16.5 45.8 45.8

12.3 149.8 149.8

.0 .0 .0

16.5 45.8 45.8

‘14.2 ‘133.2 ‘133.2

● Benefits are alleviated evenly to the acquisition and disposal phases. Also producers are assumed here to appropriate all

of the benefits associated with lower production costs. In practice some of these benefits may be passed on to consumer

through lower prices. If so, the distribution of these benefits

could be changed to reflect this, though some estimate of the

portion of benefits passed on to consumers would have to be

made.

● *On the basis of figure V-15, gains in producers surplus are

estimated by

and the losses in producer surplus by

Since Q’l and Qf reflect the consumption that would occur over

the 5 year cycle if low demand and high supply conditions prevailed over the entire period, the gain in producer surplus

measured by the first equation above (and loss in consumer

surplus) during stockpile acquisition will be overestimated

unless these variables are multiplied by m, the proportion of

total output over the cycle whose price would be lower than Pi’

without a stockpile. Similarly, the loss in producer surplus

measured by the second equation and gain in consumer surplus

140
during the disposal phase will be overestimated unless the

variables Q’h and Qh are multiplied by h, the proportion of total

output over the cycle whose price would be higher than p’h

without a stockpile.

● **The mere holding of stocks, as opposed to acquiring or

disposing of stocks, is not assumed to affect prices or generate

benefits. In practice, however, this may not always be the case.

In particular, speculative demand may be influenced by the existence of large stocks. This would produce benefits and costs to

producers and other groups over the cycle. These benefits and

costs could be estimated if the effect of holding stocks on prices

were determined.

b. Direct Benefits and Costs to Materials

Consumers. —Direct benefits and costs to

materials consumers of a copper stockpile

under SP–5 are summarized below:

Benefits and costs to consumers I Stockpile size

Operational

action

Acquisition

Holding

Disposal

(Millions of tons)

Type of benefit

or cost 0.5 2.5 5.0

Change in consumer (Millions of dollars)

surplus* -10.7 ‘125.3 I

‘125.3

None .0 .0 .0

Change in consumer

surplus* 16.6 157.7 157.7

● Gains in consumer surplus are estimated by

and 10SS by

c. Costs and Benefits to the Stockpile Investor.—The costs and benefits to the

stockpile investor of a copper stockpile under

SP-5 are summarized below:

Acquisition

Holding

Disposal

(Millions of dollars)

Initialization cost 0,5 0.5 0.5

Holding cost 43.6 256.2 512.4

Disposal cost 0.0 0.0 0.0

Capital gains 35.9 5.0 5.0

d. Estimation of External Costs and

Damages.—The estimation of external costs

and damages can be done in a generalized,

first-order approximation, or it can be

rigorously determined. The illustrative

CHAPTER V

calculations for a copper stockpile under SP–5

utilize the first approach, a general approximation. The resulting external benefits and costs

as given in the copper example are summarized below:

/

(Millions of dollars)

Acquisition External damage* 0.3 1.5 1.5

Holding External damage .0 .0 .0

Disposal External damage* 0.3 1,5

● Benefits are allocated evenly to the acquisition and disposal

phases,

4. Summary of Economic Net Benefits and

Partial Benefits for SP–5

The result of the calculations for SP–5 are

summarized in table V–25. These results are

for the initial year of operation. For comparison, table V-26 shows the terms in the net

benefit function for the second year under the

assumption that the relevant input variables

are the same. It is assumed that the expected

benefits and costs are the same for both years.

For a complete discussion of the Operating

Cost Model and estimates of the costs of implementing and running an economi c

stockpile, refer to the section in chapter VI on

Budget Cost Implications. The operating costs

are indicated here for conceptual understanding. The cost to the Government of establishing a 500,000-ton copper stockpile is estimated

to be about $409 million in the first year, with

the major components being $544.5 million for

purchase of copper plus $0.5 million for

purchase of storage and other facilities and

$43.8 million for holding costs. Offsetting

these costs are capital gains of $35.9 million. In

each succeeding year the cost of operation

would only be the holding costs minus the

capital gains if the stockpile size remains

unchanged,

The distribution of costs and benefits among

materials consumers, materials producers, and

141
CHAPTER V

the stockpile operator differ from the distribu - note that the economic costs of stockpiling are

tion under the previous three stockpile borne entirely by the operator—which is not

policies. Both consumers and producers are the case in the previous three policies—which

net gainers as a result of implementing this in turn means the taxpayer, Consequently, the

policy, with net gains increasing as the distributive effects of the cost function cannot

stockpile size increases, It is also interesting to readily be ascertained.

Table V–25.—Summary of economic benefits and costs of SP–5 for first year of operation

(In Millions of dollars)

Types of benefit or cost

Producers. . . . . . . . . . . .

Consumers. . . . . . . . . . .

Operators. . . . . . . . . . . . . . .

External. . . . . . . . . . . . ., .,

Size of stockpile

millions of tons

0.500

2.500

5.000

0.500

2.500

5.000

0.500

2.500

5.000

0.500

2.500

5.000

Acquisition

28.8

195.6

195.6

– 10.7

–125.3

–125.3

– 0.5

– 0.5

-- 0.5

0.1

0.3

0.3

Operational action*

Holding

0.0

.0

.0

0.0

.0

.0

– 43.8

–256.2

–512.4

0.0

.0

.0

Disposal

2.3

– 87.3

– 87.3

16.6

157.7

157.7

35.9

5.0

5.0

– 0.1

0.3

0.3

Net benefits are $287 mllllons $-1104 milllons, and $-3665 mllllons for 05, 25, and 50 mlllwn ton stockpile, respectively

“Signs Indl[ J tr t h~ ilgn w h II h w{ h term sh~)l}ld h,]\ e w hw sllmrnlng t{) [ndl[ ,1 te net Iwnt,fl!s

Table V–26.—Summary of economic benefits and costs of SP–5 for second year of operation

(In Millions of dollars)

Types of benefit or cost

Producers. . . . . . . . . . . . . . .

Consumers. . . . . . . . . . . . . .

Operators. . . . . . . . . . . . .

External . . . . . . . . . . . . . . .

Size of stockpile

millions of tons

0.500

2.500

5.000

0.500

2.500

5.000

0.500

2.500

5.000

0.500

2.500

5.000

Acquisition

28.8

195.6

195.6

–10.7

–125.3

– 125.3

–0.5

–0.5

–0.5

0.1

0.3

0.3

Operational action*

Holding

0.0

0.0

0.0

0.0

0.0

0.0

–43.8

–256.2

–512.4

0.0

0.0

0.0

DisposaI

2.3

–87.3

–87.3

16,6

157.7

157.7

35.9

5.0

5.0

0.1

0.3

0.3

Net benefits are $28.7 millions, $–110.4 millions, and $-266.5 millions for 0.5, 2.5, and 5.0 million ton stockpile, respectively.

“S]gns I rid]{,,] te the slxn w h I( h edt. h term ~hould h~ VI* w hen summing tn Indl[.,] tt, net henef]ts

142
—

Chapter VI

MANAGEMENT AND INSTITUTIONAL

CONSIDERATIONS FOR

IMPLEMENTING AND OPERATING

AN ECONOMIC STOCKPILE

143
CHAPTER VI

MANAGEMENT AND INSTITUTIONAL

CONSIDERATIONS FOR

IMPLEMENTING AND OPERATING

AN ECONOMIC STOCKPILE

The decision regarding whether or not to implement an economic stockpile

as a national policy is an exceedingly complex process which includes both

domestic and international issues covering the full range of economic, social,

legal, and political variables. While the United States does maintain stockpiles for

strategic purposes, it is important to recognize that there is no direct experience in

the United States with economic stockpiling, particularly as to what impact such

governmental intervention may have on the marketplace or various public sectors. For these reasons, consideration has been given in this assessment to the entire decisionmaking process related to developing, implementing, and operating

an economic stockpile.

The decisionmaking process developed here (termed “Decision Criteria

Model”) provides a conceptual model for accomplishing four requirements: (a)

how to assess whether or not to stockpile certain materials for economic purposes,

(b) how to identify candidate materials and estimate the optimal quantity of those

materials to be stocked, as well as the timing of their acquisition and disposal, (c)

how to specify the functional nature of the stockpiled materials, and (d) how to

estimate the annual and projected budget costs required to operate the stockpile.

This chapter is a discussion of the pertinent considerations related to implementing and operating an economic stockpile, with particular attention to the

management and institutional options which should be analyzed in the development of stockpiling policies. The following sections are included:

●

●

●

Decision criteria—a model for ●

making decisions regarding an

economic stockpile;

Information requirements of an

economic stockpile;

Organizational options of an ●

economic stockpile;

Interrelationships of a n

economic stockpile with existing

US. and foreign stockpiles and

with other U.S. material s

policies; and

Budget implications of a n

economic stockpile.

145
CHAPTER VI

A. DECISION CRITERIA MODEL FOR DEVELOPING

IMPLEMENTlNG ECONOMIC STOCKPILE POLICY

1. Components of Decision Criteria Model

As discussed in chapter III, the Decision Criteria Model is composed of four components:

(a) Materials Selection Criteria, (b) Economic

Welfare Model, (c) Specification of Functional

Nature of Stockpile, and (d) Operating Cost

Model. The nature and purpose of the first two

of these components are developed and discussed in chapter IV; therefore, it only remains to explain their value from a management point of view. The last two components,

however, are presented in detail in subsequent

sections of this chapter.

The Materials Selection Criteria provide the

guidelines with which decisions can be made

as to which materials ought to be considered

for an economic stockpile. These decisions

would be made after a particular stockpiling

policy has been selected for implementation.

In turn, after the specific material or materials

have been identified, the Economic Welfare

Model provides the method by which the integral parts of a stockpile--optimal quantities

and timing of acquisition or disposal--an be

estimated by the management agency.

2. Specification of Functional Nature of

Stockpile

Having determined the manner in which

materials are selected for an economic

stockpile and the method by which decisions

are made as to the quantity and timing of acquisitions (or disposals) of those materials,

there is a need to consider the third component

of an economic stockpile—the Specification of

Its Functional Nature. A distinction is made

here between the management operations and

the specification of a particular stockpile. The

basic agency organization might not vary from

one stockpile to another and could be easily

adapted for administering two or mor e

stockpiles simultaneously. In contrast, the

functional nature of a stockpile could vary

146

greatly, depending upon the nature of the

policy objective and the particular characteristics of the materials involved.

Aside from the economic impacts, there are

certain political and social impacts which may

help determine the nature of an economic

stockpile. These may be either domestic or international, or both. The extent to which the

nature of a stockpile may affect such matters

as employment, the environment, materials

conservation, foreign policy, and foreign trade

should be considered, and consultation with

industry and with interested Government

agencies should be held accordingly.

Four major categories of requirements need

to be considered to specify the functional

nature of an economic stockpile:

●

●

●

●

Acquisition and disposal,

Time factors,

Form of material, and

Location and storage.

Some of these considerations relate to the type

of material stockpiled and the rate of acquisition or disposal, but they may be stated in

general terms in order to encompass various

contingencies. To a considerable extent, the

four categories are similar to those which have

been analyzed with respect to a defenseoriented stockpile, although the scope and

ramifications of an economic stockpile may be

broader and more involved. The history and

experience of the strategic stockpile can

nevertheless provide considerable insight as to

the direction of an economic stockpile and are

drawn upon in the following discussion.

a. Acquisition and Disposal.—Materials

acquisition may be from domestic or foreign

sources. For those stockpiles in which support

of domestic production or other domestic activity is not a factor, acquisition can be
achieved either through purchase or through

transfer of materials from the strategic/critical

materials stockpile, or by exchange for other

materials such as surplus agricultural commodities. For those stockpiles in which

domestic support is involved, acquisition

would have to be made through domestic

purchase. In order to do so, however, information required about the sources would include

such items as size, location, accessibility, types

of productive facilities, degree of nationalization (of foreign sources), possibilities and probabilities of import disruptions of any kind,

and quantities available in excess of normal

requirements of the sources. The kinds of

transportation facilities normally used, their

adequacy, alternative routes, and vulnerability

to disruptions by strikes are also factors for

consideration. Among domestic sources, there

may be questions of equitability among suppliers of various sizes, including small

businesses, as well as among suppliers in

various geographical locations. Seasonal variations in supply, substitutability of other

materials, and technological changes in production and consumption should also be taken

into account in specifying acquisitions and disposals.

Some of the factors mentioned above with

respect to acquisitions would apply also to disposals, e.g., location of recipients, availability

of transportation facilities, and equitability.

Those stockpiling policies aimed at solving

problems of indefinite duration, such as import/price disruptions or a scarcity of domestic

materials, would tend to involve less-frequent

disposals than those aimed at such problems of

limited or intermittent duration, as nonpolitical import disruptions, temporar y

surpluses/shortages, or instability in international markets. It is presumed that, if required,

stockpiles would be created in anticipation of

the problems and therefore far enough in advance of problem events like temporary

surpluses/shortages to provide the quantities

required in overcoming the difficulties. On

that basis acquisitions would tend to follow

domestic supply/import patterns and normal

transportation routes. Nevertheless, problems

could arise. For example, members of a potential cartel (bauxite, perhaps) could conceivably

withhold supplies in order to defeat the purposes of an anticartel stockpile. In that case,

shifts to other sources, including whatever

domestic sources may be available, would probably be difficult if not impossible,

Disposals would involve equitability of

allocations to domestic consumers, a potential

matter of concern for the agency administering

the stockpile. The allocation programs enacted

by the Federal Energy Administration demonstrate the public sensitivity to equitable distribution of supplies and the difficulties in obtaining adequate solutions.

Acquisitions and disposals may also be

affected by how such time factors as the duration of an emergency situation or the time required to obtain certain materials impact on

various stockpiles. This subject is discussed in

the following section.

b. Time Factors. Time factors which must be

considered prior to materials acquisitions and

disposals include: the duration of the materials

to be stored, the time to acquire materials, and

the time to make materials available to consumers. The duration of the materials

problem—i.e., whether it is temporary or of indefinite extent—will influence the need for and

the timing of acquisitions, as well as the total life

of the stockpile. A short-term supply disruption

may, for example, require consideration of

seasonal and regional variations. The duration

of the materials problem is related to the probability of its occurring within certain time

limits. The latter is in turn a factor in the decision criteria governing the quantity and timing

of stockpile actions.

The time needed to acquire materials may

depend on the availability of unused productive facilities in the United States and in

foreign supplying countries. This factor

emphasizes the importance of forward planning within the terms of normal production

cycles, The time needed to make materials

147

77-119 0-76-1 1
CHAPTER VI

available to consumers during stockpile disposals may vary with the type of stockpile

specified. Such short-term problems as nonpolitical supply disruptions would involve

more rapid movement to the usage site than

such long-term problems as cartel actions.

c. Form of Material.—In general, the form

of material specified should be at that stage of

processing which permits the widest application in end uses and which in effect stockpiles

significant inputs of time, labor, transportation, and energy. In the case of metals, the

basic refinery shape meets these criteria. The

stockpiling of metals in earlier stages, such as

ores or concentrates, would require further

processing in domestic plants before the

material can be used and could result in lost

time, especially in the case of short-term supply disruptions. Exceptions to this general

standard may occur, as in the case of ferroalloying materials. For these it may be

desirable to stockpile not only certain ferroalloys but also ores/concentrates to provide

some flexibility in the ferroalloys produced

domestically. At the other end of the production line, stockpiling of special alloys or of mill

shapes would demand a multitude of forms

whose characteristics vary as requirements

patterns change. In any event, technological

developments in production or consumption

could result in changes in the basic forms

stockpiled, such as through upgrading or

through exchanges.

Whether in metals or nonmetals, the type of

stockpile specified may dictate variations from

the standards described above. A short-term

stockpile may suggest more readily usable

forms than a long-term stockpile. In all cases,

the availability of U.S. processing facilities—

metal processors, petroleum refineries, etc.—

to convert materials into the forms needed by

consumers must be taken into account in the

specification of material forms.

d. Locations and Storage.—Location and

storage are also functions of the stockpiling

policy objective. For short-term supply disruptions, the location should be closer to normal

supply lines and to consumers’ plants than

that required to meet long-term problems.

Since stockpiles for any consumers could involve a large number of relatively small

stockpiles and a large number of storage

warehouses, tanks, etc., the practical alternatives may be locations close to transportation

facilities which would be accessible to several

users.

The method of storage specified will depend

upon the characteristics of the material involved, particularly its perishability. Protection against climatic elements may be desirable for some materials; protective packaging,

for others. The choice of warehouses, tanks, or

natural cavities will depend on the type of

material and on the availability and relative

costs of storage. Maintenance of the quality of

those materials with potential deterioration must likewise be considered. This could

require periodic review of materials status and

possible rotation, i.e., disposal prior to

deterioration and acquisition of an equivalent

amount of “fresh” materials.

B. INFORMATION REQUIREMENTS FOR AN ECONOMIC STOCKPILE

The Decision Criteria Model sets the

realistic and practical boundaries on how

much, and what kind of data and information

are required for economic stockpiling. Each of

the four components of the Decision Criteria

Model requires pertinent information which

must be refined through a combination of

manual and automated mechanisms from the

general mass of domestic and foreign data and

information. The second and fourth components are economic models which involve

simulation of specifically quantifiable conditions. The first and third components are

largely judgmental functions involving selec148
CHAPTER VI

tive decisionmaking by materials experts;

however, they are supported by automatic

mechanisms which manipulate huge quantities of data to produce the relevant and highly organized information subsets required by

the machine functions.

This section is a discussion of the information required to support the four components

of the Decision Criteria Model discussed

above; therefore, it contains data elements of

three levels: (1) general information to support

the methodology of any stockpiling policy, (2)

unique or specific data elements applicable to

a particular policy, and (3) unique data elements applicable to a particular material under

consideration for a given policy.

1. General Information Requirements

Once a policy objective is defined, analysis

must be conducted as to what materials to

stockpile and the economic benefits of doing

so. The Materials Selection Criteria are

guidelines which materials experts can use to

scrutinize the data and information available

to them and identify those materials most

directly relevant to the problems which an

economic stockpile could alleviate. Calculations are then made to estimate the net

economic benefits of stockpiling thes e

Problem-Related Materials.

Two operations are needed to support these

materials experts: (1) a technical information

center where all hardcopy documentation

relevant to stockpiling can be analyzed,

classified, and then grouped into materials

categories; and (2) a computer-support facility

where a large number of automated data bases

may be scanned.

a. Materials Selection Criteria.—The

materials selection criteria utilized to select a

group of materials to satisfy a particular

stockpile policy consists of two or more questions applicable to each material, Table VI-1 is

a matrix which contains five rows corresponding to the five stockpiling policies. The 12 columns contain the selection criteria which

should be asked to determine whether or not a

material is related to the problem which the

policy is designed to solve. The marked intersections on the matrix indicate the questions

which are applied to any material for that

stockpiling policy.

Any of the 12 indicated questions as applied

to a material and a specific stockpiling policy

is highly subjective and requires considerable

information to support the decision process.

From the point of view of information requirements, the sum total of information available

from literature, interviews, relevance trees,

and human experience is required to determine whether or not a specific material passes

the initial selection test for a particular policy

and should therefore be analyzed with the

economic welfare model.

For example, in “high degree of import dependence, ” how high must the import dependence be for a material to be selected, how is

that number quantified, and what information

is required to derive the number? Similar

questions can be asked of each selection criteria. In each case, if the quantified number is

increased (or decreased), additional materials

will be rejected (or accepted) from the list for

any policy. Of course, some of these materials

may be rejected later through application of

the cost/benefit functions in the economic

welfare model.

It should be possible to establish a quantifiable relationship between data concerning activities related to a selected material and the

materials selection criteria related to a particular stockpiling policy. However, care must be

taken to assure that the number of subjective

assumptions necessary to quantify that relationship does not produce an answer of less

validity than a direct subjective estimate made

by experts.

b. Economic Welfare Model .—Th e

economic welfare model is based on determining the costs and benefits of stocking specific

materials to achieve a policy objective. Since

cost and benefit functions can be specified in a

quantitative form, it is logical to assume that

data items (numbers) can be assigned to each

149
CHAPTER VI

x

x

x

x

x

x

x

x

x

x

x x

x x x x x

ei C6 U5

150
CHAPTER VI

element in the cost/benefit functions. These

items may not be easily derived, however, and

may require the development of some quantitative data through subjective reasoning.

The cost function has been defined to consist of the external cost (EC), the holding cost

(HC), and the loss in domestic consumer

surplus (LCS). The significant data items

which are required for computation of the cost

function (dollars versus quantity) can be listed

as follows.

●

●

●

●

●

●

●

●

●

●

●

●

●

●

Storage and administrative cost in $/unit

Rate of stock loss in units/time

Interest rate in percent per annum (or

other)

Unit cost of stocks in $

Fixed costs for initialization of the

stockpile in $

Stockpile size in units

U.S. supply at price P

Supply elasticity

U.S. demand at price P

Demand elasticity

Equilibrium price (world) in $

World price elasticity

Damage and spoilage storage costs in

$/unit or $/time

Loss in consumer surplus costs in $

Indirect cost in $

These cost items can be established for each

stockpiling policy, and they are different for

each material, Time also causes a change in

the costs and must be taken into account.

The benefit functions are unique to each

stockpiling policy and consist of summations

of quantified benefits arrived at through solution of individual benefit equations. These

equations, in turn, consist of elements for

which quantitative data must be determined,

c. Specification of Functional Nature of

Stockpile.—The nature of a stockpile has been

discussed as consisting of seven main categories: administration and control, acquisition,

disposal, form, location, storage, and rotation.

The administration and control of all

stockpiles will be similar and can be considered as general to all policies. The information required for administration and control

will include detailed and timely data to allow

analysis, policy decision, operations, and

monitoring,

Table VI–Z contains the seven categories of

information and indicates the required information element for each. These information

elements are general and should be determined for each stockpiling policy and specific

material.

2. Unique Information Requirements

As discussed in an earlier section, the data

requirements for the materials selection criteria, the functional nature, and the cost functions of the decision criteria are fairly general

and apply to all stockpiling policies. The information elements for developing the benefit

functions are specific to each stockpiling

policy and will be discussed here.

Table VI–3 contains a summary matrix of

the specific data items which are required (for

each material) in order to calculate the benefit

functions for each stockpiling policy. This table illustrates the similarity of data items for

SP-1, –2, –3, -4, and –5. Further discussion of

these data items can be found in chapter V.

3. Requirements for a

Materials Information System

The required Materials Information System

(MIS) consists of a manual and an automated

segment.

The manual segment of the MIS consists o f

a physical library or “hardcopy” data base and

manually applied formulae, procedures, and

methodology. The data base is developed

through the information gathering and

151
—.

CHAPTER VI

Table VI–2.—Information elements required for specifications categories

User location. . . . . . . . . . . . . . . . . . .

Financing costs. . . . . . . . . . . . . . . . .

Operating costs. . . . . . . . . . . . . . . . .

Materials pricing . . . . . . . . . . . . . . .

Distribution costs . . . . . . . . . . . . . . .

Storage costs... . . . . . . . ........4

Import/export regulations. . . . . . . .

Storage locations . . . . . . . . . . . . . . .

Storage forms.. . . . . . . . . . . . . . . . .

Storage quantities . . . . . . . . . . . . . .

Storage life . . . . . . . . . . . . . . . . . . . .

Material sources. . . . . . . . . . . . . . . .

Material users.... . . . . . . . . . . . . . .

Supply lines/distribution . . . . . . . .

Local and national laws . . . . . . . . .

Other stockpiles (transfers) . . . . . .

Quantities available . . . . . . . . . . . . .

Potential supply disruptions . . . . .

Seasonal supply variations . . . . . .

Time to acquire . . . . . . . . . . . . . . . .

Imported suppliers . . . . . . . . . . . . . .

Domestic suppliers . . . . . . . . . . . . .

Transportation vulnerability . . . . .

Availability timing . . . . . . . . . . . . .

User demand fluctuation . . . . . . . .

Stockpile duration . . . . . . . . . . . . . .

User equitability . . . . . . . . . . . . . . .

..,.

. . . .

...,

x

. . . .

. . . .

x

...,

x

x

. . . .

x

. . . .

x

..,.

x

x

x

x

x

x

x

x

. . . .

. . . .

. . . .

..,.

. . . .

.,..

. . . .

.,,.

x

.,..

.,.,

. . . .

,,,.

. . . .

. . . .

,...

x

x

. . . .

x

x

x

x

...,

. . . .

,...

x

x

. . . .

x

x

1

x

x

x

x

x

x

x

x

x

. . .

x

,,.,

. . . .

,...

. . . .

. . . .

,.,.

x

..,.

,,,.

,...

. . . .

. . . .

x

.,,.

. . . .

,,..

,,,,

,,..

. . . .

...,

..,,

x

. . . .

.,..

. . . .

. . . .

Table VI–3.—Specific data items required for stockpile policies

Stockpile po

.,..

. . . .

. . . .

,,..

x

x

x

x

. . . .

. . . .

...,

. . . .

.,..

x

. . . .

. . . .

. . . .

4

,...

. . . .

..,.

. . . .

. . . .

..,,

.,.,

. . . .

. . . .

.,..

. . . .

.,..

. . . .

,,,.

. . . .

. . . .

..,,

. . . .

,...

,...

..,.

. . . .

. . . .

x

. . . .

. . . .

x

x

x

. . . .

. . . .

. . . .

,...

. . . .

...,

.,..

,,..

. . . .

. . . .

,...

. . . .

,...

. . . .

,...

. . . .

*

—

. . . .

. . . .

. . . .

,...

. . . .

. . . .

. . . .

. . . .

...,

,,.,

x

.,.,

. . . .

. . . .

..,.

...,

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

,.,.

x

x

. . . .

x

Specific data items

r =Risk aversion faCtOr

D=Damage of the action without stockpiling

D’=Damage counteracted with the stockpile

P =Probability of the action without stockpiling

P’=Probability of the action when a stockpile exists

i =The % import disruption

k =The duration of the disruption in months

S'ik =Supply when the action occurs without stockpiling

s,ijk =Producer supply with disposal of the stockpile

152
CHAPTER VI

Table VI–3 Specific data items required for stockpile policies—continued

1

x

x

x

x

x

,., .

.,, .

. . . .

. . .

.., .

. . . .

. . . .

. . . .

. . . .

. . . .

.,. .

. . . .

.,. .

,,. .

. . . .

,.. .

. . . .

.,. ,

. . . .

. . . .

,., ,

.,. .

.,. .

. . . .

. . . .

. . . .

. . . .

. . . .

Stockpile policy

2

x

x

x

x

x

x

x

,.. .

. . . .

. . .

,., .

. . . .

.., .

. . . .

. . . .

.., .

. . . .

. . . .

. . . .

,.. .

,., .

. . . .

. . . .

. . . .

.., ,

. . . .

. . . .

.4, .

,.. .

. . . .

,,. .

. . . .

.,. ,

.—

3

. . . .

,,, .

. . . .

. . . .

.., .

. . . .

.., .

. . . .

. . . .

. . . .

. . . .

x

.., ,

. . . .

. . . .

.., .

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

4

. . . .

. . . .

. . . .

. . . .

.,. .

.,. .

. . . . x

x

x

x

,.. .

x

x

x

x

.., .

. . . .

. . . .

. . . .

. . . .

,.. .

.., .

. . . .

,.. ,

... ,

.,. ,

... ,

,.. .

... ,

.,. .

... ,

. . . .

5

.,. ,

. .

,,. .

... ,

.,. ,

... ,

... ,

.,. .

. . . .

,,, ,

. . . .

x

.,, .

. . . .

.., .

.,. .

x

x

x

x

x

x

x

x

x

x

x

x

x

x

. . .

. . . .

. . . .

Specific data items

p'ik ‘price when the action occurs without stockpiling

p’ilk ‘price With disposal of the stockpile

d'ik =Demand when the action occurs without stockpiling

d’ijk =Demand with disposal of the stockpile

EDijk =External costs saved by the disposal of the

stockpile

D'ijk =Damage offset by stockpile j

Pik =Probability of the interruption occurring

PO =Price in current time period without stockpile acquisition

P~j =Price in current time period with acquisition of

stockpile j

Pt =Price in future time period without stockpile disposal

P'tj =Price in future time period with disposal of

stockpile j

t =Portion of surplus-shortage cycle occurring in the

coming time period

tf =Time horizon; years between current time and

future time

Qoj =Size of stockpile j accumulated in current time

period

Qtj =Size of stockpile j disposed in future time period

EDtj =External damages saved in future time period

with disposal of stockpile j

CSj =Increase in consumer surplus

ACj =Decrease in average production

EDj =External damage-external costs saved

cpj =Unit cost of production saved by stabilization due

to stockpiling

Sa =Domestic production of material over the entire

cycle

g =Fraction reflecting distribution of prices over

fluctuation range

ph =High price without stockpile

phj =High price with disposal of stockpile j

pi =LOW price without stockpile

plj =Low price with acquisition of stockpile j

dh =High demand without stockpile

d'hj =High demand with disposal of stockpile j

dl =Low demand without stockpile

d'lj =Low demand with acquisition of stockpile j

PBj =Political benefits

f =Fraction of stockpile costs obligated by the U.S.

cj =Cost of stockpile j obligated by the U.S.

153
CHAPTER VI

cataloging of (1) literature, (2) interviews, (3)

relevance trees, and

automated segment of

automated data base,

capability, automated

generation,

(4) bibliography. The

the MIS consists of an

storage and retrieval

analysis, and report

a. Manual Segment.—The “hardcopy” data

base can be utilized in conjunction with

manual techniques to perform the analysis of

stockpiling policies through application of the

Materials Selection Criteria, description of the

nature of the stockpiles, assessment of the impacts and issues, and development of the final

stockpile specification,

b. Automated Segment.—The automated

data base, MIS storage and retrieval capability,

automated analysis, and report generation

capabilities can be used for

●

●

●

Figure

Modeling and futures analysis,

Automated cost/benefit analysis, and

Automated materials stockpil e

management reporting.

VI–1 illustrates the Materials Information System.

Figure VI-I.

Materials Information System

I

MIS Requirements I

1 I

I I

I 1

Manual

Segment

Hard Copy Assessment

Data Base Methodology

Catalogs Data Formulae

\

r / / -

\

I

\

, ,// =

\ 1 ,

\

I / p- - Procedures

1

w

1 1 / /

‘ ///

J & L

\ /

w

\ /

d

. Materials Select Ion Crlterla

. Natur e

. Impacts and Issue s

●

9

I Automated [

I

Decision Criteria

Management Reports

154
c. MIS Implementation.—The implementation of the automated segment of the Materials

Information System is illustrated in figure

VI–2,

Once the MIS requirements and data requirements have been developed, the next

step is to develop the Detailed MIS specification, to include

. Hardware,

● Software, and

● System capabilities.

The detailed data specification must be

developed to include

. Specific data items,

● Source, and

● Update frequency.

Figure VI-2.

Automated MIS Implementation

Develop MIS Develop Data

Requirements/Speclflcatlon Requirements/Speclftcatlon

.

Develop MIS

● Automated Materials Reporting

● Data Storage and Retrieval

. Cost/Benefit Analysis

● Operations

. POIICy Decisions

. Information Analysis

● Cost Reporting

Acquire, Validate,

Convert Data and

Store In Data Base

\ ‘

CHAPTER VI

The MIS system must be implemented to include

●

●

●

●

●

●

●

Automated materials reporting,

Data storage and retrieval,

Cost/benefit analysis,

Operations status reporting,

Policy Decision Reporting,

Information analysis, and

Cost reporting.

The data base can be implemented by acquisition, validation, conversion, storage of data,

and update and maintenance of the data.

4. Conclusions Regarding Information

Requirements

In terms of any given material being considered for stockpiling action, specific information is required for each of the special

physical, geographic, technological, economic,

social, political, historical, and forecasting

characteristics of modes of production, processing, transportation, marketing, consumption, conservation, storage, disposal, and cyclic

reutilization.

The detailed materials information system

should include: (1) a system specification and

(2) data specification. An effort should be

begun to acquire, validate, and catalog all required data elements to support an economic

stockpile if and when it is implemented. In the

act establishing the National Commission on

Supplies and Shortages, the Congress listed

two items which pinpoint explicit inabilities of

the United States to coordinate, transfer, and

Maintain and manage data and information. To identify

Update Data Base these specific information elements is a task

which has not yet been done; however, the

Office of Technology Assessment is currently

conducting an assessment of Materials Information Systems.

155
— — — —

CHAPTER VI

C. ORGANIZATIONAL OPTIONS FOR ESTABLISHING

AN ECONOMIC STOCKPILE

The success of an economic stockpiling

program could depend in large part on the type

of organization established to administer it,

especially its ability to operate independently

in the national interest, free of influence by

special groups, whether inside or outside

Government. To a considerable extent, the

history of the strategic stockpile has been one

of diverse pressures imposed from several

directions—the executive branch, legislative

branch, producing industries, and consuming

industries. Not uncommonly, the interests of

the latter two groups were reflected in those of

the first two, and there is no reason to expect

that an economic stockpile might far e

differently, unless there is a concerted effort to

avoid such situations.

1. Safeguards Against Stockpile Abuse

A primary concern is the need to establish

safeguards which would minimize if not eliminate politically based decisions. A stockpile

authority independent of both the executive

and legislative branches of the Government

may be desirable for this purpose. The

stockpile authority should be flexible enough

to manage any type of stockpile or combination of stockpiles with a minimum of adjustments. Depending upon its legislative mandate, for example, an economic stockpile could

be in any of the several institutional arrangements discussed in chapter VIII.

2. Control of Economic Stockpile

Regardless of how it is organized, the matter

of how an economic stockpile will be controlled is a factor which could determine its

success or failure as a national policy.

Stockpile control is important for several

reasons, among which are maintaining an accurate inventory status, preventing theft or

other types of stockpile losses, and insuring

that the stockpile is specified in the most suitable manner in terms of material acquisition

and disposal,

The principal decision regarding stockpile

control is whether or not Congress should

regularly approve stockpiling actions or leave

those day-to-day operations to the stockpile

agency (wherever it is located) and exercise

control through annual or semiannual oversight, Regardless of whether Congress opts for

direct, operational control or general oversight, an economic stockpile will have to be

carefully coordinated within the Federal

Government so as not to work at cross-purposes with other national or international

programs, Moreover, some decision will have

to be made regarding whether or not, how, and

to what degree stockpiling operations need to

be insulated from the political uses of the

stockpile to serve special-interest groups, As

pointed out in chapter II, the ramifications of a

national economic stockpile are so enormous

and so attractive that one can expect great

pressure to be exerted on the agency responsible for material acquisition and disposal,

Obviously, responsibility for the broad

policy direction and oversight is lodged with

Congress and, as indicated in chapter VIII,

should be incorporated into basic legislation

establishing the economic stockpile. It is

noteworthy that the Stockpiling Act of 1946

made Congress a key part of the operational

procedure with absolute veto power over disposals, On the other hand, the legislation is

silent about the policy decisions or judgments

which led to the calculation of surpluses

which could then be disposed, Such an omission could be fatal to any proposed legislation

establishing an economic stockpile. Congressional power over appropriations eliminates

any parallel problems with respect to acquisition programs.

Another lesson to be learned from the

strategic stockpile experience is the need for

156
more expeditious action by Congress with

respect to agency disposal plans. Delays of

weeks, even months, in completing hearings

and taking action regarding the strategic

stockpile were not uncommon, While this may

be the normal and expected procedure, it

should be realized that an economic stockpile

will have to react much faster than the

strategic stockpile in meeting supply disruptions and price increases, With prices and

market conditions changing at an increasingly

rapid pace, an extension in stockpiling action

could well obviate the mandated purpose of

the stockpile. Economic stockpiling is a temporary solution to certain materials problems,

thus the ability to act swiftly in overcoming

these problems is a factor which should not be

overlooked or minimized.

3. Organizational Capabilities

The structure of an administering agency

designed to achieve the goals described above

could have three organizational capabilities,

These capabilities are as follows:

a.

b,

c.

In

A central agency responsible for overall

direction of the program, policy formulation, and congressional relations;

An organization possessing computer

resources; and

An organization responsible for day to

day operations such as acquisition, disposal, storage, etc.

addition, there could be professional and

support staff in each of the Government agencies with responsibilities related to or affected

by the economic stockpile program.

The experience of the strategic stockpile

program in the above activities under the

Office of Emergency Preparedness (OEP) is

enlightening .

1 The first activity was performed for the strategic stockpile program by

OEP itself. Since that agency was responsible

for a large number of different programs, a

substantial number of staff members devoted

CHAPTER VI

time to more than one program. However, that

agency did have a stockpile policy division

which was almost exclusively concerned with

the strategic stockpile, Additionally, considerable attention was paid to stockpile matters by members of the Director’s Office, the

Assistant Director’s Office with his assignment, and the planning staff. Together, it is

estimated that perhaps 20 man-years per annum were devoted to the stockpile program in

OEP proper.

In addition to regular professional staff,

OEP, through the Assistant Director for

Resource Analysis, provided direction and

control over the Mathematics Computation

Laboratory (MCL) of the Corps of Engineers,

This group had a staff of about 110 persons, including programmers, systems analysts,

economists, etc. The unit possessed a Univac

1108 and a full complement of peripheral

equipment. Perhaps 20 to 25 percent of the

total effort was expended to support the

stockpile program in a continuing effort to update data banks, improve analytic techniques,

keep stockpile objectives current, and the like,

Work on the stockpile program was also

performed in the Federal agencies with

responsibilities affected by the program. OEP

transferred almost $2 million a years to other

agencies for work on defense planning.

Almost one-half was transferred to the Business and Defense Services Administration

(now Bureau of Domestic Commerce) of the

Department of Commerce, which played a

large role in developing material supply estimates and requirements for the civilian (including industrial) economy. With the major

contribution coming from Interior and Commerce (State and Defense to a lesser degree), it

is estimated that 30 man-years were invested

in the stockpile program by Federal agencies

other than OEP.

IOEP became OP (Office of Preparedness) in 1973. Its functions were transferred to the General Services Administration in

1973; and it is now known as the Federal Preparedness Agency

(FPA).

219GS-PI) Condjtjons in terms of salaries, etc.

157
CHAPTER VI

D. INTERRELATIONSHIP OF AN ECONOMIC STOCKPILE

MATERIALS

An economic stockpile cannot be operated

in a vacuum without reference to the environment in which it exists. That environment includes the following real or potential factors:

(I) implementing one or more stockpiling

policies simultaneously; (2) existing U.S. national stockpiles, including the strategic

stockpile; (3) foreign national stockpiles; (4)

international stockpiles; (5) other U.S.

materials policies; and the entire fabric of

foreign economic policy. In the context of implementing and operating an economi c

stockpile, the managing agency should consider the complex interrelationships with

these various factors and their effects on such

things as benefits, costs, materials availability,

the American consumer, and foreign relations.

1. Implementing Multiple Stockpiling Policies

The analysis of the five stockpiling policies

has been conducted as though each policy

were totally independent of the other four;

however, as a practical matter this independence probably would not exist. It is quite

possible that a stockpile dealing with import

disruptions resulting from cartel and cartellike actions (SP–1) would be implemented

simultaneously with a stockpile dealing with

temporary, nonpolitical import disruptions

(SP-2). Moreover, a stockpile designed to

achieve domestic market stability (SP-5) could

be implemented along with one designed to

achieve international market stability. For that

matter, any combination of two or more of the

five stockpiles could be simultaneously implemented as appropriate to meet the various

policy objectives.

The problems of instituting or operating two

or more stockpiles simultaneously would not

necessarily be additive in scope or difficulty.

Depending upon specific policies involved,

there may be a considerable degree of commonality in various aspects of the specified

stockpiles, e.g., the form of the materials.

WITH OTHER

Furthermore, the net result of acquisition or

disposal decisions and actions could preclude

the necessity for several such independent actions for the same material.

Interrelationships in the simultaneous

operation of multiple economic stockpiling

policies will be briefly discussed in the following categories:

. Administration,

● Materials and Budget Costs,

● Economic Welfare Model,

● Stockpile Nature, and

. Information Requirements.

a. Administration.—The administrative

aspects of an economic stockpile probably provide the greatest degree of commonality

among a combination of stockpiles. A single

agency, with increments of personnel as

needed, should be able to manage any number

of stockpiles. The creation of a single administrative agency which is established to acquire, hold, and release materials in response

to specific stockpiling policies under a strict

set of regulations may be required to preclude

impacts on the U.S. economy which outweigh

the benefits of economic stockpiling.

b. Materials and Budget Costs.—As indicated above, the same materials may be

stockpiled for more than one policy objective.

For example, out of the total of 33 materials

being considered for 1 or more stockpiles, 16

are involved in at least 2 stockpiles (2 in 4

different stockpiles, 4 in 3 stockpiles, and 10 in

2 stockpiles). See chapter III, table 111-4, for a

display of these materials.

Acquisition costs and other costs of two or

more stockpiles operated simultaneously will

vary by material and the quantities needed.

Where a certain quantity of a particular

material serves more than one stockpiling ob158
CHAPTER VI

jective, the acquisition costs and related costs

are reduced in proportion. Savings in administrative and management costs will be

limited by the degree of overlapping of function.

c. Economic Welfare Model.—Because

each Economic Welfare Model applies to

a specific stockpiling policy, individual determinations based on these models must be

made separately, However, all policy development should consider the most efficient

method of arriving at the net effect of several

simultaneous, or nearly simultaneous, actions,

taking into account the interrelationships of

their economic, social, political, and legal impacts.

d. Stockpile Nature.—The form in which a

specific material should be stockpiled, the

method of acquisition (by purchase, transfer,

or exchange), the method of disposal, the timing of acquisitions and disposals, the method

of storage, the location, and the degree of rotation may or may not differ among stockpiling

policies. A high degree of commonality of

these elements would, of course, limit the

problems in specifying multiple stockpiling

policies.

e. Information Requirements.—Information requirements will tend to be similar for

more than one stockpile, In fact, some information needs may be common to all of the five

policies.

f. Summary.—The potential is large for

achieving the objectives of two or more

economic stockpiling policies simultaneously

with a minimum of duplicate effort and duplicate burden on the economy. Arriving at the

most effective and most efficient stockpile

wouId have to be the responsibility of an administrative agency operating withi n

established ground rules, taking into account

all relevant factors and the net effects of

several simultaneous or nearly simultaneous

actions.

2. Existing U.S. National Stockpiles

The United States maintains severa l

stockpiles for strategic purposes, each acquired under a different legislative authority,

One is the national stockpile acquired in the

open market, under the authority of the

Stockpiling Act of 1946. The second is the

Defense Production Act inventory which,

under the Defense Production Act of 1950, was

accumulated through the acquisition of

generally premium-priced materials

purchased as an incentive to expand production. As permitted by the Defense Production

Act, these materials can be released by the

Director of OEP at any time without legislative

approval, but they cannot be sold at less than

market price. The third stockpile is the Supplemental Stockpile, consisting of an inventory of materials acquired as the result of

barter of agricultural surpluses for strategic

materials, under the authority of th e

Agricultural Trade Development and Assistance Act of 1954. By statute, the release and

disposal of these materials is governed by the

provisions of the Stockpiling Act.

Notwithstanding the fact that materials

have been acquired under three separate

authorities, and placed in three separate inventories, all materials of specification grade

are credited to the strategic stockpile objectives. Furthermore, they are all drawn upon as

necessary in developing a strategic distribution of the materials in storage areas adjacent

to points of consumption but out of target

areas. Material reserves in the strategic

stockpile are based upon the defined length of

a possible war. In 1944, this was defined to be 5

years; in 1958, it was reduced to 3 years; and in

1959 the “Six-Month Rule” was adopted under

which the maximum objective was to be not

less than 6 months use by U.S. industry during

periods of active demand. Until 1962, the inventories and objectives of these stockpiles

were classified and were closely guarded

secrets. In addition to these, there are special

stockpiles such as the Energy Research and

Development Administration (ERDA)

stockpiles and the Naval Petroleum Reserves.

1 5 9
CHAPTER VI

The analysis in this assessment has shown

that whether or not it was intended, the

strategic stockpile has created effects beyond

its intended purpose and its legislative mandate. Furthermore, in periods of high industrial demand the strategic stockpile has increasingly been subjected to demands from industry for release of materials in short supply.

The redefining of the length of the war has

continually resulted in materials being

declared surplus and available for disposal.

For material to be sold from the strategic

stockpile, it must be both declared surplus and

approved by Congress. The revenue from the

materials sales reverts to the Treasury for

general use.

The strategic stockpile has been the subject

of various governmental studies, including

those by the Federal Preparedness Agency and

the General Accounting Office. The National

Security Council is currently conducting an interagency study on the operation of the

strategic and critical materials stockpiles.

While the content of this study has not been

released, it may result in a directive to revise

the guidelines and objectives governing the

strategic stockpile program. Possible changes

could include a better resolution of the

problem of meeting stockpile objectives in a

timely fashion without significantly affecting

domestic or international markets. Another

possible change is an extension of the definition of national emergencies to include periods

of severe supply disruptions, whether or not

they are related to wartime conditions. The

feasibility of combining one or more economic

stockpiles with existing stockpiles must be

weighed against the advantages and disadvantages of entirely separate systems, taking into

account their various goals and ramifications.

3. Foreign National Stockpiles

The same threats of supply disruptions of

foreign source materials which could seriously

affect the United States can also damage the

economies of other nations. Many countries

are more foreign source material dependent

than the United States and have planned

160

and/or initiated economic stockpiles or variations thereof as a form of self-protection. The

U.S. Government must consider the implications of such developments in foreign countries in arriving at an economic stockpiling

policy for this country. A detailed analysis of

economic stockpiling in selected countries is

presented in appendix c.

4. International Stockpiles

International stockpiles may have more significant impacts on U.S. policy than would individual foreign stockpiles. International

stockpiles would likely be related to international commodity agreements, and the number

of countries and materials would probably be

larger than for foreign national stockpiles.

The international tin buffer stocks, as part

of the International Tin Agreement (which the

United States has recently signed and submitted to the U.S. Senate for advice and consent to

ratification), is an existing example of an international stockpile. This agreement is described

in detail in chapter VII.

The possibilities of economic cooperation

and of market and price stabilization (or

manipulation) among producers, consumers,

or combinations of both in the application of

international stockpiles could be extensive in

scope and effect. In this assessment, such a

stockpile is considered an alternative arrangement to a national stockpile. U.S. participation

in the management of such a stockpile would

be but one consideration of the economic,

legal, and political aspects of international

stockpiles.

5. Other U.S. Materials Policies

National materials policy encompasses the

total range of public and private decisions

which impinge on the supply and demand of

all types of materials. Materials policy has

been the subject of many discussions and

studies, including that by the National Commission on Materials Policy, whose report was

published in June 1973. It has also been a sub-
CHAPTER VI

ject of concern by Congress as discussed in

chapter I.

One significant aspect of national materials

policy was set forth in the Mining and

Minerals Policy Act of 1970, The act states that

it is the continuing policy of the Federal

Government in the national interest to foster

and encourage private enterprise in (1) the

development of economically sound and stable

domestic mining, minerals, metal, and mineral

reclamation industries; (z) the orderly and

economic development of domestic mineral

resources, reserves, and reclamation of metals

and minerals to help assure satisfaction of industrial, security, and environmental needs;

(3) mining , mineral, and metallurgica l

research, including the natural and reclaimable mineral resources; and (4) the study and

development of methods for the disposal, control, and reclamation of minerals waste products and mined land, in order to lessen any

adverse impact of mineral extraction and processing upon the physical environment which

may result from mining or mineral activities,

Economic stockpiling policy development

should be considered as part of a national

strategy for combating materials supply and

price problems, and such development should

be coordinated among the responsible governmental, industrial, and public agencies,

E. BUDGET IMPLICATIONS OF AN ECONOMIC STOCKPILE

As one component of the Decision Criteria,

the Economic Welfare Model takes into account the overall economic benefits and

costs-both gross and net—applicable to a

specific economic stockpiling policy. Some of

the cost elements in this model are likewise

components of the Operating Cost Model.

However, the latter is used not to help arrive

at a measure of the net economic benefits to

society, but rather to estimate the out-ofpocket costs which, as budget outlays, are of

concern to the stockpile operator, namely, the

Federal Government. One fundamenta l

difference between the Economic Welfare

Model and the Operating Cost Model is the inclusion in the latter of the capital required for

the acquisition of material for a stockpile. The

Economic Welfare Model, on the other hand,

neutralizes this cost as offset by the value of

the stockpiled material.

Budget costs are incurred during each

operational phase of an economic stockpile:

the acquisition, holding, and disposal phases.

Such costs for a particular stockpile might be

as large or even larger than the economic costs

of the stockpile. The exact size of such operations will depend on the precise objectives and

timing of implementations in relation to the

existing U.S. and world situation,

1. Method of Financing an Economic Stockpile

Acquisition and disposal transactions can be

dealt with in several ways in the fiscal system,

Congress can authorize the outlays for acquisition, either open ended or up to some predetermined limit, permitting it to be financed by

borrowings from the Treasury to be repaid

from appropriations after the fact. Or an independent corporation might be set up with

nominal capitalization and authority to borrow

for its current needs. Either of these methods

essentially bypasses the budget-appropriations

process and may allow the stockpile managers

limited or unlimited freedom to roll over the

funds in selling and buying, with little or no

fiscal control. There are ample precedents for

both.

An alternative is to keep the acquisition/disposal financing within the normal

budget-appropriation process, appropriating

funds each year against budget estimates or

prospective acquisitions and disposals. In this

way the stockpile operation can be kept within

161
CHAPTER VI

budget limitations and be subject to congressional and executive fiscal control. Admittedly, this alternative presents problems of anticipation and flexibility which the other

alternatives avoid by more open-ended arrangements. It requires that stockpil e

managers, acting pursuant to authorizations

under stockpiling legislation for specified purposes (as represented by the several stockpiling policies), present to the Office of Management and Budget (OMB) annual estimates of

their prospective budgetary requirements for

acquisition and disposal to be included in the

budget and subject to appropriations legislation. Thus stockpile managers will be required

to account for their activities, past and

prospective, in defining their budget requests

both to OMB and Congress. The necessary

flexibility might be achieved by an appropriation of an uncommitted revolving fund which,

in combination with multiyear appropriations,

would enable the stockpile managers to respond quickly to contingencies or market situations. The revolving fund could be restored

after the fact by regular or, if necessary, supplemental appropriations. On the other hand,

proceeds from stockpile disposals, except

perhaps those generated by price stabilization

actions, would not be available for a revolving

fund. These would be treated as offsets in

determining amounts to be budgeted and appropriated.

2. Discussion of Operating Cost Model

This section describes the Operating Cost

Model which can be used to estimate the

operating costs for an economic stockpile.

Following a discussion of the model, illustrative calculations are made for each of the five

stockpiling policies, using the same materials

previously used in the impacts analysis to

specify the functional nature of the stockpiles

for each of the stockpiling policies, For illustrative purposes, it is assumed that each of

these stockpiles would be implemented

separately.

a. Operating Cost Equation.—The basic

operating cost equation consists of adding the

162

initialization cost, the acquisition cost, the

holding cost, and the disposal cost, then

subtracting from that the capital gains so that

OC = IC + AC + HC + DC - CG (26)

where

IC (Initialization Cost) = C + CiQ =

f

Fixed cost of initialization +

( variable uni t

cost of initialization x stockpile

size)

AC (Acquisition Cost)= CUQ

= Unit cost X size

HC (Holding Cost)

DC (Disposal Cost) =

CG (Capital Gain) =

of acquisition =

(S + dcu +

icu

) Q

[

Storage and administrative cost

per unit + (rate

of stock loSS X

unit cost) + (interest rate X

unit cost]

x stockpile

size

CdQ d1=

Unit cost of disposal X size of

disposal

Q dp

] - Qap2 =

(Size of disposal

X unit price of

disposal) - (size

of acquisition X

unit price of acquisition)

Each element in equation will vary from

policy to policy and from material to material.

In addition to the quantities of materials and

the timing involved in acquisition and disposal

which are determined using the Economic

Welfare Model, the operating cost model includes

●

the following considerations:

Acquisition sources,

Form of material,

Location,
CHAPTER VI

. Storage, and

. Rotation,

For a detailed discussion of the above considerations, see section A(z) of this chapter.

b. Administrative Costs.—These will be

virtually the same regardless of how many

materials are included in the stockpile. The

administrative organization should be so structured as to include the following elements: information gathering, information analysis,

policy decisions, and operations. It is estimated that annual administrative costs

economic stockpile would be $500,000.

3. Estimation of Operating Costs

This section describes the factors

for an

in the

Operating Cost Model and presents calculations for each of the stockpiling policies. The

quantity of material used and the options

selected for each of the factors in the calculations used to specify the stockpile nature were

selected by materials experts as being reasonable approaches. These calculations should not

be taken as definitive, but rather as illustrative

of the method of calculating the operating

costs of an economic stockpile.

a. SP–1: Discourage or Counteract Cartel

or Unilateral Political Actions Affecting

Price or Supply.

