Page images

in 1956 and are predicted at even higher levels for 1957. One may question the validity of the argument that the present level of imports has reduced the incentive for the search for new domestic sources of oil. In this connection, it must be noted that average domestic discoveries in recent years are less prolific than in earlier years, and domestic oil consumption is growing at a more rapid rate than proved domestic reserves.

Since the United States has only about 15 percent of estimated world crude reserves, and accounts for more than 45 percent of world oil consumption, it is of vital importance from both economic and national defense viewpoints that the Government does not adopt a policy which would unduly restrict oil imports from foreign areas where the reserves far outstrip the present and expected future consumption of oil.

I do not believe it is true, that partial dependence upon imports will endanger national security. Oil is not the only mineral for which future supply is a problem. It is doubtful that any nation is completely self-sufficient in mineral resources for either war or peace. Certainly the United States is a “have not” nation for many raw materials today, but this alone does not mean that our security is in a precarious position. It does mean, however, that dependence on foreign sources is one of the problems of our economy as well as of national security. The fallacy of self-sufficiency in oil, as anything else, is that costs may be prohibitive.

United States imports of foreign oil have amounted to 5.3 billion barrels over the past 35 years and most of it originated from the Western Hemisphere. If we had prohibited such imports, does anyone here think there would have been the development of present production facilities in those foreign countries that exists today? Obviously not, because no country develops oil reserves except to the extent that it may have prospective markets.

If the United States expects other countries to develop their oil resources so that they will be available to us and the free world in time of need, it must offer to them the prospect of a reasonable market outlet on a competitive basis.

There has been much discussion of why MEEC members import Venezuelan crude to the United States and sell domestic crude to Europe when the shortest haul is direct from Venezuela to Europe. Perhaps we could have diverted most of our imports of Venezuelan crude to Europe; however, for the following reasons we have not done SO:

(1) Certain Venezuelan crudes have an excellent yield of high octane gasoline. Due to the increasing demand of this product here, we have geared our operations to utilize a prorated amount of Venezuelan crude as feed stock in our Philadelphia refinery. As mentioned before, operational changes necessary to substitute domestic crudes for this amount of Venezuelan crude are expensive and impractical compared with the savings in tankers.

(2) As you know, the Government has not approved coast wise movements of domestic crude in foreign-flag tankers. We do not have a sufficient number of American-flag vessels to handle the volume of domestic crude necessary to supplant the Venezuelan crude now being used. Consequently, we would have to supplement transportation movements by the use of foreign-flag tankers which, under present conditions, is not possible.

I have noted considerable discussion in your hearings to the effect that imports have discouraged pipeline connections to domestic wells and at least one insinuation that imports are of more concern to Gulf than domestic crude production. This is not true. I have already pointed out that Gulf has complied with the ODM requests with respect to imports.

We have been criticized for challenging the constitutionality and the undue burden upon interstate commerce of a State regulation which attempts to force us to buy crude oil in Oklahoma for which we have no use and do not want.

As an indication of our interest in domestic crude production, in the 5-year period 1953 to 1957, we will have invested $933 million on production, development, and exploration activities. The figures for 1957 are the approved program in which we are now engaged.

The trend of those expenditures is upward, increasing from $129 million in 1953 to the current program for 1957 of $227 million. I think with expenditures approaching $1 billion in 5 years we emphasize our interest in the domestic oil-producing business.

The reasons for the recent domestic crude price increase have been presented and discussed rather fully in previous testimony by others before this committee. Good and valid reasons have been stated which I will not take your time to repeat; however, I would like to make a point or two with regard to the matter.

Gulf is a domestic net purchaser of crude oil. Our domestic production is insufficient to meet the needs of our refineries so that we can manufacture the volume of products to take care of our customers, notwithstanding the imports we have brought to the east coast.

In 1956 we refined in the United States over 52.5 million more barrels of domestic crude than we produced. This deficit represents purchases from other domestic producers.

Gulf did not immediately meet the first crude price increase which was effective January 3, 1957, although we had felt for months that a crude price increase was inevitable and justified.

