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Phase-Out of Old Oil Price Ceilings [Bill]
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Phase-Out of Old Oil Price Ceilings [Bill]
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Digitized from Box 13 of the White House Press Releases at the Gerald R. Ford Presidential Library
16 JUL 1975
TITLE 10 - ENERGY
CHAPTER II - FEDERAL ENERGY ADMINISTRATION
PART 211 - MANDATORY PETROLEUM ALLOCATION REGULATIONS
PART 212 - MANDATORY PETROLEUM PRICE REGULATIONS
Phase-Out of Old Oil Price Ceilings
A. Introduction
The Federal Energy Administration hereby adopts an
amendment to its regulations to provide for the gradual
removal of price controls from domestic crude oil. This
amendment is being submitted to the Congress for its review
pursuant to §4 (g) (2) of the Emergency Petroleum Allocation
Act of 1973. Unless disapproved by either house of Congress
during the five day period allowed for legislative review,
the amendment will decontrol "old" crude oil (now subject to
a ceiling price averaging $5.25 per barrel) at the rate of
3.3 percent a month over a 30-month period ending January 31,
1978.
The amendment also provides for a new ceiling price for
all domestic crude oil (other than stripper well crude oil)
to be in effect during the 30-month decontrol period equal
to the highest price charged for uncontrolled domestic crude
oil produced from the particular property concerned in
the month of January, 1975, plus $2.00 per barrel, or a
total of approximately $13.50 per barrel. This ceiling,
which approximates the present world price level plus
the $2.00 per barrel supplementary import fee, will prevent
any future crude oil price increases by OPEC from triggering
still higher domestic crude oil prices.
- 2 -
This proceeding was initiated on April 30, 1975,
when the Federal Energy Administration issued a notice of
proposed rulemaking and public hearing (40 F.R. 19219,
May 2, 1975) to amend Part 212 of Title 10 of the Code of
Federal Regulations to phase out over a 25-month period all
price controls on crude oil at the producer level.
Fifty-nine written comments were received in response
to the notice of proposed rulemaking before the close of the
period for receipt of such comments. Oral presentations
were made by 29 persons at the public hearings held on
May 13 and 14, 1975. All these comments and presentations
were considered by the FEA, and certain modifications in
the proposed amendments have been made, to arrive at the
final amendment adopted today, reflecting FEA's considera-
tion of these comments and presentations as well as other
information available to FEA. These modifications included
in the decontrol rule now promulgated are discussed in
Section E, below.
B. Background
The petroleum industry has been subject to various
forms of price controls since 1971, a period of about four
years. When the general Phase IV price controls ended on
April 30, 1974, with the expiration of the Economic
Stabilization Act of 1970, the only industry which remained
subject to price controls (as administered by the FEO and
subsequently the FEA) was the petroleum industry.
- 3 -
The reason for continuing price controls on the
petroleum industry was, of course, the serious shortage of
crude oil and products derived therefrom in late 1973 and
early 1974. In response to this emergency situation, the
Emergency Petroleum Allocation Act of 1973 was enacted in
November, 1973, pursuant to which price controls on the sale
of crude oil and derivative products have been retained.
As its name suggests, that Act was chiefly concerned
with assuring adequate supplies through regulatory mech-
anisms by which covered products would be equitably allo-
cated to all regions and to all users throughout the product
distribution chain. Price controls were retained to further
assure that reduced supplies would not lead to inequitably
high prices.
At present, about one-third of total domestic
production of crude oil is not subject to the ceiling price
of 10 CFR 212.74. This amount represents crude oil which is
under the congressionally-mandated stripper well lease
exemption and crude oil which is allowed to be priced at
market levels under existing production-incentive regulations
concerning "new" and "released" crude oil. Taking into
account imported crude oil, about 56 percent of all domestically
refined crude oil is not subject to price ceilings.
Domestic crude oil subject to price ceilings, defined
as "old" crude petroleum, sells at an average of $5.25 a
- 4 -
barrel (or about 12-1/2 cents a gallon), while the
average price of uncontrolled domestic crude oil rose from
about $11.30 a barrel in January, 1975, prior to the increase
in import fees, to a current level of about $12.25 (29 cents
a gallon).
The Emergency Petroleum Allocation Act of 1973
permits exemptions from allocation and price controls for
products subject to the Act to be granted only under certain
conditions. An exemption may apply to only one product
and may extend for a period of not more than 90 days. Any
proposed exemption must be submitted to Congress prior to
implementation, together with findings that (1) there is no
shortage of the product concerned, (2) the proposed exemption
will not have an adverse effect on the supply of any other
product, and (3) controls on the product concerned are no
longer necessary to carry out the purposes and goals of the
Act. Pursuant to §4 (g) (2) of the Act, the exemption may not
be implemented if disapproved by either house of Congress
during the period of five sessional days allowed by the Act
for legislative review by each house.
Having received written comments and having held
public hearings on its old oil deregulation proposal,
the FEA has transmitted this final decontrol amendment to
the Congress together with the findings set forth below.
Under the amendment adopted today, old oil will be gradually
decontrolled over a 30-month period, beginning immediately
upon expiration of the five-day period prescribed in §4 (g) (2)
- 5 -
of the EPAA and ending on January 31, 1978. The FEA plans
to issue a notice before August 1, 1975, stating what con-
gressional action, if any, was taken under §4 (g) (2) and, if
this amendment was not disapproved by either house of Congress
within the period provided by §4 (g) (2), the date this amendment
became effective.
The rate of decontrol of old oil will be at 3.3 percent
for each month from August, 1975, through January 31, 1978.
Since it appears that the five-day legislative review period
prescribed in the Act will expire on or about July 23, 1975,
one percent of old oil will also be decontrolled for the
month of July, 1975, to achieve the same rate of decontrol
for approximately one-third of the month of July remaining
after the effective date of the amendment. Because crude oil
is generally produced and sold to the same purchaser in a
continuous flow for an entire month, with prices under the
two-tier system calculated for the month concerned in the
subsequent month, the only practicable method for determining
the amount of old oil to be decontrolled under this amendment
for the remainder of the month of July is to determine a
decontrol rate for July which bears the same approximate ratio
to the 3.3 monthly percentage rate that the number of days
remaining in July after the amendment becomes effective bears
to the total number of days in July. The purpose of FEA in
this respect is to avoid retroactive application of the
amendment adopted today while assuring that the important
national benefits of decontrol will begin to accrue at the
earliest possible date.
