(1) We made an agreement with another company whereby 35,000 barrels daily of Kuwait crude oil ordinarily refined in the United States was diverted to refineries in Western Europe, substituting an equal volume of domestic crude delivery to us in the United States. During January, this arrangement alone made available to Europe a total of 1,100,000 barrels of crude and resulted in savings equivalent to 8 T-2 tankers. (2) We modified a contract for Kuwait crude, otherwise destined for the United States, permitting its diversion to Europe in the amount of 12,000 to 15,000 barrels daily, for which a substitution of domestic crude was made. The overall effect of this single transaction results in a tanker savings equivalent to about three T-2 tankers. (3) In November 1956, we reversed a pipeline movement and pumped 1 million barrels of Oklahoma crude south into Texas for export movement. At the same time we held in Texas crude that normally would have been pumped north, so that it, too, became available for export. This amounted to 1.5 million barrels, so the total of this one pipeline operation made available 2.5 million barrels of crude for export. Including diversion of Middle East imports, I believe we can say that Gulf has contributed an average of 132,000 barrels daily and a total of 16,250,000 barrels of crude and finished product to Europe during the last quarter of 1956 through January 31, 1957. The figure for February has just come in, and is 1.2 million barrels in addition to those I have just given. The industry has been called price gougers, and it has been stated that we are not operating in the public interest. Gulf is in business to make a profit, but we follow good business practices in determining the means by which we make a profit. You should appreciate that our domestic crude and product shipments to Europe in the last quarter of 1956 constituted heavy withdrawals from our stocks. If we had wanted to be price gougers, we could have held this crude in anticipation of a price increase which we believed to be imminent and justified. In addition, by making these heavy withdrawals, we may place ourselves in a vulnerable position in the event of any long delay in reopening of the Suez Canal. Our policy has been to do everything possible to supply our customers with their normal requirements of oil and avoid prorating our supplies to them. We have not made any tie-in sales of gasoline with crude. From an economic and practical viewpoint, it is not a simple matter to drastically change refinery yields. Our domestic customers need finished petroleum products, but their requirements of gasoline and fuel oils vary depending upon the seasonal factor. Our duty to our domestic customers is to avoid petroleum shortages here, and at the same time do everything possible to increase the flow of oil to Europe. When the enormous complexities resulting from the Suez crisis are carefully analyzed, including the economics of refining, the rerouting of available crude both from the Middle East and the Western Hemisphere, and the tanker shortage, it is evident that the industry has been very successful in meeting the emergency. Turning to the subject of imports, I note that many domestic producers are continuing to press for action under section 7 of the Trade Agreements Act. Before the closing of the Suez Canal, Gulf was importing a total of 131,000 barrels of crude daily, of which 60,000 barrels were from the Middle East and 71,000 barrels from Venezuela. Immediately after the closing, our imports of Middle East crude dropped to 35,000 barrels daily, and because of our cooperation with MEEC have been entirely eliminated since January. Presently, all of our imported crude comes from Venezuela and averages 80,000 barrels daily. We are now importing 50,000 barrels daily less than before the closing of the canal. Our company in the last few years has reduced its import plans on several occasions in view of the increased domestic productivity. In 1954, for example, when we had a large increase in our refinery requirements, our own United States crude-oil production was down. But although we had ample supplies of our own foreign crude oil and products available, we increased our total imports by only 2,470 barrels daily while increasing our net purchases of United States crude oil from other producers, at full posted prices, by 37,486 barrels daily. In that situation, although we did not believe there has been any injury to the domestic situation from imports, in our desire to be cooperative, we agreed to conform to the recommendations of the Cabinet Committee. Gulf was one of the pioneer American companies to venture abroad in the search of oil, and its whole eastern seaboard refining and marketing position was largely developed on the basis of utilizing foreign crude oil, originally from Venezuela, and in more recent years from Venezuela and the Middle East. Gulf's imports of products have always been, and still are, a very small portion of its total imports, inasmuch as its policy has been to do most of its refining for the United States in the United States. All of the company's imports are to the east coast. Gulf has complied with all requests from the ODM regarding imports, and even before the ODM was involved in this question, Gulf had many times taken action to reduce or hold back increases in its imports when total oil imports in the United States appeared to be growing at an unusually rapid rate. The result of the above policy has been that the ratio of Gulf's imports to the total for the industry has been steadily declining. Since 1947 Gulf imports have declined from 17.4 percent of the total for the industry to an estimated 9.5 percent for last year. This has not been due to any lack of adequate foreign crude of our own which we could have imported, but solely to our own voluntary restrictions. As a consequence of the above and the fact that its own domestic production has not increased fast enough to supply the balance of its refinery requirements, Gulf's purchases of crude from other domestic producers have greatly increased. This year such purchases will average double what they were 10 years ago, and greater than the company's entire imports. We have consistently argued against maintaining the ODM 1954 ratio of imports to domestic production. Notwithstanding this position, Gulf has complied with all requests from ODM. Notwithstanding the increased volume of industry oil imports since 1954, the facts are that domestic crude oil production, drilling, exploration, reserves, and production capacity were all at record high levels 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 coastwise 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 empha size 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 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 162 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 $403 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 $407 in 1947. A truck costs 54 percent more; a trailer tractor, 139 percent more; and a 2-door passenger car 89 percent more. |