FTC Staff Comment Before the Department of Commerce, International Trade Administration, Office of Industrial Resource Administration Concerning Alaskan North Slope Oil Study

BEFORE 	THE
OFFICE,OF 	INDUSTRIAL 	RESOURCE 	ADMINISTRATION·
INTERNATIONAL 	TRADE 	ADMINISTRATION
DEPARTMENT OF 	COMMERCE
WASHINGTON, 	D.C.
ALASKAN 	NORTH 	SLOPE 	OIL 	STUDY;
INQUIRY Docket 	No. 	51194-5194
Comments 	of 	the 	Bureaus 	of 	Economics, 	Competition, 	and
Consumer 	protection 	of 	the 	Federal 	Trade 	Commission 	*
The 	Office 	of 	Industrial 	Resource 	Administration,
International 	Trade 	Administration, 	Department 	of 	Commerce
(hereafter, 	Commerce) 	has 	requested 	comments 	to 	assist 	them 	in
preparing 	a 	review 	of 	possible 	changes 	in 	production 	incentives
for 	crude 	oil from 	the North Slope of Alaska and in laws limiting
distribution 	of 	that 	oil. 	possible 	changes 	include 	relaxation 	or
repeal 	of 	existing 	export 	restrictions. 	The 	Federal 	Trade
Commission's Bureaus 	of 	Economics, 	Competition, 	and 	Consumer
Protection 	are 	pleased 	to 	respond 	to 	this 	request.
In 	August 	1984, 	the 	Federal 	Trade 	Commission's 	Bureau 	of
Economics 	published 	a 	staff 	report 	on The 	Benefits 	of 	Eliminating
the 	Alaskan 	Crude ~ 	Export~. 	Under 	varying 	assumptions
regarding 	the 	competitiveness 	of 	the 	West 	Coast 	oil 	market 	and
* These 	comments 	represent 	the views 	of 	the 	Bureaus 	of 	Economics,
Competition, 	and 	Consumer 	Protection 	of 	the 	Federal 	Trade
Commission 	(Bureaus) 	and 	do 	not 	necessarily 	represent 	the 	views
of 	the 	Federal 	Trade 	Commission 	(FTC) 	or 	of 	any 	individual
Commissioner. 	The 	FTC, 	however, 	has voted 	to 	authorize 	the
Bureaus 	to 	submit 	these 	comments.

the 	market 	conditions 	facing 	tankers 	displaced 	from 	the 	Alaskan
trade, 	the 	report 	estimated 	the 	gains 	to 	producers 	and 	taxpayers,
.-
the 	losses 	to 	shipowners 	and 	west 	Coast 	oil 	consumers, 	and 	the
net 	gain 	to 	the 	u.s. 	economy 	as 	a 	whole. 	The 	estimates 	and 	a
discussion 	of 	the 	economic models 	used 	to 	obtain 	them 	are
presented 	in 	the 	attached 	copy 	of 	the 	staff 	report. 	These
comments will 	summarize 	the 	staff 	report and present some
additional 	estimation 	results 	obtained 	using 	the 	models 	presented
in 	the 	repor t.
The 	staff 	report 	develops 	and 	uses 	a 	simple 	model 	of 	profit
maximizing 	behavior 	on 	the 	part 	of 	Alaskan 	oil 	producers 	who 	are
assumed, 	under 	the 	export 	ban, 	to 	ship oil 	to 	the 	west 	and 	Gulf
Coasts 	of 	the 	United 	states. 	If 	the 	ban 	were 	removed, 	all
shipments 	to 	the 	Gulf 	Coast 	and 	some 	shipments 	to 	the 	west 	Coast
would 	be 	diverted 	to 	Japan. 	Different 	estimates 	of 	the 	effects
of 	removal 	of 	the 	export 	ban were 	obtained 	under 	differing
assumptions about 	the 	degree 	of 	competition 	in 	the 	west 	Coast
oil 	market 	and 	differing 	assumptions 	about 	the 	existence 	of 	an
excess supply of the tankers that carry oil from Alaska to the
west 	and 	Gulf 	Coasts.