- 6 -
As explained in the notice of proposed rulemaking
issued April 30, 1975, the FEA's "old oil" decontrol
program (which implements one phase of the overall energy
conservation program put forward by President Ford in
his State of the Union Message) would affect only crude oil
sales at the producer level. It would not affect the crude
oil allocation regulations or the allocation or price
regulations for any other product at any level of distribu-
tion. The old oil decontrol program would both help curb
domestic consumption and spur domestic production, thus
furthering the important national goal of reducing
dependence on imported crude oil.
Decontrol will ultimately permit all domestic crude oil
prices to rise to the current prevailing world price levels,
SO that the demand-dampening effects which have been felt
worldwide would be felt to the full extent in the United
States. Under the two-tiered price system now in effect,
the price of most domestic oil is held at a level less than
half that of current world price levels, so that the impact
which the escalation of world market prices has had on
demand elsewhere in the world has been considerably cushioned
in the United States.
In addition to conserving domestic supplies by reducing
demand, decontrol of domestic crude oil prices would stim-
ulate domestic production, or at least greatly reduce the
rate of decline in domestic production, displacing some sup-
plies of crude oil that would otherwise have to be imported.
Measures to promote maximum domestic production of crude
- 7 -
oil -- especially new exploration and drilling activity and
implementation of secondary and tertiary recovery
techniques -- are considered essential in order to
help assure adequate and dependable energy resources
for the United States until alternative domestic energy
resources can be developed over the long term. Furthermore,
the FEA has found that the production incentives afforded
by the rules permitting "new" and "released" domestic
crude oil to be sold at free market prices are of
decreasing impact or effectiveness, as production levels,
because of natural rates of decline, are generally
falling further below 1972 levels, and 1972 levels of
production for a property must be exceeded before the
new and released price rules can have any effect.
Thus, many producers, especially those whose current
production levels are substantially below the 1972 base
levels and are further declining under primary recovery
techniques, remain unaffected by the incentives presently
afforded because those incentives are too remote to outweigh
the cost of implementing the substantial secondary or
tertiary recovery programs which would be necessary to
bring production up to and above the 1972 base levels.
Under the FEA decontrol program, when fully implemented,
all production, including additional production, would
bring the higher prices now available to uncontrolled oil.
- 8 -
The existing incentives to increase production are, for
properties that were producing in 1972, only effective for
limited periods of time in any event, since the inevitable
slackening of output will eventually bring production below
1972 levels, to the point where existing incentives are no
longer adequate to encourage investment in secondary/
tertiary recovery and other costly programs designed to
increase total output of crude oil. Although the additional
incentive afforded by the gradual decontrol of old oil would
also eventually diminish in effect with respect to existing
properties, due to the inevitable decline or exhaustion of
worked-over reservoirs, the purpose of decontrol is not to
provide a permanent solution to limited domestic production
capabilities. Rather, it is intended simply to provide
incentives of sufficient effectiveness and duration as will
yield maximum levels of domestic production until such time
as supplementary energy resources can be developed and
exploited. Although existing incentives are believed to
have contributed substantially to the current reduction in
the rate of decline in domestic production, FEA believes
that existing incentives clearly cannot work to maintain
domestic production at levels now thought necessary to avoid
an unacceptable degree of reliance on imported fuels over
the next few years.
- 9 -
As also noted in the April 30, 1975, notice of proposed
rulemaking, an additional benefit of decontrol of domestic
crude oil will be the elimination of economic distortions
caused by the present two-tiered pricing system. The two-
tiered pricing system inevitably causes cost disparities
among refiners and marketers of petroleum products.
Although these cost disparities have been substantially
reduced by the crude oil entitlements program, they can
never be entirely eliminated while the two-tiered pricing
system exists. Such cost disparities significantly hinder
FEA's ability to assure that the competitive viability of
the independent sector of the petroleum industry is maintained.
Moreover, the existing complicated structure of price
controls at all levels of distribution, which is neces-
sitated in large measure by the existence of cost dis-
parities resulting from the two-tiered price system, tends
to be self-defeating over the long run by reducing normal
incentives toward increased production and cost control, and
by eliminating the ability of the industry to engage in long
range business planning. As effectiveness of price controls
- 10 -
lags over time, regulations of greater complexity and
reach become necessary to maintain a controlled-price
structure. And tightening of controls, in turn, tends
further to stifle initiative and to contribute to
greater economic distortions.
C. Findings
1. There is no shortage of crude oil.
As FEA representatives have previously testified
at congressional hearings, there is currently no shortage
of crude oil available to U.S. refiners. Worldwide
production capability substantially exceeds current demand.
U.S. refiners have been able to obtain from foreign sources
all requirements needed to fill the domestic production
shortfall. Inputs to U.S. refineries, which dropped
markedly during the first three months of 1974, now exceed
pre-embargo levels. Domestic crude oil inventories have
also increased, and exceed pre-embargo levels.
The level of crude oil production in the OPEC countries
continues to decline due to reduced demand. At the end of
March, 1975, output was 25.72 million barrels/day (b/d),
compared to 28.85 million b/d at the start of 1975, a drop
of 11 percent. These production figures represent 66 percent
of OPEC's currently estimated producing capacity of 39
million b/d.
- 11 -
U.S. petroleum inventory and import estimates for late
April 1975 show an inventory-to-import ratio of approximately
167 days. This is considerably higher than the 123 days of
stocks available in April 1974. Petroleum stocks were
approximately 852 million barrels at the end of April 1975
and 815 million barrels at the end of April 1974, an
increase of 4.5 percent. Imports for the same periods were
approximately 5.1 and 6.6 million barrels per day
respectively, a decrease of 23 percent.
The general availability of crude oil to meet U.S.
demands is also demonstrated by current data concerning the
FEA allocation programs. For example, allocation fractions
for all major refined products and residual fuel oils are at
or close to 1.0, generally indicating that crude oil is in
sufficient supply to meet virtually all demand for refined
and other products derived from crude oil. While supplies
of propane are not always adequate to meet demand in all
regions of the U.S., such shortage problems as occur relate
principally to the fact that most propane is produced from
natural gas rather than crude oil, and there has been a
decreasing supply of natural gas.
