[Congressional Record Volume 141, Number 5 (Tuesday, January 10, 1995)]
[Senate]
[Pages S731-S735]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. AKAKA:
  S. 186. A bill to amend the Energy Policy and Conservation Act with 
respect to purchases from the Strategic Petroleum Reserve by entities 
in the insular areas of the United States, and for other purposes; to 
the Committee on Energy and Natural Resources.


                   the emergency petroleum supply act

 Mr. AKAKA. Mr. President, today I am introducing the Emergency 
Petroleum Supply Act, a bill to ensure that Hawaii has access to the 
strategic petroleum reserve during an oil supply disruption. The 
Emergency Petroleum Supply Act would guarantee Hawaii oil--at a fair 
price--and give tankers bound for Hawaii priority loading during an 
emergency.

[[Page S732]]

  This legislation passed the Senate in each of the previous two 
Congresses. During the 104th Congress, I will aggressively work to see 
this legislation enacted into law.
  The objective of my bill can be summed up in one word: access. 
Because of its tremendous distance from the gulf coast, Hawaii needs 
guaranteed access to the strategic petroleum reserve [SPR], as well as 
priority access to the SPR loading docks.
  My bill addresses both these concerns. First, it provides a mechanism 
to guarantee an award of SPR oil. Hawaii's energy companies would be 
able to submit binding offers for a fixed quantity of oil at a price 
equal to the average of all successful bids. This concept is modeled 
after the Federal Government's method of selling Treasury bills. It 
would give Hawaii ready access to emergency oil supplies at a price 
that is fair to the Government. Without this bill, Hawaii's energy 
companies, and the population they serve, face the risk that their bid 
for SPR oil would be rejected and that oil inventories would run dry.

  The second component of my bill addresses the problem of delay. The 
Emergency Petroleum Supply Act grants ships delivering petroleum to 
Hawaii expedited access to SPR loading docks. It would be a terrible 
misfortune if deliveries to Hawaii were delayed because the tanker 
scheduled to carry emergency supplies was moored in the Gulf of Mexico, 
waiting in line for access to the SPR loading docks.
  As any grade-school geography student can tell you, Hawaii is a long 
way from the Gulf of Mexico, especially when you have to transit the 
Panama Canal. The distance between the SPR loading docks and Honolulu, 
by way of the canal, is 7,000 miles--more than one-quarter of the 
distance around the globe.
  But distance alone is not the issue. When you add together the time 
between the decision to draw down the reserve and the time for oil from 
the reserve to actually reach our shores, the seriousness of the 
problem emerges. It takes time to solicit and accept bids for SPR oil, 
time to locate and position tankers, time for tankers to wait in line 
to gain access to SPR loading docks, and more time to transit the canal 
to Hawaii. Obviously, Hawaii is at the end of a very, very long supply 
line. People overlook the fact that insular areas have a limited supply 
of petroleum products on hand at any one time. While Hawaii waited for 
emergency supplies to arrive, oil inventories could run dry and our 
economy could grind to a halt.
  Last year, the Department of Energy asked Hawaii's East-West Center 
to study this problem. The East-West Center report concluded that my 
SPR access measure ``is an excellent proposal which would greatly 
reassure the islands that their basic needs would be maintained.'' I 
ask that a summary of the report be placed in the Record following my 
remarks. I will also place a copy of Energy Secretary O'Leary's letter 
in support of the Emergency Petroleum Supply Act in the record 
following my remarks.
  The East-West Center report provides strong justification for 
granting Hawaii special access to SPR oil during an energy emergency. 
The report found that a major oil supply disruption would have a much 
more severe impact on the Pacific islands than on the rest of the 
United States. Although all of Asia would experience inflation and 
recession, the small economies of the insular areas would be virtually 
unprotected from volatile economic forces. While the rest of the United 
States does not have to rely on ocean transport from other nations for 
essential goods and services, the economies of Hawaii and the Pacific 
islands are heavily dependent on ocean-borne trade and foreign 
visitors.
  The need for this provision is further justified by a December 1993 
Department of Energy/State of Hawaii analysis of Hawaii's energy 
security which found the following:

