prices well above world market level: in recent 

 years, by as much as $1 per barrel. These policies 

 have been defended not only in terms of conserva- 

 tion and capacity to meet emergencies, but also as 

 incentives for intensified domestic exploration and 

 development activity. In a short run sense, these 

 arguments arc generally valid. From a longer term 

 viewpoint, however, these policies may have ad- 

 verse effects on overall National security. They 

 promote not only rapid exploration but also rapid 

 exploitation of domestic suppUes, thus reducing 

 American reserves that may be found, perhaps 

 hastening the day when our present marginal 

 dependence on imported sources or substitute 

 fuels will become a major one. 



It has become abundantly clear in recent years 

 that even the incentives provided in the form of 

 depletion allowances and other tax considerations 

 have not been sufficient to keep new discoveries at 

 a level sufficient to offset rising domestic demand. 

 There is, therefore, a real issue as to whether it is 

 in the National interest to encourage exploitation 

 as well as exploration from domestic sources, if 

 the effect is a continuous reduction in the reserves 

 under the political and physical control of this 

 country. 



From a long term standpoint, the Nation's 

 military and economic security may be better 

 served by drawing upon other people's petroleum 

 reserves to a larger extent (which would also 

 permit a considerable reduction in the average cost 

 of petroleum products to American industry and 

 consumers) while preserving more of our ovra 

 onshore and offshore resources against years of 

 future need. The Commission has not been able to 

 determine whether such alternatives have been 

 fully evaluated in the formulation of a National 

 defense policy for petroleum. 



It is quite possible that the most efficient way 

 of providing a protected reserve of crude petro- 

 leum sufficient to meet any possible contingency 

 may be to provide incentive for exploration and 

 proving up of reserves without a corresponding 

 stimulus to early production if such a system can 

 be devised. As the incentive program now oper- 

 ates, it provides rewards for expanded exploration 

 but also generates strong financial pressure for 

 production at the earliest possible date. Such a 

 policy may tend to defeat the security reserve 

 concept. 



Since offshore oil is, for practical purposes, 

 fully integrated with onshore supplies, any apprais- 

 al of National security requirements with respect 

 to petroleum must influence Federal leasing policy 

 and hence the rate of development of petroleum 

 resources on the continental margins. Under pres- 

 ent arrangements, offshore oil from Federal lands 

 is subject to prorationing off Texas and Louisiana. 

 Texas and Louisiana afford offshore operations 

 somewhat more generous "allowables" (i.e., they 

 are permitted production in excess of that allowed 

 for a similar onshore well) as an incentive for 

 deeper exploration and drilling and to compensate 

 to some extent for the added cost of offshore 

 development. 



Carried to its logical conclusion, it is apparent 

 that if offshore production beyond State bounda- 

 ries were not subject to prorationing, the rate of 

 development of these supplies would be increased 

 in some degree. To the extent that there is a 

 National interest in expanding the pace of offshore 

 oil production, the policy of allowing unrestricted 

 production from offshore Federal lands would be 

 a significant positive step. Moreover, the larger 

 lease size and the limited number of lease holders 

 in offshore Federal areas tend to assure that 

 adjacent leases will be developed on a unitized 

 basis without the destructive and wasteful race to 

 produce from a common pool that has made 

 prorationing necessary in Texas, Louisiana, and 

 other States. 



The effect on the present structure and opera- 

 tion of the domestic petroleum industry of unre- 

 stricted production from offshore Federal leases is 

 not certain, but it would not appear to be of major 

 proportions. At present, offshore production from 

 Federal lands accounts for only about eight per 

 cent of total United States production. While this 

 production is expected to increase in the future, 

 the increase in domestic demand is certain to 

 outstrip the growth in production from all domes- 

 tic sources. Thus, the industry anticipates that 

 restriction on individual well production under the 

 present prorationing program will be reduced 

 steadily and should virtually disappear by the early 

 1980's. If offshore oil is allowed to enter the 

 market without prorationing, it would create a 

 short run adjustment period of varying degrees of 

 difficulty for onshore producers, but the problem 

 will eventually disappear with growth. 



VlI-213 



