would be resisted by the using countries, the buying countries, as a whole, and I think that there would certainly be great efforts made by all of the countries that use oil to resist this kind of measure if indeed it were only being used by the exporting countries. If the buying countries themselves are split, with some of them having the same restrictions, it becomes harder to form the kind of joint effort which might be useful in resisting this effort on behalf of the producing countries. Senator BEALL. Can I pursue that?

Senator SPONG. Yes, Senator Beall.

Senator BEALL. Isn't it true that the buyer has more control over how the goods are going to be shipped than the seller does? If I go to the furniture store and buy a couch, if I want to haul it away myself, it is my right to do so and the store doesn't tell me I have to ship it on their truck. If I am buying oil from a country, isn't it logical to assume that I control the way that I am going to take the oil home?

Mr. REIN. Senator, I think we know that, from domestic experience and I think somewhat internationally, whether you control the terms of sale as a buyer is heavily dependent on your relative economic position.

Senator BEALL. Ours is not bad, is it?

Mr. REIN. It is a question of the terms of trade in oil, whether the producer or buyer has the advantage. There are many firms in this country that will only sell you on a delivered price basis and won't let you take it FOB. I think the same is true in oil, that the seller can dictate the terms of the sale if he is in a position where what he has is so valuable to the buyer that his economic leverage is very great. We can't at all be confident, as we look to the future, that the buyers will be in a, especially if taken one by one, in a situation of significant leverage with respect to the seller. I think you have seen more and more the producing countries extracting concessions of one kind or another from the buyers, the oil companies that not only work with them but are their customers. I think this indicates they have some leverage that they might be able to enforce these measures if they are not resisted.

Senator BEALL. That leverage generally relates to the production of oil rather than the selling of it.

Mr. REIN. I think once you control production and dictate to whom it will be sold and won't be sold, your overall leverage is very great and on issues in which the buyers are in some disarray or disagreement among themselves, for example, the reservation of carriage, if that were to come to pass by legislations of this kind, I think that the unified sellers front would be politically very powerful. It might indeed be able to dictate whether the sale could be closed out on FOB or CIF terms.

Senator BEALL. I find that difficult to believe. I just find it hard to imagine a situation arising where the United States would buy so much oil that it wouldn't be in a position to at least control 50 percent of the flow of that oil if it so desired and this would be, I think, readily accepted by the people who are selling the oil.

Mr. REIN. Well, if you are talking about 50 percent

Senator BEALL. Neither one of us can win this argument until it happens, but I don't think the premise is very good.

Mr. REIN. If you are talking about 50 percent-I thought we were talking about whether the producing country could control 50 percent. I think it would be easier to say yes, the buyer might be able to enforce 50 percent on his ships, the producer couldn't enforce 100 percent. But the question is really whether the producer can enforce 50 percent. Maybe both of us can agree that too would be possible, the producing countries may be in a situation of advantage which would enable them to make 50 percent go on their own ships, even though we correspondingly might be able to make 50 percent go on ours. Those are not inconsistent propositions.

Senator BEALL. I don't have much difficulty with that. If my pur pose is to try to accomplish a 50 percent shipment on our ships, if they want to send the other 50 percent on their ships, that is all right with me.

Mr. REIN. I guess what we are saying is that is not all right with us. Senator BEALL. I don't think that will happen. I think from our standpoint it is highly unlikely.

Senator SPONG. Well, the first part of my question was based on a notation that some oil-producing countries are moving in this direction. I would like to ask you a hypothetical question now, after hearing you and Senator Beall in this exchange. If they are successful in achieving a result whereby 50 percent of their exports are being carried in their own bottoms at their direction, would you still oppose this legislation?

Mr. REIN. I think in part our concerns have been to preserve as much as possible of the freedom of choice for the shippers to get the lowest possible rate.

Now if 50 percent of the oil is removed from the area of competitive shipping, that is locked up by the producing countries, I think we would again look at the risks of locking up the other 50 percent. That is to say, what would the impact of that on world shipping be? Would it create an overall situation in which much of the tonnage available pulled out of the trade, so that one might have to fall back on one's own resources? I can't answer that question today. I think if nothing else changed, that is to say if there was still quite freely available either effectively controlled U.S. tonnage or allied tonnage, I think we would still be concerned about the added cost of the reservation to U.S.-flag vessels of the other 50 percent. So I think some of our concerns would remain, but it is hard to predict what the world shipping picture would look like if indeed the producing countries were able to get control of 50 percent of the oil and put it on their own vessels.