       Hawaii depends on imported oil for over 92% of its energy. 
     This makes Hawaii the most vulnerable state in the Nation to 
     the disruption of its economy and way of life in the event of 
     a disruption of the world oil market or rapid oil price 
     increases.
       Currently, 40% of Hawaii's oil comes from Alaska and the 
     remainder from the Asia-Pacific region. The export 
     capabilities of these domestic and foreign sources of supply 
     are projected to decline by approximately 50 percent by the 
     year 2000. This will likely increase Hawaii's dependence on 
     oil the reserves of the politically unstable Middle East.
       Hawaii is also vulnerable to possible supply disruptions in 
     the event of a crisis. The long distance from the U.S. 
     Strategic Petroleum Reserve in Louisiana and Texas, combined 
     with a declining number of U.S.-flag tankers capable of 
     transiting the Panama Canal, make timely emergency deliveries 
     problematic.

  Other studies have consistently verified Hawaii's energy 
vulnerability and its need for special access to the SPR. An analysis 
by Mr. Bruce Wilson, an accomplished oil economist, determined that the 
delivery of SPR oil to Hawaii from the Gulf of Mexico would take as 
long as 53 days. That exceeds the state's average commercial working 
inventory by 23 days. As Mr. Wilson's research demonstrates, an oil 
supply disruption is Hawaii's greatest nightmare.
  Opponents of the Emergency Petroleum Supply Act insist that market 
forces will ensure that Hawaii and the territories receive the oil they 
need during an energy emergency. Unfortunately, these are the same 
market forces that cause Hawaii's consumers to pay 50 percent more for 
a gallon of gasoline than consumers pay on the mainland. And when a 
crisis hits, our energy prices could easily double or triple.
  Hawaii may be the 50th State, but we deserve the same degree of 
energy security that the rest of the Nation enjoys. It's simply a 
matter of equity. Hawaii's tax dollars help fill and maintain the 
reserve; Hawaii should enjoy the energy security the SPR is designed to 
provide.
  My bill will safeguard Hawaii from the harsh economic consequences of 
an oil emergency. The Emergency Petroleum Supply Act is not only good 
energy policy, it's good economic policy for Hawaii.
  Mr. President, I ask unanimous consent that the text of the bill and 
additional material be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 186

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Emergency Petroleum Supply 
     Act''.

     SEC. 2. PURCHASES FROM THE STRATEGIC PETROLEUM RESERVE BY 
                   ENTITIES IN THE INSULAR AREAS OF THE UNITED 
                   STATES.

       (a) General Provisions.--Section 161 of the Energy Policy 
     and Conservation Act (42 U.S.C. 6241) is amended by adding at 
     the end the following new subsection:
       ``(j)(1) With respect to each offering of a quantity of 
     petroleum product during a drawdown of the Strategic 
     Petroleum Reserve:
       ``(A) the State of Hawaii, in addition to having the 
     opportunity to submit a competitive bid, may--
       ``(i) submit a binding offer, and shall on submission of 
     the offer, be entitled to purchase a category of petroleum 
     product specified in a notice of sale at a price equal to the 
     volumetrically weighted average of the successful bids made 
     for the remaining quantity of petroleum product within the 
     category that is the subject of the offering; and
       ``(ii) submit one or more alternative offers, for other 
     categories of petroleum product, that will be binding in the 
     event that no price competitive contract is awarded for the 
     category of petroleum product on which a binding offer is 
     submitted under clause (i); and
       ``(B) at the request of the Governor of the State of 
     Hawaii, petroleum product purchased by the State of Hawaii at 
     a competitive sale or through a binding offer shall have 
     first preference in scheduling for lifting.
       ``(2)(A) In administering this subsection, and with respect 
     to each offering, the Secretary may impose the limitation 
     described in subparagraph (B) or (C) that results in the 
     purchase of the lesser quantity of petroleum product.
       ``(B) The Secretary may limit the quantity of petroleum 
     product that the State of Hawaii may purchase through binding 
     offer at any one offering to one-twelfth of the total 
     quantity of imports of petroleum product brought into the 
     State during the previous year (or other period determined by 
     the Secretary to be representative).