In 	some 	of 	the 	estimations, 	the 	west 	Coast 	oil 	market 	is
assumed 	to 	be 	competitive; 	that 	is, 	no 	producer 	can 	affect 	the
price 	by 	his 	choice 	of 	quantity 	shipped. 	Assuming 	the 	West 	Coast
market 	is 	competitive, 	the quantity 	of 	Alaskan 	oil 	sold 	on 	the
west Coast will be that quantity that leads to a price that makes
the 	netback 	from 	West 	Coast 	sales--the 	price 	received 	on 	the 	west
Coast 	minus 	the 	cost 	of 	transportation 	from 	Alaska--equal 	to 	the
2
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· .
netback 	from 	sales 	on 	the 	Gulf 	Coast, 	or 	in 	Japan, 	if 	the 	export
ban 	were 	1 if ted.
In 	other 	estimations, 	It 	is 	assumed 	that 	a 	single 	Alaskan
producer, 	or 	group 	of 	producers, 	can 	influence 	the 	price 	of 	oil
on 	the 	West 	Coast 	through 	his 	choice 	of 	quantity 	shipped. 	In
this 	dominant 	firm 	model, 	a 	fringe 	of 	other 	producers 	is 	assumed
to 	lack 	the 	ability 	to 	exert 	this 	influence. 	The 	dominant 	firm
will behave as a monopolist over his share of the West Coast
market 	and 	choose 	a 	quantity 	of 	shipments 	that 	will 	result 	in a
price on the West Coast at which his netback 	is greater 	than that
earned 	on 	the 	Gulf 	Coast. 	Despite 	the 	higher 	netback, 	additional
shipments 	will 	not 	be 	made 	to 	the 	West 	Coast 	because 	they 	would
lower 	the 	price 	there 	and 	reduce 	the 	dominant 	firm's 	profits.
Because 	(under 	the 	Jones 	Act) 	only 	domestic 	tankers 	can
transport 	oil 	from 	Alaska 	to 	the 	West 	and Gulf 	Coasts, 	whether 	or
not there is an excess supply of domestic tankers is a 'relevant
consideration 	for 	the 	model. 	The 	existence 	of 	an 	excess 	supply
of 	these 	tankers 	affects 	the 	rates 	charged 	for 	such 	transport.
If 	an 	excess 	supply 	exists, 	then 	rates 	will 	approximate 	variable
costs, 	namely 	costs 	of 	fuel 	and 	labor. 	By 	contrast, 	if 	the
tankers 	are 	not 	in 	excess 	supply, 	then 	the 	rates 	will 	exceed
variable 	costs 	and 	make 	a 	contribution 	to 	the 	fixed 	costs
incurred 	to 	construct 	the 	ships.
In 	some 	estimations, 	it was 	assumed 	that 	the domestic
tankers 	on 	the 	Alaskan 	trades 	were 	in 	excess 	supply 	under 	the
export 	ban 	and 	would 	be 	if 	it 	were 	repealed. 	In 	other
estimations, 	it 	was 	assumed 	that 	repeal 	would 	cause an excess
supply 	of 	these 	tankers, 	which 	were 	fUlly 	utilized 	under 	the 	ban.
3

"
Finally, 	in 	still 	other 	estimations, 	it 	was 	assumed 	that 	the
tankers were 	fully 	utilized'both 	with 	and 	without 	the 	export 	ban.
In 	addition 	to 	examining 	the 	total 	removal 	of 	the 	export
ban, 	Commerce 	requests 	comments 	on a 	partial 	relaxation 	to 	permit
exports 	at 	one 	of 	the 	following 	levels: 	50,000 	barrels 	per 	day
(50 	kb/d), 	100 	kb/d, 	200 	kb/d, 	and 	500 	kb/d. 	Estimates 	of 	the
effects 	of 	a 	partial 	relaxation 	on 	producers, 	taxpayers,
consumers, 	and 	shipowners 	can 	be 	obtained 	using 	the 	models
developed 	in 	the 	staff 	report.
