The result of these developments within and outside of the United States has been sharply increasing prices of residual oil and coal. And I think it is important to note that we are talking now about residual oil and not oil in some general aspects, because there are enormous differences in situations as between residual oil and others, and it is the very key to thinking about this question. Anyway, there have been sharply increasing prices of residual oil and coal, and a great deal of concern on the part of the fuel users, as to whether their demands will be met this winter.

Residual fuel oil is the heavier type of fuel oil used to heat and power utilities, industrial plants, apartments, and office buildings, schools, and hospitals. It is to be distinguished from the much lighter No. 2 oil, or home heating oil, which is used to heat ordinary residences. Historically, residual oil, as its name suggests, has been the less valuable, leftover part of the barrel which sold at a price below that of crude. With technological developments in the refinery industry, it has been possible for U.S. refiners to minimize production of this product and emphasize the more highly valued light products, such as gasoline. Since 1966 residual fuel oil has been admitted freely into PAD (Petroleum Administration for Defense) district I, the east coast. And that is another key factor to remember about this whole situation.

But the thing that scares us at this moment is the thing that is freely admitted into the east coast, that is not subject to quota restrictions and has not been since 1966. By making cheaper foreign residual oil available to east coast consumers this change in the import program accelerated the shift of U.S. refiners to the lighter products. The result of this exemption is that residual oil users on the east coast have become overwhelmingly reliant on overseas imports. Last year 93 percent of the residual oil consumed in district I was imported. Consumers of residual in this area have realized substantial benefits from this exemption. The prices paid have been significantly below those that would have prevailed if residual oil had been treated as other products are. Imports of gasoline and home heating oil into the United States have been very small and consumers of these products have therefore paid prices based on the domestic price of crude oil which is substantially higher than the world price.

At this point I should mention that it is a matter of deliberate national policy that U.S. crude oil prices are higher than world prices. The purpose of this policy is to increase incentives to explore for and develop oil wells in the United States and to minimize reliance of foreign sources. By supplying a large proportion of our petroleum needs from several domestic sources, the national security is enhanced. When foreign supplies are cut off for political, military, or other reasons, the United States is clearly less affected by the lower proportion of imported oil. The additional price consumers pay for oil products in the United States is in a sense an insurance premium for protection during those times when foreign sources become scarce and prices rise sharply.

Residual oil users do not pay such an insurance premium. They participate in the world market, where prices are lower, but where, as has become evident now, risks are higher. World prices of residual oil have recently reached very high levels, and depending on location

and type of contract, have as much as doubled. It is instructive to compare what has happened in the last year to other products and to crude oil, which are protected by the program. The Oil and Gas Journal average price of gasoline (excluding tax) up to September 22 of this year was 23.50 cents per gallon; to the same period last year it was 23.59 cents per gallon. Boston cargo prices of No. 2 home heating oil were 10.3 cents per gallon on September 25 of this year, the same as last year. Crude oil prices, using the Louisiana wellhead price as the basis, are also about the same.

The purpose of this discussion is not to point the finger at residual oil users and to suggest that in some sense they deserve what has happened to them since they do not play according to the same rules as other U.S. consumers. The fact is that they do participate in a world market and are therefore to a greater extent at the mercy of forces over which they and the U.S. Government have less control. The production cutbacks in Libya and the failure to permit the repair of a pipeline through Syria are the results of policies of foreign governments. The worldwide increase in the demand for residual oil is the result of decisions by numerous independent consumers throughout the world.

What can be done then to make sure that U.S. consumers obtain the quantities of residual oil they require? The first thing that can be done is that U.S. users can simply go out and bid away some of the available overseas oil from their world competitors. To a large extent they have already done that. In spite of developments overseas the United States will be importing significantly more residual oil this year than last. If we can continue at the same pace set for the first 6 months of this year we will import as much as 1,525,000 barrels per day, compared with 1,264,000 barrels per day in 1969. That is another point that should be remembered that seemed to have been forgotten in much of this discussion, that we would expect to have a larger total supply of residual fuel supply this year than last year. The effects, however, of our bidding against other foreign users for these supplies is that the world price has risen sharply.