                           *   *   *   *   *

       ``(3) Notwithstanding any limitation imposed under 
     paragraph (2), in administering this subsection, and with 
     respect to each offering, the Secretary shall, at the request 
     of the Governor of the State of Hawaii, or an eligible entity 
     certified under paragraph (6), adjust the quantity to be sold 
     to the State of Hawaii as follows:

[[Page S733]]

       ``(A) The Secretary shall adjust upward to the next whole 
     number increment of a full tanker load if the quantity to be 
     sold is--
       ``(i) less than one full tanker load; or
       ``(ii) greater than or equal to 50 percent of a full tanker 
     load more than a whole number increment of a full tanker 
     load.
       ``(B) The Secretary shall adjust downward to the next whole 
     number increment of a full tanker load if the quantity to be 
     sold is less than 50 percent of a full tanker load more than 
     a whole number increment of a full tanker load.
       ``(4) The State of Hawaii may enter into an exchange or a 
     processing agreement that requires delivery to other 
     locations, so long as petroleum product of similar value or 
     quantity is delivered to the State of Hawaii.

                           *   *   *   *   *

       ``(6)(A) Notwithstanding the foregoing, and subject to 
     subparagraphs (B) and (C), if the Governor of the State of 
     Hawaii certifies the Secretary that the State has entered 
     into an agreement with an eligible entity to effectuate the 
     purposes of this Act, such eligible entity may act on behalf 
     of the State of Hawaii for purposes of this subsection.
       ``(B) The Governor of the State of Hawaii shall not certify 
     more than one eligible entity under this paragraph for each 
     notice of sale.
       ``(C) If the secretary has notified the Governor of the 
     State of Hawaii that a company has been barred from bidding 
     (either prior to, or at the time that a notice of sale is 
     issued), the Governor shall not certify such company under 
     the paragraph.
       ``(7) As used in this subsection--
       ``(A) the term `binding offer' means a bid submitted by the 
     State of Hawaii for an assured award of a specific quantity 
     of petroleum product, with a price to be calculated pursuant 
     to this Act, that obligates the offeror to take title to the 
     petroleum product;
       ``(B) the term `category of petroleum product' means a 
     master line item within a notice of sale;
       ``(C) the term `eligible entity' means an entity that owns 
     or controls a refinery that is located within the State of 
     Hawaii;
       ``(D) the term `full tanker load' means a tanker of 
     approximately 700,000 barrels of capacity, or such lesser 
     tanker capacity as may be designated by the State of Hawaii;
       ``(E) the term `offering' means a solicitation for bids for 
     a quantity or quantities of petroleum product from the 
     Strategic Petroleum Reserve as specified in the notice of 
     sale; and
       ``(F) the term `notice of sale' means the document that 
     announces--
       ``(i) the sale of Strategic Petroleum Reserve products;
       ``(ii) the quantity, characteristics, and location of the 
     petroleum product being sold;
       ``(iii) the delivery period for the sale; and
       ``(iv) the procedures for submitting offers.''.
       (b) Effective Date.--The amendment made by that final 
     regulations are promulgated pursuant to section 3, whichever 
     is sooner.

     SEC. 3. REGULATIONS.