The 	staff 	report 	used 	1983 	data 	on 	Alaskan 	crude 	oil
production and the pattern of shipments to the rest of the united
States. 	Table 	I 	presents 	these 	and 	similar 	data 	for 	1984 	and
January-October 	1985. 	The 	1985 	numbers 	indicate 	that 	production
and 	shipments 	to 	the 	Gulf 	Coast 	have 	expanded 	slightly, 	while
shipments 	to 	the 	west 	Coast 	are 	unchanged. 	In 	all 	three 	years,
the 	level 	of 	shipments 	to 	the 	Gulf 	Coast 	(800 	kb/d) 	is 	greater
than 	the 	levels 	of 	exports 	that 	would 	be 	permitted 	under 	the
proposed 	relaxations 	of 	the 	ban 	(SO-SOO 	kb/d). 	This 	means 	that
a 	partial 	relaxation 	would 	divert 	only 	a 	fraction 	of 	the 	shipments
that 	currently go to the Gulf Coast and thus would not affect the
4

· 	.
Table 	1: 	Annual 	Producti-on 	and 	Shipments 	of 	Alaskan 	Oil
Year 	Alaskan
production Shipments
to
West 	Coast
Shipments
to
Gulf 	Coast
-----------------(kb/d)------------------
1983
1984
1985
( Jan. - Oc t . )
1,700
1,700
1,800
900
900
900
800
800
900
Sources: 	Bureau 	of 	Economics 	Staff 	Report 	to 	the 	FTC, 	The
Benefits 	of 	Eliminating 	the 	Alaskan 	Crude 	Oil 	Export 	Ban,
August 	1984; 	and 	telephone 	conversation with 	Department 	of
Energy 	official.
5

"
quantity 	supplied 	or 	the 	price 	of 	oil 	on 	the 	West 	Coast. 	I 	As 	a
result 	the 	effects 	of a 	partial 	relaxation 	would 	be 	limited 	to
gains 	to 	producers 	and-taxpayers, 	possible 	losses 	to 	shipowners,
and 	a 	net 	gain 	to 	the 	RS. 	economy 	as 	a 	whole. 	In 	other 	words,
partial 	relaxation 	would 	have 	no 	effect 	on 	West 	Coast 	oil
consumers.
By 	contrast, 	as 	shown 	in 	the 	staff 	report, 	the 	free 	market
level 	of 	exports 	resulting from 	total 	repeal 	would 	exceed 	the
800 	kb/d 	currently 	shipped 	from 	Alaska 	to 	the 	Gulf 	Coast. 	Hence,
some 	shipments 	to 	the 	West 	Coast would 	be 	diverted 	to 	Japan, 	and
the 	West 	Coast 	price 	would 	rise. 	As 	a 	result, 	total 	repeal 	would
impose 	losses 	on West 	Coast 	consumers 	(partly 	offset 	by 	their
gains 	as 	taxpayers) 	in 	addition 	to 	its 	effects 	on 	producers 	and
shipowners.
As 	suggested 	above, 	the 	effects 	of 	either 	total 	repeal 	or
partial 	relaxation 	will 	depend 	on 	the 	competitiveness 	of 	the 	West
Coast 	oil 	market 	and 	on 	the 	market conditions 	facing 	the 	tankers
currently 	serving 	the 	Alaskan 	trade. 	The 	staff 	report 	considers
lOur 	model 	assumes 	that 	the 	quantity 	of 	oil 	supplied 	by 	all
Alaskan 	producers 	is 	large 	enough 	to 	affect 	netback 	on 	the 	West
Coast 	but 	not 	on 	the 	Gulf 	Coast, 	because 	of 	the 	availability 	on
the Gulf Coast of oil from other parts of 	the world. 	This means
that 	diversion 	of 	West 	Coast 	shipments 	to 	Japan 	would 	raise 	the
West 	Coast 	netback, 	while 	diversion 	of Gulf 	Coast 	shipments 	would
leave 	the 	Gulf 	Coast 	netback 	unchanged. 	As 	a 	result, 	diversion
of 	oil 	from 	the Gulf 	Coast 	would 	impose 	a 	smaller 	sacrifice 	of
profits 	than 	diversion 	of 	oil 	from 	the 	West 	Coast. 	Hence, 	other
things 	equal, 	a 	profit-maximizing 	oil 	producer 	would 	divert 	all
Gulf 	Coast 	shipments 	to 	Japan 	before 	diverting 	any 	West 	Coast
shipments.
