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year of operation. Thus after the first 48 inch line is completed, if
Canadian production and through put is substantial, a second parallel
line could be installed to handle the full production of both Alaskan and
Canadian fields with no serious diminution of planned deliveries to the
Turning to the national security arguments, there are two aspects of
national security relevant to the pipeline issue, the timing of delivery,
and the region receiving the additional supply. Here I will only comment
on the latter,
For any given marketing region, the danger and cost attri
butable to a disruption of foreign supply is directly related to that
region's dependence on imports, in other words to imports as a percentage
of total consumption. The relative dependence of the East Coast and Mid
West on non-Canadian imports is far higher than for the West Coast.
regional considerations of national security suggest higher national
security benefits for the Canadian alternative.
Concerning the costs of delaying delivery of Alaskan oil, a decision
to use the Canadian route would entail a delay for negotiations, planning,
and construction of the line.
But both the magnitude and significance of
these costs have been greatly exaggerated in the Impact Statement and by
pipeline advocates, and there are compensating benefits which must be
weighed against these costs.
As my comments make clear, the Impact State
ment uses an illogical technique and indefensible assumptions in calculating
the costs of delaying delivery of oil.
The true costs of delay depend on
the cost of imported oil, whether Alaskan oil would be in excess supply on
the West Coast as seems likely, and on whether the economic benefits of the
Canadian route are greater than for TAPS.
If the Canadian route is
advantageous economically, it will pay us to wait. Despite the recent
short term problems and crisis atmosphere, the real danger is in making
a hasty and unwise decision to push ahead with TAPS now.
It should also be bome in mind that just as the benefits of exploiting
Alaskan oil will largely accrue to oil companies in the form of profits,
the costs of delay are simply the costs of deferred receipt of those
BALANCE OF PAYMENTS
The impact of the development of Alaskan oil on the U.S. balance of
international payments is an important but often misunderstood point. Public
discussion of the issues has often been confused by the failure to make an
There are two quite different questions: first,
what is the balance of payments impact of the substitution of low cost
Alaskan oil for higher cost imported oil?; and second, what difference does
It make to the balance of payments whether Alaskan oil is shipped through
Both TAPS and the Canadian route would reduce imports of foreign oil
the two routes, that information plays no role in the choice of which route.
The dominant consideracions in comparing the balance of payments
impacts of the two alternatives are the details of the arrangment for
financing the construction of the Canadian route.
To illustrate what is
Involved let us consider two extreme hypothetical alternatives.
First suppose the Canadian pipelines were entirely financed by u.s.
capital. This would show up as a long term capital outflow during the
construction period followed by a return flow of recouped investment,
Interest, and profits over the life of the project.
Over the lifetime of
the pipeline, the return flow would substantially exceed the original invest
ment and the net effect on the U.S. balance of payments would be positive.
Alternatively suppose the pipeline were financed entirely by Canadian
or other foreign capital. Then the fee charged for shipping oil through
the Canadian portion of the line would represent a direct dollar outflow.
If the Canadian line were financed as a joint venture, for example with a
majority of the equity capital coming from Canada but a majority of the
debt capital being U.S., the balance of payments outflow would be reduced
as the U.S. share in the investment increased.
How big are these outflows likely to be?
It is possible to provide
some very crude estimates of the likely first round outflows.
But it must
be strongly emphasized that whenever dollar payments to another country
are increased, the transaction triggers other economic forces which lead
to offsetting increases in dollar receipts from these countries.
the first round dollar outflows will be partially offset by induced dollar
And furthermore, to the extent that the payments are not
fully offset, a smoothly functioning international payments system can
accommodate whatever adjustments are necessary, for example by a change
in the value of the floating Canadian dollar.
Bearing this in mind, I offer some rough estimates of first round
outflows under different assumptions regarding financing. The Impact
Statement estimates that shipment by a Canadian route would cost approxi
mately $1.20 per barrel.
If the line is built entirely with Canadian
capital, the first round outflow would be $876 million per year.
line were built with 50% U.S. capital, the direct outflow would be $438
million per year. Furthermore, to put these figures in perspective the
total dollar outflow for imports of goods and services is likely to be
over $100 billion per year by 1980, and may be over $150 billion per year
Thus the net dollar outflow attributable to building the
Canadian route rather than TAPS will be a small fraction of 1% of the
total volume of u.s. expenditures abroad.
It should not be a major factor
in the choice of routes.
As an aside, I would like to comment on Secretary Morton's statement
that foreign oil cost the U.S. balance of payments $6 billion in first
round outflows in 1972 and are likely to cost $16 billion by 1980.
his letter to all Senators dated April 4, 1973). This statement is at
best misleading and irrelevant, and at worst irresponsible.
It is mis
leading because by referring only to total oil imports it sheds no light
on the questions of TAPS vs. the Canadian route.
In fact it diverts
attention from the real issue.
It is irresponsible because it is
apparently based on an inappropriate concept of dollar outflow which
biases the estimate upward substantially.
On the basis of incomplete
information, I estimate the true first round foreign expenditure
for 1972 to be between $4.5-5 billion.
Congress faces an important decision reflecting conflicts
between environmental and economic values and between narrow
short run private and broad long run public interests.
an historic opportunity to utilize the best available scientific,
technical, and economic information in making this decision.
important work has already been done in compiling, organizing,
and analyzing this information.
But there are still major gaps
and serious uncertainties.
On both environmental and economic grounds, the scales are
already tipped toward the Canadian route.
Despite this the Depart
ment of Interior persists in advocating TAPS, in distorting and
misrepresenting the results of its own analysis, and in refusing
to enter into good faith discussions with the Canadian government.
It would be desirable, particularly in the face of this rigidity
on the part of Interior, and what must be
a massive private lobby
ing effort on behalf of the oil industry, to obtain more informa
tion, the bulk of which already appears to have been amassed by
likely needs for oil delivery capacity during the next 10-12 years.
I therefore urge congress to direct an independent, objective,
and thorough analysis and evaluation of the Canadian common