       (a) In General.--The Secretary shall promulgate such 
     regulations as are necessary to carry out the amendment made 
     by section 2.
       (b) Administrative Procedure.--Regulations issued to carry 
     out this section, and the amendment made by section 2, shall 
     not be subject to--
       (1) section 523 of the Energy Policy and Conservation Act 
     (42 U.S.C. 6393); or
       (2) section 501 of the Department of Energy Organization 
     Act (42 U.S.C. 7191).
                                  ____



                                      The Secretary of Energy,

                                    Washington, DC, July 27, 1994.
     Hon. J. Bennett Johnston,
     Chairman, Committee on Energy and Natural Resources, U.S. 
         Senate, Washington, DC.
       Dear Mr. Chairman: This is to provide you with Department 
     of Energy views on S.     , the ``Emergency Petroleum Supply 
     Act,'' introduced by Senator Akaka.
       S.     , would amend the Energy Policy and Conservation Act 
     to give certain preferences to the State of Hawaii and 
     several other insular territories and possessions of the 
     United States in the event of a drawdown and sale from the 
     Strategic Petroleum Reserve.
       The Department has worked closely with Senator Akaka's 
     staff to understand the concerns of the State and the intent 
     of the legislation, and to help make the bill technically 
     sound. Based upon these discussions, a number of changes to 
     the bill have been made. As redrafted, the legislation would 
     apply solely to Hawaii. It would allow the State, or a 
     company with a refinery on Hawaii with which Hawaii has a 
     contract, to submit a bid for Strategic Petroleum Reserve 
     petroleum product that is assured of receiving an award at 
     the average price paid for the same product by other 
     successful bidders. The bill also would provide that Hawaii 
     be given first priority for scheduling deliveries of oil that 
     is purchased from the Strategic Petroleum Reserve.
       The State of Hawaii always has believed that it is more 
     vulnerable to oil supply disruptions than the mainland due to 
     its high level of dependence on oil in general and its 
     distance from sources of supply and from the Strategic 
     Petroleum Reserve. The provisions of this bill that would 
     assure Hawaii of supply and allow for timely delivery will 
     satisfy the State that it is receiving protection for Hawaii 
     commensurate with that offered to the U.S. mainland by the 
     Strategic Petroleum Reserve. At the same time, the Department 
     is satisfied that it will receive full market value for the 
     oil that it sells to Hawaii, that the quantity directed to 
     Hawaii will not materially reduce the volume available to 
     other locations, and that the process of making the award and 
     delivering the oil will not be an unreasonable administrative 
     burden.
       For these reasons, the Department of Energy supports the 
     amendment offered by Senator Akaka during the Committee's 
     consideration of S. 2251, to amend and extend the Energy 
     Policy and Conservation Act.
       The Office of Management and Budget advises that from the 
     standpoint of the Administration's program, there is no 
     objection to the submission of this report for the 
     consideration of the Committee.
           Sincerely,
     Hazel R. O'Leary.
                                  ____


Energy Vulnerability Assessment for the U.S. Pacific Islands, the East/
                        West Center, April 1994


        oil supply disruption scenarios for the pacific islands

       The following sections describe the potential oil supply 
     disruptions scenarios provided by the USDOE for this report, 
     the likely impacts of these supply disruptions on the island 
     economies, and selected response issues. The discussions 
     parallel those in chapters 4 to 7, which also discuss 
     vulnerability response options for the individual island 
     entities. The response issues which are discussed below 
     reflect the larger economies of scale which can be gained by 
     linking Guam, the CNMI, Palau, and American Samoa. Hawaii and 
     the Federated States of Micronesia and the Republic of the 
     Marshall Islands should also be included in any regional 
     groupings because they are also part of the same oil supply 
     system. Unfortunately, the terms of reference for this report 
     did not allow for assessment of these island entities.
       Three oil supply disruption scenarios for the Pacific 
     islands are discussed below and evaluated with respect to 
     their potential impacts. Figures 2.16, 2.17, and 2.18 provide 
     the basis for the assessment. The three scenarios are all 
     estimated to last six months and include:
       Scenario I: Major disruption caused by major political 
     turmoil affecting Middle Eastern and Asian producers with a 
     net loss of 4.5 MMBD (9.0 MMBD production loss minus 4.5 MMBD 
     drawdown of global strategic petroleum reserve).
       Scenario II: Medium-scale disruption caused by simultaneous 
     upheaval in West African and Latin American producers with a 
     net loss 4.5 MMBD (production loss of 6.0 MMBD minus SPR 
     drawdown of 1.5 MMBD).
       Scenario III: Minor disruption based on limited upheaval in 
     the Middle East with a loss of 2.0 MMBD (production loss of 
     4.3 MMBD minus production increase by other countries of 2.3 
     MMBD).
       Before discussing the specific scenarios, several 
     historical reference points should be noted. First, the Asian 
     market is a net importer of oil sourced largely from the 
     Middle East. Second, during previous oil crises, Asian 
     producers such as Indonesia and Malaysia have not diverted 
     supplies. Instead, Asian producers have generally given 
     preference to traditional markets, including Singapore, for 
     their products. Third, most Asian refineries such as those in 
     Singapore are configured to process Middle Eastern crudes and 
     are not as well adapted to refining the lighter, sweeter West 
     African crudes and the heavier, more sour Latin American 
     crudes. In other words, Asia's refining capacity is geared 
     towards supplies from the Middle East, and substitutes are 
     not readily available or easily incorporated. The scenarios 
     are discussed below beginning in reverse order.

