63. Letter From the Director of the Office of Emergency Preparedness (Lincoln) to President Nixon1
Dear Mr. President:
Proclamation 32792 under which we manage the oil import program requires that I maintain a continual surveillance of the program.
Recently several oil companies announced increases in quick succession in prices of crude oil and also practically simultaneously, in most cases, of gasoline. At the outset of this action, I concluded that under my surveillance responsibility, as defined in the Proclamation, it was necessary to undertake a determination as to whether such increases are necessary to accomplish the national security objectives of the basic Act and of the Proclamation. Twenty three companies, according to our records, raised prices between November 11 and November 25.
In order to acquire the needed information on which to seek a determination, and also in fairness to members of the industry who should have the opportunity to present their reasons for the increase, I have placed a notice in the Federal Register on November 17 asking for comments by December 1. The needed analysis may be lengthy.
I have, however, made a preliminary analysis of the oil price situation in relationship to the overall supply situation. It is well known that we have a tight worldwide oil supply situation stemming from the tanker shortage which in turn stems in part from the Middle Eastern situation. Spot tanker prices are high (which causes charters to rise) and the price of overseas oil delivered to the East Coast with spot charter tankers is the same or higher than our Gulf Coast oil, particularly for Eastern Hemisphere oil. Overseas imports into the U.S. of crude oil are below those permitted by the import quota system. But U.S. excess capacity has provided significant increased production (currently over 700,000 barrels per day above a year ago), principally from Texas and Louisiana. Canadian oil is currently flowing at a rate considerably above the rate of last year. The increase in demand for residual oil, particularly on our East Coast, is being meet by increased production [Page 156] in the U.S. and by increased imports, principally from the Caribbean. Residual oil imports into the East Coast are not limited by the oil import program. The general supply situation is in my judgment at least adequate for crude oil and products, even though there may be some local distribution problems.
There have been previous efforts in the past two years to raise gasoline prices. Those efforts failed. I am not at all certain that the current rise in gasoline prices will be sustained by the market conditions. The last increase in the price of crude was 20¢ a barrel in February 1969. The current increases are .7¢ a gallon for gasoline and generally 25¢ a barrel for crude oil.
The central facts to me from this preliminary analysis are that inventories of crude oil (except on the West Coast) are now higher than on the corresponding date of the last two years (gasoline inventories are about the same as the previous two years), and that there still remains a significant amount of production capacity shut in by state regulations on Federal offshore lands in the Gulf, particularly off the State of Louisiana. If any question about adequacy of supply remains, the relaxation of state controls of production on Federal offshore lands and increased imports from Canada substituting for any shortfall in authorized imports from overseas, will more than insure adequate supply in current circumstances. For instance, the currently shut-in capacity on Gulf Federal offshore lands can provide on the order of an additional 300,000 barrels per day within 90 days (according to the Department of the Interior)—or an amount greater than the current shortfall in authorized imports.
I conclude, on the basis of facts now available to me, that Federal acquiescence in restriction by states on oil production from Federal offshore lands does introduce an unnecessary artificial restraint into our total national oil program at the present time. Furthermore, any systematic analysis of the price/supply situation evaluating the justification, if any, of increased prices, using the national security criterion, is certain to be complicated perhaps to the point of frustration by the existence of this control factor. It is, moreover, a control factor beyond the cognizance of the Federal Government, withholding a significant increment of supply from the market. An increasing proportion of domestic oil production may be from Federal lands in the future.
I do not believe the current, or any, price increases can be determined as necessary to the national security objectives of the program until the situation as to Federal offshore lands has been changed.
I recognize that it can be argued, although not universally accepted, that the price of crude oil and also of products will, over the longer run, move in a relationship with the trend of other prices. For instance, I note an upward movement in well head prices of foreign [Page 157] oil. The upward movement in general price levels over the last several years is a fact.
As required by Proclamation 3279, I have consulted the Secretaries, or representatives speaking for them, of State, Defense, Treasury, the Interior, Commerce, and Labor on the foregoing analysis and my preliminary conclusions. I have also consulted with the Department of Justice and the Council of Economic Advisers. They are in accord with the analysis in this letter and with the proposed courses of action.
In light of my determination above, I believe it is my responsibility to outline to you the courses of action reasonably available with comments thereon:
Offshore Lands. Production from Federal leases off the Texas and Louisiana coasts has been subject to state prorationing limitations. Under the Outer Continental Shelf Act the Federal Government has exclusive jurisdiction over these lands and full authority to control the conservation and production of oil and gas from these leases. The application of state prorationing over these lands has been solely a matter of tolerance and cooperation from the Federal Government. Particularly in the case of Louisiana, these Federal offshore lands represent an immediate source of significant additional production if state prorationing limitations are removed. Unless the additional production from these lands is available to the market, it is more difficult, if not impossible, to determine whether the existing supply/demand situation warrants a crude oil price increase as necessary for the national security objectives. This situation is directly related to the national security objective. Logically, production from these Federal lands should be under Federal regulation and thus immediately available to meet an interruption in overseas supply. I recommend that the Federal Government promptly assume full authority over production from the Federal offshore lands.