In addition, activity under the FEA's crude oil alloca-
tion program has slackened during recent quarters. The buy-
- 12 -
sell program in its current form enables small and inde-
pendent refiners to obtain crude oil supplies from the major
refiners to supplement their own supplies. The fact that
more and more small and independent refiners are obtaining
their supplemental crude oil supplies through normal market
channels further indicates the general availability of crude
oil at all levels and in all regions of the U.S.
2. The proposed exemption will not have an adverse
impact on the supply of any other oil or refined petroleum
products subject to the Act.
Under today's conditions, 20 months after passage of
the Act, national policy requires that dependence on
imported crude oil be reduced. This can be done by stim-
ulating domestic crude oil production and by curbing demand
for residual oil and refined petroleum products. The
proposal to decontrol old oil is an important step toward a
greater degree of self-sufficiency in meeting our energy
needs.
To the extent that decontrol contributes, as expected,
to stimulate domestic crude oil production by encouraging
increased exploration and drilling activity and the use of
secondary and tertiary recovery techniques, decontrol
obviously tends to enhance rather than adversely affect the
- 13 -
supply of products derived from crude oil. To the extent
that higher prices resulting from decontrol dampen demand,
as expected, decontrol will also tend to increase rather
than reduce supplies of petroleum products.
Increased production and reduced demand brought by
decontrol will not result in any domestic surplus of crude
oil. It is expected that the result will be an offsetting
decrease in the amount of crude oil or refined product that
would otherwise be imported to meet domestic needs. To
this extent, decontrol will not change the overall avail-
ability of petroleum products in this country. However,
because domestic crude oil is a more reliable source of
crude oil for production of petroleum products than
is imported crude oil, decontrol will tend to have a
beneficial rather than adverse impact on the nature
of the domestic supply of petroleum products subject to
the Act.
3. Price controls on crude oil are not necessary
to carry out the Act.
All of the purposes and goals of the Act are predicated
upon alleviating the emergency conditions resulting from
shortages of crude oil, residual fuel oil and refined
petroleum products which were being experienced or appeared
imminent when the Act was made law late in 1973. As indicated
- 14 -
in Finding 1, shortages of crude oil no longer exist.
Inasmuch as the underlying condition to which the purposes
and goals of the Act generally relate is no longer present,
the necessity of price controls on old oil to carry out the
Act is no longer apparent.
The express purpose of the Act, as stated in
§2 (b) is to grant to and direct the President to
exercise "specific temporary authority to deal with
shortages of crude oil, residual fuel oil, and refined
petroleum products or dislocations in their national
distribution system." The specific goals to be reached
by exercise of the authority granted under the Act, as
set forth in §4 (b) (1), may be placed in the following
groupings: (a) to protect the general welfare and the
national defense; (b) to maintain residential heating,
public services and agricultural operations; (c) to
preserve an economically sound and competitive pe-
troleum industry; (d) to allocate crude oil in order to
permit refineries to operate at full capacity; (e) to
provide for equitable distribution of crude oil,
residual fuel oil and refined petroleum products at
equitable prices among all regions and among all users;
(f) to allocate residual fuel oil and refined petroleum
products in order to maintain exploration and pro-
duction or extraction of fuels; and (g) to provide for
- 15 -
economic efficiency and minimization of economic distortion,
inflexibility and unnecessary interference with market
mechanisms.
The decontrol of old oil prices should serve to further
the goals indicated in items (c) and (g), above, under
present conditions. The economic inefficiencies and
distortions brought about by price controls when they are
extended over a long period of time are discussed in Section
B, above. In addition, the gradual removal of price
controls during a period of adequate supply should lead to
improvement in the economic position of the petroleum
industry and stimulate resumption of normal competitive
conditions. These results are particularly desirable in
view of the major effort which will be required to alter the
trend of declining U.S. crude oil production.
The adequacy of supply under current conditions means
that the threat to the national security and welfare posed
by an existing or imminent shortage of crude oil no longer
exists. Price controls on crude oil are therefore no longer
necessary to achieve the short-term goals of the Act
concerning protection of the national defense and public
welfare (item (a)). For the longer term, removal of price
controls should have a favorable effect on the national
- 16 -
defense and public welfare. As the Secretary of Treasury
found in connection with the President's Proclamation
regarding imposition of import fees, the heavy reliance by
the United States on imported crude oil poses a significant
threat to the national security. As noted above, the
decontrol of old oil prices should over the long run
significantly reduce reliance on foreign sources of oil.
The goals indicated in items (d) and (f) relate
primarily to the allocation program or to petroleum products
other than crude oil. These goals are therefore not
directly affected by the proposal to decontrol the price of
old oil.
The goals in item (b) address the threat to adequate
supplies of fuel for residential heating, public services
and agricultural operations resulting from imminent crude
oil shortages. This threat was countered primarily by the
allocation of crude oil used to produce fuels for these
needs, and by the allocation of these fuels themselves.
This fact, plus the current absence of any shortage of crude
oil, leads to the conclusion that price controls on crude
oil are no longer necessary to achieve the goals of the
Act relating to maintaining adequate fuel supplies for
residential, public service and agricultural needs.
- 17 -
The goal of providing for "equitable distribution
of crude oil
at equitable prices among all
regions and
all users" (item (e) ) is one which
is clearly predicated upon the existence or imminence of a
serious crude oil shortage situation. When supplies are
short, normal market mechanisms may not assure equitable
distribution of supplies across the country and do not
prevent price gouging and other shortage-related pricing
abuses. In other words, the goal of "equitable prices"
should not be isolated and read out of context as mandating
permanent price ceilings, even when supplies of crude oil
are adequate to permit normal market mechanisms to function.
In the absence of shortages of crude oil, therefore, price
controls on crude oil are not necessary to carry out the
goal of equitable distribution at equitable prices.
In addition, FEA believes that "equitable" prices, within
the meaning of §4 (b) (1) (F) of the Act, will be achieved by
restoring normal market mechanisms during a period of
adequate supply and by eliminating economic distortions
caused by the current two-tier pricing system. However, to
the extent that a return to normal market mechanisms at this
time would bring prices on crude oil to levels which might
be viewed in certain sectors of the economy as inequitably
- 18 -
high because they result in higher prices on certain
petroleum products, this view is outweighted by the need to
achieve other objectives of the Act and by other considera-
tions, including the fact that decontrol is being phased
in gradually and the availability of legislative measures
to alleviate, through tax relief or rebates, the impact
of price increases on consumers and other sectors of the
economy.
