[Federal Register Volume 60, Number 111 (Friday, June 9, 1995)]
[Notices]
[Pages 30514-30517]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14214]



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DEPARTMENT OF COMMERCE

Bureau of Export Administration
[Docket No. 950510133-5133-01]


Summary of Secretarial Report Under Section 232 of the Trade 
Expansion Act of 1962, as Amended

AGENCY: Bureau of Export Administration, Commerce.

ACTION: Notice.

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SUMMARY: On February 16, 1995, President William J. Clinton concurred 
in the Secretary of Commerce's finding that oil imports threaten to 
impair the national security. The President determined that no action 
is necessary to adjust imports of petroleum under Section 232 of the 
Trade Expansion Act of 1962, as amended, because on balance the costs 
to the economy of an import adjustment outweigh the benefits. Included 
herein is the Executive Summary of the Department of Commerce's Section 
232 report to the President dated December 29, 1994.

ADDRESSES: A copy of the report is available for public review and 
duplication in the Bureau of Export Administration's Freedom of 
Information Facility, Room 4525, U.S. Department of Commerce, 
Washington, DC 20230, (202) 482-5653.

FOR FURTHER INFORMATION CONTACT: John A. Richards, Deputy Assistant 
Secretary for Strategic Industries and Economic Security, Bureau of 
Export Administration, U.S. Department of Commerce, Washington, DC 
20230 (202) 482-4506.

SUPPLEMENTARY INFORMATION: On March 11, 1994, the Independent Petroleum 
Association of America (IPAA) and various other industry associations, 
companies, and individuals filed a petition under Section 232 of the 
Trade Expansion Act of 1962, as amended (19 U.S.C. Section 1862 (1988)) 
requesting the Department to initiate an investigation of the impact on 
the national security of imports of crude oil and refined petroleum 
products.
    On April 5, 1994, the Department initiated the investigation and 
invited public comment. The Department held three public hearings in 
New York, New York; Dallas, Texas; and Santa Clara, California. During 
the comment period, 69 people presented comments reflecting both 
support for and opposition to the allegations made by the petitioner. 
The Department also chaired an interagency working group that included 
the Departments of Energy, Interior, Defense, Labor, State, and 
Treasury, the Office of Management and Budget, the Council of Economic 
Advisors, and the U.S. Trade Representative to assist in the 
investigation.
    On December 29, 1994, Secretary Ronald H. Brown submitted his 
investigation report to President Clinton. The Department found that 
since the previous Section 232 petroleum finding in 1988, there have 
been some improvements in U.S. energy security. The breakup of the 
Soviet Union and the apparent disarray within OPEC have enhanced U.S. 
energy security. However, the reduction in exploration, dwindling 
reserves, falling production, and the relatively high cost of U.S. 
production all point toward increasing imports from OPEC sources. 
Growing import dependence increases U.S. vulnerability to a supply 
disruption because non-OPEC sources lack surge production capacity, and 
there are at present no substitutes for oil-based transportation fuels. 
Given the above factors, the Secretary found that petroleum imports 
threaten to impair the national security.
    The Secretary recommended, however, that the President not use his 
authority under Section 232 of the Trade Expansion Act to adjust oil 
imports through the imposition of tariffs because the economic costs of 
such a move outweigh the benefits, and because current Clinton 
Administration energy policies will limit the growth of 
[[Page 30515]] imports. On February 16, 1995, President Clinton 
approved Secretary Brown's finding and determined that no action to 
adjust oil imports under Section 232 need be taken.
    The Executive Summary of the December 29, 1994, U.S. Department of 
Commerce Section 232 Study is reproduced below.

    Dated: June 5, 1995.
Sue E. Eckert,
Assistant Secretary for Export Administration.
Executive Summary

Introduction

    On March 11, 1994, the Independent Petroleum Association of America 
(IPAA) and various other industry associations, companies, and 
individuals filed a petition under Section 232 of the Trade Expansion 
Act of 1962, as amended (19 U.S.C. Section 1862 (1988)) requesting the 
Department to initiate an investigation of the impact on the national 
security of imports of crude oil and refined petroleum products.
    The IPAA petition alleged that U.S. energy security worsened since 
the Department's last Section 232 oil import investigation in 1988 
because oil imports grew both in absolute terms and as a percentage of 
U.S. oil consumption, leaving the United States further subject to an 
oil supply disruption with the resultant economic costs. The petition 
also alleged that imports of low-priced oil are weakening the domestic 
petroleum industry to such an extent that it will not be able to 
support U.S. security needs in the event of a major conventional war.
    On April 5, 1994, the Department initiated the investigation and 
invited public comment. The Department held three public hearings in 
New York, New York; Dallas, Texas; and Santa Clara, California. During 
the comment period, 69 people presented comments reflecting both 
support for and opposition to the allegations made by the petitioner.
    Under Section 232, the Department had 270 days, until December 31, 
1994, from the date of initiation of an investigation to submit a 
report of findings and recommendations to the President.

