ECONOMIC

sumption to available supplies, the industry has been forced to curtail deliveriesunder both firm and interruptible contracts. In addition, many gasdistributors have been unable to add new customers. Recently, arrangementswere made to import liquefied natural gas (LNG) at a price several timesthe domestic price for natural gas. Because the gas price has been maintainedbelow the market-clearing level, a heavier burden has been placed on otherfuels, mainly oil.PetroleumIn 1959 the Mandatory Oil Import Program was adopted to limit dependenceupon foreign sources of supply. This program was partly a response tothe curtailment of Middle East oil exports during the Suez Crisis of 1956.Under the program, quotas were imposed on imports of oil, especially crudeoil. These quotas increased the profitability of domestic production and ledto additional drilling. The major oil-producing States had earlier establisheda maximum efficient rate of recovery (MER) for oil fields, and had limitedproduction to some percentage of MER. This prorationing, together withimport quotas, served to support the domestic price above the price of imports.In addition, prorationing resulted in excess capacity in crude oil production,in the form of production below MER.After 1960 the only major new discoveries of petroleum in the UnitedStates were on the North Slope of Alaska and on the Outer ContinentalShelf. In the "lower 48" States, the ratio of proved reserves of crude oil toannual production declined throughout the 1960's. Excess crude oil productioncapacity also declined as allowable rates of recovery were raised by theState regulatory agencies. This permitted output to increase rapidly duringthe 1960's. But after 1969 the increases in production failed to keep pacewith the growing domestic demand. As an alternative to raising the supportedprice which would have stimulated domestic production and restraineddemand, exceptions were made to the existing quotas, to permit agreater level of petroleum imports. Finally, in April 1973, the system of importquotas was abandoned altogether in favor of a flexible import fee. Thisfee is currently set at a low level to encourage importation.Beginning in the late 1960's, the expansion of domestic refinery capacityfailed to keep up with the growing demand for oil products. Frequent exceptionsto oil import quotas and the continuing review of the MandatoryOil Import Program gave rise to uncertainties about whether future policywould encourage importation of crude oil or of refined products. In theface of this uncertainty few new domestic refineries were built. In some casesdomestic refinery construction may also have been discouraged by the difficultyof finding a site that would not arouse community objections for environmentaland other reasons. In addition, the income tax credit to companiesfor income taxes paid to foreign governments may have increased theincentive to build refineries outside the United States.The use of petroleum products in the United States increased by 66 percentfrom 1960 to 1972. Much of this increase occurred in the transporta-115