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PMAA

PETROLEUM MARKETERS ASSOCKTON AMERICA 100 OMT AV M.M in VALENGTON (3) W1-11

March 28, 1991

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Senator Malcola Wallop
Ranking Republican Member
Committee on Energy and National Resources
United States Senate
SR-237 RSOB
Washington, D.C. 20510-5001
Dear Senator Wallop:

Please consider this the response to the questions you raised
in your March 13th letter to John Arnold on energy policy. You
posed these questions as a follow-up to the March 11 hearing.
(1) Would you agree that many of today's energy problems stem

from reliance on an international market-place where energy prices have no relationship to the costs of production or the full costs of maintaining access to

those supplies? PM believes that a complex interaction between costs, supply and demand deteraine prices in world energy markets. History has shown that markets are far better at allocating scarce resources than are governpents. U.s. energy policy should not interfere with energy parket pricing, but should, on the other hand, encourage the creation of additional production worldwide to limit the control that any producer country or group of producer countries can exert in international markets.

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(2)

Do you agree that the United States must find the means to stimulate development of competitive supplies by assuring sufficient stability in domestic energy prices that investments can be made in the development of domestic alternatives? What mechanism would you propose to accomplish this objective?

Yes and No. PMAA has always supported a strong domestic energy industry. However, we believe there are less economically destructive and disruptive ways than artificial energy pricing mechanisms like oil import fees to induce exploration and production of domestic energy sources. For example, the federal and state governnents can encourage domestic oil activity by reducing severance taxes on crude oil, by extending the oii depletion allowance, and through increasing the intangible drilling credits. In addition, we could adopt a system similar to the one the United Kingdon uses in the North Sea. Under this system a well's production is not taxed until all the exploration and development costs have been recovered by the company. Currently

Senator Malcolm Wallop
Page two
March 28, 1991

the domestic oil industry carries the heaviest tax burdens of any industry and recent changes in the tax law due to the enactment of Superfund legislation increases that burden substantially. PMAA also supports the opening of more federal lands for offshore drilling as well as the ANWR.

PMAA believes we must find a way to "stimulate domestic energy sources" but not at the expense of the American economy. (3) As you are aware, s. 341 contains a provision which could

establish a price differential between domestic and imported crude oil and petroleum products. This is accomplished by requiring that approximately 9 percent of crude oil and petroleum product imports,

or the equivalent, be furnished to the Federal Government for use in both filling the strategic Petroleum Reserve and meeting the fuel requirements of the Department of Defense.

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a. Would you agree that this requirement is in effect

a surcharge on the importation of crude oil and

petroleum products? Yes. The set-aside mechanism in S. 341 acts as an import fee

crude oil and petroleum products. The level would be approximately 9 percent. The economic effect would be identical to an oil import fee. PMAA believes that this is an extremely inefficient and uneconomic mechanism for funding acquisition for the SPR or for meeting the fuel requirements of the Department of Defense as John Arnold testified at the hearing.

b. What mechanism would you propose to fund expansion

of the Strategic Petroleum Reserve under the present

Federal budgetary constraints? PMAA continues to support the SPR and the notion of increasing the reserve's fill rate from its current levels. However, we believe funding a buildup of the SPR through the import set-aside program in Title VII of S. 341 is fundamentally unfair and would ultimately work against the goal of energy security.

Since all Americans benefit from a strong SPR, all Americans should bear the cost of financing it. Because PMAA understands the fiscal constraints associated with raising the SPR to a billion barrels and increasing the fill rate of the SPR from current levels, we strongly support alternative means of financing that do not unfairly discriminate among individual citizens of the Untied States.

mator Malcolm Wallop Page three March 28, 1991

One of the measures we support in this regard is a viable SPR oil leasing program. It is our understanding that in September of 1990 the Department of Energy (DOE) was given statutory authority to enter into contracts to store oil owned by others in the reserve. Such a program would help to fill the SPR at a minimal cost to the Federal Government. As soon as practicable, DOE should move forward with negotiations with a number of prospective suppliers to lease oil for the SPR. Now that the Persian Gulf situation has been resolved, the Middle East oil producing allies of the United States may be more willing than ever to enter into these types of agreements.

To the extent that favorable leasing arrangements cannot be negotiated with producers, petroleum should continue to be acquired for the SPR through purchases to the extent possible given federal budgetary constraints. There are more than 560,000,000 barrels of crude oil in the SPR at this time. Although expansion is important, it is not urgent that the fill rate be increased unless the increase can be implemented without economic distortion.

PMAA appreciates this additional opportunity to present its views and would be glad to provide any further information you may

need.

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Enclosed are the responses to questions you raised in your
March 13, 1991 letter to me.

Please let me know if we can provide you additional information.

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Responses by Charles J. DiBona, President, American Petroleum
Institute, to questions from Senator Malcolm Wallop (R-WY) for the
record relating to the March 11, 1991 hearing on the Strategic
Petroleum Reserve, Senate Committee on Energy and Natural Resources

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Question 1: Would you agree that many of today's energy problems
stem from reliance on an international market-place where energy
prices have no relationship to the costs of production or the full
costs of maintaining access to those supplies?
Answer: The U.s. is heavily reliant on imported oil, which trades
in a world market where its price

determined by the
quantities supplied relative to demand is much higher than the
cost of production in the major oil exporting countries. However,
even if the U.S. did not rely on oil from the Middle East, where
the cost of oil production is far below world prices, or on oil
from other exporting areas: economy nevertheless would be
affected by events in the oil exporting nations. This is because
a substantial oil supply disruption anywhere will affect oil prices
in markets around the world. Thus, our economy and the economies
of many other nations are vulnerable to energy shocks; they are
damaged when oil prices rise sharply and helped when oil prices
remain low. The most prudent federal energy policy is not to
artificially
raise domestic energy prices

which would counterproductively slow our economy or to substitute more costly resources for imported oil, but rather to take costeffective steps that would improve our economic performance. These include such measures as providing greater access to public lands for energy development and avoiding overly stringent environmental and other regulations that unnecessarily impede domestic energy development.

A large Strategic Petroleum Reserve, which cushion the effects of any supply disruption, is an important part of such a prudent energy policy.

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Question 2: Do you agree that the United States must find the means
to stimulate development of competitive supplies by assuring
sufficient stability in domestic energy prices that investments can
be made in the development of domestic alternatives?
What mechanism would you propose to accomplish this objective?

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Answer: Since oil prices are on world markets, do not believe that. the federal government should take special measures to assure stability of domestic energy prices. Price volatility does not necessarily reduce investment in domestic energy development, but extensive government intervention to stabilize energy prices might well discourage such investment. Rather than trying to stabilize energy prices, the federal government should encourage domestic energy investment by providing greater access to federal lands, adopting cost-effective environmental and other regulations,

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