6

five 	cases: 	1) 	competitive 	West 	coast 	oil 	market, 	tankers 	in
excess 	supply 	on 	Alaskan 	trade 	before 	and 	after 	exports
..
permitted; 	2) 	competitive 	oil 	market, 	no 	excess 	tanker 	supply; 	3)
competitive 	oil 	market, 	excess 	tanker 	supply 	after 	exports
permitted; 	4) 	non-competitive 	oil 	market, 	no 	excess 	supply 	of
tankers; 	5) 	non-competitive 	oil 	market, 	excess 	tanker 	supply
after 	exports 	permitted.
Estimates of the effects of total 	repeal of the export ban
for 	these 	five 	cases 	are 	presented 	in 	Table 	1 	of 	the 	staff
report, 	which 	is 	reproduced 	in 	these 	comments 	as 	Table 	2. 	2 	As
shown 	in 	the 	table, 	the 	annual 	net 	gain 	for 	the 	u.s. 	economy 	as 	a
whole 	is 	estimated 	to 	range 	from 	$150 	million 	to 	more 	than 	$800
million. 	3 	Producers 	and 	taxpayers 	are 	the 	beneficiaries 	of
removal 	in an 	amount estimated 	to 	range from 	$600 	million 	to 	more
2 	Data 	from 	recent 	issues 	of 	Platt's 	Qilgram 	price 	Report
indicate 	that 	the 	price 	of 	Alaskan 	North 	Slope 	crude 	at 	the 	Gulf
Coast 	is 	currently 	at 	approximately 	the 	same 	level 	as 	that
assumed 	in 	the 	staff 	report. 	Moreover, 	in 	the 	report, 	no 	attempt
was 	made 	to 	estimate 	price 	with 	great 	accuracy 	for 	three 	reasons:
1) 	reliable 	data 	were 	not 	readily 	available; 	2) 	a 	simplifying
assumption was 	made 	that 	crude 	oil 	is 	homogeneous, 	thus 	price
variation 	due 	to 	heterogeneity 	was 	ignored; 	3) 	the 	estimates 	of
the 	effects 	of 	repeal 	of 	the 	export 	ban 	are 	not 	sensitive 	to
reasonable 	variation 	in 	the 	price 	of 	crude.
3 	The 	estimates 	of 	welfare 	gains 	and 	losses 	in 	the 	staff 	report
are 	sensitive 	to 	the 	shipping 	rates 	for 	crude 	oil. 	However, 	data
on 	these 	rates 	may 	not 	be 	accurate. 	Because 	most 	Alaskan
producers 	own 	their 	tankers, 	a 	market 	price 	for 	shipping 	is 	often
not 	observable. 	Also, 	current 	tax 	laws 	create 	an 	incentive 	to
overstate 	shipping 	costs. 	The 	different 	models 	analyzed 	in 	the
staff 	report 	provide 	an 	indication 	of 	the 	impact 	of 	different
assumptions 	regarding 	tanker 	rates. 	In 	each 	model, 	levels 	of
tanker 	rates 	were 	assumed 	to 	be 	consistent 	with 	either 	a
competitive 	or 	a 	dominant 	firm 	equilibrium.
7

Table 	2: 	Annual 	Gains 	dnd 	Losses 	from 	Complete 	Removal
of 	the 	Ban 	on 	the 	Export 	of 	Alaskan 	Oil.
Net
Gains
to 	U. S.
Economy
Gains
to
Produce rs
Gains
to
Taxpayers
Losses
to
West 	Coast
Oil 	Consumers
Losses
to
Shipowners 	1
-----------------(millions 	of 	dollars 	per 	year)----------------
--Competitive 	West 	Coast 	oil 	market.
--Excess 	tanker 	supply 	before 	and 	after 	repeal.
161-163 	60 	542 	439-441 	o
--Competitive 	West 	Coast 	oil 	market.
--No 	excess 	tanker 	supply.
379-389 	141 	1271 	1023-1033 	o
--Competitive West 	Coast 	oil 	market.
--No 	excess 	tanker 	supply 	before 	repeal.
--Excess 	tanker 	supply 	after 	repeal.
161-163 	106 	955 	439-441 	459
--Non-competitive 	West 	Coast 	oil 	market.
--No 	excess 	tanker 	supply.
814-837 	201-203 	1810-1825 	1188-1201 	o
--Non-competitive West 	Coast 	oil 	market.
--No 	excess 	tanker 	supply 	before 	repeal.
--Excess 	tanker 	supply 	after 	repeal.