Senator SPONG. Well, you can't answer my question today then either.

Mr. REIN. I can't give you a definitive answer, because I think that would really create quite substantial changes in the whole nature of the shipping industry.

Senator SPONG. Well, you haven't said no, so I would assume from your answer that there would be some reevaluation of the world shipping situation.

Now, if this took place, wouldn't that put our transportation capability in the hands of the same nations that you have characterized as unstable?

Mr. REIN. I would assume, and I have said that it would be troublesome to us to see not only the production capability, but 50 percent of

the transportation capability fall into the hands of those nations. That would be troublesome. And that is the result we want to avoid and that is part of the reason we oppose this bill.

Senator SPONG. I have so many questions here, Mr. Rein, that we would be here well beyond noon. I have selected two. I am going to submit the rest to you for the record and we will be back in further touch with you.

I note there is nothing in your statement relating to the effect of the bill on our balance of payments. Is the Department of State concerned about our balance-of-payments problem and have you done any study of the effects of this bill in that regard?

Mr. REIN. Well, we have given a good bit of thought to that subject. We are concerned about our overall balance of payments position. And we recognize that of course payments for services are exported to someone else and imports to us in balance-of-payments terms.

The question that is difficult to answer, as we said, looking at the whole set of conditions which might be established by this bill, is whether the total payment for shipping services would be increased or decreased over any period of time by the enactment of this bill.

The reason is if 50 percent goes on U.S. flag, quite clearly 50 percent of the payments would not be made to foreign flag. But what happens to the other 50 percent. That other 50 percent may be carried by more expensive foreign-flag tonnage. The possible cost differentials are substantial, I think there is testimony in the House and you will hear it here, that these can go up to 4 to 1. If you assume the other 50 percent is put on higher cost foreign-flag tonnage by other people's reservation, you may get into a situation where you are quadrupling the foreign exchange costs of carrying that 50 percent and where, the net effect on balance of payments is negative. In order to assess the balance of payments, you can't look in isolation of what you might stop paying for half of the oil, you have to look at what you will pay to bring the rest in. If that more than doubles, your total balance-ofpayments outflow is greater.

Senator SPONG. Other than your comments, has the State Department done any study on the effects of the bill on the balance-of-payments situation?

Mr. REIN. Well, I think what I said is based on some work we tried to do. But I don't think we have done a formal study.

Senator SPONG. You would not characterize the information that you have as a result of any study of the problem?

Mr. REIN. Well, I hate to say that we didn't study this, because we did look very closely at it, and took a number of different assumptions. But if you are talking about a formal written study, suitable for presentation as such, no, sir; it is not the result of a study of that kind. But we did study the subject.

Senator SPONG. All right.

With respect to the increases in transportation costs you cited testimony indicating increased cost of a billion dollars annually by 1985. You said by 1975. Which year is correct do you mean?

Mr. REIN. This is based on testimony that was given in the House and this subject was commented on by the American Petroleum Institute, with some figures, the American Maritime Association also

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gave some estimates of the per barrel increases. It is a typographical error. It should be 1985.

Senator SPONG. In both instances?

Mr. REIN. Yes, sir; that is the testimony in the record. We have not attempted an independent assessment of the actual added costs, so we are looking at figures that have been placed in the public record. Senator SPONG. Well, the testimony in the House that you are quoting is that of foreign-flag tanker owners; is that correct?

Mr. REIN. As I say, there were a number of sources which discussed added costs. The Department of Interior gave some figures which I think are fully consistent. There was also testimony on behalf of the American Petroleum Institute, the producers of oil. The foreign-flag tanker owners are also of course largely U.S. oil companies, so they are not wholly foreign sources. Indeed the American Maritime Association, which represents independent tanker owners under U.S. flag gave figures that confirmed there would be a substantial increase in the cost of oil carried.