                     Scenario III: Minor Disruption

       Under Scenario III, there would be no redirection of Asian 
     oil supplies. Impact on U.S. West Coast supplies would be 
     negligible. However, there would be a drop of 10 percent in 
     supplies for Singapore (approximately 100 to 150 MBD), and a 
     similar reduction in Australia and New Zealand crude imports. 
     The result is an anticipated shortfall of approximately 10 
     percent for the Pacific islands region.
       The effects of this 10 percent shortfall are considered 
     minimal. Oil price rises would be very modest and there 
     should be no appreciable negative secondary effects for the 
     islands region such as a major decline in tourism.
       No official response measures would need to be instituted. 
     However, it is recommended that monitoring of supplies and 
     prices should be carried out. It is also recommended that 
     utilities, the oil industry, and governments promote energy 
     conservation programs, including voluntary measures by the 
     population to reduce consumption of electricity and gasoline.

                     Scenario II: Medium Disruption

       Although the volume of oil lost to the market is 
     considerable (4.5 MMBD), because the West African and Latin 
     American producers are linked to other markets, the Asia-
     Pacific region would be only slightly affected. There would 
     be some redirection of Middle Eastern supplies, but it is 
     anticipated that the net effect would lead to only a 10 
     percent decrease in supplies for Singapore, Australia and New 
     Zealand. Similarly, the effect on the U.S. West Coast would 
     be minimal.
       The results and response measures for Scenario II are 
     identical to those described above for Scenario III.

[[Page S734]]