(1)

(2)

(3)

Stockpile of l/z billion barrels Of

petroleum.

Acquisition sources.—Although there

has been some discussion about bartering wheat or other surplus agricultural

products for petroleum, it is assumed

that acquisition would be by direct

purchase, partly from foreign sources

and partly from domestic sources.

Form of material.—This stockpile may

consist wholly of crude oil, wholly of

petroleum products, or of a combination

of the two. In turn, petroleum products

may be entirely of one specific type, for

(4)

(5)

(6)

(7)

example, gasoline of a

rating or of a mixture of

certain octane

many products

in innumerable combinations. For the

purpose of this stockpile it is assumed

that only crude petroleum would be inventoried, as the basic refinery feed

stock from which all petroleum products could be derived for specific applications. Assuming a mixture of both

foreign and domestic crude, it would be

such as to pose an average acquisition

price of $10.30 per barrel, including an

increase of 30 cents per barrel resulting

from the stockpile acquisition.

Location.—To provide the maximum

inhibiting effect of a crude oil stockpile

on cartel or cartel-like actions, it would

be desirable to locate this material close

to consumers (refineries), thus limiting

transportation costs and time t o

availability when needed.

Storage. —Five options for storing

petroleum have been suggested as

follows: shut-in oil wells, conventional

steel tanks, onshore salt domes,

offshore salt domes, and offshore

nuclear-created rock caverns. On the

basis of availability, leadtime, and costs,

onshore salt domes are selected as the

most feasible method. The one-time acquisition cost for salt dome storage

facilities is estimated at $5 per barrel.

Annual cost estimates range from $0.60

to $1 per barrel; the high figure is

chosen for the purposes of this assessment.

Rotation. —The absence of loss by

deterioration of crude oil precludes the

need for inventory rotation.

Summary of operating costs,—Taking

into account the factors described

above, operating costs for this stockpile

are estimated as follows, for the first 2

years of its operation:

163

77-119 0-76-1 2
CHAPTER VI

First year $ billion

Oc =

IC = Cf + C i Q = $0.5

million+ ($5)X500 million

barrels = 2,5

+AC = CUQ = $10.30

(500 million barrels) ‘5.2

+HC = (s+dcu+icu)Q =

[$1+0 +0.08 ($10.30)]1.5

billion barrels =0,9

+DC =O.O

-CG =0.0

8.6

Second year

OC-CiQ-AC = $912.5

b. SP–2: Cushion the Impact of Nonpolitical Import Disruption

(1)

(2)

(3)

(4)

(5)

(6)

(7)

164

Stockpile of 100,000 short tons of zinc.

Acquisition sources.—The acquisition

of zinc could involve purchase, transfer

from the strategic/critical material

stockpile , or barter for surplu s

agricultural commodities. It is assumed

that the zinc from this stockpile would

be purchased, from both domestic and

foreign sources.

Form of material.—To achieve maximum flexibility in the use of this

material, when it is disposed of, it

should be in the form of slab zinc,

Location .—Proximity of the stockpile to

using plants is more significant than is

nearness to producing plants, The

former would facilitate the flow of zinc

to using plants in temporary shortage

situations. While the stockpile is being

accumulated, time would be available to

move material from producing plants to

the stockpile site.

Storage.—Zinc could be stored as slabs

stacked in the open on Governmentowned land.

Rotation.—Zinc slabs do not deteriorate

in quality from exposure to the elements and a rotation program is not

necessary.

Summary of operating costs.—Taking

into account the factors described

above, the first year’s operating costs for

this stockpile are estimated as follows:

$ million

OC =

IC = Cf+CiQ = $0.5

million+ (0) 100,000 tons = 0 . 5

+AC = CUQ = $720(100,000

tons) = 72.0

+HC = (S+dcu+.icu)Q =

[$0.10+0+0.08($720)]

100,000 tons = 5.8

+DC = 0.0

-CG = 0.0

78. 3

C. SP–3: Assist in International Materials

Market Stabilization.

(1)

(2)

(3)

(4)

(5)

(6)

(7)

Stockpile of 20,000 long tons of tin.

Acquisition sources.—The acquisition

of tin could involve purchase, transfer

from the strategic/critical material

stockpile , or barter for surplu s

agricultural commodities. It is assumed

that tin for this stockpile would be

purchased entirely from foreig n

sources; production of tin from domestic

resources is negligible.

Form of material.—Tin would be

stockpiled in the form of pig tin, allowing flexibility in its end uses.

Location.--Since this material would be

purchased from abroad, the stockpile

location would be significant only with

respect to proximity to consumers.

Storage.—Pig tin would be stacked in

the open on Government-owned land.

Rotation.— Although there could be

some quality deterioration in pig tin, it

would not be significant and rotation

would be minimal.

Summary of operating costs.—Taking

into account the factors described

above, the first year’s operating costs for

this stockpile are estimated as follows:

$ million

OC =

IC = Cf+ CiQ = $0.5+ (0)20,000

tons

= 0.5

+AC = CUQ = $7,588(20,000

tons) = 152.0
(1)

(2)

(3)

(4)

(5)

(6)

(7)

Stockpile of 1,000 short tons of contained tungsten trioxide in ores and concentrates.

Acquisition sources.—Tungsten would

be purchased from domestic sources

only. This stockpile is designed to

assure that tungsten is both produced

and consumed at a rate which differs

from that which results from a market

not thus influenced by Government intervention.

Form of material.—Tungsten would be

stockpiled in the form of ores and concentrates, permitting flexibility in its

conversion to various forms of tungsten

intermediate and end products.

Location.—In view of the relatively

long period of time involved in the life

of this stockpile, its location is not important in relation to proximity to producers or users.

Storage.—Tungsten ores and concentrates would be stored in cans placed in

Government-owned warehouses.

Rotation.—Tungsten ores and concentrates stored in cans in enclosed

warehouses do not deteriorate and require no rotation.

Summary of operating costs.—Taking

into account the factors described

above, the first year’s operating costs for

this stockpile are estimated as follows:

$ million

CHAPTER VI

+DC = 0 . 0

-CG = 0.0

10.2

e. SP–5: Provide a Market for Temporary

Surpluses and Ease Temporary Shortages.

(1)

(2)

(3)

(4)

(5)

(6)

(7)

Stockpile of 500,000 short tons of copper.

Acquisition sources. -copper for this

stockpile would be purchased from

domestic producers during periods

when surpluses develop for which

market demand is depressed or otherwise insufficient at market prices,

Form of material.--Copper would be

stockpiled in the form of copper ingot or

wire bar, forms which provide maximum flexibility in fabrication into mill

shapes or for conversion into “specification ingots” in combination with other

materials, for use by foundries.

Location.—Because of the short-term

acquisition and disposal aspects of this

stockpile it would be desirable to locate

the copper at locations reasonably accessible to both producers and consumers.

Storage. -Copper would be stored in ingots or wire bars stacked in the open on

Government-owned land.

Rotation. -Copper ingots and wire bars

stored in the open do not undergo

quality deterioration and rotation of this

material would not be necessary.

Summary of operating costs.—Taking

165
V.

Chapter VII

ALTERNATIVES TO

ECONOMIC STOCKPILING

167
Chapter Vll

ALTERNATIVES TO

ECONOMIC STOCKPILING

The impacts analysis in chapter V indicates that the economic net benefits

would be positive for three of the five stockpiling policies and negative for the

other two. Certainly for the latter, and to a lesser extent for the former, alternatives must be considered since they might provide net benefits even greater than

stockpiling. Moreover, there may be certain overriding considerations which

could lead to the conclusion that any or all of these stockpiling policies should not

be implemented and that alternative approaches should be taken. These overriding considerations could include adverse social and political impacts, as well as

excessive operating costs and the lack of available information.

A complete assessment of economic stockpiling should include a cost/benefit

analysis of each alternative and a comparison of the results with the total net

benefits of the related stockpiling policies. Such a quantitative analysis was beyond

the scope of this assessment, but it would be the proper function of an agency

established to implement an economic stockpiling program. What is presented

here is a qualitative analysis of three general categories of alternatives to stock piling.

A. REASONS FOR CONSIDERING

Just as economic stockpiling is conceived as

primarily a governmental program requiring

either direct or indirect industry participation,

the emphasis on alternatives is also likely to be

in the Government sector, Industry self-interest can be expected to lead to some kinds of

protective actions in order to overcome both

short- and long-term supply problems.

Nevertheless, it could be necessary for the

Government to provide some type of incentive

for encouraging the improvement of supply

capabilities. Similarly, it could be necessary

for the Government to mandate use limitations

in order to help achieve a balance between

supply and demand. In every instance, effective Government-industry cooperation would

be essential to achieve the same goals which

ALTERNATIVES TO STOCKPILING

might be attained by economic stockpiling,

Thus, it appears that if future shortages of

material are to be avoided, some degree of

governmental intervention into the normal

marketplace may be required.

While economic stockpiling may be viewed

by many as unwarranted intervention in the

marketplace, it must be recognized that some

intervention is already present in a number of

aspects of materials production and distribution. To some degree almost every one of the

alternatives described below is already in

practice. The concern here is to what extent, if

any, there should be broader use of those alternatives which are already in existence and

which, if any, ought to be added, In some in169
CHAPTER VII

stances, as in the case of Government assistance to industry to help increase the supply of

materials, more than one alternative has been

applied simultaneously. Given the various

forms of Government intervention already in

existence, economic stockpiling could be

found to be less a source of market intervention than the introduction of new alternatives

or the extension of present ones.

In recent years intervention by Government

in the marketplace has not always prevented

shortages and, in some cases, may actually

have caused shortages, as is alleged in the supply of natural gas, Efforts to enhance the supply of materials has taken such forms as depletion allowances, expensing of development

costs, subsidization, favorable tax incentives

for investment, and stockpile purchases to initiate or sustain production of certain minerals

and materials. Despite these efforts by the

Government, some shortages have occurred.

What an economic stockpile may do is alleviate the impact of a future shortage of material,

provided that particular material is stockpiled

in adequate quantity.

The present assessment envisions the use of

an economic stockpile to achieve certain social

benefits thru the prevention of materials shortages. But since an economic stockpile is an intervention in the marketplace, the social

benefits from implementation of a stockpile

must be measured against the economic costs

and the relative desirability of alternatives to

achieve the desired social benefit.

Virtually all the alternatives presented

below were mentioned in some of the interviews as being preferable to the 11 stockpiling

policies. However, the preference for alternatives was less true with respect to stockpiling

policies aimed at overcoming import disruptions than for the other policies,

B. ALTERNATIVE METHODS TO INCREASE SUPPLY

Materials supply could be increased through

the following means, each of which is discussed in subsequent order:

● Direct subsidies to producers working marginal resources,

● Tax incentives to encourage production from marginal resources,

. Research and development to increase production from marginal

resources or to process substitute

materials,

. Tax concessions to favor capital formation and investment in mineral

supply,

. Low interest loans and investment

guarantees to encourage exploration

and production,

. Tariff concessions to raw-materialproducing countries,

● Increased recycling of secondary

materials, and

. Production from public lands.1

1S, Victor Radcliffe, in the Henniker Report, lists the following methods of increasing supply;

I. Advances in the understanding of mineral formation and

the techniques for exploration, and of plant biochemistry.

Z. Creation of new materials or processes that open up new

resources (e.g., synthetic polymers, new mining techniques for

minerals on land and in the oceans).

3. Improving the physical efficiency of the extraction of

resources (e.g., increased energy efficiency in processes for

aluminum and steelmaking, or wood products).

4. Develop lower cost alternatives for existing materials (i.e.,

substitution of materials or systems to provide the same performance or function), including the possibilities for greater use of

the more abundant materials, such as manganese and silicon, or

of renewable materials, including current organic wastes such as

Iignin, All other references used from this conference will be

cited as Henniker Rejwrf.

170
1. Direct Subsidies to Producers

Working Marginal Resources

Direct subsidies would provide. for payment

to producers in amounts sufficient to cover the

difference between costs (including a reasonable rate of return) and market prices for each

material involved, Such a program has been

used in the past as part of the strategic and critical materials stockpiling program for

defense, Under this program, substantial quantities of asbestos, beryl, chromite, columbium,

Fluorspar, manganese, mercury, mica, and

tungsten were purchased at higher than

market prices, This program had the added

purpose of supporting domestic production of

certain materials in order to maintain the

mobilization base, However, much of the

material produced was of relatively low

quality and was not adequate for defense

stockpiling purposes, The program included

premium price plans for copper, lead, and zinc

in World War II, as well as floor and ceiling

contracts during the Korean war.

Although these subsidy programs were

directly related to the strategic and critical

stockpile, they are examples of Government

support which could be provided irrespective

of the existence of a stockpile. Two such examples, copper and titanium, are discussed

below,

Under Title III of the Stockpiling Act of

1946, provision was made for various methods

of capacity expansion of materials, including

Government floor-price purchase contracts to

stimulate private companies to increase mine

production. Under these contracts the Government agreed to purchase specified amounts of

output at the guaranteed floor price if the

market did not take up these quantities at that

price or a higher price.

a. Government Subsidies and Copper.—In

1951 and 1952 the Defense Production Administration approved 10 projects for Government assistance in the production of copper, In

most of these projects, a floor price was

guaranteed in a long-term purchase contract.

Some of these 10 projects also involved acCHAPTER VII

celerated tax amortization, Government loans,

or both, as authorized by the Stockpiling Act of

1946. It was estimated at the time that the annual increase in output from the mines opened

by these projects would total about 250,000

tons of copper, that about 100,000 tons would

be available in 1954, and that the full output

would come in by 1955. An additional nine

projects were subsequently approved, bringing

the total number of projects within that

program to 19, and increasing the potential

commitment to 1,191,240 tons of copper.

However, since copper prices were relatively

good during the contract delivery period, the

bulk of the output (949,354 tons) was sold to

industry and only 231,959 tons were delivered

to the Government. Obligations to deliver

9,927 tons to the Government were canceled,

There was also a small program for the

maintenance of production at some existing

mines which could not produce copper at the

Government ceiling price of 24.5 cents per

pound for electrolytic copper ($490 per short

ton). Contracts were therefore consummated

for 30,434 tons at an average subsidy of $127.39

per ton. These contracts were terminated

when price regulations were removed from

copper in March 1953. Under this program,

slightly over half of the contracted amount

(16,201 tons) was delivered to the Government.

The program under title III achieved its objective of increasing copper production for the

defense program. With the help provided by

the subsidies and additional incentives of

rapid tax amortization, several copper properties operating today had their inception in this

expansion program,

b. Government Subsidies an d

Titanium.—In the case of titanium, Government assistance has gone through two major

phases, The domestic industry had been

started in 1950 through Government aid in the

form of guaranteed purchase contracts,

coupled with loans, loan guarantees, and

research contracts, More recently, the collapse

of the SST program, in particular, put the

171
CHAPTER VII

titanium sponge industry in jeopardy in the

last half of 1971.

As a result of serious concern on the part of

the Office of Emergency Preparedness, Congress, and other interested agencies, a

stockpile purchase/buyback program was

adopted to support the titanium industry. In

January 1972 the GSA was authorized to acquire 7,000 tons of domestically produced

titanium sponge from the three existing producers, although the smallest subsequently

dropped out of the program. The purchase of

this tonnage was to be paid for with other

materials excess to the stockpile, in lieu of

cash. All the 6,500 tons which were to be supplied by the two other producers have been

delivered to the Government. This program

helped sustain the titanium industry during

the period of uncertainty prior to an upsurge

of demand in 1973 and 1974.

c. Future Subsidy Programs.—The future

of a direct subsidy program under peacetime

conditions would depend upon the willingness

of Congress to provide the funds. In order to

do so, however, Congress would have to determine that the activation of marginal and submarginal mineral deposits would be in the best

interests of the country. Political support in

mining areas would have to offset broader

concerns about the optimum use of national

resources, unless the loss of foreign supplies

were to become a fact or a serious threat. If

such an incentive as a direct subsidy program

were implemented, it would have to be supplemented by an allocation program for distribution to customers and could involve additional costs of upgrading the material to meet

consuming industry specifications.

In summary, direct subsidization has

worked effectively to initiate production, to

develop marginal resources, and to maintain

an ailing industry. These programs were frequently joined with stockpiling, but may be

extended in lieu of any stockpiling by direct

payments rather than by purchase of material.

2. Tax Incentives To Encourage Production

From Marginal Resources

Tax adjustments or incentives, such as rapid

tax amortization allowances, have been used

in the past under the defense program to

stimulate capital investment in mining and

processing facilities, and have been successful

in increasing the mobilization base. Concessions could also be made through selective

depletion allowances for low-grade resources,

The National Commission on Materials

Policy, in referring to depletion allowances,

made the following statement which is presented here in its entirety:

Although the gamble in exploration is

governed by scientifically determined odds, the

stakes are so high and the risk so great that it is

necessary to take specific action to share the

costs to compensate those who take these risks,

The primary methods of providing encouragement has been through percentage depletion

allowances in tax laws. For the very expensive

and highly risky search for oil and gas, charging

the first year’s drilling costs to expenses rather

than to the capital account is also allowed.

Although the equity of depletion allowances

is questionable, lawyers and economists have

found no other generally acceptable mechanism

to cover fairly the risks of developing a mineral

reserve.

Depletion allowance is applied to the gross income from the property, which means that an

operator must have taxable income above expenses in order to have anything from which to

deduct this authorized depletion percentage.

Minerals that have been discovered in paying

quantities in the ground area capital asset, but as

they are produced, that asset is used up. Percentage depletion, therefore, is the best method yet

devised to permit a mineral resource owner to

recover at least a part of his capital so that it can

be used to develop additional mineral deposits,

and to provide incentive to potential investors.

On the other hand, percentage depletion is of no

value whatever to those who take the risk of exploration but find little or nothing, since there

must be income above expenses in a tax year in

order to receive the depletion deduction.

Because of its speculative nature, exploration

cannot be financed by bonds or by bank loans.

Funds can come only from those who are willing

172
CHAPTER VII

to risk a succession of failures in confidence that

they will enjoy eventual success.

The traditional means of providing this

stimulation has been through the substitution of

percentage depletion for cost depreciation in the

tax structure and the privilege of charging exploration costs against other income.

This principle has been subject to public attack, but criticism has not produced better alternatives, and in our brief tenure, we have not

been able to do better than the critics. 2

Following that analysis, the National Commission then made the following recommen -

dations:

● . . . Congress continue the percentage deple- ,

tion provisions of our tax laws as a time-tested

major incentive to discovery and development

of mineral resources. These provisions should

not be further reduced unless and until a better incentive system can be developed,

● . . . the total cost of mineral exploration be

allowed as a tax-deductible item, as intangible

oil and gas well drilling costs are today,

As in the case of direct subsidies, the future

of tax incentives , including depletio n

allowance, is uncertain, All such tax concessions would face fiscal problems in light o f

growing budget deficits and questions o f

equitability in the tax treatment of various national resources. In the case of petroleum, the

depletion allowance of 22 percent was eliminated on March 29, 1975, except for small producers with 2,000 barrels per day output o r

less, The 22-percent allowance will apply t o

succeedingly smaller daily outputs each yea r

until 1980, when it will cover producers with

1,000 barrels per day or less. After 1980 the

percent allowance on 1,000 barrels per day or

less will decline each year until 1984, when it

will amount to 15 percent and remain at that

figure thereafter. Average annual output i n

the United States in 1974 was approximatel y

8,740,000 barrels,

Tax incentives , such as depletio n

allowance, from goods or marginal resources

are a very important means of increasing the

ZMQteriQ]S NeedS and the Environment Today and Tomorrow, National Commission on Materials Policy, June 1973.

supply of materials, but they do not prevent

shortages of material due either to suddenly

increased demands or unexpected interruptions in the supply of foreign source materials.

The question of an adequate supply of

materials enhanced by such tax incentives

may not lead to the accumulation of a sufficient industrial inventory to alleviate the need

for an economic stockpile, On the other hand,

too great an extension of subsidies or tax incentives to marginal producers may have the

effect of discouraging private investment in

good resources. A tax-incentive program for

the support of research and development is

mentioned in the following section.

3. Research and Development To Increase

Production From Marginal Resources

or To Process Substitute Materials

Research and development could take

various approaches: (1) one financed and operated by the Government, (2) one jointly financed and operated by Government and industry, or (3) one operated by industry under

the impetus of a tax incentive, Government

grants-in-aid could also be made to research

organizations, universities, and companies

possessing competence in research,

The potential domestic production of oil

from shale and aluminum from nonbauxitic

materials stand out as examples in which

research and development may in the future

increase the United States supply of these

basic materials. Such activity could also include technical assistance to foreign producers

to help improve their efficiency and broaden

their markets.

a. The Importance of Research an d

Development.—Richard W. Roberts, then

Director of the National Bureau of Standards,

mentioned five technical options in materials

research which can be used alone or in consort

to improve materials performance. These options would in general have the ultimate effect

of increasing supply: (1) development of new

materials, (2) development of new processing

techniques, (3) improvement in manufactur-
CHAPTER VII

ing and fabrication techniques, (4) improvement in nondestructive evaluation techniques,

and (4) improvement in design theories and

concepts. 3

Dr. John Morgan, Jr., Assistant Director of

the Bureau of Mines, cites the following five

areas which require “accelerated development

of new and improved technology and rapid introduction thereof”: (1) exploration, (2) mining and petroleum and natural gas products,

(3) processing, (4) use, and (5) recovery and

recycling.4

Julius J. Harwood, Director, Physical

Sciences, Scientific Research Staff, Ford Motor

Co., suggests a four-part strategy to increase

the research and development efforts directed

toward “materials substitution, recycling, solid

waste disposal and materials processing to

provide new sources of materials, reduce scrap

generation and increase productive utilization

of available materials to offset tight supply and

increasing costs of materials. ”5 The four-part

strategy encompasses the following points:

(1)

(2)

(3)

Alert, as early as possible, the outside

market to any major upward shift in

specific materials usage. . . . clearly

recognize that 2-to 3-year leadtimes or

more may be required for materials

producers to effect significant capacity

expansion;

The extended leadtimes emphasize the

need for establishing early-on, continuous liaison and communication

among product planning/engineering,

manufacturing and supply activities

concerning product assumptions and

materials requirements to ensur e

availability of required materials to

support our future vehicle programs;

Maintain periodic updates o f

availability, supply, and economic projections to establish a monitoring and

early warning system; and

(4) Explore feasibility of alternate markets

to provide flexibility to compete in

shifting materials supply markets,

b. NCMP R&D Recommendations.—The

National Commission on Materials Policy

(NCMP) made a number of far-reaching

recommendations dealing with research in

energy and nonenergy materials and related

subjects. These recommendations are presented as follows in summary form.6

(1) Regarding research on new sources of

energy and the environment, NCMP recommended that

. , . the Government sponsor a massive research

effort to improve the use of fossil fuels and

develop new sources of energy, to improve slurry

transport of coal, to develop processes of obtaining synthetic oil and gas from coal or from such

raw materials as shale and tar sands;

. . . research into fuel cell development be pursued;

, , , greater priority be assigned to efforts to

develop the breeder reactor;

. . . research in high-temperature materials be accelerated;

. . . research be undertaken in economical, clean

sources of automotive power for private and

public transportation;

. . . the Government support extensive R&D on

the dynamics of environment ecosystems; and on

the impact of major human activities and their

effect on human, animal, and plant life. The R&D

will emphasize the detection and study of substances in low levels of concentration, and

studies of their life cycles and chronic, additive,

or delayed effects on public health;

. . . development of additional techniques to

repair environmental damage from surface and

underground mining and similar activities, and

methods for reducing pollutants from various

effluents to a more desirable level; and

. . . research and development be supported, with

the participation of industry, on alternative efficient technologies that produce materials without undue sacrifice on environmental quality.

.,, consideration be given to such measures as:

sHenniker Report.

4Henniker Report.

5Henniker Report.

1 7 4

6NCMP, Materja] Needs and the EnVjrOnrnent.
● review of the potentially inhibiting effects

of antitrust procedures on joint industrywide research, e.g., antipollution efforts,

and modification of present procedures

where appropriate,

● sharing between the Government and industry the costs inherent in demonstrating,

at the pilot plant level, promising developments protective of environmental quality,

e.g.,hydro-metallurgical processes, formedcoke production methods (bypassing the

high-emission coke ovens in coke manufacture), and extension of vacuum technology

in extractive metallurgy, cooperative ventures of the Government and industry for

developing technologies, exemplified by

the wartime synthetic rubber program, by

the recent cooperative blast furnace

research of the Bureau of Mines, by

research into nonpolluting coking methods

which is now being undertaken jointly by

the Office of Coal Research and industry,

and by the current Technology Incentives

Programs of the National Science Foundation and the National Bureau of Standards;

and

,.. Government support be provided for studies,

particularly at universities, which will stimulate

rapid development of the geosciences and their

application to problems of mineral exploration.

(2) Regarding waste utilization and

materials conservation, NCMP recommended

that

. . . the Federal Government cooperate with State

and municipal governments and industry in

developing technologies for utilizing industrial

and urban waste as a source of fuel and raw

materials;

. . . support be offered to universities, private institutions, and industry to further research into

development of feedstocks for polymer production from renewable raw materials, and to encourage continued research into extraction of

mineral values from low-grade ores; and

. . . R&D be sponsored on improvements in resistance to corrosion and other degradation; in nondestructive testing methods; in techniques of

characterization; in new composites; and on

other topics relating to materials effectiveness.

This R&D, supported in the past by the Department of Defense, National Aeronautics and

Space Administration, and Atomic Energy Commission, should also be pursued by other agencies with materials responsibilities, and should

CHAPTER VII

be complemented by efforts to translate

knowledge into practice.

(3) Regarding technology research and

development and education/training, NCMP

recommended that

. . . the agencies assigned substantial responsibilities in the materials and resources field be

instructed and enabled to take steps to build up

commensurate research and development to

generate new knowledge and technology, and

also to enhance the exploitation of available

knowledge. Their activities should include:

●

●

●

●

●

✎ ✎ ✎ a

in-house research capabilities sufficient to

insure adequate support for their entire

research and development program;

appropriate basic research in the physical,

biological, social, economic, and political

sciences as relevant to materials;

cooperation between national laboratories

and industry, including shared research,

personnel, and information;

sponsorship of coupling programs involving

the Government, industry and nonprofit

and university laboratories in joint research

and development directed at serving national needs; and

deliberate, explicitly funded efforts on the

part of agencies generating new technology

to alert the public to the potentials of applying this knowledge and to stimulate its

transfer to industrial use.

continuing analysis be carried out, Preferably by NSF, of the numbers of graduates to be

needed by the materials industries in various

specialties, with allowance for sufficient lead

time;

. , . support of education and training in the

materials field take into account the need to

modify those aspects concerned with materials

extraction and processing to give them sufficient

prominence in the materials engineering curricula; and to incorporate up-to-date knowledge

from materials fields and from physical sciences

and engineering;

. . . cooperative efforts be fostered among

Federal, State, and local agencies, private industry, and labor for the development of uniform national codes. These standards should be based

upon performance requirements designed to increase efficiency in the use of materials, to encourage introduction and acceptance of superior

175
CHAPTER VII

materials, and to enhance recovery or disposition

of materials from worn-out products; and

. . . the Government review present policy with

respect to the vesting of patent rights when undertaking joint research with the private sector.

Research and development by industry

and/or Government will continue as part of

normal operations. The emphasis on particular

materials will shift as new developments occur. Direct Government assistance will be’

limited by funds and the criticality of particular situations. The fallout of research and

development from both industry and Government, including that dealing with defense matters, will accrue to other areas as it has in the

past.

4. Low Interest Loans and Investment

Guarantees To Encourage

Exploration and Production

Actions in the investment area include low

interest loans and investment guarantees such

as those provided by the Overseas Private Investment Corporation, That agency provides

incentives to United States private investors to

encourage investments in many developing

countries by insuring against losses which

might result from social, political, or economic

problems in the developing country and by

reducing the need for government-to-government lending programs in supplying capital

through private investment channels. Other

governmental or intragovernmental organizations, such as the Export-Import Bank and the

International Bank of Reconstruction and

Development, are also sources of capital for

the construction and operation of facilities.

The National Commission on Materials Policy

recommended that the U.S. Government

reestablish and adequately fund a financial institution, possibly modeled after th e

Reconstruction Finance Corporation or the

Defense Plant Corporation, which can arrange

for low-cost investment capital for industry, if

a clear national need can be shown, ”7

Although the

tion in the U.S.

Office of Minerals

Geological Survey

Explora-

(the successor to the Defense Minerals Exploration

Administration) exists to provide low-cost

loans for minerals exploration, it has ceased

making new loans due to a lack of funds. A

total of 36 minerals have been covered, mostly

for loans of up to 50 percent of exploration

costs and some up to 75 percent. At the present

time, unexpired contracts exist only in gold

and silver. This experience of the Office of

Minerals Exploration does not suggest greater

Government involvement in granting loans for

exploration, but this situation could change if

supplies of critical imported materials were to

become a threat or an actuality. With further

regard to financing problems, NCMP recommended the relaxation of antitrust laws to permit “special industry groups to form joint venture corporations for the production of critical

industrial materials under economies of scale

that cannot be attained by individual companies, and under conditions that do not

restrain trade. ”8

Low interest loans and investment guarantees are an alternative to stockpiling of scarce

domestic resources, recycling, and new technology, i.e., those policies which would not

counteract long-term shortages,

5. Tariff Concessions to Countries

Producing Raw Materials

Tariff concessions to countries producing

raw materials could increase supplies to the

United States. However, the effect of these

concessions would be limited by the fact that

import duties on most materials in which the

United States is heavily import dependent are

already low or nonexistent. Nevertheless,

some favorable developments from the standpoint of improving the overall economic situation in developing countries and from reducing costs to United States consumers could

flow from the current tariff and trade negotiations under the General Agreement on Tariffs

and Trade (GATT) agreement.

7NCMP, Materja/ Needs and the En Vjronmen t.

176

eNcIvlp, Ma@rja] Needs and the Environment,
The Interior Department, in its report “Critical Materials: Commodity Action Analyses, ”

March 1975, takes another view on tariffs as a

means of increasing supplies. According to the

report, higher tariffs would, by raising U.S.

prices and costs, presumably encourage increased domestic productive capacity, Given

the historical trend toward lower tariffs and

the need to compensate through GATT for

higher tariffs in one commodity with tariff or

trade concessions in another, the probability of

higher tariffs seems rather remote.9

Tariff concessions as an alternative to

stockpiling might be effective if changes are

made so as not to penalize imports of raw

material or destroy domestic production. As an

alternative to stockpiling, these concessions

could aid in maintaining foreign supply but

could adversely affect domestic production. It

is probable that tariff changes are not an alternative to any stockpile policy.

6. Increased Recycling of

Secondary Materials

The recovery of secondary materials has the

effect of renewing nonrenewable resources.

Much of the metal and some of the secondary

glass generated in producing plants is reused

at the manufacturing site. The recycling industry, with about 8,000 establishments, collects economically recoverable wastes, processes them where necessary, and sells them

to consumers of secondary materials. While it

is already being carried out on a large scale by

established industries, recycling on an increased scale, particularly from municipal

waste, could augment the supply of usable

materials. Recycling could be stimulated by

Government by such actions as direct subsidy

payments, tax concessions to producers and/or

consumers, research and development in

recovery and use technology, adjusted freight

eIn ‘cCritical Materials: Commodity Action Analysis” (March

1975), p. 2, the Interior Department presents an analysis of

materials supply problems for aluminum, chromium, platinum,

and palladium and concludes that stockpiling is more cost-effective than either a tariff or a subsidy in most cases, but that a

combination of these three options is the overall optimal policy,

CHAPTER VII

rates to provide more comparable rates between recycled and primary materials, and

grants to State and local governments to assist

in solid waste recovery programs,

Municipal waste recovery has become the

subject of much discussion as well as work.

Seymour L. Blum, Director, Advanced

Program Development, The Mitre Corp., lists

the following alternatives for consideration:

●

●

●

●

●

●

●

Resource recovery technology, to include

front end separation,

incineration, and

comporting;

Energy recovery, to include

steam,

oil pyrolysis,

gas pyrolysis, and

direct firing;

Disposal technology, to include

land fill, and

incineration;

Collection procedures;

Transport procedures;

Storage procedures; and

Separation economics.10

As a means of increasing the recycling of secondary materials, NCMP made the following

recommendations:

, , . the Federal Government offer loans at low

rates of interest to private firms for recovery of

resources from municipal waste;

, , . the Federal Government offer subsidies for

solid waste handling to municipal or county

efforts to levy user charges that will enable the

operations to pay all costs;

, , . the Federal Government give users (scrap

consumers, e.g., steel mills) of materials

economic incentives in the form of tax credits for

expanded use of recycled materials;

. 0 . the Federal Government offer tax credit for

investments in new plants and equipment

specifically geared to the production of marketable products from recycled materials, with 5 year

amortization deductions for companies that install ancillary equipment that will allow them to

process larger quantities of scrap than at present;

IOHenniker Report.

1 7 7
CHAPTER VII

. . . the Federal Government take the necessary

steps to correct the existing freight rate differentials between secondary and primary materials;

. . . the Federal Government exercise leadership

by using its purchasing power to provide a

market for products made from recycled

materials;

,., the Federal Government help reduce the flow

of solid waste by establishing, within Federal

purchasing departments, performance standards

rather than composition standards that discriminate against secondary materials;

. . . the Federal Government remove any labeling

regulations, unrelated to consumer protection,

that discourage consumers from buying products

that contain secondary materials;

. . . the Federal Government accelerate research

and development and technology transfer on

resource recovery, especially to encourage recovery of resources in municipal wastes;

. . . the amount of solid waste requiring disposition be increasingly reduced where possible by

methods of recycling, reuse, and recovery;

. . . industry develop and expand technology and

markets that will allow for practical use of all

bulk waste; and

. . . industry dispose of waste, including mine

tailings, in a manner to facilitate eventual recovery of valuable resources.11

An economic stockpile to aid recycling may

be unnecessary if any of the foregoing recommendations are enacted. The problems of

recycling are not only economic or technological, but largely arise due to institutional

problems between private enterprise and local,

State, or Federal Government. A more viable

alternative to a national stockpile to aid recycling might be one set up on a local or regional

basis with some Federal help in initial financing and organization.

In view of the great interest in the recovery

of usable solid materials from municipal waste

and the accompanying use of energy materials

in that waste, progress in that direction can be

expected for the future within the limits of

quantity, quality, and costs. A technology

assessment on resource recovery, materials

IINCMP. Ma~erja/ Needs and the Envjronmen~,

178

recycling and reuse was requested by the

House Committee on Science and Technology

and is currently being carried out by the Office

of Technology Assessment.

7. Role of Public Lands in Increasing

Domestic Supply

Much of current production comes from

claims originally filed on public land. Access

to minerals on public land is increasingly

being restricted by policies arising from concern with alternative land use and environmental impact. Supply from public land can

logically be considered as a component to

various alternatives to stockpiling. Its importance as an issue in itself justifies separate discussions, however. The use of public lands as

a means of increasing supply of materials was

discussed by NCMP as follows:

The Government has a responsibility to oversee exploration of mineral resources within

public lands. Development of these resources is

in the public interest, for they can add substantially to the Nation’s reserves. This benefit

should be weighed against the negative effects of

possible ecological disturbance or insult to the

natural environment,

We recognize the need to protect public

monuments, unique and irreplaceable natural

wonders, and parks. Vast areas of public domain,

however, have been so restricted, with their

status so uncertain, that the risk of exploration

cannot be economically justified by the prospect

of success. Without entry to these lands and

without assurance of tenure in the event of a discovery, no mining group can calculate the relative costs and benefits which would permit

determination of the most effective use of the

land. There are indeed numerous examples of

places where better use of the land has been

made after mineral extraction than was made

before,

As the Congress develops the urgently needed

legislation governing public lands, we recommend that

United States statutes recognize without

equivocation that final judgments on the value of

publicly owned lands cannot be made until the

subsurface has been explored thoroughly, and

that the laws assure:
● land be used in a way that will optimize its

future material contribution; and

● in the future when values change, a tract of

land may be used for purposes far different

from the present.

The exploration of wilderness tracts is

likewise discussed in the NCMP report as

follows:

The opposing objectives of protecting wilderness tracts and expanding mineral reserves can

be reconciled at their points of difference. Such

possibilities include rationale regulation of the

movement of aircraft over wilderness areas and

the entry of other suitable forms of transportation where they are now prohibited.

The exploration, without evident damage, of

pristine tracts is now permitted by Federal land

agencies. The need for such regulated exploration was recognized in principle by the Wilderness Law which permitted a period for determining the value of mineral deposits before further

access was denied. The failure to provide the

U.S. Geological Survey and the Bureau of Mines

resource evaluation programs with funds for

these explorations has frustrated Government

efforts to assess these potentialities. At the same

time, private exploration has been prevented by

regulations intended for other purposes, Normal

prudence prohibits financial entities from spending money where constantly changing regulaCHAPTER VII

tions could turn an economically sound venture

into a losing

Following

mended that

. . . Congress

proposition.

that analysis, NCMP recominclude, in legislation governing

land, permission to explore under regulations

which will prevent irreparable damage to the

protected areas and hold disturbances to the

lowest level possible;

. . . Congress provide for:

● the development of mineral properties by

private industry where there will be

minimal impairment of recreation or

biological functions, or where plans are

provided in advance to restore or improve

original conditions when extraction is terminated;

● evaluation of the costs and benefits of mining development, by methods such as those

used in the environmental impact statements of governmental projects: and

● strict sanctions against

tive regulations.

A technology assessment

violation of protecof constraints and

incentives affecting domestic minerals accessibility on public lands is currently being

conducted by the Office of Technology

Assessment.

C. ALTERNATIVES TO MAINTAIN STABLE LEVELS OF SUPPLY

Maintaining stable levels of supply could involve four principal approaches: (1) inventory

management, (z) extended futures markets, (3)

standby capacity, and (4) international commodity agreements.

1. Inventory Management12

Departures from traditional inventory

management patterns in order to provide relative stability at all phases of the business cycle

and overcome unusual interruptions in supply

1 ZI nventory management in response to indirect incentives,

is here treated as an alternative to stockpiling in contrast with

the holding of stocks by industry on contract to the Government

which is treated as stockpiling in ch. IV,

could require Government incentives in the

form of tax adjustments. Industrial firms, including both producers and consumers of

materials, tend to maintain normal working inventories which vary from material to

material, depending on such factors as the

degree of integration within individual companies, the form of the material, seasonal factors, and assurances of supply sources.

The current Swedish tax system, which permits accelerated writeoffs of inventories to encourage private stockpiling by allowing changing acquisition costs to be spread over long

periods of time, has frequently been cited as a

pro to type, nongovernment economi c

1 7 9

77-119 0-76-1 3
CHAPTER VII

stockpile. For that reason it is discussed here

in some detail.

The government of Sweden maintains

stockpiles of raw materials for strategic purposes and is currently examining the possibility

of implementing an economic stockpile. It also

provides tax incentives which encourage industry to maintain adequate inventories. The rules

governing the taxation of corporate income in

Sweden apply to three special areas:

(1) inventory valuation; (z) depreciation and

(3) reserves for future investment. The

Swedish tax rules in these areas have increased the ability of Swedish industry to compete in world markets. By providing substantial incentives to industry and commerce, the

Swedish Government has encouraged the use

of private capital to deal with economic fluctuations and the business cycle. An essential

feature of these devices is the degree of control

they give business taxpayers over the amount

of profit to be reported. The corporation has

the option of taking larger or smaller deductions in any particular year. To that extent,

corporate and other taxpayers are permitted a

substantial degree of latitude in leveling out

their annual results and in building up

reserves.

a. Inventory Valuation.—Sweden’s tax

provision governing the valuation of inventories are designed to eliminate taxation of

merely inflationary profits and permit the

strengthening of corporate resources against

the possibility of inventory price declines.

Under this system the basic rule is that the

valuation of the inventory entered by the taxpayer in his account books shall govern for tax

purposes. However, the right to value inventories in the taxpayer’s business discretion is

subject to certain limitations established by

the tax laws.

The main rule governing valuation is complemented by two supplementary rules. The

first of these is the rule of “comparable value.”

If the value of the inventory at the end of a

corporation’s fiscal year-at cost or market,

and after deducting obsolete or unsalable

items—is less than the average of the value of

the inventory at the close of the two prior

years (average value termed the “comparable

value”), the corporation may write its inventory down by 60 percent of that comparable

value, rather than by 60 percent of the value at

the end of the income year in question.

The second supplementary rule relates to

the valuation of raw materials or staple commodities in the inventory. The corporation has

an option to value these inventory assets at the

lowest market price in effect during the income year or in any of the nine previous years,

and then to reduce that figure by 30 percent to

give an inventory valuation equal to 70 percent of the 10-year low. If the corporation

chooses to value raw materials or staple commodities in this way, it may not also take advantage of the rule of “comparable value” outlined above, In any event, a corporation may

always write its inventory down to its actual

value, despite the foregoing rules, and take appropriate deductions from taxable income. So

far as the company’s books are concerned, it is

immaterial whether the amount of a n

authorized writeoff is deducted directly from

the cost or market value of the inventory price

decline on the liability side, The latter method

is customarily used, however, when the use of

the “comparable value” rule results in a negative inventory value.

b. Depreciation.—The second area of incentives granted industry by the Swedish

Government is depreciation. The main rule

dealing with depreciation provides that a taxpayer, after first writing off all obsolete or unsalable items in full, may write down the

balance of the inventory by 60 percent to a

floor of 40 percent of cost or market value,

whichever is lower. Cost is determined on a

first-in, first-out basis. The amount of this inventory writeoff is deductible from taxable income.

c. Reserves for Future Investment.—The

third area of incentive in the Swedish system

is the establishment of reserves for future investment. A special provision enacted in 1964

permits a Swedish parent company selling in1 8 0
ventory assets to a foreign subsidiary for

future resale on the foreign market to defer tax

on profits attributable to goods which remain

unsold in the hands of the subsidiary at the

end of the parent’s fixed year. The parent may

take a deduction from taxable income by an

amount not exceeding the difference between

the price at which the parent sold these goods

to the subsidiary (minus any amount of inventory writeoff deducted by the subsidiary), and

the parent’s cost of these goods. The allocation

must be restored to taxable income during the

following fiscal year; at the end of that year

the question of a deduction for a renewed

allocation is considered in view of the then existing circumstances.

While the tax system of Sweden was not

designed to create a national stockpile, but

rather to support a healthy industrial economy

in good rapport with Government, it has

tended to obviate the need for a national

stockpile by encouraging industry to maintain

inventories large enough to meet emergency

situations. On the one hand, the inventories

thus supported include items which are of a

strategic and critical nature, as well as those

which are not. On the other hand, the

materials coverage becomes much greater than

would be possible if the Government were to

purchase and store only those items which it

could afford and which were deemed vulnerable enough to warrant the Government effort.

In brief, then, the Swedish tax rules, as they

apply to inventories and other tax measures,

are designed to increase the efficiency of

Swedish industry as a competitor in world

markets. The creation of a “Swedis h

stockpile” is more or less a byproduct of those

rules,

2. Futures Markets

The extension of futures markets for

materials in which they do not already exist

could provide a means of greater market

stability, despite the problems which would be

raised by speculation in these materials.

Among the metals, there are futures markets

in the United States (such as the Commodity

CHAPTER VII

Exchange in New York) and abroad (such as

the London Metal Exchange) in copper, gold,

lead, mercury, platinum group, silver, tin, and

zinc.

A commodity futures market is any exchange or association of persons engaged in

buying or selling a commodity or receiving it

for sale on consignment. 13 Contracts, called

“futures,” are made at a mutually agreed price

between buyers and sellers or their agents for

delivery of commodities at some future

specified date. The commodity futures market

provides a vehicle through which buyers and

sellers hedge against losses which may be incurred because of price changes in the future.

For example, the buyer in a long-term contract

could hedge his purchase by selling forward;

i.e., by taking a short position in the futures

market. If the price were to fall in the interim

before actual delivery is made to him, he

would offset his short position on the futures

market, making a profit on the closed-out position, thus compensating for the loss incurred

under his long-term contract for accepting

delivery on an overvalued commodity. Transactions could also be made to offset the effect

of possible future price increases and apply to

sellers as well as buyers. In short, gains in a

rising market and losses in a falling market

could be compensated for by opposite gains or

losses resulting from physical delivery under a

long-term contract.

Commodities which are traded on a futures

market should meet certain criteria. Uniformity of specifications is a prime consideration.

Since there must be certainty that the grade

and quality named in the contract can be

delivered with little variation from the standard, the commodity should therefore be interchangeable and homogeneous. Another requirement is that the freight cost should be

small in comparison with the delivered value

of the commodity. High freight-to-value ratios

could require a number of storage warehouses

at strategic locations and would make it

l%ee “A Study of Ferrous Scrap Futures,” United States

Department of Commerce, June 1974.

181
CHAPTER VII

difficult to operate a central commodity exchange with a sufficient number of floor traders to keep the contracts liquid. In relation to

the location of inventories, there should be

enough stock available on the cash or spot

market to allow a short position to be offset by

delivery rather than by “buying in” the contract. A workable commodity exchange should

either carry adequate inventories against actual delivery contracts or have ready access to

inventories of others through adequate spot

trading. The possibility of making or demanding delivery tends to keep the futures price

levels of the nearest delivery month in close

alignment with the spot price. Finally, a commodity with a large number of active buyers

and sellers is necessary in order to supply the

hedging contracts and the large volume of

trading needed to keep the market liquid. The

absence of a large number of traders on both

sides of the market could reduce the competition required to avoid restrictive action by an

individual or group on supplies or prices.

Although there has been consideration from

time to time regarding the development of a

futures market in commodities not now so

handled, and although some of the materials

which might be selected for consideration in

an economic stockpiling program might

qualify, there is no present indication of an extension of such markets in those directions.

Nevertheless, this alternative should be kept

in mind as a possible means of market

stabilization if future developments warrant it.

3. Standby Capacity

Standby capacity to produce materials

would require Government financing or tax

incentives to encourage the construction of

facilities for future use when needed. Standby

capacity is a deferrable and/or mothballed

mining and/or industrial capacity capable of

producing in quantity critical and strategic

materials in time of scarcity. Its major advantages are that it provides a quick reaction

capability to scarcity problems and requires a

relatively short leadtime to be put into use.

The major disadvantages of standby

capacity, according to Buttner, are

high capital tieup, rapid depreciation of capital

through obsolescence, and deterioration of plants

standing in idleness. The losses in mothballed

plants are so great that the temptation has been

overwhelming to run the plants instead, and that,

like a night out on the town, results in a DPAlike, stockpile hangover. In addition, the deferral

of ”existing equipment and manpower from other

less critical activity is disruptive to industry and

usually requires special Government bodies set

up to manage it equitably. To rely 100 percent on

standby capacity to combat scarcity would incur

exorbitant costs.14

The stockpiling of technology—in the form

of standby capacity--can occur either as

standby production plants or excess plant

capacity, by subsidizing the operation of higher cost production plants or excess plant

capacity, or by subsidizing the operation of

higher cost production processes which permit

the use of nonvulnerable resources, Compared

with maintaining stocks of materials, the costs

incurred in stockpiling technology are very

large and it appears doubtful if the insurance

provided would be worth it. A major relevant

issue of science and technology policy is

whether the Federal Government should underwrite research and development for alternative technologies, substitute materials, or

raw material supplies. However, such an issue

is really more concerned with long-term impacts than with short-term needs. Instituting

standby capacity as an alternative to stockpiling, costly as it would be, is a doubtful

development under peacetime conditions.

4. International Commodity Agreements

International commodity agreements with

developing countries have been put forth as a

potential means of achieving international

market stability for two mutually beneficial

purposes: materials supply/price stability for

the United States and market/price stability for

IAHenniker Report.

182
the materials-producing countries, 15 Unde r

such agreements, floor and ceiling prices could

be established to protect both producers and

consumers. Without an economic stockpile as

a repository for materials obtained through

such international agreements, some types of

allocations of supplies to consumers would

probably be necessary. International commodity agreements would be expected to have

limited effect on cartel or unilateral political

actions which, because of their political nature,

do not make the countries involved amenable to

international agreements, However, the

possibility y of such agreements should not be ignored,

The analysis of international commodity

agreements in this chapter does not obviate

the consideration of such an agreement as an

economic stockpile. It is placed here as an

alternative simply because it is clearly not a

national stockpile and because it involves

defined foreign-policy decisions,

One potential problem with international

commodity agreements was cited by several of

the persons interviewed, namely, that many

countries might not consistently adhere to an

international agreement during periods when

it might not be to their best economic advantage,

Heavy investment costs of mineral development and processing plants have helped to

promote the growth of large, vertically integrated firms and, more recently, of multinational

corporations which have to a large extent

organized and controlled markets and trade in

minerals, The current picture is changing,

however. The power and influence of the

multinational mining corporations have been

declining and will probably continue to

diminish in the future, as their facilities, are

nationalized, as foreign governments intervene in their operations and marketing, and as

hostility toward foreign investment grows.

15’’prospects for International Cooperation in Critical

Materials: The Case of International Commodity Agreements.”

A paper by John E. Tilton, Department of Mineral Economics,

Pennsylvania State University, June 1975.

CHAPTER VII

Since multinational corporations no longer

appear to be serving the interests of producer

(exporter) or consumer (importer) countries,

other avenues are being considered. From the

standpoint of importing countries, particularly

the United States, there is a growing concern

over future access to mineral supplies, and a

fear of possible political confrontation over

mineral policy issues, as well as of sharply

higher prices. These countries are therefore

looking more favorably on international commodity agreements and other alternative arrangements for organizing international

mineral markets, In May 1975, Secretary of

State Henry Kissinger indicated a willingness

by the United States to consider international

arrangements for individual commodities on a

case-by-case basis, And, in fact, the U.S. has

recently signed the International Tin Agreement and submitted it to the Senate for

ratification,

a. Functions of International Commodity

Agreement. —In certain respects, international

commodity agreements might serve the interests of both importing and exporting countries in four ways. First, buffer stocks which

stabilize the price and output of mineral commodities around their long-run trend might

benefit both sets of nations, Second, buffer

stocks might stabilize export earnings, Third,

they might transfer earnings from developed

countries to developing countries, if this were

found to be desirable, Finally, they could provide gains in political good will and result in a

type of materials detente,

N. E. Promisel lists the following services

which an international organization could perform:

●

●

●

Provide a forum for international discussion and debate of critical issues, followed

by joint planning for action;

Provide a recognized mechanism for

cooperative programs in research and

development and other sectors of materials

and processes technology;

Provide an adequate and rapid means for

information and technology transfer, for

mutual education, and for exchange of

183
CHAPTER VII

materials scientists and engineers. Included

would be international publications and

jointly planned conferences and symposia;

. Stimulate the advancement of materials

science and engineering on a global basis

and promote professional growth in this

field;

● Promote a better understanding and appreciation of materials science and

engineering and its importance by key executives and administrators in many countries;

. Insure a mechanism for proper inputs and

response to the many other international

bodies in other fields and thus to insure

adequate consideration (now mostly lacking) of materials science and engineering in

many global, critical issues; and

. The organization would not deal with

proprietary industrial technology or the

market place per se although the impact of

materials science and engineering on

economics would be included.16

Whatever the agreement or disagreement

regarding these possible benefits of an international stockpile, the international community

should strive to achieve at least two additional

objectives: (1) minimize the potential for

political conflict arising from mineral trade,

and (z) encourage production efficiency. Exploration, development, and production

should not be encouraged in high-cost areas

while lower cost areas are neglected, And

material substitution should not be stimulated

before relative production costs make such

changes desirable, As Tilton points out

International commodity agreements which

attempt to set prices above the long run market

clearing level are unlikely to achieve either of

these objectives. Once importing states agree

that exporting countries are entitled to monopoly

profits, disagreements over just how high prices

should be almost ensures continual confrontation. In addition, the incentives of producers and

users are distorted in a manner that may promote

serious production inefficiency. For these

reasons, importing states should resist the strong

pressures of exporting states for artificially high

prices, Although

16 Henniker Report,

184

a transfer of income and wealth

from the importing countries, which tend to enjoy high standards of living, to the less

developed, exporting countries may be highly

desirable, it should be done in a manner which

improves international relations and production

efficiency, Moreover, a number of mineral exporting countries, such as Canada and Austria,

already enjoy high standards of living, while

some of the world’s poorest countries have little

mineral wealth to export. If a redistribution of income among nations is considered desirable for

equity and humanitarian reasons, then a country’s level of development, rather than its

mineral endowment, seems a more appropriate

criterion for receiving assistance.17

International buffer stocks have also been

discussed by F. H. Buttner of Battelle Columbus Laboratories. Such a stockpile, he insists,

would “replace national buffer stocks, for the

main purpose of reducing the amplitude of

world price fluctuations encountered in

economic cycles. “18 Buttner would call this

stockpile an International Trade Inventory

(ITI) to avoid the “nationalistic and aggressive

connotations” of the term “stockpile.” He

points out the following potential advantages

of an

To

(1)

(2)

(3)

(4)

(5)

international materials stockpile:

Consumer Countries, An inventory would:

Relieve the disruption of hand-to-mouth

material procurement,

Avoid economic damage of sudden scarcity,

Bypasses a “decelerator effect, ” (The

decelerator effect occurs when a scarcity

idles consumer’s manufacturing capacity requiring him to carry higher costs,)

Stabilize prices, preventing them from

penetrating ceilings that add to costs; i.e.,

idle-equipment costs, which reduce profit

margins and create an increment of inflationary pressure.

