5
period, the trade press reports that spot purchase and sale transac-
tions in major export market centers, such as Rotterdam, the Medi-
terranean, and Singapore, have already reflected some signs of
buying pressure in recent days.
Although the volumes transacted in these so-called spot market
centers are relatively small compared to total free world oil con-
sumption, the prices are widely publicized in the trade and general
press and the escalation in these prices in early 1979 following the
Iranian export suspension was used by OPEC as a key reason for
their increases in official OPEC government selling prices for crude
during 1979 and early 1980.
Hopefully, the current high level of worldwide inventories—
which was not the situation in early 1979—will mitigate against
escalating spot crude and product prices if the current crisis does
not extend too long. Obviously, the willingness of other OPEC
producers to increase current production levels and the willingness
of oil consumers worldwide to use oil even more conservatively
than they have in recent months are other key factors.
Now I would like to comment on the U.S. situation.
Total oil demand has averaged 17 million barrels per day over
the first 8 months of 1980, with imports averaging 6.9 million
barrels per day. Of course, the United States has not imported any
oil from Iran since last November and recent imports of Iraqi
crude into the United States would appear to be less than 50,000
barrels a day.
Given these relatively low imports from Iraq, one would not
expect any dramatic or immediate market changes on what has
been a relatively comfortable supply situation. U.S. crude and prod-
uct inventories are in relatively good shape, with some 175 million
barrels representing volumes above historically normal levels at
this time of the year. In addition, there is the Government strate-
gic inventory cushion of 90 million barrels.
As a final, but to me a very obvious and critically important
point, the oil importing nations of the world, including of course
the United States, are and will continue to be for many years
vulnerable to political uncertainty and possible sudden supply dis-
ruptions in the Middle East oil exporting countries. Thus, the need
continues even greater than before to find ways to use oil more
conservatively and to concurrently accelerate efforts to develop
major new sources of domestic energy supplies.
h Thank you. Now I will try to answer any questions you may
ave.
Mr. Moffett. Mr. Sachs, the Chair wishes to thank you on
behalf of the subcommittee for an excellent and informative state-
ment, particularly in view of the short notice which you had. We
are most appreciative.
At this time, as is our practice, the Chair will recognize members
for questioning under the 5-minute rule. The Chair reminds mem-
bers that we do have two other witnesses who will speak on rough-
ly on the same topics. Let us save some questions for them and not
have Mr. Sachs bear the brunt of all of the questioning.
At this time, the Chair recognizes the gentleman from Massachu-
setts, Mr. Drinan, for 5 minutes.
Mr. DRINAN. Thank you, Mr. Chairman.
70-004 O - 81 - 2


7
there are any distinct trends appearing right now. There have been
signs of buying pressure, but on a day-to-day basis this market has
actually bounced back and forth. That is a distinctly different
pattern than we saw evolve following the Iranian problem in early
1979.
Mr. DRINAN. Thank you very much, Mr. Sachs.
I yield back the balance of my time.
Mr. Moffett. The Chair now recognizes the gentleman from
Minnesota, Mr. Stangeland, for 5 minutes.
Mr. STANGELAND. Thank you, Mr. Chairman.
Mr. Sachs, I do want to compliment you on a very good state-
ment.
You state that in the reserves that are held now in the free
world we have 4 months supply, and then we have another 4
months if the mandatory strategic stocks could be released. There-
fore, we have approximately 8 months' of reserves in the free
world.
What is the situation in the United States? How long can we
operate if the Straits of Hormuz were closed? What kind of a
reserve do we have?
Mr. SACHS. I pointed out in my statement, I believe, that using
the same reference that I attempted to use for the worldwide
inventory description, it appears that we have 175 million barrels
of crude and products above what would be deemed historically
normal for this time of year. That does not include the 90 million
barrels that are in the SPR reserves.
I would say, without having the arithmetic at my fingertips,
roughly that we have a similar inventory situation as that which I
described for the free world.
However, let me point out the importance, at least immediately
and in the near term, of the relatively small dependence that U.S.
refiners have on the import of Iraqi, and of course Iranian, crude
into this country. At least for the immediate future, I would not
expect to see any noticeable signs of this suspension of exports
from those two sources here in the United States.
Mr. STANGELAND. The question I raised is this. What happens if
the Straits of Hormuz are closed? Does that alter the picture?
Mr. SACHS. I am sorry. I did not understand that.
Mr. STANGELAND. There is a lot more than Iraqi and Iranian oil
coming through the Straits of Hormuz.
Mr. SACHS. Yes, sir.
Mr. STANGELAND.. I think that is the critical point, given the
disturbances going on over there.
Mr. SACHs. Yes, sir. Roughly one-third of the free world's oil goes
through there.
Mr. STANGELAND. What is our potential for increased production
and how long a time frame would it take to make up for some of
the shortfall that we might experience if the Straits of Hormuz
were closed?
Mr. SACHS. If I might, I have a colleague here from our domestic
affiliate in Houston, who is quite a bit more familiar with the U.S.
production situation than I am, so if you will bear with me for one
moment, I just want to consult him.


