Emergency Allocation Rules Fail To Recognize Needs of Petrochemical Industry

EMD-80-39: Published: May 21, 1980. Publicly Released: May 21, 1980.

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The rapidly growing petrochemical industry plays a critical role in the Nation's economy comparable to that of the metals industry. However, future petrochemical growth could be subject to severe constraints as a result of constricted supplies of petroleum and natural gas. Because its basic feedstocks, natural gas, natural gas liquids, and petroleum liquids, also have valuable energy uses, the petrochemical industry must compete for its feedstocks with virtually the entire economy. Current Government allocation programs are based on fuel uses, not feedstock uses. Failure to recognize the hydrocarbon raw material feedstock requirements of the petrochemical industry could adversely impact the manufacture of such vital products as rubber, fibers, agricultural chemicals, plastics, and medical drugs. Most new petrochemical plants are based on the heavy crude fractions of naphtha and gas oil because the industry once believed that the domestic availability of natural gas and natural gas liquids was declining. Presently, petrochemical feedstocks account for 3.3 percent of U.S. consumption of crude oil, 2.7 percent of natural gas consumption, and 21 percent of all natural gas liquids consumed. Under normal market conditions, the high value added of petrochemical products would probably give the industry an advantage over other uses of crude oil. However, if confronted with the current Department of Energy (DOE) philosophy of equally distributing shortages across the board, the petrochemical industry could be more affected than other industrial users.

Current Government allocation policies and possible chronic problems of fuels availability indicate a strong need for a revised information system if petroleum and natural gas shortfalls are not to affect the petrochemical industry disproportionately. Such a revised information system should recognize the following: (1) The feedstock uses of natural gas liquids represent a major share of the overall natural gas liquids used. (2) Feedstock usage is beginning to change as the petrochemical industry switches from natural gas to crude derived feedstocks. (3) Information should be provided on current levels of consumption, trends in these levels, and alternate feedstocks which could be used. (4) The comparability of the data resulting from a uniform definition of the industry must be provided. (5) The level of detail must be sufficient to reveal trends. (6) Initial priority should be given to developing timely and accurate general data before developing detail. (7) Attention should be focused first on the problems of developing an allocation system for, and information on, the consumption patterns of all natural gas liquid users. (8) The required level of detail on energy/feedstock use and economic roles of the petrochemical industry will depend on the extent to which adjustments in initial allocations by participants are precluded. GAO considers that economic efficiency would be more likely under a system permitting adjustment within broad governmental allocation rules.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of DOE, working in collaboration with the Secretary of Commerce, should establish a standardized definition of the petrochemical industry suitable for allocation purposes. The definition, and the rationale supporting it, should be provided to Congress not later than 6 months from release of this report. DOE should define information requirements necessary to support timely allocations of petroleum, natural gas, and natural gas liquid feedstocks, if conditions necessitate direct Government apportionment of supplies. The allocation system should recognize industry's needs for both energy and feedstock requirements. Special attention should be given to allocation procedures for natural gas liquids. As part of his report to Congress, the Secretary of DOE should explain the rationale for anticipated standby allocation procedures including an examination of alternatives for maintaining as much market flexibility as possible. Within 1 year following issuance of this report, DOE should submit to the Office of Management and Budget and Congress, its recommendations for medium- to long-term phasing out of any data systems that might overlap or be duplicated by the required new system. However, both the new and present systems should be maintained for a sufficient period of time to retain the information on trends in the petrochemical industry.

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