CRUDE OIL PRICING AMENDMENTS OF 1977 THURSDAY, SEPTEMBER 22, 1977 U.S. SENATE, SUBCOMMITTEE ON ENERGY CONSERVATION AND REGULATION, The subcommittee met, pursuant to notice, at 8 a.m. in room 3110, Also present: Benjamin S. Cooper, professional staff member; James T. Bruce, counsel; and Danny Boggs, deputy minority counsel. OPENING STATEMENT OF HON. J. BENNETT JOHNSTON, A U.S. SENATOR FROM THE STATE OF LOUISIANA Senator JOHNSTON. The hearing will come to order. The hearing today will focus on S. 2073, the Crude Oil Pricing Amendments of 1977. S. 2073 is a responsible approach to crude oil pricing. I believe it can be a reasonable alternative to the President's proposal of a wellhead tax on domestic crude oil which will bring the cost of all domestic oil to the level of the world price. I hope my proposal will attract a broad base of support. If such support is forthcoming, I am prepared to offer S. 2073 on the floor of the Senate as an amendment to the utility rate reform legislation. Let me explain S. 2073. First, S. 2073 amends the Emergency Petroleum Allocation Act, EPCA, to eliminate the composite pricing system established in December 1975, when the Energy Policy and Conservation Act was adopted. However, the benefits for the consumer of price controls on old and new oil under the present pricing system will continue under S. 2073. Under EPCA, FEA created two major classifications of domestic oil, old and new crude oil. S. 2073 retains these two classifications and establishes the ceiling price for these two classifications, the February 1976, prices determined pursuant to EPCA. These prices will be allowed to rise with inflation only. There will be no phaseup of old and new oil prices to world crude oil price levels. It is my intention that these old and new oil price ceilings continue in perpetuity, increasing only with the rate of general inflation. Second, S. 2073 allows the President to establish different classifications of oil with ceiling prices higher than those established for old and new crude oil if he determines that such action is necessary to encourage maximum crude oil production. However, the President cannot grant such special treatment to more than 3 percent of the domestic crude oil produced in any calendar year. The purpose of this provision is to allow the President continued flexibility to deal with such special problems as crude oil produced by enhanced recovery techniques and crude oil with special gravity differential problems. Finally, S. 2073 deregulates two classifications of domestic crude oil. The first classification, stripper oil, is deregulated under present law and my bill would continue this exemption. The second classification which would be deregulated, newly discovered oil, is in accord with the intent of the President's April 20 announcement. That is, newly discovered crude oil would be given the highest possible price. Under S. 2073, newly discovered oil is defined as crude oil produced from a new reservoir which was first penetrated by a well the drilling of which commenced on or after April 20, 1977. S. 2073 does not adopt the artificial 2.5 miles, 1,000 feet cylinder definition proposed by the administration. Rather, newly discovered oil, under S. 2073, is simply newly discovered oil. It would receive whatever price buyers are willing to pay. For the producer, S. 2073 offers price certainty, freedom from price freezes and price rollbacks and maximum incentive for new crude oil discoveries. For the consumer, S. 2073 offers price certainty, incentives for maximum domestic crude oil exploration and production, and an alternative to the $14.5 billion which will be taxed into the Federal Treasury under the President's crude oil pricing plan. At this point I will insert in the record a copy of S. 2073. [The bill follows:] 3 1 cent change, seasonally adjusted at annual rates, of the most 2 recent implicit price deflator for the gross national product 3 which shall be computed and published for each calendar 4 quarter by the Department of Commerce, subject to such 5 6 additional modification as the President shall make to exclude therefrom any amount which he determines is attributable 7 solely and directly to increases which occur after the date of 8 enactment of this section in prices of imported crude oil, 9 residual fuel oil, or any refined petroleum product resulting 10 from concerted action of two or more petroleum exporting 11 countries.". 12 13 14 (c) deleting section (e) and inserting in lieu there of the following new section (c) as follows: "(e) The regulation under section 4 (a), as amended, 15 may provide, in any calendar year, for different classifications 16 of a maximum of 3 per centuin of the crude oil produced in 17 the United States, first sale prices higher than the ceiling 18 prices specified in subsection (b) of this section. In provid19 ing for such different classifications of crude oil and such 20 higher first sale prices, the President shall determine that 21 such classifications and such first sale prices 2 2 2 2 22 23 "(1) will give positive incentives for (A) enhanced recovery techniques, or (B) deep horizon development; 2 1 an amendment to the regulation under section 4 (a) of this 2 Act which regulation, as amended, shall establish ceiling 3 prices (or the manner of determining ceiling prices) in 4 accordance with subsection (b) applicable to the first sale 5 of that crude oil produced in the United States.". 7 (b) deleting section (b) and inserting in lieu thereof the following new section (b) as follows: “(b) (1)_The_regulation under section 4(a), as 9 amended, shall— 8 10 11 "(A) provide a ceiling price for old crude oil equal to the average first sale price for such oil during the 12 month of February 1976, as adjusted to take into account the impact of inflation since February 1976, as measured by the adjusted GNP deflator; and “(B) provide a ceiling price for new crude oil equal to the average first sale price for such oil during the month of February 1976, as adjusted to take into account the impact of inflation since February 1976, as measured by the adjusted GNP deflator. "(2) As used in this subsection, the terms 'old crude oil and new crude oil' means those terms as defined in 22 sections 212.72 of title 10, Code of Federal Regulations, as 23 in effect on June 1, 1977. 24 25 "(3) As used in this subsection, the term 'adjusted GXP deflator' means the first revision of the quarterly per 3 1 cent change, seasonally adjusted at annual rates, of the most 2 recent implicit price deflator for the gross national product 3 5 which shall be computed and published for each calendar 4 quarter by the Department of Commerce, subject to such additional modification as the President shall make to exclude 6 therefrom any amount which he determines is attributable 7 solely and directly to increases which occur after the date of 8 enactment of this section in prices of imported crude oil, 9 residual fuel oil, or any refined petroleum product resulting from concerted action of two or more petroleum exporting 11 countries.". 10 12 13 14 (c) deleting section (c) and inserting in lieu there of the following new section (e) as follows: "(e) The regulation under section 4 (a), as amended, 15 may provide, in any calendar year, for different classifications 16 of a maximum of 3 per centun of the crude oil produced in 17 the United States, first sale prices higher than the ceiling 18 prices specified in subsection (b) of this section. In provid19 ing for such different classifications of crude oil and such 20 higher first sale prices, the President shall determine that 21 such classifications and such first sale prices 22 "(1) will give positive incentives for (A) enhanced 23 recovery techniques, or (B) deep horizon development; |