The other place that we can look to is of course our own domestic industry. In their joint statement Chairman McCracken and General Lincoln called upon the domestic petroleum industry to help meet the demand for residual oil and pointed out that the price structure brought about by overseas developments makes residual oil much more attractive to produce than before. Public statements by some major oil companies expressing their intention to produce more residual oil, and the statement by the National Petroleum Council that sufficient quantities can be produced to meet requirements, are reassuring.

I call attention to the statement yesterday by Humble Oil indicating its intention to increase the production of residual oil from domestic sources by 80,000 barrels a day, and other recent statements by other companies.

Some public comment on this approach has suggested that this is a high-priced solution, that the consumer is shouldering the whole burden, and that the domestic oil industry is in some way profiting greatly from this solution. I have already pointed out that there is not a great deal we can do about the world price of residual oil.

Some simple arithmetic suggests that the refiner who is intending to produce additional residual oil from domestic crude oil can do little either. The wellhead price of Louisiana crude is about $3.30 per barrel and it costs something on the order of 50 cents to move this barrel to New York. Thus, before refinery costs, or any other charges are added, we are already to $3.80 per barrel, which is in the neighborhood of prices for residual oil on the east coast. If we consider that the refiner will typically have to make investments in his refinery to shift his yields toward residual oil it is easy to see how he can little afford to make this shift at prices lower than those prevailing.

If we are to talk about having lower residual oil prices and more domestic residual oil production we are implying lower tanker costs, or lower domestic crude prices, Since tankers are leased in what is generally regarded as a competitive market it is not clear what can be done there. The price of domestic crude, as I have already pointed out, is a matter of national policy, and has, during this recent world petroleum shortage, served its primary function of keeping products, except for residual oil, in adequate supply and at stable prices. And the price of crude itself has been reasonably stable.

The Government can, however, take action to ameliorate the consequences of this shortage. The McCracken-Lincoln statement mentioned a number of actions and I would like to explain, some of them and estimate, where possible, what their impact might be.

First, we are now allowing imports of natural gas liquids from Canada without the requirement that they be deducted from the crude oil quota in districts I-IV-east of the Rockies. This will have the effect of allowing an additional amount of crude oil into the United States equal to the quantity of natural gas liquids that will come in. For this year this would be about 50,000 barrels per day. This will enable Great Lakes and Midwest refiners to produce more residual oil. Production of crude oil in Texas and Louisiana has increased by 700,000 barrels per day in the past few months; the combined effect of these actions should give us an adequate supply of crude oil.

I might mention that the figure cited by an earlier witness about the extent of the revision of domestic crude oil production related to an earlier period before the very large increases in the allowables that have occurred this year.

Second, we are permitting overseas crude oil to enter the United States for topping provided all of the produce is burned. Topping is a process by which lighter more volatile parts of the crude oil are removed so that what remains can be burned just as residual oil. The topped part could be burned in a refinery. If the crude is imported from Canada the topping product may be reexported. It is hard to estimate the quantities of oil that might come in for this purpose, but private industry is already making arrangements to take advantage of this program change. The importance of this action derives from the fact that the overwhelming part of the barrel of crude will wind up as fuel oil, whereas the typical barrel of crude brought in for refining results in a rather small proportion of residual oil.

Third, we will be permitting the importation of liquified petroleum gas-ethane, propane, and butane-from the Western Hemisphere. At present, we cannot say with any confidence what imports will turn

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out to be, but if the transportation were available and developments proceed as scheduled in the Caribbean there could be 40,000 barrels per day. This would substitute for, and thus relieve the pressure on, other fuels.

While these actions treat the overall problem of residual oil and crude oil supply a measure has already been taken that will assist particular refineries that are unable to obtain adequate supplies of crude oil. The Oil Import Appears Board has been permitted to allocate as much as 30,000 barrels per day of Canadian crude oil for the rest of this year to refiners suffering exceptional hardships. I now turn to the problem of bituminous coal.

The production of bituminous coal this year is running well ahead of last year's pace. In the period up to September 19, 415,550,000 tons of bituminous coal were produced as compared with 393,915,000 tons during the same period in 1969. It is estimated that the full year's total will exceed last year's 560 million tons by 30 million tons. The coal industry, as everyone knows, has not been a growth industry—a new high in production is not the commonplace it is in some other industries. That the estimated 590 million tons will be a new high in production is a significant fact.