151-159 	223-225 	2006-2026 	1188-1201 	891
Source: 	Bureau 	of 	Economics 	Staff 	Report
Benefits 	of 	Eliminating 	the 	Alaskan 	Crude to 	the 	FTC, 	The
oil 	Export 	Ban,
If 	removing 	the 	export ban 	reduces 	the 	demand 	for 	domestic
tankers, 	adjustment 	costs 	may 	be 	imposed 	on 	sailors 	who 	operate
the 	tankers and who must find new 	jobs. 	No attempt has been made
to 	estimate 	these 	one-time 	costs 	of 	transition. 	Because 	such
costs would probably be incurred for only one or two years, 	they 	_
are 	unlikely 	to 	be 	significant 	by 	comparison 	to 	the 	net 	benefits
of 	repeal, 	which 	will 	be 	reaped 	year 	after 	year.
August 	1984.
1
8

"
than 	$2.2 	billion 	pe~ year. 	Under 	present 	tax 	laws, 	90 	percent
would 	be 	paid 	in 	taxes ,to 	state 	and 	federal 	governments, 	leaving
producers with an estimated 	$60 to $225 million. 4 	Of the
increased 	tax 	revenues, 	an 	estimated 	$360 	million 	to 	$1.35
billion 	would 	be 	collected 	by 	the 	federal 	government, 	and 	$90 	to
$ 36 0 mill ion w0 u1 d got 0 	the s tat e 0 f Al ask a. 	It i s est i mat e d
that 	West 	Coast 	oil 	consumers 	would 	lose 	between 	$400 	million 	and
$1.2 	billion 	due 	to 	higher 	prices. 	Assuming 	that 	increased
government 	revenues 	yield 	comparable 	increases 	in 	benefits 	to
taxpayers 	or 	reductions 	in 	other 	taxes, 	at 	least 	some 	of
consumers' 	losses 	will 	be 	offset 	by 	their 	gains 	as 	taxpayers.
Finally, 	we 	estimate 	that 	owners 	of 	domestic 	tankers on 	the
Alaskan 	trades 	would 	lose 	at 	least 	$459 	million 	if 	shipping
rates·fall 	due 	to 	repeal 	of 	the 	export 	ban.
As 	noted 	in 	the 	staff 	report, 	the 	analysis 	of 	the 	cases 	in
which 	tanker 	rates 	fall 	is 	complicated 	by 	the 	fact 	that 	most
Alaskan 	producers 	are 	the 	owners 	of 	the 	tankers 	that 	transport
their 'oil 	to 	the 	rest 	of 	the 	United 	states. 	As 	a 	result, 	in
deciding 	how 	to 	respond 	to 	a 	partial 	relaxation 	of 	the 	export
ban, 	the 	Alaskan 	producers 	will 	take 	into 	account 	both 	their
gains 	as 	producers 	and 	their 	losses 	as 	shipowners. 	Under 	current
4 Of 	this 	90 	percent, 	30 	percent 	goes 	to 	the 	state 	of 	Alaska 	in
the 	form 	of 	royalties, 	severance 	taxes, 	and 	state 	income 	taxes,
and 	60 	percent 	to 	the 	federal 	government 	in 	the 	form 	of 	windfall
profit 	taxes 	and 	corporate 	income 	taxes. 	The 	windfall 	profit 	tax
is 	scheduled 	to 	expire 	in 1990, 	reducing 	federal 	revenues 	from 	an
export 	ban 	repeal 	by 	a 	half, 	and 	yielding 	a 	corresponding
increase 	in 	benefits 	to 	producers.
9

, .
tax 	rates, 	when 	total 	repeal 	lowers 	tanker 	rates, 	Alaskan
producers' 	losses 	as 	shipowners 	exceed 	their 	gains 	as 	oil
producers, 	thus 	makingexpo~ting less 	profitable 	than 	unchanged
shipments 	to 	the 	Gulf 	Coast. 	5 	If, 	as 	suggested 	in 	the 	staff
report, 	all 	Alaskan 	oil 	were 	valued 	for 	tax 	purposes 	as 	if 	sold
to 	Japan, 	then 	the 	distorting 	effect 	of 	these 	tax 	rates 	would 	be
eliminated.