On the basis of all the foregoing considerations, the
FEA concludes that price controls on crude oil are not
necessary to carry out the Act.
D. Comments on Old Oil Decontrol Proposal
Comments in opposition to the FEA old oil decontrol
proposal generally reflected the following arguments:
1. The argument that U.S. crude oil price levels should
be based on production costs and not reflect arbitrary
OPEC pricing decisions.
The FEA decontrol program permits old oil prices
ultimately to rise to the vicinity of current prevailing
world market prices, plus the supplementary import fee of
$2.00 per barrel. Some commentators who opposed the FEA de-
control program generally felt that the world price was
artificial and therefore unnecessarily high, and might go
higher, resulting in still higher domestic prices for decontrolled
crude oil. In order to provide appropriate incentive toward
- 19 -
increased domestic production, it was proposed that the old
oil price ceiling be retained but set at some higher
intermediate level, such as $7.50, $8.50 or $10.00 a barrel.
While no indisputable conclusions in this matter are
possible, it is clear that current world price levels,
including the supplementary import fee, do not exceed the
point at which further price increases cannot be expected to
bring significant returns in terms of increased crude oil
production. In the view of FEA, decontrol at prices up to
current world price levels (plus U.S. import fees) will
effectively stimulate domestic production and over time
substantially reduce our dependence on imported oil.
Nevertheless, in order to be responsive to the concern that
further OPEC price increases could result in further domestic
price increases above those levels providing the maximum
useful production incentives, the amendment adopted today
imposes an ultimate ceiling on domestic crude oil prices.
It should be remembered in this connection that
the great bulk of new domestic production of crude oil
will come not from traditional production techniques
within the contiguous portions of the continental United
States but from more sophisticated and expensive production
techniques within this area, or from the continental
shelf and remote areas of Alaska. Most offshore production
- 20 -
is expected to come from previously untapped areas of
the Atlantic and Pacific rather than from the more
familiar and tested reaches of the Gulf of Mexico. These
considerations all point to the need for new technologies,
heavier investment burdens, greater risks and greatly
increased costs of production.
In addition, the potential exists for substantial
new recoveries from worked-over "onshore" reservoirs
provided technology for secondary and tertiary recovery
is further developed or existing technology becomes
economically feasible as prices rise. While not as
costly as recovery from offshore and Alaskan frontiers,
recovery utilizing secondary/tertiary recovery techniques
is generally substantially more costly than primary
recovery.
Unfortunately, the level of incentive needed to
induce high-risk exploration and cost estimates for
successful development projects vary considerably due
to the substantial uncertainties connected with explora-
tion and ultimate recovery from remote and unhospitable
regions and considerable doubt as to future rates of
inflation. Thus, even if costs could be projected
with great precision, necessary incentives for increased
- 21 -
production could not be provided by setting prices
which merely covered costs. While producers acknowledge
that current uncontrolled domestic crude oil price levels
provide sufficient incentive to produce new oil,
nevertheless as long as three-fifths to two-thirds of
production must be sold at the old oil price ceiling of
approximately $5.25 per barrel, cash flow, together with
other sources of capital, will not be adequate to generate
enough capital to finance exploration and development of new
oil, no matter what price it may be expected to bring. This
problem is of even greater urgency now that tax reform has
removed the depletion allowance as a means of accumulating
capital for exploration and development.
In this connection, comment provided by oil producers
indicates that while industry profits were high in 1974,
profits for the first quarter of 1975 have dropped to an
- 22 -
average of about two-thirds of the level of the first
quarter of 1974. On an annualized basis, this level of
profit would produce a return on stockholder equity of 10.5
percent. For the ten-year period prior to 1974 the rate of
return on stockholder equity was 11.4 percent for the petroleum
industry compared with 11.6 percent for all manufacturing.
These figures tend to support the view that the high profit
levels of 1974 were not typical, and were the result of
short-term non-recurring forces. According to industry
comments, the steep decline in industry profits this
year, while attributable in large degree to the change
in the depletion allowance, significantly exceeds the
decline attributable to that change.
Management decisions as to capital needs and adequacy
of price incentives necessarily rest with producers and,
unless control of oil production is to be assumed by the
government, oil firms cannot be forced to develop and market
additional amounts of crude oil, even if price levels deemed
- 23 -
"adequate" by FEA or Congress were to be adopted. Several
commentators made reference in this connection to the
serious decline in natural gas production that has
occurred under long-term federal price regulation.
Taking into account both FEA and industry estimates,
adequate incentive for development of new "onshore"
crude oil (i.e., enhanced recovery from traditional
domestic reservoirs by secondary/tertiary methods) is
currently estimated at between $7.00 to $10.00 a barrel;
for development of new oil from Alaska and offshore or
continental shelf regions, at between $7.00 to $12.00
a barrel; for development of oil from shale, at between
$12.00 to $15.00 a barrel; for development of oil
from coal, at about $18.00 a barrel. This array of
estimates suggests that if imports are to be held at
acceptable levels by substituting significant amounts of
new domestic production, it will be both necessary and
appropriate to allow prices to rise to the vicinity of
currently prevailing world market levels.
The foregoing estimates are generally supported by
estimates provided to FEA by other sources. For example,
industry data submitted by the Society of Petroleum Engineers
- 24 -
indicates that cost of developing and producing a barrel of
crude oil in 600 feet of water in the North Atlantic and
North Pacific is 3.5 times the cost at the same depth in the
Gulf of Mexico, while the cost in the Gulf of Alaska
may range up to six times that in the Gulf of Mexico. Lag
times are more than twice as great in these frontier areas.
In addition, an independent economist testified before a
congressional committee that the replacement cost or
"economic cost" of domestic crude oil reached a level of
$12.73 a barrel in 1974. The high cost of finding
"replacement" barrels of crude oil for those we consume
today must be financed, in the main, by profits earned on
the barrels sold today.