Senator SPONG. I gather from what you said the Department of State has not independently analyzed and evaluated these costs?

Mr. REIN. No, sir, but we feel our testimony is valid over the whole range given on all sides. We don't think there is much dispute that the added costs would be substantial.

Senator SPONG. Are you aware the Department of Commerce estimates are only a small fraction of that amount?

Mr. REIN. We are not aware that the Department of Commerce testified in the House proceedings.

Senator SPONG. They did not testify, but we have access to the figures. We will submit that you for further comment, along with any additional questions which we would like you to answer. Senator Beall, do you have any questions?

Senator BEALL. No more questions.

Senator SPONG. Mr. Rouvelas of the staff has a question.

Mr. ROUVELAS. Mr. Rein, as you noted one of the key issues is whether these costs will be passed on to the consumer. The proponents of the legislation have prepared a rather detailed study, have profounded a theory, and provided some empirical backup for that theory as to why it would not result in increased consumer costs.

I don't have your exact language in front of me, but you said something to the effect that we must assume that the lower costs of foreign oil is passed on to the consumer. I wondered, wasn't the Department of State part of the Cabinet Task Force on Oil and didn't it conclude exactly to the contrary in that regard?

I am looking at some testimony by Chairman Shultz of that Cabinet task force which said:

Once it is acknowledged that under the present quota system, the domestic price of No. 2 oil is independent of the delivered price of product imports, it follows that imposition of even a prohibitively high tariff would have no effect on the long run domestic cost.

He went on to say that it is domestic refining cost plus transport that set the price and therefore even a prohibitively high tariff and increase in transportation cost wouldn't have any impact on the long

run consumer cost.

Did the Department of State concur in that or not?

Mr. REIN. I believe that statement is accurate, but not in conflict with what I have said today.

First of all, the real question we faced today is not what the impact. of lower cost landed foreign oil is on today's market, it is what an increment in those costs would mean.

So whether or not, first of all, whether or not the lower costs are passed on to the consumer today, you would still ask the question would increased costs be passed on tomorrow? That is, what is happening to the return?

Mr. ROUVELAS. Increased costs in the form of a tariff, for example? Mr. REIN. Well, I think that, yes; increased costs would come from a tariff as well. But increased costs in the form of a tariff, that refers to the landed price of oil.

The question here is the product as it is passed on to the consumer. One might assume that the companies are looking for certain rate of return overall, that their mix of costs would be related to their revenues to determine profit. They have got to generate a certain amount of capital.

So what I am saying is while increased costs might not directly affect the landed cost of oil, so long as the foreign oil cost netted out was still cheaper, and that is an assumption that may disappear, the fact is the cost to the consumer is not solely dictated by the cost of the imported oil.

So what I might charge you for an oil transfer may be different from the way I set my prices on the ultimate range of the consumer product. Mr. ROUVELAS. I think what Mr. Shultz was saying is the ultimate price to the consumer is not affected at all by the landed cost of the foreign oil, and that is why even a prohibitively high tariff woudn't affect the price to the consumer.

I do not understand how you can go to an average cost analysis, as opposed to a marginal cost analysis, unless you posit that there is absolutely no competition.

Mr. REIN. Any additional information would be useful and we would be glad to comment on that situation.

Senator SPONG. Thank you very much, Mr. Rein.

Mr. Jesse Calhoon.

Mr. Calhoon, your testimony will be received in the record in its. entirety and we would be pleased to have you testify from it in summary, or in part.

STATEMENT OF JESSE CALHOON, PRESIDENT, MARINE ENGINEERS BENEFICIAL ASSOCIATION; ACCOMPANIED BY BEN MAN, DEPUTY EXECUTIVE DIRECTOR OF THE AFL-CIO MARITIME COMMITTEE

Mr. CALHOUN. Thank you, Mr. Chairman.

My name is Jesse Calhoon. I am president of the National Marine. Engineers' Beneficial Association, AFL-CIO, and a member of the Executive Board of the AFL-CIO Maritime Committee. I am accompanied by Ben Man, deputy executive director of the AFL-CIO Maritime Committee.

Mr. Chairman, and members of the committee, I would like to express the appreciation of the AFL-CIO Maritime Committee com