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May 25,1 979 Export Alaskan Oi l? While struggling with the shortage of gasoline in the California consumer market, the oil industry and official Washington have until June 22 to deal with a related problem - what to do with the "surplus" Alaskan oil which West Coast refineries cannot utilize because of their limited capacity to process that relatively high-sulfur crude. June 22 marks the expiration date for a 1977 amendment to the Export Administration Act which sharply restricts the marketing of Alaskan oil outside the United States. Many Congressmen want to extend or even tighten the restrictive amendment; the Administration, on the other hand, would prefer to live with the more flexible language of the earlier Trans-Alaska Pipeline Authorization Act. The catalyst in this debate is the proposed so-called "swap" arrangement, a transportationcost-saving export exchange under which Alaskan oil would be shipped to Japan in exchange for an equivalent amount of Japanbound foreign-produced oil diverted to the u. S. Gulf or East Coasts. Mexico in particular has been mentioned recently as a possible third party in such an arrangement. Under the Trans-Alaska pipeline legislation, the President could permit exports if they were in the form of exchanges with adjacent nations on grounds of transportation efficiency, or, if the President found that the export in question was in the national interest and did not "diminish the to- tal quantity or quality of petroleum available to the United States." Additional restrictions were later placed on exports, and under the proposed legislation now being debated in Congress to renew and strengthen that amendment, the President also would have to certify that any export scheme would actually help reduce the cost to refiners, marketers and consumers. Both houses of Congress also would have to approve the arrangement. In effect, this would eliminate the export option. Distribution of oil The debate raises the key question of whether "swaps" would help or hinder the key objective of the nation's energy policy: namely, to reduce u.s. depen-dence on foreign oil imports and vulnerability to supply interruption. Alaskan North Slope production, since coming on stream in July 1977, has contributed to that goal. Production has risen gradually to a current level of 1.2 million barrels a day, displacing a roughly equivalent amount of foreign crude oil at U.S. refineries on the West and Gulf Coasts. West Coast (District V) refineries now absorb about 850,000 bId of total Prudhoe Bay production. That amount represents just about the maximum volume those refineries presently can handle, given their product mix, environmental requirements, and technical capacity for processing high-sulfur Alaskan crude. The remaining (continued on page 2) 350,000 bid is shipped by U.S. flag tankers from the Alaska pipeline terminus at Valdez to Gulf Coast refineries through the Panama Canal. Advocates of the swap arrangement claim that their proposal would reduce producers' transportation costs, increase the return at the wellhead, and thereby provide producers with the incentive to increase North Slope and other Alaskan production. Shipment through the Panama Canal is more costly than other alternatives for marketing the Alaskan oil that is surplus to the needs of the West Coast, mostly because the Jones Act, of 1917 vintage, requires the use of costly U.S. flag vessels between American ports. The present system also yields Alaskan producers the lowest price at the wellhead. This is because petroleum's selling price in any given market is based on the landed price for Saudi-Arabian crude, and North Slope producers must absorb transportation costs in order to compete against foreign crude in those markets. Producer revenues North Slope crude now sells for an estimated $15.79/barrel on the U.S. Gulf Coast. However, North Slope producers receive a wellhead price of only about $6.34/ barrel, after subtracting the Trans-Alaska pipeline tariff of $6.20/barrel and the ValdezPanama Canal-Gulf Coast shipping cost of $3.25/barrel. But under a swap arrangement, North Slope oil could be shipped to Japanese refineries in foreign tankers at a 2 rr-.c+ '-V...Jt.. ,....+ r-.n '-'I V .I., I" ':lhr-.,.+ UkJ\J\AL Q:O AO/h':l ......ol ..vVe-rv/vu.,t""",., and this cost saving would mean a $2.85/barrel increase in the wellhead price to Alaskan North Slope producers. If Mexico were the third party in the exchange, Mexican producers similarly would benefit from diverting their Japan-bound crude to U.S. Gulf Coast refineries at a shipping cost of only $0.40/barrel. Proponents of export exchanges maintain that these transportationcost savings are essential to help finance the necessary increase in North Slope production that would enable the Alaska pipeline to be expanded and utilized to its full 2.0 million bid potential. Production from the main Prudhoe Bay reservoir - the Sadlerochit should reach potential capacity of 1.5 million bid by late next year, and will probably fall below that level by the mid-1980's. Some output may become available from nearby - as yet untapped reserves. But a major expansion - sufficient to meet the pipeline's fullpotential throughput may require the development of higher-cost reserves in new areas, for example, in the Beaufort Sea. Criticism of swaps Critics of the swap proposal, while agreeing that it would boost producer revenues and thus production incentives, argue that other alternatives are