Methodology

    The Department chaired an interagency working group that included 
the Departments of Energy, Interior, Defense, Labor, State, and 
Treasury, the Office of Management and Budget, the Council of Economic 
Advisors, and the U.S. Trade Representative to assist in the 
investigation.
    The Department used a two-step process to evaluate the petition. In 
the first step, the Department reviewed key factors from the 1988 
investigation to determine whether they improved or deteriorated. These 
factors included: (1) domestic oil reserves; (2) domestic oil 
production; (3) industry employment; (4) the impact of low oil prices 
on the economy; (5) the status of the domestic oil industry; (6) oil 
import dependence; (7) import vulnerability, including measures to 
offset an oil supply disruption; (8) foreign policy flexibility; and 
(9) U.S. military requirements. The second step involved review of new 
factors that emerged since the last investigation, including: (1) the 
status of OPEC; (2) oil price transparency due to the emergence of a 
futures market; and (3) the demise of the Soviet Union.
    The Department made use of the extensive data and analyses that 
were already available regarding the current and prospective status of 
the domestic petroleum industry and the world oil market. In view of 
this extensive body of available data, the Department determined that 
an industry survey was not necessary. The Department also drew upon the 
written comments and testimony from interested parties who participated 
in the public hearings.
    This report is based on a number of agreed-upon economic 
assumptions including, inter alia, crude oil price levels, U.S. crude 
oil production, economic growth rates, and inflation.

Review of Key Factors From the 1988 Investigation

1. Domestic Oil Reserves

    Petition: Low-priced oil imports (hereinafter referred to as low 
oil prices) were largely responsible for the decline in domestic oil 
reserves.
    DOC Analysis and Conclusion: Since the 1988 investigation, U.S. 
proved crude oil reserves declined by 3.8 billion barrels. Low oil 
prices contributed to, but are not totally responsible for, the erosion 
of the U.S. oil reserves base. The underlying physical reality is that 
the U.S. already developed the bulk of its known and easily accessible 
low cost deposits and decided against developing other geological 
prospects such as the Arctic National Wildlife Refuge and the Outer 
Continental Shelf. Since the reserves base reflects the structural 
geological reality, given present technology, oil price increases at 
best can arrest, but not reverse this trend.

2. Domestic Oil Production

    Petition: Low oil prices are responsible for the decline in U.S. 
production.
    DOC Analysis and Conclusion: The production outlook remains 
essentially the same as in the 1988 investigation. The United States is 
a high-cost producer compared to other countries because we have 
already depleted our known low-cost reserves. Since 1986, low oil 
prices have exacerbated the cost-price squeeze facing U.S. producers. 
U.S. production declined by 1.7 million barrels per day (MB/D) and net 
imports increased. The dislocation undercut U.S. exploration activities 
and impaired the development of competing energy sources, thereby 
enabling OPEC to recapture part of the market it lost after the price 
shocks of the late 1970s.
3. Exploration and Industry Employment

    Petition: Low oil prices are responsible for the massive falloff in 
drilling and in industry employment.
    DOC Analysis and Conclusion: The Department found a sharp reduction 
in U.S. drilling and oil and gas industry employment between 1985 and 
1993. The level of exploratory drilling, well completions, and rotary 
rigs in use for oil and gas exploration declined since 1988. Employment 
fell from 582,000 in 1985 to 351,000 in 1993. A large share of the lost 
jobs occurred in petroleum exploration and development sectors.
    However, oil imports are not the only reason for the decline in 
exploratory drilling and well completions. U.S. companies are drilling 
less because they made substantial gains in total productivity by 
employing new exploration and drilling technology and focussing on the 
most productive geological opportunities.