Due to the various prices for different grades of crude, Gulf took a careful view of its situation before announcing a new schedule of prices. Should we meet exactly the prices as announced by some other companies or should Gulf establish a schedule based entirely upon its own appraisal of relative crude values ?

After taking into account our own situation, we announced our schedule on January 8. In view of the competitive situation, we have subsequently made adjustments. We had previously lost 5,000 barrels a day of very desirable crude oil to a competitor who offered a price above Gulf's.

In the recent situation, had we failed to meet the price, we would have had insufficient oil.' Had we offered too high a price, we soon

a would have had more oil than we could use.

I said only a moment ago that we had been considering a crude oil increase for months. Not only had we been constantly studying the economic factors involved in Gulf's own exploration and production costs, but we had been subjected to outside pressures complaining about the prices we paid for crude.

We have in our files, and there have been furnished to this committee, copies of telegrams received from independent producers and royalty owners asking us to consider an advance in our purchase price of the crude oil we bought from them.

This is understandable. They, too, in their search for and production of oil, have been subjected to the same economic pressures as wemaybe more so. If they are to stay in the business, and they are a vital part of the national economy, then they must receive a living wage.

Since it has already been stated that Gulf is a net purchaser of domestic crude, we cannot escape the fact that the cost of the crude is a major factor in arriving at product prices. There is a direct relationship between the price of crude oil and the price of petroleum products.

The record shows that following a crude-price increase there has been a product-price increase, and this last movement was no exception. Generally the price of gasoline increased about a penny a gallon; however, in Gulf's territory, it amounted to approximately threefourths of a cent at this last increase. Due to competitive pressures, the price fell off in many areas so that as of today we estimate the increase to be less than one-half cent per gallon.

This has been the first general increase in the gasoline-price level since June 1953. Today the average tank-wagon price of gasoline in Gulf's territory is approximately 1612 cents, or an advance of only 40 percent, over a 10-year period.

As contrasted to this, since 1947 our employees have been given 11 so-called general and cost-of-living increases amounting to 73 percent. During the same period, the average monthly wage of our employees has increased 92 percent, which reflects merit increases over and above the general increases.

Thus labor is an important cost factor in the oil business.

Many people do not realize the great sums of money required to construct, maintain, and operate a modern, efficient refinery. Gulf alone has over $660 million invested in its refining facilities, and well over one-half of this sum has been invested in the same 10-year period we are talking about.

The measure of the fixed capital assets employed in our refineries has increased from $1.71 per barrel of crude processed in 1946 to $2.86 per barrel of crude processed in 1956, or an increase of 67 percent.

These refinery costs are also subject to other industry wage and material increases with which you are familiar. Considering all of the cost factors involved, our refinery-operating costs per barrel of crude refined in 1946 as against a barrel of crude refined in 1956 have stepped up approximately 100 percent. Such increases in costs inevitably influence the price of the finished product.

Marketing costs follow the same pattern. By way of illustration, a service-station gasoline pump now costs us $103 as compared to $271 in 1947; a 2,000-gallon underground service-station tank formerly cost $143 but now we pay $224; for a hydraulic grease-rack lift we now pay $731 as against $107 in 1947. Å truck costs 54 percent more; a trailer tractor, 139 percent more; and a 2-door passenger car 89 percent more.

Since 1948, Gulf has increased its octane number for its house-brand gasoline 94 octanes which costs 11/2 cents per gallon. Over this same period of time, our average tank wagon price has increased 2.7 cents per gallon, which demonstrates that over one-half of this price increase was brought about by increased octane requirements alone.

The motorist is primarily concerned with the price to him of a gallon of gasoline at the pump. To make a purchase of Good Gulf gasoline today in Pittsburgh, I would pay 30.9 cents per gallon.

The tank-wagon price of that same gasoline to the dealer—the actual amount that Gulf would receive for the gasolineis 15.3 cents per gallon. The company that finds and produces the oil, breaks it up into products, and lays them down at the retail outlet receives less than 50 percent of the retail price of the product.

This is due to several reasons. First, there is a heavy tax load reflected in the price. Both State and Federal taxes are included in the price, and in the example I just cited, 9 cents or over 29 percent of the retail price is directly attributable to taxes.