                      Scenario I: Major Disruption

       A global net loss of 4.5 MMBD based on major political 
     upheaval in the Middle East and Asia and includes a total 
     loss of 2.5 MMBD from Asia oil producers would affect various 
     Pacific Rim markets very differently. The direct impact on 
     U.S. West Coast supplies would be fairly limited (e.g., 5 
     percent or less) because imports have only a small role in 
     that market. The direct and indirect effects on supplies to 
     Australia and New Zealand should be relatively modest, 
     approximating a 10 percent decline. The Singapore refiners, 
     however, would be severely affected.
       In this scenario, Singapore would experience a 30 percent 
     loss in Asian supplies. The cutback in Middle Eastern 
     production would result in additional 20 percent decrease. 
     The combined loss of 50 percent would greatly affect the 
     islands region both directly and indirectly.
       Directly, the islands region would lose at least 50 percent 
     of its supplies from Singapore. Australia would be able to 
     provide some additional supplies, but it would also have to 
     compensate for its own loss of supplies. The net loss to the 
     islands region could well be in the range of 25 to 50 
     percent.
       A secondary impact would be significant price hikes. Under 
     Scenario I, spot prices on the Singapore market would soar. 
     Price doubling and even tripling would be likely outcomes. In 
     the 1979/80 period, the crisis centered on Iran led to an 
     additional 20 percent increase in prices. The short-term 
     consequences of the 1979 oil price rise lead to inflation 
     rates of 7.5 percent in Japan, 11 percent in Australia, 15 
     percent in Fiji and nearly 30 percent in Tonga and Vanuatu. 
     In other words, inflation rates in some of the islands nearly 
     doubled. If the 1979 experience is applied, it would be 
     reasonable to anticipate a near doubling of inflation rates 
     for Guam, the CNMI and Palau.
       Compounding the direct supply and price effects of Scenario 
     I, the political complications of the oil supply disruption 
     have to be considered. Following the onset of the recent 
     Persian Gulf War, the Iraqi President threatened to attack 
     U.S. territory and economic interests throughout the world, 
     and there had been several reports of terrorist activity by 
     Iraqis in Asia which heightened concern. As a result, Guam, 
     the CNMI, and Hawaii experienced a downturn in tourism 
     immediately following the outbreak of the 1991 Gulf War 
     because tourists were frightened to fly to U.S. territory. 
     Whether fact or only perception, people reduce their 
     international travel even to relatively ``safe'' destinations 
     during crisis periods: if there is political upheaval in a 
     major Middle Eastern or Asian nation, international business 
     and tourist travel will be restricted in order to reduce the 
     vulnerability to terrorist attacks.
       Interestingly, the number of tourists to Guam and the CNMI 
     began to revive soon after the Gulf War and by early 1992 
     tourist arrivals were at record levels. However, in September 
     1992, Typhoon Omar struck Guam and the CNMI and was followed 
     by several other typhoons. The result was a drop of nearly 45 
     percent in the level of Guam's tourist arrivals, a loss of 
     1,500 jobs, and a substantial decline in tax revenues, all of 
     which have been greatly compounded by the continuing slump in 
     the Japanese economy.
       These effects would probably be similar to the effects of 
     an oil supply disruption under Scenario I. Although difficult 
     to predict with any level of certainty, tourist arrivals 
     could fall sharply (by as much as 50 percent) if a political 
     upheaval in Asia elevated fears of international terrorist 
     activity and/or resulted in higher travel costs. The near-
     term effects would be a loss of jobs by roughly 5 percent and 
     a fall in tax revenues by a similar level. However, if a 
     recession were to follow, and this would be a likely outcome, 
     then the downturn would be much more severe and could easily 
     double the effects of the crisis.
       With Scenario I, it is very likely that in addition to oil 
     supply shortfalls, oil price increases, inflation, and 
     reduced levels of international tourism resulting from the 
     political upheaval causing the oil supply disruption, a 
     recessionary period in the major economies would ensue. The 
     effects of a major recession would again greatly affect the 
     island economies through reduced levels of tourism and 
     reduced demand for their exports, mainly fresh and canned 
     seafoods. As an example, the 1973/74 oil price rise led to 
     global recession, including a severe downturn in Australia 
     which greatly reduced the levels of Australian tourists to 
     Fiji. In other words, a severe oil supply disruption creates 
     downstream effects which are not felt for several months yet 
     may continue for several years.
       Two key questions emerge under Scenario I. The first is 
     whether the islands would experience more severe impacts than 
     the rest of the United States. Although all of Asia would 
     experience inflation and recession, the islands' small open 
     economies would be virtually unprotected from the global 
     market: nearly all food and all medicine are imported. The 
     economies are nearly totally dependent on off-island trade 
     and international tourism; with the exception of Hawaii, the 
     rest of the United States does not have to rely on ocean 
     transport and other nations for essential goods and services. 
     In sum, there would be no territory of the United States more 
     severely affected by a major Asian oil supply disruption than 
     the Pacific islands.
       The second question is how to respond with short-term 
     measures to meet basic demands for petroleum. Oil price and 
     supply monitoring and voluntary conservation programs would 
     be insufficient responses to a disruption of this magnitude. 
     With respect to the oil supply, the U.S. West Coast could 
     divert some of its supplies to the islands. The Australian 
     arrangement for the South Pacific islands may provide a 
     useful guide. In the event of an oil supply disruption which 
     results in a net market loss of crude oil or petroleum 
     products of 7 percent of the total International Energy 
     Agency (IEA) market, the IEA member may elect to activate the 
     Emergency Oil Sharing System, the objective of which is to 
     ensure fair sharing of available supplies among the IEA group 
     of countries (the OECD minus France). As a member of the IEA, 
     Australia is committed to take certain demand restraint 
     measures should the IEA Emergency Oil Sharing Scheme go into 
     effect. The demand restraint is measured as a percentage 
     decrease in total consumption, including traditional exports. 
     This means that if a 10 percent demand restraint measure is 
     instituted, then Australia has to cut its combined own 
     consumption and traditional exports by 10 percent.
       The Australian arrangement covers the independent island 
     nations sourced from Australia. It does not cover American 
     Samoa or any of the North Pacific nations and territories 
     sourced via Guam, including the Federated States of 
     Micronesia and the Republic of the Marshall Islands. These 
     nations and territories either have to secure emergency 
     supplies via Singapore or from a nontraditional supplier, the 
     United States.
       The United States via its military infrastructure has 
     considerable levels of stocks in the Asia-Pacific region as 
     well as the shipping capacity to deliver supplies. However, 
     as Figure 3.2 shows, the military is cutting back on its 
     commercially leased storage capacity and is also shutting 
     down some of its own storage facilities in certain locations.
       Another potential source of crude petroleum is Papua New 
     Guinea whose oil production is now at 135,000 b/d. Currently 
     refined throughout the Asia Pacific region, this crude 
     resource could provide a substantial margin of safety for the 
     Pacific islands. A 30,000 b/d refinery has been approved by 
     the government and could be operating in 1996.
       Through the supply capacities of the oil companies 
     operating in the region, other regional suppliers, and the 
     U.S. government (Strategic Petroleum Reserve and the 
     military), the Pacific islands should be able to receive 
     emergency supplies. It is possible that some type of formal 
     assurance to the island governments is required. Currently 
     being considered for legislation in the U.S. Congress is a 
     proposal which would guarantee the U.S. Pacific islands 
     including Hawaii a percentage drawdown of the national SPR if 
     emergency measures were placed in effect. This guarantee 
     would ensure access to oil supplies for the islands. Market 
     prices would have to be paid, but basic services could be 
     maintained. Not guaranteed is transport for the oil supplies. 
     However, preliminary indications are that tankers could be 
     acquired, albeit at market rates which would be high during 
     crisis periods. This is an excellent proposal which would 
     greatly reassure the islands that their basic needs would be 
     maintained.