Increase in Canadian imports. The pipeline capacity from Canada is not currently being fully used. Overseas allocations are not being fully used. By technical changes in the management of the oil import program it is quite practical, in the current situation, to protect the interests of refiners dependent on the Canadian pipeline while providing for substantially full use of that pipeline through allowing substitution of Canadian for overseas oil allocations. I recommend that these technical changes be made immediately.
Connally Hot Oil Act. This Act, 15 U.S.C. 715(b), in effect gives the needed Federal support to state regulation of oil production. 15 U.S.C. 715(c) provides that the President may by Proclamation suspend Section 715(b) when he finds that the effect on petroleum and petroleum products moving in interstate commerce is a cause, in whole or in part, for a lack of parity between supply and demand resulting in an undue burden on interstate commerce.[Page 158]
The inventory situation, as noted above, does not indicate a shortage of supply. There are other actions (placing of offshore lands under Federal regulation) which can significantly increase supply. My limited analysis indicates that a sudden suspension of Section 715(b) might cause production dislocation and may interfere with desirable conservation measures in certain states. State controlled production capacity subject to this Act (as distinct from the offshore Federal lands, which are a much clearer case for positive action recommended above) is stated by the Department of the Interior to be producing at or near maximum for most states (there may be some controversy about this point for one or two states). Hence, I conclude you should not take this action at this time.
Suspending the oil import program. Under present worldwide conditions, suspension of the program will give little or no assurance of additional imports. The import level has recently been well below the allowable imports of crude oil under the oil import program. While difficult to forecast, the tanker situation and other factors contributing to the current tight oil situation in the world seem likely to continue for some time. Hence, suspension of the program would have insignificant substantive effect on the supply situation if actions outlined above for Canada are taken. Suspension requires a finding by the Director of the Office of Emergency Preparedness, and agreement by you, that the action will not impair national security. The analysis obviously has to extend to reinstatement, when and how. As a further point, suspension of the program would indicate an instability of policy, particularly since the oil industry and other knowledgeable people know that the action would not now contribute significantly to the supply situation. Suspension might thereby further discourage the investment and exploration in Alaska, offshore in the Gulf, and other places, which are necessary to assure adequate secure oil in the future for our country. For these and other reasons inherent in the oil import program, I recommend against suspension of the oil import program.
Institution of price controls under the Defense Production Act. Section 202 of the Defense Production Act (PL 91–379) provides that the President is authorized to issue orders and regulations to stabilize prices at levels not less than those prevailing on May 25, 1970. This authority expires on February 28, 1971. I believe the language of the Act permits selective stabilization actions. But, in addition to the stated Administration policy on price control, it is pertinent that there are other instruments, mentioned above, than this Act available to the President. These instruments derive from oil being a special case commodity due to the existence of the oil import program and certain special domestic policies. Also, it can be correctly asserted that prices of many other commodities have risen more in the last few years than the price increases [Page 159] on which I am making a determination under the provisions of the oil import proclamation. I recommend you not use this authority.
The mechanics for executing the foregoing options are:
- Placing oil production on Federal offshore lands under Federal regulation. This action can be taken by the Secretary of the Interior or by Presidential action. It will be necessary for the Secretary of the Interior to provide a regulatory program independent of the state programs.
- Increase in imports of oil from Canada. This can best be done, in the current oil situation, by provision of regulations by the Secretary of the Interior, with the concurrence of the Director of the Office of Emergency Preparedness, which make overseas quota tickets eligible for exchange for Canadian oil through 1971. A Presidential proclamation change giving authority to the Secretary of the Interior is needed. The technical situation is such that the outcome will be the use of substantially all pipeline capacity available for Canadian imports.
- Suspension of the Connally Hot Oil Act. This action requires a finding and proclamation by the President.
- Suspension of the Oil Import Program. This action requires a finding by the Director of the Office of Emergency Preparedness, with the advice of the Oil Policy Committee, that the action will not impair national security, and a proclamation change by the President.
- Institution of price controls under the Defense Production Act. This action would require a proclamation or executive order by the President to include delegation of the administration of the action to an executing authority, followed by preparation and publication of a regulatory program.
I recommend that at this time the necessary actions be taken to place production of oil on Federal offshore lands under Federal regulation and that the actions outlined above for increasing imports of Canadian oil be instituted.3
- Source: National Archives, Nixon Presidential Materials, White House Central Files, Subject Files, Confidential Files, Box 26, EXTA 4/CM Tariff Imports, Oil, Sep 28–Nov 1970. No classification marking.↩
- See footnote 3, Document 4.↩
- According to circular telegram 207316, December 22, the President was scheduled to sign the oil import proclamation for 1971 that day. The telegram identified the details of the new import program as follows: 1,450,000 bpd total imports, of which 450,000 was for Canada, 40,000 for imports of No. 2 fuel oil from the Western Hemisphere, and the remainder for imports from Mexico and all overseas imports. Imports were increased by about 100,000 bpd over 1970 levels, the Brownsville Loop was eliminated, and imports from Canada separated from the remainder of the program so that changes in the import level for Canadian oil would not affect other allocations. The telegram noted that it was difficult to predict the effect on imports from Venezuela due to the format of the proclamation and tanker shortage. (National Archives, RG 59, Central Files 1970–73, PET 17–2 US)↩