In the opinion of FEA, the task which the nation faces
is one of providing sufficient incentives to private
industry to develop, to the maximum extent possible and
as quickly as possible, additional domestic crude oil
resources which will reduce dependence on unreliable
foreign crude oil. Revival of domestic production will
require a major undertaking in frontier regions at high
cost. A decision to offer maximum incentives and to pursue
maximum efforts to this end is our own decision and not one
dictated by foreign pricing policies.
- 25 -
2.
The argument that decontrol would impose too great
a burden on the consumer.
Most commenting refiners stated that old oil decontrol
would result in an average price increase of 5 cents or 6
cents per gallon of petroleum product. Suggesting that
actual dollar cost increases to the consumer would be within
manageable limits, Exxon commented that gasoline prices
today are below 1950 levels, in terms of constant dollars,
and would remain so even if old oil decontrol were effected
immediately. Other comments either directed attention to
"ripple effects" or noted that the cost was a small price to
pay for greater energy independence.
FEA assessment of impact on the consumer indicates
that the average retail price increase attributable to
decontrol by the end of this year would be only about 1
cent per gallon of petroleum product. This fact illustrates
that the program to phase out crude oil price controls over
a 2-1/2 year period will substantially diminish the impact
of decontrol on consumers. FEA estimates that the total
retail price increase attributable to decontrol over the
2-1/2 year period will be approximately 7 cents per gallon
of petroleum product.
The FEA assessment of impact on the consumer also
takes into account the intangible but real benefits which
would accrue to the public at large through increased national
economic security brought by lessened dependence on
unreliable foreign crude oil sources, improved balance of
- 26 -
payments position, revived domestic industrial production
and new jobs in the petroleum industry. In addition, the
"windfall profits" tax on oil producers' excess revenues
proposed by the President would yield tax receipts which
would be used to provide direct rebates to energy consumers.
These factors mitigate to a significant extent the actual
dollar cost to consumers.
On the other hand, the FEA is aware that prices on
such products as home heating oil are already very high
and that further increases could impair the ability of
certain consumers (particularly the aged and the poor) to
pay heating bills, despite the gradual nature of the FEA
decontrol program and tax relief. Specific legislative
proposals, such as a home insulation tax credit, have
been proposed to the Congress to minimize the impact
that relatively higher energy costs, including costs
of home utilities, will ultimately have on various
sectors of the economy.
However, the FEA considers the immediate adoption of
this gradual crude oil decontrol program of such overriding
national importance that no further delay can be justified.
FEA believes this action to be consistent with the admonition
in the Conference Report on the Emergency Allocation Act of
1973 that in exercising authority under that Act it would be
necessary to "strike an equitable balance between the
- 27 -
sometimes conflicting needs of providing adequate inducement
for the production of an adequate supply and of holding down
spiraling consumer costs."
3.
The argument that decontrol will not reduce demand.
Several comments were received which stressed that
consumers have already "dialed down" and taken all other
available conservation steps, and that no further realistic
anti-consumption measures are available, particularly to the
homeowner. According to this view, the decontrol program
would therefore merely squeeze the consumer.
While the FEA acknowledges that many useful conser-
vation measures in home heating (except perhaps major
insulation efforts) were instituted last year, nevertheless
comments with respect to inelasticity of demand are not
bcrne out by the demand responses experienced with respect
to past price increases.
The decontrol program will contribute to the long-term
goal of reducing dependence on unreliable foreign crude oil
and the benefits of achieving that goal must therefore be
measured on a long-term basis. The FEA position that
increased prices of domestic crude oil will dampen demand
domestically is based on the realistic assumption that
higher fuel prices in the long run will inevitably result in
or contribute to smaller and/or more efficient automobiles,
more efficient home heating systems, increased construction
and use of public transportation systems, and more efficient
- 28 -
use of fuels in commerce and industry. All of these will
contribute to contracting energy demand.
Moreover, means are available for easing short-term
problems relating to demand reduction. The President has
consistently urged that appropriate legislative action be
taken to ease the burden on consumers of the transition to
an economic system based on relatively higher costs for
energy than have been experienced in the past. The FEA will
continue to work actively in seeking to solve transitional
consumer problems.
4.
The argument that decontrol of crude oil should not be
undertaken unless natural gas prices are deregulated
simultaneously.
A number of petroleum marketers stated that they would
not support the FEA decontrol program unless natural gas
prices were decontrolled at the same time. Understandably,
marketers of petroleum fuels are concerned that they will
lose a share of their fuel markets to natural gas marketers
if petroleum fuels become increasingly non-competitive in
price.
To some degree the concern of petroleum marketers in
this respect may be exaggerated. The present short supply
of natural gas is expected to become more critical in
the coming months, SO that it is most unlikely that
- 29 -
many consumers will be able to substitute natural gas
for petroleum fuels even if the latter become more
expensive. Only if Congress acts to decontrol natural
gas prices substantially in advance of implementation of
a program to decontrol crude oil prices could there be
an expansion of natural gas supplies sufficient to permit
inroads into the petroleum fuels market. In that event,
of course, natural gas prices would have begun to climb
before those of petroleum fuels, so that the petroleum
marketers would be in a relatively better competitive
position.
The FEA agrees that many of the same reasons which
support decontrol of crude oil prices support decontrol
of natural gas price levels. However, regulation of
natural gas prices is not within the jurisdication
of FEA. In exercising its responsibilities under the
Emergency Petroleum Allocation Act of 1973, the FEA
must move forward to develop policies and programs
within its mandate, while recommending for congressional
action complementary measures which are beyond FEA
authority to implement.
Congress has under active consideration proposals to
deregulate the prices of natural gas. In view of the
- 30 -
urgency of taking steps now to alter the trend toward
increased imports of crude oil, and in view of the gradual
phase-out approach of the FEA decontrol program, the FEA
believes it is appropriate to commence gradual decontrol of
old oil price ceilings without waiting for final congres-
sional action on natural gas prices.
The FEA recognizes that the Emergency Petroleum
Allocation Act of 1973 places special emphasis on protecting
the competitive viability and market share of independent
marketers, to the maximum extent practicable and consistent
with the other objectives of the Act. FEA will therefore
maintain a continuing review of the market shares of home
heating oils versus competing fuels to insure that decontrol
of crude oil does not have a significant adverse impact on
independent marketers.
5.
The argument that decontrol of crude oil should not be
undertaken until a "windfall" profits tax is enacted.
