al security requirements in case of national or 

 international emergencies. 



Availability of an adequate domestic supply has 

 proved to be of critical importance several times in 

 the past: during two world wars and during the 

 Arab-Israeh confrontations in 1957 and 1967. To 

 maintain its indigenous reserve, the United States is 

 paying a premium over imported crude in excess 

 of a dollar a barrel for its oil supplies. Canada, our 

 nearest neighbor, has taken a similar approach but 

 pays a somewhat smaller premium. 



D. National Security, Import Quotas, and Prora- 

 tioning 



Minerals underlying the earth's surface are in 

 the public domain under the law in most countries 

 and do not belong to the surface owners. Under 

 Anglo-American law, however, mineral rights gen- 

 erally go wath surface ownership. While this creates 

 no difficulty with solid minerals, in the case of oil 

 the direct link between surface ownership and the 

 mineral resource is broken; a well drilled into an 

 oil reservoir from one piece of property may drain 

 oil from under other ownership tracts which also 

 overlie that reservoir. 



Moreover, at high rates of production and 

 without compensation measures, there is generally 

 an inverse relationship between the rate of flow 

 from a pool and the total amount of oil that can 

 be recovered by primary means, for a variety of 

 complicated reasons. 



Experience in the United States and other 

 countries has demonstrated beyond any doubt 

 that completely unrestricted crude oil production 

 has led to serious physical and economic waste. It 

 is essential in the case of pubUc resources that the 

 "external" costs inflicted on one oil property 

 lessor by another in the process of draining oil from 

 a common pool be corrected in order to achieve a 

 production program that maximizes the net eco- 

 nomic value available from the petroleum re- 

 source. 



In general. State regulatory practices are now 

 designed to overcome the adverse effects of the 

 common property status of oil lying in pools 

 beneath lands subject to multiple ovmership where 

 there is a corresponding rush to produce oil before 

 a neighbor drains the pool. Techniques have been 

 devised to coordinate the production of all States 

 having excess producing capacity with current 



market demand, and to prorate each State total 

 into production quotas for individual producers. 

 In the aggregate, the prorationing measures of the 

 individual states operate to prevent excessive levels 

 of crude production in the Nation and to dampen 

 price fluctuations, as well as to minimize the 

 detrimental reservoir effects of excessive rates of 

 production. Reservoir conservation is also encour- 

 aged on Federal leases by control of gas-flaring, by 

 encouraging unitization of reservoirs and fields, 

 and by other means. 



The effectiveness of State control is in- 

 creased tremendously by Federal legislation prohi- 

 biting interstate shipment of oil produced in 

 excess of State quotas. The prorationing program 

 is further implemented by Federal action limiting 

 crude oil imports. The Federal Government also 

 effects total production less directly through its 

 leasing pohcies for Federally owned land, both 

 onshore and offshore. Although offshore produc- 

 tion from leased lands lying outside State jurisdic- 

 tion is not formally included in the State prora- 

 tioning mechanism, the Federal Government has 

 chosen to include such production within State 

 prorationing in the only two States, Texas and 

 Louisiana, where it is of current significance. 



The objectives of Federal oil policy are com- 

 plex, and they involve issues of major National 

 significance. Oil is a strategic material of prime 

 importance, affecting both the miUtary capacity of 

 the Nation and its economic weD-being and rate of 

 growth. There are, of course, substitutes for 

 petroleum in virtually all uses, but for some— 

 particularly transportation— petroleum products 

 have advantages so great as to make them nearly 

 indispensable to a modern industrial economy. 

 Clearly, therefore, the Federal Government must 

 be concerned with the state of the Nation's 

 petroleum reserve; its access to new supplies; 

 incentives for exploration and development by 

 industry; and fiexibiUty and resihency of the 

 industry in the face of possible adverse develop- 

 ments that could cut off, partially or entirely, 

 imports of both crude and refined products. 



Formulation of the relations between the vari- 

 ous segments of the petroleum industry, State and 

 Federal Governments, that bear on national securi- 

 ty raises a series of extraordinarily comphcated 

 issues. The combination of policies outlined above 

 has, by its very nature, held U.S. crude petroleum 



VII-212 



