Do you convert gas, coal and oil, all three resources, to electricity? Mayor LINDSAY. Yes. Coal is decreasing quite rapidly. And there is supposed to be an end to any coal conversion to electricity by 1971, next year.

Mr. SMITH. Is oil your principal source, then?

Mayor LINDSAY. Yes, it is.

Mr. SMITH. What you are recommending here on a short term-I wonder if it wouldn't be a long-term possibility, too-is something you might call an ever-normal oil barrel? We have an ever-normal grainery, you know, for grain. We are glad to have it, because if we didn't have it this year, we would have a shortage next year. But what you are saying is that we need a sort of an ever-normal barrel because there is always a supply there.

Mayor LINDSAY. That is a pretty good way to put it.
Mr. SMITH. Mr. Conte.

Mr. CONTE. Mr. Chairman, I had a very brief opening statement which I had intended to read, including a copy of the editorial which the mayor mentioned that appeared in the New York Times for October 2, 1970, together with a more extensive statement for submission in the record. I would now like to submit both statements for the record to save time.

(The material referred to follows:)

OPENING STATEMENT OF HON. SILVIO O. CONTE, A MEMBER OF CONGRESS FROM THE STATE OF MASSACHUSETTS

Mr. Chairman, I am grateful to you for deciding to hold these hearings on a subject of critical importance, not only to my own New England area, but to the entire nation.

Let me say at the outset that I fully share the concern of you, Mr. Chairman, and of our subcommittee Chairman, Mr. Smith, that we must examine here the entire range of the energy problem and the shortage of coal and natural gas as well as oil. I agree too that we must develop a single national energy policy and, in that regard, I was pleased to learn over the weekend of the so-called Freeman study, announced by the President's Office of Science and Technology, which would contribute to the development of such a policy, and, at the same time, consider its environmental aspects.

I think you can appreciate, however, why a major focus of my concern in this field must be directed to the shortages of number 2 home heating oil and the heavier residual oil used by so many industries, large and small, and by our power companies. Over 70 percent of our homes in Massachusetts are heated with oil and over 80 percent of our industries use oil for heating or power.

At the heart of the petroleum shortage problem is the inequitable mandatory oil import quota program which I have opposed since its inception in 1959. Over a year ago I introduced the first bill to eliminate these quotas which now cost the American consumer over 5 billion dollars annually. I am proud to say that this legislation (identical bills, H.R. 10799, 10800, 10801 and 16779) now has 65 cosponsors, including a number of my colleagues on this Committee.

Because of our busy agenda of distinguished witnesses, Mr. Chairman, I will not dwell at length here on my efforts to deal with the oil shortage. For the use of the Committee, however, I have prepared a more extensive statement of my views and recommendations. With your permission, I would like to submit this for the record at the close of my remarks.

For the moment let me simply say that I am not satisfied that the Administration has taken sufficient steps to avert a crisis. It must be kept in mind that this is indeed a man-made crisis, as The New York Times, noted in an excellent editorial on October 2, 1970. I ask permission to include a copy of the editorial at this point in the record. The Times noted that even Administration spokesmen, Chairman McCracken & OEP Director, General Lincoln, have stated that "no one can now be sure that these steps will be adequate."

Mr. Chairman, for the sake of the small businessman and all American consumers, I consider it our responsibility to examine those steps to determine whether they are adequate and, if they are not, to suggest what aditdtional steps should be taken. The needs of too many Americans-hospital patients, school children, small businessmen and all consumers-are far too serious to permit us to experiment with half-way measures.

Thank you.

(Mr. Conte's more complete statement on the petroleum shortage, to be submitted for the record follows:)

STATEMENT BY REPRESENTATIVE CONTE ON THE PRICE AND SUPPLY CRISIS IN PETROLEUM PRODUCTS

BACKGROUND

The price and supply crisis in petroleum products for heating oil and power has now reached epidemic proportions. While it is most serious in the northeast it is also acute in the northern midwest.

The principal problem involves heavy residual oil used by schools, hospitals, municipalities and industry. For a number of reasons demand for this product has increased drastically while our domestic petroleum industry has failed to anticipate it. The residual problem leads also to a serious price-supply picture for number two home heating oil as well, since this product is increasingly being used to blend with, or to substitute, for residual oil.