For the reasons given under argument number 4, above,
the FEA believes that the decontrol program must begin now,
without further delay. Action on a "windfall" profits tax
can be completed within the next few months by Congress
without disrupting an orderly administrative decontrol
program. Increases in producer revenues will be gradual
under the phased decontrol schedule, and in any event a new
profits tax may be imposed retroactively.
- 31 -
6.
The argument that decontrol by FEA would harm the
airline industry, in contravention of one of the
goals of the EPAA.
Representatives of the airline industry commented that
U.S. airlines, already in financial difficulty because of
the increases in jet fuel prices in 1974 and the effects
of the recession on airline travel, would be further adversely
affected by another round of fuel price increases brought
about by decontrol.
The airline industry takes the position, in effect,
that decontrol should not be permitted to proceed because it
would impair public air transportation in contravention of
one of the goals of the Emergency Petroleum Allocation Act.
The FEA recognizes that one of many express goals to be
achieved by the allocation and price regulations promulgated
under the Emergency Petroleum Allocation Act of 1973 is to
"provide for maintenance of all public services
including
transportation facilities." However, the concern of Congress
in this respect was directed to the adequacy of supplies to
keep transportation systems running. This is clearly shown
by the following specific discussion of air transport
problems in the Conference Report on the Act.
The petroleum fuel shortage threatens numerous
areas of commerce. The jeopardy from shortage of
these fuels impacts most directly on transportation.
Without adequate petroleum fuel most United States'
domestic and international transportation, with no
option to convert to other fuels, potentially
- 32 -
would be seriously disrupted. A significant reduction
of transportation capability could adversely affect all
other areas of commerce and the national economy.
Thus, one of the primary objectives of the Act is to
assure maintenance of transportation services.
The Act clearly does not require the "maintenance" of price
ceilings on certain petroleum products purchased by a
particular industry.
Moreover, each of the many goals listed in §4 (b) of
that Act is qualified by the proviso that the allocation and
price regulations need provide for those goals only "to the
maximum extent practicable." In explaining why this
qualification was included, the Conference Report stated,
"It is fully recognized that, in some instances, it may be
impossible to satisfy one objective without sacrificing the
accomplishment of another." The qualification was thus
intended, according to the Report, "to give the President
administrative flexibility in marshalling short supplies and
equitably assigning them to particular needs."
Therefore, even if FEA were to agree with the airline
industry's view that decontrol does not fully meet one of
the many sometimes conflicting objectives under the Act,
this would not overcome the FEA's conclusion as to the
overriding need to proceed with this decontrol program -- a
program designed to reflect the present adequacy of supplies
and to begin on a gradual basis to restore the petroleum
industry to normal functioning.
- 33 -
The FEA is sensitive to the special problems which face
the airline industry and other public service industries
due to energy cost increases. The change from a 25 to a
30-month phase-out schedule should serve to reduce the
impact of decontrol on industries which are especially
dependent on petroleum fuels. The FEA is prepared to discuss
with any industry or affected group other ways in which
adverse effects under the decontrol program can be minimized.
E. Rule Modification.
1.
Length of Phase-Out Period.
A great variety of suggestions were received for
changing the 25-month period for decontrol proposed by
FEA in its notice of proposed rulemaking in this matter.
These ranged from requests for immediate decontrol, to
decontrol over a 5-10 month period, to decontrol over
a 4 or 5-year period. However, many commentators indicated
that they would be willing to accept the FEA proposal
on this issue as a compromise or second choice.
Those who proposed a longer period for phase-out were
chiefly concerned with minimizing or softening the impact on
the economy or on consumers, in particular. Those proposing
a shorter period stressed either the need to remove the
economic distortions and other deleterious effects of
- 34 -
controls as soon as possible or the need to achieve a
greater degree of national self-sufficiency in crude oil
at a more rapid pace.
The FEA must, of course, strike a balance between
these opposing considerations or concerns. The FEA believes
that a somewhat more gradual decontrol pace, at the rate of
3.3 percent a month for 30 months (after decontrol of
one percent for the month of July, 1975), represents a
reasonable balance on this issue. This will mean that
the decontrol process would extend to February 1, 1978,
compared with August, 1977, under the 25-month proposal
and August, 1980, under the decontrol proposal contained
in H.R. 7014 as recently reported out of the House
Commerce Committee. This phase out program, once placed
in motion, will permit planning and mobilization for
long range exploration and development of new domestic
crude oil resources to begin immediately. At the same
time, the 30-month phase-out schedule appears to provide
an appropriately gradual mechanism to minimize the impact
on the economy.
2.
Requirement of Maximum Feasible Rates of Production.
Comments were received which expressed concern that
the decontrol program, as proposed, might have the
unintended result of reducing production temporarily
- 35 -
if producers held back on production until the end
of the phase-out period, when all crude oil could be
sold at uncontrolled price levels.
In view of this possibility, the FEA has decided to
adopt generally the same express requirement now applicable
by its terms only to the stripper well lease exemption,
which requires production to be maintained at maximum
feasible rates of production. The FEA believes this re-
quirement is appropriate to assure that the purpose and
intent of the decontrol program are not circumvented.
The requirement is also fully consistent with the main
purpose of decontrol, which is to maintain and increase
current levels of domestic production as rapidly as
possible. Any holding back would defeat this purpose and
would also defeat the effort to minimize adverse effects on
the economy by phasing out controls on a gradual basis.
3. Decontrol Base Level.
Under the proposed rule the amount of decontrolled
oil would have been calculated as a percentage of the
base production control level crude petroleum (i.e., 1972
production) rather than as a percentage of the old oil
currently being produced. It was pointed out to FEA
that inasmuch as 1972 production levels are generally
greater than current production levels, the monthly
decontrol volume would be correspondingly larger if
- 36 -
the amount of decontrolled oil were to be calculated
against a 1972 base. This would mean that the old
oil produced from a property would be decontrolled
in a period of less than 25 months, to the extent
that its current production was at less than 1972
levels. Thus, the overall decontrol program,
as proposed, would have extended to the end of that
25-month period, and would have affected for the full
25 months (as proposed) those properties which continue
to produce at 1972 levels, but would have decontrolled
properties producing at less than 1972 levels before
the end of that period.