Probably about 20 million of the 30 million additional tons produced this year will go into domestic supply while the remainder will be exported. The exported coal, which will run about 11 percent of U.S. production, is overwhelmingly higher priced metallurgical coal and is not generally capable of use as a source of energy in utility plants. Coal exports this year will probably contribute $800 million to a billion dollars to our balance of trade.

At the same time, bituminous coal prices have been rising sharply. In past years they have moved in a narrow range between $4.39 per ton, the average in 1963, to $5 per ton, the average in 1967. But this year they will certainly reach new highs. The most significant moves have, of course, occurred in the spot market.

High-priced metallurgical coal has increased in the spot market from $7.88 per ton in July 1969 to $11.07 per ton in July 1970. Prices of f.o.b. utility plants, which are perhaps the most relevant from our point of view, will rise from $6.02 in 1968 to an estimated $6.50 in 1970. The fact that most of this coal is supplied on lower priced longterm contracts accounts for the less dramatic rise in price.

The simultaneous occurrence of a significant rise in production and in price is the classical economic response to a rise in demand. I pointed out earlier one of the sources of this increased demand-the shifting of unmet demands for other sources of energy, particularly, atomic energy. Many utilities that have been large coal users in the past intended to switch to atomic energy and it was made clear to potential investors in the coal industry that some of their markets would diminish in the near future, and eventually disappear.

This expectation on the part of utilities has not been realized and the coal industry, fearful of losing old markets, has actually faced increased demands.

Although production has increased substantially, there is still a potential for further advances. These will come through the elimination of the most significant bottleneck, the shortage of hopper cars.

The McCracken-Lincoln statement announced a series of measures that would increase the effective supply of cars by raising the efficiency of their utilization.

One measure, already put into exect by the N. & W. and C. & O. Railroads, requires permits to move cars to the port of Hampton Roads and thereby reduces the number of cars standing idle at ports while awaiting the arrival of ships. This measure should increase the effective supply by 8,000 hopper cars, which over this winter means an additional 7 million tons of coal, or about 18 million tons for the full year. The benefits of this action will be felt mainly in the Southeastern part of the United States.

Other actions taken include the doubling of the demurrage charge, which will mean that it will cost twice as much to keep a car standing idle in loading or unloading areas, and the diversion of general service hopper cars from alternative uses. Although it is difficult to quantify the impact of these measures, their effect should be significant.

While these measures treat the broad overall problem of coal supply another action is focused on local problems that may arise in the coming months. We are establishing, in fact have established, a joint board composed of the Director of the Office of Emergency Preparedness (Chairman), the Secretaries of Interior and Commerce, and the Chairmen of the Council of Economic Advisers, the Council on Environmental Quality, the Interstate Commerce Commission, and the Federal Power Commission, to identify emergency problems in fuel supply and fuel transport and coordinate prompt and appropriate remedial action by the responsible Federal agencies.

I should add in closing that the measures taken, including some that are not discussed here, are judged to be sufficient to meet the fuel problem as we see it now. It goes without saying that projections of supply and demand of the kind required here are always surrounded by a zone of uncertainty. A severely cold winter, or an unforeseen shortfall in supply, might require further actions. We are prepared to take those actions if the situation requires it.

Mr. SMITH. Mr. Stein, I want to thank you for your statement. It was an excellent dissertation on the fuel situation in general.

I wonder, is this committee also going to study and make recommendations concerning the generation capacity?

Mr. STEIN. The long-run study will cover the problem of generation capacity, and also, we specifically think, the problem of why we have the unforeseen and unsuspected shortages.

As far as this winter is concerned, our view is that the problem is not a shortage of generating capacity, but a possible shortage of fuel. Mr. SMITH. What about next summer?

Mr. STEIN. Well, I really couldn't say about that.

Mr. SMITH. Are you going to cover that in your study?

Mr. STEIN. Yes; it will be covered in the longer run study.

Mr. SMITH. Mr. Conte.

Mr. CONTE. Mr. Stein, I want to thank you for taking time from your busy schedule to come here. I appreciate your statement, though I disagree with it.

First of all, I must agree with you that we are keeping the price of crude oil up, above and beyond the world price. You say that the