Throughout my state of Massachusetts, schools and hospitals, municipalities and industry have all faced the same situation: almost none of them are able to secure bidders who can guarantee delivery.

While demand for these products has increased dramatically, this has not been unexpected. Two years ago; along with nearly all New England Congressmen, I supported the application for a free trade zone at Machiasport which would have met half the residual oil needs of all New England. While serious concern for its effects on the environment now put this proposal in doubt, the fact is that we did recognize the need.

The price situation is no less serious. The Associated Industries of Massachusetts report average prices in my state as of August 1970 were 56% higher than a year ago. We hear many reports of prices 100% higher.

On August 3, 1970, I wrote the President, calling for the creation of an emergency plan to avert a shortage this winter, and suggesting a number of possible remedies. I include a copy of my letter at the close of this statement.

A few days later, on August 6, 1970, the President appointed Chairman Paul W. McCracken of the Council of Economic Advisers to head a special energy subcommittee of the Domestic Council to find solutions to the fuel crisis.

On August 31, 1970, I wrote Chairman McCracken and submitted a series of recommendations for his consideration. This letter is also included at the close of this statement.

Last Tuesday, September 29, 1970, the results of the subcommittee's work was reported on jointly by Chairman McCracken and OEP Director General George A. Lincoln. Their report is also attached to this statement.

With respect to the shortage of light and heavy fuel oil, the report recommends no substantial government action. While it did announce a doubling of the present small import allocation of 40,000 barrels per day of number two oil into the East Coast for the first quarter of 1970, there is no overall annual increase in imports of this product.

The only other action taken was to permit imports of Canadian crude for "topping" purposes. "Topping" is a relatively simple refining process that produces a product which can be burned as residual oil. It remains to be seen, however, just how much oil can be obtained through this process. I understand there are few plants designed solely for topping and that, while most refineries can engage in topping, there is little likelihood they will suspend or substantially curtail their sophisticated refining (hydrocracking, etc.) which produces gasoline or jet fuel, in order to produce more residual fuel. I am hopeful that these hearings will enable us to secure some definitive data on the amount of relief we can expect through this approach.

In the place of any of the substantial government actions which I and others recommended, the McCracken-Lincoln report placed its faith in what it termed "the proven adaptability of the American economic system [to] respond to the

present and prospective demands for fuel by converting to the production of what is most needed and its delivery where it is most needed." The report then simply relies on skyrocketing prices to provide the incentive.

While I find such faith in our oil industry's "adaptability" almost comicalin view of its history of unprecedented governmental protection in the last decade the result of this selective hands-off policy is no joking matter: in essence, the report gives no consideration whatsoever to its inflationary result and to the extreme hardship which faces the small businessman and all Americans as consumers and taxpayers. No attention is paid to Chairman McCracken's own "Inflation Alert" of August 7, 1970 which reported a 47 percent price rise in residual fuels in the first half of 1970.

While I am somewhat encouraged by recent news that Gulf, Humble, and Shell will increase production of residual oil, it remains to be seen at what cost to the consumer.

RECOMMENDATIONS FOR MEANINGFUL RELIEF

Because I believe that much more needs to be done I will now detail the actions which I believe should be taken. While these recommendations represent a good deal of thought and consultation, I earnestly hope that these hearings will produce additional suggestions. I note the McCracken-Lincoln report indicated that it would actively consider other actions if the situation did not improve. In that spirit these are the steps which I recommend.

First and foremost, there must be developed a program which will ensure, not merely hope for, a substantial increase in domestic production of residual oil. I recommend amendment of the Oil Import Proclamation and Regulations to encourage the building of low-sulfur residual fuel oil refining capacity on the East Coast. This can be accomplished by extending to the East Coast the crude oil bonus plan and foreign trade zone regulations now in effect on the West Coast. Secondly, all import controls on No. 2 home heating oil should be eliminated. In my letters to the President and Chairman McCracken I urged an immediate increase in imports of 100,000 barrels per day for the remainder of 1970, and complete decontrol by 1971. The major portion of such imports should come from Western Hemisphere sources, with an emergency waiver permitted during the coldest months, when required to fill supply needs. The present price-supply pressure on number 2 has greatly increased, particularly because of its growing use as a substitute for residual oil. While the world-wide shortage of the latter fuel remains it makes no sense to restrict the imports of number 2 oil which are available.