Introduce de facto currency support by virtue

of a nation’s ownership of part of the inventory, thus strengthening its currency convertibility and valuation,

Introduce de facto expansion of currency via

extending credit against ITI stocks, thus

relaxing need for IMC to be prepared to lend

170p, Cit.

laHenniker Report,
To

(1)

(2)

As

money to nations faced with sudden rises in

demand for foreign currency,

Producing Countries. An inventory would:

Become an inventory-customer to stand in

for disappearing consumer-customers in

times of depressed demand and prices.

A~oid economic damage of sudden high demand bypassing the “accelerator effect. ”

(Accelerator effects occur when an increased

demand pushes producer beyond his

capacity, requiring him to raise his investment. A five percent increase in output,

above capacity, would as a rule, raise the investment/spending budget by perhaps 50 percent.) The Inventory would absorb the shock

or a sharp discontinuity in demand, and

relieve pressures on that investment/spending budget; also allow for an orderly expansion over time if demand proves

to be continuous.

(3)

(4)

(5)

b.

CHAPTER VII

Stabilize prices (of inelastic commodities)

preventing them from penetrating floors that

reduce revenues at a time when (1) idle

capacity may be increasing unit costs due to

lower productivity and (z) reduced revenues,

and profits bear hardship on producer country.

Introduce de facto currency support of producer-country currency in foreign exchange.

Currency convertibility increases with

knowledge that valuable raw material is

available in its ITI account to holders of the

producing country’s currency,

See (15) under “Consuming Countries, ”

International Tin Agreements,—The

ITA is currently the only formal international

commodity agreement for a metal, For a complete discussion of the ITA, see appendix B;

“Case-Study: The International Tin Council, ”

D. ALTERNATIVE METHODS TO RESTRICT DEMAND

an alternative to economic stockpiling,

restricting demand is in part a negative approach, contrary to the other alternatives

which are aimed for the most part at increasing supply. The distribution of materials could

be achieved in at least three ways: (1) conservation, (2) substitution, and (3) export controls. Conservation and substitution are longterm solutions to the materials problems for

which an economic stockpile is being considered, while export controls provide a shortterm solution.

S, Victor Radcliffe lists the following

methods for reducing demand for new supply:

●

●

●

Better integration of materials selection

with component design to develop

manufacturing processes that reduce

materials loss during manufacturing;

New or improved materials to permit

engineering designs that reduce the

amounts of material required to perform a

given function (e.g., miniaturization, as in

solid-state devices, or improved reliability);

Conservation in use through improved

materials performance that provides in-

●

On

creased service life (e.g., reduction in rates

of deterioration by corrosion and wear);

and

Improved recovery or direct reuse of

materials during processing, manufacturing, and after completion of the useful life

of capital or consumer goods.19

1. Conservation

the domestic side, conservation—

whether voluntary, mandatory, or induced by

higher prices—would be a means of reducing

demand and therefore import dependence.

Such conservation measures would have to be

accompanied by allocation techniques in order

to provide equitability among consumers,

Conservation could also be achieved in a

reduction of materials waste. A prime current

example of conservation as an alternative has

been the U.S. response to OPEC.

Ira Grant Hedrick identifies three certain

mechanisms which can help promote more

conservative designs in the use of materials:

lgHenniker Report.

185
CHAPTER VII

● A shift in customer appeal. Simply, this is

getting the customer to choose products

because they conserve materials. This

could be quite a chore with the private and

commercial customer.

. A reordering of the “Dollar Economy. ” The

introduction of a carefully considered

system for assessing the true value of a

material to our society such that the price of

a product would better reflect its total

materials impact,

● The application of artificial constraints and

controls such that the traditional principles

of maximum appeal at minimum cost are

forcefully ‘overridden’ in favor of resource

conservation. 20

The National Commission on Materials

Policy recommended that the public be alerted

to materials savings by

●

●

●

Publicity campaigns mounted by public and

private consumer protection agencies or

other appropriate means;

Publicizing the results of public or private

product testing laboratories; and

Development of product performance

specifications by trade organizations and

technical and professional societies, with

public participation and encouragement of

compliance by their respective industries,

The Commission also recommended that “the

Department of Commerce fund a comprehensive survey”

● To determine losses sustained in the United

States from corrosion, friction and wear,

fracture, and high temperatures, service

failure in the various industries, and to

calculate the amount of savings that can be

affected by application of established

measures;

● To assess adequacy of present research in

these fields and to fund additional research,

if necessary; and

● To recommend improved methods for dissemination of pertinent data.

The Office of Technology Assessment currently has a study underway on materials conservation.

Also on the

other available

2. Substitution

domestic side, substitution of

materials—whether voluntary

or under Government order—would tend to

reduce demand for materials in short supply.

The major advantages of substitution are, first,

that it relieves critical-material demand by

replacing them with noncritical materials

offering equivalent effectiveness in given

uses; and second, that once underway, it pays

for itself as it goes, except where the replacement material is inferior and requires paying

an incremental cost to make up for that margin

of difference. The major disadvantage of

substitution is that it cannot take the economy

far enough to combat broad and deep scarcity

situations. Substitution technology is not that

well developed, and it will require long leadtimes to develop it. That is not to say that

substitution is not done in industry. It is, as

Buttner points out, but on a relatively small

“nutritional” scale, so to speak, not on a sufficient scale to provide the large-scale “therapy”

we would need to combat real or sudden scarcity. “Even though further technical development appears worthwhile and should take

further technical development appears worthwhile and should take us a long way, ” he continues, “it would be visionary to expect a 100

percent substitution to solve all scarcity

problems. One can foresee at its best exorbitantly high cost, and, for technical reasons, a

significant short fall of the ’100 percent’

goal.” 21

The extent of substitution maybe limited by

performance standards, relative costs, and the

supply of substitutes, Substitution could be increased by the imposition of high tariffs,

resulting in increased prices and reduced demand for the material involved, but such higher tariffs are not likely. Substitution of one

scarce material for another would obviously

change the problem but not solve it, Where

alterations in processing methods and investment in new equipment are involved, substitu -

zOHenniker Report

1 8 6

ZIHenniker Report.
tion is a more feasible

supply problems than

duration. For example,

solution for long-term

those of likely short

the shortage of certain

raw materials during World War II and the

Korean war led to rather extensive substitution in the component elements of alloy steel

and tool steel making. A major change occurred in the use of molybdenum in lieu of less

plentiful materials, such as tungsten and

vanadium,

The Office of Technology Assessment currently has underway a study on substitution.

3. Export Controls

On the foreign side, Government-imposed

export controls or voluntary industry actions

reducing exports would shift supplies to

domestic consumers. These export limitations

CHAPTER VII

could apply directly to materials, or they could

achieve much the same result by being applied

to the products made from those materials. Except under wartime conditions or under extraordinary peacetime conditions, the imposition of Government export controls isunlikely. Over the past 10 years, such controls

have been virtually limited to serious shortsupply conditions in nickel, copper, ferrous

scrap, and petroleum products. In 1974, for example, the United States discontinued the export controls it had imposed in July 1973 on

ferrous scrap. This program was instituted as a

result of the rising price of ferrous scrap

associated with a surge in U.S. exports and a

domestic short supply. As these conditions

changed, the United States acted quickly, in

consultation with its foreign trading partners

and domestic suppliers and users of scrap, to

terminate export controls.

E. SUMMARY OF ALTERNATIVES AND IMPACTED SECTOR GROUPS

1. Alternatives to Economic Stockpiling

Policies

The following matrix (table VII-I) identifies

alternatives which could principally apply to

each of the five stockpiling policies studied in

depth. The greatest number of alternatives—

12 of the IA-offer possibilities in overcoming

the problems of import disruption/price actions by cartels. Not all the alternatives shown

for any single stockpiling policy would be required to achieve the purpose of that policy,

nor are they all of equal value. A judicious

choice of alternatives, based on a quantitative

cost/benefit analysis of their advantages and

disadvantages, is needed and could be performed by an agency responsible for economic

stockpiling. Such an analysis of alternatives

was beyond the scope of this assessment.

2. Sectors Impacted by Alternatives to

Economic Stockpiling

Table VII–2 identifies the various sectors in

the economy which are principally impacted

by the three sets of alternatives discussed in

this assessment. The identification of the sectors is derived in large part from the Relevance

Trees.

187
CHAPTER VII

Table VII–l—Alternatives to economic stockpiling policies

Loans and Investment

Guarantees

Tariff Concessions

Recycling

Production from

Public Lands

Tax Incentives for Inventory Maintenance

Extended Futures Markets

Standby Capacity

International Commodity

Agreements

Conservation

Substitution

Export Controls

x*

x*

x *

X *

x*

x*

X *

x

x

x

x

x*

x .

x

. . .

. . .

. . .

ALTERNATIVES

Direct Subsidy

Tax Incentives for Capital

Investment & Production

Research & Development

. . .

x

x

x

. . .

x

x

. . .

. . .

. . .

x

x

. . .

x

x

x

x

. . .

. . .

. . .

x

x

x

● These are long-term alternatives which are not effective in the short run, but which may be effective in the long run.

Table VII–2.—Sectors impacted by alternatives to economic stockpiling

. . .. . . .

. . ~, . . . *.

Redirect

distribution

Government , . . . . . . . . . , , ., , . . .

Consumers , ., . . . . . . . . . . . . . . . .

Producers—primary materials , .

Processors—primary materials. .

Processors—secondar y materials

Scrap collectors. . . . , , . . . . . . . . .

University labs , , . . . . . . . . , , . . .

Research labs. , ., , . . . . . . . . . . . .

Private R&D groups ., , , . . . . . .

Resource investors . . . . . . . . . . . .

Traders . . . . . . . . . . . . . . . . . . . . .

Importers, . . . . . . . . . . . . . ., , ., , .

Exporters . . . . . . . . . ., ., . . . . .

x

x

x

x

x

x

x

x

x

x

. . .

. . .

. , .

x

x

x

x

x

x

. , .

, . ,

. . .

. . .

x

x

x

x

x

x

x

x

, . ,

x

x

x

. . .

. . .

. . .

, . .

188
. .— — —..

Chapter Vlll

LEGISLATIVE CONSIDERATIONs

REGARDING ECONOMIC STOCKPILING
Chapter Vlll

LEGISLATIVE CONSIDERATIONS

REGARDING ECONOMIC STOCKPILING

There are two general courses of action open to the United States in dealing

with current or anticipated materials problems. On the one hand, the United

States could allow the existing market system to continue solving these problems

and hope that future dislocations will not further exacerbate the situation. On the

other hand, the United States could implement some national policy in an attempt

to overcome the current problems and avert similar problems in the future. If the

latter course of action is chosen, two options are available: (1) to establish an

economic stockpile as a means of achieving whatever policy objective(s) are

deemed most beneficial; or (z) to implement (either separately or in conjunction

with a stockpile) some alternative means other than stockpiling to achieve the

policy objective(s).

Although the emphasis of this assessment has clearly been directed toward

an analysis of economic stockpiling, it is important in the development of legislation to present the full range of options available for congressional consideration,

Accordingly, this chapter includes the following sections:

● Options for considering economic stockpile legislation,

● Institutional considerations for establishing an economic stockpile, and

. Major public policy issues related to establishing an economic stockpile.

A. OPTIONS FOR CONSIDERING ECONOMIC STOCKPILE LEGISLATION

There are a number of options for Congress

and the President to consider in determining

whether or not establishing a nationa l

economic stockpile, or participating in an international economic stockpile, would be in

the best public interest. This section is a presentation of four such options.

1. Evolution of Current Public and Private

Systems Without Enacting New Legislation

The first option is for Congress and the

President to forgo establishing an economic

stockpile, letting the current market system,

with its existing support mechanisms, attempt

to prevent or correct the damaging impacts of

supply disruptions and price increases, An essential consideration related to this option is

whether or not the existing market system has

the power and the flexibility, either to discourage such supply disruptions as those

caused by the Organization of Petroleum Exporting Countries (OPEC) or counteract such

disruptions after they occur. A further consideration is whether or not the market system

191
CHAPTER VIII

will discourage or counteract supply disruptions in a manner beneficial to the public

welfare, as opposed to the private welfare of

individual industries or sectors either involved

in or impacted by the supply disruptions.

It is especially important to understand the

extent to which economic stockpiling is interrelated with the existing U.S. market system as

well as U.S. foreign policy, particularly as the

needs of the industrial nations are influenced

by the growing demands of the less developed

nations, In that sense, the decision as to

whether or not the current public and private

systems can be expected to deal effectively

with materials problems becomes the starting

point for further analysis,

2. Congressional Options Without Enacting

New Legislation

The second option is for Congress to act

without drafting new legislation, It could initiate such action in three ways:

a. To Provide Information Regarding

Economic Stockpiling Within the Legislative

Branch--Congress, through its various offices

and agencies, can either initiate new action, or

strengthen action already begun, in order to

analyze and disseminate data and information

throughout the legislative branch. Such data

and information might concern the potential

for future supply shortages, the expected

damage of such shortages, and the estimated

benefits and costs of economic stockpiling to

avert or counteract such shortages. The major

agencies which could be involved in this information transfer are the Congressional Budget

Office, the Congressional Research Service,

the General Accounting Office, and the Office

of Technology Assessment.

b. To Provide Information Regarding

Economic Stockpiling Within the Executive

Branch.—Congress also has the option of disseminating data and information regarding

economic stockpiling to the executive branch.

Such action can be initiated through hearings,

the use of oversight and investigative powers,

as well as joint resolutions. It should be

192

emphasized that while such actions

faster and easier to initiate than

may be

drafting

legislation, they neither bind the President

legally nor guarantee that he will take executive action.

c. To Provide Information Regarding

Economic Stockpiling Within the Private

Sector.—Not only can congressional Members

issue policy statements, hold investigations,

and exercise oversight functions in areas related to materials, but Congress as a whole can

encourage the various Government agencies to

increase and improve their working relationships with private sectors which have interests

in the materials field. While such action may

enhance the market system’s capability to deal

effectively with supply disruptions and price

increases after they occur, it will in no way

guarantee that such problems will not recur.

3. Executive Options Without Enacting

New Legislation

The third option is for the President to take

executive action without proposing new

legislation. Such action could be accomplished

in several ways: (a) issue a Presidential

proclamation to set overall policy direction, (b)

issue an Executive or agency order, and (c)

make research and development grants available for analysis of materials problems. While it

is certain that a combination of these Presidential actions will improve the executive

branch’s capabilities to understand and deal

with materials problems, it is not equally certain that such actions will provide the necessary impetus for Congress and the private sectors to do so.

4. Options Through Enacting

New Legislation

The fourth option in the consideration of

economic stockpiling presumes that the first

three options will not be sufficiently effective

in dealing with current or anticipated

materials supply problems and price increases.

New authorizing legislation based upon a complete assessment of the impacts of an

economic stockpile will clearly be more com-
prehensive and possibly more effective in

combating materials problems-especially if

such legislation is a deliberated component of

a more comprehensive national materials

strategy.

The following discussion centers first on the

legal authority for economic stockpiling, then

examines the possible components of an

economic stockpile program and their relationship to past and current legislation.

a. Authority for Economic Stockpiling.—

Authority for economic stockpiling, as for

other Federal actions, must be found in the

Constitution. Several specific clauses of the

Constitution, such as the General Welfare

Clause, the Property Clause, the Spending

Clause, and the Commerce Clause, coupled

with the Necessary and Proper Clause,

establish a broad foundation for the exercise of

legislative power in achieving national objectives which can be seen as being in the broad

public interest.

b. Economic Stockpiling: Its Components

and Relationship to Existing Legislation.—

The establishment of an economic stockpiling

program would impact a wide range of policies

embodied in current legislation, and such

stockpile legislation should attempt to identify, accommodate, and harmonize these

policies. In this section, 10 components of an

economic stockpiling program are outlined

and analyzed in light of existing legislation.

Each of these components has an analog

in previously enacted legislation; and the recently enacted Energy Policy and Conservation Act of 1975 pulls them all together for oil

and gas (For a detailed discussion of the act,

see ch. I, sec. A (3).) Prior to this act, the

closest analogs were the programs under the

Defense Production Act of 1950 and those administered by the Federal Energy Administration (FEA) under the Federal Energy Administration Act of 1974, the Emergency

Petroleum Allocation Act of 1975, and the

Energy Supply and Environmental Coordination Act of 1974. The FEA’s authorities are

generally of limited duration, generally around

CHAPTER VIII

2 years. This no doubt reflects a concern that

governmental intrusion into the marketplace

should be limited to the minimum time necessary to deal with the problem at hand.

The same concern would exist with respect

to an economic stockpiling program, but it

would have to be dealt with differently, since

the nature of such a program precludes its

being time limited on a short- or medium-term

basis. Such a program would require some institutional mechanisms for insuring at least a

minimal amount of monitoring and a minimal

level of readiness to respond to disruptions,

Furthermore, the program should have welldefined and carefully circumscribed “trigger

points” for invoking standby emergency

authorities, much as the Selective Service

System maintained manpower mobilization

capability on a standby basis.

The 10 components which should be included in both active and standby stockpiling

authorizations are as follows:

(1) Definition and distribution of authority.—Implementation of an economic stockpiling program will both subserve and impact

upon a wide range of national interests. These

include national defense, foreign policy, conservation of domestic resources, environmental quality, full employment, reduction of the

need for governmental intervention, and

maintenance of an open and strong U.S.

economy.

To the maximum extent possible, these

policies should be explicitly identified and integrated into a legislative statement of findings

and purposes in order to provide guidance to

those entrusted with implementing the

stockpiling program. They should also be

reflected in the list of delegated functions and

authorities. Although the delegated authority

must be broad enough to encompass all activities necessary for successful implementation of a stockpiling program, it should be accomplished by specific designation of the

scope and distribution of component functions, such as authority to buy, store, process,

sell, allocate, contract, limit exports, issue

193
CHAPTER VIII

rules, regulations and orders, etc., together

with delineation of procedures and guidelines

for coordinating these functions among themselves and with respect to broader national

policies. Particular care must be taken to coordinate the strategic and economic stockpiling

policies. In addition, specific standards and

criteria should be established to control the exercise of specific functions, Such specificity

not only avoids constitutional difficulties related to excessive delegation of legislative

authority, it also minimizes future administrative and mitigative conflicts. The danger of such

conflicts is particularly acute when functions

are distributed to more than one agency.

Assuming sufficiently explicit statements of

standards and criteria, the choice of a vehicle

becomes of lesser importance, However,

multiple choices of a vehicle exist, including

the President, with power of delegation and

redelegation; a department or agency; a

Government corporation; a quasi-Government

corporation, or a combination of these. Discussion of these choices is included in chapter VI,

The most detailed exposition of materials

policy at the present is contained in the Mining and Minerals Policy Act of 1970, 30 U.S.C.

21a, which covers only mineral materials. The

National Materials Policy Act of 1970, 42

U.S.C. 325 (note), covers all materials but is

much less detailed. Both acts emphasize the

environmental consequences of materials

policies but do not provide specific guidelines

for resolving conflicts between materials

development and conservation policies and

the environmental policies embodied in such

statutes as the National Environmental Policy

Act of 1969, 42 U.S.C. 4321-4347; the Federal

Water Pollution Control Act, 33 U,S.C.

1251-1376; the Clean Air Act, 42 U.S.C.

1857-1857; and the Endangered Species Act of

1973, 16 U.S.C. 1531-1543.

The need to consider the impact of materials

policy on other national policies is recognized

in such statutes as (1) the Comprehensive

Employment and Training Act of 1973, 29

U.S.C. 801-992, which directs the Secretary of

Labor to make a study of the impact of energy

shortages, including fuel rationing, upon manpower needs; (2) the Federal Energy Administration Act of 1974, 15 U.S. C. 761-786,

which requires the Administrator to provide

the Cost of Living Council at least 5 days to approve or disapprove any proposed rule, regulation, or policy relating to the cost or price of

energy before promulgating the same, and- to

afford the Administrator of the Environmental

Protection Agency at least 5 days to provide

written comments on any proposed rule,

regulation, or policy which will affect the

quality of the environment; and (3) the Energy

Supply and Environmental Coordination Act

of 1974, 15 U.S. C, 791–798, which relaxes certain air-quality standards for plants required

to convert to coal as a major fuel source and

authorizes priority allocation of low sulfur

coal to areas most needing the same for environmental reasons,

(2) Acquisition of information.—There are

several precedents for required reporting of information needed to implement materials

oversight and management programs. Section

705 of the Defense Production Act of 1950, 50

U.S.C. App. 2061–2169, contains provisions

relating to mandatory recordkeeping, reports,

confidentiality of records, and related matters.

The most comprehensive reporting requirements are those related to energy information

contained in the Federal Energy Administration Act of 1974 and the Energy Supply and

Environmental Coordination Act of 1974,

supra. These acts require the Administrator to

collect, assemble, evaluate, and analyze

energy information of sufficient comprehensiveness and particularity to permit fully informed monitoring and policy guidance with

respect to the exercise of his functions and to

assure the Federal and State governments and

the public access to reliable energy information. They require any person engaged in any

phase of energy supply or major energy consumption —including the production, processing, refining, transportation by pipeline, or distribution (at other than the retail level) of

energy resources—to submit reports and writ1 9 4
CHAPTER VIII

ten answers to interrogatories and other requests for reports or other information, including all information in whatever form on fuel

reserves, exploration, extraction, and energy

resources (including petrochemical feed

stocks); projections as to source, time, and

methodology of development; production, distribution, and consumption of energy and

fuels; and corporate structure proprietary relationships, costs, prices, capital investments,

assets, and other matters directly related to

energy and fuels. The acts grant the Administrator subpoena powers enforceable by

the Federal courts under their contempt

power; give him authority to make onsite

physical inspections, inventories, and sampling and to examine, copy, and question; and

make violation of any rule, order, or regulation

requiring such information an offens e

punishable by law.

The Federal Energy Administration Act

further provides the Comptroller General with

access to all information in the possession or

control of the Administrator, together with independent authority to require disclosure of

similar information on his own. Information

acquired by either the Comptroller General or

the Administrator is available to other Federal

agencies and to Congress. These provisions for

exchange or release of information should be

compared with those of the Federal Reports

Act, 44 U.S.C. 3501–3512, Access of the public

to such information will be discussed below

under subsection 10, Public Access and Participation.

(3) Stockpile management.—Th e

mechanics of stockpiling per se can be

modeled on the provisions of the Helium Act

of 1925, 50 U.S.C. 167–167n; the Strategic and

Critical Materials Stockpiling Act, 50 U.S.C. 98

to 98h; and the Defense Production Act of

1950, supra.

(9) Control of domestic distribution.-If a

material is in very short supply, stockpile

operations will have to be coordinated with a

mandatory allocation program for nongovernmental as well as governmental supplies of the

material to assure its availability for priority

uses such as national defense and to avoid

severe dislocations in the economy or any particular sector thereof, Precedent for such

allocation authority can be found in the

Defense Production Act of 1950, the Emergency Petroleum Allocation Act of 1973, and the

Energy Supply and Environmental Coordination Act of 1974, supra, A possible obstacle to

domestic control is the Connolly Hot Oil Act

of 1935, 15 U.S.C. 715–15m, which gives

Federal protection to State regulation of production. As materials controls become more

extensive, there is a danger that certain

aspects of such controls may be construed as

takings of private property for which compensation would have to be paid under the Constitution,

(5) Control of exports. —The need to limit or

prohibit the exportation of materials in

severely short supply in the domestic economy

is recognized in the Export Administration Act

of 1969, 50 U.S. C. App. 2401-2413, which

declares that it is the policy of the United

States to use export controls to protect the

domestic economy from the excessive drain of

scarce materials, to reduce the serious inflationary impact of foreign demand, to achieve

foreign policy and national security purposes,

and to secure the removal by foreign

countries of restrictions on access to supplies

where such restrictions have or may have

serious inflationary impact, cause severe

domestic shortage, or were imposed to influence U.S. foreign policy. The act authorizes

Presidential actions, including, but not limited

to, imposition of license fees to implement

these policies, See subsection(T), International

Trade, for additional information.

(6) Control of imports; access to foreign

supplies.—It maybe desirable either to restrict

imports to encourage domestic production or

to adopt a policy of purchasing stockpile inventories from foreign sources to preserve

domestic supplies, Either approach has foreign

policy implications. The basic authority for the

imposition of tariffs or duties is contained in

the Tariff Act of 1930, 19 U.S.C, 1202–1654,

195

77-119 0-76-1 4
CHAPTER VIII

while trade agreements and foreign assistance

are authorized by the Trade Expansion Act of

1962, 19 U.S. C. 1801–1991; the Foreign Assistance Act of 1961, 22 U.S.C. 2151–2434; and the

Trade Act of 1974, 19 U.S.C. 2101–2487.

The Trade Expansion Act and the Trade

Act authorize the President to suspend, withdraw, or prevent the application of benefits of

trade agreement concessions to a foreign country which engages in discriminatory or other

acts (including tolerance of international cartels) or policies unjustifiably restricting U.S.

commerce; and to increase or impose duties,

impose quantitative import quotas, or provide

financial assistance to firms or workers when

an article is being imported in such increased

quantities as to be a substantial cause of

serious injury, or the threat thereof, to the

domestic industry.

The Foreign Assistance Act restricts the

stockpiling of defense materials for foreign nations and authorizes the President, when he

determines it is in the national interest, to furnish assistance under the act, or to furnish

defense articles or services under the Foreign

Military Sales Act, pursuant to an agreement

with the recipient which provides that the

recipient may obtain such assistance, articles,

or services only in exchange for any raw

natural substance controlled by such recipient

which is in short supply in the United States,

The President may allocate any such material

when received to any appropriate Federal

agency for stockpiling, sale, transfer, disposal,

or any other purpose authorized by law,

The Agricultural Trade Development and

Assistance Act of 1954, 7 U.S.C. 1961–1976,

particularly authorizes the exchange of

surplus federally owned agricultural commodities for strategic and other materials

which can be transferred to a supplemental

stockpile of strategic and critical materials.

Although the Antidumping Act of 1921, 19

U.S.C. 160-173, and the Buy American Act of

1933, 41 U.S.C. 10a-10d, express a policy of

protecting domestic producers from belowmarket-price foreign goods and requiring

purchase of domestic goods for public use,

respectively, neither of them should be a barrier to purchase of foreign materials at the

lowest possible price for a domestic stockpile,

One statute which may hinder import controls

on critical materials, however, is the Strategic

and Critical Materials Stockpiling Act, supra,

which prohibits the President from prohibiting

or regulating importation into the United

States of any strategic and critical materials

from non-Communist-dominated countries as

long as importation from Communist-dominated countries is not prohibited by any provision of law,

(7) International trade.—Temporary control

of imports or exports to prevent or relieve critical shortages in the domestic economy is

recognized as a valid measure under international law by the General Agreement on

Tariffs and Trade (GATT), although in the recently enacted Trade Act of 1974, supra, Congress has directed that discussions on GATT

and other foreign policy discussions emphasize much more strongly both the principle of

access to supplies and the use of temporary

measures to ease adjustment to disruptions in

the domestic market as principal negotiating

objectives of the United States, Imposition of

certain controls may be viewed by foreign nations as grounds for retaliatory action.

(8) Domestic economic impact.—The concern with maintaining an open and strong

domestic economy is reflected in such past and

present statutes as the Economic Stabilization

Act of 1970, 12 U.S.C, 1904 note, and the act of

December 30, 1947, 50 U,S.C, App. 1911–1919,

More particular policies are embodied in the

Small Business Act, 15 U.S.C, 631-647, and the

Antitrust Acts, 15 U.S,C, 1–33. Protection of

small-business interests, maintenance of free

competition, and stabilization of the economy

through allocation of scarce supplies are primary components of the policies, functions, and

procedures established by the Emergency

Petroleum Allocation Act of 1973 and the

Federal Energy Administration Act of 1974,

supra. The FEA Administrator is required, to

the greatest extent practicable, to evaluate and

196
consider the potential economic impact of proposed actions, making such analyses explicit

whenever possible and consulting with other

Federal, State, and local agencies to the extent

possible. The mandatory petroleum allocation

regulation is subject to required review by the

Justice Department and the Federal Trade

Commission for antitrust impacts, and a

carefully limited exemption from the antitrust

laws is provided for activities required under

the FEA statutes. A similar exemption appears

in the Defense Production Act of 1950, supra.

(9) Fiscal incentives.—Taxes, loans, contracts, and other fiscal matters affect and are

affected by materials programs. The act of

August 21, 1958, 30 U.S.C. 641-646, provides

for a program of participating financial assistance toward exploration by private industry

to establish additional domestic mineral

reserves, excluding organic fuels. Loans and

loan guarantees under the Export-Import Bank

Act, 12 U.S.C. 635 et seq., and the Defense Production Act of 1950, supra, can be used to finance expanded materials production abroad.

The latter act has been used to support a considerable expansion of domestic capacity

through loans, loan guarantees, and Government guarantees to purchase surplus produced

materials at attractive prices. The income tax

laws, title 26 of the U.S. Code, provide depletion allowances for the production of almost

all minerals as well as various investment credits, depreciation provisions, and exploration

and development expenditure deductions. The

Tax Reduction Act of 1975, 89 Stat. 26,

repealed the oil and gas depletion allowance

for major oil producers, provides for a gradual

reduction of the allowance for independent

producers, and reduces or eliminates several

tax breaks tied to foreign operations. This

change in tax breaks makes foreign production

now somewhat less attractive to U.S. and

multinational firms.

(10) Public access and participation.—

Various statutes provide generally for citizen

access to information concerning and participation in Federal planning and program imCHAPTER VIII

plementation. The Administrative Procedure

Act, subchapter II of chapter 5 of title 5 of the

U.S. Code, provides for public participation in

rulemaking and hearings. Section 552 of the

act, popularly known as the Freedom of Information (FOIA), provides for access to information in the possession of Federal agencies,

with certain exemptions for confidential information, internal predecision documents, and

the like. The Federal Advisory Committee

Act, 5 U.S.C. App. 1-15, provides for general

public access to the meetings and records of

agency advisory committees and requires that

such committees be fairly balanced in terms of

points of view represented and functions to be

performed. The policies embodied in these

acts have been strongly emphasized in recent

acts such as the Federal Energy Administration Act of 1974 and the Energy Supply and

Environmental Coordination Act of 1974,

supra, which have incorporated their requirements and added even further provisions to insure public access and participation, These

acts adopt the usual exclusions of trade secrets

and other confidential information, a s

specified in the FOIA and 18 U.S.C. 1905,

which makes it a crime to disclose such information except as authorized by law.

The National Environmental Policy Act of

1969, 42 U.S.C. 4321-4347, enhances citizen input on environmental matters by requiring the

preparation and circulation of a detailed environment impact statement for any major action significantly affecting the quality of the

human environment. This requirement does

not apply when time will not permit. It was

held, for example, not to apply to the FEA’s required promulgation of emergency petroleum

allocation regulations within 15 days of enactment of the Emergency Petroleum Allocation

Act of 1973, supra.1 And certain statutes have

relaxed the requirements, although they have

not eliminated them completely, where they

IGUIj Oil Corp. v, Simon, 373 F. Supp. 1102 (DDC 1974).

1 9 7
CHAPTER VIII

would unduly delay economic and resource

adjustment programs.2

Finally, it may be desirable to provide

special procedures for judicial review of administrative decisions under an economic

stockpiling program in order to minimize

mitigative disruption, while maintaining a

forum for valid challenges and efforts at

clarification. An example can be found in the

judicial review procedures under the Federal

Energy Administration Act of 1974, supra,

which requires petitions for review of FEA actions to be filed within 30 days in certain

designated courts.

c. Conclusions Regarding Legal Impacts.— Implementation of each of the

stockpiling policies will require consideration

of the 10 listed components, although for each

separate policy the relative importance of the

different components will vary. For example,

the standby authorities, such as the authority

to allocate supplies and to prohibit the import

or export of certain materials, may be critical

to the success of SP–1 (Discourage or Counteract Cartel or Unilateral Political Actions

Affecting Price or Supply), but it may be completely unnecessary for SP–5 (Provide a

Market for Temporary Surpluses and Ease

Temporary Shortages),

B. INSTITUTIONAL CONSIDERATIONS FOR ESTABLISHING

AN ECONOMIC

It is not the objective of this assessment to

develop economic stockpiling policy for the

United States, but rather to assess the impacts

of alternative options for Congress to consider

in implementing such policy. However, it is

pertinent to suggest here alternative decisionmaking and reporting mechanisms for the

Congress to consider in formulating such

policy.

As presented in chapter I, the history of the

strategic stockpile and the defense production

inventory has been one of diverse pressures

imposed from several directions—the executive branch, the legislative branch, the producing industries, and the consuming industries.

The success of an economic stockpiling

program will therefore depend in large part

upon the type of organization established to

administer it, especially its ability to operate

independently in the national interest, free of

influence by special-interest groups, whether

inside or outside the Government,

Zsee the Energy

Act of 1974, supra.

Supply and Environmental Coordination

STOCKPILE

1. Management Considerations

Implicit in the consideration of alternative

institutional arrangements for establishing an

economic stockpile are several questions.

Among these are: (1) What powers and

authority would an economic stockpile be

granted? (2) How would it operate? (3) How

would it be structured? and (4) Where would

it be located? Because the U.S. operation of (or

participation in) an economic stockpile can be

expected to generate much interest, both nationally and internationally, the answers to

these questions are fundamental to its success.

For a detailed discussion of the management

considerations pertinent to establishing an

economic stockpile, see chapter VI.

2. Institutional Arrangements

Six general institutional arrangements

which should be considered in the development and establishment of an economic

stockpile have been identified. The arrangements are listed below and discussed immediately following:

. A unilateral economic stockpile con1 9 8
●

●

●

●

●

It is

trolled and operated by the U.S.

Government,

A unilateral economic stockpile controlled by the U.S. Government, but

operated by U.S. industry,

A unilateral economic stockpile controlled and operated by a public-private

corporation,

United States participation in a

multinational or internationa l

economic stockpile,

United States participation in an

economic stockpile operated by producer/consumer councils,

A unilateral economic stockpile controlled and operated by the U.S.

Government, but in accordance with

international guidelines.

assumed that, regardless of the overall

institutional arrangement selected for implementation, the stockpile agency will possess

three capabilities: (a) the expertise to set

policy and manage both program and congressional relations, (b) computer analysis and

computer resources, and (c) the materials expertise responsible for day-to-day operations

such as acquisition, disposal, and storage. In

addition, the professional and support staff in

each of the Government agencies with responsibilities related to or affected by the economic

stockpile program could be used. The experience of the Strategic Stockpile program in

the above activities under the Office of

Emergency Preparedness (OEP) is enlightening and is drawn upon in the analysis presented in chapter VI.

a. Arrangement 1 : Economic Stockpile

Controlled and Operated by the U.S.

Government.— Both the legislative analysis in

chapter I and the institutional analysis in

chapter VI present considerations which are

relevant to the establishment and operation of

a unilateral U.S. economic stockpile. Such a

stockpile might be established as another component of the present strategic stockpile, or it

CHAPTER VIII

could be established as an independent

stockpile whose operations are carefully coordinated with those of the strategic stockpile.

Regardless of which action may be taken, the

option of establishing an economic stockpile

which is controlled and operated by the

Federal Government might be the quickest of

the six general arrangements to implement.

And given the fact that economic stockpiling is

at best a temporary solution to short-term

problems, such an advantage is quite important.

b. Arrangement 2: Economic Stockpile

Controlled by the U.S. Government, but

Operated by U.S. Industry.—The advantage

of this arrangement would be twofold: first, it

would forgo some of the acquisition and initialization costs required for the Federal

Government to establish and operate its own

economic stockpile; and second, it would

strengthen the working relations between the

Federal Government and U.S. industry,

thereby demonstrating that an economic

stockpile is intended to be an adjunct to, not a

replacement of, normal industry operations, A

disadvantage of such a policy might be that it

would take too much time to implement and

that its operations might give preference to the

interests of powerful industry groups in lieu of

the public welfare.

c. Arrangement 3: Establish Unilateral

Economic Stockpile Controlled and Operated by a Public-Private Corporation.—Such

a corporation would be funded by the Federal

Government, vested by Congress with a mandate and guidelines on U.S. stockpile purposes,

and given independent authority to acquire

and maintain national stockpiles without

direct control but with provisions for Executive consultation.

Since annual appropriations for operating

expenses and the stockpile corporation requests for any needed additions of the revolving capital fund would be reviewed only once

a year by the President and Congress, the corporation would be able to maintain a certain

degree of political independence (comparable

199
CHAPTER VIII

to the Federal Reserve System on monetary

matters).

d. Arrangement 4: U.S. Participation in

Multinational or International Economic

Stockpile .—This is the first of two collective

arrangements which might provide benefits to

the United States. An economic stockpile operated by two or more nations, either multinational or international in nature, could be

formed along such existing political or

organizational lines as the Organization of

American States (OAS), the European

Economic Community (Common Market), the

United Nations, or just with friendly nations

having materials requirements similar to those

of the United States. At present the United

States is conducting several discussions/negotiations which do consider this arrangement: the UNCTAD discussions within

the United Nations, and the International

Energy Agency. The cost of establishing and

maintaining such a collective stockpile would

be spread among the participants and would

thus be less for any one government. The

stockpile would not take as much material out

of use as would separate national economic

stockpiles which might further exacerbate the

spiraling world shortage. The stockpile might

have less effect upon specific materials prices.

than separate unilateral actions. And, finally,

the participating nations would have to work

closely together in order to make the stockpile

work successfully, The greatest disadvantage

would be the possible loss of control and

sovereignty over the U.S. resources and actions.

e. Arrangement 5: U.S. Participation in

Producer/Consumer Council Economi c

Stockpile .—Another form of collective

stockpiling could be achieved by the creation

or expansion of producer/consumer councils

like the International Tin Council which is run

by both producers and consumers and maintains its buffer stock to help stabilize the supply and price of tin. The benefits and costs of

arrangement 5 are the same as for arrangement 4, but in addition to these there is

another important benefit: an economic

stockpile operated by a producer/consumer

council attacks the basic cause of the materials

availability problem and thereby could provide a long-term solution to specific materials

problems by developing policies which are acceptable to producers and consumers, exporters and importers, developed countries and

lesser developed countries. In this sense, option 5 requires even stronger cooperation

among international participants than option

4. Also like option 4, though, such agreements

could take a considerable amount of time to

implement,

f. Arrangement 6: Economic Stockpile

Controlled by U.S. Government, but Operated According to Internationa l

Guidelines.— This arrangement could combine the advantages of arrangements 1, 2, and

4. As with option 1, the only time constraints

in implementing this sixth option would be

those required to create the legislation and acquire the optimal quantity of materials.

Moreover, certain elements of options 2 and 4

could be introduced by specifically defining

the use of the economic stockpile in the form

of an “international code of operations for

economic stockpiles. ” This code could be introduced as the announced policy of the

United States and expanded on an international basis as needed. Option 6 would recognize the fact that some national economic

stockpiles are being created, but that some

countries like Germany have not implemented

them because of serious concern regarding

their impact on domestic and world market

systems. An international code of operations

might help reduce this concern, as well as

develop effective mechanisms for alleviating

U.S. supply problems without increasing the

world shortage.

200
CHAPTER VIII

C. PUBLIC POLICY ISSUES RELATED TO ESTABLISHING

AN ECONOMIC STOCKPILE

Whatever position regarding economic

stockpiling is taken by Congress and the President, the detailed consideration necessary to

develop that position will highlight a number

of important and interrelated public policy

issues which merit careful attention. Not only

will the implementation of a nationa l

economic stockpiling policy involve significantly large amounts of public money, the impacts of such a policy will be unevenly distributed throughout the U.S. economy. While

the existing market system will in most cases

be able to deal effectively with materials

problems, it is simply unable to compensate

for supply disruptions and price increases

which could be imposed by an international

political organization like OPEC.

Based on the overall impacts analysis, the

public policy issues summarized below suggest

both the diversity and the intensity of conflict

which could be aroused and which would

have to be resolved if an economic stockpile

were implemented as part of a national

materials strategy,

(1) Should an economic stockpile be implemented in concert or in conflict with other

United States materials policies? For example,

how should the planning of an economic

stockpile be coordinated with the International

Tin Council, which the United States has just

joined, or with the long-term grain agreements

with the U. S. S. R., or with the discussions now

underway with the lesser developing nations

regarding materials supply and prices?

(z) What agreements with other industrialized, as well as less developing, nations will be required in order for an economic

stockpile to provide the greatest benefit to U.S,

citizens?

(3) How can an economic stockpile be

designed and operated so that it will not be

misused for financial advantage by special-interest groups? How can it be sufficiently insulated from the political process to obviate its

misuse, yet insure that it will achieve the

public benefits for which it was established?

(4) What measures can be taken to insure

that an economic stockpile will not be used to

accomplish public policy objectives other than

those for which it was established? For example, a stockpile established to deter cartels

should not be used to stop domestic labor

strikes or to control domestic prices.

(5) Under what conditions, and to what

degree, is it justifiable for the Federal Government to intervene in the market place in the

form of an economic stockpile? Should such

intervention be used to require that industry

disclose private, proprietary information to the

Federal stockpile managers? And if so, what

assurances will be taken to protect the privacy

of such information?

(6) What is the real potential for future supply disruptions and price increases? What is

the expected impact (i.e., benefits and costs) of

such economic dislocations upon the U.S.

economy in general and sectors of U.S. society

in particular? What is the cost of insuring

against such dislocations? For example, will

the acquisition of large amounts of materials

like petroleum or chromium compensate for

such shortages, or will it stimulate the already

spiraling inflationary rate? Second, are the expected benefits of an economic stockpile sufficiently greater than the cost to warrant the expenditure of large amounts of public money

and if so, how will this money be obtained?

(7) What measures will be taken to ensure

public participation in the planning of an

economic stockpile? Is such involvement

necessary? Further, if the public is involved,

what measures will be taken to maintain the

201
CHAPTER VIII

confidentiality of U.S. strategic economic in- the United States maintain, increase, or

formation? decrease its present consumption patterns?

How will future supply disruptions affect

(8) What is the long-term outlook for these consumption patterns, and vice versa?

growth in the United States? For example, will How will they affect the environment?

202
Chapter IX

GLOSSARY

.
Chapter IX

GLOSSARY

A. ORGANIZATIONS AND TERMS-ABBREVIATIONS

ICSID -

IMAC -

ITC -

JCS -

LDC -

MB -

MNC -

NCMP -

NRPB -

NSRB -

OCDM -

ODM -

OEM -

OEP -

OEP -

OP -

OPEC -

OPIC -

International Convention on the

Settlement of Investment Disputes

Interdepartmental Materials Advisory Committee

International Tin Council

Joint Chiefs of Staff

Less-Developed Countries

Munitions Board

Multinational Companies

National Commission of Materials

Policy

National Resources Planning

Board

National Securities Resources

Board

Office of Civil and Defens e

Mobilization

Office of Defense Mobilization

Office of Emergency Management

Office of Emergency Planning

(September 22, 1961-October

21, 1968)

Office of Emergency Preparedness (October 21, 1968–July 1,

1973)

Office of Preparedness (General

Services Administration)

Organization of Petroleum Exporting Countries

Overseas Private Investment Corporation

AEC

ANMB

BDSA

Atomic Energy Commission

Army-Navy Munitions Board

Business and Defense Services

Administration (Department of

Commerce)

B E A

CIEP

CIPEC

Bureau of Economic Analysis

(Department of Commerce)

Council on Internationa l

Economic Policy

Council Intergovernmental des

Payes Exportateurs de Cuivre

(Inter-Governmental Council of

Copper Exporting Countries)

CSP Candidate Stockpile Policy

DMA Defense Materials Administration

(Department of the Interior)

DMO Defense Mobilization Orders

DMPA Defense Materials Procurement

Agency (General Services Administration)

DMS

DOD

DPA

EEC

EPA

ERDA

Defense Materials System

Department of Defense

Defense Production Act

European Economic Community

Environmental Protection Agency

Energy Research and Development Agency

FEA

GATT

Federal Energy Administration

General Agreement on Tariffs and

Trade

GSA

IBA

ICC

General Services Administration

International Bauxite Association

Interstate Commerce Commission

205
CHAPTER IX

OTA - Office of Technology Assessment RFC - Reconstruction Finance CorporaPAW - Petroleum Administration for

tion

War (Department of the In- RFF - Resources for the Future

terior) WPB - War Production Board

B. DEFINITIONS

Stockpiling Policy—An economic stockpiling policy which has as its purpose the solution of a specific materials-related problem.

Eleven such policies are covered by this

assessment,

Consumer Surplus—The difference between consumers’ willingness to pay for a good

or service and its market price,

Decision Criteria Model—Formulations

which can be used to determine optimal

stockpile acquisition and release, These formulations include cost functions, benefit functions, and net benefit determinations,

Economic Stockpile—A stockpile of

materials acquired, held, and released as required to achieve an economic objective, such

as supply assurance or price stabilization,

which the market would not otherwise accomplish.

External Costs--Costs incurred by the

economy (society) which are not borne by the

direct consumers of the specific materials

under consideration.

Impacts and Issues—The economic, social,

political, environmental, legal, and other

effects of economic stockpiling under various

assumed scenarios.

Landscape of Scenarios—The landscape is

a set of scenarios, designed around assumptions which illustrate a range of specified

trends.

Materials—For the purposes of this assessment, “materials” means “natural resources

intended to be utilized by industry for the production of goods, excluding foods. ”

206

Materials Selection Criteria—Standards

established for each candidate stockpile policy

to determine which materials should be

stockpiled to meet its problem-related objectives.

Producer Surplus—Economic rents accruing to factors of production, or the difference

between what a factor earns and what it could

earn in its next best alternative use,

Relevance Tree—A hierarchical structure

in which the entries at each successive level in

the aggregate describe completely the next immediate level above. It is a tool for depicting

the organization of relationships among

groups, interests, or activities related to the rationale proposed for the initiation of stockpiling and for identifying various areas of impact

(political, social, economic, legal).

Risk Aversion Factor—A measure of

society’s reluctance to be exposed to damaging

events.

Scenario—A plausible, self-consistent narrative concerning a future time period. Major

determinants of change are examined through

delineation of past trends and plausible

changes in future population levels, technological developments, demand patterns,

gross domestic product, public preferences,

and government policies,

Technology Assessment—Projection of an

existing physical, economic, social, political,

etc., environment and related technologies to

some future, and assessment of the impacts

and related issues, both independently and as

part of the total structure, Techniques and

methodologies used to accomplish technology
assessments include studies of cost/benefit,

materials management, information systems,

and operations analysis.

Weighting Matrix—A device for presenting

in tabular form a series of assumed relationships between impacts on stockpiling and the

groups which are affected or the policies

which produce impacts. The impacts are identified from the most specific area of impact

(domain) provided by relevance trees. The impacts are weighted according to their relationship to particular policies, The most important

impacts for one or more stockpiling policies

are then weighted according to their importance to particular interest groups. The summation of impacts in this matrix gives the total

impact on all interest groups for a particular

set of candidate policies within a particular

scenario. In this way, sensitivity evaluation

can be arrived at quantitatively for each candidate policy,

207
Chapter x

REFERENCES

,
Chapter X

REFERENCES

A. STOCKPILING

A Deterministic Stockpile—Management

Model, by R. H. Kupperman and H. A.

Smith. Working Draft: Technica l

Memorandum TM–111, Nationa l

Resource Analysi s Center .

Washington, D. C,, Office of Emergency

Preparedness, 1969.

Agricultural Act of 1956 (P.L. 540, 84th

Congo).

Agricultural Trade Development and Assistance Act of 1954 (P.L. 480, 83d Cong.).

An Introductory Model for Estimating

Market Value of Stockpiled Commodities, by John K. Borkman, Working Draft: Technical Memorandum

TM-119, National Resource Analysis

Center. Washington, D. C., Office of

Emergency Preparedness, 1969.

Annual Reports of the Office of Emergency

Preparedness and predecessor agencies to the Joint Committee on Defense

Production, 1951–1974.

Borrowing Authority, Report of Office of

Preparedness, General Services Administration, OP%annually June sO.

Critical Materials and Commodity Action

Analysis, the Interior Department,

March 1975,

Defense Materials Inventories, Summary of

General Services Administration,

March s, 1975.

Defense Production Act of 1950 (64 Stat.

798, 50 U.S.C. Sec. 2061, et seq.), as

amended.

Defense Production Act Progress Report No.

36. A study of supply and distribution

of nickel. Report dated December 31,

1956, by the Secretary of Commerce,

Joint Committee on Defense Production, 85th Cong., 1st sess., January 8,

1957. Washington, D. C., Government

Printing Office.

Draft Report of the Hearings of the National

Stockpile and Naval Petroleum

Reserves Subcommittee of the Senate

Committee on Armed Service s

(Symington Hearings), 1962-64,

Emergency Economic Stabilization—

Economics of National Security series,

Industrial College of the Armed Forces,

Washington, D, C., 1964,

Final Report of the Reconstruction Finance

Corporation: Secretary of the Treasury–Pursuant to Sec. 6(c), Reorganization Plan Number 1 of 1957,

Washington, D, C., GPO, 1959.

Industrial Mobilization for War, Volume I,

Program and Administration, Civilian

Production Administration, 1947,

Inventory of Stockpile Material, Office of

Stockpile Disposal, GSA, October 31,

1975.

Management of Selected Aspects of the

Strategic and Critical Stockpile, GAO

Report to the Congress (B-125067),

December 9, 1971.

Numerous past and present reports and

working papers of draft legislation of

211

77-119 0-76-15
—

CHAPTER X

congressional committees on stockpile

matters. These include the Committees: Armed Services and their subcommittees, interior and Insula r

Affairs, etc.

OEP’S Stockpile Report to the Congress, Semiannual, especially period 1960-74.

These include reports of the activities

of the General Services Administration, Department of Commerce, State,

Defense, Agriculture, and Interior.

Selected Minutes of the Program Advisory

Committee to the Director of the Office

of Preparedness (and Predecessor

Agencies), 194P–73.

Special Stockpile Advisory Committee (The

Pettibone Committee), Stockpiling for

lle~ense in the Nuclear Age, A Report

to the Director of the Office of Defense

Mob i 1 i za t ion, January 1958 .

Washington, D. C., ODM.

Stockpile Objectives of Strategic and Critical Materials ShouM Be Reconsidered

Because of Shortages, GAO Report to

the Congress (LCD-PL1440), March 11,

1975.

Stockpile Report to the Congress, Semiannual reports issued by the Munitions

Board, July 23, 1948, to August 5, 1953.

Washington D. C., GPO.

Stockpile Report to the Congress, Semiannual reports issued by the Office of

Emergency Preparedness (and predecessor agencies,) July 19s0 to June

19P!i Washington, D. C., GPO.

Stockpile Report to the Congress, Statistical

Supplement (Semiannual Janu -

ary-July, July–December), General Services Administration Office of Preparedness.

Stockpiling for the Future, by F. H. Buttner,

SC.D. Senior Fellow, Battelle Columbus

Laboratories. A paper presente d

August 16, 197A, at the Henniker Conference III. Henniker, New Hampshire.

Stockpiling Strategic Materials, by Glenn H.

Snyder. New York, Chandler Publishing Co., 1966.

Strategic and Critical Materials Stockpiling

Act of 1946 (60 Stat. 596, 50 U.S.C. Sec.

98).

Strategic Materials: More Vulnerable Bottlenecks Ahead? by Simon D. Strauss,

ASARCO, paper delivered at National

Security Affairs Conference, July 8–10,

1974.

Summary of Disposals, Defense Materials

The

The

The

(DM-80), March 31, 1975, General Services Administration.

Compensation Criterion for Stockpile

Disposal, by Henry M. Peskin. Technical Memorandum TM-112, National

Resource Analysis Center .

Washington, D. C., Office of Emergency

Preparedness, 1969.

history and policy and other papers of

the War Production Board, the Defense

Production Administration, the National Production Authority, and other

agencies as appropriate, from the National Archives.

Stockpile Problem. American Mining

Congress, June 1973.

War and Defense Economics, by Backman,

Basch, Fabricant, Gainsbrugh, an d

Stein. New York, N. Y.: Rinehart & Co.

212
CHAPTER X

B. MATERIALS ASSESSMENT

“A Study of Ferrous Scrap Futures,” U.S.

Department of Commerce, June 1974.