             the economic effects of oil supply disruptions

       In addition to the issue of continued access to oil 
     supplies, the economic impacts of a major oil market 
     disruption can be devastating. The most harmful economic 
     repercussions of Scenario I are: inflation, recessions in 
     major markets, and a simple reluctance of potential tourists 
     to travel because of a perceived vulnerability to terrorist 
     acts stemming from the political upheaval which caused the 
     oil supply disruption. The initial loss of jobs and economic 
     activity could be further worsened by the likely occurrence 
     of a subsequent regional or global recession. The longer the 
     recession, the greater the negative impacts, including 
     increased loss of jobs and tax revenues. Small open economies 
     such as the U.S. Pacific islands are especially vulnerable. 
     Would the United States provide any type of assistance to the 
     Pacific islands to compensate for the downstream effects of 
     an oil supply disruption? Are they eligible for emergency 
     aid? This is a complicated issue and cannot be resolved in 
     this discussion. Suffice it to say that it would probably be 
     more useful and more important for the island economies to 
     have a buffer against recessions than an SPR established on 
     Guam or in American Samoa.
       Discussed below are some of the likely identifiable impacts 
     of an oil supply disruption on the island economies. Data 
     have been drawn from a range of sources. Published data from 
     government and private sector sources have been referenced, 
     and estimates generated as part of the energy vulnerability 
     assessment are appropriately noted. Assessing impacts on the 
     islands in the year 2000 based on current economic growth 
     projections is an order of magnitude exercise. However, the 
     best available data have been utilized and the estimates can 
     and should be revised when more data become available. The 
     section discusses the effects of an oil supply disruption on 
     the value of petroleum imports, GDP, inflation, employment, 
     and government revenues.