12
Mr. Moffett. The gentleman's time has expired.
I would just say that the mandating of the strategic petroleum
reserve stemmed from that 1975 law and is of course required, as I
recall and as you correctly stated, by the International Energy
Agreement.
We learned that DOE was going to start refilling the strategic
reserve, beginning about tomorrow, but it is our guess that due to
the current situation that that may not happen. Have you heard
anything with regard to that?
Mr. CARTER. No, sir. I have not.
Mr. MoEFETT. We will direct that at Government witnesses, but I
wondered if you had. It is an interesting question as to whether or
not the rather optimistic picture that you paint, Mr. Sachs, with
regard to supply could in fact allow us to continue with plans to
refill the strategic reserve. That is a question that needs to be
answered.
At this time, the Chair recognizes the gentleman from Indiana,
Mr. Fithian, for 5 minutes.
Mr. FITHIAN. Thank you, Mr. Chairman.
Thank you, Mr. Sachs. Even though the American supply is not
so directly effected by the Iraqi-Iranian controversy because of our
historical purchase patterns, will there not be a tendency for oil
companies to take advantage of this situation and raise oil prices
rapidly over the next year?
Mr. SACHS. I think that we are hardly in a position to speak for
any other marketer in terms of that aspect of the business. I think
the standard of Exxon in supplying customers is to continue trying
our best to get products to the consumer in the most economical
way possible.
I would have an awful lot of trouble translating that into the
connotation that I believe you expressed.
Mr. FITHIAN. However, as an expert in this area, if you were
betting your own money in Las Vegas, you would bet on higher
prices of oil pretty rapidly, would you not?
Mr. SACHS. I tried to say earlier that I would not bet that way
immediately. The spot market, again, is a small part of the indus-
try picture but one that is highly publicized and highly volatile. It
has shown mixed signals. Some buying pressures are starting to
show up in the product market. The crude market is almost frozen.
There is hardly any activity at all. That is in complete contrast to
what happened after the Iranian situation.
Mr. FITHIAN. However, given the percentage of the world's
supply that comes from those two countries, even if it does not
spread to any other area, if the damage reports about which we
now read are true and if the repair is significantly delayed by
continued military activities, that shortage will rather quickly wipe
out whatever oversupply we have, certainly in 3 to 4 months. I am
talking about this year, 1980, when decontrol will be there and the
Government will not in any way be able to hold the price.
It just seems to me, as a nonexpert in this area, that it would be
an absolutely safe bet that we will see domestic oil prices very
appreciably higher, unless we get a very rapid cessation of the
Iraqi-Iranian conflict and a pretty rapid repair of the facilities.