A Declaration of Policy, American Mining

Congress, October 6, 1974.

Aluminum—From Shortage to Surplus in ‘74

reversing the pattern of ‘73, by Sidney

Blumenreich, Engineering & Mining

Journal, March 1975.

Borrowing Authority. See listing under

“Stockpiling.”

Comments and Suggestions on the policy

recommendations i n ‘‘ Meeting

America’s Resource Needs, ” American

Mining Congress Journal, November

1971.

Commodity Data Summaries. Washington,

D. C., U.S. Department of the Interior,

1975.

Copper—A Materials Survey, Bureau of

Mines IC 8225, Department of the Interior, 1965.

Critical Imported Materials, by U.S. Council

on International Economic Policy,.

December 197+1. Washington, D. C.,

Government Printing Office, 1974.

Defense Materials Inventories, Summary of

GSA. See listing under “Stockpiling.”

Eight Mineral Cartels: The New Challenge

To Industrialized Nations, by Clarfield,

Kenneth W.; Jackson, Stuart; Keeffe,

Jeff; Noble, Michaele Ann; and Ryan

A Patrick. Metals Week, 1975.

Emergency Preparedness for the Interruption of Petroleum Imports into the

United States, National Petroleum

Council, December 1973.

Engineering & Mining Journal, Annual Surveys and Outlook Issues. New York:

McGraw-Hill.

Final Report on the Reconstruction Finance

Corporation. See listing unde r

“Stockpiling.”

International Economic Report of the President, transmitted to the Congress,

March 1975.

Material Needs and the Environment Today

and Tomorrow, Final Report of the National Commission on Materials Policy,

June 1973.

Materials and Man Needs, Summary

Report of the Committee on the Survey

of Material Sciences and Engineering,

National Academy of Sciences, 1974.

Materials Shortage Workshop, DOD, January 14–16, 1975, Metals and Ceramics

Information Center, Battelle Columbus

Laboratories, February 1975.

Materials Shortages Workshops. Report on

U.S. Department of Defense, January

14–16, 1973, 1975, 1976.

Materials Shortages. U.S. Congress. Senate.

Committee on Government Operations. Hearings. 93d Cong., 2d sess.,

September 11-12, 1974, Pts. I, II-III.

Washington, D. C., Government Printing Office, 1974.

Materials Shortages: Selected Readings on

Energy Self-Sufficiency and the Controlled Material Plan. U.S. Congress.

Senate Committee on Government

Operations. Committee Print. 93d

Cong., 2d sess., Aug. 1974. Washington,

D. C., GPO, 1974.

Materials Shortages: Workshop on Resource

Management. U.S. Congress. Senate

Committee on Government Operations. 94th Cong., 1st sess., February

1975 Washington, D. C., Government

Printing Office, 1975.

213
CHAPTER X

Proceedings of the Department of Defense

Materials Shortages Workshop, January 14–16, 1975, by Battelle Memorial

Institute. Ceramics Information Center.

Report No, MCIC SR–75-01, Columbus,

Ohio, Battelle, 1975.

Materials Technology in the Near-Term

Energy Program, National Academy of

Sciences, 19740

Meeting America Resource Needs:

Problems and Policies. U.S. Congress.

House. Committee on Banking and

Currency. Ad Hoc Committee on the

Domestic and International Monetary

Effect on Energy and Other Natural

Resource Pricing Report. 93d Cong., 2d

sess,, November 19741. Washington,

D.C., Government Printing Office,

1974.

Meeting America’s Resource Needs, Report

on, American Mining Congress journal

November 1975.

Mercury—A Materials Survey, Bureau of

Mines IC 7941, Department of the Interior, 19590

Metal Statistics, 1974: The Purchase Guide

to the Metal Industries. New Jersey:

The American Metal Market, 1974,

Mineral Commodity Summary Tables, 1973

Data Base, Bureau of Mines, U.S.

Department of the Interior, 1970,

Mineral Facts and Problems, 1960, by U.S.

Department of the Interior, Bureau of

Mines Bulletin 585. Washington, D.C.,

Government Printing Office, 1960,

Mineral Facts and Problems, 1965, by U.S.

Department of the Interior, Bureau of

Mines Bulletin 630. Washington, D. C.,

Government Printing Office, 1965.

Mineral Facts and Problems, 1970, U.S.

Department of the Interior, Bureau of

Mines Bulletin 650. Washington, D. C.,

Government Printing Office, 1970.

Minerals Yearbooks, prepared by the U.S.

Department of the Interior, Bureau of

Mines. Washington, D. C., Government

Printing Office.

Mining and Minerals Policy, 1975 Annual

Report of the Secretary of the Interior

under the Mining and Minerals Policy

Act of 1970.

National Commission on Materials Policy,

reports of, Washington, D.C.

National Materials Policy. Proceedings of a

Joint Meeting of the National Academy

of Sciences and National Academy of

Engineering, October 25–26, 1973.

Washington, D. C., National Academy

of Sciences, 19750

Oil and Gas Journal, August 11, 1975, pp.

36–37.

Problems and Issues of a National Material

Policy, paper delivered at an Engineering Foundation Research Conference

on National Materials Policy, Inc. 1970,

U.S. Government Printing Office,

Washington, D. C., 1970,

Project Independence Report, Federal

Energy Administration (Washington,

D.C., U.S. Government Printing Office,

1974), pp. 369-377.

Prospects for International Cooperation in

Critical Materials: The Case of International Commodity Agreements, a

paper by John C. Tilton, Department of

Mineral Economics, Penn Stat e

University, June 1975.

Raw Materials in the United State s

Economy: 1960-1969, U.S. Department

of Commerce and the U.S. Department

of the Interior.

Requirements for Fulfilling a National

Materials Policy, Proceedings of an

Engineering Foundation Conference

held at Henniker, New Hampshire,

August 1974. N.B. All other references

to articles from these proceedings will

be cited as the Henniker Report.

214
Reports by the National Materials Advisory

Board, various materials.

Resources and Man, Committee o n

Resources and Man—Nationa l

Academy of Sciences–Nationa l

Research Council. San Francisco: W.

H. Freeman.

Selected Reports of the National Materials

Advisory Board, National Academy of

Sciences, various dates, 1968–72.

Senate Report 327, 19th Cong., 1st sess., 24

(1975). Naval Petroleum Reserve No. 4

in Alaska is estimated to contain 10 to

33 billion barrels of oil, but unlike Elk

Hills the capability for immediate production does not exist in NPR 4.

Special Report: Critical Imported Materials,

Council of International Economic

Policy, December 1974.

Strategic and Critical Materials: Descriptive

Data, General Services Administration,

December 1975.

Strategic Materials: More Vulnerable Bottlenecks Ahead ? Simon D.” Strauss. See

listing under “Stockpiling.”

Summary and Analysis of the Fifth International Tin Agreement, Department of

State, July 30, 1975.

CHAPTER X .

Summary of Disposals of Defense Materials

(DM-880. See listing under “Stockpiling. ”

The Aluminum Industry Price an d

The

The

Availability, S.M. Blumenreich, 1975.

Domestic Mining Industry of the United

States in World War II, John Davis

Morgan, Jr. Washington, D, C., GPO,

19490

Economic Value of Ocean Resources to

the United States, U.S. Senate Committee on Commerce, December 19741.

Titanium—A Materials Survey, Bureau of

Mines IC 7791, Department of the Interior, 1958

U.S. Life Lines, OP Nov-09D-Pl (revised),

June 1971, U.S. Navy, Office of Chief of

Naval Operations,

Wall Street Journal, August 13, 1975.

Workshop on Resource Management, Committee Print of the Permanent Subcommittee on Investigations of the Committee on Government Operations,

U.S. Senate, 1975.

World Outiook for Critical Materials in the

1970’s, by Dr. John D. Morgan, Jr,,

Associate Director, Bureau of Mines,

Department of the Interior, 1975.

C. TECHNOLOGY ASSESSMENT

Annual Report to the Congress by the Office

of Technology Assessment, March 15,

1974.

A Study of Technology Assessment, Report

to the Committee on Public Engineering Policy, National Academy of

Engineering, July 1969,

Perspectives on Benefit-Risk Decision Making, Report of a colloquium conducted

by the Committee on Public Engineering Policy, National Academy of

Engineering, April 26–27, 1971.

Washington, D, C., The National

Academy of Engineering, 1972,

Second-order Consequences : A

Methodological Essay on the Impact of

Technology, by Raymond A, Bauer,

Richard S. Rosenbloom, Laure Sharp,

et al. Cambridge, Mass.: MIT Press,

1969.

Society and the Assessment of Technology:

Premises, Concepts, Methodology, Experiments, Areas of Application, by

Francois Hetman, Organization for

2 1 5
CHAPTER X

Economic Cooperation and Development, Washington and Paris.

Some Methods and Techniques for Comprehensive Impact Assessment, Joseph

F. Coates, Technological Forecasting

and Social Change 6, 341-357 (1974).

Technology and Public Policy: The Process

of Technology Assessment in the

Federal Government, by Vary Taylor

Coates, Program of Policy Studies in

Science and Technology, the George

Washington University, Washington,

D. C., July 1972.

“Technology Assessment, ” by David M,

Kiefer, Senior Editor, Washington,

D. C., Chemical & Engineering News,

October 5, 1970.

Technology Assessment, A Quarterly Journal of the International Society for

Technology Assessment (ISTA).

Technology Assessment and Publi c

Wisdom, Joseph F. Coates, J. Wash,

Academy of Science, vol. 65, November 1, 1975.

Technology Assessment for the Congress,

Staff Study of the Subcommittee on

Computer Services of the Committee

on Rules and Administration, U.S.

Senate. Bibliographic Review of Technology Assessment (reprinted from

Technology Assessment, vol. 1, no. 1),

Technology Assessment, by Genevieve

J. Knezo,

“Technology Assessment: More Talk Than

Action, ” by David M. Kiefer, Senior

Editor, Washington, D, C., Chemical &

Engineering News, January 3, 1972.

“Technology Assessment: The Benefits

. , , the Costs . . the Consequences, ” by

Joseph F. Coates, The Futurist, December 1971.

Technology Assessment: Understanding the

SociaJ Consequences of Technological

Applications, Raphael G, Kasper, ed,

New York, N. Y.: Praeger, 1972.

“The Assessment of Technology, ” by

The

D. CARTELS

Cartels and ]nternationai Patent Agreements, Legislative Reference Series,

Library of Congress. Washington, D. C.,

June 1944.

“Cartels, the Menace of Worldwid e

Monopoly, ” The New Republic, March

27, 1944,

Control of Cartels and Monopolies, by Corwin D. Edwards, New York: Oceana,

1967.

Controling World Trade: Cartels and Commodity Agreements, by Edward S,

Harvey Brooks and Raymond Bowers,

Scientific American, vol. 222, no. 2,

February 1970, p. 131.

Relationship of Technology Assessment to Environmental Management,

by Louis H, Mayo, Program of Policy

Studies in Science and Technology,

George Washington University ,

SDP06, October 1969.

Mason. New Jersey:” McGraw-Hill,

1946.

History of the Combined Raw Material

Board, Office of the (WPB) Vice Chairman for International Supply, file

083:208, 194245.

International Cartels, by Ervin Hexner,

Connecticut: Greenwood Press, 1945,

International Conference on Monopolies,

Mergers and Restrictive Practices—

Papers and Reports, Cambridge, England, 1969.

2 1 6
CHAPTER X

The Bottlenecks of Business, by Thurman “OPEC: The Economics of Oil Cartels”.

W, Arnold. New York, N, Y.: Reynal & Business Week, January 13, 1975, pp.

Hitchcock, 1940. 77-81.

The Law of International Cartels, by “The U.S. Now Must Deal With the Other

Heinrich Dronstein. New York: Cornell Cartels”. New York Times, June 1,

University, 1973. 1975, Sec. 4, p, E4,

E. INPUT-OUTPUT MODELS

A Short-Run Forecasting Model of the

United States Economy, Ray C. Fair,

Lexington, Mass.: D.D. Heath & Company, 1971. And An Introduction to

Econometrics, Lawrence R. Klein,

Englewood Cliffs, N. J.: Prentice-Hall,

Inc., 1962.

“ ‘Appraisal’ Model, ” L.L. Fischman, InterOffice Memorandum, Resources for

the Future, Inc., July 17, 1974.

“How Accurate Are Economic Forecasts, ”

Stephen K. McNees. New England

Economic Review, Novem -

ber-December 1974, pp. 2–19.

Matrix Methods in Economics, Almon, Jr.,

and Clopper. Reading, Mass.: AddisonWesley Publishing Corn., 1967.

1985 Interindustry Forecasts of the

American Economy, Almon, Jr., Clopper, et al., Lexington, Mass.: D.C.

Heath & Co. 1974.

1973–1985 in Figures, Almon, Jr,, Clopper, et

al., Lexington, Mass.: D.C. Heath &

Company, 1974.

“The BEA Quarterly Model,” Albert A,

The

Hirsch et al., Bureau of Economic

Analysis Staff Paper 22, July 1973.

Data Resources Model, Uses, Structure,

and Analysis of the U.S. Economy,

Otto Eckstein et al., Economic Studies

15 Lexington, Mass.: Data Resources,

Inc.

“The Predictive Accuracy of Econometric

Forecasts,” Stephen K, McNees, New

England Economic Review, September-October 1973, pp. 3-27.

T h e

The

Wharton Annual and Industr y

Forecasting Model, Ross S, Preston,

Philadelphia, Pa.: Economic Research

Unit, University of Pennsylvania, 1972.

Wharton Econometric Forecasting

Model, Michael K. Evans and Lawrence R, Klein. Philadelphia, Pa.:

Economic Research Unit, University of

Pennsylvania, 1967.

F. GENERAL

Economics of National Security, 2d edition, Resources for Freedom, Volumes I, II, and V,

New York: Prentice-Hall, 1954. President’s Materials Policy CommisEconomic Problems of War, George A,

Steiner & Associates. New York, John

sion, Washington, D. C,, June 1952,

GPO, 1952.

Wiley & Sons, Inc., 1942.

IndustriaJ Mobilization for War, Civilian The President’s 1975 State of the Union

Productio n Administration . Message, January 15, 1975.

Washington, D. C., GPO, 1947.

Joint Committee on Defense Production, Ac- Wartime Production Controls, Novick,

tivities of, Annual report, Washington, Anshen, and Truppner, New York:

D. C., GPO, 1951 to 1975. Columbia University Press, 1949.

217
APPENDICES

219
Appendix A

HISTORY, MANAGEMENT, AND PROBLEMS OF

STOCKPILING IN THE UNITED STATES

A. INTRODUCTION

The stockpiling experience of the United States involves a number of separate programs, each with a goal of its own. The Stockpiling Act of 1946 had as its

objective the accumulation of an inventory of strategic and critical materials. The

Defense Production Act (DPA) of 1950, as amended, aimed at improving the

mobilization posture of the United States by encouraging and assisting the creation of productive capacity where needed. The right to deliver materials to the

Government if the market could not absorb them at acceptable prices was an inducement in a number of DPA contracts. The barter program under the

Agricultural Trade and Adjustment Act of 1954 (P.L. 480) was designed to exchange perishable surplus agricultural commodities for strategic and critical

metals and minerals, and thereby assist in stabilizing the markets for these

materials.

Although not its purpose, the Defense Production Act of 1950 developed into

an economic balance wheel by providing markets for metals, minerals, and other

materials when prices were low and the market needed some support and later

selling materials under disposal programs, presumably when there were shortages

and prices were higher. Whether by intent or accident, these disposals did actually provide some financial support to the Vietnam war.

B. LEGISLATIVE HISTORY OF STOCKPILING

Although the national stockpile was acquired basically under Public Law 520, 79th

Congress, the Strategic and Critical Materials

Stockpiling Act of July 23, 1946 (60 Stat. 596, 50

U.S.C. Sec. 98d), the concept of such a

stockpile was first put forth after World War I,

when shortages of materials had frequently

upset production schedules and delayed essential programs, The Army General Staff subsequently considered material requirements in

its planning and in 1921 drew up a list of 42

materials required for military operations.

This was known as the Harbord List.1

It was not until 17 years later, however, that

the first official step was taken toward

stockpiling, This was an appropriation of $3.5

million to the Department of the Navy for the

accumulation of reserves of strategic raw

IM(Initions Board, Stochpil ing Report to the Congress, ]an.

23, 1950. Washington, D. C., Government Printing Office, 1950,

pp. 16 & 18,

221
APPENDIX A

materials.

2 (For comparative purposes, this

amount may be set alongside the $3,013

million appropriation of stockpiling funds in

the fiscal year 1951 or the $906 million expenditure of stockpiling funds in the fiscal year

1953.)3

Meanwhile, the Army-Navy Munitions

Board (ANMB),4 supported by other agencies,

made recommendations to Congress which

culminated in the Stockpiling Act of 7 June

1939 (53 Stat. 811). This act, which was the

first official recognition by Congress of the

need for a stockpile, authorized $100 million,

and Congress appropriated $70 millions Under

this act the Treasury was authorized to accumulate stockpiles over a 4-year period.

(Again, for comparative purposes, obligations

of stockpiling funds incurred during the 4-year

period, July 1, 1950, through June 30, 1954, aggregated $3,515 million; and expenditures during the same period totaled $3,051 million.)6

As the prospect of U.S. involvement in

World War 11 increased, it became clear that

more money and broader authority were

needed. The act of July 25, 1940, gave the

Reconstruction Finance Corporation (RFC)

broad authority to produce, acquire, and

transport materials for defense. The RFC conducted most of the Government procurement

activity in strategic materials during World

War II through the Rubber Reserve Company,

the Metals Reserve Company, and the Defense

Supplies Corporation.

ZBaCkrnan, JU]eS, et a]. War an(j Defense E~OnOmjCS. New

York, Rinehart, 1952.

sGenera] Services Administration. Stockpile Report to the

Congress, Statistical Supplement, /uly—December 1974.

Washington, D. C,, General Services Administration, 1974. p. VI.

qThe Army-Navy Munitions Board was renamed the Munitions Board in 1947, but for convenience and to avoid confusion

the initials ANMB are used throughout. This board was

abolished in 1953 when its functions were transferred to the

Office of Defense Mobilization (ODM), a predecessor to the

Office of Emergency Preparedness (OEP),

5Munitions Board. Stackpile Report to the Congress, Jan. 23,

1950. Washington, D. C., Government Printing Office, 1950. p. 16.

8Genera] Services Administration, Stockpile Report to the

Congress, Statistical Supplement, /uly-December 1974,

Washington D. C., General Services Administration, 1975, pp. 16,

17.

At the time of the 1939 Stockpiling Act, the

ANMB developed three separate lists of

materials based on accessibility: strategic, critical, and essential. In 19%1 new definitions of

strategic materials were drawn up based on

the need for stockpiling as against other

measures, p Three criteria were to be used:

1.

2.

3.

Deficiency or insufficient development of

natural resources to supply the industrial,

military, and naval needs of the country

for common defense;

The acquisition and retention of stocks of

these materials within the United States

and encouragement of conservation and

development of sources of these materials

within the United States; and

The reduction and prevention wherever

possible of dangerous and costly dependence of the United States upon foreign

nations for supplies of these materials in

time of national emergency.

Postwar additions to the residue of wartime

stockpile were initiated under the Surplus Property Act of 1944, which authorized the

transfer of materials not required for defense

or other essential purposes.

The producers of mineral raw materials

recognized the threat of dumping surplus

mineral stocks on postwar markets at the close

of World War II, This stimulated considerable

interest in a national stockpiling program, On

June 3, 1943, a bill (S. 1160) was introduced in

the Senate. The purpose of the bill was “to

stimulate production of strategic and critical

minerals for the present war effort and to

assure an adequate supply of such minerals for

any future emergency by continuance, intact,

in the postwar period of all stockpiles surviving the present War and by necessary augmentation thereof primarily from domesti c

sources, and for other purposes, ”8

After public hearings on the bill, a revised

version (S. 1582) was introduced on December

7~hj(f,

8u. s, Department of the Interior, Bureau of Mines, Minerals

Yearbook, 1953. Washington, D. C., Government Printing Office,

1953.

222
APPENDIX A

8, 1943. Wide differences of opinion developed

on many features of these bills, but there was

substantial support for two of the objectives of

the proposed legislation: (1) the creation of

stockpiles for national defense, and (2) the

freezing of stocks at the end of the war to provide the nucleus for permanent stockpiles and

prevent undue dislocation of postwa r

markets, g

The discussions on the bill brought out the

divergent interests of the minerals industries.

The producers feared the potential competition of postwar surpluses, and the consumers

hoped to secure bargains in raw materials.

From the viewpoint of the producers, the

freezing of surplus stocks of minerals and

metals at the end of World War II was a prerequisite to any program designed to cushion the

effects of sudden termination of war production. The industry supported this position by

referring to World War I and claiming that lack

of controls on the disposal of stocks of metals

and scrap at that time brought on a deflation of

the metal markets and resulted in widespread

unemployment due to forced curtailment of

production from 1920 to 1922.10 Consumers, on

the other hand, maintained that there should

be no restraints on raw material supplies if industry were to meet the tremendous demand

that many expected to follow the end of the

war, They argued that the freezing of war

stocks might retard the production of goods for

civilian consumption or induce inflationary

tendencies in the raw material markets inimical to the maintenance of postwar stability .11

Subsequently, other bills along similar lines

were introduced in Congress. The executive

departments also initiated studies in an attempt to develop a program which would

reflect the views of the executive branch, As

of July 1, 1944, however, no positive action had

been taken by either branch of the Government, Pressures for legislation to assist industry in its problems of reconversion from wartime to peacetime production received priority

in the competition for congressional attention.

For the moment the possible effects of disposals of Government stocks on recovery of

the minerals industry were not considered.13

C. LEGISLATIVE AND EXECUTIVE AUTHORITY FOR

STOCKPILING PROGRAMS

The authority for the accumulation of

stockpiles of strategic and critical materials

was derived from the following statutes:

. The Strategic and Critical Materials

Stockpiling Act (Public Law 520, 79th

Cong., 60 Stat 596, U.S.C. 98d), approved by the President, July 23, 1946,

as amended by Reorganization Plan

No. 3, effective June 12, 1953, This law

provided the basic authority for the acquisition and retention of strategic and

critical materials to decrease and prevent, wherever possible, a dangerous

and costly dependence of the United

9 lhid.

●

10 Ibid.

11 fbid,

12 Ibid,

States upon foreign nations in time of

emergency.

The Defense Production Act of 1950

(Public Law 774, 81st Cong,) (64 Stat

798, 50 U.S. C. 2061), as amended, provided broad authority for the expansion of productive capacity including

the making of purchases or commitments to purchase metals, minerals,

and other materials and for the encouragement of exploration, development, and mining of critical and

strategic minerals and metals.

223
APPENDIX A

● The Agricultural Trade Development

and Assistance Act of 1954 (Public Law

480, 83d Cong.), of which title I provided for the creation of a supplemental stockpile of strategic and critical

materials; and title III provided for

barter of agricultural commodities for

strategic materials which entail less

risk from deterioration and spoilage, as

well as substantially less storage cost.

. The Agricultural Act of 1956 (Public

Law 540, 84th Cong.), Section 206,

further facilitated barter of surplus

agricultural commodities by stipulating

that materials acquired by barter in excess of the needs of other programs

should be transferred to the supplemental stockpile.

• Certain specialized minerals legislation

including the Domestic Minerals

Program Extension Act of 1953 (Public

Law 206, 83d Cong.), and the Domestic

Tungsten, Asbestos, Fluorspar, and

Columbium-Tantalum Production and

Purchase Act of 1956 (Public Law 733,

84th Cong.) which authorized the acquisition of specific amounts of certain

named minerals.

1. Agency Responsibilities13

Public Law 520, 79th Congress, the basic act

supporting the present stockpiling program,

designated the Secretaries of War, Navy, and

Interior, acting jointly through the agency of

the Army and Navy Munitions Board, to determine which materials should be stockpiled

and the quantities and qualities of each. In

making these determinations the Secretaries of

State, Treasury, Agriculture, and Commerce

were required to designate representatives to

cooperate with the Army and Navy Munitions

Board. The responsibilities of each Federal

agency under Public Law 520 are listed below:

IsSenate Armed services committee, subcommj~~ee Hear.

ings on Na tionol Stockpile, {uly 24, 1957. Washington, D. C.,

Government Printing Office, 1957.

224

a. The Treasury Department, Procurement

Division, was charged with the responsibility

of purchasing the materials for the stockpile,

so far as practicable, from supplies of materials

in excess of current industrial demand and in

accordance with the Buy American Act. It was

also responsible for the storage, security, and

maintenance of strategic and critical materials;

for the rotation of inventories where necessary; and for the disposal, under certain

safeguards, of those materials which had

become deteriorated or obsolescent.

b. The Interior and Agriculture Departments were charged with responsibilities

toward research on the materials within their

areas, These assignments of responsibilities

were amended by Reorganization Plan No. 3,

effective June 12, 1953. These amended

responsibilities provided that—

(1)

(2)

(3)

The National Security Council was

responsible for establishing broad

defense policies, including those applicable to materials.

The Office of Emergency Preparedness

(OEP) (and predecessor agencies) was

responsible for coordinating al l

mobilization activities of the executive

branch of the Government, including

programs intended to assure an adequate supply of materials in time of

emergency. The agency was als o

responsible for stockpiling certain medical supplies and items for survival and

rehabilitation,

The Department of the Interior was

responsible for recommendations on

means for insuring adequate supplies of

metals, minerals, and fuels to meet

mobilization requirements. This included recommendations for the appropriate level of the domestic production component of the mobilization base,

This Department also had a responsibility for research and development of

strategic minerals pursuant to section

7(a) of the Stockpiling Act. It was also

responsible for the mineral purchase
(4)

(5)

(6)

(7)

2.

program under Public Law 733, which

authorized the acquisition of specific

amounts of certain named minerals.

The Department of Agriculture was

responsible for recommendations on actions in regard to supplies of agricultural

commodities, including food. This

Department was also responsible for the

barter activities in connection with the

disposal of surplus agricultural commodities. It also had a responsibility for

research on and development o f

agricultural materials pursuant to section 7(b) of the Stockpiling Act.

The Department of Commerce was

responsible for recommendations as to

actions on all other materials. It also

developed requirements estimates for

the industrial and civilian elements of

the economy. It was responsible for the

administration of the Export Control

Act.

The Department of Defense was responsible, among other things, for providing

estimates of military requirements.

The General Services Administration

had responsibility for acquirin g

materials for the strategic stockpile and

for the negotiation, consummation, and

administration of necessary contractual

arrangements for expanding supplies

under the Defense Production Act. It

also had responsibility for the storage of

Government-owned materials.

Other agencies from time to time

became involved in specific materials

situations.

Organization of OEP Interdepartmental

Committees

Within the OEP (and predecessor agencies),

responsibilities with respect to materials were

centered in Assistant Director for Production

and Materials, To facilitate his working relationships with the various agencies, he and his

staff called upon a number of interagency advisory groups in formal session or in day-toAPPENDIX A

day communications with the various members as necessary or appropriate.

At the working staff level, seven interdepartmental committees reviewed basic supply-requirements data for specific materials

and recommended necessary action to the

OEP staff, who prepared reports which were

usually included in the OEP’s proposals as

reviewed by the Interdepartmental Materials

Advisory Committee (IMAC). These reviews

covered the following materials:

●

●

●

●

●

●

●

Light metals;

Nonferrous metals;

Nonmetallic minerals;

Iron, steel, and ferroalloys;

Chemicals and rubber;

Forest products; and

Fibers.

An eighth committee, the Stockpile Storage

Committee, advised on the effective deployment of stockpile inventories, including technical advice on the storage, custody, preservation, and security of stockpile materials.

At the Deputy Assistant Director’s level, advice was obtained from the IMAC on OEP staff

and commodity committee recommendations

to insure consistency with overall governmental policies and programs. The Deputy Assistant Director for Production and Materials submitted his recommendations to the Director of

OEP through the Assistant Director for

Resources and Production.

At the Director’s level, there was the Civil

and Defense Mobilization Board (CDMB), consisting of heads of the agencies having defense

mobilization responsibilities, which advised

on the broader aspects of defense programs

and policies—not only in the production and

materials field, but in all mobilization areas.

The CDMB, for example, reviewed mobilization plans to insure coordination between current defense programs and actions required in

the event of any of a number of types of

emergencies.

225
APPENDIX A

D. SELECTION OF STOCKPILED MATERIALS

The determination as to what and in what

quantities materials must be stockpiled could

be made only after careful consideration of

certain criteria. Materials could be designated

as strategic and critical if they were required

for essential military or war-supporting uses

during an emergency and if supplies were estimated to be insufficient to meet the requirement. Such supply problems could arise from

insufficient domestic natural resources, inadequate domestic processing facilities, dangerous

dependence on vulnerable foreign sources of

supply, and potential transportation hazards,

Computation of the stockpile objective for

any material involved consideration of three

general factors:

1.

2.

3.

The estimated duration of the emergency;

The estimated annual requirements during the emergency;

The estimated year-by-year supply from

sources other than the stockpile. These

sources included: (a) domestic production, including such expansion thereof

during the emergency as might be

deemed practicable and desirable during

war conditions; and (b) imports, to the extent they might safely be assumed to be

forthcoming, including such increases

above normal levels as would result from

stimulation of foreign production prior to

and during the emergency,

1. Determination of Objectives

Following the decision as to what to

stockpile, a decision had to be made as to how

much of each material should be stockpiled.

Obviously, the objective (quantity) had to be

based on the gap between wartime requirements and wartime supply, and adjusted for

potential reductions which could result from

losses in transport, sabotage, political interference, or other hazards which could reduce

available supply. In determining stockpile objectives, the total national requirements for

each strategic and critical material for

mobilization was compared with the estimated

total (factored) supply. If a shortage was indicated, a stockpile objective was recommended,

Stockpile objectives were of two types: (a)

basic objectives and (b) maximum objectives.

The basic stockpile objective was developed

from the deficit remaining after allowing for

U.S. production and imports from free world

sources, the latter discounted for estimated

strategic risks involved in securing the

material in time of war. The maximum objective was based on discounting completely all

offshore sources of supply.

A stockpile objective which varied to a considerable extent from the calculated deficit

might be established if there were significant

considerations which could not be accounted

for in the statistical analysis. Such considerations might include excessive concentration of

domestic productive or processing capacity,

rotation problems, potential substitutability of

alternate materials, or the likelihood that subsequent calculations could result in substantially different objectives.

2. Supply Considerations

Supply data were usually developed by subcommittees of the OEP working committees,

generally composed of representatives of the

Department of State, the GSA, and either the

Department of the Interior (in the case of

metals, minerals, and fuels), the Department

of Agriculture (in the case of agricultural products), or the Department of Commerce (in the

case of other materials). Future supply estimates were usually based on historical data;

the existing supply situation was analyzed

with due regard to known or foreseeable

changes in both foreign and domestic supplies

in times of emergency, Consideration was

given to potential changes in market patterns,

especially for foreign sources of supply. The

226
estimates of supply were submitted to the OEP

working committees for review, exchange of

supplementary knowledge of events and factors which might tend to modify the estimates,

and final revision.

3. Factoring of Supply

After review and approval by the working

committee, the OEP member of the working

committee would discount the estimates of

foreign supplies in accordance with factors

developed on the basis of advice of the Department of Defense, the Department of State, and

other agencies. These discounts were intended

to apply safety factors to estimates of supply

for possible losses. Domestic supply estimates

were also factored for possible loss of heavily

concentrated industries.

4. Estimates of Mobilization Supply

These included potential primary production in the United States, secondary recovery

from scrap materials, and imports from foreign

sources of supply. Although this was a general

pattern, each material was considered as a

separate situation.

In preparing estimates of supply for purposes of determining stockpile objectives, it

was customary to prepare some historical data

on country-by-country production, together

with imports into the United States from each

country. While this was intended to form some

guidance as to the capability of each producing

country, it could sometimes be misleading.

High output in some previous year could have

been achieved at the expense of future

capacity to produce. Low past production

might merely reflect lack of markets. Despite

these pitfalls, however, it was necessary to use

historical data. It was up to the working committee to recognize the conditions underlying

APPENDIX A

unusual phenomena with regard to output of

materials in foreign areas.

5. Production Estimates

Historical data on domestic primary and secondary production would be easier to interpret. One only needed to be aware of past

strikes, inventory recessions, price fluctuations, foreign spurts of economic activity, and

other factors which could influence production and affect markets. Next, a series of estimates of production for the current period and

for the immediate future was presented. This

was usually based on known expansion

programs and the most recent experience

modified to reflect the economic outlook.

Finally, estimates of potential foreign output

and its availability to the United States under

mobilization conditions were prepared, primarily on the basis of information secured by

the Departments of State and Interior.

When the estimates of mobilization supply

were prepared, it was generally assumed that

all economic facilities would be operated at

capacity, that prices would be approximately

at or slightly above current prices, and that

labor would be available and stable. It was also

assumed that economic stabilization would

hold the general price and wage line. Expansion of domestic producing capacity was

assumed only where plans and schedules for

expansions of Government or industry were

known. In making estimates of secondary supply, the committee tried to recognize the factors which would tend to restrict the generation of old scrap, as well as those factors which

could contribute additional supplies. When the

estimates of domestic and foreign mobilization

supply were presented, notes were submitted

by the committee explaining the factors contributing to the estimate,

227

77-119 0-76-1 6
APPENDIX A

E. MOBILIZATION

1. Military Requirements

Direct military requirements require no

definition; for stockpiling purposes, however,

the data represented a second translation. The

first, prepared by the DOD, translated the military programs for the production of planes,

missiles, ships, weapons, material, and

equipage into the required fabricated steel,

copper, aluminum, and other mill products,

The second, required for stockpiling purposes,

translated the requiremenys for mill products

into requirements for basic raw materials such

as refinery products.

2. Indirect Requirements

The mill-product requirements for direct

military needs were developed from bills of

materials whenever possible. The bills of

materials also listed requirements for component units, such as electrical motors, fasteners,

wheels, and other units purchased in the

manufactured state. Although these components were just as essential to the aircraft,

weapons, and equipage in which they were installed as the mill products required for “direct

military” purposes, they were classified as

“indirect military. ” These “indirect military”

requirements estimates were obtained from

industry through the Department of Commerce industry divisions. In this manner total

requirements for all electrical motors, for example, were obtained at one time through one

source,

3. War Industries Requirements

The third category of material requirements

represented the war-supporting industries

which supplied machine tools and other items

without which the direct military requirements could not be produced, These, too, were

developed through the Department of Commerce industry divisions,

4. Civilian Requirements

Frequently, there is a tendency to look upon

civilian requirements during wartime as a lux228

REQUIREMENTS

ury. On the contrary, it would be a serious ‘error to overlook the essential civilian requirements. Power, communications, water, and

transportation facilities have to be maintained,

repaired, and operated or else the mobilization

manpower supply would suffer and absenteeism rise.

5. Export Requirements

Finally, allowances had to be made for exports of raw materials to our allies. Export requirements for direct military, war-supporting, and essential civilian requirements were

subject to the same screening process as

domestic requirements.

The determination of the material requirements in these classes posed a variety of

problems. During a wartime emergency, the

determination was relatively easy, since current data on inventories, recent shipments,

and order books were usually available in claimant applications for material allocations. For

purposes of estimating requirements for

stockpiling, however, the benefit of such recent and current experience was not available

in peacetime.

6. The Time Factor

From the beginning of postwar stockpiling

in 1944, it had been assumed for the purposes

of computing stockpile objectives, that a future

war would last 5 years and that the stockpile

would have to be large enough to cover all

material shortages for such a period. l4 T h e

military officers in the Munitions Board who

originally had established this guideline had

assumed that a future war would be like

World War II and then added approximately

another year, just in case.

This was a rough assumption with no supportive judgment to justify it. It was assumed

that the estimate of duration would be superIqsnyder, Glenn. s~o~kpi];n~ Strategic MO Ierials. San Francisco, Chandler, 1966.
sealed by a more carefully developed estimate.

Yet this assumption remained the basis for

stockpiling for the next 14 years.

Section 2 of Public Law 520, the Strategic

and Critical Materials Stock Piling Act of 1946,

provided that—

the Secretary of War, the Secretary of the Navy,

and the Secretary of the Interior, acting jointly

through the agency of the Army and Navy Munitions Board, are hereby authorized and directed

to determine, from time to time, which materials

are strategic and critical under the provisions of

this Act and to determine, from time to time, the

quality and quantities of such materials which

shall be stockpiled under the provisions of this

Act. In determining the materials which are

strategic and critical and the quality and quantities of same to be acquired, the Secretaries of

State, Treasury, Agriculture, and Commerce shall

each designate representatives to cooperate with

the Secretary of War, the Secretary of the Navy,

and the Secretary of the Interior in carrying out

the provisions of this Act.

7. The Interior Department and Mobilizations

While Interior was like all other departments in seeing national security as the reason

for the stockpile, the route the Department

would follow to attain it was different in

several fundamental ways, Unlike State and

the military departments, Interior favored a

large stockpile. Materials would cover a wide

APPENDIX A

area of need. The assumed period of disruption would be long. The period of hostilities

protracted.

Emphasis would be placed on domestic

purchasing. This, of course, would enhance

national security by building up the mobilization base through development of a healthy

domestic industry. The same objective would

be supported by tight restrictions on stockpile

disposal and the transfer of all war surplus

materials to the stockpile. Clearly, tight

restrictions on disposal minimized the threat

of depressed prices and injury to domestic industry,

During the first 4 years of the program, Interior wanted the objectives to be about twice

as high as the military departments thought

necessary, A compromise was reached by

adopting two sets of goals: minimum objectives, which were worked out and preferred by

the staff of the Army-Navy Munitions Board

(ANMB); and the maximum established after

the war, This is consistent with the suggestion

for monetization of stockpile reserves mentioned in the RFP,

From the foregoing, it appears that most of

the basic policy issues which surround a

materials stockpile were debated at length in

the period between the end of World War II

and July 1946 when the Stockpiling Act was

signed into law,

F. THE STOCKPILE POLICY CONTROVERSY16

In general, stockpile legislation reflected the portant economic

“tight control” advocates, The stockpile’s pur- or not. Thus, it

pose was to protect national security, the act security would be

had a national emergency setting, the military balanced program;

effects—whether intended

was argued that national

best served by acquiring a

i.e., spreading procurement

was prominent in its administration, and the over a wide spectrum of materials. Opponents

constraints on disposal were strong. pointed out that stockpile dollars would

Nonetheless, it soon became apparent that stretch further if procurement were delayed

for materials for which demand equaled or ex- actions under the stockpile program had imceeded supply. Industry would not be

15Sn yde~, Glenn. ,$toc; kpiling ,Str[ltcgic M(lfcrials, San Francisco, Chandler, 1966. 16 lhi~,

229
APPENDIX A

deprived of the quantity purchased for

stockpile and pressure on prices would be

relieved, Of course, the converse was true if

prices were depressed by supply goals advocated by the Department of the Interior.

However, the ANMB people tended to ignore

the compromise, They believed that national

security in stockpiling could only be expressed

in a single objective based upon objective

calculations of probable supplies and requirements in wartime. As far as the Munitions

Board was concerned, the only function of the

maximum objective was to permit the free

transfer of surplus materials from other agencies to the stockpile where such transfers

would raise the inventory of a material above

the minimum objective, When it became apparent that the ANMB was ignoring the maximum objectives, Interior challenged the objectives and demanded they be raised.

1. ANMB and Interior: A Difference of Opinion

The differences of opinion between the

ANMB and the Interior Department from early

1947 until 1950 were concerned principally

with the question: How much material should

be assumed to be available to the United States

from foreign sources during a global war?

a. The Military Position. 17—The ANMB

used a set of strategic assumptions, e.g., military accessibility, shipping losses, and concentration of supply, Under military “accessibility, the Joint Chiefs of Staff (JCS) indicated which countries and regions would be

accessible to the United States during the war

and which would not, Estimates of shipping

losses were applied as percentage reductions

of the rate of normal peacetime shipments of

materials from each accessible source. Ten

percent was the maximum discount for this

factor. The JCS recommended that if all or

nearly all of the supply of a commodity were

concentrated in a single source outside the

Western Hemisphere, that supply should be

discounted completely,

b. The Interior Department Position. 18—

The JCS made no specific evaluation of nonmilitary factors which might limit the

availability of foreign supplies during war.

The Department of the Interior challenged the

assumptions of the JCS and the ANMB, It

pointed to the loss of access to the principal

peacetime sources of tin, rubber, manila fiber,

and other materials, as well as to the loss of access to the Mediterranean Sea and other areas,

The Interior Department did not consider the

Western Hemisphere to be a safe source of

supply either, Interior also warned of the

unpredictability of the political allegiance of

foreign countries, In brief, Interior felt that no

supplies of materials should be expected from

outside the Western Hemisphere in time of

war and that the Western Hemisphere should

be discounted by 75 percent to take account of

shipping losses, shortage of ships, and possible

political developments adverse to the United

States, Where supplies of a material came from

a single source, that source should be discounted completely,

c. The Debate.—While the ANMB ignored

the industrial support of the military, the Interior Department argued for full consideration of the need to support war-supporting industrial requirements, Interior also argued that

accumulation of a large stockpile should be

looked upon as a capital asset rather than an

expense, It also pointed to the long-range upward trend of minerals prices, indicating a potential profit. Interior also maintained that a

large stockpile would reduce or eliminate the

need to use costly or inefficient substitutes for

scarce materials in wartime production, Interior pointed out that stockpiling materials

also stockpiles energy, labor, and transportation, thereby releasing these for other wartime

needs, It would also release military forces

from the job of guarding sea lanes and source

areas, Acquisition of a larger stockpile would

contribute to the economy of our friends and

allies abroad, stimulate the development of the

domestic mining industry, and contribute to

17 Ibid.

230

la ibid.
the self-sufficiency

strategic materials.

of the United States in

The ANMB argued that there was no

justification for taking less of a “calculated

risk” in stockpiling than in other defense

programs. Larger stockpile objectives would

require larger appropriations, and the

stockpile appropriations would be carried in

the national defense budget. Congress would

be more likely to accept the stockpiling

program if it were presented in terms of

moderate reasonable figures. The strategic

assumptions of the JCS and the ANMB were

based on strategic plans for fighting the war,

and felt that it was unnecessary and illogical to

stockpile more than was necessary on the basis

of these plans and assumptions.

The ANMB also claimed that a stockpile of

the size proposed by Interior would have a

damaging inflationary effect on the national

economy, and the existence of such a large

stockpile would create uncertainty and instability in world commodities markets.

The advisory members of the Strategic

Materials Committee became involved in the

debate, A formal vote was taken for each

source area on the percentage discounts to be

applied in estimating probable wartime supplies. In most cases Interior was supported by

the majority in favor of maximum discounts.

Thus, there were to be no supplies assumed

during wartime from any source outside the

United States, Canada, and Mexico. The

ANMB and the State Department members

protested against the total writeoff of supplies

from South and Central America, but apparently were only mildly opposed to the 100-

percent discounting of Eastern Hemisphere

supplies. A small discount was voted for

Canada and a larger discount for Mexico.

Decisions of the Strategic Materials Committee were not authoritative. After the Committee had taken its vote on supply discounts

late in 1947, the results which favored the Interior position were submitted to the Joint

Chiefs of Staff for comment. The JCS replied

in the spring of 1948 indicating their disapAPPENDIX A

proval of the Committee’s figures by simply ignoring them and by issuing a new set of

strategic assumptions which differed in no significant respect from those already in use.

d. The Compromise Position. 19—In an attempt to reach some sort of compromise, the

ANMB prepared an “interpretation” of the

new JCS assumptions which, in effect,

changed them considerably toward the Interior viewpoint.

The JCS judgment about which countries

would be militarily accessible was unaltered,

except that certain areas were considered

totally inaccessible. Where a single source accounted for more than half of the total accessible supply of material, supplies from that

source were discounted completely if outside

the Western Hemisphere, and fractionally if in

South America or the Caribbean area. For purposes of making this concentration discount, a

source was defined not as a country, but as an

area. In addition, the interpretation called for a

further partial discount of all remaining Asian

supplies because of the uncertainty as to

whether such supplies would be available

even if militarily accessible. Furthermore,

shipping losses considerably larger than those

estimated by the JCS were assumed. The new

formula was approved by the ANMB and the

JCS. Interior, however, was not satisfied.

e. The NSRB Decision20—The impasse was

finally turned over to the National Security

Resources Board (NSRB) for solution with the

explanation that the JCS–ANMB assumptions

would provide “reasonable” national security,

with a certain “calculated risk, ” while Interior’s formula would provide greate r

security at greater cost. The NSRB was also

told that the rates of acquisition in the near

future would be the same under both plans,

since these would be governed by availability

of funds.

The NSRB, late in September 1948, decided

in favor of the JCS–ANMB. The NSRB indi231
APPENDIX A

cated that strategic estimates, in stockpiling as

elsewhere, was a military responsibility,

although the concurrence of Interior was still

required on stockpile goals with respect to the

nonmilitary aspects” of their formulation.

f. Further Problems.—Now that the

strategic aspect of the stockpile was decided,

new problems arose with respect to the degree

of wartime expansion of production and the

level of civilian requirements. The ANMB

assumed substantial expansion of wartime

production. Interior maintained that except in

special cases, expansion of production should

not be assumed because it would use up valuable energy, resources, and manpower at a time

when these were required to fight a war. On

the contrary. ANMB argued that manpower

could be lost from civilian production to increase the availability to the military.

In order to estimate requirements, the

ANMB proposed substantial increases in military requirements, such as peak year of World

War II plus one-third and multiplied by 5.

War-supporting industries were also to be increased by one-third. Civilian requirements,

however, were to be established generally at

WWII levels with additions only enough to account for population growth. Interior opted for

the year 1970, whereas the ANMB preferred to

use the year following the year in which the

objective was reviewed. The 1970 date would

have substantially increased the requirement

estimate—and the stockpile objective.

The problems were resolved in favor of Interior’s position on domestic production and

essential civilian requirements, and in favor of

the ANMB on the assumed date of the outbreak of the war.

g. New Objectives Established. 21—Wit h

these issues out of the way, the review of

stockpile objectives under the Industrial

Feasibility Test (JCS Plan 1725/22) proceeded

smoothly, and by June 30, 1950, new objectives

had been established for 34 materials and staff

work completed on 20 more, In 26 cases an inZ1 Mun I[ions BOUr[i, Sto{;kpile Report to the Congress, January

23, 1950. Washington, D. C., Government Printing Office, 1950. p.

7.

crease was established or recommended, 12

objectives were reduced, 10 remained

unchanged, and 5 were removed from the

stockpile list,

h. Problems of Precision.—The practical

application of the strategic assumptions of the

JCS uncovered a number of problems of ambiguity which bothered the civilian agencies.

These problems pertained to the application of

discounting factors to estimates of supplies

from sources which could be affected by such

contingencies as sabotage, political

unreliability, concentration of supply, and accessibility. During these first reviews the

NSRB had become involved in the effort to

establish a workable stockpile program,

specifically seeking precision in the assumptions leading to the establishment of objectives. The NSRB was supported in this effort

by the Bureau of the Budget because of the

Bureau’s basic interest in administrative efficiency and the effect of stockpile goals on annual appropriation planning, In general, the

Department of State did not take an active

stand in the debates on stockpile policies, but

rather seemed to defer to the military positions.

In response to pressures for increased precision, the ANMB asked the JCS for a new set of

assumptions which, would provide more

specific evaluations of non-military contingencies. In May 1950 the JCS provided a

new set of guidelines which included only an

appraisal of military accessibility and shipping

losses. The guidelines specifically excluded

political considerations and other factors relating to conditions within source countries.

2. Establishment of Interdepartmental

Stockpile Committee22

In order to fill the gap which the JCS

guidelines created, a subcommittee of the Interdepartmental Stockpile Committee was set

up under the chairmanship of the State

Department. This subcommittee included, in

Zzsnyder, Glenn. Stockpiling Strategic Moteriols. New York,

Chandler, 1966.

232
addition to the State Department, the Department of Commerce and the Central Intelligence Agency. The subcommittee considered general political orientation, sabotage,

labor dependability, and governmenta l

stability. On the basis of these four considerations, the subcommittee devised a set of “dependability ratings” for about 30 countries.

Each factor was rated on a scale of 0–100. the

lowest of the four ratings was adopted as the

overall dependability rating. The subcommittee also considered the effect of concentration

of supply sources and proposed discounts for

concentration of more than half of the available supply of a commodity in a given region.

The subcommittee further proposed an additional discount representing the extent of U.S.

dependency on foreign sources of supply.

Although the work of the subcommittee constituted a complete revision of the basic

assumptions of supply, the “strictly military”

assumptions of the Joint Chiefs were left intact.

3. The Factoring System

The Korean war broke out before the subcommittee had finished its work. The NSRB,

anxious for a quick decision on the supply

estimates, proposed a system which was more

general in nature than the JCS formula. It

assumed that no supplies would be available

from outside the Western Hemisphere except

from Australia, New Zealand, and Africa. It

discounted supplies from these three areas by

75 percent; it discounted supplies from the

Western Hemisphere except the United States,

Canada, and Mexico by 50 percent. It assumed

full supplies from these sources, with discounts for materials whose production was

especially vulnerable to sabotage or bombing.

In effect, the NSRB formula would have eliminated the guidance of the JCS and would have

raised the stockpile objectives substantially.

The Interdepartmental Stockpile Committee

considered both plans and voted to accept the

State Department Subcommittee plan with

some minor changes. The adopted plan, which

APPENDIX A

was called the Factoring System, included the

following considerations:

Military accessibiltiy and shipping

losses;

Political dependability, including

general political orientation, sabotage,

labor dependability, and governmental

stability;

Concentration of supply, including

concentration by region and total dependence on foreign sources; and

Contingency factors.

With the adoption of the factoring system,

another major review of stockpile objectives

was conducted during the last 6 months of

1950. All but 10 of the objectives were increased, 3 materials were added to the list, and

3 were eliminated.

Thus, the factoring system provided a

uniform procedure for calculating objectives.

It reduced the range of uncertainty and

freedom of choice, and thereby reduced but

did not eliminate the vulnerability of the

stockpile program to pressures from special interests.

4. Defense Production Act of 195023

Soon after the outbreak of hostilities in

Korea, the need for new administrative

machinery to control the use of scarce

materials was recognized. The Defense Production Act was approved on September 8,

1950. Under this act the President was given

authority to require the acceptance of contracts and to allocate materials when, in his

opinion, any of these actions would promote

the national defense. The President was empowered to authorize GSA, Army, Navy, and

other agencies engaged in procuring materials

for defense needs to guarantee the contracting

firm or public agency against loss when

necessary to expedite the flow of materials for

defense needs. The President was also

‘%ee Case Study, found in App. B on “Expansion of copper

Producing Capacities”, Defense Production Act of 1950, as

amended,

233
APPENDIX A

authorized to make loans, grant purchase commitments, and encourage the exploration,

development, and mining of strategi c

materials.

One of the major purposes of the Defense

Production Act was the expansion of the U.S.

mobilization base. In the early 1950’s the incentives provided by the act were used to induce private industry to invest funds in the

construction of new plants. One of these incentives provided that the Government could

negotiate a delivery schedule to permit the

company developing the new facility to “put”

unsold production to the Government. Such

materials were subsequently placed in the

Defense Production Act Inventory.

a. Sales from DPA Inventory24—Later, the

Office of Defense Mobilization (ODM), successor agencies, and eventually OEP administered the DPA program. Materials in the

DPA inventory could be sold (or diverted from

delivery) by the agency Director without

either Presidential or congressional approval.

As a result of the depression of market

prices of many materials below Korean war

levels, deliveries under DPA floor price

purchase contracts were heavy after 1952.

During the 1950’s the large DPA deliveries,

together with the relative administrative ease

with which disposals could be made from the

DPA inventory (compared with the difficulties

of releasing material from the strategic

stockpile). resulted in placing heavy emphasis

on the use of the inventory for economic

stabilization purposes.

Sales from DPA inventories were made in

tight market situations. National security

justification usually lay in the development of

a healthy domestic industry. Strongly urged by

the Commerce Department (as the consuming

industry spokesman), sales of copper, nickel,

and aluminum were made to industry. Perhaps

surprisingly, such sales were sometimes supported by the producing industry as a reasonaz4see case Study, found in App, B on “Releases of Copper

from the Stockpile.”

ble price to pay for reducing the threat of the

stockpile and dissuading the search for

substitute materials.

In November 1959 the U.S. Mint purchased

copper from industry at what was deemed to

be a relatively high price. This purchase was

criticized because there was a substantial

quantity of copper in the DPA inventory

which could have been acquired at a substantially lower cost.

In May 1960 the Mint requested 10,000 tons

of copper to be purchased from the DPA inventory. This was the first of a series of such

sales to the Mint. Subsequently, from January

1961 through October 1964, there were eight

more sales of DPA copper to the Mint totaling

97,000 tons.