Table 	3 	presents 	estimates 	of 	the 	effects 	of 	partial
relaxation 	of 	the 	export 	ban 	on 	producers, 	taxpayers, 	shipowners,
and 	the 	u.s. 	economy. 	These 	effects 	depend 	on 	the 	volume 	of
exports 	permitted, 	as 	well 	as 	on 	the 	competitiveness 	of 	the 	West
Coast 	oil 	market 	and 	the 	market 	conditions 	facing 	Alaskan 	trade
tankers. 	The 	estimated 	annual 	benefits 	to 	producers 	range 	from
$1 	million 	to 	$83 	million, 	while 	those 	to 	taxpayers 	range 	from 	$9
million 	to 	$747 	million. 	If 	partial 	relaxation 	lowers 	tanker
rates, 	then 	shipowners 	lose 	an 	estimated 	$459 	million 	per 	year.
Finally, 	the 	estimated 	net 	benefits 	to 	the 	U.S. 	economy 	as 	a
whole 	range 	from 	$10 	million 	to 	$371 	million.
As 	in 	the 	case 	of 	total 	repeal, 	partial 	relaxation 	will 	not
make 	it 	profitable, 	at 	current 	tax 	rates, 	for 	Alaskan
5 	It 	should 	be 	noted 	that 	this 	result 	is 	due 	to 	the 	higher
marginal 	tax 	rate 	on 	oil 	profits 	than 	on 	shipping 	profits. 	If
profits from 	the 	two 	operations were 	taxed 	at 	the 	same 	marginal
rate, 	then 	the 	Alaskan 	producer/shipowners 	would 	realize 	net
benefits 	even 	if 	their 	tankers' 	capital 	value 	were 	reduced 	to
zero.
10

Table 	3: 	Annual 	Gains 	and 	Losses 	from 	Partia~. Relaxation
of 	the 	Ban 	on 	the 	Export 	of 	Alaskan 	Oil.
Gains
to
Producers
dollars 	per 	year)----------
Quantity
Exported
(kb/d)
Net
Gains
to 	u. S.
Economy
---------(millions 	of
Gains
to
Taxpayers
Losses
to
Shipowners
--Competitive 	West 	Coast 	oil 	market.
--Excess 	tanker 	supply 	before 	and 	after 	partial 	relaxation. 	1
50 	10 	1 	9 	0
100 	20 	2 	18 	0
200 	40 	4 	36 	0
500 	100 	10 	90 	0
--Competitive West 	Coast 	oil 	market.
--No 	excess 	tanker 	supply. 	2
50 	24 	2 	21 	0
100 	47 	5 	42 	0
200 	94 	9 	85 	0
500 	235 	24 	212 	0
--Competitive West 	Coast 	oil 	market.
--No 	excess 	tanker 	supply 	before 	partial 	relaxation.
--Excess 	tanker 	supply 	after 	partial 	relaxation. 	3
50 	10 	47 	422 	-459
100 	20 	48 	431 	-459
200 	40 	50 	449 	-459
500 	101 	56 	504 	-459
--Non-competitive West 	Coast 	oil 	market. 	4
--No 	excess 	tanker 	supply.
50 	50 	5 	45 	0
100 	101 	10 	91 	0
200 	202 	20 	182 	0
500 	506 	51 	455 	0
--Non-competitive 	West 	Coast 	oil 	market.
--No 	excess 	tanker 	supply 	before 	partial 	relaxation.
--Excess 	tanker 	supply 	after 	partial 	relaxation. 	5
50 	38 	50 	447 	-459
100 	74 	53 	480 	-459
200 	149 	61 	547 	-459
500 	371 	83 	747 	-459
Source: 	FTC 	Bureau 	of 	Economics 	staff 	calculations.
11

, . ... ,
"
Tab~e 	3 	Footnotes
1 	with 	tankers 	in 	excess 	supply, 	the 	rates 	for 	shipping 	crude 	oil
approximate 	average variable 	cost, 	which, 	assuming 	a 	competitive
West 	Coast 	oil 	market, 	we 	have 	estimated 	to 	be 	$0.50/b 	from
Alaska 	to 	the 	West 	Coast, 	and 	$2.l3/b 	from 	Alaska 	to 	the 	Gulf
Coast. 	At 	these 	rates, 	we 	estimate 	that 	Alaskan 	producers 	net
back 	$25.50 	from 	shipments 	to 	the 	Gulf 	and 	West 	Coasts. 	A
partial 	relaxation 	of 	the 	export 	ban would 	permit 	shipments 	to
Japan, 	where 	we 	estimate 	the 	netback 	to 	be 	$26.05. 	Hence, 	for
each 	barrel 	diverted 	from 	the 	Gulf 	Coast 	to Japan, 	producers 	will
net 	back 	an 	additional 	$0.55 	before 	tax.