16
Mr. SACHs. In the case of the instance you mentioned, the Octo-
ber 6 loading, that had been scheduled before the conflict broke out
in Iraq in conformance with the contracts I alluded to earlier.
Our affiliates have been served notice by the Iraq National Oil
Co. of a force majeure situation, a total force majeure situation,
which means no oil at all; so obviously the people involved in our
ships' scheduling have scratched that vessel for the moment (from
that October 6 loading) until we get further notice.
In terms of the other vessels entering the Persian Gulf—and as I
mentioned earlier, primarily for Saudi Arabian liftings as our
major source of supply—we are moving those vessels normally and
hope we can continue to do that. We appraise the situation through
reports from our captains. They keep us informed and we keep
trying to run the operation normally.
Mr. Moffett. Do you have tankers in or near the Straits at this
moment, to your knowledge?
Mr. SACHS. I am not sure. I believe we had one go through over
the weekend and we have another one that should be coming out
within the very immediate period.
Mr. Moffett. Your testimony is that, as far as the traffic that
you create there is concerned, things are going on as usual.
Mr. SACHS. Yes, sir. I did mention that we moved from the
normal ingress or the normal shipping channel into the Gulf. We
did move that south, but on leaving the Gulf, because of the navi-
gational issues involved with a laden vessel, we have had to stay
with the existing exit channel which is closer certainly to the
Iranian coast than is the new route that we are taking coming in.
M; Moffett. Have you had only one encounter with the Iran-
lans:
Mr. SACHS. One Iranian vessel signaled one of our larger vessels
that they would like to have a word with us. They did ask whence
we were coming and whither we were going. They then wished us
God's speed in our sailing.
Mr. Moffett. That is probably the only contact we have had
with Iran.
Can you tell us something about your own inventory now with
regard to petroleum and petroleum products? How specific can you
be with us?
Mr. SACHs. I can say that we, like industry, are in a fortunate
inventory position. I can also say that we as a company were hit
unusually hard by the situation that occurred in Iran last year and
the following events that resulted primarily from the dramatic
changes in the Iranian crude situation.
As such, our ability to rebound and recover from that has been
somewhat slower than the general trend of industry overall, in the
sense of inventory build which has been dramatic since the second
quarter of 1979.
Nevertheless, I can say today that I feel we are in a comfortable
position.
Mr. Moffett. Is it fair to say that you have no plans at this time
to reduce refinery runs in order to, in any way, tighten the market-
place and husband your inventory?


18
Mr. SACHS. I cannot really answer that question. I have no
knowledge of it personally.
Mr. Moffett. I have one final question and one final point. This
subcommittee spent weeks and months on the issue of emergency
energy preparedness. I think every member of this subcommittee,
Democratic and Republican, has said at one time or another on the
record, that it looks as though a turmoil in the Persian Gulf is not
only possible but likely. Now, here we are.
We have turmoil in the Persian Gulf. Would you say that, realiz-
ing that you are not a foreign affairs expert per se, but is it your
experience, when you think about the Persian Gulf and the stake
of your company there, that it is safe to assume that this is likely
to be a turmoil-filled region for some time, to come?
Mr. SACHS. I think, as an individual as well as in my statement, I
tried to refer to the fact that, just based on recent history, one
would have to have some concerns about the stability of that area
and that, I have to venture to say, that I think I would like to see
the situation either resolved or a little clearer in terms of calm and
perspective on calm, or see the oil elsewhere.
Mr. MoffeTT. Thank you very much.
Are there any additional questions for this witness?
No response.
Thank you very much for your cooperation. We appreciate it.
Our next witness is Mr. C. L. Campbell, senior vice president of
Gulf Oil Trading and Transportation, who is accompanied I believe
by P. E. Luitwieler, vice president for crude oil, Gulf Oil Refining
and Marketing.
Gentlemen, will you please stand and raise your right hands.
Do you swear to tell the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. CAMPBELL. I do.
Mr. LUITwiFLER. I do.
Mr. Moffett. Thank you for being with us.
It is my understanding that you do have a presentation to make
with the slide projector. Is that correct?
STATEMENT OF C. L. CAMPBELL, SENIOR VICE PRESIDENT,
GULF OIL TRADING AND THANSPORTATION: ACCOMPANIED
BY PETE P. E. LUITWIELER, VICE PRESIDENT FOR CRUDE
OIL, GULF OIL REFINING AND MARKETING; AND ROBERT
HILL, GULF OIL TRADING AND TRANSPORTATION
Mr. CAMPBELL. That is right, Mr. Chairman. We have a paper
written for you, but I think that we can do this with a little bit of
verbalization on the slides. It basically follows the text.
We have a handout for you at the end about some of the current
inventories, which we were not able to get on the slides, and then
we can talk after that.
Mr. MoEFETT. Let me say that your statement, for which we are
very appreciative since you gave it on such short notice, will be
included as part of the record. You may proceed in whatever
fashion you desire and then we will proceed to questions by the
members.
While you are getting that set up, let me say that we have had
witness from Gulf on several occasions and we have been very