In order to clarify this ambiguity concerning the
phase-out schedule and in order to assure a full 30-month
phase-out for all properties which continue to be
productive, the FEA has concluded that it would be
preferable to calculate the amount of decontrolled
crude oil on the basis of a recent level of old oil
production rather than on the basis of the 1972 base
level production.
The FEA has also concluded that, in view of the
urgent need for increased domestic production of crude
oil, the modified decontrol amendment should provide
production incentives for all properties, at all
- 37 -
levels of production. As discussed in Section B,
above, existing production incentives relating to
"new" and "released" crude oil are not effective to
encourage additional production in many cases where
current production has declined substantially below 1972
base levels. Gradual decontrol of old oil based on the
current month's production would not directly stimulate
additional production in these cases, since such a
decontrol formula would subject any incremental pro-
duction to price controls in the same percentage as if
a lesser amount had been produced.
In view of the foregoing considerations, the
decontrol rule adopted by FEA today has been modified
to measure decontrolled old crude oil by reference to
an established base of the recent production level
of old oil from the property concerned. This will
provide an immediate price incentive to all properties
to increase production above that level. Accordingly,
the new regulation establishes a "decontrol base pro-
duction level," which is defined as the average monthly
production of old oil from the property concerned
during the three calendar months ending June 30, 1975,
- 38 -
based on maximum feasible rates of production in those
months. Any old oil production above that level in each
month beginning with August, 1975, will be decontrolled, as
will an amount of each current month's old oil production
which is equal to the decontrol base production level
multiplied times a percentage equal to 3.3 percent times
the number of months beginning with August, 1975, through
that current month, plus one percent (representing the
decontrol action for July, 1975). However, for the month of
July, 1975, the only production to be decontrolled will be
one percent of the decontrol base production level. Since
the decontrol calculations are based exclusively on old oil
production levels (controlled oil less "new" and released"
oil), this amendment leaves undisturbed and is in addition
to the existing regulations which permit "new" and "released"
crude oil to be priced at market levels.
For example, a property which had a 1972 base pro-
duction control level of 2,000 barrels per month (b/m) and a
1975 "decontrol base production level" (i.e., old oil
production level) of 1,680 b/m might reach the following
hypothetical total production levels: in July, 1975,
1,600 b/m; in August, 1975, 1,640 b/m; in October, 1975,
1,880 b/m; and in January, 1976, 2,180 b/m.
Under the amendment adopted by FEA today, the amount of
July production of 1,600 barrels which would be decontrolled
- 39 -
would be one percent of the decontrol base production level
of 1,680 barrels, or 17 barrels. The amount of August
production of 1,640 barrels which would be decontrolled
would be 4.3 percent (3.3 percent for August plus one
percent for July) of the decontrol base production level
of 1,680 barrels, or 72 barrels.
Decontrolled production for October would be the 200
barrels of oil (all of which is old oil) produced in excess
of the decontrol base production level, plus 10.9 percent
(3.3 percent times three months plus one percent) of the
1,680-barrel decontrol base production level, a total of
383 barrels.
For January, in order to determine the amount of crude
petroleum that could be sold at market levels, the producer
would first note that the 180 barrels in excess of the 2,000
barrel base production control level comprised "new" oil,
and that, accordingly, 180 barrels of "released" oil
would be available (omitting for purposes of this example
the cumulative deficiency requirement). This means that
the month's production of old oil is 1,820 barrels. The
amount of old oil which would then be decontrolled pursuant
to this amendment would be the 140 barrels by which the
1,820 barrels of old oil production for the month exceeds
the 1,680 barrel decontrol base production level, plus 20.8
- 40 -
percent (3.3 percent times six months plus one percent)
of the 1,680-barrel decontrol base production level, or
349 barrels. Thus, for the month, 1,331 barrels would be
subject to the old oil ceiling price and a total of
849 barrels would be sold at market levels (although subject
to the higher ceiling price for "decontrolled" oil.)
The foregoing examples are intended merely to illus-
trate the computations under current new and released crude
oil price rules, and under this amendment, where the current
month's production is (1) below the "decontrol base pro-
duction level," (2) above the "decontrol base production
level" but below the 1972 base production control level, and
(3) above both the "decontrol base production level" and the
1972 base production control level. (These examples are not
intended to reflect projected rates of production for any
particular property or for U.S. domestic production generally.)
4.
Decontrolled Price Ceiling.
Pricing policies recently announced by OPEC indicate
that world crude oil price levels, which have remained
generally stable for more than a year, might be increased in
the coming months.
In order to avoid the possibility that future world
price increases might result in U.S. domestic price
increases to levels which are above the current landed
- 41 -
cost for imported oil (i.e., the world market price
plus the $2.00 per barrel supplementary import fee),
the FEA has further modified its proposed rule, to
establish in this amendment an ultimate price ceiling
for decontrolled domestic crude oil of $13.50 per
barrel applicable until the end of the 30-month decontrol
period. This ceiling will apply to all domestic crude
oil other than stripper well crude oil, which is exempt
from price controls pursuant to the Emergency Petroleum
Allocation Act of 1973. With respect to properties from
which new or released crude oil was produced and sold in
the month of January, 1975, the ceiling price shall be
the highest price charged for crude oil produced and sold
from that property in January, 1975, plus $2.00 per
barrel; and with respect to decontrolled crude oil
produced and sold from all properties which did not
produce and sell new or released crude oil in January,
1975, the ceiling price shall be $13.50 per barrel.
The FEA does not intend by imposing this safeguard
to alter the fundamental nature or direction of the
decontrol program. While the existence of an ultimate
price ceiling means in one sense that decontrol is not
absolute, the experience under price controls since
- 42 -
the Economic Stabilization Act of 1970 indicates that
no price exemption can be considered permanent where
economic conditions remain unsettled or vulnerable to
disruption. The FEA intends under this rule merely
to make clear in advance the point above which
decontrolled prices will not be permitted to rise
without a price freeze and concurrent reassessment of
crude oil cost/price and supply/demand forces.