4. The Impact on the Economy of Low Oil Prices

    Petition: The petitioner did not specifically address the benefits 
to the economy of low oil prices.
    DOC Analysis and Conclusion: The Department found that the economic 
consequences of low prices resulted in positive benefits to the U.S. 
economy. Because the United States is now a net importer of oil, lower 
prices on balance helped the economy. The public benefitted from lower 
prices for transportation fuels and heating oil. For the economy as a 
whole, low oil prices contributed to a reduction in inflation, a rise 
in real disposable income, and an increase in the Gross Domestic 
Product. [[Page 30516]] 

5. Current Status of the Domestic Oil Industry

    Petition: Low oil prices and the uncertainty concerning future 
price drops were forcing small producers to abandon many fields 
prematurely. The possible loss of these reserves and production would 
result in increased dependence on foreign oil.
    DOC Analysis and Conclusion: The Department found that, as world 
crude oil prices declined since 1986, the relatively smaller U.S. oil 
fields with higher cost production became uneconomical and the 
operators shut-in or abandoned some wells. The impact of low prices has 
been especially severe on small producers operating stripper wells with 
average production of 15 barrels per day or less. If small producers 
continue to shut-in production because of low oil prices, this could 
result in reduced cash flow to reinvest in exploration and increased 
dependence on lower-cost foreign oil.

6. Oil Import Dependence

    Petition: U.S. national security worsened because oil imports have 
increased since 1988 both in absolute terms and as a percentage of U.S. 
oil consumption and our dependence on imported oil will continue.
    DOC Analysis and Conclusion: The Department found that net U.S. 
imports have grown from 5.9 MB/D in 1987 to 7.5 MB/D in 1993. Imports 
currently account for 44 percent of domestic consumption compared to 37 
percent in 1987. Imports from Persian Gulf countries increased from 
1.07 MB/D in 1987 to 1.64 MB/D in 1993.
    U.S. demand for imported oil is expected to continue growing 
because of declining production and increased economic growth. The 
Energy Information Administration of the U.S. Department of Energy 
(EIA/DOE) projects that net imports will increase to 11 MB/D by 2000 
and account for approximately 51.5 percent of domestic consumption.
    To the extent the United States and other countries import more oil 
in the future, EIA/DOE projects that they will turn increasingly to 
OPEC countries located in the Persian Gulf which has the largest amount 
of known low-cost reserves and surplus production capacity. The Persian 
Gulf producers will account for approximately 55 percent of world crude 
oil exports by 2000.

7. Vulnerability to a Supply Disruption

    Petition: Increased reliance on low-priced oil imports will leave 
the United States subject to a supply disruption and resulting costs to 
the economy.
    DOC Analysis and Conclusion: The Department found that political 
and economic problems in the Persian Gulf region make supply 
disruptions a possibility in the near-term. Disruptions are possible in 
other regions, but the risks to the U.S. and other importing countries 
are lower because oil production facilities elsewhere are not as 
concentrated as they are in the Persian Gulf.
    The United States and the OECD countries have limited prospects to 
offset a major oil supply disruption because: (1) there is little 
surplus production outside the Persian Gulf; (2) U.S. and OECD 
government oil stocks today provide less protection from an 
interruption than was the case in 1988; and, (3) there is currently no 
substitute for liquid transportation fuels which account for 
approximately two-thirds of all oil consumption in the United States. 
During a major oil supply disruption, there could be substantial 
economic austerity as a result of the decreased availability of oil. 
This, in turn, could pose hardships for the U.S. economy.
8. Foreign Policy Flexibility

    Petition: The petitioner did not raise this issue.
    DOC Analysis and Conclusion: The Department found that our allies' 
and trading partners' dependence on potentially insecure sources of oil 
may affect their willingness to cooperate with the United States during 
a major oil supply disruption.

9. U.S. Military Requirements

    Petition: Low oil prices are weakening the domestic petroleum 
industry to such an extent that it will not be able to support U.S. 
security needs in the event of a global conventional war.
    DOC Analysis and Conclusion: The Department of Defense advised that 
the military requirements for petroleum fuels could be satisfied under 
current planning scenarios.

10. Other Factors

    The Department evaluated several factors that served to improve the 
security of U.S. oil supplies since the 1988 investigation. Foremost 
among these factors are the following:
    Status of OPEC: Low oil prices are in large part a symptom of the 
apparent disarray within OPEC. The ability of OPEC to manipulate prices 
has been impaired because its members have been unable to coordinate 
production levels among themselves.
    Transparency of Oil Markets: The growth of the futures market into 
a full-fledged commodity market has made crude oil prices more 
transparent and less subject to manipulation. Computerized trading, 
options, and forward contracts have connected refined products and 
crude oil markets more closely than was the case in 1988.
    Demise of the Soviet Union: The end of the Cold War and the breakup 
of the Soviet Union removed the risk of Middle East oil becoming a pawn 
in East-West competition. The demise of the Soviet Union also has 
reduced the probability of a conventional war that could jeopardize 
Western Europe's and Japan's access to Middle East oil.