If this suggestion is not implemented, at the very least, Puerto Rican refineries should be permitted to participate in the number 2 import program. Present policy, which treats this U.S. territory as a foreign country is indefensible.

Also on the subject of home heating oil it should be noted that the anticipated phasing out of historical quotas (which I endorse) makes no provision for the almost 60,000 barrels of finished product imports now allocated. Such finished products should not be swallowed up by a single overall allocation for crude oil. Rather, again assuming that quotas are to be retained for No. 2, the present finished product allocation should be added to the presently existing No. 2 imports now going to east coast terminal operators.

Third, the unjustified decision of last March to impose quotas on crude oil from Canada despite the unanimous Task Force view that no foreign source is more secure, should be rescinded. The hardship this decision has caused in the northern midwest can no longer be tolerated.

Fourth, the Administration should move promptly to reduce the force of, if not eliminate, the present market-demand pro-rationing system which, in effect, permits our 2 leading oil producing states, Louisiana and Texas to maintain, domestic oil prices at artificially high levels throughout the United States. The pro-rationing system, which would otherwise constitute an unconstitutional burden on interstate commerce, is sanctioned by a federal law known as the Connally "Hot Oil" Act which bans the interstate transporting of products in violation of these state production controls. It is not generally known, however, that the Connally Act contains a provision (15 U.S.Č., Section 715c) requiring the President to suspend the operation of the act whenever he finds that the amount of petroleum is "so limited as to be the cause, in whole or in part, of a lack of parity between supply (including imports and reasonable withdrawals from storage) and consumptive demand (including exports and reasonable additions to storage) resulting in an undue burden on or restriction of interstate commerce in petroleum and petroleum products." I am convicned that the present critical shortage compels such a finding.

While it may be unrealistic to expect this recommendation to be adopted, greater public awareness of its existence could serve as a powerful incentive to the state regulating agencies and the oil industry officials which dominate them to permit greater petroleum production.

A more realistic alternative, perhaps, is that federal off-shore areas should no longer voluntarily restrict their production in accordance with state pro-rationing regulations.

Fifth, as an additional short-term measure, the President should institute an emergency allocation system under the direction of the Office of Emergency Preparedness to assure balanced distribution of heating oil during the coming winter. Such a system could help to prevent physical shortage in inland areas of high consumption such as my own district in Western Massachusetts.

Finally, any long-range solution to eliminate the conditions which permit this crisis in supply to occur should weigh heavily the report of the President's Cabinet Task Force on Oil Import Control. While the report is presently out of favor in the Administration, it remains the most exhaustive study ever made. Its conclusion, that present severe import restrictions are not justified for reasons of national security, has not been effectively disputed. As long as the present system remains this nation will be at the mercy of an industry which has shown no disposition to act in the best interests of the nation, but which through its unparalleled political power, has managed to insulate itself from competition.

CONGRESS OF THE UNITED STATES,

HOUSE OF REPRESENTATIVES,
Washington, D.C., August 3, 1970.

The PRESIDENT,
The White House,
Washington, D.C.

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DEAR MR. PRESIDENT: In recent weeks I have received numerous plaints from municipalities, utilities, hospitals and schools in my Congressional District about their inability to purchase, at any price, sufficient quantities of residual fuel oil (No. 6 fuel oil). They are particularly concerned about shortages of this product in the coming winter, when lack of No. 6 fuel could mean the closing down of factories, and cold school-rooms, hospital wards and apartments. The shortage presents an even more alarming, immediate danger that electric power companies will be unable to continue generating power. I understand that several of these companies will be out of the residual fuel oil on which they depend within a few weeks unless they succeed in a desperate, last-minute search for additional supplies.

In discussions with my colleagues from many parts of the country, I find that the shortage of residual fuel oil is nationwide, and that a severe crisis threatens almost all states in the upper half of the nation in the months ahead.

In short, we are facing a national emergency that calls for prompt action by both Government and industry.

Because we are in an emergency, it is essential to face facts squarely. One major cause, of course, is the increased demand due to disruptions of supplies of coal and natural gas. But the most critical fact-the root cause of the crisisis the failure of the oil industry to project accurately the demand for this essential product. The industry has always prided itself on its "realism" and "hardheadedness." Those of us who have called into question current U.S. oil import policy are constantly attacked as being unfamiliar with the facts of world politics and economics.