27
THESE ARE DIFF icult questions of GREAT complexity,
AND I BELIEVE IF THEY ARE TO BE ANSWERED MEANINGFULLY,
THEY MUST BE CONsidered in THE CONTExT OF ALL THAT HAS
BEEN HAPPENING IN THE INTERNATIONAL OIL TRADE DURING RECENT
YEARS, THUs, WITH YOUR PERMission -- FOR I RECOGNIZE THAT
Much of WHAT I will SAY WILL NoT BE NEWs To You -- I SHOULD
LIKE TO REVIEW SOME OF THE CHANGES WHICH HAVE OCCURRED,
AFTER THAT, I PROPose To ADDREss Both PoteNTIAL LONG AND SHORT
TERM EFFECTS OF THE CURRENT FIGHTING, THEN CONCLUDE WITH SOME
REMARKS ABOUT STEPs WHICH THE UNITED STATES MUST BEGIN
TAKING SOON,
To SET THESE QUESTIONS IN PERSPECTIVE, THEN, Let's
BEGIN BY REVIEWING THOSE RECENT EVENTS WHICH HAVE SO PROFOUNDLY
ALTERED THE RELATIONSHIP BETWEEN THE U.S. AND OTHER
INDUSTRIALIZED CONSUMING COUNTRIES, ON THE ONE HAND, AND
THE OIL-PRODUCING COUNTRIES, ON THE OTHER HAND,
FoR Most OF THis century, THE U.S. ENJOYED THE OPTION
OF EITHER IMPORT ING CRUDE O IL OR Using DOMESTIC PRODUCTION,
WE WERE NOT DEPENDENT ON IMPORTED oil.


31
Chart º
Chart #5
SINCE THAT PERIOD of TIME, OPEC PRODUCTION HAs DROPPED To
AN ESTIMATED 27.5 MILLION BARRELS PER DAY, of which LEss
THAN HALF OR 12.5 MILLION BARRELs PER DAY is AvAILABLE To
The MAJOR INTERNATIONAL OiL COMPANIES,
BY THE END of THE 1973 conFLicT, Prices HAD BEGUN To
RISE SHARPLY AND THE INDUSTRIAL NATIONS HAD LEARNED WHAT
A DISRUPTION IN oil IMPORTS FROM OPEC countries could MEAN,
IN ADDITION To RAIsiNG Prices, some OPEC MEMBERs
ATTEMPTED DURING THE 1973–74 PERIoD To speci FY DESTINATIONs
FOR THE OIL THROUGH AN EMBARGO AGAINST VARIOUS CONSUMING
countries, BUT AT THAT TIME THE OiL companies STILL
MARKETED MORE THAN 80% of THE OiL, AND WERE SELLING LARGE
AMOUNTS TO INDEPENDENT REFINER/MARKETERS IN EUROPE, ASIA,
AND SOUTH AMERICA.