Finding

    Since the previous Section 232 petroleum finding in 1988, there 
have been some improvements in U.S. energy security. The breakup of the 
Soviet Union and the apparent disarray within OPEC have enhanced U.S. 
energy security. Lower oil prices on balance benefitted the U.S. 
economy. However, the reduction in exploration, dwindling reserves, 
falling production, and the relatively high cost of U.S. production all 
point toward a contraction of the U.S. petroleum industry and 
increasing imports from OPEC sources. Growing import dependence, in 
turn, increases U.S. vulnerability to a supply disruption because non-
OPEC sources lack surge production capacity; and there are at present 
no substitutes for oil-based transportation fuels. Given the above 
factors, the Department finds that petroleum imports threaten to impair 
the national security.

Recommendation

    The Department does not recommend that the President use his 
authority under Section 232 to adjust imports. The Clinton 
Administration's other efforts to improve U.S. energy security are more 
appropriate than an import adjustment.
    Section 232 requires the Secretary of Commerce and the President to 
recognize the close relationship between the economic welfare of the 
nation and U.S. national security. As energy security effects the 
economic welfare of the U.S., energy security must be considered in 
determining the effects on the national security of petroleum imports.
    The Department concurs with the conclusions of the 1988 study that, 
on balance, the costs to the national security of an oil import 
adjustment outweigh the potential benefits. For example, an oil import 
adjustment such as a tariff would likely have an inflationary effect on 
the economy and would result in the loss of significant jobs in the 
non-petroleum sectors. This, in turn, would reduce real Gross 
[[Page 30517]] National Product (GNP). An import adjustment would 
diminish the competitiveness of energy-intensive export companies and 
strain relations with close trading partners who may seek an exemption 
from the adjustment.
    The Clinton Administration recognizes the importance of U.S. energy 
security and is pursuing a series of policies to enhance that security. 
It is important to note that no cost-effective government action could 
eliminate U.S. dependence on foreign oil entirely, but the following 
supply enhancement and energy conservation and efficiency policies help 
limit that dependence. Thus, the Department recommends continuing the 
policies described below:
     Increased Investment in Energy Efficiency--The 
Administration increased the budgets substantially over the last two 
years to achieve an enhanced energy efficiency level. There are 
extensive programs underway ranging from developing new appliance 
standards to working on innovative workplace solutions to decrease 
long-distance commuting. The goals of these extensive energy efficiency 
programs are to decrease consumption of oil.
     Increased Investment in Alternative Fuels--The 
Administration placed particular emphasis on improving the efficiency 
of the transportation sector where oil comprises about 98 percent of 
the fuel utilization. The Administration is among other things 
initiating a partnership with automobile manufacturers to design more 
energy efficient automobiles and developing a program to bring 
alternative transportation fuels and vehicles into the marketplace. 
These actions will reduce direct consumption of petroleum-based 
transportation fuels so that the need for imports will decrease.
     Increased Government Investment in Technology--The 
Administration more than doubled its investment with American industry 
in advanced technologies for the exploration and production of natural 
gas and oil. This is important because technological innovation can 
significantly decrease the domestic finding costs for natural gas and 
oil, thereby maintaining and expanding the domestic resource base and 
improving its economics.
     Expanded Utilization of Natural Gas--The Administration 
aggressively promoted expanded markets for natural gas at the expense 
of imported oil. In addition, reliance upon natural gas as one of the 
cornerstones of our Climate Change Action Plan provides benefits to our 
environment through the reduction of greenhouse gas emissions.
     Increased Government Investment in Renewables--The 
Administration increased investment in renewable resources because they 
offer great hope of replacing imported oil in selected end uses.
     Increased Government Regulatory Efficiency--The 
Administration is reducing the red tape and regulations that burden 
domestic industries. Various government agencies are conducting 
sweeping reviews to make their regulatory structures more responsive to 
domestic concerns.
     Increased Emphasis on Free Trade and U.S. Exports--Free 
trade, privatization, and promotion of American exports helps develop 
the world's energy resources and prevent over-reliance on any single 
region of the world. These actions include: assisting energy 
conservation efforts and the development of new energy supplies in this 
hemisphere and other areas friendly to the United States.
     Maintaining the Strategic Petroleum Reserve--The Strategic 
Petroleum Reserve is the nation's stockpile of crude oil available in 
the event of an oil supply disruption. The 580 million barrels of crude 
oil under government ownership and control provides a bulwark against a 
supply disruption.
     Coordinating Emergency Cooperation Measures--The United 
States is coordinating oil emergency cooperation among the energy 
consuming countries through the International Energy Agency. 
Discussions are continuing to strengthen the existing market-oriented 
coordinated energy response measures for dealing with possible future 
disruptions.

[FR Doc. 95-14214 Filed 6-8-95; 8:45 am]
BILLING CODE 3510-DT-P