Should Congress adopt a windfall profits tax
measure, as urged by FEA, any increased oil-producer
revenues generated due to possible future OPEC price
increases would be returned to the Treasury whether
or not FEA imposed an ultimate crude oil price
ceiling. However, assuming a windfall profits tax
is enacted and the authority of the FEA to regulate
petroleum prices is extended, it would remain the
responsibility of FEA to monitor progress toward
import-reduction goals and to take such additional
steps as might be necessary to assure that domestic
production is increased at the rate and in the manner
deemed most appropriate. The establishment of an
ultimate price ceiling at this time helps to clarify
- 43 -
energy policy for both producers and consumers and is in
keeping with FEA's continuing responsiblity to guide
and direct attainment of energy policy goals.
5. Technical Changes.
Technical changes have been made in $$211.62 and
212.131 to conform the entitlements program and the
crude oil sales certification requirements to the
decontrol program.
(Emergency Petroleum Allocation Act of 1973, as amended,
Pub. L. 93-159, as amended by Pub. L. 93-511; Federal
Energy Administration Act of 1974, Pub. L. 93-275; E.O.
11790, 39 FR 23185).
In consideration of the foregoing, Parts 211 and 212 of
Chapter II, Title 10 Code of Federal Regulations, are
amended as set forth below, effective immediately upon the
expiration of the period required pursuant to §4 (g) (2) of
the Emergency Petroleum Allocation Act of 1973, as amended,
unless this amendment or any portion thereof is disapproved
by either house of Congress during that period.
Issued in Washington, D.C., July 14, 1975.
RS
Robert E. Montgomery, Jr
General Counsel
Federal Energy Administration
- 44 -
1.
Section 211.62 is amended in the definition of
"old oil" to read as follows:
$211.62 Definitions.
*
*
*
"Old oil" means old crude petroleum less any related
decontrolled old crude petroleum, as each of these
terms is defined in $212.72 of this chapter.
*
*
*
2.
Section 212.72 is revised to add, in appropriate
alphabetical order, a definition of "decontrol base
production level" and "decontrolled old crude petroleum"
to read as follows:
$212.72 Definitions.
*
*
*
"Decontrol base production level" means the total
number of barrels of old crude petroleum produced and sold
from the property concerned during the three calendar
months ending June 30, 1975, divided by three. The decontrol
base production level for each property shall be based
upon each well on that property having been maintained
at the maximum feasible rate of production during the
- 45 -
three calendar months ending June 30, 1975, in accordance
with recognized conservation practices, and not significantly
curtailed by reason of mechanical failure or other disruption
in production. In a case where the property concerned was
not so maintained, the FEA may assign a decontrol base
production level which fairly represents the production
level which would have been attained if that property had
been so maintained.
"Decontrolled old crude petroleum" means:
(1) For the month of July, 1975, a number of barrels
of old crude petroleum produced and sold from the property
concerned in that month equal to 1 percent of the decontrol
base production level for that property;
(2) For months subsequent to July, 1975, (a) the total
number of barrels of old crude petroleum produced and sold
from the property concerned in the current month which
exceeds the decontrol base production level for that property,
plus (b) a number of barrels of old crude petroleum produced
and sold from the property concerned in the current month
equal to the product of the decontrol base production level
for that property multiplied by a percentage equal to 3.3
percent multiplied by the number of months beginning with
August, 1975, through the current month plus one percent.
- 46 -
3.
Section 212.74 is revised to read as follows:
$212.74 New, released and decontrolled old crude petroleum.
(a) Notwithstanding the provisions of $212.73 (a), but
subject to paragraphs (b) and (c) of this section, a producer
of crude petroleum may charge any price for the new crude
petroleum, the released crude petroleum, and the decontrolled
old crude petroleum produced and sold from the property
concerned in the month concerned.
(b) Until February 1, 1978, no producer may charge a
price for any new crude petroleum, released crude petroleum,
or decontrolled old crude petroleum which exceeds the highest
price charged for new or released crude petroleum produced
and sold from the property concerned in January, 1975, plus
$2.00 per barrel, or with respect to such crude petroleum
produced from a property from which new or released crude
petroleum was not produced and sold in January, 1975, a
maximum of $13.50 per barrel.
(c) A producer that charges a price for decontrolled
old crude petroleum which exceeds the ceiling price for
old crude petroleum shall maintain each well on the property
concerned at all times at the maximum feasible rate of
production, in accordance with recognized conservation
practices, and shall use all reasonable means to insure that
production is not significantly curtailed by reason of
mechanical failure or other disruption in production.
- 47 -
4.
Section 212.131 is revised in paragraphs (a) and
(b) to read as follows:
$212.131 Certification of domestic crude petroleum sales.
(a) (1)
Each producer of domestic crude petroleum
shall, with respect to a first sale of domestic crude
petroleum, certify in writing to the purchaser: (i) the
ceiling price of that domestic old crude petroleum, (ii)
the amount of stripper well crude petroleum, (iii) the
amount of new crude petroleum, (iv) the amount of
released crude petroleum, (v) the amount of decontrolled
old crude petroleum, and (vi) the amount of old crude
petroleum which has not been decontrolled, provided,
that the certification requirements of this paragraph
(a) (1) may be complied with by a one-time certification
by a producer to the purchaser as to the base production
control level crude petroleum for each month of 1972
and as to the decontrol base production level for the
particular property. The certification shall also
contain a statement that the price charged for the
domestic crude petroleum is no greater than the maximum
price permitted pursuant to this part.
(2) Each seller of domestic crude petroleum, other
than a producer of domestic crude petroleum covered by
paragraph (a) (1) of this section shall, with respect to each
- 48 -
sale of domestic crude petroleum other than (i) an allocation
sale pursuant to $211.65 of part 211, or (ii) a sale in
which no volumes of old oil (as defined in $211.62) are
deemed to have been transferred pursuant to $211.67 (g) of
part 211, certify in writing to the purchaser the amount of
old crude petroleum which has not been decontrolled
included in the volume of domestic crude petroleum SO
sold. The certification shall also contain a statement
that the price charged for the domestic crude petroleum
is no greater than the maximum price permitted pursuant
to this part.
(b) With respect to each allocation sale under $211.65
of part 211, the seller shall certify in writing to the
purchaser the amount of old crude petroleum which has
not been decontrolled deemed (under the provisions of
$211.67 (f) of part 211) to be included in the volume
of crude petroleum so sold. Such written certification
shall be made within 25 days following the month in
which the crude oil so sold is delivered to or for the
account of the purchaser.
*
*
*
*
*