             Oil Shocks and the Value of Petroleum Imports

       Table 3.10 shows the impact of petroleum price increases 
     and growth in the volume of petroleum imports. The first 
     column shows projected rates of price increases for petroleum 
     products under low price, base price and high price 
     scenarios. The second column

[[Page S735]]

     shows the most recent value figure for imported petroleum 
     products. The value figure shown in the second column 
     corresponds to a volume figure which is then multiplied by 
     the demand growth scenarios in the third column (e.g., low, 
     medium and high growth in demand for petroleum products) and 
     the three price scenarios to indicate the estimated value of 
     petroleum imports in the years 1995 and 2000. High, medium 
     and low demand growth scenarios were available only for Guam 
     and the CNMI. In addition, among the different scenarios for 
     both 1995 and 2000, there is a scenario which doubles prices 
     for the medium demand growth case. This doubling of prices is 
     a result of a petroleum price increase associated with Oil 
     Supply Disruption Scenario I, a loss of 4.5 MMBD caused by 
     political turmoil in the Middle East and Asia. The price 
     doubling is an estimated price increase which reflects short-
     term market responses, similar to those following the Iraqi 
     invasion of Kuwait and the 1979/80 oil price increase.
       The demand growth (1.2 percent per year) and a base case 
     petroleum price increase (3.9 percent per year) result in a 
     doubling in the value of petroleum imports for American Samoa 
     between 1990 and 2000. The values of Guam's, the CNMI's, and 
     Palau's petroleum imports more than double by the year 2000. 
     The effect of a high oil price and high demand growth is a 
     seven-fold increase in the value of the CNMI's petroleum 
     imports. Although this may seem unlikely, demand increased by 
     21 percent between 1991 and 1992, and the planned expansion 
     to the power sector indicates that growth will remain high.
       Table 3.10 only assumes the indicated growth rates, which 
     is to say that other variables such as the impact of demand-
     side management programs and other efficiency and 
     conservation activities have not been factored into the 
     analysis because data are not available. The estimates also 
     do not reflect the impact of higher petroleum prices on 
     consumption. For example, when gasoline prices rise, theory 
     suggests that people will drive less. However, the experience 
     during the recent Persian Gulf War indicates that island 
     consumers did not curtail their driving or use of electricity 
     when prices increased. Thus, it has been assumed that 
     consumption rates will not be significantly affected by price 
     increases, a very tenuous assumption.
       The result of an oil price shock following political 
     upheaval in the Middle East and Asia is a doubling of the 
     values for petroleum imports. For comparative purposes, in 
     1990, American Samoa imported goods valued at $360 million 
     and exported items worth $306 million. Under a high oil price 
     scenario generated by an oil shock in the year 2000, the 
     value of petroleum imports increases to $175 million. Guam, 
     which had imports valued at $385 million in 1988 and exports 
     valued at $85 million in 1991, would have petroleum imports 
     valued at $742 million under a high oil price and high demand 
     growth scenario. Similarly, the CNMI, with imports at $392 
     million and exports at $255 million in 1991, would have 
     petroleum imports valued at $503 million under the high oil 
     price/high demand growth scenario. Palau, with imports valued 
     at $25 million and exports at $600 thousand in 1989, would 
     have petroleum imports valued at $37 million under a high oil 
     price and demand growth scenario in the year 2000.
       Given the above projected effects of an oil price shock, it 
     is doubtful that any of the economies would be able to 
     sustain the projected rates of growth. The cost of petroleum 
     imports would require the use of public and private sector 
     surpluses simply to maintain existing standards of living. 
     Even if the oil price shock were short-lived, it is likely 
     that the effects would have substantial repercussions on 
     economic activity for an extended period of time. These will 
     be discussed in subsequent sections.
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