The Fight over Quotas

The newest and hottest oil scramble last week centered on what has traditionally been one of the industry's most lucrative fields of endeavor: Washington. At issue is the Nixon Administration's policy, now in the formative stage, for dealing with the flow of cheap foreign oil into the U.S. The report of a Cabinet Task Force recommending changes in the current system of restrictive import quotas is expected to land on the President's desk this week. Its contents are officially secret, but enough details have already leaked to roil the industry and start what promises to develop into a fierce debate.

The stakes are enormous, primarily because Middle Eastern oil costs about $2 per bbl. v. U.S. oil's $3.30. Since 1959, the U.S. has held down imports from all sources to 21% of domestic consumption -- in effect assuring a market for high-cost Texas and Louisiana oil at the consumer's expense. Protecting domestic-oil producers through quotas on low-cost imports adds an estimated $4 billion to, $5 billion a year to prices paid by the users of gasoline, fuel oil and other products.

There is no doubt that the quota system is in need of drastic change. Permits to import oil are handed out by the Government to individual U.S. refiners. The system of distributing permits is wide open to favoritism, and the companies that get permits can make fortunes by selling cheap foreign oil at the U.S. price. That gives refiners a reason to resist changes in the system.

Move to Tariffs. The report of Nix Task Force, headed by Labor Secretary George P. Shultz, will probably not be made public until February. But it is believed to recommend a gradual phase-out of the quotas in their present form and their replacement with tariffs. These duties would be set so as to bring the total price of foreign oil landed in the U.S. to about $3 per bbl., or roughly 300 lower than the present domestic price of $3.30. Theoretically, domestic producers would have to lower their own prices to meet the foreign competition, and Washington could force them to cut still further by lowering the tariff later on. To assure that the U.S. would not be swamped by foreign oil, some overall ceiling on imports would also be imposed.

An advantage of a tariff system is that it would allow the Government rather than the oil refiners to collect the difference between the price of imported and domestic oil. On the other hand, a possible disadvantage of the current plan is that it would be discriminatory: the tax would be higher for Middle Eastern oil than for Venezuelan or Canadian oil, largely because the Government does not want the U.S. to become dependent upon Middle Eastern sources of supply.

World Control Center. One articulate critic of the Task Force plan is Walter J. Levy, dean of oil consultants, who argues that Middle Eastern governments might well object to a tariff that discriminates against them. The tariff itself would involve mind-boggling complexity to cover varying costs of production and shipping. It would also require frequent adjustments to take account of the Defense Department's calculation of the reliability of supplies from each producing country.

Levy's most compelling-argument is that tariffs "would make the U.S. Government the world oil-control center." Decisions limiting how much oil each region could sell in the U.S. would be made primarily by the Government and not by companies simply seeking the cheapest oil with which to fill their quotas. "Every oil decision would become a foreign policy decision," says Levy. He also raises the prospect that oil-producing countries, rather than let the U.S. collect more in oil tariffs than they do in oil royalties and taxes, might raise their own share of the take. Such an increase would lead to higher prices and would be particularly costly to European and Japanese customers, who depend much more on Middle Eastern oil than the U.S. does. (Others argue that competition would continue to keep foreign prices down.)

Levy contends that carefully liberalized quotas would bring down prices but would not present as many problems as a tariff system. Higher quotas, however, might just increase the size of the unearned bonanza awarded annually to U.S. refiners in import permits.

Looking to Alaska. The real issue is protectionism and the conflicting pressures, demands and interests of domestic and foreign producers, as well as consumers. If all controls were abolished, foreign crude would inundate the U.S. and put domestic producers out of business. Though the domestic producers have drunk long and deeply at Washington's subsidy well, they do provide insurance against foreign price rises. There is also the balance of payments to consider and the claims of Canada and Venezuela to a continuing place in the U.S. market.

At bottom, both the current debate and the historic justification for import restrictions rest primarily on a highly questionable assumption: that Texas and Louisiana producers must be protected to provide a reliable supply of oil in time of emergency. The argument has become increasingly threadbare. The U.S. has varied and reliable sources of supply, including Canada and Venezuela, and Alaska North Slope oil will be coming on stream in 1975. That would be enough to assure supplies through anything but a nuclear war, when the question would probably be irrelevant.

The policy of holding down imports is often called illogical, since it encourages depletion of the same domestic wells that the Government wants to conserve. Another effect has been to encourage the search for ever more costly and marginally economic wells in the U.S. Proponents of restriction continue to argue that the U.S. should not become overly dependent on Middle Eastern oil sheiks, or beholden to them in its foreign policy. But, since Middle East crude now accounts for only 3% of U.S. oil consumption, there is obviously room for much expansion of imports without tying the U.S. too closely to possibly erratic overseas sources of supply.

The final decision is Nixon's alone, and it is likely to be as much political as economic. The President will no doubt be pressed to take into account the campaign contributions of oilmen, and the importance of the oil-producing Southwest to Republican political strategy. But unlike President Eisenhower, who established the quotas in the first place, Nixon now must also consider the rising resentment of consumers who are being overcharged to protect and provide so generously for a high-cost and overly privileged domestic industry.

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