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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

U.S.

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.

Thus

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

profits.

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

important distinction.

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

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Both TAPS and the Canadian route would reduce imports of foreign oil

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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.

Thus

the first round dollar outflows will be partially offset by induced dollar

return flows,

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.

If the

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

by. 1985.

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.

(See

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.

CONCLUSION

Congress faces an important decision reflecting conflicts

between environmental and economic values and between narrow

short run private and broad long run public interests.

Congress

has

an historic opportunity to utilize the best available scientific,

technical, and economic information in making this decision.

Much

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

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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

corridor alternative.

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