34
THESE NEW constraints MAKE IT Much MoRE DIFFicult
to Do Business, since they wake the syster. Much more rigid.
THEY ALso contRIBUTE To HIGHER OPERATION costs WHICH MUST
BE PASSED ON TO THE CONSUMER,
As You can SEE, over A TEN-YEAR PERIOD PRODUCTION AND
MARKETING DEcision-MAKING RESPONsibility HAS LARGELY PASSED
FROM THE HANDs of THE MAJOR oil companies To THose of OPEC
MANAGERs, AT THE SAME TIME, INTERNATIONAL PETROLEUM MARKETs
ONCE CHARACTERIZED BY PRICE STABILITY AND FLEXIBILITY, ARE
NOW CHARACTERIZED BY INSTABILITY, RIGIDITY AND ESCALATING
PRICEs. WiTH Most of THE oil concessions Now GONE, THE
MAJOR COMPANIES NOW HAVE ACCESS TO LESS THAN ONE-HALF OF
OPEC's cruDE PRODUCTION,


44
IMPORTING NATIONs WHICH Lose cruDE IMPORTS WILL LOOK
ELSEWHERE TO MEET THEIR NEEDs, IT is PoinTLESS TO TRY TO
PREDICT WHAT THE WORST CASE MIGHT BE, SO UNPREDICTABLE
HAS THE oil Bus INEss BECOME, BUT IT MIGHT BE PRUDENT TO NOTE
THAT WHEN THE 1979 REVOLUTION IN IRAN DISRUPTED THE SYSTEM,
CRUDE COSTS MORE THAN DOUBLED,
SOME STEPS HAVE ALREADY BEEN TAKEN TO CUSHION AGAINST
A SEVERE SUPPLY SHOck, FoR EXAMPLE, SHOULD ANY MEMBER country
of THE INTERNATIONAL ENERGY AGENCY SUFFER A Loss of As MUCH
As seveN PERCENT of suPPLY, THE U.S. -- ALONG WITH other IEA
MEMBERS -- WOULD BE OBLIGED TO SHARE IMPORTS,
THE CENTRAL PROBLEM, However, Is NoT conFINED TO THE
Loss of IRANIAN AND IRAQI ExPORTS, THE MAIN QUESTION CONCERNS
THE EFFECT ON SHIPPING IN THE PERSIAN GULF, SINCE ABOUT
40 PERCENT OF THE OLL consumED IN THE NON-COMMUNIST WORLD
AND NEARLY 60 PERCENT OF oil- Moving IN INTERNATIONAL TRADE
MUST FLOW THROUGH THE STRAITS OF HORMUz,


46
Ours is basically a PETRoleum-fueled Economy, OIL
AND NATURAL. GAS WILL CONTINUE TO BE THE BACKBONE OF OUR
ENERGY SUPPLY FOR A LONG TIME TO COME,
AT THE PRESENT TIME, WE ARE CONSUMING THE ENERGY
EquivalENT OF 38 M.ILL.ION BARRELS OF oil EACH DAY IN THE
UNITED STATES: 19 PERCENT IS FROM coAL; 119 PERCENT is
FROM DOMEST ic oil AND NATURAL GAS; NEARLY H PERCENT is
FROM NucLEAR ENERGY; AND ALMosT H PERCENT IS FROM
HYDROELECTRIC, GEOTHERMAL, SOLAR, AND SIMILAR SOURCES,
THUS THE REMAINING NEARLY ONE-QUARTER OF OUR ToTAL ENERGY
SUPPLY IS MADE UP OF IMPORTS,
THE U.S. NEED NOT STAND IDLY BY. THERE ARE POSITIVE
STEPS THAT CAN BE TAKEN, AND QUICKLY,
WE MUST INTENSIFY THE ONGOING EFFORT TO AWAKEN THE
AMERICAN PEOPLE TO THE TRUE DIMENSIONS OF THE PROBLEM, AND
THE DANGER,


50
35
30
25
20
15
10
chart -5 OPEC OFFICIAL CRUDE OLL PRICES
$/B AND
CONTROL OF OPEC SUPPLY $32.00
BY MAJORS
TAPLINE FAILURE
*-MIDDLE EAST WAR AND ARAB, EMBAngo
70 l 71 I HTTE * 7. I 75 I 76 I 77 l 70 l 79 I 80 I
PROFILE OF OPEC PRODUCTION lo
ciiart 6 - 1980 PRODUCTIVE CAPACITY
MMB/D
DEFINITIon-
Maximum production rate that can be sustained for
several months. This capacity concept does not reflect
-----a-
F- ceilings applied by vari opec bers.