2 	If 	tankers 	are 	currently 	not 	in 	excess 	supply 	and 	if 	they 	have
alternative 	uses, 	then 	the 	rates 	for 	shipment 	of 	oil 	will 	exceed
average 	variable 	cost. 	If 	the 	West 	Coast 	oil 	market 	is
competitive, 	we 	estimate 	that 	the 	rate 	from 	Alaska 	to 	the 	west
Coast 	is 	$1.24/b, 	and 	the 	rate 	from 	Alaska 	to 	the 	Gulf 	Coast 	is
$2.87/b. 	At 	these 	rates, 	the 	netback 	to 	Alaskan 	producers 	from
sales 	to 	these 	destinations 	is 	$24.76. 	Hence, 	each 	barrel 	sold
in 	Japan 	w ill 	increase 	the 	netback 	by 	$1.29 	before 	tax.
3 	If 	a 	partial 	relaxation 	creates 	an 	excess 	supply 	of 	tankers
(because 	they 	have 	no 	alternative 	use), 	then 	shipping 	rates 	will
fall 	to 	average 	variable 	cost. 	Producers 	will 	gain 	both 	from 	an
increased 	ne":back 	of 	$1.29/b 	before 	tax 	on 	shipments 	diverted
from 	the 	Gulf 	Coast 	to 	Japan, 	and 	from 	a 	$O.74/b 	reduction 	in 	the
rates for 	the remaining shipments to the Gulf Coast and for 	the
unchanged 	shipments 	to 	the 	West 	Coast. 	Shipowners 	will 	lose
$0.74/b 	due 	to 	this 	decline 	in 	rates. 	.
For 	Alaskan 	producer/shipowners, 	current 	tax 	rates will 	make
it 	unprofitable 	to 	divert 	shipments 	to 	Japan 	after 	partial
relaxation 	of 	the 	export 	ban. 	At 	a 	90 	percent 	tax 	rate, 	an
increased 	netback 	of 	$1.29/b 	before 	tax 	is 	worth 	only 	$0.13/b
after 	tax. 	Assuming 	a 	50 	percent 	corporate 	income 	tax 	rate, 	the
loss 	of 	$0.74/b 	in 	shipping 	revenues 	above 	variable 	costs 	before
tax 	is 	a 	$0.37/b 	loss 	after 	tax. 	Hence, 	diverting 	shipments 	to
Japan 	would 	impose 	a 	loss 	of 	$0.24/b 	on 	Alaskan
producer/shipowners.
4 	At 	a 	dominant 	firm 	equilibrium, 	we 	estimate 	the 	rate 	for
shipping 	from 	Alaska 	to 	the 	Gulf 	Coast 	to 	be 	$4.35, 	and 	the
netback 	f rom 	these 	shipments 	to 	be 	$23.28. 	As 	a 	resul t,
diversion 	of 	shipments 	to 	Japan 	will 	increase 	the 	netback 	by
$2.77 	before 	tax.
12

· ,
"
Table 	3 	Footnotes 	(continued)
5 	If 	partial 	relaxation 	creates 	an 	excess 	supply 	of 	tankers,
rates will 	fall 	to 	average variable 	costs, 	which, 	for 	a 	dominant
firm 	equilibrium, 	we-estimate 	to 	be 	$0.50 	for 	shipments 	from
Alaska 	to 	the 	West 	Coast, 	and 	$3.61 	for 	shipments 	from 	Alaska 	to
the 	Gulf 	Coast. 	At 	these 	rates, 	diversion 	of 	shipments 	to 	Japan
increases 	producers' 	netback 	by 	$2.77 	before 	tax. 	In 	addi tion,
producers 	save 	$0.74/b 	on 	shipments 	to 	the 	West 	and 	Gulf 	coasts.
Shipowners 	lose 	the 	same 	$0.74/b due 	to 	the 	decline 	in 	rates.