When necessary, materials were transferred

to the Strategic Stockpile to meet long-term

objectives which were high as a result of a

series of pessimistic assumptions relating to

accessibility of foreign supply. This removed

them as a market overhang.

b. Effectiveness of DPA of 1950.—The

Defense Production Act of 1950 served to improve the capacity of the mining industry to

meet the heavy demands of the Korean war.

Much of this expansion was accomplished

with Floor Price Purchase Contracts. While

many of the facilities fostered by these contracts became productive in time to enjoy full

demand at high prices and thereby released

the Government from its obligation to

purchase material at floor prices, some enjoyed only partial success, and some came into

production after prices (and demand) had

already fallen below the floor price s

established in the contracts. Consequently,

substantial quantities of lead, zinc, and other

materials flowed into the DPA inventories.

One example of the effectiveness of the

Defense Production Act of 1950 in expanding

productive capacity is found in the copper industry. For this analysis, see the case study,

“Expansion of Copper Producing Capacities

under the Defense Production Act of 1950, as

amended,” as found in appendix B.

234
APPENDIX A

G. THE MOBILIZATION READINESS PROGRAM25

After the change of administration in 1953,

the stockpiling program underwent some

changes which in effect had some impact on

the economy, The Defense Production Administration developed the Mobilization

Readiness Program, This was a procedure for

estimating mobilization requirements for steel,

copper, and aluminum by claimant agency and

industry division, along the pattern of the

Controlled Material Plan (CMP) used during

World War II and the Korean war. Reorganization Plan No. 3, effective June 12, 1953, designated the Office of Defense Mobilization

(ODM) to assume the functions of the Defense

Production Administration and the NSRB,

both of which were abolished by Reorganization Plan No, 6, effective June 29, 1953.

Stockpiling procedures remained essentially

as they had been except that a civilian agency

was coordinating the program, The GSA continued to purchase the materials and manage

the inventory. The DOD became one of the advisory agencies, with responsibility for the

preparation of estimates of military requirements and, along with other advisory agencies,

to cooperate with the ODM in establishing

stockpile goals.

1. Cabinet Committee on Minerals Policy

The ODM had to consider what to do with

the materials coming into the DPA inventory,

especially those materials for which the objective had already been filled, and what could be

done to help the domestic mining industry.

The Interior Department, specifically, was requesting a comprehensive “national materials

policy. ” Therefore on October 26, 1953, the

President appointed a Cabinet Committee on

Minerals Policy, referring to depressed conditions in the mining industry and specifically

mentioned lead and zinc producers. The President charged the Committee with the following tasks:

~ssn Yder, G]enn, Stockpiling Stru tegic Materials. San Francisco, Chandler, 1966.

●

●

●

To make sure the United States had

available mineral raw materials to

meet any contingency during the “uncertain years” ahead;

To make sure the United States could

meet the ever-growing minerals requirements of an expanding economy;

and

To preserve the added economi c

strength represented by recent expansion of facilities by the domestic mining industry, through policies that

would be consistent with other U.S. national and international policies.

The Committee recommended th e

establishment of mineral stockpile objectives

which would authorize acquisition o f

materials beyond levels indicated by existing

minimum objectives, The President accepted

the recommendation and on March 26, 1954,

authorized the ODM to establish new “longterm” procurement goals for metals and

minerals, Nonminerals on the stockpile list

were excluded, Purchases were to be spread

out over a period of time and were to be confined to newly mined metals and minerals of

domestic origin. In determining objectives,

there was to be no wartime reliance on sources

of minerals located outside of the United

States, Canada, Mexico, and comparably accessible nearby areas as defined by the National Security Council, Purchases toward the

long-term objectives were to take place at “advantageous prices” and at times when they

would “help to reactivate productive capacity

and in other ways to alleviate distressed conditions in domestic mineral industries that are

an important element of the nation’s mobilization base. ” Provision was also made for

upgrading during slack periods in the processing plants.

Acquisitions toward the long-term objectives were to be obtained by direct purchases

transfers from DPA purchases and expansion

235
APPENDIX A

programs, and from barter of surplu s

agricultural commodities. Thus, stockpile

purchases were to acquire materials for wartime security and to promote the well-being of

the mining industry.

2. Lead-Zinc Programs

The lead and zinc programs appeared to

receive special attention. The objectives were

increased to the level of “at least one year’s

normal U.S. use of any strategic and critical

metal and mineral. ” This rule was to be used

only when it would yield a higher objective

than did the discounting of oversea imports. In

practice, the rule applied only to lead, zinc,

and, to a lesser degree, antimony,

3. Establishment of Long-Term Objectives

In order to establish and review the

minimum objectives, the basic framework of

the factoring system as established in 1950 was

used. Determination of the long-term objectives involved a recalculation for each metal

and mineral, applying the new assumptions

contained in the President’s directive, notably

the assumption of no distant oversea imports

and the additional requirement for stocks of

lead and zinc for “one year’s normal use, ”

Public Law 480, the Agricultural Trade and

Adjustment Act of 1954, added one more nonnational security feature to the stockpile

program. This legislation provided for a supplemental stockpile of strategic and critical

materials purchased through the disposal of

agricultural surpluses in foreign markets. Importantly, through barter arrangements, industrial raw materials were acquired in exchange for perishable farm products to reduce

the storage costs for the total holdings. Disposal of materials from the supplemental

stockpile was subject to the same constraints

as sales from Strategic Stockpile.

4. New Revisions

The Mobilization Readiness Program was

revised in 1956 by the ODM and retitled the

236

ODM Second Round Supply-Deman d

Analysis. It was again revised in late 1957.

Under this program an overall estimate of industrial capability was based on an estimated

gross national product for an assumed

mobilization period. This estimated GNP was

then broken down into component shares

which were assigned to the military and to

supporting industrial areas. Using the experience of 1952 material consumption as the

base, the ODM developed new estimates of requirements for CMP mill products. These

were then factored to convert to refinery product, with due allowance for alloy content and

scrap generation.

For non-CMP materials, relationships were

sought between the material in question and

consumption of steel, copper, or aluminum,

For instance, one part of the zinc requirements

is based on the production of galvanized sheet

and wire; another part, on zinc content of

brass. Some materials are related to automotive production and automotive population;

for example, lead for batteries and gasoline.

Some materials seem to be without any relationship to other materials. In this case the

estimated GNP index may be used,

5. Revisions of Time Factors and Objectives

From the beginning of stockpiling in 1944,

stockpile objectives were calculated on the

assumption that a future war would last 5

years. By 1954 the assumption was being

challenged by the Air Force. Gradually, the

military shifted to the idea of a 3-year

mobilization effort. On June 30, 1958, the

stockpiling policy was revised to assume a 3-

year war, This had the effect of reducing all

stockpile objectives by about 60 percent and

created a number of surplus stockpile situations. The former “minimum” and "longterm” categories of stockpile objectives were

renamed “basic” and “maximum,” respectively. On June 30, 1958, only 10 materials

were still short of the basic goals, and these

plus 8 more were below the maximums, The

balance of the 75 materials were held in excess
APPENDIX A

of the maximum goals and therefore were not

subject to further procurement. 26

Methods of calculating the basic and maximum objectives were essentially the same as

before except for the shorter time period. The

maximum objectives were calculated on nonaccessibility of supplies from outside the U.S.

and Caribbean areas, while basic objectives

assumed some imports for other areas.

Under DMO V-3 (dated December 10, 1959)

the “six-month rule” was adopted. This rule

provided for “basic” and “maximum” objectives. The maximum objective included an additional allowance to take into account the

complete discounting of sources of supply

beyond North America and comparably accessible areas. The maximum objective was to

be not less than 6 months usage by industry in

the United States during periods of active demand.

6. Stockpile Declassified

From the time that it was created in 1946,

the stockpile was considered to be so related to

national security that inventories and objectives were closely guarded secrets.

In 1962 Senator Symington questioned the

need for continued secrecy of the stockpile

data, the President agreed, and ordered the

declassification of information of stockpile objective and inventories.

7. Stockpile Releases

There followed a large number of requests

for releases and sales to industry of materials

which were in short industrial supply and for

which the inventories exceeded the objectives.

Copper was one of the most frequent targets.

These requests were resisted consistently.

Although a surplus did exist, the determination of the nuclear objectives had not yet been

completed, and preliminary estimates indicated a substantial need for more, not less copper. Furthermore, the strategic stockpile was

~~cenera] Services Administration, Stockpile Report tO the

Congress, S to tis ticul Supplement, ]on uary-]une 1958.

Washington, DC., General Services Administration, 1958.

not intended to be an economic balance wheel:

in fact, when the Stockpile Act of 1946 was debated in Congress, industry representatives

expressed their apprehension over the possible

misuse of the stockpile and were promised

that the stockpile would never be used as an

economic weapon.

In 1964 the copper industry was in a shortsupply situation. One brass mill was most persistent in requesting some material from the

stockpile inventory. The President complied

by ordering the release of a relatively small

quantity (20,000 tons) from the DPA inventories for defense and hardship cases. Pandora’s

box was now open. (A case study on “Releases

of Copper from the Stockpile” can be found in

appendix B of this assessment.)

It should be noted that some of the releases

of copper were not for the purpose of providing assistance to industries, but rather to provide budgetary assistance to the prosecution of

the Vietnam war and to relieve upward

pressure on prices,

8. Justification for Stockpile Releases

In order to justify releases of material from

stockpile inventories, the material to be

released had to be either obsolete or surplus to

the objectives. This may explain some of the

changes in the guidance provided for the

calculation of objectives in Defense Mobilization Orders (DMO) 8600.lA and 8600.1B. Each

had the effect of lowering the objectives,

thereby moving more material into the surplus

category available for disposal.

On March 30, 1964, Defense Mobilization

Order 8600.1 (formerly DMOV–7) eliminated

the 6-month rule and established one objective

(maximum) to be adequate for limited or

general, conventional or nuclear war,

whichever shows the largest supply-requirements deficit for a 3-year period to be met by

stockpiling. Furthermore, the order provided

that only domestic sources of supply or those

in contiguous countries would be considered

available during an emergency. The order also

provided for discounting of potential wartime

237
APPENDIX A

supplies if such supplies were relatively concentrated, either locally or in North America.

Domestic supplies were also to be discounted

to reflect vulnerability to sabotage. In cases of

excess concentration, provision was to be

made for supplies during the estimated time

required to restore capacity and operations.

The release of 200,000 tons of copper in

March 1966 carried with it the suggestion that

productive capacity should be increased. This

led to the Second Expansion Program, discussed as a case study in appendix B of this

assessment.

DMO 8600.lA (dated December 16, 1968)

had the effect of increasing estimates of supply and thereby tended to reduce the stockpile

objectives and make more material eligible for

disposal. It stated that estimates of supply

should be based on readily available capacity

and known resources in the United States and

such other countries as certified by the Joint

Chiefs of Staff and approved by the Director of

OEP The usual discounts for concentration,

sabotage, etc., were to be applied.

DMO 8600.lB (dated April 11, 1973) provided that the stockpile objectives be limited

to meeting estimated shortages of material for

the first year of a war. Requirements were

assumed to approximate the consumption

capacity of industry, taking into account

necessary wartime limitation, conservation,

and substitution measures.

As a result, accessibility constraints were

relaxed, maximum substitution of materials

assumed, and a very limited military force accepted as a planning assumption. Above all,

however, the 3-year war assumption was discarded, and preparation was made for the first

year of war. The rationale offered for this

change assumed that the stockpile was needed

merely during the transition from a peacetime

to a wartime economy. It stated that beginning

with the second year of war, the necessary adjustments would have been made and the need

for stockpile withdrawals would vanish. This

shift in planning assumptions had the advantage of eliminating debates as to the validity of

a l-year war assumption. Experience does not

lend much support to this view.

The net effect of the above changes in

strategic planning assumptions was to create

surpluses for most materials in the national inventory available for disposal. This was soon

reflected in sales from the stockpile. Compared with the fiscal year 1972 total of $146

million, 1973 sales more than tripled to $558

million, and 1974 sales soared to $2,051

million. 27

On June 30, 1973, OEP was abolished by

Presidential order and its records and remaining functions transferred to GSA.

9. Policies of the 1960’s

In retrospect, the decade of the 1960’s was

marked by the role played by the national

stockpile in dealing with some of the economic

consequences of the Vietnam war. When a

high level of economic activity coincided with

burgeoning requirements for the production of

military equipment, materials shortages and

upward pressure on prices were the inevitable

result.

Department of Defense, Atomic Energy

Commission (predecessor to the Energy

Research and Development Administration

and the Nuclear Regulatory Commission) and

National Aeronautics and Space Administration contractors and subcontractors all

possessed priority authority in the purchase of

materials and equipment under the operation

of the Defense Materials System. As a consequence, shortages of materials impacted entirely on the nonmilitary industrial and

civilian economy, thus magnifying the shortage effects on the concerns not involved in

war production.

Stockpile and DPA Inventory sales were

made to soften the adverse impact and reduce

upward pressure on prices of industrial

materials, In some measures, stockpile sales

were used to reduce demands for the imposition of wartime material and production con-

,?7 Data from General Services Administration,

238
APPENDIX A

trols. Sales during the lo-year period ending in

1970 amounted to $3.1 billion. During the 3-

year period 1965-67, which marked the high

years of materials requirements related to the

production of military equipment for the Vietnam war, sales amounted to just under $2

billion.

The OEP Stockpile Report to Congress for

the July–December 1966 period had this to say

in connection with the long-term contractual

arrangement between the General Services

Administration and the aluminum industry:

During the 13-month period ending December 31,

1966, industry purchased a total of 357,294 tons,

valued at $175.7 million, to meet the growing demands for aluminum products resulting from the

Vietnam war and civilian economy. Of the total,

approximately 83,875 tons were committed during the July–December period at a time when

growth in productive capacities was unable to

keep pace with mushrooming requirements for

aluminum.

The huge sales of copper, nickel, tin,

tungsten, and aluminum had the same objective. In short, Government policy had evolved

to the point where stockpile was being used as

a tool for economic stabilization.

10. Future Stockpile Policy

If present rules remain unchanged, the

future stockpile program consists of establishing an orderly disposal program. The alternative is to make explicit a number of objectives

which have largely been implicitly sought

under the cloak of national security. This

would permit the use of stockpiling to meet

new national objectives and obviate the need

for a large, quick disposal program. Experience

gained in the evolution of the present stockpile

program could be invaluable in guiding such a

future program and helping to avoid negative

and confusing actions.

.

239
APPENDIX B

CASE STUDIES

A. LONG-TERM PROGRAM FOR DISPOSAL OF GOVERNMENT

STOCKPILES OF ALUMINUM

1. Introduction

The long-term program for the disposal of

Government stockpiles of aluminum ingots

has been unique in that it was the only such

program established on an orderly, though

somewhat flexible, schedule. As with other

stockpile disposals, it has economic and political overtones. There were the usual caveats

about the avoidance of adverse effects on the

international interests of the United States;

due regard to protection against avoidable financial loss by the United States; avoidance of

adverse effects on domestic employment; and

avoidance of partiality in labor disputes. As

might have been expected, there were implications of attempts by the United States to influence prices.

In common with other stockpiled materials

for which disposal plans were under consideration at the time of the aluminum

program’s initiation, the Federal Government

recognized two factors of importance: (1) a

desire to help reduce budget deficits by selling

surplus materials; and (2) the supply and inflation problems to all materials, was the desire

to reduce the balance of payments deficit by

substituting domestic for imported aluminum.

This case study discusses the industry position

on the aluminum stockpile disposal program

and the steps taken by the Federal Government in the disposal programs.

2. Purposes of the Aluminum Program

a. The Existing Aluminum Surplus—

The aluminum disposal program was initiated

in November 1965 after a series of discussions

within the Government and between Government and industry which began as early as

1963. The stockpile objective for aluminum

had undergone wide fluctuations in the postWorld War II period, ranging from a low of

250,000 short tons in 1949 to a high of 2,500.000

tons in 1954. At the time of the long-term disposal program’s inception, the three conventional-war stockpile objective was 450,000

tons, while Government stockpiles totaled

1,898,483 tons. Of this total, 769,499 tons were

in the Defense Production Act (DPA) inventory and 1,128,984 tons were in the strategic

stockpile. This left a surplus of 1,448,483 tons

available for disposal. There had been a disposal program inaugurated in May 1963,

covering 135,000 tons, of which 106,000 tons

were sold to the three major primary producers through March 1965, The remaining

29,000 tons were set aside for small businesses

but not sold.

Plans for a long-term disposal program were

developed in February 1965 by the Government committee given the responsibility to

provide for the disposal of all the DPA inventory and about 680,000 tons of national

stockpile inventory. The latter disposal would,

under law, require congressional approval, On

February 18, 1965, the General Services Administration (GSA) was officially authorized

by the Office of Emergency Planning (OEP) to

develop a disposal plan and to reach agreement on it with the interested segments of the

aluminum industry.

b. Industry Position on a Disposa l

Program . —At a meeting between th e

Government and the aluminum industry on

May 10, 1965, industry representatives (in241
APPENDIX B

eluding primary producers as well as processors) made the following main points:

●

●

●

●

●

●

●

●

●

The industry did not need the Government material, but was willing to

cooperate to meet a national objective.

All basic aluminum producers should

participate in whatever program was

worked out.

Absorbing more than 800,000 tons over

a lo-year period would disrup t

employment, but this effect could be

tempered by permitting flexibility

within the program so long as the ultimate commitments were met, subject

possibly to the commitment to take at

least half of the 10-year total in the first

5 years.

The program should be based on a

series of firm contracts rather than spot

sales.

A 10-year disposal plan should cover

only DPA tonnage (about 770,000 tons),

since this material would be readily accessible for sale, whereas the national

stockpile material would require congressional approval. If the total surplus

were to be disposed of, the program

should extend over a 15-year period.

All sales should be made at market

price through normal commercial

channels, and should be based on an

average aluminum content of 99.5 percent purity.

Plans should be developed as early as

possible to help industry make rational

facility expansion plans.

Consideration should be given to using

the surplus in Government-sponsored

projects.

Provisions should be made for smallbusiness set-asides.

c. Subsequent Meetings Regarding a

Disposal Program.—A subsequent Government-industry meeting was held on July 7,

1965, with nine primary producers to continue

negotiations on a disposal program. Discussions dealt with a long-range program to run

about 10 to 15 years to cover the entire 1.4-

million-ton surplus, with 100,000 tons to be

disposed of in the first year. There were two

main areas of disagreement: (1) method of participation: the large companies wanted all primary producers in the program, but some of

the smaller producers wanted out; and (2) rate

of release: the industry suggested 20 years; the

Government wanted 10 years.

Other meetings were held in July and

August at the urging of the White House,

which was concerned about budget deficits

and the inflationary impact of increasing Vietnam War demands. Both sides stepped up their

efforts in September and October. They appeared to be near an agreement when price increases announced by various companies in

late October and early November precipitated

a tug-of-war between Government and industry.

d. Government Alternatives for Disposal of Surplus Aluminum.—On November 6, 1965, the White House released a statement by Secretary of Defense McNamara

which referred to the following five alternative formulas proposed by the Government for

disposal of surplus aluminum, none of which

were accepted by the industry:

1.

2.

Disposal of 100,000 tons per year for 14

years; no further sales unless defense requirements in any year exceeded the

level of defense requirements in 1965. If

so, industry would buy such excess based

on allocable shares of the first 100,000

tons.

Same as alternative 1, except that if

defense requirements reached the above

level, the Defense Department would

furnish as much as it could as Government-furnished material; the Government would dispose of the rest at market

price and industry would process

Government-furnished ingots.

242
3.

4.

5.

Disposal of 528,000 tons as follows: the

amount by which defense requirements

exceeded the 1965 level, plus 100,000 tons

per year, both instances on a base of proportional shares, with the obligation not

to exceed 150,000 tons in one year.

Disposal of 200,000 tons over a l-year

period on an allocable-share basis.

Disposal of 200,000 tons; the Defense

Department would furnish as much as it

could as Government-furnished material;

the remainder would be disposed of at

market price.

e. Further Industry Proposal fo r

Aluminum Disposal.—The industry was

reported to have proposed a “complex system”

under which they would procure from the

stockpile only half of the aluminum used in

defense production, with a guarantee of not

less than 100,000 tons per year. The industry’s

proposal would presumably have required a

complex system of certificates relating to each

contractor and subcontractor, which would

not have been possible in the next 12 months.

The Government, nevertheless, stated that it

would accept the industry’s proposal if the industry would be willing to guarantee the

purchase of 200,000 tons in 1966, which it did

not undertake to do.

Statements by the Chairman of the Council

of Economic Advisers and the Secretary of the

Treasury, also issued on November 6, 1965,

said respectively that the price increases were

inflationary and unjustified, and that a

stockpile release was needed to help cover

military needs and reduce the balance of payments deficit.

Industry consensus was not opposed to the

200,000-ton proposal for 1966, providing adequate provision could be made to cover

defense business. Discussions between

government and industry about these terms

had been limited to four companies, and there

was concern about how other producers would

fit into a disposal plan. There was some feeling

APPENDIX B

that the 200,000-ton proposal came in response

to the industry’s action in raising prices.

f. Release of Surplus Material.—On

November 9, 1965, OEP directed GSA to

release 300,000 tons for sale from the DPA inventory, with no mention of a long-term disposal program. The first 100,000 tons would be

offered for sale immediately. However, other

events intervened before a sale was made. The

price increases previously announced were

rescinded, and negotiations were resumed on

November 16, 1965, for an orderly long-range

disposal program. On November 23, 1965, GSA

announced that agreement had been reached

with four major producers, with othe r

domestic producers, as well as the Aluminum

Co. of Canada (Alcan), eligible to participate.

A Memorandum of Understanding was entered into, and contracts issued accordingly.

Three of the additional producers did become

part of the program in early 1966.

Approval for the disposal of surplus

material in the national stockpile was effected

on June 21, 1966, and the disposal of this

material and the DPA material proceeded. On

December 20, 1972, the stockpile objective was

reduced to zero as part of an overall review of

objectives, and the contracts were amended

accordingly.

The history of disposals is contained in the

table of Aluminum Stockpile Disposals (table

B–l), accounting for all but 17,500 tons of

aluminum, which remained after June 1974.

This amount has subsequently been sold.

Fluctuations in the rate of disposal reflect the

flexibility built into the program. The surge in

1973 and 1974 was largely the result of increased civilian demands.

For the entire period, the disposal of approximately 1.4 million tons of surplus

aluminum represented about 3.8 percent of the

total apparent consumption of primary

aluminum (producers’ shipments, plus imports, plus stockpile receipts, minus exports).

It also accounted for about 45 percent of the ingot equivalent to all defense-rated shipments.

To the extent such shipments were covered by

243

77-119 0-76 -17
APPENDIX B

Table B–l.—Aluminum stockpile disposals

National stockpile

invantory

Defense production

act inventory Total Cumulative total

Quantity

short

tons

49,455

273.419

357,294

401,005

403,046

434,258

460,959

553,604

598,269

616,941

616,964

616,984

619.234

623,091

629,091

933,089

1,436,206

1,885,684

Period Quantity

short

Quantity

short

tons

Value

($000)

Value

($000)

Value

($000)

Value

($000)

49,455

223,964

83,875

43,711

2,041

31,212

26,701

92,645

44,665

18,672

23

20

2,260

3,857

6,000

303,998

503,117

449,478

Nov.–Dec. 1965

Jan.-June 1966

July-Dec. 1966

Jan.-June 1967

July-Dec. 1967

Jan.-June 1968

July -Dec. 1968

Jan.-June 1969

July-Dec. 1969

Jan.-June 1970

July-Dec. 1970

Jan.-June 1971

July -Dec. 1971

Jan.-June 1972

July-Dec. 1972

Jan.-June 1973

July-Dec. 1973

Jan.-June l974

24,462

109.959

41,285

21,708

1,026

15,546

14,026

49,812

24,415

10,475

13

12

1,305

2,226

3,000

153,859

254,401

274,902

24,262

134,421

175,706

197,414

198,440

213,986

228,012

277,824

302,239

312,714

312,727

312,739

314,044

316,270

319,270

473,129

727,530

1,002,432

49,455

223,964

44,142

7,416

1,530

6,849

6,627

18,822

10,077

1,527 —

—

750 —

6,000

102,750

133,991

169,852

24,462

109,959

21,570

3,891

771

3,460

3,484

10,238

5,489

857 —

—

435 —

3,000

52,577

68,609

100,825

—

—

19,715

17,817

255

12,086

10,542

39,574

18,926

9,618

13

12

870

2,226 —

101,282

185,792

174,077

—

—

39,733

36,295

511

24,363

20,074

73,823

34,588

17,145

23

20

1,500

3,857 —

201,248

369,126

279,626

salescommitments.

Source: Stockpile Reports to the Congress, Office of Emergency Planning and successor agencies.

stockpile aluminum, an equivalent amount

was of course made available for civilian business.

account capacity under construction and shipments from Alcan to the United States.

For companies participating in the program,

the breakdowns were as follows, with

reference to 1967 and beyond. These were, in

effect, merely guidelines, rather than firm requirements.

3. Program Provisions

The disposal was tied into a Government

Use Program, under which DOD contractors

(and other Government agencies as approved)

were required to purchase, directly or through

subcontractors, 1 pound of excess stockpile

aluminum for every pound of aluminum contained in the items acquired under contracts,

with reasonable exceptions for de minimis

quantities.

I

short tons

Minimum Maximum

Alcoa. . . . . . . . . . . . . . . . . . . . .

Reynolds. . . . . . . . . . . . . . . . . .

Kaiser . . . . . . . . . . . . . . . . . . . .

Olin . . . . . . . . . . . . . . . . . . . . . .

Revere. . . . . . . . . . . . . . . . . . . .

Harvey . . . . . . . . . . . . . . . . . . .

Alcan. . . . . . . . . . . . . . . . . . . . .

29,400

22,400

20,100

3,800

1,900

2,700

10,000

58,800

44,800

40,200

7,600

3,800

5,400

20,000

From November through December 1966,

the total industry commitment was 150,000

tons; for subsequent years a minimum of

100,000 tons and a maximum of 200,000 tons

were established. Within these totals were

assigned specific quantities for participating

producers based on their proportion of total installed capacity at the end of 1965, taking into

90,300 180,600

The program was established in 4-year intervals, the first ending in December 1969 and

the second in December 1973. To provide flex244
ibility, each participant could purchase more

than its obligation in any period and could

defer annual obligations within

period. Contracts were to run until

material had been sold. Set-asides

business, nonintegrated purchases,

a 4-year

all excess

for small

and other

nonparticipating purchases amounted to

25,000 tons in 1966 and 10,000 tons annually

thereafter, Quantities set aside for these purposes but not sold were to become part of the

industry’s overall commitment.

The purchase price was to be each participating purchaser’s published price in effect

at the date of delivery for the sale of the grade,

form, size, and quantity of aluminum involved

(including and subject to the standard terms

and conditions

lower common

storage location

that if on the

applicable thereto), less the

carrier rate from Government

to destination. It was provided

date of delivery the current

published price of any other participating company were lower than the participating

purchaser’s published price, the lower price

would prevail.

APPENDIX B

4. Conclusion

Despite many of the problems incidental to

potential serious economic disruptions which

could affect a large industry, the aluminum

disposal program appears to have ac -

complished its purpose. The positions taken by

the aluminum industry reflect one of the major difficulties encountered with any commodity stockpile disposal program, the fears of

market disruption to the detriment of industry.

5. References

Bureau of Domestic Commerce, unpublished memoranda

Washington, D. C.: U.S. Department of Commerce.

Farin, P,, et al. Aluminum—Profile of an Industry. New York:

McGraw-Hill, 1969.

Fifteenth Annual Report of the Activities of the ]oint Committee

on Defense Production, Washington, D. C., Jan. 17, 1966, (Contains details on stockpile negotiations and price developments in November 1965.)

Hass, J. A., A. M. Poret, and A, H. K. Tan The Aluminum Price

Crisis of November 1965—lts Ef~ect on Business-Government

Relations. Pittsbu~h: University of Pittsburgh Graduate

School,

Office of Emergency Preparedness, Semi-Annual Stockpile

Reports to the Congress, Washington, D.C.

B. TITANIUM STOCKPILE PROGRAM, 1972-75

1. Introduction

The titanium stockpile program inaugurated

in June 1972 was a classic example of the fullscale arrangement—from acquisition to disposal—containing all the elements o f

mobilization base, economics, and politics. As

a move to keep in existence the titanium industry whose future was otherwise threatened

by market conditions, the program had the

support of the Department of Defense (DOD),

segments of Congress and, of course, the industry itself, An added consideration was a

quid pro quo with Congress—a titanium

stockpile in exchange for the release of other

stockpile material bottled up in congressional

committee.

To date, the program has run close to its

schedule, and it appears to have more than

served its purpose of maintaining a titanium

industry in this country, From the standpoint

of the two producers involved, the results

have been favorable in that an approximate

doubling of the domestic market price since

the inception of the program has resulted in

potential financial gains through buy-back

privileges at the original price, This case study

presents the record of the governmentindustry titanium program with a discussion

of available options aside from stockpiling,

2. Titanium Use in Aircraft Industry

The fortunes of the titanium industry in the

United States have been closely tied to the ups

and downs of both military and civilian

aircraft production, in which about 90 percent

of all titanium finds its use due to its high

245
APPENDIX B

strength-to-weight ratio. The industry was markets and

started in 1950 through Government aid in the quently led to

Government prodding subsethe entrance of other firms, but

form of guaranteed purchase contracts, loans, the collapse of the SST program in particular

loan guarantees, and research contracts. put these in jeopardy by the last half of 1971.

Although six large companies had begun pro- There were then three integrated titanium

ducing titanium sponge, the raw material for producers handling all stages from raw

mill products and castings, only one company material to finished products. Their situations

remained in production by 1960, Increasing are summarized in the table below:

Company

TIMETa

RMIb

OREMETC

Location

Henderson, Nev.

Ashtabula, Ohio

Albany, Oreg.

Titanium

sponge

annual

capacity

(million lb)

28

15

5

48

Operating

status

Closed

6-71

Closed,

12-71

Closed,

8-71

Employees

laid

off

500

150

125

775

$5.6

6.0

2.4

14.0

“50 percent owned by Allegheny Ludlum Steel. ‘Principal stockholders, Armco Steel and Ladish Forge,

‘Jointly owned by U.S. Steel and NL Industries.

a. Titanium Imports.—With imports

from the U.S.S.R. and Japan accounting for 30

percent of domestic usage of titanium sponge,

the demand in 1971 and that projected for 1972

would be only large enough to permit U.S. producers to operate at no more than 40 percent of

capacity. Immediate factors in the closings

shown in the above table were not only the

decline in sales, but the resulting large inventory accumulations amounting to 9 to 12

months’ supply. Imported material was of the

quality required by some domestic mill product producers. In addition to the three integrated producers, there were six nonintegrated

producers of titanium mill products, most of

whom were using imported sponge.

b. Impact of Titanium Industry Closings.-The plant closings and the unfavorable

prospects for a near-term recovery of titanium

demand led to serious concern from several

areas about the future of the U.S. industry.

The DOD was worried about a viable domestic

246

industry for a mobilization base, as was the

OEP. The two Senators from Nevada were

worried about employment at the plant at

Henderson. The industry was naturally worried about its own existence.

Discussions were already being held in

Government circles When the chairman of the

Joint Committee on Defense Production wrote

to the Director of OEP on November 1, 1971,

requesting reports on the following: current

status of the industry, estimates of future demand, views as to a need for maintaining a

domestic industry, and information on any action taken or contemplated in connection with

maintaining a domestic titanium industry. At

about the same time, industry officials were in

contact with both OEP and DOD on the same

subject, OEP’s December 22 reply to the Joint

Committee summarized the situation and

stated that an analysis was being made of the

extent to which a domestic titanium industry

would be needed to meet mobilization require-
ments, and that work with DOD would continue in examining alternatives for sustaining

the industry to meet national security needs.

In addition to the overall concern about the

future of the domestic industry, there were

also considerations regarding even the temporary plant closings, which raised questions

about the deterioration of plant facilities

unused for a number of months and the

availability of technicians and skilled labor for

reopening these plants.

3. The Available Options

As a result of discussions between OEP,

DOD, other interested agencies, and the industry, the following six options were put forth,

although the last three were not given serious

consideration:

a. Option l.—Government purchase of

.7,000 tons of titanium sponge for the national

stockpile, all from domestically produced

sponge. The total stockpile objective was

33,500 short tons, while the amount in the

stockpile was 26,501 tons, leaving the 7,000

tons contemplated for purchase. All the

material in the stockpile met stockpile

specifications. (There were, in addition, 8,514

tons of nonspecification material.) As part of

the arrangement, the participating companies

would buy back the material, if and when

stockpile surpluses later developed, Of the

26,501 tons of specification quality, 6,000 tons

were in the national stockpile, 9,021 tons in the

supplemental stockpile, and 11,480 tons in the

DPA inventory. The release of the 15,021 tons

in the national and supplemental stockpiles

under the buy-back provision would require

not only a declaration of excess but also approval by Congress for its release, The latter

provision was not applicable to the DPA

stockpile, The purchase of the 7,000 tons

would be paid for with other materials excess

to the stockpile in lieu of cash. A previous

purchase of 6,000 tons of domestic origin, completed in December 1970, was likewise paid for

by surplus materials,

APPENDIX B

b. Option 2.—A buy-American policy,

put into effect by DOD, required all titanium

for filling defense contracts to be made from

domestic sponge, As part of its review of this

option, DOD surveyed titanium product producers and found that four of nine companies

would have no problem in using domestic

sponge, but that the five others would have

problems because of chemical characteristics,

requiring the installation of new facilities to

adapt to the use of domestic sponge. After considering this option, DOD rejected it as not

achieving the purpose intended, that of being a

short-run politically feasible solution.

c. Option 3 .—Direct DOD funding of (1)

new manufacturing technology programs to

include additional projects intended to make

titanium more economically usable and more

adaptable for use in DOD weapons systems;

and (2) research on the use of domestic ilmenite ore for titanium sponge products in

lieu of imported rutile ores. These, again, are

longer term solutions to the problems of the industry. DOD did proceed with its manufacturing technology program, while the ore question became part of other agency research, including that of the Materials Advisory Board.

d. Option Q.-Government financing of

layaway or standby costs of one sponge facility

which had sufficient productive capacity to

meet future defense requirements.

e. Option 5 .—Government financing of

costs to upgrade the quality of sponge produced in the three U.S. facilities and subsequent implementation of the buy-American

provision.

f. Option 6.-Government purchase of

one of the current U.S. sponge facilities. The

Government would maintain it in operating

condition for current and future defense requirements.

4. Acquisition and Revisions

The stockpile purchase/buy-back

was adopted as a feasible solution

option

to the

247
APPENDIX B

titanium mobilization base problem. On January 16 1972, OEP authorized GSA to acquire

7,000 tons of titanium sponge meeting current

purchase specifications in order to fill the

deficit in the stockpile objective and to maintain the domestic mobilization base. The procurement would be limited to material produced domestically, subsequent to the effective date of contracts to be made with the producers, and would be achieved over a 2-year

period. Payment would be made solely from

excess materials authorized for disposal. (A

previous authorization to acquire 7,000 tons,

made in December 1969 was almost immediately rescinded at the request of the

Office of Management and Budget.)

The buy-back of the material by the producers would be at the option of the Government and subject to its being declared excess

and available for disposal. Until the total inventory was disposed of, the purchasers had to

agree to refrain from any current expansion of

facilities for the production of sponge anywhere in the world,

Contract negotiations with the three sponge

producers were begun immediately, but were

not consummated until June 1972, and then

only with the two largest producers—TIMET

and RMI. The third company, OREMET, was

in financial difficulty, and although time extensions were granted the company, nothing

came of them. The 500 tons which would have

been purchased from OREMET was dropped

from the program.

Each contractor was to supply 3,250 short

tons at $1.245 per pound, including brokerage

costs in disposing of the payment materials

and costs for special packaging to meet

government specifications. Delivery was required over a 2-year period.

amounts for the two companies

into account the differin g

capacities.

The equa l

did not take

productiv e

5. The Buy-Back Program

The buy-back provisions called for purchase

by each of the two participating producers

248

over a 10-year period; i.e., 8 years beyond the

period for Government acquisition. The provisions would be subject to future Government

actions in declaring the sponge both excess

and available for disposal.

Ten percent of the excess authorized for

sale would be set aside for other then-participating producers and for direct use by the

Government.

In the contracts, the two producers were

given the option of buying back at the original

acquisition price of $1.245 per pound or at the

market price at time of sale. Both companies

chose the original acquisition price-a wise

move from their standpoint in view of the

nearly 100-percent” increase in the current

price.

6. Deliveries Under the Program

Of the two companies, only RMI has completed its contractual deliveries. RMI had

delivered 3,249 tons by May 24, 1974, and has

already entered into the buy-back phase of the

contract, having taken about 600 tons of DPA

material to date. As of December 31, 1974,

TIMET deliveries totaled 2,103,3 short tons

against the obligation of 3,250 tons, The completion date for deliveries was extended to

March 31, 1975. TIMET has faced production

problems due to shortages of chlorine and

natural gas as production and energ y

materials.

The stockpile objective was reduced to zero

in April 1973 as part of the overall review of

stockpile policy, but it is subject to further

review. Although the entire stockpile is

therefore now in excess of mobilization needs,

acquisition has continued in accordance with

the contracts. About 50 percent of the 8,514

tons of nonspecification material has been

separately disposed of. Sale of recent

authorization covering 975 tons for DOD use is

pending.

7. Conclusion

There has been decided market improvement since the stockpile program was begun.
Domestic production of sponge increased in

1973 by more than 40 percent over 1972, and it

increased by another 18 percent in 1974. Part

of this production was, of course, due to the

program. At the same time, sponge metal consumption increased by 54 percent in 1973 and

by 33 percent in 1974. Imports accounted for

slightly less than 30 percent of total consumption in each of these 3 years. It would appear

that the increased demand—resulting from

higher domestic and foreign purchases of military aircraft, as well as stronger nonaerospace

demand—would have gone far toward susAPPENDIX B

taining the industry without the need for the

stockpile program. Much, if not all, of the

material which moved into the stockpile

would have found current markets, In any

event, the domestic industry is now considering capacity expansion,

8. References

Files of the Office of Preparedness, General Services Administration.

Study of Titanium Usage, Materials Advisory Board, National

Academy of Sciences.

C. EXPANSION OF COPPER-PRODUCING CAPACITIES:

THE DEFENSE PRODUCTION ACT OF 1950, AS AMENDED

1. Introduction

In view of the international situation existing at the time the Defense Production Act

of 1950 (64 Stat 798, 50 U.S.C. Sec. 2061 et seq.)

was debated, it was recognized that in order to

provide for the national defense and national

security it would be necessary to divert certain

materials and facilities from civilian use to

military and related purposes. In order to

reduce the time required to achieve full

mobilization in the event of an attack on the

United States, it would also be necessary to

develop preparedness programs and expand

productive capacity and supply beyond the

levels needed to meet civilian demand. This

case study is a brief account of a successful

effort that in the end accounted for more than

a million tons of copper production.

2. Defense Production Act of 1950

Neither the Stockpile Act of 1939 (53 Stat.

811) nor the Stockpiling Act of 1946 (60 Stat

596, 50 U.S. C, Sec. 98d) had made any provision for governmental assistance to encourage

expansion of copper production. The Defense

Production Act of 1950, as amended, was intended to establish a system of priorities and

allocations for materials and facilities, to

authorize the requisitioning thereof, to provide financial assistance for expansion of productive capacity and supply, to provide for the

settlement of labor disputes, to strengthen controls over credit—and by these measures, to

facilitate the production of goods and services

necessary for national security and other purposes. The act authorized Government action

to divert scarce resources into the production

of military weapons and other essential

programs, including stockpiling; to expand

production of needed materials, equipment,

and components; and to minimize th e

economic impact of the defense buildup.

a. Authorization of Contracts and Orders.—Title I of the act authorized the President to require that contracts or orders deemed

necessary or appropriate to promote the national defense, be given priority and allocation

assistance to the extent necessary or appropriate. These powers were not to be used to control the general distribution of any material in

the civilian market, unless it was a scarce and

critical material essential to the national

249
APPENDIX B

defense, and unless

national defense for

the requirements of the

such materials could not

otherwise be met without causing a significant

dislocation of the normal distribution in the

civilian market, thereby creating appreciable

hardship. Title I also contained provisions for

protection against hoarding and price gouging.

b. Expansion of Productive Capacity,

Incentive s .—Title III of the act was designed

to promote the expansion of productive

capacity and supply of materials necessary for

the national defense. Under title III, provision

was made for loan guarantees and loans for

the expansion of capacity, the development of

technological processes, or the production of

strategic and critical metals and minerals, This

financial assistance was to be made available

only to the extent that it was not otherwise

available on reasonable terms.

Also under title III, provision was made for

the purchase or commitments to purchase

metals, minerals, and other materials for

Government use or resale, and for the encouragement of exploration, development, and

mining of critical and strategic minerals and

metals. Under title III, a variety of production

expansion programs were developed for a

number of materials. These included production loans, Government floor-price purchase,

contracts, and issuance of certificates of

necessity. These certificates permitted accelerated amortization of capital investment for tax

purposes and exploration loans up to 50 percent of total costs repayable from eventual

production,

c. Tax Provisions and Floor Prices.—

As indicated above, the Defense Production

Act of 1950 was designed to produce the

stimulus needed to expand production in a

number of materials. These stimuli included

rapid tax amortization, loans, and floor-price

purchase contracts to stimulate private companies to increase mine production. Under

these contracts the Government agreed to

purchase specified amounts of output at the

guaranteed floor price if the market should not

take up these quantities at that price or a higher price,

In 1951 and 1952 the Defense Production

Administration approved 10 projects for

Government assistance in the production of

copper, In most of these projects a floor price

was guaranteed in a long-term purchase contract, Until the middle of 1952 no actual

purchases of copper by the Government had

occurred on such expansion contracts. Some of

the 10 projects also involved accelerated tax

amortization, or government loans, or both.

d. Increase in Production.—It was estimated that the annual increase in output from

the mines opened by these projects would total

about 250,000 tons of copper, It was expected

that the full output would come in by 1955 and

that about 100,000 tons would be available in

1954.

3. Results of the Program

Table B–2 lists 19 contracts to expand production of copper. In terms of the Government’s commitment to purchase copper under

these contracts, the total potential commitment of the 19 projects totaled 1,191,240 short

tons of copper. However, since copper prices

were relatively good during much of the contract delivery period, 949,345 tons were sold to

industry and only 253,525 tons were delivered

to the government. In addition, obligations to

deliver 9,924 tons to the government were canceled.

There was also a small program for the

maintenance of production at some mines

which could not produce copper at the fixed

price prevailing in 1952. Contracts were consummated for 30,434 short tons of copper at an

average subsidy of $127.39 per ton. These contracts were terminated on removal of copper

from price regulation in March 1953. Under

this program, 16,201 tons of copper were

delivered.

250
APPENDIX B

Table B–2.—Copper: Summary of Defense Production Act borrowing authority transactions

(In short tons)

Contract Contractor number

DMP–III-11

DMP–19

DMP-131

D-12190

DMP-80

DMP-83

DMP-89

D–12129

D-12116

DMP-94

DMP-3

D-12084

DMP-84

DMP-60

DMP-92

DMP-57

D-12087

D-12088

DMP-90

Subtotal

Various

Various

Tota l

Rhodesian Congo Border Power Corp. . .

San Manuel . . . . . . . . . . . . . . . . . . . . . . . . .

National Lead Co. . . . . . . . . . . . . . . . . . . . .

White Pine Mining Co. . . . . . . . . . . . . . . .

International Nickel Co.. . . . . . . . . . . . . . .

Banner Mining Co. . . . . . . . . . . . . . . . . . . .

Copper Range Co. . . . . . . . . . . . . . . . . . . . .

AS+R. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Anaconda . . . . . . . . . . . . . . . . . . . . . . . . .

Appalachian Sulphide . . . . . . . . . . . . . . . .

Campbell Chibougamau. . . . . . . . . . . . . . .

Copper Cities . . . . . . . . . . . . . . . . . . . . . . . .

Copper Creek Cons. Mining Co.. . . . . . . .

Falconbridge. . . . . . . . . . . . . . . . . . . . . . . . .

Howe Sound Co. . . . . . . . . . . . . . . . . . . . . .

Miami Copper Co.. . . . . . . . . . . . . . . . . . .

North Butte Mining. . . . . . . . . . . . . . . . . . .

Phelps Dodge.... . . . . . . . . . . . . . . . . . . . .

Riviera Mines Co.. . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Maintenance of production (1952). . . . . .

Stockpile diversions. . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . ......

contract

quantity

34,316

347,500

3,600

243,750

50,000

6,480

3,982

88,500

128,000

2,000

31,600

85,000

2,750

16,000

5,939

25,198

2,625

112,500

1,500

1.191,240

30,434

5,365

1,227,039

Delivered to

Government

15,705

79,117

1,420

30,045

47,504

4,833

8,658 —

2,000 —

—

101

15,978

5,935

25,198 —

—

468

231,959

16,201

5,365

253,525

"Put’’rights

not used

18,611

268,383

430

213,705

—

—

88,500

128,000

31,600

85,000

—

—

—

—

2,625

112,500

—

949,354

—

—

949,354

Canceled

—

—

1,750

2,496

1,647

345

—

—

—

2,649

22

4 —

—

—

1,032

9,924

14,233

24,157

Source: Report on Borrowing Authority, June 30, 1974. Office of Preparedness, General Services Administration

4. Conclusion 5. References

The program did achieve its objectives; Defense Production Act of 1950 (64 Stat 798, 50 U.S.C. Sec. 2061

however, it is important to recognize that price et seq.)

Report on Borrowing Authority, June 30, 1974, General Services

incentives were used and that tax amortization Administration,

certificates were also issued as stimulus under Files of Office of Preparedness, General Services Administrathe program. Several properties operating to- tion.

day began producing as a result of this expansion program.

D. RELEASES OF COPPER FROM THE STOCKPILE

1. Introduction reflects determinations by the executive

departments of the Federal Government,

Because of past efforts to stimulate the pro- largely through Presidential action. This case

duction of copper for the defense stockpile, the study indicates how the copper releases were

subsequent history of disposals represents a accomplished and the steps taken in stockpile

change in stockpiling policy which primarily disposal.

251
APPENDIX B

2. Early Releases of Copper

a. Coinage Releases.—In November 1959

the Bureau of the Mint purchased copper for

coinage from industry at a price which was

publicly criticized because of its high level,

especially since copper was available in the

national stockpile and Defense Production Act

inventory. The Mint thereafter sought the copper it needed from the stockpile.

Between May 24, 1960, and October 22,

1964, nine separate releases totaling 107,000

tons were made to the Mint. At the time these

releases were made, the total inventory of copper exceeded the copper stockpile objective,

and all of these releases were made from the

DPA inventory. It was therefore not necessary

to secure congressional approval.

b. Requests for Stockpile Releases.—

Subsequent to the declassification of stockpile

information in 1962, the Office of Defense

Mobilization (subsequently the OEP) was

besieged with frequent requests that copper be

released to industry from the stockpile. The

OEP consistently resisted these demands,

pointing out that the stockpile was not

designed to be an economic weapon or to act

as a buffer stock, and that it was to be released

only on authority of the President for the common defense in time of war. At that time the

maximum stockpile objective for copper was 1

million tons and the inventory totaled about

1,135,000 tons. Since preliminary estimates indicated that the nuclear stockpile objectives,

when established, would exceed the inventories then on hand, it was not considered prudent to release even that amount which exceeded the objectives. In June 1963 the copper

stockpile objective was reduced from 1 million

tons to 775,000 short tons.

In 1963 and 1964 the price of refined copper

in the foreign markets was substantially higher than the U.S. producer price, and U.S.

dealers tended to follow the foreign market

price rather than the U.S. producer price.

These differentials gave rise to demands for

copper from the U.S. stockpile inventories

which, if released, would be at the U.S. producer price level. A frequently submitted rationale was that the copper was required for

defense contracts and that the costs of

materials would ultimately be borne by the

Government.

3. Copper Releases Accelerated

In December 1964 the President ordered the

release of 20,000 tons of copper from the

stockpile. This was released from the DPA inventory and was allocated by the BDSA (Commerce Department) on a defense-related hardship basis. The remaining balance of DPA copper was relatively small--only 6,186 tons.

In April 1965 a second release to industry

was authorized by the Congress and the President (Public Law 89-9). This time, 100,000 tons

were released from the strategic stockpile.

Again allocations were made by BDSA on a

defense-related hardship basis.

a. Further Coinage Requirements.—In

August 1965 the Mint indicated a new and

larger need for copper. Public Law 89-81, approved July 16, 1965, provided for the elimination of silver from dimes and quarters and a

reduction in the silver content of half dollars

from 90 percent to 40 percent. The new dimes

and quarters would consist of about 90 percent

copper and 10 percent nickel, while the half

dollars would be about 60 percent copper. In

view of these estimated coinage needs for copper over the next several years, the Treasury

requested that 117,000 tons of copper be earmarked for Mint use, in addition to that

already so identified.

The Director of OEP requested the Administrator of GSA to make available to the

Mint all of the uncommitted DPA copper in inventory, except 1,800 tons to be reserved for

payment in kind for upgrading contracts and

approximately 110,000 tons of fire-refined copper from the national stockpile. Since the

110,000 tons needed congressional authorization, the Director of OEP requested the Ad252
ministrator of GSA to seek such approval as

soon as possible, including a waiver of the 6-

month waiting period. The authorization was

approved by the Congress on October 9, 1965,

in Public Law 89–251.

b. Presidential Authority.—On November 15, 1965, the Attorney General sent a

memorandum to the Director of OEP, advising

him that under section 5a of the Stockpiling

Act of 1946, the President may order the

release of material from the stockpile at any

time when, in his judgment, such release is “required for purposes of the common defense. ”

On November 17, 1965, the Secretaries of

Commerce, State, Treasury, and Defense, and

the Chairman of the Council of Economic Advisers signed letters which recommended the

immediate release of 200,000 tons of copper

from the national stockpile for purposes of the

common defense.

c. Anticipated Supply Disruption.—

Defense uses of copper for the Vietnam war

were substantial at the time and were expected to double in 1966. The Chilean copper

industry, the largest single foreign supplier to

the United States, was on strike, and the supply of copper from Zambia was in danger of

being cut off. This would have imposed

serious disruptions in the supply of copper for

the industrial nations of Western Europe, and

these disruptions, in turn, would have had

repercussions for the total supply of copper

available to the United States.

4. Presidential Action

On November 18, 1965, the President, acting

in accordance with the provisions of section 5

of the Strategic and Critical Materials Stockpiling Act of 1946, as amended (50 U.S.C. 98d),

ordered the release of 200,000 tons of copper

from the stockpile for purposes of the common

defense. Three corollary actions were taken:

● Exports of both copper and copper

scrap from the United States would be

controlled for an indefinite period in

order to conserve domestic supply;

●

●

APPENDIX B

Legislation was to be requested of Congress by the administration to permit

the suspension of import duties on copper, which at that time amounted to 1.7

cents per pound; and

Discussions were to be held with the

directors of the New York Commodity

Exchange urging them to curb excessive speculation in copper trading

by raising the margin requirements

from the current level of 10 percent to a

figure more comparable to that required by the New York Stock Exchange (i.e., 70 percent at that time),

a. Further Request .—Approximately 4

months after the November 1965 release of

200,000 tons of copper from the national

stockpile, another request for a similar amount

was put forward,

Despite the imposition of U.S. export controls on copper, copper scrap, and copper products, which heiped to prevent any serious

disruption of domestic production or further

increases of prices in the dealers’ market, the

demand for copper continued to increase, and

many users found difficulties in obtaining adequate supplies, The increase in demand for

copper gave credence to the belief that

speculative inventories were being accumulated.

According to a memorandum for the Attorney General from the Acting Chairman of

the Council of Economic Advisers, the rationale for another stockpile release appeared

to be more directly related to economic considerations and only indirectly related to

defense needs,

b, Further Presidential Action.—On

March 21, 1966, the President, again acting in

accordance with the provisions of section 5 of

the Strategic and Critical Materials Stockpiling

Act (and basing his action on the opinion of

the Attorney General and on letters signed by

the director of OEP; the Secretaries of State,

Treasury, and Commerce; the acting Secretary

of Defense; and the Acting Chairman of the

253
APPENDIX B

Council of Economic Advisers), determined

that a release of 200,000 tons of copper was required for purposes of the common defense.