preferable, especially when energy security is considered. Producer transportation costs also could be lowered by shipping Alaskan crude through domestic pipelines, such as the proposed Sohio line from Long Beach, California to Midland, SOURCES OF WEST COAST (DISTRICT V) CRUDE OIL SUPPLIES California 1978 Domestic 1977 1976 g@1 1975 %i%1 Refinery Inputs (thousands of barrels) Texas, and the proposed North2ir. r ..i+irc Tier pipeline from Port Angeles, Washington to Clearbrook, Minnesota. Moreover, North Slope producers already benefit from every increase in the, OPEC price; since last December alone, the wellhead price for North Slope oil sold on the Gulf Coast has risen about 20 percent, simply on the basis of the sharp run-up in the Saudi landed price. Again, producer revenues could be increased, on an after-tax basis, by a reduction in Alaskan state taxes and/or Federal income taxes. that such arrangements would result in somewhat higher wellhead prices and higher profits for Alaskan producers than domestic pipelines, but they would still reject that solution on energyindependence grounds. Most such critics would opt instead for the Long Beach, California/Midland, Texas pipeline that would bring Alaskan oil to the Midwest and/or the Northern Tier pipeline that would serve the states bordering on Canada (such as Montana, North Dakota and Minnesota). Those pipelines also would result in higher wellhead prices for producers than would the Panama Canal route - although not as high as with export exchanges. But they would have the added advantage of minimizing the threat of outside supply interruption. Moreover, without the Northern Tier pipeline, that region of the U.S. is likely to face the prospect of a.crude oil shortage by 1982, when the Canadian government - in its own interests of self-sufficiency - stops exporting its crude oil as planned. Both sides agree that increased domestic production, with or without swap arrangements, will tend to reduce net imports of petroleum for any given level of. consumption. Thus, as long as domestic production expands, the U.S. oil trade balance will improve relative to what it otherwise would have been. In other words, export exchanges have a neutral effect on net imports. But critics of such arrangements argue that swaps increase grossimports, and so expose the U.S. to a higher degree of potential supply interruption than would a more restrictive policy. Further, they argue that even if exported Alaskan oil were redirected back to this nation in a supply curtailment directed against the United States,that action would simply transfer the dislocation to Japan and would thus undermine Japan-U.S. relationships. But in response, advocates of swap arrangements argue that a restrictive policy would undermine the efficiencies that should accrue to the domestic econoJllY from unhampered world trade. 3 '-' •• \. ........ ..J r.f V I ovnr..-+ \,... ....'p'-Jlt. ovrh'CH'HTOC ,-/\,,-,,U"6'-...) -:>rtrY\i+ Q U .l •• \. By acting next month to exclude the export option, Congress would create an incentive for' producers to invest in domestic pipelines, and also to retrofit their refineries to handle larger volumes of high sulfur North Slope oil. Thus, Congress might choose the weaker economic alternative in favor of what appears to be a stronger approach from the autarkic standpoint of energy independence and supply security. Yvonne levy UOlSU!4SE'M • 4E'ln • uoS<3JO• E'PE'i\<3N 0 04E'PI !!E'MEH • E'!UJOj!lE':) • E'UOZPV • E')ISE'IV CG):J)<§Y:J) J( CG) 'l!le:>'o:>spueJ:fueS lS4 'ON @'& J(@<§@( QI GI Vd 1 9VlS Od 's'n llVW SSV1:> JJ. \qI BANKING DATA-TWELFTHfEDERALRESERVE DISTRICT (Dollar amountsin millions) SelectedAssetsandliabilities large CommercialBanks Amount Outstanding Change from 5/9/79 5/2/79 Changefrom yearago@ Dollar Percent + 17,724 16.42 + 16,848 19.62 14.03 + 3,723 27.06 + 7,794 NA NA NA NA Loans(gross,adjusted)and investments* 125,686 711 Loans(gross,adjusted)- total# 102,737 532 Commercialand industrial 30,259 87 Realestate 36,594 128 Loansto individuals 21,330 83 Securitiesloans 1,736 92 ;U.S.Treasurysecurities* 7,790 83 164 2.06 Other securities* 15,159 H- 7.37 96 + 1,040 Demanddeposits- total# ItI- 1,947 40,650 6.90 + 2,624 Demanddeposits- adjusted I30,182 H- 5.52 352 + 1,578 ISavingsdeposits- total 29,596 763 36 2.51 Time deposits- total# 49,918 238 + 6,300 II- 14.44 Individuals,part. & corp. 40,624 237 II- 20.60 + 6,939 (LargenegotiableCD's) 17,157 96 + 1,146 It- 7.16 Averages Weekended Weekended Comparable of Daily figures 5/9/79 5/2/79 year-agoperiod MemberBankReserve Position ExcessReserves(+ )/Deficiency(-) 14 9 57 Borrowings 90 224 148 Net free reserves(+ )/Net borrowed(-) 76 214 92 federalfunds- Sevenlarge Banks Net interbanktransactions + 2,304 + 967 + 903 [Purchases(+ )/Sales(-)] Net, U.S.Securitiesdealertransactions + 365 + 220 + 427 [Loans(+ )/Borrowings(-)] * Excludestradingaccountsecurities. # Includesitemsnotshownseparately. @ Historicaldataarenotstrictlycomparable dueto changes in the reportingpanel;however,adjustments havebeenappliedto 1978datato.removeasmuchaspossible theeffectsof thechanges in coverage. In addition,for someitems,historicaldataarenotavailabledueto definitionalchanges. Editorialcommentsmaybe addressed to theeditor(WilliamBurke)or to theauthor.... Freecopiesof this andotherFederalReserve publicationscanbeobtainedbycallingor writingthePublicInformationSection, federalReserve Bankof Sanfrancisco,P.O.Box7702,SanFrancisco 94120.Phone(415)544-2184.
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