51
PROFILE OF OPEC PHOLUUT ION
Cliart - 7 1979
MMB/D
30.8
Egmºſg,34.
Consumption :
rt innraºr 1070 pnnni Irrinn


52
Mr. Moffett. Let me ask that the members be allowed to look
this over. Meantime, we will move to questions and you can ex-
plain this as you go along. I am sure there will be questions.
Mr. CAMPBELL. Certainly.
Mr. Moffett. At this time, the Chair recognizes the gentleman
from Minnesota, Mr. Stangeland, for 5 minutes.
Mr. STANGELAND. Thank you, Mr. Chairman. I have not had a
chance to look at this chart.
Your slides were very informative. In your opinion—I asked
these questions of Mr. Sachs—what does the supply situation look
like for us, should we be cut off from not only Iranian and Iraqi
crude, which we were not getting anyway, but other sources if the
Straits of Hormuz were blocked? How long can we operate at a
normal pace? How long a time will it take before we would be able
to adjust to the cutoff ourselves?
Mr. CAMPBELL. In 1977 we had a peak level of about 3.2 billion
barrels of inventory in the world. Right now, we have more inven-
tory than the world has ever had. At least in our case, this is the
first time that we have had a significant amount of floating stor-
age. That is the 3.5 billion barrels.
Mr. STANGELAND. Excuse me. Does that mean that you are rent-
ing tankers for storage?
Mr. CAMPBELL. Let us say that we all have spare tankers, simply
because there is not as much oil being produced as we built tankers
for in 1974. There is generally a surplus of tankers.
If you want to put it in economic terms, we are using tankers
that would have gone out in the spot market if we had not stored
oil, so on a book basis we are taking losses but on a cash basis we
are not really going out and chartering in ships.
The world needs about 2.2 billion barrels for working inventory,
oil in pipelines, oil in tank trucks, and that kind of thing. If it is
only Iran and Iraq that go down, we see that you could get through
into about the second quarter of next year before there is any
really significant problem.
We are starting to approach the minimum working inventories
at that point in time, but in terms of the way the rest of the world
will react you cannot expect people who have no oil to sit around
and not go after oil.
The reason that the inventories are so awfully high today is that
people did not need the oil. They were afraid to cut the contracts
with any individual producers, so they just kept buying and stor-
ing. The reason we have all of this oil now is because people were
afraid of an eventuality such as we have. Therefore, we are in a
fairly fortuitous position now.
The question you ask is this. If we lost the whole Middle East,
what would happen? We would have chaos if you ask how long it
would take to get out of it. I would say 10 to 15 years.
We do not have sufficient alternative energy sources. Japan and
Western Europe are totally dependent upon Middle Eastern oil.
Brazil is a country that has been very badly hit by all of this.
If you are saying, “Well, will it go away;” it just is not going to
go away. We have a big problem on our hands.


70
Mr. ENGELMYER. Mr. Edwards, Mr. Moffett asked me to ask you
just one more question. Since heating oil inventories are at such a
high level, what is your projection for heating oil prices this winter
absent a blockade of the straits of Hormuz?
Mr. Edwards. I would not expect them to increase. In fact, with
the competition that we are seeing from an overabundance of
supply, I think some terminal operators who are hurting from the
impact of carrying inventories long term, I think we might see
heating oil prices through the winter actually be lower than they
were this past summer.
Mr. ENGELMYER. Thank you.
Mr. SYNAR. I would like to thank all of the witnesses who testi-
fied today. I think this has been one of the more informative
meetings of the subcommittee.
If there are no other questions, the subcommittee is adjourned.
[Whereupon, at 12:35 p.m., the subcommittee adjourned, to recon-
vene subject to the call of the Chair.]
O