The President directed that disposals should

be made through regular producer channels on

a periodic basis and in such a way as to facilitate the orderly distribution of copper supplies

with priorities to defense and defense-supporting users.

c. Replenishment Option.—The Secretary of Commerce, the Director of OEP, and

the Administrator of the GSA were instructed

to make provision, in connection with the copper disposals, to give the Government an option to replenish the stockpile at the then-current market price of 36 cents, or at the

domestic market price if it were less than 36

cents at the time the Government option was

exercised. The option arrangement was to give

the Government the right to call for immediate

delivery in the event of any emergency,

The Administrators of the GSA and other

Government agencies were instructed to use

acceptable substitutes for copper where feasible.

d. Domestic Expansion Plan of 1966.—

The Secretaries of Commerce and Interior and

the Director of OEP were instructed to take all

necessary steps to expand domestic production

of copper through the use of special incentives

on a selected basis.

On March 29, 1966, the President authorized

the Director of OEP to take steps to accomplish

a copper expansion program. (See Case Study

on the second copper expansion.)

The repurchase of copper never took place.

Funds were not available for repurchase in

1969, 1970, 1971, or 1972. Finally, in September

1971, the Administrator of GSA wa s

authorized by the Director of OEP to cancel all

options to repurchase this copper.

e. Industry Position on a Thir d

Releas e .—By September 1966 the question of

a third release of 200,000 tons of copper from

the national stockpile was raised. In

at the Department of Commerce

a meeting

the eight

leading copper producers indicated they felt

there was no need for any additional releases

of copper from the stockpile; in fact, they did

not want it and believed they could handle all

defense orders without assistance, They felt

the inventory was too low and might be

needed at some future time. However, if any

release was to be made, it should be confined

to defense-related orders. Furthermore, the

producers did not want to handle the allocation and wanted someone else to do it. It

should be noted that these were the opinions

of the producers who were ever mindful of

their markets and their customer relations.

The consumer inventories of fabricated copper mill products were high at the time, and

the order boards at the mills contained many

duplications. It was also estimated that a

release of copper would probably go into inventories rather than consumption.

However, labor contracts were due to expire

between March and June 30, 1967, and the extra inventory could support industrial production during the second and third quarter of

1967 if strikes occurred.

f. Presidential Action.—A review under

revised criteria affecting the stockpile objective for copper appeared to support an inventory objective of about 250,000 tons. The inventory at the time was 408,000 tons. On

December 1, 1966, the President, in accordance

with the provisions of section 5 of the Strategic

and Critical Materials Stockpiling Act, as

amended (50 U.S.C. 98d), determined that the

release of 150,000 tons of copper was required

for purposes of the common defense. This left

the copper inventory balance at 258,000 short

tons.

The President’s letter ordering the release of

150,000 tons of copper noted his approval of

the recommendations of the Office of

Emergency Planning; the Secretaries of Treasury, Defense, and Commerce; the Acting

Secretary of State; and the Chairman of the

254
Council of Economic Advi

directed that disposals

through regular producer

defense and defense-su

necessary.

sers. The letter also

should be made

channels solely for

pporting uses, as

On December 2, 1966, the OEP instructed

GSA and Commerce to sell the 150,000 short

tons of copper released from the stockpile in

two logs—90,000 tons in February and 60,000

tons in May.

g. Industry Proposal.—Copper industrylabor contracts were up for renegotiation in

mid-1967. Subsequently, the copper producers

indicated to BDSA that they might have a

difficult time absorbing the full impact of

defense orders when the stockpile copper was

exhausted. It was proposed that the copper be

sold as follows:

● 22,000 S.T. (short tons) each month for

the first 3 months of 1967;

APPENDIX B

● 20,000 S.T. each month for the next 2

months of 1967;

● 12,000 S.T. each month for the next 2

months of 1967; and

● 9,000 S.T. each month for the next 2

months of 1967.

This would permit the copper producers to

stretch out the copper over a 9-month period,

and it would provide a hedge against the

possibility of strikes in their copper mines.

5. Final Disposal of Copper

The balance of copper inventory was subsequently released to the U.S. Treasury for

coinage. This terminated the copper stockpile

disposal program.

6. Reference

Files of Office of Preparedness, General Services Administration.

E. SECOND EXPANSION PROGRAM, DUVAL SIERRITA MINE

1. Introduction

This case study is an account of the Federal

program which resulted in the establishment

of the Duval Sierrita mine, an operation which

is producing copper today with a favorable

return to the Government and a substantial

improvement in the availability to U.S. industry of copper and molybdenum.

2. The Title Ill Proposal

The release of 200,000 tons of copper ordered on March 21, 1966, carried with it the

suggestion that production capacity for copper

be increased. This suggestion was formalized

in a letter dated March 29, 1966, from the

President to the Director of the Office of

Emergency Preparedness (OEP) whic h

authorized him to take steps to encourage additional production through new purchases or

commitments to purchase copper under section 303 of the Defense Production Act.

The Director of the OEP thereupon directed

the Administrator of the General Services Administration (GSA) to develop, by authority of

title 111 of the Defense Production Act, a

limited program of expansion of copper production capacity in addition to such increases

in capacity as were then contemplated or

already underway by domestic producers.

Priority attention was to be given to those

situations where additional copper production

could be brought into being in a relatively

short time. The period of performance of proposed contracts covering purchases and commitments to purchase under the program was

not to extend beyond June 30, 1971.

An effort was to be made to provide for total

commitments of approximately 120,000 tons of

255
APPENDIX B

copper. However, in view of the limitations on

use of the borrowing authority contained in

section 304(b) of the Defense Production Act

of 1950, as amended, the total of new

purchases and commitments, including contingent liabilities, was not to exceed $100,000.

a. Purchase Price Estimates.—The proposed supply of copper could not be effectively increased at lower prices or on terms

more favorable to the Government. Therefore,

it was recognized that purchases, or commitments to purchase, involving prices higher

than the one then current (36 cents pe r

pound), or involving anticipated loss on resale,

would be inevitable.

An OEP telephone survey of the major copper producers revealed that 10 of these producers had their own expansion program underway and did not need or want Government

assistance. Estimated 1965 production of these

10 companies totaled 1,193,625 short tons.

Capacity to be added was estimated at 95,000

tons in 1966; 114,500 tons in 1967; and a net addition of 21,000 tons in 1968.

Potential additional expansions for which

Government assistance would be needed

showed an additional potential capacity of

4,750 tons which could be in during 1966,

20,000 more in 1967, and 30,000 in 1968.

However, these projections were dependent

upon higher prices.

b. Marginal Properties.—Firms seeking

to expand production or initiate new production from marginal properties were invited to

submit applications for governmental assistance to the GSA, which chaired an interagency working group including representatives of

the Departments of Commerce and Interior

and the OEP. The group evaluated proposals

received under the program and recommended

appropriate disposition. Forms of governmental financial assistance which were considered

included advances on firm purchase contracts,

guaranteed private loans, and incentive price

arrangements. In addition, the program attempted to utilize to the extent possible the

facilities, funds, and authorities available in

such agencies as the Department of Commerce, Interior, and the Small Business Administration.

3. Selection of Duval Corporation

Under this program, approximately 150 applications were received from firms and individuals. From the several proposals

received, one contract, involving substantial

long-term production of new copper, was executed in November 1967 with the Duval

Corp., a subsidiary of the Pennzoil Corp. The

Duval Corp. was to develop and operate the

Duval Sierrita mine in Pima County, Ariz. Of

the $100 million authority available in the

Defense Production Act, this project took $83

million, to be repaid with 109,000 tons of copper,

a. The Contract.—As the contract was

originally written, the Duval’s Sierrita mine in

southern Arizona was to produce 60,000 short

dry tons of ore per day. Between November

1967 and March 1973, eight amendments were

attached to the contract. These concerned increases in minimum capacity from 60,000 to

70,000 short dry tons per day; a stretchout of

deliveries completion from 1971 to 1975, then

to 1979; an increase of working capital of the

company from $10 million up to $25 million;

and the shipment of electrolytic cathodes in

lieu of electrolytic wirebars. The switch to

cathodes was made to accommodate the needs

of the Mint for cut cathodes. In January 1971

provision was made to transfer shipments to

the Mint instead of to GSA.

The GSA controls capital expenditures and

has the authority to restrict the cash flow of

the company. The copper is being delivered at

38 cents per pound. This price was 2 cents in

excess of the market price of copper at the

time the contract was written. Thus far the

price has been substantially below the market

in all of its deliveries. Deliveries up through

March 15, 1975, have totaled 43,831 tons.

2 5 6
APPENDIX B

b. Expansion Program Terminated.—

Because the primary objectives of the Copper

Production Expansion Program had been

achieved, and since the small balance of remaining funds precluded any significant new

production under the program, the OEP concluded on April 15,1968, that the best interests

of the Government would be served by closing

out the program and so notified GSA.

F. THE

1. Introduction

4. Conclusion

The contract for the Duval Sierrita mine has

again demonstrated the value of a copper contract of this nature, The Government has

benefited, copper-producing capacity has been

increased, and an expanded mine facility has

been put into operation.

5. Reference

Files of Office of Preparedness, General Services Administration.

The free world lost nearly zoo million

pounds of primary nickel production from July

to November 1970, when the two major freeworld producers of primary nickel were shut

down by labor strikes. U.S. availability of

nickel fell from more than 28 million pounds

to 9 million pounds of primary nickel per

month. In its efforts to ease the situation, the

Government released in November 9 million

pounds of nickel from the inventories of the

U.S. mint. These were used to fill defenserated orders in November and December. This

case study tells the story briefly of the nickel

acquisition contracts, the stockpile, and the

eventual disposal of its contents.

2. Nickel Shortage and Stockpile Release

Even with the strikes settled and the Treasury nickel being shipped to defense consumers, the supply picture was far from adequate, Therefore, the Director of OEP in concurrence with the Secretaries of Defense,

State, Commerce, and Interior recommended

that the President take action to insure added

nickel supplies for common defense purposes.

Accordingly, on December 15, 1970, the President, acting under section 5 of the Strategic

and Critical Materials Stockpiling Act,

released 20 million pounds of nickel for purposes of the common defense.

The release of nickel from the stockpile took

the form of a loan rather than a sale, with the -

arrangements calling for the stockpile to loan

nickel to any of the three primary nickel producers. The loans were to be subject to the setaside provisions of the Defense Materials

System and to distribution by allocation for

defense-rated orders by the Business and

Defense Services Administration (BDSA) of

the Department of Commerce.

a. Contract Accepted by International

Nickel Co., Inc. (Inco).--Three firms were

eligible to participate: Hanna Nickel Smelting

Co., Kaiser Le Nickel Corp., and the International Nickel Co., Inc. (Inco). However, Hanna

and Le Nickel, feeling that they could not comply with the conditions set forth by the

Government, dropped out of the program. International Nickel accepted the conditions.

These conditions required that—

The participant would agree to distribute the nickel, in the form received

or in an upgraded form, to U.S. consumers of nickel under allocations by

BDSA.

The participant would agree to return

all nickel due the U.S. Government

before July, 1, 1972, the exact schedule

to be negotiated by GSA.

257
APPENDIX B

. The quantity a participant must return

would be calculated on a value-forvalue basis, less processing and handling costs, plus the value of interest

earned. The specific handling and

processing costs and the rate of interest would also be subject to negotiation

by GSA.

● The participant would agree to replace

nickel with a higher form than that

received from the Government.

The nickel to be loaned was in the form of

nickel oxide powder, large cathodes, and briquettes. These forms had been in the stockpile

at least 10 years. Produced under older production technology, they were of somewhat lower

quality than the nickel used in the industry at

the time of the loan. It was planned that when

a participant replaced the stockpile nickel,

they would replace it with nickel from new

production and of higher quality. This would

raise the quality of the stockpile and make it

more flexible for emergency use.

In accepting the Government’s conditions,

Inco also agreed to aid the small-business

firms injured by the strike by increasing the

amount of production made available to plating houses, distributors, and others who distribute to small nickel users.

b. Nickel Shortage Overcome.-Almost

1 year later, representatives of Inco tested the

possibility of converting the loan of 20 million

pounds of nickel to an outright sale or obtaining a deferral of their repayment deliveries to

the stockpile. At the time the company extended this feeler, demand for nickel was high,

due to the need for filling pipelines. It was

believed that meeting the repayment delivery

schedule would place a hardship on the company. Shortly afterward, the nickel shortage

turned into an oversupply.

A review of the nickel stockpile objective in

December 1970 reduced the stockpile objective

to zero. There was therefore no apparent need

for the physical return of the loaned nickel.

In anticipation of formal proposal from Inco,

several factors were considered. GSA lawyers

reviewed the legality of converting the nickel

loan to a sale, and decided that if the President

desired to convert the loan to a sale, he could

do so without any further public announcement, However, it was noted that at the time

of the loan there was much publicity about the

fact that nickel was being released in one form

but would be returned to the Government in

upgraded form, thus increasing the national

security value of the stockpile. Furthermore,

the Director of the OEP, testifying before the

Armed Services Committees, had provided

specific details on the proposed loan, including

the fact that the stockpile would be upgraded

by the return of newer nickel. Nevertheless it

was expected that an announcement of the

zero objective established in December 1970

would remove any serious objections to the

conversion of the loan to a cash sale.

c. Nickel Disposal Program.—The disposal program faced a substantial shortfall in

its targets for fiscal year 1971, and the estimated $26 million sale was considered to be an

attractive bonus. Furthermore, it would be a

positive dollar receipt compared with the uncertain outcome of any later request for

necessary disposal legislation from Congress.

.

Another consideration was the relative importance of maximizing receipts in fiscal year

1971 versus maximizing them in fiscal year

1972, when the final receipt picture could have

some impact on the 1972 election campaign. It

appeared that the fiscal year 1971 budget was

already in a substantial deficit position; as the

sale of the nickel would not appreciably alter

that position, it was suggested that a White

House decision be sought on whether the conversion to sale should be delayed to fiscal year

1972, when the receipts could be used to maximum political advantage.

It was pointed out that a delay in the repayment schedule would present no problem to

the Government. Inco would have to continue

paying interest on the loan.

2 5 8
d. Deferral of Nickel Deliveries. -On

December 15, 1970, representatives of Inco met

with the director of OEP and members of his

staff to review the status of the nickel loan

under section 5 of the Stockpiling Act. The

company requested approval of a deferral of

their deliveries for the period of January to

June 1971. In return, Inco would agree to an

amendment of the contract which would insure that the Government would not suffer

any loss, in either total value or number

pounds of nickel. In view of the status of the

nickel market at the time and the outlook for

the following 3 or 4 years, it was agreed that it

would be in the best national interest to permit

Inco to defer their deliveries to an added-on

time period.

A review of stockpile policy and guidance

was underway at the time of the meeting.

Because of that and the most recent review of

the nickel stockpile objective, it was decided to

amend the contract later in the year to permit

the government to receive, as it desired, either

nickel or cash in repayment of the loan. To

calculate the interest costs involved in deferring deliveries from the first one-third time

period to an added-on time period, it was

agreed that the middle date in each time

period would be used.

In general, the company appeared agreeable

to doing whatever the Government desired,

but indicated a need for planning time if the

Government decided on cash payment.

e. Revision of Payment Terms.—The

GSA and Inco accordingly began negotiating a

revision of the repayment terms of the loan

contract. On January 14, 1971, Inco representatives stated that the company was willing to

convert the first third of the contract to a cash

payment. They recognized that the Government wanted to convert the entire contract to

cash, but they would not make a commitment

on the remaining two-thirds at that time.

However, they were sure that Inco and GSA

could reach a satisfactory agreement before

June 1, 1972. The GSA representatives felt

they could reach agreement prior to that date

APPENDIX B

if they received authority from OEP. The conversion of the contract to cash required three

actions: (1) Announcement of the new nickel

stockpile objective; (2) Presidential approval

of cash repayment; and (3) OEP authorization

for GSA to seek cash conversion.

On February 9, 1971, the Director of OEP

formally established a zero stockpile objective

for nickel, Ten days later he requested the

President to amend his instruction of December 15, 1969, to permit a cash repayment rather

than replacement of the nickel. The President

was advised that if the Government were compelled to take nickel in repayment of the loan,

the metal would be excess to the zero stockpile

objective. The OEP and GSA would then have

to seek congressional authority to dispose of it.

On March 5, 1971, the President accepted the

Director’s recommendations and authorized

the acceptance of cash as repayment for all or

part of the nickel loaned after December 15,

1969.

The subsequent negotiations between Inco

and GSA were successful. The GSA expected

to receive over $28 million in principal and interest prior to July 1, 1973.

f. Disposal of Excess Nickel.—I)uring

the January 1971 negotiations, Inco sought

assurances that reduction of the stockpile objective would not mean Government entry

into the commercial nickel market. It was suggested that the OEP could minimize this concern by indicating that any excess nickel

would be made available to the U.S. Mint for

coinage and that OEP plans at the time

precluded any commercial offers excess

stockpile nickel.

On February 24, 1971, at the request of OEP,

the GSA submitted a plan for selling the

balance of the nickel stockpile to the Mint.

The OEP accepted and approved the plan and

authorized the sale to the Mint of the entire

Defense production Act inventory— 2,439,518

pounds of nickel.

On

quest

April 5, 1971, the GSA submitted its refor congressional approval of the plan.

259

77-119 0-76-1 8
APPENDIX B

On July 26, 1972, the Congress enacted Public

Law 92–355, authorizing the GSA to sell the

balance of their strategic stockpile of nickel.

The sale covered 77,712,878 pounds of nickel

from the strategic stockpile. The sales value of

the disposal to the Mint amounted to

$119,617,293 for the strategic stockpile nickel,

plus $3,244,559 for the Defense Production Act

nickel, for a total of $122,861,852. The acquisition cost had totaled $44,711,340,

3. Conclusion

As of this date, the nickel in the defense

stockpile has been sold and disposed of. As indicated in the preceding paragraph, the

Federal Government showed a profit of approximately $78 million without taking into

account inflationary trends.

4. Reference

Files of Office Preparedness, General Services Administration

G. INTERNATIONAL TIN COUNCIL

1. Introduction

. Most of the world’s major tin producers and

consumers are signatories of the International

Tin Agreement, the only formal international

commodity agreement for a metal. (The

United States has recently signed and submitted to the U.S. Senate for advice and consent to

ratification its agreement to the Fifth International Tin Agreement.) Under this agreement,

the International Tin Council (ITC) sets floor

and ceiling price operating ranges for the ITC

buffer stock manager, who buys and sells tin

on world markets with the intention of preventing wide swings in world tin prices. The

producers make obligatory contributions to the

tin buffer stock and are required to impose export control if the ITC deems such action

necessary. The combined actions of the buffer

stock manager and export controls have prevented prices from going below ITC -

established floor prices, but the ITC has been

less successful in preventing the price from

going above the established ceiling price.

The ITC Agreement was signed or ratified

by 20 tin producing and consuming countries

and became effective on July 1, 1956, for a 5-

year term. The second ITC Agreement came

into force on July 1, 1961, Three of the larger

consuming nations, the United States,

U. S. S. R., and West Germany did not sign or

ratify either agreement. The Third Agreement

became effective July 1, 1966, and the Fourth

260

Agreement on July 1, 1971. Because the First

ITC Agreement became the model upon which

subsequent agreements were reached, some

review of its program becomes important.

2. The First International Tin Council

Agreement

The stated objectives of the original agreement were (1) to insure adequate supplies of

tin at reasonable prices, and (2) to prevent excessive fluctuations in the price of tin, The

governing body of the ITC is composed of a

representative from each producing and consuming member government. The producing

countries have 1,000 votes (5 initial votes for

each country) and an additional number proportionate to their consumption. The voting

power could be changed to meet changing conditions.

The First Agreement established a floor

price of £640 per long ton (80 cents per pound)

and a ceiling price of £880 per long ton ($1.10

per pound). The floor and ceiling prices were

raised several times. On December 5, 1963, for

example, the floor price was raised to £850 per

long ton ($1.0635 per pound) and the ceiling

price was raised to £1000 per long ton ($1.25

per pound). This agreement further provided

for establishing a buffer stock of 25,000 long

tons of tin or the equivalent in cash, Contributions (not to exceed 75 percent in metal) of

metal or cash were compulsory for producing
APPENDIX B

countries. Additional voluntary contributions Buffer Stock Manager was required to offer tin

could be made by producing or consuming for sale if he had tin available. When the price

countries. was at or below the floor price, the manager

was required to buy tin if he had funds. The

a. Pricing Under the First ITC Agree- range between the floor and the ceiling was

ment.—Under the agreement, when the price divided into three sections, as follows:

of tin was at or above the ceiling price, the

Upper range Lower range Middle range

£ per long ton . . . . . . . . . . 850-900 900-950 950-1,000

Cents per pound . . . . . . . . . 106.25–

112.50 112.50-188.75 118.75–

125

Manager may. . . . . . . . . . . . Buy No action* Sell

● Unless the Council directs otherwise.

The Buffer Stock Manager bought tin in

1958 in an attempt to support the floor price of

$750 per ton (91.25 cents per pound) until

funds (both regular and special voluntary contributions) were depleted in September.

In 1959, the manager liquidated tin acquired

by the special fund. The remaining tin was

sold in 1961 in an attempt to maintain the ceiling price of £880 per long ton (110 cents per

pound).

The manager entered the market briefly in

the fall of 1962 to support the floor price of

£790 (98.75 cents) and again in 1963 in an attempt to maintain the ceiling price of £965

(120.625 cents).

b. Export Control Authority.—It should

be noted that the ITC had an ally in its efforts

to contain the price of tin, This was its

authority to require its producer members to

impose export controls when the situation

recommended such action, Thus, export controls by producer member countries were in

effect from December 15, 1957, to September

30, 1960. The Buffer Stock Manager was permitted to operate in the middle price range to

prevent a sharp rise in the price of tin when

the export controls first became effective,

3. The Fourth International Tin Agreement

This agreement became effective July 1,

1971, and will expire June 30, 1976, There are 7

producer members and 20 consumer members,

The members and their voting strengths are

listed as follows:

Producer countries: Votes

Malaysia 426

Bolivia 179

Thailand 126

Indonesia 138

Nigeria 45

Zaire (Congo-Kinshasa) 39

Australia 47

1.000

Consumer countries:

Japan

United Kingdom

Germany, Fed. Rep. of

France

U.S.S.R.

Italy

Netherlands

India

Canada

Poland

Czechoslovakia

Belgium

Spain

Yugoslavia

Hungary

Denmark

Bulgaria

Austria

Taiwan

Korea, Republic of (South)

204

147

111

90

65

58

45

42

40

34

34

29

24

16

15

11

10

10

8

7

-

1,000

261
APPENDIX B

a. Buffer Stocks Under Fourth Agreemen t.—The buffer stock of the Fourth Agreement comprised compulsory contributions

equivalent in cash or tin metal to 20,000 tons

payable by the producing members of the

Council on an installment basis. An initial

contribution—the cash equivalent of 7,500

tons or £10,125,000 was paid at the inception of

the agreement-and from these funds 2,672 tons

of tin were acquired from the liquidation of the

Third Agreement buffer stock.

Further installments could be called up by

the Council from time to time as considered

necessary, and the Council could extend to the

Executive Chairman the authority to call up

funds at short notice. At its second session

under the Fourth Agreement, the ITC made

use of the new provision and gave authority to

the Executive Chairman to call up installments should he consider it necessary for the

efficient operation of the buffer stock.

In order to avoid unnecessary retention of

funds in the buffer stock, another new provision permitted the Council to make refunds to

the producers if the total cash assets of the

buffer stock at any time exceeded the total of

initial contributions payable and of any voluntary contributions. The revolving nature of the

fund, together with the new power both to buy

and sell in the upper and lower section, made

it possible for the manager to operate with

smaller financial resources committed over

the period of the agreement.

Two consumer nations, France and the

Netherlands, have made voluntary contributions to the buffer stock.

The International Monetary Fund has accepted the Fourth Agreement as consistent

with the principles applicable to its buffer

stock financing facilities under which the

Fund will meet, subject to provisions including the establishment of a balance of payment

needs, requests by IMF members for foreign

exchange required for financial compulsory

contributions to the buffer stock.

262

b. Pricing on London Metal Ex -

change .—The tin price on the LME governs

the participants of the agreement as follows:

●

●

●

●

●

The

If the market price of tin on the LME is

equal to or greater than the ceiling

price and the manager has tin at his

disposal, the manager is to offer tin for

sale on the LME at the market price,

until the market price of tin falls below

the ceiling price or the tin at his disposal is exhausted.

If the LME market price of tin is in the

upper sector of the range below the

floor and ceiling price, the manager

may operate on the LME at the market

price if he considers it necessary to prevent the market price from rising too

steeply provided he is a net seller of

tin.

If the LME market price is in the middle sector of the range between floor

and ceiling prices, the manager may

buy and/or sell tin only on special

authorization by the Council.

If the LME market price is in the lower

sector of the range ‘between the floor

and ceiling prices, the manager may

operate on the LME at the market price

if he considers it necessary to prevent

the market price from falling too

steeply, provided he is a net buyer of

tin.

If the LME market price is equal to or

less than the floor price, the manager

shall, unless otherwise instructed by

the Council, offer to buy tin on the

LME at the floor price until the market

price of tin is above the floor price or

the funds at his disposal are exhausted.

4. The Fifth Tin Agreement

ITC convened on May 20, 1975, to

negotiate a Fifth Agreement to become effective July 1, 1976. The agreement, finalized in

June 1975, is set to run 5 years to June 30, 1981.
The major question facing the conference

was the method of financing a bigger buffer

stock. Producer nations have proposed that the

buffer stock be doubled to 40,000 tons and that

it be financed by compulsory contributions by

consumer and producer nations.

The new agreement, however, provides for

compulsory buffer stock contributions by producer nations totaling 20,000 tons to be supplemented by voluntary contributions from consumers of up to an additional 20,000 tons. So

far, only France and the Netherlands have indicated their willingness to contribute.

Canada, Britain, Switzerland, and Italy have

indicated they will consider the proposal. Consideration is also being given to membership

by the United States. However, this may create

a number of problems for the United States.

This will be discussed further below.

The Fifth Agreement also contains a new

clause under which the ITC may modify the

amount of buffer stock contributions required

of members if it obtains outside financial assistance from any international group, such as

the International Monetary Fund (IMF).

The IMF presently loans money for use by

the ITC to countries with balance-of-payments

deficits, but is considering extending credit

directly to the Council’s buffer stock.

The new agreement also empowers the ITC

to recommend that producers give preference

to consumer countries which were ITC members during past times of tin shortage. This

would act as a deterrent to any of the consumer countries who may consider leaving the

ITC because of the requirement to contribute

to the buffer stock. It may also be considered

as an effort to compel the United States to join

the agreement.

APPENDIX B

5. Position of the United States

The United States has recently signed the

Tin Agreement and submitted it to the Senate

for advice and consent to ratification. Under

the ITA a buffer stock made up of compulsory

contributions from producer member-countries and voluntary contributions from a few

consumer member-countries is used by a

Buffer Stock manager to intervene in the free

tin market to try to maintain tin prices within

a prescribed range.

The United States, as a condition of its

membership in the ITA has insisted that contributions to a buffer stock be the responsibility of producing, not consuming countries,

since it is producer-countries that benefit most

directly from the stockpile operations. As a

further condition of membership, the United

States has insisted that disposals from our

General Services Administration (GSA) administered strategic stockpile will not be

affected by membership in ITA. We have,

however, consulted with the Tin Council on

our surplus disposals of tin and will continue

to do so. The objective of the ITA is to reduce

fluctuations of tin prices in international

markets; our objective in surplus disposal

operations is to assure that they are carried out

in a way that will minimize impact upon the

commercial markets.

6. References

American Metal Market, May 12, June 11, June 27, July 8, July

11, 1975.

Minerals Facts and Problems, by U.S. Bureau of Mines, 1965 and

197o, GPO.

Minerals Yearbook 1969, Department of the Interior.

Minerals Yearbook 1971, Department of the Interior.

263
APPENDIX B

H. INTERNATIONAL CARTELS

1. Introduction

This review is limited to a discussion of international materials cartels, both existing and

potential, as opposed to national cartels

operating in individual countries. International cartels are defined as combinations

among governments or companies in two or

more countries which intend to control the

production, pricing, and distribution of a commodity. International commodity agreements,

such as the International Tin Agreement, are

not considered cartels. Examined in this paper

are existing cartels in petroleum, copper,

bauxite, and mercury, as well as potential cartels in other mineral raw materials. The International Tin Agreement is covered in a separate case study.

2. Materials Subject to Cartel Action

Listed below are those materials subject to

potential cartel action where combinations or

unilateral action in restraint of trade could

have an adverse effect upon the U.S. economy.

Any discussion of potential cartels would

cover those materials listed below in which international cartels either exist or could be

formed, under conditions favorable to their

effectiveness, as well as materials in which

cartels are unlikely for the reasons indicated.

Petroleum Iron ore Titanium

Copper Lead Tungsten

Bauxite Manganese Vanadium

Mercury Nickel Zinc

Chromite Phosphate Tin

Cobalt Platinum Natural Rubber

Of

a.

The

3. Petroleum and the Organization

Petroleum Exporting Countries (OPEC)

Formation of Petroleum Cartel.—

Organization of Petroleum Exporting

Countries (OPEC) was created in 1960. It comprises 12 countries or areas controlling more

than two-thirds of total world reserves of

264

crude petroleum, with the top six members

having well over 50 percent of the total.

Further, the OPEC members account for more

than 85 percent of world trade in oil. The

members, their reserves, and daily average

production in 1973 are shown in table B–3.

Table B–3.—OPEC members, petroleum

reserves, and production

Members

Saudi Arabia. . . .

Kuwait. . . . . . . . .

Iran, ., , , , . . . . . .

Iraq. , . . . . . . . . . .

Libya. . . . . . . . . . .

United Arab

Emirates. . . . . . . .

Nigeria. . . . . . . . .

Venezuela , , ., .,

Indonesia. . . . . . .

Algeria. . . . . . . . .

Qatar. . . . . . . . . . .

Ecuador , . . . . . . .

Reserves

(Billion bbls)

140.8

72.7

60.2

31.2

25.5

25.5

19,9

14.2

10.8

7.4

6.5

5.7

1973 Production

(Million bbls/day)

7.7

3.1

5.9

2.0

2.2

1.5

2.0

3.5

1.3

1.0

.5

.2

Source: Business Week, Jan. 13, 1975

As a combination of governments, OPEC

was an outgrowth of combinations of international oil companies, including U.S. firms,

which had been in operation for some 30 years

prior to 1960. These international oil companies had exercised various degrees of control over Middle Eastern production, partly

through price cuts which kept competition out.

Nevertheless, these firms had found their

market power diminishing in the 1950’s and

1960’s as smaller independent companies and

various state oil units opened up new drilling

concessions and gave governments better

deals than they were receiving from the

established producers. A contributing factor to

the weakening of power by the international

oil companies was a growing trend towards

the nationalization of the petroleum industry

in some countries.
b. Organization of OPEC.—The creation of OPEC was triggered by price reductions

by major producers, which brought angry

reactions from oil-producing countries and

which were for the most part rescinded immediately after the cartel was formally

established. OPEC’s bargaining power was

limited in the early 1960’s by excessive world

supply. Nevertheless, despite its slow beginning, various coordinated actions by the group

and by individual members graduall y

strengthened the cartel’s hand.

c. Purpose of OPEC.—The original purposes of OPEC were economic—to increase

member government revenues by raising taxes

and royalties earned from crude oil production

and to take over from the major international

oil companies control over production and exploration through government ownership.

Revenue from taxes and royalties collected

from producers were tied to so-called “posted

prices, ” which were set solely for the purpose

of determining the amount of revenue and did

not necessarily reflect selling prices or market

values.

d. Pricing of Petroleum.—Changes in

posted prices have nevertheless served as indications of variations in costs of purchasing

crude oil from OPEC members. This has been

dramatically true with the sharp increases

which were initiated on October 16, 1973, immediately after the start of the Arab-Israeli

war and followed up subsequently, Actually

the cost of crude oil is based on a combination

of both the posted price and tax and royalty

rates, and it may vary from area to area, depending on individual OPEC member action.

From a posted price at the Persian Gulf of

$3.01 per barrel in August 1973, the level rose

to $5.12 on October 16 and to $11.65 on January

1, 1974: Prior to October 1973 the posted price

had been set by the oil companies, presumably

after consultation with OPEC. Subsequently,

however, the pric e increases wer e

unilaterally announced by OPEC. The royalty

had traditionally been set at 121/~ percent of

the posted price. In June 1974 that rate was

APPENDIX B

raised to 121⁄2 percent by all the Middle Eastern

and African countries except Saudi Arabia,

For the fourth quarter of 1974 the royalty was

generally set at 16 2/3 percent, but on November

1, Saudi Arabia, Qatar, and Abu Dhabi (One of

the United Arab Emirates) raised that rate to

20 percent. This action was accompanied by a

cut in the posted price by those countries and

an increase in the tax rate, with the net result

of an increase in actual price of about 50 cents

per barrel. Taxes had been set by OPEC at 55

percent of the posted price, less the royalty

and production cost, but have been increased

and are now about 85 percent in the Persian

Gulf countries, but lower in South America,

Further price increases may occur on October 1, following a current freeze. Apparently,

increases ranging up to $4 per barrel are being

considered, in order to offset purchasing

power presumably lost as a result of inflation.

A small increase (about 30 cents per barrel)

will also stem from a switch on October 1 from

dollar value quotations to Special Drawing

Rights (SDR) of the International Monetary

Fund, which are based on a weighted group of

16 currencies. The dollar makes up one-third

of SDR value.

In a recent (July 1975) action, Ecuador—the

smallest OPEC member in terms of reserves

and output—reduced its export price through a

cut in the income tax rate charged oil producers operating in that country. Although the

resulting price decrease is probably less than

50 cents per barrel and Ecuador’s participation

in OPEC is small, its action may be a straw in

the wind, in view of a generally declining

trend in petroleum demand and production,

e. Political Warfare.—The Arab-Israeli

conflict of late 1973 introduced the new element of political warfare through the instruments of export embargoes which were in

effect from October 1973 until the spring of

1974 and the sharp price increases which have

been put into effect. OPEC has partly achieved

its political goals by forcing a hard look at

Arab-Israeli relations, Although its economic

goals, which concern both Arab and non-Arab

265
APPENDIX B

members of the cartel, have also been

furthered, the cartel’s drastic actions in supply

restrictions and price increases have brought

reactions which should tend to reduce its longterm effectiveness. The extent of conservation, substitution, and the development of

other energy sources not only by the United

States but by other import-dependent countries as well will be significant determinants of

OPEC’s future. The inflationary effect of the

price increases was an important factor in the

recent recession here and abroad.

f. Future Policy Decisions.—As offsetting actions occur, OPEC will be faced with

policy decisions which will affect its future. It

could cut prices far enough below their present levels to retard production in Alaska and

the North Sea, or it can reduce its production

by enough to balance the entry of new supplies of oil from those areas. For countries like

Venezuela, Ecuador, Iran, Nigeria, Iraq, and

Algeria, decreased revenues resulting principally from production cuts would tend to

defeat plans for industrial growth or lower

their standards of living-both unpalatable

political results. For some countries, reduced

revenues could affect plans for the growth of

military establishments,

Such internal differences and varying political ambitions would have a dampening effect

on the solidarity of OPEC. If a mutually acceptable plan cannot be designed, each country

may make its own decision about production

and price and thus undermine OPEC’s effectiveness. On the other hand, those OPEC

members like Saudi Arabia and Kuwait, who

have the largest reserves but no ambitions for

economic growth, would be more concerned

about maintaining the long-term strength of

the cartel’s export market. OPEC’s future

ability to achieve its goals will depend in part

on whether or not its conflicting elements can

be reconciled, and in part on the extent to

which dependence on OPEC’s oil is reduced.

4. Background

a. The U.S. Positio n .—Although the

United States is a major world producer of

266

petroleum, it is dependent upon imports for a

substantial proportion of its supply-about 30

percent for crude and 2o percent for petroleum

products. Despite the Arab embargo, U.S. imports increased in 1973 and 1974 under

pressures of growing demand. The major

foreign sources of crude petroleum in 1973-74

were Canada (27 percent of total), Nigeria (15

percent), Venezuela (13 percent), Saudi Arabia

(12 percent) and Iran (9 percent). Imports from

the 12 members of OPEC accounted for twothirds of the total. A major breakthrough in

output will come, of course, with the completion of the Alaska pipeline, and in Western

Europe with North Sea developments. Production from shale is a longer-range prospect.

Petroleum is the source of 46 percent of

energy consumed in the United States (1974).

Other sources are natural gas, 30 percent; coal,

18 percent; hydropower, 4 percent; and

nuclear power, 2 percent. Shifts to these alternative materials raise problems of availability,

particularly in the short run. While natural gas

has environmental advantages of cleanliness,

its supply has been limited due in part to a

low-price deterrent to development of

resources. A larger supply of coal may be inhibited by environmental considerations,

although coal liquefaction and gasification

hold some promise. Increased production of

nuclear power is part of the longer range

program toward greater independence from

imported oil. Conservation measures by

Government and industry have brought some

decline in demand as another phase of the independence drive.

b. Reserve Oil Supply.—There is no

Government stockpile of petroleum, but recent

voting in the Congress indicates that stockpiles

will be established. On July 8, 1975, the Senate,

without a dissension, voted to create a 90-day

national reserve supply of oil as insurance

against another Arab embargo. This reserve, to

be owned by the Government and stored in

underground salt domes, tanks, abandoned

mines or surplus tankers, could amount to

from 360 million to 785 million barrels, de-
pending on the annual level of imports. The

Government would also be authorized to acquire reserves of petroleum products.

The Senate bill, which will be considered in

the House, authorized the Government to get

its oil from three potential sources: 1)

purchases directly on the market; 2) as

royalties from wells on Federal offshore oil

leases; and 3) from existing naval oil reserves

at Elk Hills, Calif.

5. Copper and CIPEC

CIPEC is an abbreviation of Concil Intergouvernemental des Payes Exportateurs de

Cuivre—translated as Inter-Governmental

Council of Copper Exporting Countries.

CIPEC was established in 1967 following a

meeting of representatives of Chile, the Congo

(Kinshasa)-since renamed Zaire, Peru, and

Zambia who met in Lusaka, Zambia, on June 1,

1967, to discuss common problems concerning

copper.

Up to the present the membership has consisted of Chile, Peru, Zaire, and Zambia. The

Council provides for a ministerial conference

which meets every 2 years and an Administrative Council which meets twice yearly in May

and November in Paris, and a permanent Information Bureau of Copper in Paris. On occasions special nonscheduled meetings of the

Administrative Council have been held. The

stated purpose of CIPEC is to act in a consultative manner in helping member countries, individually or collectively, to avoid extreme

fluctuations in the price of copper.

a. Effect of Copper Price ,—Price fluctuations have only a marginal effect on the

quantities of copper exported by the producing

countries, but do have a substantial effect on

the foreign currency earnings and on the tax

receipts of the producer countries. This has a

serious effect on the planning for development

of these countries. It also gives rise to grave internal political problems, When copper

prices-and tax receipts-are high, so are

governmental expenditures. When prices

APPENDIX B

retreat, exporting countries must face a reduction of resources and retrench on expenditures, imports, and investments.

b. Problem of Developing Nations.—

Developing countries are seeking national independence. They desire to control the activities of mining enterprises. They want to

process minerals as far as possible down the

line to manufacturing, in lieu of exporting concentrates and blister for further processing in

the consuming centers, Thus, governments in

many countries have felt they were under

obligation to intervene in health and security

matters. Their intervention now extends to

such matters as labor conflicts and wages, conservation, currency remittances and utilization, marketing, and pricing policy, In some

countries, this indirect control has been supplemented by a direct participation of the state

in the capital, and therefore in the management, of the mining companies. Finally, the

developing countries, realizing that they cannot become developed nations on the basis of

a single commodity, are interested in diversifying their economies.

C . Common Problems.—There are

problems common to developing nations including the CIPEC members, CIPEC is not a

supranational authority, but rather a consultative body providing the member governments

with basic information and opportunities to

exchange views and possibly harmonize their

own individual and fully independent policies.

The principal function of the international

staff located in Paris is to gather statistics, provide information on markets, production

programs, substitutions, trade barriers, and

labor problems and their effects on the copper

industry. Toward this end the Information

Bureau conducts marketing studies and disseminates reports on world copper developments.

The importance of mine production of

CIPEC countries is shown as follows (in thousands of short tons):

267
APPENDIX B

World total . . . . . . . . . . . . . . . . . . . . . . .

Chile. , . . . . . . . . . . . . . . . . . . . . . . .

Peru ., , , . . . . . . . . . . . . . . . . . . . . .

Zaire . . . . . . . . . . . . . . . . . . . . . . . . .

Zambia, . . . . . .,,,,,... ,. ..,,.,

CIPEC total.... . . . . . . . . . . . . . . . . . . .

Percent of world total. . . . . . . . . .

U.S. production . . . . . . . . . . . . . . . . . . .

Percent of world total .,.....

1969

6,281

771

219

393

825

2,208

36

1,545

25

1970

6,567

756

234

425

754

2,169

33

1,720

26

1971

6,669

791

229

447

718

2,185

33

1,522

23

l972

7,329

800

248

472

791

2,311

31

1,665

23

197$

7,857

819

241

538

779

2,377

30

1,718

22

Source: Minerals Yearbook, Bureau of Mines.

There is an approximate similarity in the Copper is produced in 60 countrie s

economic characteristics of the member coun- throughout the-world. World production and

tries of CIPEC. All four countries may be estimated reserves (in thousands of short tons)

called “underdeveloped” or “developing” are presented as follows:

countries. The population growth rate is substantially higher than that of the United States

and other developed countries.

World copper production

United States. .,,...., ,,.,.

Canada ...,,... . . . . . . . . . . .

CIPEC countries:

Chile . . . . . . . . . . . . . . . . . . .

Peru. . . . . .,, ..,....,, . . .

Zaire . . . . . . . . . . . . . . . . . . .

Zambia, , . ., ..,.,,... . . .

CIPEC total . . . . . . . . . . .

Others:

Free world.,...,,. . . . . ..

Communist countriesl ,...

World total. ...., ...,.,

1,718

899

819

241

538

779

2.377

1,683

1,160

7,857

1,588

900

910

240

560

760

2,470

1,742

1,240

7,940

90,000

40,000

70,000

30,000

20,000

30,000

150,000

95,000

55,000

430,000

‘Estimated.

EXCept Yugoslavia.

Source: Commodity Data Summaries, 1975; Bureau of Mines.

268
APPENDIX B

The United States is almost self-sufficient in statistics on copper in the United States for the

respect to its needs for copper. Salient years 1972–74 are as follows:

Production:

Mine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ .

Refined copper:

Primary. ...,.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Secondary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

General imports:

Blister ..,..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other primary forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Secondary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total general imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exports:

Refined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other primary forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Secondary, old . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shipments from Government

stockpiles. ..., . . . . . , ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consumption: Refined .......,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Price: Average (cents per pound). . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Source: Commodity Data Summaries, 1975: Bureau of Mines

d. National Dependence on Copper.—

A second characteristic, in somewhat varying

degree, is the extreme dependence of each of

these countries on copper. This dependence

affects the balance of payments, the gross national product, and the Government’s budgets.

For CIPEC member countries as a whole, copper exports represent a total of 64 percent of

their foreign currency entries. The individual

percentages vary from 25 percent for Peru,

which has a relatively varied economy in

which other metals, fishery products, and

different agricultural products contribute to a

better balance of trade, to over 55 percent for

Zaire, over 65 percent for Chile, and 95 percent

for Zambia (1967 data). The effect of copper on

the member countries’ balance of payments

may be recognized from the fact that their copper exports pay the total of their imports up to

more than 70 percent.

e. Manpower.—The copper industry requires a large investment per employee and

( In thousands of short tons of copper)

1972

1,665

1,873

423

2,296

157

248

11

416

183

26

45

254

2,239

51.2

1973

1,718

1,868

465

2,333

154

244

19

417

189

31

88

308

2,437

59.5

1974

1,588

1,620

500

2,120

200

379

33

612

110

23

49

182

252

2,300

77.1

therefore contributes only marginally to the

use of manpower. Even so, this contribution

amounts to 15 percent in Zambia. The copper

industry contributes importantly to the gross

national product of Zaire (33 percent) and

Zambia (45 percent). In Chile and Peru, where

the economies are relatively more diversified,

the contribution of copper is significant but

not as great as in the African countries,

f. Taxe s.—Taxes on copper, including

company profits tax, export duties, and

royaIties, approximate 55 percent of the total

tax receipts of Zambia, 45 percent for Zaire, 14

percent for Chile, and 12 percent for Peru (in

1965).

g. Secondary Impacts of the Coppe r

Industry .—The effect of the industry within

these countries includes the consumption of

goods and services, parts of which are produced in the country itself Without the copper

industry most of these goods and services

269
APPENDIX B

would have no market and would therefore

not exist. In the case of Zambia, for example, it

has been estimated that if these indirect consequences were taken into account, the copper

contribution to the GNP would be 50 percent

instead of 40 percent, the contribution to

Government revenues would be 75 percent instead of 60 percent, and the contribution to

employment would be 32 percent instead of 15

percent. Furthermore, income generated in the

mining industry in the form of salary, wages,

etc., is again spent on goods and services.

When this is taken into account, the Zambian

figures become 69 percent for the contribution

to the gross national product, 84 percent to

Government revenue, and 57 percent to total

employment.

h. Recent Developments.—Due to a lagging world economy in 1971 and 1972, most

minerals and metals were in surplus supply.

Prices for these commodities, including copper, were soft and there was little incentive to

expand capacity. In 1973, demand for copper

suddenly rose and producer’s inventories were

quickly exhausted.

Domestic and world demand for copper continued strong in the first quarter of 1974. During the months of February through May the

balance of the copper stockpile inventory

amounting to 252,000 tons of refined copper

was released for use by the U.S. Mint. The

drawdown of inventories continued and prices

were forced up until a record high monthly

average of $1.38 per pound was reached on the

London Metal Exchange (LME) during the

month of April 1974. However, befor e

mid-1974 there was a weakening of the copper

market which continued for the balance of the

year. (LME copper prices averaged 57 cents

per pound in December 1974.)

Strikes at most producing units in July and

August 1974 and reduced demand in the second half of 1974 combined to create a negative effect on the U.S. copper industry. For the

year as a whole, the U.S. mine, smelter, and

refinery production—and refined copper consumption—were all substantially smaller than

270

in 1973. Consequently,

tured copper increased

ports declined.

imports of unmanufacsignificantly, while exi. 1974 CIPEC Communique .—This

situation was bound to affect CIPEC. Following a 2-day meeting in Paris, CIPEC issued a

communique on November 19, 1973, stating

that beginning December 1, 1974, its four

members would reduce shipments by 10 percent below the levels established in the previous 6 months. (Production was not affected.)

The communique also stated that the quota

system would be reviewed and adjusted if the

10 percent reduction did not achieve the

desired effect on prices. This was the first

positive collective action by CIPEC countries

to attempt improvement in the price of copper.

Early in April 1975 the CIPEC Ministerial

Council met in Paris and decided to increase

the cut in shipments an additional 5 percent to

a total of 15 percent and to cut production as

well by 15 percent, These measures became

effective April 15, 1975. CIPEC is reported to

be seeking support for a producer/consumer

buffer stock and to have appealed to the International Monetary Fund for financial help.

CIPEC has also been trying to increase its

membership but to little avail. One possibility

is Iran which expects to become a substantial

producer of copper when the Sar Cheshmeh

porphyry copper mine begins production.

Although 1977 is the target date, 1978 is more

realistic. At full production, future annual output is estimated at 145,000 tons of refined copper per year. Iran has indicated an interest in

joining CIPEC.

6. International Bauxite Association

a. Cartel Potential .—Ten countries, including most of the world’s major bauxite exporting countries, have formed the International Bauxite Association (IBA) to coordinate

information on bauxite production and increase revenues from bauxite operations in

member countries, These countries—

Australia, Dominican Republic, Ghana ,

Guinea, Guyana, Haiti, Jamaica, Sierra Leone,
APPENDIX B

Surinam, and Yugoslavia—produce over 65

percent of the world’s bauxite, and account for

about 80 percent of the bauxite/alumina trade.

The potential for a bauxite cartel thus exists in

the structure of the IBA.

b. The Case of Jamaica.—Jamaica has

taken steps to increase its revenue from the

sale of bauxite through increased taxes and

most producers appear to be willing to follow

its pricing lead. Although Jamaica may press

other members of IBA to attempt joint restrictions of supply, no firm pricing and taxation

policies have yet been established. A sevenfold increase in Jamaica’s revenue from bauxite has resulted in a doubling of its cost to

buyers. Most of the other members of IBA are

anxious to expand production and gain a bigger share of the export market, and may thus

no-t go along with Jamaica’s aims for supply

restrictions. Brazil is a nonmember with vast

resources of its own, and its plans to increase

exports would be counter to any move by IBA

to limit output.

c. Price of Bauxite.—Even a further

doubling of the price of bauxite would add less

than 10 percent to the price of aluminum

metal. A price increase of this size may lead to

only limited substitutions. Although this

further doubling would probably have little

effect on U.S. bauxite production, the other

aluminum-bearing ores might become competitive at that price level.

d. Stockpile Requirements.—A recent

study by the Office of Minerals Policy

Development, U.S. Department of the Interior

(March 1975), has estimated optimal government and industry stockpiles of aluminum

metal equivalent, in excess of strategic requirements, needed to offset the economic impacts of embargoes and cartel-sponsored

monopoly pricing. In terms of aluminum content, the total combined private and Government inventory declared excess of strategic requirements is around 6 million tons. The study

finds that this inventory is only about onefourth to one-fifth the indicated optimum for a

cartel action with a probability close to 1. In

order to minimize the costs of certain levels of

monopoly pricing policy, the optimal inventory release policy would be impossible. The

most that could be hoped for is a credible

threat to prevent the cartel from charging full

monopoly prices. “Staged sales, perhaps in the

amounts in proportion to those which would

be sold under an optimal policy, may be required to make the stockpile a more potent

weapon. ”

In another set of calculations the study estimates annual real costs to the U.S. economy of

embargoes and cartel price actions, as shown

in table B-4.

Table B-4.-Annual real costs to the U.S.

economy of a foreign initiated commodity

action in aluminum

Million dollars

Year after beginning

of commodity action1

1 . . . . . . . . . . . . . . . . . . . . .

2 . . . . . . . . . . . . . . . . . . . . .

3 . . . . . . . . . . . . . . . . . . . . .

4 . . . . . . . . . . . . . . . . . . . . .

5 . . . . . . . . . . . . . . . . . . . . .

6 . . . . . . . . . . . . . . . . . . . . .

7 . . . . . . . . . . . . . . . . . . . . .

8 . . . . . . . . . . . . . . . . . . . . .

9 . . . . . . . . . . . . . . . . . . . . .

Embargo

2

24,500/91 8

10,500

8,100

5,600

4,800

4,500

4,100

3,800

3,100

170

Cartel price

actions

2

20,000/36 0

6,30 0

5,400

4,700

3,800

3,200

2,600

1,800

1,100

160

l

10-year short-run to long-run adjustment period.

1

The larger number assumes no release from privately held

inventories during the first year of the commodity action. The

smaller number assumes private inventories are released at the

equilibrium price of (1.1) times the price in the year prior to the

commodity action. With an interest rate of 10 percent, this

release price will cover the holding cost of a stockpile for one

year.

3

The 10th year costs would continue for each year after year

10.

e. Background, Substitutes, and Imports.—The United States produces about 10

percent of its bauxite requirements. Imports

come principally from Jamaica (54 percent of

the total in 1970–73), Surinam (20 percent),

Dominican Republic (8 percent), and Guyana

(7 percent). Bauxite is by far the most impor271
APPENDIX B

tant aluminum raw material produced commercially. About 90 percent of all bauxite is

used to make aluminum. There are large

domestic deposits of alumina-bearing clays, as

well as other aluminous materials, but their

production is not yet competitive. Alumina,

the intermediate product made from bauxite

and processed into aluminum, is also imported

to the extent of about one-third of U.S. needs.

These imports are chiefly from Australia (49

percent in 1970–73), Jamaica (27 percent), and

Surinam (16 percent).

Aside from the substitution of othe r

aluminum-bearing material for bauxite, discussed above, there are possibilities of

substitution for aluminum by other materials.

Copper, magnesium, stainless steel, and plastic

can be substituted to a limited extent, but

without identical results and in some cases at

higher costs.

The U.S. Government strategic stockpile of

metal-grade bauxite totaled 14,158,881 long

dry tons on December 31, 1974. The stockpile

objective is 4,638,000 tons, leaving an excess of

9,520,881 tons. The total stockpile is

equivalent to about 10 months’ consumption.

The refractory-grade bauxite stockpile is

173,000 tons, all of which is excess. As a result

of the completed long-range disposal program

for aluminum metal, the stockpile of that

material is now zero.

7. The Mercury Cartel

The United States is dependent on foreign

sources for a substantial part of its needs for

mercury. Net imports have risen from 32 percent of U.S. consumption of primary mercury

in 1970 to virtually 100 percent in 19740 Salient

U.S. supply/demand statistics for the 1970-74

period are presented as follows:

Salient statistics—United States

Production:

Mine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Secondary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

General imports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exports and reexports . . . . . . . . . . . . . . . . . . . . . . . .

Consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Price per flask:

Average N.Y. (duty paid). . . . . . . . . . . . . . . . . . . .

London , , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stocks: Consumer and dealer. . . . . . . . . . . . , . . . . .

Employment: Mine and mill . . . . . . . . . . . . . . . . . .

1970

27,296

8,051

21,672

4,703

61,503

.$407 .77

$411.45

12,693

600

1971

17,883

16,666

29,750

7,232

52,257

$292.41

$282.46

11,489

350

1972

7,333

12,651

29,179

963

52,907

$218.28

$203.01

11,537

150

1973

2,171

10,329

46,076

342

54,283

$286.23

$273.54

14,019

80

1,700

9,000

51,400

500

59,600

$290.00

$275.00

16,000

80

Import Sources (1970-73): Canada, 53 percent; Algeria, 12 percent; Mexico, 11 percent; Spain, 11 percent; other, 13 percent. Imports in 1974 were 62 percent greater than the 1970-73 average because of the sharp reduction in domestic production. Mexico and

Algeria each supplied about one-fifth of the imports, and Canada supplied about one-third.

‘Estimate,

1

Includes releases by the General Administration of surplus mercury obtained from the Atomic Energy Commission.

World resources of the major mercury 1974 with the discovery and development of

deposits of the world are unknown, and only new deposits.

estimates based on production records and World Mine Production and Estimated

geologic knowledge can be made. Reserve and Reserves are presented by the Bureau of resource estimates for the United States and

Algeria were increased significantly during Mines, as follows:

272
APPENDIX B

World mine production and reserves

United States. . . . . . . . . , . . . ., , , , , , . . ., .

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mexico ..,..., . . . . . . . . . . . . . . . . . . . . . . . . .

Spain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Yugoslavia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other free world, . .,,....,.,,,,., ,, ...,..

Communist countries (except Yugoslavia). . .

World total. ,.,. . . . . . . . . . . . . . . . . . . . . .

‘Estimated.

Mine production I Reserves

1973

2,171

12,500

32,315

‘28,000

60,076

15,606

40,535

‘85,000

276,203

1974e

1,700

12,000

30,000

25,000

60,000

15,000

36,300

82,000

262,000

450,000

120,000

400,000

250,000

2,000,000

500,000

565,000

1,015,000

5,300,000

a. The Spanish-Italian Cartel.—In 1928,

Spanish and Italian producers of mercury controlled over 80 percent of world production.

Mercurio Europeo, a cartel of Spanish and

Italian producers, was formed October l, 1928,

when world stocks were excessive. Headquarters was at Lucerne, Switzerland. The cartel

was formed for the purpose of controlling production, allocating sales, and stabilizing prices.

Sales were to deallocated 55 percent to Spain

and 45 percent to Italy. Meetings were held annually to allocate world quotas and markets.

Although one of the stated aims of the cartel

was to stabilize prices, the actual policy of the

cartel was to sustain prices. Less rigid control

was exercised over production. Consequently

producer stocks increased and by the end of

1930 were estimated to be approximately

150,000 flasks, most of which had been produced but not sold by members of the cartel

As might have been expected, the maintenance of high prices stimulated production in

other countries which tended to replace

markets formerly supplied by Spanish and

Italian producers.

b. U.S. Production.—The largest gain in

mercury production occurred in the U.S.

mines, In 1931 the U.S, mines were able to supply U.S. requirements for the first time in 14

years and, in addition, had an exportable

surplus. In mid-1931 the cartel reduced its

price but failed to stimulate buying. However,

in 1932 U.S. production was cut in half. Efforts

on the part of the cartel to stimulate consumption were unsuccessful.

c. Cartel Interruptions.—The cartel was

suspended in 1936 when it was denounced by

Spain who alleged that Italy was selling arms

to the insurgents. The cartel operations were

resumed in May 1939 following the end of the

Spanish Civil War. Operation of the cartel was

virtually impossible in World War II, but was

revived in 1945.

Spain withdrew from Mercurio Europeo

and the cartel was dissolved January 1, 1950,

following a large purchase of Italian mercury

by the U.S. Government with counterpart

funds.

d. Other Competition and Decline in

Price.—A group of mercury producers including Algeria, Italy, Mexico, Spain, Turkey,

and Yugoslavia, with Canada as an observer,

had been meeting informally during the early

1970’s to exchange views on market developments and try to formulate a price policy.

Efforts by individual members such as Spain

and Italy to raise prices by stockpiling had

been unsuccessful in the past. In May 1974 the

group met in Algiers and decided to form a

producers organization, The provisional

secretariat announced a mininum sales price

of $350 per flask, EOB., effective May 17, 1974,

Although the price briefly reached the an273
APPENDIX B

nounced minimum price, it has steadily fallen

since then.

It is felt that higher prices would likely

bring more rapid substitution, especially in

battery applications and in the chemicals industry. If prices returned to the levels obtained

in 1969, U.S. mine production would probably

be resumed, and production would increase in

other countries.

8. Chromite

a. Cartel Potential.—The major concern

about possible cartel price and supply actions

applies to metallurgical-grade chromite. A formal combination of the major sources of this

material—the U. S. S. R., Rhodesia, South

Africa, and Turkey—for the purpose of controlling markets appears to be a remote

possibility because of the political differences

among them. However, supply restrictions by

a Rhodesian-South African cartel might find

tacit cooperation of the U.S.S.R. On the other

hand, technological developments in the use

of chromite, which permit the use of South

African chemical-grade ores in metallurgical

applications, have reduced U.S. dependence

on the U.S.S.R. and Rhodesia for metallurgical-grade chromite.

b. Recent data.—A recent study of the

Office of Minerals Policy Development, U.S.

Department of the Interior (March 1975), has

made estimates on optimal industry and

Government stockpiles under varying degrees

of probability of an embargo by exporting

countries or of cartel-sponsored monopoly

pricing. Estimates have also been made of real

costs of embargoes and monopoly pricing. Tables B–5, B-6, B–7, and B-8 present these findings of the study,

c. The U.S. Deficiency.—The United

States had produced no chromite (chromium

ore) since 1961. While large amounts of

chromium-bearing materials are found in this

country, they are low-grade and uneconomical

to develop under current and foreseeable costs

and technology. The major use of chromite is

in the manufacture of stainless steel (66 percent of the total in 1971). The other uses are

Table B-5.-Estimated real cost

of a chromium embargo

Years of

embargo

(t]

1 . . . . . . . . .

2 . . . . . . . . .

3 . . . . . . . . .

4 . . . . . . . . .

5 . . . . . . . . .

6 . . . . . . . . .

7 . . . . . . . . .

8 . . . . . . . . .

!3 . . . . . . . . .

10. . . . . . . . .

273

963

799

789

632

533

495

461

412

374

248

796

601

540

393

301

254

215

175

144

Subtotal

years 1–10 5,731 3,667

Plus $374 million in each additional year up to and

including the 24th year, thereafter, alternative unit

costs exceed long-run price.

Subtotal

years 11–24 5,236 1,061

Tot al

years 1–24 10,967 4,728

2 7 4
Table B–6.—Optimal

APPENDIX B

chromium stockpile in an embargo situation

[Thousands of short tons]

Year of

embargo

1 ,. .,...

2 . . . . . . .

3 . . . . . . .

4 . . . . . .

5 . . . . . . .

6 . . . . . . .

7 . . . . . . .

8 . . . . . . .

9 .. .,,..

10 .., . . .

11 . . . . . .

12 , , . . . .

13 , , , . . .

14 . . . . . .

15 . . . . . .

16 . . . . . .

17 , . . . . .

18 . . . . . .

19 . . . . . .

20. , ., , .

21 , . . . ! ,

22 . . . . . ,

23 . . . . . .

24 . . . . . .

Total.

Prob

1

247

521

516

512

508

502

498

489

477

460

444

426

407

385

362

336

308

277

243

205

163

118

68

12

8,484

0.2

240

501

313

225

1,279

231

479

710

0.05

215

435

650

Table B–7.—Estimated real cost

of a chromium cartel action

Years of Annual cost Present value

cartel (millions of of cost

(t) dollars) (millions of dollars)

1 . . . . . . . . .

2 . . . . . . . . .

3 . . . . . . . . .

4 . . . . . . . . .

5 . . . . . . . . .

6 . . . . . . . . .

7 . . . . . . . . .

8 . . . . . . . . .

9 . . . . . . . . .

10. ..., , , . .

203

625

556

523

456

408

365

326

288

250

185

517

418

358

283

231

187

152

122

97

Subtotal

years 1-10 4,000 2,550

Plus an annual cost of $250 million in each additional year up to and including year 17. Thereafter,

alternative unit costs exceed the monopolistic

price,

Subtota l

years 11–17 1,750 470

Total

81

69

150

years 1–17 5,750 3,020

275

77-119 0-76.19
APPENDIX B

Table B–8.—Optimal stockpile in a chromium cartel situation

[Thousands of short tons]

Year of

cartel

1 ., ..,,., ,

2 . . . . . . . . .

3 . . . . . . . . .

4 .,, ,,, ,,.

5 . . . . . . . . .

6 . . . . . . . . .

7 . . . . . . . . .

8 . . . . . . . . .

9 . . . . . . . . .

10 . . . . . . . .

11 . . . . . . . .

12 . . . . . . . .

13 . . . . . . . .

14 . . . . . . . .

15 . . . . . . . .

16 . . . . . . . .

17 .., ,..,.

Total. . . .

247

484

480

476

471

466

462

453

441

425

410

393

374

354

331

307

279

6,853

Probability of occurrence

0.2

240

464

445

428

393

352

296

291

2,909

0.1

231

443

403

369

293

205

1,944

0.05

215

403

320

248

1,186

0.01

refractories (19 percent) and chemicals (15 1973 and 1974 imports of this commodity were

percent).

Imports of all grades in 1974 came from

South Africa (30 percent of the total), U.S.S.R.

(29 percent), the Philippines (17 percent),

Turkey (11 percent), Rhodesia (7 percent), and

Albania (6 percent). One of these countries,

Rhodesia, was out of the picture during

1967–71, when imports were halted by the

United States in support of U.N. sanctions

against that country. The resultant heavy dependence on Russian chromite was eased

beginning in late 1971, when imports from

Rhodesia were resumed.

d. Processing and Use.—For metallurgical purposes, in the production of stainless

steel, chromite is processed into ferrochrome.

While much of this processing had been performed in the United States, increasing quantities are being produced overseas, largely in

ore-producing areas. This shift is reflected in

significant increases in U.S. imports of highcarbon ferrochromium over the last 5 to 6

years. Consumption has also risen as a result

of shifts toward use of this grade, though not

to the same extent as the rise in imports. In

276

13 times as large as in 1968, and now account

for 70 percent of all ferrochromium imports.

Imports of the low carbon grade have fluctuated and were actually lower in 1974 than in

1967. Of total imports of both grades, South

Africa was the principal source (37 percent of

total), followed by Rhodesia (23 percent) and

Yugoslavia (13 percent).

e. Use in Stainless Steels .—Chromium

is an indispensable ingredient of stainless

steel. Possible substitutes for stainless steel in

some applications include aluminum, nickel,

and titanium or alloys of these metals with

other elements. Chromium used as an alloy in

the production of steels other than stainless

and in high-temperature metals may be

substituted fully or in part by cobalt, nickel,

molybdenum, or vanadium, but usually with

lower performance standards or higher costs.

Chromium used in plating can be replaced by

nickel, zinc, and various other metals.

Substitutes are also available for chromium

used in pigments.

f. Stockpile Composition.—Chromium

is stockpiled by the Government in various
forms: three grades of chromite, three grades

of ferrochromium and chromium metal. As of

December 31, 1974, stockpile surpluses were as

follows, in relation to U.S. consumption in

1973: metallurgical-grade chromite, 26 months’

supply; refractory-grade chromite, 15 months;

chemical grade, 14 months; low carbon ferrochromium,

l 25 months; high carbon ferrochromium, 18 months; ferrochromium

silicon,

l 8 months; and chromium metal 1

, 8

months.

9. Cobalt 2

With approximately two-thirds of the world

cobalt production, Zaire clearly is in a position

to increase world cobalt prices by artificially

manipulating the supply. Such action,

however, is unlikely because cobalt is a

byproduct of other mineral production. Nickel

can be substituted for cobalt in a number of

important uses, and the large U.S. stockpile is

a standing threat to cobalt producers.

10. Iron Ore

There have been no concerted moves by

producers to use or control international iron

ore trade. Furthermore, a sustained iron ore

producers’ cartel for the purpose of increasing

prices appears unlikely because of the abundance and wide distribution of iron ore

reserves, World iron ore production is expected to remain 20-25 percent below capacity

for at least several years. And with 85-90 percent of the world’s iron ore produced from

open pits, large increases in ore production can

be achieved within 1–2 years.

a. The Caracas Group . —The lessdeveloped countries (LDC) iron ore producers

(Liberia, Brazil, Venezuela, and others) stated

their view at UNCTAD that iron ore prices

should be linked to those of steel, but nothing

IZero objective.

ZRe~erence. The following statements, dealing with the potential for cartellike action to restrict supplies or raise prices for

a number of other materials, are taken verbatim from the Special

Report-Critical Imported Materials, published by the Council

on International Economic Policy, December 1974.

APPENDIX B

has yet come of this idea. An informal LDC

group, known as the “Caracas Group,” has

held a series of meetings to discuss iron ore

prices. Its last meeting was in Geneva in

March, with Australia, Canada, and Sweden

attending as observers. The meeting dealt

mainly with technical aspects of production,

transport, and trade and did not consider

possible action to improve prices or to restrict

supplies, nor did it act on proposals for

establishing a more formal structure,

In May 1974 Venezuela announced its intention to nationalize the iron ore operations

there. Under Government ownership and control, Venezuela may well attempt to obtain

higher prices for its iron ore exports, within

the limitations of the existing competitive

situation, whether or not there is a subsequent

move to secure joint producer action. The

Government may also limit exports and channel supplies to its growing domestic steel industry and to other members of the Latin

American group, called the Andean Pact.

A “worst case” scenario might be the

simultaneous closing down of the Great Lakes

iron ore facility, a limiting of Venezuelan exports, and a prolonged labor strike in Canada, a

series of events which would affect 33 percent

of U.S. iron ore consumption.

b. Possible First U.S. Action.—Th e

first reaction of the United States could be to

attempt short-run supplementation of ore supplies from presently operating surplus

capacity. Other reactions would include: attempts to secure new domestic sources and to

open up new mines abroad (2.7 years’ leadtime); relaxation of environmental constraints;

conservation of steel and substitution to the

extent practicable; and an embargo on exports

of scrap iron.

c. Use of Low-Grade Ores.—It should

be noted, however, that bringing new domestic

sources of iron ore on stream entails significant costs. We would be mining lower grade

ore, thereby necessitating more energy in the

furnaces, more pollution control, and probably

277
APPENDIX B

additional transportation facilities to reach

remote supply sources.

Aside from the possibility of a sudden disruption resulting from the unilateral nationalization of U.S.-owned iron ore production facilities abroad, there are no impending

supply problems for the United States. There

is a nebulous group which conceivably could

be encouraged by an appearance of success in

other commodities to coalesce into operating

as a price-hiking cartel. To be effective, the

cartel would have to include Australia, Brazil,

and Canada. Although these three countries

are currently more favorably disposed toward

international producer organizations, their

wider interests compel policies of moderation

in questions of pricing of and access to their

mineral resources, The sheer volume of imported iron ore, and the lack of substitutes or

reserve stocks, make this commodity a critical

one to watch.

11. Lead

Price gouging would have to involve both

Canada and Australia and this is unlikely,

given the current policies of these countries.

Several factors, however, suggest that a significant price increase in lead is a possibility:

(1) due to environmental standards the future

earnings potential of lead may be dim; the

temptation to reap immediate profits, great; (2)

there are few economic substitutes. On the

other hand, because the dependence of foreign

producers on lead for foreign exchange is

small, there is little interest of individual producer countries in joint market action to obtain

higher prices. Moreover, producers may feel

that higher prices wilI discourage new uses of

lead.

In the short run there might be some

temptation to gain higher profits from lead due

to its relatively dim future. If a cartel were

formed, it would have to involve developed

countries. The United States currently produces 75 percent of its lead requirements and

could become self-sufficient within 54 years.

The likelihood of a joint price-gouging

effort is low. And without a cooperative effort

278

to control production, the attempt to sustain

high prices would be difficult if not impossible.

12. Manganese

An effective manganese cartel would, at the

minimum, require the cooperation of Gabon,

Brazil, South Africa, and Australia. Such action could take the form of a price leadership

group of Brazil, Gabon, India, and Australia,

with South Africa and the U.S.S.R, following

the “lead. For political reasons, South Africa

might be unwilling to join an LDC producer

group, Before joining with others to restrict exports to raise prices, Australia would have to

consider carefully the effect of such actions on

its other exports to Japan, particularly iron ore,

for which Japan is by far Australia’s most important market. Iron ore is in plentiful supply

worldwide, and an Australian move to restrict

manganese exports could possibly result in a

gradual Japanese shift in iron ore sourcing to

“more stable” suppliers, The same constraint

is true for India, which exports both

manganese and iron ore to Japan. Finally,

Brazil is a substantial iron ore supplier to

Western Europe, where continued available

markets for iron ore might be threatened by a

cutback in manganese exports. Supply restrictions or price-manipulating efforts would

likely be frustrated within a 2-to-3 year period

by production and capacity expansion by

others —to the long-term detriment of the

restricting producers, Price increases would

also add impetus to seabed recovery of

manganese nodules.

13. Nickel

The potential for cartel-like action to raise

prices or restrict supplies is quite limited. It

appears that prices have already reached cartel

profit-maximizing levels. A formal cartel of

producing governments acting jointly probably

would not revise the present pricing strategy

to any considerable extent. Moreover, the

possibility of new producers (including seabed

producers) in the next few years would make

any market-sharing agreement by a cartel both
difficult and unstable. Over the long run, these

developments make the probability of price

declines substantial.

14. Phosphate

The conditions for a cartel action are present: supply and demand are not responsible to

price in the short run, there is a lack of

substitutes for the crucial agricultural applications, there is no excess capacity, and there are

only a few producing countries. The price of

phosphate rock will rise, cartel or not.

15. Platinum

With only five significant producers of primary platinum operating in three countries,

the potential of collusive pricing behavior is

fairly high. But because of the following factors, one might conclude that platinum is

already priced at or near optimum levels:

. Despite marginal costs of production

(believed to be only half or less of recent market prices), major producers

appear to withhold stocks from the

market to maintain what resembles a

long-run profit maximizing price.

. Despite tremendous gyrations in the

dealer price of platinum, major producers have for many years supported

a stable producer price.

. Producers have admitted to holding

down prices to prevent more intensive

efforts to develop platinum substitutes.

It thus appears that the platinum producers

already cooperate to regulate both supply and

price. The potential for further action

therefore seems to be present.

a. Substitutes for Platinum .—The basic

force opposing action detrimental to the

United States or other consumers appears to be

apprehensiveness on the part of producer

companies concerning the development of

substitute materials or processes which do not

require platinum. There are also indications

that there are substantial inventories in the

hands of the major users.

APPENDIX B

Other materials or processes could be

substituted for the use of platinum catalysts in

the petroleum refining and chemicals, but this

would be a lengthy and expensive endeavor,

Short-term reactions could include the release

of stockpile materials and the allocation of

available supplies, including excess industrial

inventories to the more essential uses.

b. Few Platinum Suppliers.—Th e

possibility of supply withholding or drastic

price increases is present because of the small

number of suppliers, demand which is

relatively insensitive to price, and the lack of

ready substitutes. Concerted intergovernmental action would not be necessary; price

leadership by one platinum producer and the

tacit cooperation of others would be sufficient,

However, the history of the industry, including the recent undertaking by the major producer to increase production to fill contracts

with U.S. auto manufacturers, indicates a sensitivity by the producers to market needs and a

willingness to fill them.

16. Titanium

With the considerable world ilmenite production and the numerous present producers,

a concerted producer country action to increase ilmenite prices artificially would appear difficult. Although higher prices for

Australian minerals and raw materials is a major goal of its Labor Government, Australia,

which has 97 percent of the non-Communist

world’s rutile production, would have to “go it

alone” in any market action on rutile production, rather than taking the politically easier

step of “giving in” (willingly or unwillingly) to

LDC requests for Australian cooperation in a

market action. Given Australia’s strong political and economic ties to the West, it is

doubtful she would be willing to take such action alone. Nevertheless, the Australian rutile

producers seem to have jointly been making

price and output decisions to extract as much

long-run profit as they could; however, if

these producers feel they have not fully exploited their situation, further price increases

may be forthcoming,

279
APPENDIX B

The chances of significant artificial price increases in titanium involve developed countries and the possibility of such action is

negligible. In any case, the economic impact

on the United States would not be significant.

In the longer run, the development of

substitutes for rutile seems promising.

17. Tungsten

Because of what appears to be a dwindling

reserve situation, and given the lack of available substitutes, tungsten is a possible candidate

for short-term price manipulation, although

Canada and Australia would have to be involved to make a cartel effective.

While we are dependent at present on imports, the dependence is more a matter of current price situation than necessity, Given the

possibilities for substitution, the existing

stockpile levels, and the domestic reserves,

it does not appear that the United States can be

threatened by either embargo or price actions

on the part of foreign tungsten producers for

many years.

18. Vanadium

The only possibility would be a unilateral

price increase by South Africa. A significant

increase could be frustrated by substitutes:

columbium has, in fact, been replacing

vanadium in steel-alloying applications over

the past 2-4 years, and other alloying elements, such as molybdenum, are also replacements at higher prices. Nevertheless, the

United States imports all its columbium.

19. Zinc

A “Producers Group,” including virtually

all West European, Canadian, and Australian

privately owned producers, is apparently trying to establish prices and operating rates to

maintain price stability at a level satisfactory

to the members. In view of current production

magnitudes and potential, a group attempting

to establish firm control of the world zinc

market would probably have to include

Australia, Canada, Mexico, the European

Community, Zaire, and Zambia. A zinc cartel

would therefore require the close cooperation

of highly disparate private-sector entities. It

might also run afoul of the European Community’s antitrust regulations,

Most foreign producers realize the value of

the U.S. market and thus are likely to avoid

moves which could lead to greater U.S. production. Given this fact, the diffusion of

sources, the countries involved, and the eventual availability of certain substitutes, it is

unlikely that price gouging or cartel-like action will occur. What we can expect is that the

major zinc producers will try to tailor their

output and expansion plans to try to avoid

creation of all oversupply and falling prices,

such as was experienced during the 1960s and

early 1970’s.

20. Tin

Most of the world’s major tin producers and

consumers are signatories of the International

Tin Agreement (ITA), the only formal international commodity agreement for a metal, (The

United States has recently signed and submitted to the U.S. Senate for advice and consent to

ratification its agreement to the Fifth International Tin Agreement.) For a detailed discussion of the ITA see Case Study, The International Tin Council. Under this agreement, the

International Tin Council (ITC) sets floor and

ceiling prices and its buffer stock manager

buys and sells tin on world markets with the

intention of preventing wide swings in world

tin prices. The producers make obligatory contributions to the tin buffer stock and are required to impose export controls if the ITC

deems such action necessary.

a. Tin Agreements.—Four sequential

Tin Agreements have been in operation since

1956. Over their life, the combined actions of

the buffer stock manager and export controls

have prevented prices from going below ITCestablished floor prices. The ITC has been less

successful in preventing the price from going

above the established ceiling price. Since

November 1973 the world tin price has ex280
ceeded the ceiling price, despite the fact that

the buffer stock manager has disposed of about

40,000 tons from the U.S. stockpile,

Price gouging on the part of tin producers is

deemed unlikely, Under the terms of the ITA,

to which all of the major producers belong,

one of the objectives is to increase production

in case of a tin shortage and make a fair distribution to tin metal consumers in order to

mitigate serious difficulties which consuming

countries might encounter, To restrict supplies

would run counter to the agreement and

jeopardize the upcoming negotiations for the

Fifth Agreement, Moreover, the producers are

quite concerned about the potential sales from

the U.S. stockpile. Substitutes and the potential for conservation of tin in solder make longrun prospects for cartel-like action poor.

b. Cartel Activity not Expected.—The

present price of tin is higher than even many

of the tin producers believe can be sustained.

A more likely possibility is that producers, acting through the International Tin Agreement,

will move to ensure that prices do not drop to

previous low levels, They will attempt to accomplish this by significantly raising the present floor price in the tin agreement,

21. Natural Rubber

There is an international organization, the

International Rubber Study Group (IRSG),

comprising producers and consumers of both

natural and synthetic rubber, including the

United States. This organization has not acted

to control supply or price, but it has served

mainly as a forum for discussion of the

problems of the rubber producers. Because of

dissatisfaction with the IRSG ability to solve

the low-price problems, the Southeast Asian

producing countries, led by Malaysia, formed

the Association of Natural Rubber Producing

Countries (ANRPC) in 1971. Thus far, the

association has concentrated on technical matters, although the members have discussed the

APPENDIX B

possibilities of joint action in regard to natural

rubber marketing, freight rates, and stockpiling natural rubber.

The natural producers have never tried to

curtail production to advance higher prices,

but the Malaysian Government attempted to

influence the market by buying rubber in 1971

and 1972 and by suggesting in July 1974 that

producers temporarily hold larger stocks until

the price decline had been reversed. The

natural-rubber producers have been sensitive

to the political and economic problems that

curtailed production would entail; e.g. ,

widespread rural unemployment and hardship

for small family-operated plantations.

Nevertheless, since natural-rubber production

capacity cannot be expanded rapidly, exporting countries could sustain price increases for

a few years.

It is unlikely that the natural-rubber producers will withhold supplies from the market

for long, but led by Malaysia they may attempt

to obtain greater control over world marketing

of natural rubber. However, even if this is

achieved, they are not likely to be able to sustain any price gouging effort because of the

availability of synthetics,

22. References

Cartels and International Patents Agrecments, Washington,

D. C., Legislative Reference Series, Library of Congress, June

1944.

“Cartels: The Menace of Worldwide Monopoly,” The New

Republic, Mar. 27, 1944.

Control of Cartels and Monopolies, by Corwin G. Edwards, New

York: Oceana, 1967.

Con trolling World Trade: Cartels and Commodity Agreements,

by Edward J, Margon, Committee for Economic Development

and the Research Study. New York: McGraw-Hill, 1946.

The Law of International Cartels, by Heinrich Dronstein. New

York: Cornell University, 1973.

“OPEC: The Economics of the Oil Cartel, ” Business kl’eek, Jan.

13, 1975. pp. 77—81.

“The U.S. Now Must Deal With Other Cartels, ” New York

Times, June 1, 1975, Sec. 4, pp. E4,

281
Appendix C

ECONOMIC STOCKPILING IN FOREIGN COUNTRIES

Appendix C discusses economic stockpiling in the nine-nation European

Economic Community (EEC) in general, and then specifically examines the

stockpiling policies of three foreign countries: Japan, France, and Sweden.

A. THE EUROPEAN ECONOMIC COMMUNITY STOCKPILING PROGRAM

This information was derived from an interview which was not part of the planned series

undertaken as part of this assessment. It represented a valuable opportunity to exchange

ideas with a representative of the European

Economic Community (EEC) who is engaged

in a study closely paralleling the stockpile

assessment, The informant is a Coordinator

for Industrial Raw Materials Supply Policy for

the EEC. He was referred to us by the Visitor

Program Service, a nonprofit organization

making arrangements for foreign dignitaries to

consult with experts in this country.

The informant was in the United States to

discuss economic stockpiles with Government

officials, experts in stockpiling or resource

management, corporation heads, private

research companies, and so on. He said that

the nine-nation EEC had asked him in 1974 to

prepare a policy paper on the subject of

economic stockpiling, The request wa s

prompted by the OPEC oil embargo, the subsequent price increase, and the possibility of

similar actions being taken by other nations

for other materials, The following information

briefly outlines the EEC plan and the informant’s reactions to this assessment,

1. Conclusions

This policy paper prepared by the informant

was reviewed by the EEC, The conclusion

reached was that an economic stockpile might

contribute to the achievement of one or more

of the EEC’s objectives and that the informant

should undertake extensive travel and discussion with persons in other countries of the

world, including other importing and exporting countries. It was felt that the United States

might be able to offer some useful counsel

based on previous stockpile experience.

2. EEC Management

Of particular interest was the informant’s

description of a combined policy/management

system being analyzed by the EEC. The policy

objectives are the growth and stabilization of

the economies of less developed nations which

are heavily dependent on the income from exports of a particular material. To support these

objectives, the EEC nations would enter longterm agreements for purchase of such

materials at agreed-upon prices. If market

prices fell below the agreed-upon price, the

nations would make their required purchases

and pay for them at the agreed-upon price

rather than the market price. He was less certain of the arrangement

occurred. This apparently

jects under negotiation.

The EEC arrangement is,

it

is

of

native to stockpiling. It was

the contrary

one of the subcourse, an alterthe informant’s

view that its application should be limited to

those materials for which the nations are not

heavily import dependent. The reason for this

is that the drain on their financial resources

(and possible competitiveness in export

markets) would be too great if market prices

fell substantially below the agreed-upon prices

for a large import volume material,

2 8 3
APPENDIX C

The informant said that considerabl e

progress in this effort had already been made

and that discussions were about to commence

regarding the budget contribution to be made

by member nations.

3. The Attitude of West Germany

Of particular interest was his anticipation

that West Germany would present the greatest

difficulty in funding any economic stockpile

program and his reason for thinking so. He

said that West Germany could be expected to

offer opposition to any EEC program which interfered with the operation of the free enterprise system. This is not to say that West

Germany does not participate, or is inexorably

opposed to such programs, but rather that it

places very much more stress on the cost of

such interference than do the other member

nations.

4. Review ot OTA Stockpile Assessment

The informant reviewed the list o f

economic stockpile policies and found them

generally consistent with the EECs thinking.

He was in total agreement with those cases in

which U.S. interests and EEC interests were

parallel, such as protection against cartels and

increased foreign country production of

materials.

a. Concentration on Aluminum, Steel, and

Base Metals.-Several phases of this assessment were outlined to obtain the informant’s

reaction. He was astonished at the number of

materials under consideration. He said the

Raw Materials Supply Policy section of the

EEC, which he heads, is one of six such units

into which the EEC staff is divided. He stated

that lack of sufficient expertise alone demanded that study efforts be limited to toppriority materials only. All efforts are presently being concentrated on lead, zinc, copper, bauxite, and iron ore.

He was moving toward the conclusion that

iron ore was too bulky to make it feasible to

stockpile. For much the same reason, he was

weighing the costs and benefits of stockpiling

284

bauxite ore against the costs and benefits of

stockpiling it in a more highly fabricated form

such as alumina, or even aluminum.

Notes.—The informant made the following

observations:

●

●

●

●

●

He would have been quite surprised if

such an assessment had not been underway.

He seemed to proceed on the basic

assumption that major changes will

take place in the next few years in the

buyer/seller relationships between less

developed nations exporting industrial

materials and highly developed importing nations.

His view was that the major element in

such a new relationship would be the

development of a stabilization device

to permit the industrialized importing

nations to aid (economically) the less

developed exporting nations.

(Presumably the national interest of

the developed nations would be served

by improving the stability an d

economic prospects of the less

developed nations, thus reducing the

likelihood of cartels, embargoes,

violent price increases, etc.)

An economic stockpile program represents one potential tool for use in accomplishing the above-stated objectives. It should be evaluated in terms of

an alternative means of dealing with

the future rather than in terms of the

institutional arrangements that were

created to deal with the past.

The prospect of the Europea n

Economic Community’s engaging in

the management of an economi c

stockpile program, or taking alternative

actions with the same objectives, raises

the possibility of a large new institution with which a U.S. stockpile

program will interact. Considering

especially the relatively thin margin
APPENDIX C

which frequently exists between a

shortage and upward pressure o n

prices and a surplus and falling prices,

B. STOCKPILING IN

Japan, of all the major powers, has the worst

imbalance between requirements for mineral

resources to support a modern industrial complex and the ability to produce these resources

domestically. Japan depends on imports for

almost 100 percent of its requirements for

bauxite and alumina, chromium ore, nickel,

phosphate rock, and tungsten; for more than

90 percent of its copper, iron ore and concentrate, manganese ore, and tin; and for more

than 75 percent of its lead ore and concentrate,

and zinc, The following account presents

Japan’s program as currently planned.

1. Import Dependence and Stockpiling

Japan’s resource shortage is complicated by

its high degree of independence on relatively

few sources of imports, In 1973, for example,

more than 50 percent of its copper imports

came from Canada, Zambia, and the Philippines; 64 percent of its lead from Canada and

the United States; 58 percent of its zinc from

Canada and Peru; 65 percent of its nickel from

New Caledonia and Canada; and 54 percent of

its bauxite from Australia, Japanese industry

was forced to cope with reduced production

attributed to conditions beyond its control,

such as labor walkouts and strikes, natural disasters, and political changes in the producing

countries. Domestically, Japanese industry in

recent years has also experienced great

difficulty in obtaining plant sites because of

aroused public interest in environmental protection and preservation.

a. Stockpile Consideration.—The use of

stockpiles as one means of solving Japan’s

resource problems has been under active consideration for much of the last decade. At least

as early as 1967, the Japanese Ministry of International Trade and Industry (MITI) drew

up plans for a semigovernmental agency to acquire and maintain stockpiles of materials like

nickel,

that interaction could be of critical importance to the success of both the U.S.

and EEC programs.

JAPAN

molybdenum, cobalt, tungsten, and

vanadium which are needed by the specialty

steel industry, The plan contemplated an

agency, supported on a 50–50 basis by the

Government and the specialty steel industry,

which would guard against increases in metal

prices by developing mines in Japan and

abroad and by purchasing ores when market

prices were low.

b. Copper.—Late in 1971, officials of Japan’s

copper smelting industry urged the Government copper and copper concentrates, which

at that time were estimated to be about 50,000

tons above Japan’s normal stock position of

30,000 tons. The officials stated that copper

smelters were having difficulty in arranging

cuts in copper concentrate shipments from

overseas sources, particularly in the developing countries. And because of the low market

prices overseas, Japan’s surplus of refined copper could not be exported except in very small

lots,

c. Other Metals.—Early in 1972, MITI proposed that the Government support a

$500-$700 million stockpile of materials consisting of iron ore, zinc, nickel, bauxite, copper, and other ores and concentrates, The proposed stockpile would serve three major purposes: (1) protection of Japanese industries

from price fluctuations and delivery interruptions; (2) use of the country’s growing foreign

reserves, then approaching $16 billion; and (3)

elimination of pressure on Japanese industries,

faced with business slowdowns, to cancel or

amend existing contracts for imports of overseas ore.

d. Guidelines for Stockpile. -Stockpiling

again received high-level attention a few

months later when the subject was included in

a document published in May 1972 by the

Natural Resources Committee of the Prime

285
APPENDIX C

Minister’s Economic Council. This document

contained the first important statement of

Japan’s minerals policy issued after devaluation of the U.S. dollar. It proposed the following guidelines for Japan’s future minerals

policy:

● Increase efforts to stabilize world supply and demand, emphasizing international cooperation to achieve harmony

with scarce resources;

● Establish a buffer stockpiling program

to help stabilize prices, thereby enabling the orderly development of

minerals in countries with mineral

resources;

● Expand the world minerals supply by

using Japan’s technical and financial

resources in all fields of minerals activity—from exploration, development,

and production to transport, processing

e. Rare Metals.—In June 1972, MITI began

studies on a program to stabilize demand, supply, and prices of the so-called “new metals”

(such as tantalum, beryllium, columbium, zirconium, and rare earths), and to create adequate emergency stockpiles of these materials

equivalent to 6—12 months’ supply. Stockpiling would be handled by the Japan Rare

Metals Co. This company had been established

in 1967 by the steel, ferroalloy, and nickel producers to buy up nickel, tungsten, cobalt, and

molybdenum. By mid-1972, 1,300 tons of ferronickel and 120 tons of tungsten ore had been

stockpiled.

f. Nonferrous Metals.—The $500–$700

million stockpiling program for nonferrous

metals which MITI had proposed early in 1972

was temporarily shelved late that year. Instead

of going ahead with it, the Japanese Government used its large holdings of foreign-currency reserves to finance loans to refiners of nonferrous metals who were committed to take

and construction; delivery of foreign ores beyond their immedi-

● Stress technology and planning to

achieve maximum utilization o f

resources, investigate substitutes for

and regeneration of materials, develop

new energy sources, adopt more efficient processes, control pollution

hazards, cooperate with other countries in large projects, and aid developing countries; and

● Develop integrated approaches to

resource development and utilization

in contrast to pursuing a project-based

approach.

In addition to acquiring minerals for its own

needs, Japan’s basic goal would be to help

developing countries improve their efficiency

and maximize economic growth. Japan’s involvement would be from the initial phase and

would be broad in scope--encompassing mapping, initial surveying, business consultations,

infrastructure building, financial and technical

assistance, joint ventures, and improvement of

the investment climate.

ate requirements. The rationale for this course

of action was that many developing nations, as

well as suppliers in Australia and Canada,

would otherwise encounter serious financial

difficulties and might well seek outlets other

than Japan.

2. The Japanese Ministry of International

Trade and Industry (MITI)

Metals Program

In September 1974, a nonferrous metals

study group of the Mining Industry Council

(an advisory group to MITI) recommended

that the Japanese Government immediately

subsidize the stockpiling of certain nonferrous

metals. In making its recommendations, the

study group sought to identify metals that are

economically important to Japan; not amenable to substitution; unavailable domestically;

maldistributed in terms of known reserves and

the sources of import into Japan; monopolized

by large international mining companies subject to supply interruptions through strikes,

natural disasters, and political instability; and

2 8 6
frequent targets of speculative purchasing.

The group selected nine metals as follows:

●

●

●

Recommended for immediate stockpiling: copper, nickel, chromium, and

tungsten;

Immediate stockpile held to be desirable, but market conditions judged to be

currently inappropriate: zinc, cobalt,

and molybdenum;

Supplies considered stable at present,

but supply structure requiring observation: antimony and tin.

a. Four Critical Metals in the First Category.—The study group recommende d

stockpiling of copper, nickel, chromite, and

tungsten in the first category as follows:

● The report of the study group noted

that Japan’s consumption of copper

over the past decade has increased at

an average annual rate of 11.4 percent

and that Japan’s dependence on imports has reached 89 percent. It was

estimated that 100,000 MT of primary

copper would meet Japan’s requirements for 1 month on a minimum basis.

Stockpiling was justified on the ground

that difficulties in finding refining sites

and managing pollution problems will

force Japan to become increasingly dependent on imports of refined copper

and reduce the country’s ability to

adapt to supply interruptions.

● The amount of nickel was set at 8,000

MT, estimated to provide a 3 months’

supply. Japan has no domestic nickel

resources, and depends on only four

countries (New Caledonia, Canada,

Australia, and Indonesia) for 90 percent of its total supply. The report expressed particular concern over labor

problems and tropical storms in New

Caledonia, which supplies 47.1 percent

of Japan’s nickel,

. One million MT

mated to provide

of chromite was estia 3 months’ minimum

●

APPENDIX C

supply. According to the study group,

Japan’s consumption of chrome has increased by an average of 12 percent annually over the past decade. The concentration of world chromiu m

resources in Rhodesia and South Africa

presents Japan with a major problem in

view of its efforts to improve relations

with Black Africa. Japan has recently

been increasing the percentage of its

imports from India, Iran, the U. S. S. R.,

and Malagasy.

With tungsten, 330 MT was determined to provide a 3 months’ minimum

supply. Japan’s consumption o f

tungsten has increased at an annual

rate of 4.6 percent over the past decade,

The study group noted with concern

that Communist China has over 75 percent of the world’s reserves of tungsten

ore, that Japan obtains tungsten from a

large number of small mines in

developing countries which are frequently in financial difficulty, and that

the U.S. tungsten stockpile cannot be

expected to lend stability to the market

for many more years.

b. Other Critical Metals in a Secon d

Category.—In recommending the second

category of metals for stockpiling when

market conditions are appropriate, the study

group made the following observations regarding zinc, cobalt, and molybdenum:

● While Japan produces 40 percent of its

zinc requirements domestically, during

the past decade consumption of zinc

has increased at an average annual rate

of 8.7 percent, and Japan is dependent

for 74 percent of its imports on three

countries (Canada, Peru, an d

Australia). The large-scale scrapping of

Canadian zinc refineries unable to

meet new environmental standards is a

matter of concern to Japan, which gets

34.5 percent of its zinc imports from

Canada.

287
APPENDIX C

. Japan’s consumption of cobalt has

been increasing at an average annual

rate of 11.5 percent over the past

decade. Japan’s only production of

cobalt at present is a byproduct of

nickel mining, and amounts to about 10

MT annually. Plants are being built

that are expected to produce a total of

about 2,800 MT annually. Imports from

Zaire account for over 80 percent of

Japan’s cobalt supply. At present

cobalt stocks on hand amount to about

3 months’ supply, the level recommended for stockpiling.

. Japan’s consumption of molybdenum

has been increasing at an average annual

rate of 12.6 percent over the past

decade. Japan is almost totally dependent on imports for molybdenum, with

the United States supplying 53 percent

of Japan’s ore imports and 37 percent of

its metal imports. Strikes by miners

and longshoremen in the United States

are of concern to Japan. Although the

stockpiling of 3 months’ supply was

considered desirable, the current tight

world supply situation as regards this

metal precluded such action.

c. Two Metals in a Third Category.—The

study group recommended observation of two

metals, antimony and tin:

. Domestic demand for antimony has

been increasing at an average annual

rate of 1.8 percent. Japan is almost

totally dependent on imports for this

metal, with Bolivia and Communist

China supplying about 50 percent and

30 percent, respectively, Stocks on

hand exceed the recommended 3

months’ stockpile supply,

. Domestic tin demand has increased at

an average annual rate of 8.6 percent,

Japan produces only a small amount of

tin, and depends on two countries for

most of its imports (Malaysia, 85 percent; Indonesia, 12 percent), The

research group concluded that buffer

stocks held under the International Tin

Agreement are adequate to insure a

stable supply, but thought that market

developments should be watched.

The research group also studied Japan’s supply situation regarding aluminum, iron ore,

coking coal, and timber products, but made no

recommendations for stockpiling thes e

materials.

d. Stockpile Supervision and Quantities.—

The study group’s report recommended that

the stockpiling of the four metals in the first

category (copper, nickel, chromium, and

tungsten) be carried out through a private corporation financed by Government-guaranteed

funds and also partially subsidized by the

Japanese Government. The Japan Mining

Public Corp., which is controlled by MITI,

would supervise stockpiling arrangements and

the issuance of bonds.

MITI considered the recommende d

stockpile quantities to be adequate for major

supply interruptions, but it halved the

amounts of copper and chrome to b e

stockpiled. It did not consider the acquisition

of buffer stocks to stabilize prices. MITI requested the Finance Ministry to budget 44,100

million yen ($147 million) for this project, and

also asked the Japan Export-Import Bank to

make available 70,000 million yen ($233

million) at 7.5 percent interest to private companies to finance up to 70 percent of the cost of

imported ore for the stockpiling product.

e. Financing.—The Japanese Ministry of Finance turned down MITI’s request for funds in

the fiscal year 1975 budget to finance the proposed national stockpile of nonferrous metals.

It also reduced from 70,000 million yen to

10,000 million yen MITI’s request for funds to

support a special financing issue by Japan’s

Export-Import Bank to facilitate the obligatory

receipt of copper ore.

Of the nonferrous metals, copper is giving

Japan the most problems at present. Large

stocks are accumulating in the current

depressed market despite production cutbacks

2 8 8
APPENDIX C

by smelters. Stock levels in April 1975 were

expected to reach 200,000 MT of refined copper, as compared with 136,000 at the end of

l974, Copper stocks held by fabricators and

consumers were estimated to bring the total to

300,000 MT, Japan has sought relief by urging

exporters to reduce or delay shipments to

Japan, but has been only partly successful in

this campaign. Government loans to support

the growing inventory increase totaled 50,000

million yen as of March 1975, and the Japanese

Mining Association as of March 25 was requesting another 90,000 yen,

f. Scrap.—Japan appears to have recently

decided to create a stockpile of scrap steel

from domestic sources, Late in April 1975,

MITI announced that an organization for this

purpose would start functioning by the middle

of May. Initially funded at 4,110 million yen

(about $13.7 million), the organization (a nonprofit foundation composed of steel manufacturers, scrap wholesalers, and scrap collectors)

would stockpile up to 100,000 MT of highgrade domestic scrap steel to stabilize prices

and encourage recycling.

g. Recycling. —A separate organization,

known as the Cycling Association, will be created to promote utilization of recovered iron

resources. The association will guarante e

loans advanced to scrap processors fo r

purchasing new equipment to modernize the

recycling of scrap. The association will also

develop new technology for more efficient

utilization of scrap, and will promote the

wider use of the new technology and equipment.

3. References

Airgram A-750, from American Embassy, Tokyo, to U.S.

Department of State, Dec. 24, 1974.

American Metal Market, Apr. 24, 1975.

Council on International Economic Policy, Special Report: Critical Imported Materials.

“Japan Makes Plans for Stockpiling Agency,” Metals Week,

Aug. 21, 1967.

“Japanese Smelters Urge Central Stockpile,” American Metal

Market, Dec. 14, 1971.

Journal of Commerce, Mar. 7, 1972,

Metal Bulletin, Mar, 25, 1974.

“Metal Stock Build-Up Plan Facing Complex Problems, ” Japan

Chemical Week, vol. 15, No, 755, Oct. 17.1974.

Metals Week, Jan. 20, 1975.

“The Mineral Industry of Japan, ” reprint from Minerals Yearbook, U.S. Bureau of Mines, 1972.

C. STOCKPILING IN FRANCE

The French Government in 1972 announced

its decision in principle to establish a national

stockpile of critical material to meet economic

rather than strategic supply crises. Th e

stockpile was to have four purposes:

1.

2,

3.

4.

Reduce the excessive vulnerability of

certain processing industries, and protect small- and medium-sized companies from excessive shortages and

price fluctuations;

Allow France to participate more actively in international agreements to

stabilize prices of raw materials;

Provide possibilities for regulating

prices of materials; and

Serve political and economic defense

needs,

The French Government’s decision involved

participation with French industry in a combined or cooperative program as follows.

1. Stockpile Management

The stockpiling management program

would be given to Groupment d’Importation et

de Repartition des Meteaux (GIRM), This

semigovernmental organization, whose ac -

tivities had formerly been limited to copper,

would serve a much broader area of responsibility. GIRM would assist French mining

companies in mining activities beyond their

traditional efforts in French Africa and the

oversea territories. GIRM would also be expected to help French companies extend their

endeavors into developed countries wit h

minimal resources, such as Australia and

Canada, and also ore-rich developing coun289
APPENDIX C

tries such as Brazil, Iran, Indonesia, Zaire, and

Yugoslavia. GIRM would examine mining

possibilities in mineral-rich countries, intervene more actively as a service company in

the developing countries, and generally promote new possibilities for French private mining industries over the long run.

a. Selection of a Commodity.—Fo r

stockpile purposes, selection would be made

on the following conditions:

1. France is a substantial consumer but

not a major producer of the commodity.

2. Suppliers of the commodity ar e

relatively few and are concentrated in

politically unstable areas.

b. Copper Priority.—Because France was

totally dependent on non-French companies

for its copper supplies, copper was given

priority over other materials. The Government’s goal was to have French-owned companies provide from one-quarter to one-third

of France’s imports of this metal. To this end,

GIRM planned a program of copper development which would eventually embrace activities ranging from extraction to refining.

The program anticipated expenditures of some

300 million francs over a period of 4 years,

with the French Government subsidizing 35 to

40 percent of the outlays. At the end of 1972,

GIRM was maintaining a copper stockpile of

about 60,000 tons for the benefit of French industry.

c. Nickel.—The 1972 program also gave

special attention to nickel. France’s Societe Le

Nickel (SLN) signed a nickel stockpiling agreement estimated to add $20 million to the company’s coffers, and permitting SLN to continue

mining New Caledonia ore at the 1972 rate,

while expanding facilities in northern New

Caledonia to meet anticipated future demands.

Under this agreement, GIRM was to purchase

10,000 tons of SLN nickel ore in 1973 at a

negotiated price, with SLN to repurchase the

nickel at the same price over the next 5 years,

depending on market conditions.

2 9 0

2. Specific Actions Taken

Although discussions of the pros and cons

of stockpiling continued within Government

circles, the 1972 stockpiling program appears

not to have been implemented to any substantial degree, mainly because of opposition from

the Ministry of Finance.

Early in 1975, however, following a year’s

study of France’s vulnerability to deficiencies

in supplies of hard minerals, the Government

of France apparently made some major policy

decisions for corrective action. These decisions were inspired by interministeral studies

showing that the supply of over half of

France’s mineral imports (which account for

55 percent of total consumption) could become

critical under certain eventualities. The

Government’s policy decisions, which were

taken at a special session of the Council of

Ministers, chaired by President Giscard, contemplated action in four areas:

Mineral geological research and exploration;

Increased recycling;

Negotiation with producers; and

Stockpiling.

a. Mineral Geological Research and Exploration.—A multiyear approximation of 125

million francs (10 million in 1975 and approximately 25 million annually thereafter) has

been made for increased hard mineral

prospecting in France, and revision of the mining code is being studied to improve the

economic conditions of mineral production.

The goal is to double France’s own mineral

production or, at a minimum to achieve a more

complete inventory of the country’s available

resources. Development or subsidy of noneconomic mines is not presently being considered. French geological research activities

overseas are also to receive priority attention.

b. Increased Recycling.—A new office will

be created in the Ministry of Industry to provide increased recycling of metals, as well as
other materials. Legislation on recycling will

soon be presented to Parliament.

c. Negotiation With Producers.—Maintenance of good relations with mineral exporting

countries will continue to be emphasized as

the most important factor in securing mineral

imports, 65 percent of which come from lessdeveloped countries. To this end, the Government will continue to seek arrangements for

cooperating with traditional and potential suppliers of minerals in such fields as geological

research, minerals exploration, and manpower

training. Relationships that promise to stimulate new export sales for French manufacturers will be emphasized.

d. Stockpiling.—A national minerals

stockpile will be created to contain stocks

equivalent to 2 months’ average imports for

each category of raw or processed materials

normally imported. An appropriation of 100

million francs (approximately $23 million) has

been provided in 1975 for this purpose. The

appropriations are expected to double in 1976

and remain at that level during the expected

buildup period of 3 to 4 years. (U.S. Embassy

APPENDIX C

officials believe that given gross Frenc h

mineral imports of approximately 12 billio n

francs in 1974, the buildup may take longer,)

Stockpiles will be maintained at Governmen t

expense and will be available only unde r

Government authorization, which could in -

clude drawdowns in time of extreme marke t

shortages or price rises.

According to the Ministry of Industr y

officials, France would not try to use the stock

to intervene in the marketplace, The relativ e

unimportance of potential French stocks i n

proportion to world supply would make suc h

an effort fruitless in any event. Officials

hoped, however, that creation of a nationa l

stockpile would enable France to negotiat e

with minerals producers from a stronger position.

3. References

Buttner, F. H. Draft Report on Stockpiling Effects. on Economic

and Supply Stability, National Commission on Materials

Policy, Apr. 9, 1973.

Minerals Yearbook, Area Reports: International, U.S. Bureau of

Mines, 1972.

Airgram A-95, from American Embassy, Paris, to U.S. Department of State, Feb. 25, 1975.

Metals Bulletin, Apr. 14, 1972.

D. STOCKPILING INCENTIVES IN SWEDEN

In view of the immense investment in the

U.S. strategic stockpile, a search for a method

of financing stockpiling less costly to the

Government should not be surprising. Sweden

has decided to eliminate the expense of

stockpiling through a system of tax incentives

to support production and encourage industry

to maintain its own inventories. The explanation of this plan is as follows.

1. Taxation of Corporate Income

The Government of Sweden maintains

Government-owned stockpiles of raw material

for strategic or economic purposes. At the

same time, it provides incentives to industry to

do so too. It does this through its unusual

system of taxation of corporate income. The

rules governing the taxation of corporate income in Sweden apply to three special areas:

● Inventory valuation;

● Depreciation; and

● Reserves for future investment.

The Swedish tax rules in these areas have contributed to the ability of Swedish industry to

compete in world markets. By providing substantial incentives to industry and commerce.

The rules have encouraged the use of private

capital to deal with economic fluctuations and

the business cycle.

a. Use of Tax Incentives.—An essential

feature of these devices is the degree of control

they give business taxpayers over the amount

of profit to be reported. The corporation has

the option of taking larger or smaller deductions in any particular year. To that extent,

corporate and other taxpayers are permitted a

substantial degree of latitude in leveling out

291

77-119 0-76-20
APPENDIX C

their annual results and in building u p

reserves.

b. Inventory Valuation.—Sweden’s tax

provisions governing the valuation of inventories are designed to eliminate taxation of

merely inflationary profits and permit the

strengthening of corporate resources against

the possibility of inventory price declines.