As 	in 	the 	competitive 	case, 	at 	current 	tax 	rates, 	Alaskan
producer/shipowners will 	not 	find 	it 	profitable 	to 	divert
shipments 	to 	Japan. 	Their 	before-tax 	increase 	in 	netback 	of
$2.77/b 	would 	be 	worth 	only 	$0.28/b 	after 	tax, 	while 	their 	after-
tax 	loss 	in 	shipping 	income 	would 	be 	$0.37/b, 	resulting 	in 	a 	net
loss 	of 	$0.0 9/b.
13

· ( 	~ ..
producer/shipowners 	to 	divert 	oil 	to 	Japan. 	6 	If, 	as 	suggest~d
in 	the 	staff 	report, 	all 	Alaskan 	oil 	were 	valued 	for 	tax 	purp0ses
as 	if 	sold 	to 	Japan, 	then 	the 	distorting 	effect 	of 	these 	tax
rates 	would 	be 	eliminated. 	7
Summary ~ 	Conclusions
In 	these 	comments we 	have 	presented estimates 	of 	the 	effects
of 	a 	total 	removal 	of 	the 	export 	ban 	on 	North 	Slope 	Alaskan 	crude
oil. 	These 	estimates 	were 	obtained 	from 	a 1984 	Bureau 	of
Economics 	staff 	report 	to 	the 	Federal 	Trade 	Commission. 	In
addition, 	using 	the 	models 	developed 	in 	that 	report, 	we 	have
presented estimates 	of 	the 	effects 	of 	partial 	relaxation 	of 	the
ban. 	Under 	all 	the 	conditions 	examined, 	permitting 	Alaskan 	oil
exports 	would 	increase 	the 	net 	welfare 	of 	the 	U.S. 	economy 	by
millions 	of 	dollars 	per year, 	with 	the 	amount 	depending 	on 	the
competitiveness 	of 	the 	West 	Coast 	oil 	market, 	the 	market
conditions 	facing 	tankers 	on 	the 	Alaskan 	trade, 	and 	the 	extent 	of
relaxation 	of 	the 	ban. 	The 	effects 	on 	producers, 	shipowners, 	and
6 	Exports 	will 	become 	profitable 	when the 	windfall 	profit 	tax
ends, 	as 	scheduled, 	in 	1990, 	other 	things 	equal.
7 	If oil w·ere valued for windfall tax purposes as if shipped to
Japan, 	then 	we 	estimate 	that 	the tax 	would 	be 	$23.45/b,
regardless 	of 	destination. 	Assuming a 	competitive 	West 	Coast 	oil
market, 	if 	an 	Alaskan 	producer/shipowner 	did 	not 	export, 	his
after tax netback on shipments to the Gulf Coast would be
$1.3l/b. 	If 	he 	did 	export 	to 	Japan, 	his 	after 	tax 	netback 	would
be 	$2.60/b, 	yielding 	an 	increase 	of 	$1.29/b 	after 	tax. 	Even 	with
a 	loss 	of 	shipping 	profits 	of 	$O.37/b, 	exporting 	would 	increase
his 	overall 	profits 	by 	$O.92/b. 	Assuming 	a 	non-competitive 	West
Coast 	oil 	market, 	the 	Alaskan 	producer/shipowner's 	tax 	would
exceed 	his 	before 	tax 	netback 	of 	$23.28/b, 	yielding 	an 	after 	tax
loss 	of 	$O.17/b. 	Exporting 	to 	Japan 	would 	thus 	increase 	the
netback 	by 	$2.77/b, 	which, 	after 	subtracting 	the 	loss 	of 	shipping
profits, 	would 	yield 	an 	increase 	in 	overall 	profits 	of 	$2.40/b.
14

taxpayers 	would 	3150 	depend 	on 	these 	factors. - By 	contrast 	with
total 	removal, 	partial 	relaxation, 	to 	the 	extent 	considered 	in
the request for 	comments, would not affect the price of oil to
West 	Coast 	consumers. 	Although, 	at 	current 	tax 	rates, 	exporting
oil 	to Japan 	would 	not 	be 	profitable 	for 	Alaskan 	producer/
shipowners, 	valuation of Alaskan oil as if it were sold to Japan
would 	make 	exporting 	profitable.
15