Then, too, the dealer must have a sufficient markup to stay in business. Like the rest of us, he has been exposed to the same inflationary factors—increased labor, maintenance, utilities, et cetera-and therefore must maintain a reasonable margin. Contrary to popular impression he is the one who determines the margin and establishes the price of the gasoline at the pump.

Regardless of the above-mentioned factors, the recent price increase has been questioned due to the condition of gasoline inventories. There have been divergent opinions expressed as to th reasonableness of gasoline stocks depending upon the speaker. Although these stocks have been at record levels, I noted with particular interest the statement of Mr. Hines Baker, president of Humble Oil & Refining Co., that considering line fill, operating stocks, seasonal demands, location differentials, increasing consumption, and the like, only about 3 to 5 days' supply of this inventory could be actually considered as surplus.

Certainly gasoline inventories have some effect on the selling price of gasoline, but they do not have any effect on the costs of crude oil, manufacturing plant, or marketing distribution.

The fact that the gasoline was in inventory and had not been made from the costlier crude has nothing to do with it. When there is a decrease in gasoline price, the converse is true, notwithstanding that stocks on hand were made from higher priced crude.

This is true of necessity-otherwise, the independent refiner would be out of business. He has inadequate storage to protect himself against delayed price movements, and his products move in a continuous flow from the crude input line to his customers. Therefore, when the price of crude moves, the price of his products must moveand to argue that the manufacturer must absorb the increased crude price is to argue for this man's demise.

One other point should be made before leaving product prices, and that is the highly competitive nature of the market into which they are sold.

In spite of the increasing cost factors, it is obvious that the current price structure is not immune to the competitive pressures which operate in a free market. Reduction in gasoline prices has already

occurred in a large area of Gulf's marketing territory, which, in many cases, have eliminated the initial price increase.

It is becoming more and more difficult to replace the reserves behind our growing production. It is true that domestic reserves of crude oil have so far followed an increasing trend, but the new oil found per exploratory well, or per foot of wildcat drilling, has been declining during recent years.

A large part of the reserves additions we have been able to develop to counterbalance the withdrawal of reserves by production has come from extensions of old fields, by development drilling, or by improved technology. As stated by General Thompson of the Texas Railroad Commission:

The whole United States discovered in new fields and new pools in old fields in 1955 only 476,957,000 barrels of oil, whereas the United States production was 2,419,300,000 barrels. So it will be seen that the United States as a whole produced her oil 5 times as fast as we found new discoveries.

The effect of the increased costs of finding new oil reserves is that we are forced to replace the oil we are now producing, which was found at low cost in years past, by reserves being discovered and developed now at much greater per barrel costs.

We have already mentioned the large capital expenditures which in recent years have reached record levels. And too often overlooked is the fact that these capital investments must ultimately come from profits. In other words, we must have made a profit in order to have available money to plow back into the business.

In 1947, for example, Gulf's total invested capital was $687 million, upon which we earned a return of 14.3 percent. By large capital expenditures since that time, we had by 1955 increased our average employed capital to $1,631 million; however, the rate of return on this larger investment in 1955 was only 13.7 percent.

Figures for 1956 are not yet available; present indications are that that they will approximate the same ratios. Comparing these figures with comparable ones in other industries for 1955, 2 automotive concerns showed earnings of 23 and 25 percent; an electric company showed a return of 19 percent; a chemical company reported earnings of 22 percent; while the steel-industry earnings seem to about parallel our own.

Our wage scales and employee benefits produce a standard of living second to none. These benefits are not free. They add to our cost of doing business. Any way you look at it, it becomes clear that the charge of "gouging the public" for the benefit of the so-called vested interests is just not true.

I am sure that all industry employees, shareholders, and those connected with the industry join me in protesting any smear which blackens our industry's reputation in the eyes of the public.

Thank you very much, sir.
Senator OʻMAHONEY. Thank you, Mr. Whiteford.
Mr. McHugh will now address some questions to you.
Senator DIRKSEN. May I make one comment!
Senator O'MAHONEY. Yes, indeed.

Senator DIRKSEN. Mr. Whiteford, I think this is one of the most candid and most all-inclusive statements that has been presented to the

« PreviousContinue »