Although provisions exist in other countries

for similar purposes, none takes the same form

as Sweden’s, where the basic rule is that the

valuation of the inventory entered by the taxpayer in his account books shall govern for tax

purposes. However, the right to value inventories in the taxpayer’s business discretion is

subject to certain limitations established by

the tax laws.

The main rule governing inventory valuation is complemented by two supplementary

rules. The first of these is the rule of “comparable value.” If the value of the inventory at

the end of a corporation’s fiscal year-at cost

or market and after deducting obsolete or unsalable items—is less than the average of the

value of the inventory at the close of the 2

prior years (this average value is called the

“comparable value”), the corporation may

write its inventory down by 60 percent of that

comparable value, rather than by 60 percent of

the value at the end of the income year in

question.

The second supplementary rule relates to

the valuation of raw materials or staple commodities in the inventory. The corporation has

an option to value these inventory assets at the

lowest market price in effect during the income year or in any of the 9 previous years,

and then to reduce that figure by 30 percent to

give an inventory valuation equal to 70 percent of the lo-year low. If the corporation

chooses to value raw materials or staple commodities in this way, it may not also take advantage of the rule of “comparable value” outlined above,

In any event, a corporation may always

write its inventory down to its actual value

292

despite the foregoing rules and take appropriate deductions from taxable income.

So far as the company’s books are concerned, it is immaterial whether the amount of

an authorized writeoff is deducted directly

from the cost or market value of the inventory

on the asset side, or is set up instead as a

reserve for inventory price decline on the

liability side. The latter method is customarily

used, however, when the use of the “comparable value” rule results in a negative inventory

value.

c. Depreciation.—The main rule provides

that a taxpayer, after first writing off all obsolete or unsalable items in full, may write

down the balance of the inventory by 60 percent to a floor of 40 percent of cost or market

value, whichever is lower. Cost is determined

on a first-in, first-out basis. The amount of this

inventory writeoff is deductible from taxable

income,

d. Reserves for Future Investment.—A

special provision, enacted in 1964, permits a

Swedish parent company selling inventory

assets to a foreign subsidiary for further resale

on the foreign market to defer tax on profits attributable to goods which remain unsold in the

hands of the subsidiary at the end of the

parent’s fixed year. The parent may take a

deduction from taxable income, by an amount

not exceeding the difference between (1) the

price at which the parent sold these goods to

the subsidiary (minus any amount of inventory writeoff deducted by the subsidiary), and

(2) the parent’s cost of these goods. The allocation must be restored to taxable income during

the following fiscal year; at the end of that

year, the question of a deduction for a

renewed allocation is considered in view of

current circumstances,

While

designed

rather to

in good

2. Incentives Preferred to

Stockpiling

the tax system of Sweden was not

to create a national stockpile, but

support a health industrial economy

rapport with Government, it has
APPENDIX C

tended to obviate the need for a national

stockpile by encouraging industry to maintain

inventories large enough to meet emergency

situations.

True, the inventories thus supported include many items not necessarily of a strategic

and critical nature, as well as those that are.

On the other hand, the coverage becomes

much greater than would be possible if the

Government were to purchase and store only

those items it could afford and which were

deemed vulnerable enough to warrant the

Government effort.

In brief, the Swedish tax rules as they apply

to inventories, along with other tax measures,

are designed to increase the efficiency of

Swedish industry as a competitor in world

markets. The creation of a “Swedis h

stockpile” is more or less a byproduct,

Whether or not it might be desirable to extract

at least the principle from the Swedish tax

system for application to the United States

would seem to warrant further examination.

3. Reference

The Tax System in Sweden, Skandinaviska Enskilda Banken,

February 1972.

2 9 3
Appendix D

RELEVANCE TREES AND WEIGHTING MATRICES

A. INTRODUCTION

At the beginning of this assessment there was a general requirement for a

detailed analysis of the purposes, policies, and issues of stockpiling. These maybe

put in the four categories of stockpiling policies, stockpiling procedures, stockpiling alternatives, and stockpiling impacts. The methodology chosen for analysis is

the construction of relevance trees. These are described in more detail later in this

discussion. Basically, the relevance trees serve as a detailed method for organizing

the assessment. The relevance trees categorize policy, criteria, exogenous factors

triggering stockpiling actions and issues and impacts pertaining thereto.

The relevance trees are particularly useful in the construction of the

scenarios and technology forecast. By breaking the entire stockpiling subjects

down into their constituent building blocks, the important areas may be recognized and then incorporated in the scenarios and technology forecasts. The effort

of actually constructing the stockpiling relevance trees is a very educational one,

requiring a forced education of the authors which directly leads to a better understanding and more constructive assessment in all of the later tasks.

The relevance trees are particularly useful in showing the construction of the

stockpiling systems basic blocks which consist of: criteria for stockpiling, price of

materials, policies, procedures, and materials. All of these areas are treated in

great detail in the relevance trees.

In chapter V the impacts on the economic, social and political areas due to

stockpiling critical material are examined and tested. The impacts and interest

groups who are affected and their various relationships are shown in the relevance trees here. The interest groups are shown as Level 5 of the first three relevance trees. From the detailed relevance trees structure, the important interest

groups may be selected for examination in the impact areas.

Finally, the relevance trees focus in great detail on stockpiling policies, procedures, issues, and activities, and serve as a guide for coordinating the candidate

stockpiling policies and the impacts in order to determine the overall policy implementation for stockpiling key materials.

Hence, it is seen that the construction of the relevance trees in great detail

facilitates doing the other tasks, outlining the entire project in detail, and shows

2 9 5
APPENDIX D

the general relationship of the policies, issues, and impact areas in the overall

stockpiling policies project. The following is a more detailed discussion of the

stockpiling relevance trees themselves and details the method of construction and

organization of them. The top levels of the relevance tree for all of the key

materials are presented here. However, only the lower levels for the specific key

material of iron/iron ore is presented in this assessment. The relevance trees for

the other metals and nonmetallic minerals will be essentially the same. For fibers

and fuels, some of the lower levels in the relevance trees will be necessarily

different.

The relevance trees show a hierarchical structure for stockpiling policies.

Each of these relevance trees has several levels. Each level contains a disaggregation of the information contained in the next higher level. The logic linking the

levels is revealed by a set of statements (displayed on the tree at the left) defining

the content of each level.

For each material, four relevance trees are developed: (1) a stockpiling policy

for dealing with reasons for stockpiling; (2) a stockpiling procedure tree concerned with methods of stockpiling; (3) a stockpiling activities tree identifying ancillary programs which may be associated with stockpiling; and (4) a stockpiling

impacts tree which shows where and how the impacts of stockpiling will be felt.

The lowest level of each tree identifies those interest groups which are most

closely affected or which impact on stockpiling policies. The same groups may

appear at several positions on level 5 of a given tree as well as on level 5 of the

other trees. Where this occurs, it indicates the interplay of policies of the three

trees.

B. RELEVANCE TREES

The logic of the individual relevance trees is ●

outlined below:

. The Stockpiling Policy Tree begins

with the question, Why stockpile a particular material? (Level 1). Level 2

shows two general reasons for initiating stockpiling: to maintain a supply in

case of cutoffs from primary sources,

and to provide protection against

economic pressures, Level 3 identifies

the material resource problem areas as

being domestic and foreign, The ●

problems which may be alleviated by

stockpiling are detailed on Level 4. The

lowest level (Level 5) shows those interest groups which can be expected to

impact on the specific problems.

The Stockpiling Procedure Tree deals

with the question, How can a particular material be stockpiled? (Level 1).

Level 2 shows the two areas of concern: domestic and foreign. On Level 3,

general methods of stockpiling are

identified. Specific storage procedures

are shown on Level 4. Level 5 (the

lowest level) identifies the interest

groups that may be affected by the

stockpiling procedures.

The Alternates to Stockpiling Tree

derives from the question, What activities may stockpiling a particular

material stimulate (Level 1)? The

general policies which may be initiated

as a result of stockpiling are given on

296
APPENDIX D

. .

Level 2. Level 3 specifies the policies

sufficiently so that programs derived

from these policies can be identified on

Level 4. The lowest level (Level 5)

shows those interest groups which

would be directly affected by these

programs,

. The stockpiling impact tree begins, at

Level 1, asking where, throughout the

world, the impact might be felt. The

major divisions recognized are: the

United States, other countries which

import the material, countries which

export the material, countries which

could export the material o r

substitutes, and countries which have

secondary dependence on the material

Materials of Concern

Reason for Initiating

Stockpiling Policy

Nature of Problem

Which Generates Need

For Stockpiling Policy

Stockpiling

(e.g., countries which import products

manufactured from the material). At

Level 2, the relevance tree centers on

the question, “How might the impact

be felt?” Here, the divisions are social,

economic, political, legal, and other,

The domain of the impact is next addressed at Level 3. The impacts can be

felt totally internally to the country, or

in relations between the country and

others. Level 4 consists of a further

subdivision of the domain, and Level 5

addresses the areas of the impacts

themselves (e.g., institutional viability,

political stability between nations, and

trade alliances). In all, this relevance

tree of impacts produced approximately 355 impact areas,

Policy Tree

1.01

Why Stockpile

Materials

n

2.011

1 I

I

To Cushion

Against Interruption in Supply

I I

3.0111

I I

To Assure

Supply at a

Given Cost

I

3.0121

I 1

2 9 7
—

APPENDIX D

Reason for Initiating

Stockpiling Policy

Nature of Problem

Which Generates Need

For Stockpiling Policy

More Specific

Problem Definition

Interest Groups Affecting

Specific Problem Areas

Nature of Problem

Which Generates Need

For Stockpiling Policy

Reason for Initiating

Stockpiling Policy

More Specific

Problem Definition

Interest Groups Affecting

Specific Problem Areas

2.011

/

To Cushion Against

Interruption in Supply

3.0111

Domestic

Interruption

4.01111

Exhaustion of Lack of

Materials at Monopolistic Lack of Adequate

Acceptable Practices Available Labor Producing

Economic Levels Capacity

-1 .,

5.01111

Geological Explorers

Environmentalists

Land Owners

(Public, Private)

Resource Investors

To Cushion Against

Interruption in Supply

Foreign

Interruption

4.01121

Exhaustion of Lack of Avail- Socio/Economic/

Materials at Cartel ability of Labor Political

Acceptable Actions and/or Materials Disruption Within

Economic Levels in Producer Producer

Countries Countries

f I I I

2 9 8
APPENDIX D

Reason for Initiating

Stockpiling Policy

Nature of Problem

Which Generates Need

For Stockpiling Policy

2.012

u

To Assure Supply

at a Given Cost

+

Domestic

Issues

4.01211

I L 1

More Specific Exhaustion of

Problem Definition Materials at Monopolistic

Acceptable Practices

Economic Levels

t

5.01211

I

5.01212

Geological Explorers Producers

Interest Groups

Affecting Specific Environmentalists Transporters

Problem -Areas - Land owners

k

Processors

(Public, Private) Warehouses

Reason for Initiating

Stockpiling Policy

Nature of Problem

Which Generates Need

For Stockpiling policy

More Specific

Problem Definition

Interest Groups Affecting

Specific Problem Areas

Resource Investors Material Suppliers

4.01221 ~

2.012

Increasing

Labor and

Production

costs

Increasing

Capital

Equipment

costs

t

Processors

t

Financiers

Warehouses Environmentalists

Material Suppliers

To Assure Supply

at a Given Cost

?

Foreign

Issues

L

Im

4.01222 m

Exhaustion of

Materials at

Acceptable

Economic Levels

5.01221

Geological Regions

Environmentalists

Land Owners

(Public, Private)

~Resource Investors

Cartel Actions

5.01222

-National Government

-National Private

Corporations

(Vertically/

Horizontally

Integrated)

-Multi-National

Corporations

Increasing

Labor and

Production Costs

in Producer

Countries

F

5.01223

Unions

Producers

Transporters

Processors

Warehouses

~ Material Suppliers

SOCIO /Economic/

Political

Disruption

Within Producer

Countries

1

I 5.01224

t

National Government

Expropriation,

Taxation, etc.)

Dissident Groups

(Revolutionaries,

Paramilitary,

Political

Organizations, etc. )

2 9 9

77-119 0-76-2 1
APPENDIX D

Stockpiling Procedure Tree

1.01

1

Material of Concern

Areas of Concern .

How Can Materials

Be Stockpiled?

I I

2.011

I

Stockpiling Policies

Domestic

a

3.0111

H

3.0112

3,0115

m

Foreign

b

3.0121

I

1

Stockpile In

Proven Reserves

# I

3.0122

I

i

Stockpile as

Raw Ore

1 I

3.0123

I

I 1

3.0125

t

4

Stockpile

as Scrap

300
APPENDIX D

Area of Concern

Stockpiling Policies

More Specific Definition

of Stockpiling Policies

Interest Groups Affected

by Stockpiling Policies

Area of Concern

Stockpiling Policies

2.011

Domestic

3,0111

4

L I

4.01111

Leases of Purchases of Purchases of

Land and Land and Mineral Rights

Mineral Rights Mineral Rights Only

+

5.01111

[

5.01112 5.01113

-Geological Explorers -Geological Explorers

- Resource Investors - Resource Investors -Resource Investors

-Land Owners (Public, A Land Owners (Pubtic, ~ Land Owners (Public,

Private, etc.) Private, etc.] Private, etc.)

2.011

)

%

Domestic

3.0112

I

Stockpile as

Raw Ore

I

More Specific Definition

of Stockpiling Policies

1 * J

4.01121

Open Storage, Open Storage, Protected Protected

Close to Close to Storage, Close Storage, Close

Supply Areas Consumers to Supply Areas to Consumers

4 m %

&

1

301
APPENDIX D

Stockpiling Policies

2.011

/

Domestic

3.0113

I

I

Stockpile as

Processed Ore I

. .

4.01131

h 4

1

Open Storage.

Close to

Consumers

Area of Concern

Stockpiling Policies

More Specific Definition

of Stockpiling Policies .

Interest Groups Affected

by Stockpiling Policies

5.01133

k

5.01134

=Warehouses (Private) Warehouses (Private)

-Processors Processors

---Consumers Consumers

—Government Government

2.011

/

Domestic

+, .

3.0114

Stockpile

as Product

4.01141

Store in Central Store in Store in Store in General

Locations in Selected Shapes Selected Shapes Geometric Bulk

General Geometric in Central Close to Forms Close to

Bulk Forms Locations Consumers Consumers

. 9 I

I 5.01141 I

5.01142 I5.01143 I

5.01144

302
Area of Concern

Stockpiling Policies

More Specific Definition

of Stockpiling Policies

Interest Groups Affected

by Stockpiling Policies

Area of Concern

Stockpiling Policies

More Specific Definition

of Stockpiling Policies

Interest Groups Affected

by Stockpiling Policies

APPENDIX D

2$011

u

Domestic

3.0115 I

Stockpile

as Scrap

4.01151

High-Grade High-Grade Low-Grade Low-Grade

Scrap, Near Scrap, Centrally Scrap, Near Scrap, Centrally

Processors Located Processors Located

● *

5.01151 5.01152 5,01153 5.01154

—Scrap Collector; —Scrap Collectors —Scrap Collectors —Scrap Collectors

—Processors —Processors -Processors —Processors

—Sources of Scrap —Sources of Scrap -Sources of Scrap —Sources of Scrap

—Warehouses (Private) -Warehouses (Private) -Warehouses (Private) -Warehouses (Private)

—Government *Government —Government —Government

2.012

F

Foreign

3.0121

I

Stockpile in

Proven Reserves I

303
—

APPENDIX D

Area of Concern

Stockpiling Policies

More Specific Definition

of Stockpiling Policies

Interest Groups Affected

by Stockpiling Policies .

Stockpiling Policies

More Specific Definition

of Stockpiling Policies

Interest Groups Affected

by Stockpiling Policies

2.012

ST

.

3.0122

I

I

Stockpile as

Raw Ore

I

{ I

4.01221

1 1

Open Storage,

Close to

Ports

Open Storage, I I

Protected Protected

Close to Storage, Close Storage, Close

Supply Areas to Ports to Supply Areas

I

5.01221 I

5.01222 I

5.01223 I

5.01224

k

Producers

t

Producers

t

Producers

t

Producers

Warehouses Warehouses Warehouses Warehouses

+

2.012

Foreign

3.0123

I

Stockpile as

Processed Ore

1 I

I

m

4.01232

Open Storage,

Close to

Ports

304
APPENDIX D

Area of Concern

.012

Foreign

Stockpiling Policies

3.0124 9

Stockpile

as Product

1

.01242

1

4.01241 9

More Specific Definition Store in

of Stockpiling Policies General

Geometric

Bulk Forms

Interest Groups Affected

by Stockpiling Policies

5.01241

Processors

Warehouses

Area of Concern

Stockpiling Policies

More Specific Definition

of Stockpiling Policies

Interest Groups Affected

by Stockpiling Policies

2.012

/

Foreign

3.0125

Stockpile

as Scrap

4.01251

1

High-Grade

Scrap

I

5.01251

E

Scrap Collectors

Processors

Sources of Scrap

Warehouses

Low-Grade

Scrap

5.01252

-Scrap Collectors

—Processors

–Sources of Scrap

-Warehouses

305
APPENDIX D

Material of Concern

General Policies Stimulated

by Stockpiling

More Specific Policies

Alternatives to Stockpiling Tree

1,01

m

2.011

Influence

Consumption

3.0111

3.0112

E

Institute

Conservation

Pollcles

Encourage

Recycling

I

3.0121

n

Improve

Methods for

Economical

Reclamation

3.0122

n

Institute

Conservation

Policies

Provide for

Substitutes

3.0131

1

R&D Into Other

Materials Having

Similar Structural

Properties

3.0132

R&D Into Materials

Having Similar

Metallurgical

Properties

Increase

Discovery Rates

of Economical

Resources

3.0141

I

Improved

Detection

Methods

3.0142

m

Encourage

Exploration

3.0143

Improve

Usefulness of

Lower-Grade

Resources

306
General Policies

Stimulated

by Stockpiling

More Specific Policies

Programs Leading

From Policies

Interest Groups Directly

Affected bv Policies

APPENDIX II

2.011 /

Influence

Consumption

3.0111

Limit

Production

.

4.01111

Industrial Consumer

Quotas Rationing

5.01111 5.01112

-Government -Government

-Consumers -Consumers

-Producers -Producers

-Processors -Processors

Taxation on

Ore/Product

5.01113

Government

Consumers

Producers

Processors

General Policies

Stimulated

by Stockpiling

More Specific Policies

2.011

/

Influence

Consumption

3.0112

Institute

Conservation

Policies

4.01121

Programs Leading

From Policies

R&D for More

Effective Tax Benefits

Usage per

For Long-Term

Unit Weight

Depreciation

5.01121 5.01122

Interest Groups Directly

Affected by Policies -Government —Government

-Consumers —Consumers

-Processors —Processors

-Producers —Producers

307
APPENDIX D

General Policies

Stimulated

by Stockpiling

More Specific Policies

2.012

Encourage

Recycling

3.0121

Improve Methods

For Economical

Reclamation

L J

I

4.01211 i

Programs Leading

From Policies

Provide

Incentives

For Gatherinq

I

Scrap -

L

1

Interest Groups Directly 5,01211

Affected by Policies Government

Scrap Collectors

Scrap Processors

General Policies

Stimulated

by Stockpiling

More Specific Policies

Programs Leading

From Policies

Interest Groups Directly

Affected by Policies .

012

R&D Into

Techniques for

Separating Alloy

Components

I

5.01212

Government

Scrap Collectors

Scrap Processors

University Labs

& Research Labs

Encourage

Recycling

Institute

Conservation

Policies

4.01221

Refundable Tax

On Material

Offered as

Scrap

5.01221 5.01222

Government Government

Consumers Consumers

Producers Producers

Processors Processors

308
APPENDIX D

General Policies

Stimulated

by Stockpiling

More Specific Policies .

.013

Provide

Substitutes

z

R&D Into Other

Materials Having

Similar Structural

Properties

m

4.01311

Programs Leading

From Policies Study Other Study

Metals Plastics

●

5.01311 5.01312

Interest Groups Directly

Affected by Policies Government Government

Universities Universities

Private R&D Groups Private R&D Groups

Consumers Consumers

General Policies

Stimulated

by Stockpiling

More Specific Policies

013

Provide

Substitutes

3.0132

1

I

R&D Into Materials

Having Similar

Metallurgical

Properties

4.01321 ?

Programs Leading

From Policies Study Other Study

Metals Plastics

} (

5.01321 5*01322

Interest Groups Directly

Affected by Policies Government Government

Universities Universities

Private R&D Groups Private R&D Groups

Consumers Consumers

309
APPENDIX D

General Policies

Stimulated

by Stockpiinq

More Specific Policies

5.01411

2.014

A

Increase

Discovery Rates

of Economical

Resources

3.0141

Improved

Detection

Methods

4.01411

Programs Leading Develop Indirect Develop Indirect

From Policies Techniques Techniques

(Geological Mapping,

Geophysical and

(Sampling

Geochemical Methods)

Technologies)

Interest Groups Directly

Affected by Policies ~

General Policies

Stimulated

by Stockpiling

More Specific Policies

Programs Leading

From Policies

Interest Groups Directly

Affected by Policies

Government

Universities

5.01412

Government

Universities

Producers Producers

Private R&D Groups Private R&D Groups

-

Increase

Discovery Rates

of Economical

Resources

9

3.0142 I

I

Provide Bonuses

for Location

of Identified

Resources

.

4.01421

Require by Law Require

That Percentage Percentage

of Depletion

Allowance

of Cash Flow

Be Put Into

Be Put Into

Exploration

Exploration

A

5.01421 5.01422 5.01423

Government

Producers

Government Government

Producers Producers

Resource Investors Resource Investors Resource Investors

310
General Policies

Stimulated

by Stockpiling

More Specific Policies

APPENDIX D

Increase

Discovery Rates

of Economical

Resources

Improve Usefulness

of Lower-Grade

Resources

4.01431

Programs Leading

From Policies R&D into

Methods of R&D into

Ore Extraction Ocean Resources

5.01431 5.01432

Interest Groups Directly

Affected by Policies Government Government

Universities Universities

Producers Producers

Private R&D Groups Private R&D Groups

311
——

APPENDIX D

D-1 Stockpiling Impacts Tree

How Might the

Impact Be Felt? . Social Economic Political Legal Other

What is the Domain

of the lmpact ?

What is a Further

Subdivision

of the Domain?

What are the

Impact Areas?

I

Social Impacts I t

■

Internal Effects Effects Involving the

on the Country Country and Others

Individual. Societal Structural

Health Perceptions Institutional

Nutrition

About U.S. Change

Range of Choice

Perceptions Laws and

About Self Regulations

Welfare and

Economically

Demographic

Internal

Regressive Effects Migrations

Mobility Services

Housing Domestic

Education Environment

International

Global Environment

Migration

Value Structure

and Expectations

of Others

Travel

Leisure Technological

Directions

Values Value Structure

and Expectations

312
APPENDIX D

I

Economic Impacts I

I I

I

What is the Domain

of the Impact?

m

Internal Effects Effects Involving the

on the Country Country and Others

1 I

■

What is a Further

Subdivision

of the Domain? Macroeconomic Structural Monetary Structural

Economic Output

Income

Liquidity

Employment

What are the

Impact Areas? Currency Value

Wealth (Value

of Resources)

Capital

Investment

What is the Domain

of the impact?

b

What is a Further

Subdivision of

the Domain?

k

What are the

Impact Areas?

e

Taxation

Availability

and Price of

Commodities,

Products, and

Services

Industrial Balance of Trade

Infrastructure Price of Exports

Relative and Competitiveness

Abundance of on World Market

Materials Relative Value

Distribution of Currency

Mechanism

(Rationing or Cost of Imports

Allocations)

Development

of Marginal

Resources or

Substitutes

Internal

Business

Restriction

Cost of Living

National

Expenditures

I

Political Impacts I 1 -1

I

Trade Patterns

Multinational

Business

Restrictions

Development

of Resources

by Others

Economic

Aspirations

of Others

m

Internal Effects Effects Involving the

on the Country Country and Others

I

I

) 4 1 1 I 1

Public at Large

Levels of

Satisfaction

(With Government,

etc.)

Internal Political

Stability

Laws and

Regulations

Domestic

Institutions

Regulatory

Structure

Institutional

Viability

Political/Economic Political/Cultural

Trade Alliances Cultural Alliances

and Agreements and Agreements

(e.g., GATT)

Buyers’ or Sellers’

Consortia

Aspirations of

Other Potential

Consortia Members

Aspirations of

Consortia in

Other Materials

Perceptions

About U.S. Intent

Political/ Political/

Institutional Military

U.N. Effects Military

and Other Alliances and

Institutional Agreements

Arrangements Political

Stability

Among

Nations

Political

Aspirations

of Others

National

Boundaries

Political

Pressure

to Affect

Third Part

313
APPENDIX D

What is the Domain

of the Impact?

m

Internal Effects Effects Involving the

on the Country Country and Others

I I

I

1 I

I

h 1

Legislative Administrative Fiscal

What is a Further Delegation of Publication of Funding Tax

Subdivision Authority Regulations Incentives

of the Domain? Standards Enforcement of

Authority for Orders

Economic Environmental

Stockpiling Impact Statements

Appeals; Procedure

Power to Requisition

and Condemn Export

Controls

Monitoring of

Transactions by the

Department of Justice

Reporting Requirements

Effects on Business Effects on

Antitrust International

Agreements

Private Trade

Agreements Trade Agreements

Tax Arrangements U.N. Organizations

Other Aid Organizations

Emergency Sharing

Agreements

C. IMPACTS EVALUATION MATRICES

As discussed in the chapter describing stockpiling policy. These weighting matrices

methodology (chap. I), the importance of the were evaluated according to the weights given

various impacts from the lower level of the im- on each table. These matrices are as follows:

pacts tree were weighted for each candidate

314
APPENDIx D

o

co

l-l

-g

IE

K

I n

3 1 5

77-119 0-76-2 2
APPENDIX D

m m m m m m m N ml N & j

A.-

m

c

m 0

316
m m m o e m N N m N:

‘5m

ti

m

@a m

u
APPENDIX D

I

Fww)

p~AIOAU1 @~

~U/iXXlUJ4)AOf) ● S+n m m N mm N m

‘5

318
APPENDIX D

sa~J!szaAyn

sdnw~

awi w-w

@3npuI

S18X3U!W ● S*n

N m N m N ‘N

A

4

U7

0

N

6

3 1 9
APPENDIX D

Matrix l—Relevance of economic impacts to various SP’s, sheet 1

IMPACT AREAS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

Economic Output

Income

Liquidity

Employment

Currency Value

Wealth (Value of Resources)

Capital Investment

Taxation

Availability and Price of Commodities

Cost of Living

Selected Industrial Output

Selected Industrial Profit

Selected Industrial Liquidity

Selected Industrial Employment

Selected Industrial Relative

Prices

Selected Industrial Capital Stock

Industrial Infrastructure

Relative Abundance of Materials

Distribution Mechanisms

Development of Marginal

Resources

21 Domestic Business Restrictions

22 Balance of Trade

23 Price of Exports

24 Relative Value of Currency

25 Cost of Imports

26 Trade Patterns

27 Multinational Business Restrictions

28 Development of Resources by

Others

29 Economic Aspirations of Others

SP

1

4

3

2

4

3

4

4

4

4

3

5

5

3

5

5

4

5

5

5

5

5

5

5

3

5

5

5

5

4

SP

2

2

2

1

2

1

2

1

1

3

1

4

4

2

4

3

2

4

3

4

4

4

1

1

1

1

2

2

3

2

SP

3

4

3

2

3

2

4

3

2

4

3

5

5

3

5

5

4

5

5

5

5

5

5

5

3

4

5

5

5

4

SP

4

2

2

1

1

1

2

1

1

1

1

2

2

1

2

2

1

4

3

4

4

4

1

2

1

1

2

2

3

2

SP

5

2

2

1

2

1

2

1

1

4

1

4

4

1

4

2

2

4

4

4

4

4

1

2

1

1

2

3

3

2

RELEVANCE KEY

5= Great Relevance

3= Moderate Relevance

l= Little Relevance

0=No Relevance

WEIGHT KEY

5= Extremely important impact area

3= Important Impact Area

l=Of Little Importance

0=NO Importance

WEIGHT

5

4

3

5

4

5

3

3

3

3

3

3

3

3

3

2

4

4

4

4

4

5

4

5

4

4

4

4

3

3 2 0
APPENDIX D

Matrix l—Relevance of social impacts to various SP’S, sheet 2

IMPACT AREAS

30 Health

31 Nutrition

32 Range of Choice

33 Welfare and Economically

Regressive Impacts

34 Mobility

35 Housing

36 Education

37 Leisure

38 Values-Domestic

39 Perceptions About U.S.

40 Perception About Self

41 Internal Migrations

42 Services

43 Domestic Environment

44 Technological Directions

45 Value Structure

46 Institutional Change

47 Laws and Regulations

48 Global Environment

49 Migration

50 Values and Expectations

51 Travel

SP

1

1

2

4

3

5

1

1

4

3

4

4

0

1

3

5

3

4

4

3

1

3

1

RELEVANCE KEY

5= Great Relevance

3= Moderate Relevance

l= Little Relevance

0=N0 Relevance

SP

2

0

0

3

0

0

0

0

1

0

1

1

0

0

2

3

0

0

3

0

0

0

0

SP

3

1

2

4

3

2

1

1

3

3

4

4

0

1

2

4

3

4

4

3

1

2

1

SP

4

0

0

3

0

0

0

0

2

0

1

1

0

0

3

5

0

0

4

0

0

0

0

SP

s

o

0

4

3

0

1

0

2

2

2

2

0

2

2

3

1

2

3

1

0

1

0

WEIGHT KEY

5= Extremely Important Impact Area

3= Important Impact Area

l=Of Little Importance

0=NO Importance

WEIGHT

4

4

3

4

4

4

4

4

2

3

4

2

3

4

2

2

4

4

4

3

4

2

321
APPENDIX D

Matrix I—Relevance of political impacts to various SP’S sheet 3

IMPACT AREAS

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

60

Levels of Satisfaction with

Government

Internal Political Stability

Laws and Regulations

Regulatory Structure

Institutional Viability

Trade Alliances and Agreements

Buyers’ and Sellers’ Consortia

Aspirations of Other Potential

Consortia Members

Aspirations of Consortia in Other

Materials

Perception About U.S. Intent

Cultural Alliances and Agreements

U.N. Effects

Impacts on Other International

Institutions

Military

ments

Political

tions

Political

National

Alliances and AgreeStability Between NaAspirations of Others

Boundaries

Political Pressures on Third Parties

SP

1

5

5

4

5

5

5

5

5

5

5

3

4

4

5

5

5

1

3

RELEVANCE KEY

5= Great Relevance

3= Moderate Relevance

l= Little Relevance

0=NoRelevance

SP

2

3

2

4

4

4

5

2

2

2

3

0

0

0

0

1

1

0

2

SP

3

5

4

4

5

5

5

5

5

4

5

3

4

4

4

4

4

1

3

SP

4

3

2

4

4

4

4

2

2

2

3

0

0

0

0

2

1

0

2

SP

5

4

2

4

4

4

4

2

2

2

3

0

0

0

0

1

1

0

2

WEIGHT KEY

5= Extremely Important Impact Area

3= Important Impact Area

l=Of Little Importance

0=No importance

WEIGHT

4

5

4

3

3

4

5

4

5

4

2

3

3

4

5

4

5

4

322
INDEX

Administrative Procedure Act, 197

Agricultural Act of 1956, 224

Agricultural Products, 52, 164, 236

non-food, 55

Agricultural Trade and Adjustment Act of 1954, 221, 236

Agricultural Trade Development and Assistance Act of 1954,

159, 196, 224

Alumina. (See aluminum.)

Aluminum (see also bauxite), 26, 56, 85, 228, 234, 239, 272, 276,

284, 288

ingots, 241

program, 241-245

Aluminum Company of Canada (Alcan), 243, 244

Antidumping Act of 1921, 196

Antimony, 36, 56

Antitrust Acts, 196

Army-Navy Munitions Board (ANMB), 222, 224, 228, 229,

230-232

Asbestos, 31, 57, 171

Association of Natural Rubber Producing Countries (ANRPC).

(See rubber.)

Atomic Energy Commission, 175, 238

Australia, 30, 233, 261, 270, 272, 277, 278, 279, 280, 285, 286, 287,

289

barter Arrangements, 48, 52, 164, 235

bauxite (see also aluminum), 11, 25, 28, 31, 47, 55, 56, 57, 147,

264, 271, 284

exporting countries, 27

International Bauxite Association, 27, 29, 31, 270-272

ore tax, 80

beryl ore, 16, 171

Brazil, 30, 118, 271, 277, 278, 290

Bureau of Domestic Commerce, 157

Bureau of Land Management, 32

Bureau of Mines, 174, 175, 179, 272

Business and Defense Services Administration, 157, 257

Buy American Act of 1933, 196, 224

Cadmium, 15

Canada, 30, 31, 106, 107, 231, 233, 235, 261, 263, 266,273, 277, 278,

280, 285, 286, 287, 289

capital investment, 29, 45, 81, 188, 195, 320

capital gains/losses, 91, 92-93, 115, 116, 124, 126, 127, 135

cartels and cartel action, 2, 12, 25, 27-29, 45, 47, 48, 50, 51, 52, 77,

78, 82, 87-92, 98, 99, 103, 147, 158, 163, 183, 188, 196, 198,

264-283

chromite (see also chromium), 16, 30, 48, 94, 171, 264, 274-277,

287

carte] potential, 274

ferrochrome, 276

major use of, 274

chromium (see also chromite), 6, 14, 25, 36, 55, 56, 57, 201, 276,

287, 288

chrome, 48

Clean Air Act, 194

coal, 12, 13, 56, 174, 194, 288

cobalt, 14, 30, 36, 55, 56, 264, 276, 277, 285, 287, 288

columbium, 30, 57, 171, 280, 286

common defense. (See national defense.)

Common Market. (See European Economic Community.)

Comprehensive Employment and Training Act of 1973, 194

Congressional Committes:

House Armed Services Committee, 1, 14, 15, 35

House Committee on Banking and Currency, 1, 15

House Committee on Science and Technology, 1

Joint Committee on Defense Production, 1

Joint Economic Committee, 28

Senate Commerce Committee, 1

Senate Committee on Government Operations, 1

Senate Interior & Insular Affairs Committee, 15

Congressional Budget Office, 192

Congressional legislation, 4, 14-16, 20, 34, 191-198

Congressional Research Service, 192

Connally Hot Oil Act of 1935, 195

conservation, 2, 27, 50, 78, 155, 165, 175, 185-186, 188, 193, 238,

253, 277

consumers, 5, 12, 33, 44, 45, 50, 51, 52, 81, 86, 91, 93, 102, 103, 111,

113, 115, 131, 135, 158, 188, 223

consumption patterns, 7, 47, 50, 52, 81, 82, 83, 86, 155, 188, 195,

202, 260

Controlled Material Plan (crop), 235

copper, 26, 36, 47, 55, 56, 57, 85, 171, 181, 187, 228, 234, 237, 239,

250, 255-260, 264, 284, 285, 287, 288, 290

International Council of Copper Exporting Countries

(CIPEC), 28,29,267-270

price of, 267

releases of, 251-255

taxes on, 269

Copper Production Expansion Program, 257

Cost of Living Council, 194

Council of Economic Advisors, 243, 253, 254

Chairman of, 254-255

“Critical Materials; Commodity Action Analyses, ” 177

Decision Criteria Model, 3, 21-22, 145, 146-148, 161

defense contractors, 34

Defense Materials System (DMS), 34, 238

Defense Plant Corporation, 176

Defense Production Act of 1950, 14, 15, 34, 159, 193, 194, 195, 197,

221, 223, 225, 233-235, 241, 249, 250, 255, 256

Inventories, 14, 33, 34, 234, 235, 238, 247, 252, 259

Defense Production Administration, 171, 235, 250

Defense Supplies Corporation, 222

Department of Agriculture, 12, 224, 225, 226

Secretary of 224, 229

Department of Commerce, 34, 157, 186, 225, 226, 228, 233, 234,

252, 255, 256, 257

Secretary of, 224, 229, 253, 254, 257

Department of Defense, 34, 157, 175, 225, 227, 228, 235, 238, 242,

243, 245, 247, 248, 253

Secretary of, 254, 257

Department of Energy and Natural Resources, 12, 32

Department of the Interior, 12, 13, 157, 177, 224, 226, 229,

230-232, 235, 256, 271, 274

Secretary of, 224, 229, 257

323
Department of Justice, 197

Department of Labor, 194

Department of Natural Resources, 12

Department of the Navy, 221

Secretary of, 224, 229

Department of State, 157, 226, 227, 232, 233

Secretary of, 224, 229, 253, 254, 257

Department of Treasury, 161,.322, 224, 242, 252

Secretary of, 15, 224, 229, 253, 254

detente, 12

Domestic Tungsten, Asbestos, Fluorspar, and ColumbiumTantalum Production and Purchase Act of 1956, 224

Duval Corporation, 256-257

Duval Sierrita Mine, 255-257

Economic Stabilization Act of 1970, 196

Economic Welfare Model, 2, 3, 51, 61-64, 77, 87-92, 99-100, 101,

104, 111, 115, 118, 121, 122, 125, 127, 131, 134, 146, 149-151,

158, 159, 161, 162

use of, 64-69

economy, the, 33, 44, 45, 49, 53, 69-70

domestic, 6, 11, 12, 13, 15, 193

industrial, 25

international, 13

Elk Hills, Naval Petroleum Reserve (see also Naval Petroleum

Reserves), 83, 267

embargo, 82, 89, 266

Arab, oil 11, 44, 47, 49, 50, 266

Emergency Petroleum Allocation Act of 1973, 193, 195, 196, 197

Endangered Species Act of 1973, 194

energy, 25, 28, 47, 50, 82, 93, 174, 232

conservation plans, 13

consumption of, 195

demand for, 13

price increases, 26

energy industries, 32, 315, 316, 317, 318, 319

Energy Independence Act, 98

Energy Policy and Conservation Act, 13-14, 193

Energy Research and Development Administration (ERDA),

159, 238

Energy Research and Environmental Coordinating Act of 1974,

193, 194, 195, 197

environment, the 17, 12, 46, 47, 161, 174, 193, 194, 202, 315, 316,

318, 319

protection and preservation, 285

R&D on ecosystems, 174

environmental constraints, 11, 277

air quality, 136

availability of water, 86, 136

environment, impact statements, 197

land restoration, 86, 136

land use, 86

runoff, 86

waste disposal, 136

Environmental Protection Agency, 194

European Economic Community, 5, 37, 200, 280, 283-285

Export Administration Act of 1969, 195

Export Control Act, 225

export controls, 187, 188, 195

Export-Import Bank, 176

Export-Import Bank Act, 197

Factoring System, 233

FederaI Advisory Committee Act, 197

Federal Energy Administration (FEA), 15, 147, 193

Act of 1974, 193, 194, 195, 196, 197, 198

Federal Preparedness Agency, 160

Federal Reserve System, 5, 200

Federal Trade Commission, 197

Federal Water Pollution Control Act, 194

fibers, 56, 225, 295

finished materials, 17, 26

fluorspar, 31, 57, 171

Foreign Assistance Act, 196

Foreign Military Sales Act, 196

foreign policy, 3, 44, 79, 192, 193, 195

forest products, 55, 56, 225, 288

France, 28, 36-37, 261, 262, 263, 283

Groupment d’Importation et de Repartition des Meteaux

(GIRM), 289-290

Ministry of Industry, 290, 291

recycling, 290-291

Societe le Nickel, 290

stockpiling, 290-291

Freedom of Information Act (FOIA), 197

General Accounting Office (GAO), 34, 160, 192

General Agreement on Tariffs and Trade (GATT) agreement,

176, 196

General Services Administration (GSA), 83, 172, 225, 226, 233,

235, 238, 239, 241, 252, 253, 255, 256, 257, 258, 259, 260, 263

Administrator of, 254

gold, 55, 176, 181

Great Britian (see also United Kingdom), 28, 263

Gross Energy Policy (GEP), 101

Gross National Product (GNP), 50, 93, 101, 102, 128, 236, 270

Groupment d’Importation et de Repartition des Meteaux

(GIRM). (See France,)

Hanna Nickel Smelting Co., 257

Harbord List, 221

Helium Act of 1925, 195

House Armed Services Committee. (See Congressional committees.)

House Committee on Banking and Currency. (See Congressional

committees.)

House Committee on Science and Technology. (See Congressional committees.)

hydropower, 266

ilmenite. (See titanium.)

import dependence, 11, 25-26, 49, 53, 54, 77, 86, 226

degree-of-dependence rule, 50

Import disruptions, 2, 48, 50, 52, 53-54, 77, 93, 104-115, 147, 158,

164, 188

Indonesia, 30, 261, 264, 287, 288, 290

Industrial Feasibility Test, 232

Industrial Sector, ( See U.S. industry.)

inflation, 6, 11, 33, 223, 195, 201, 266

Information Bureau of Copper, 267

International Bank of Reconstruction and Development, 176

International Bauxite Association (IBA). (See bauxite.)

international commodity agreements, 182-185, 188

International Council of Copper Exporting Countries (CIPEC).

(See copper.)

International Energy Agency (IEA), 5, 78, 200

international energy program, 13

324
International Monetary Fund (IMF), 262, 263, 265

International Nickel Co., Inc. (Inco), 257-256

International Rubber Study Group, (See rubber.)

International Tin Agreements, 30, 85, 160, 183, 185, 264, 280-281

First ITC Agreement, 260

Third ITC Agreement, 260

Fourth ITC Agreement, 261-262

Fifth ITC Agreement, 260, 262-263, 280

International Tin Council (ITC), 5, 6, 11, 121, 200, 201, 260-264,

280-281

International Trade Inventory (ITI), 184

iron ore, 25, 31, 36, 47, 53, 55, 56, 225, 264, 277-278, 284, 288, 296

Caracas Group, 277

Scrap iron, 277

Iran, 31, 264, 266, 287, 290

Jamaica, 27, 31, 80, 270, 271, 272

Japan, 25, 28, 36, 261, 278, 283

Cycling Association, 289

Import dependence, 285-286, 287

Ministry of International Trade and Industry (MIT]), 36, 285,

286-289

stockpiling, 285-289

Japan Export Import Bank, 288

Japan Metal Mining Public Corporation, 36

Japan Mining Public Corp., 288

Japan Rare Metals Co., 286

Japanese Mining Association, 289

Joint Chiefs of Staff (JCS), 230, 231, 233, 238

Joint Committee on Defense Production (See Congressional committees.)

Joint Economic Committee. (See Congressional committees.)

Kaiser Le Nickel Corp., 257

labor sector, 80, 233, 241, 249, 315, 316, 317, 318, 319

strikes, 106, 107, 254

lead, 55, 56, 57, 171, 181, 234, 235, 236, 264, 278, 284

less developed countries (LDC), 201, 267, 277, 279

London Metal Exchange, 54, 118, 181, 262, 270

magnesium, 272

Malaysia, 30, 118, 261, 281, 288

manganese, 11, 14, 30, 48, 55, 56, 57, 171, 264, 278

seabed recovery, 278

market systems, 6, 191, 201

American, 32, 192

marketplace, the, 1, 6, 18, 54, 80

government intervention in, 170, 193, 201

operations, 84-87

markets:

domes~ic, 2, 48, 51, 54

international, 2, 32, 48, 54, 115, 147

Materials Information System (MIS), 151-155

Materials Selection Criteria, 146, 149

materials substitution, 28, 173-176, 186-187, 188, 238

Mercurio Europeo. (See mercury.)

mercury, 31, 57, 171, 181, 264

cartel, 29, 272-4

decline in price, 273-274

Mercurio Europeo, 273

Spanish-Italian Cartel, 273

Metals Reserve Company, 222

mica, 171

Military security, 14

minerals, 55, 255

mineral leasing laws, 32

minerals inventory system, 13

Minerals Policy Report, 32

mining, 174

industry, 230, 234, 235, 236

surface, 32

Mining and Minerals Policy Act of 1970, 32, 161, 194

Mining Industry Council, 36

Ministry of International Trade in Industry (MITI). (See Japan.)

Mobilization Readiness Program, 235-241

molybdenum, 36, 255, 276, 285, 286, 287, 288

National Aeronautics & Space Administration (NASA), 34, 175

National Bureau of Standards, 173, 175

National Commission on Materials Policy (NCMP), 13, 32, 46,

160, 172, 173, 174-179, 186

National Commission on Supplies and Shortages, 1, 13, 155

National defense (see also national security), 193, 195, 223, 233,

249, 250, 252, 257

National Economic Stockpile Association, 15

national emergencies, 41, 48, 222

National Environmental Policy Act of 1969, 194, 197

National Materials Policy Act of 1970, 194

National Science Foundation, 1975

national security (see also national defense) 35, 195, 234

National Security Council, 160, 224, 235

National Security Resources Board (NSRB), 231-232, 233, 235

National Strategic Petroleum Reserve, 98

natural gas, 12, 55, 56, 57, 170, 266

products, 174

Natural Gas Act, 32

natural resources. (See resources)

Natural Resources Coordinating Committee, 13

Naval Petroleum Reserves (see also Elk Hills Naval Petroleum

Reserves), 159

New York Commodity Exchange, 181, 253

New York Stock Exchange, 253

nickel, 31, 36, 56, 57, 107, 187, 234, 239, 252, 257-260, 264, 276,

278-9, 285, 286, 287, 288

Societe le Nickel, 290

nuclear power, 266

Nuclear Regulatory Commission, 34, 238

Office of Coal Research, 175

Office of Defense Mobilization (ODM), 234, 235, 236, 252

Office of Emergency Preparedness (OEP), 157, 159, 172, 199,224,

225, 226, 227, 241, 246, 247, 252, 253, 255, 256, 257, 259

Director of, 254

Office of Management and Budget (OMB), 162, 248

Office of Minerals Exploration, 176

Office of Technology Assessment (OTA), 1, 155, 179, 186, 187,

192

oil embargo. (See Organization of Petroleum Exporting Countries-OPEC,)

Operating Cost Model, 124, 133, 141, 161, 162, 163

OREMET, 248

Organization of American States (OAS), 5, 200

Organization of Petroleum Exporting Countries (OPEC), 11, 26,

27, 31, 80, 85, 93, 195, 191, 201, 264-266

oil embargo, 11, 33, 47, 49, 50, 266

Overseas Private Investment Corp., 176

325
Paley, Commission, 12

petrochemicals, 56

industry, 50

products, 28

petroleum, 6, 11, 12, 15, 25.28, 31,48, 53,55, 56,57,82,83,93,100,

101, 163, 174, 201, 264-266

consumption of, 102

prices, 44, 265

products, 187

reserves, 13, 15, 83, 98, 159, 267

synthetic oil, 44, 174

pharmaceuticals, 56

phosphate, 264, 279

plastics, 55, 56, 272

platinum, 11, 14, 25, 30, 53, 56, 57, 181, 264, 279

substitutes for, 279

President’s Materials Policy Commission, (See Paley Commission)

price controls, 126

private industry. (See U.S. industry.)

process substitution, 28

producer/consumer councils, 5

public lands, 178, 188

public transportation, 50, 228

rationing, 13, 50, 81

fuel, 194

raw materials, 17, 85, 222, 174, 175, 176, 228, 235, 236, 246

markets for, 223

Reconstruction Finance Corporation (RFC), 176, 222

recycled materials, 42, 178

tax credits for use of, 177

recycling, 12, 36, 42, 48, 51, 155, 170, 174, 176, 177-8, 188, 289

industry, 177

relevance trees 19, 70-72, 154, 187, 295-297

research and development, 170, 173-176, 188, 315, 316, 317, 318,

319

NCMP recommendations for, 174-179

resources, 46, 82, 107

shortages of, 13

waste materials as, 46

RMI, 248

rubber:

Association of Natural Rubber Producing Countries

(ANRPC), 281

International Rubber Study Group, 30, 281

natural, 30, 56, 57, 264, 281

synthetic, 30, 225, 281

Rubber Reserve Company, 222

Russia. (See U. S. S. R.)

rutill. (See titanium, )

Saudi Arabia, 31, 264, 265, 266

scrap material, 36, 42, 177, 187, 227, 277

Senate Commerce Committee, (See Congressional committees,)

Senate Committee on Government operations. (See Congressional committees.)

Senate Interior and Insular Affairs Committee. (See Congressional committees.)

Semiprocessed materials, 17

Silver, 16, 55, 57, 176, 181, 252

Sunshine Mine, 107

Small Business Act, 196

Small Business Administration, 256

Societe Ie Nickel (SLN). (See France.)

South Africa, 11, 30, 274, 276, 278, 280, 287

Spanish-Italian Cartel. (See mercury.)

special-interest groups, 6

stainless steel, 272, 276

steel, 11, 26, 225, 228, 284, 286

Stockpile Committee, 232

Stockpile Policies (SP):

SP-1, 50, 53, 56-57,78,80, 82-83,87-104,151, 158, 163-164, 188,

198

SP-2, 50, 53-54, 56-57, 78, 104-115, 128, 151, 158, 164, 188

SP, 50, 54, 56-57, 78, 79, 84, 115-124, 151, 164, 188

SP, 50-51, 54, 56-57, 78, 81, 86, 125-133, 151, 165, 188

SP-5, 51 56-57, 78, 81, 83, 134-142, 151, 158, 165, 188, 198

specific purposes, 47-48

Stockpile Storage Committee, 225

Stockpiling Act of 1939, 222, 249

Stockpiling Act of 1946, 159, 171, 221, 249

Strategic and Critical Materials

Stockpiling Act of 1946, 15, 41, 195, 196, 221, 223, 229, 254,

257

Strategic and Critical Stockpile, 14, 236

Strategic Petroleum Reserve, 13, 15

strikes. (See labor sector. )

substitution of materials. (See materials substitutions.)

Supplemental Stockpile, 14, 159

supply,3, 179, 185

concentration of, 233

disruptions, 6, 7, 192, 202

foreign, 234

source of, 2, 226, 233

supply/emand, 33, 54, 86, 116, 229, 249, 272

domestic changes, 32

Surplus Property Act of 1944, 222

surpluses/shortage, 115, 116, 117, 127, 132, 134-142, 147, 165, 170,

176, 188, 198

Sweden, 36, 37, 277, 283

stockpiling, 291-293

tax system, 179-181, 291-292

synthetic fuel industry, 44

systems analysis, 18-19

tantalus materials, 30, 286

Tariff Act of 1930, 195

tariff concessions, 176

Tax Reduction Act of 1975, 197

taxation, 37, 126, 250, 320

depletion allowance, 173, 197

tax incentives, 170, 171, 172-3, 179, 182, 188

technology, assessment, 16

definition of, 17-18

TIMET, 248

tin, 16, 30, 36, 56, 57, 118, 123, 164, 181, 239, 260-264, 280-281

International Tin Agreements. (See International Tin Agreements.)

International Tin Council. (See International Tin Council.)

Titanium, 55, 57, 171, 245-249, 264, 276, 279-280

ilmenite, 57, 279

rutile, 57, 247, 279, 280

sponge, 246, 247

Use in Aircraft industry, 245-247
Trade Act, 196

Trade Expansion Act, 196

tungsten, 36, 48, 55, 56, 57, 127, 128, 131, 132, 133, 165, 171, 187,

239, 264, 280, 285, 286, 287

United Kingdom (see also Great Britain), 30, 36, 37, 261

United Nations, 5, 200, 276

United Nations Conference in Trade and Development

(UNCTAD) IV, 5,6, 12,28, 200,277

University of Maryland, 77

INFORUM, 77

U.S. Geologic Survey, 176, 179

U.S. industry, 5, 11, 41, 48, 49, 80, 198, 229, 315, 316, 317, 318, 319

U.S. Mint, 234, 252, 256, 259, 260, 270

U. S. S. R., 6, 11, 30, 48, 118, 201, 260, 261, 274, 276, 278, 287

Vanadium, 187, 264, 276, 280, 285

Venezuela, 31, 264, 266, 277

waste:

urban, 175, 177, 178

disposal, 174

welfare economics, 61

West Germany, 6, 25, 36, 37, 200, 260, 261, 284

World War I, 221, 223

World War II, 222, 233, 171, 187, 228, 229, 232, 235, 241

Zaire, 30, 118, 261, 267, 269, 280, 288, 290

Zambia, 267, 269, 270, 280, 285

zinc, 25, 31, 36, 55, 56, 57, 83, 106, 110, 112, 164, 171, 181, 234, 235,

236, 264, 276, 280, 284, 287

zirconium, 286

327

u S C.OVE RN MENT PRINT INL OFFICE 1976 0 77 119