But where were the realists in the oil industry several years ago when it was time to project residual fuel oil needs for 1970? Two companies, Esso and Shell, did make major investments several years ago in desulfurization facilities in the Caribbean, designed to produce substantial quantities of No. 6 oil for the U.S. market; and they are to be commended for their foresight.

But what of the other major refiners? And why is the industry so quick to come up with alibis for the present crisis, such as the new, long-overdue, anti-pollution requirements (which they have known were coming for years), the current cutback in supply availability in the Mediterranean (which affects only 3% of the Free World crude oil supplies), high tanker rates (which affect very few tankers and almost none used by the major oil companies), and the claim that the crisis will cost the industry money (when, in fact, it is counting on higher residual fuel oil prices to improve profits in the last half of 1970.)

What is the response of an industry which enjoys special privileges and benefits on the grounds of national security (the only industry, I might add, which receives such massive support from the U.S. Government), when the needs of our people are involved? If the industry is as realistic as it claims, one can only ask whether there has been conscious collusion designed to create the crisis and thereby promote a rapid increase in No. 6 fuel oil prices?

The crisis calls into serious question the advisibility of shielding the oil industry from competition by Government interference in the market place.

These are hard questions, but the people of my District may go without heat this Winter, and they must know why. They must know why the oil industry has failed the American consumer, and why there are continuing shortages and a continuing escalation of prices of essential petroleum products.

While these matters must be investigated, we cannot wait for prolonged studies before developing a course of action. This emergency must be dealt with now. I realize that residual fuel imports into the East Coast are not subject to import controls. However, because the Oil Import Program has created a special and close relationship between the Executive Branch and the oil industry, I urge that you instruct the Chairman of the Oil Policy Committee to develop, in close consultation with the oil industry and local marketers and consumers, an Emergency Plan for the period September 1, 1970 through April 1, 1971 to prevent a crisis in the coming Winter. I would hope that the Plan will also be designed to halt and reverse the sharp escalation in the price of No. 6 oil which is having a severe inflationary impact on hospitals, schools and apartment dwellers, and that consideration will be given to basic changes in the Oil Import Program-decontrol of No. 2 fuel oil imports into the East Coast, construction of residual fuel oil refineries in trade zones and a low sulfur residual import bonus system-designed to prevent a recurrence of this potentially tragic situation.

There may be other devices that could be employed to meet this crisis. One way or another there simply must be greater domestic refining of residual oil. It is my personal feeling that the only way to bring this point home to our domestic industry is for you to bring the prestige of your office to bear on industry leaders. In closing let me assure you of my cooperation and support for your efforts to meet this emergency. If there is any way that I can be of help, in my individual capacity or as Co-Chairman of the informal House Committee on Oil Import Reform, please call upon me. With best wishes, am, Cordially yours,

SILVIO O. CONTE,
Member of Congress.

CONGRESS OF THE UNITED STATES,

HOUSE OF REPRESENTATIVES,
Washington, D.C., August 31, 1970.

Dr. PAUL W. MCCRACKEN,

Chairman, Council of Economic Advisers,
Executive Office of the President,
Washington, D.C.

DEAR MR. MCCRACKEN: I am writing to you in your capacity as Chairman of the emergency committee of the Domestic Council, created by the President on August 6, 1970 and directed to develop solutions for the acute nationwide shortage of clean fuels. As you know a major part of this crisis is the shortage of residual oil, so heavily relied upon in the New England region, both as a fuel source for schools, hospitals and large housing units, and as a source of power. I am writing to endorse the proposal presented to you by the New England Council in its letter to you of August 26, 1970.

The Council's recommendation, based on data they have developed indicating that more than one-third of New England residual fuel users can convert to the use of lighter no. 2 oil, is that an additional import allocation of 100,000 barrels per day of no. 2 oil be granted to the New England area.

While I consider this the minimum action necessary for the balance of this year, it is my feeling that more substantial action must be taken to alleviate the crisis we face for the balance of the coming winter and thereafter.

On August 3, 1970 in a letter to the President urging him to undertake the kind of assignment you and your committee have now been given, I suggested a number of possible alternative solutions for his consideration. (A copy of that letter