Since 1948, Gulf has increased its octane number for its house-brand gasoline 91 octanes which costs 12 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 gasoline-is 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 the 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 move and 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 O'MAHONEY. 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

committee and there is enough concrete fact in it so that it is readily understandable.

Senator O'MAHONEY. It is a well-prepared paper.

Mr. WHITEFORD. Thank you, sir.

Senator DIRKSEN. When you talk about cost changes, for instance, if you anchor it and say a pump cost so much in 1947 and so much today, anyone can understand that.

Mr. WHITEFORD. Thank you, Senator, very much.

Mr. McHUGH. Mr. Whiteford, on page 2 of your prepared statement you refer to several situations where you engaged in transactions pursuant to the plan of action under the Middle East Emergency Committee.

I wonder, with reference to No. 2, if you can describe for the committee who the parties were with whom you dealt there, what the nature of the transactions was, how they were effected, and how that was brought about.

Mr. WHITEFORD. May I call on Mr. McGranahan, our vice president in charge of transportation, who has a more intimate knowledge of these facts than I do, or would you want me to answer?

Mr. McHUGH. If you think Mr. McGranahan can answer it, fine. Mr. McGRANAHAN. When the problem came up of diverting supplies to Europe, the question arose as to who had sufficient tankers under the United States flag to move domestic crude, and in trying to find companies that were in a position to supply that service, we found that the Standard Oil of New Jersey had ships available to move domestic crude and had refineries in Europe that were short of crude.

As a result of discussions with them, we made arrangements to move 35,000 barrels a day of Kuwait crude that had been coming to this country to points in northern Europe and in turn they moved domestic crude from the gulf coast to our refineries at Philadelphia to make up the oil that was being diverted to Europe.

Does that answer the question?

Mr. McHUGH. The crude that was moved from Kuwait to Western Europe was moved in whose tankers?

Mr. McGRANAHAN. In our tankers, our gulf tankers-foreign flag. Mr. McHUGH. Did Esso acquire title to purchase the crude put on board tankers?

Mr. MCGRANAHAN. We sold them on a delivered price basis, f. o. b. price at loading.

Mr. McHUGH. With reference to the crude that was carried to your refineries by Standard, that, again, was carried on Esso tankers? Mr. McGRANAHAN. That is right.

Mr. MCHUGH. What were the pricing arrangements of the mechanics for transmission of that crude?

Mr. McGRANAHAN. That was part f. o. b. to the gulf coast and transportation was adjusted separately.

Mr. McHUGH. What do you mean by saying transportation was adjusted separately? How was that handled?

Mr. MCGRANAHAN. Well, we arrived at the fact that there was a differential in the volume of ton-miles between moving on United States-flag ships versus a foreign-flag ship. We arrived at a differential of 10 percent of that value. It costs more to build and operate a United States-flag ship than a foreign-flag ship and moving over a

differential mile route and we took that difference into consideration. That was the only adjustment that was made.

Mr. McHUGH. Ordinarily this shipment would have cost your company a considerably larger amount if it was delivered directly from Kuwait to the east coast than the cost of the transportation from the gulf coast to your refineries. Was the extra expense divided between the two companies?

Mr. MCGRANAHAN. Yes.

Mr. McHUGH. On what sort of a basis?

Mr. MCGRANAHAN. 50-50.

Mr. McHUGH. In other words, you added the total cost of the transportation both ways and split it down the middle.

Mr. McGRANAHAN. That is right.

Mr. McHUGH. Do you know whether that has generally been the arrangement of the various companies with reference to sharing transportation costs pursuant to the schedules which have been entered into? Mr. MCGRANAHAN. I don't know. Would you

Mr. RHOADES. I don't know.

Mr. MCGRANAHAN. I can't answer that.

Mr. McHUGH. Were the details of this arrangement reported to the MEEC?

Mr. RHOADES. Yes. That is right. All arrangements made pursuant to the Middle East Emergency Committee action have been reported. Mr. McHUGH. How soon after the transaction was completed are these reported?

Mr. RHOADES. I could not answer that, sir. I have not made the reports myself, but I know that the requirements of the arrangements within the Committee specify that that should be done and I am sure they were done in the proper timing as required.

Mr. MCHUGH. Were the transactions approved by MEEC?

Mr. RHOADES. I don't say the transactions are approved by the Committee, because the Committee does not have that function. They make the recommendations for certain scheduling and under those schedules, the companies are expected to cooperate to the extent they

can.

Mr. McHUGH. Are the transactions required to be approved by MEEC or Government agencies?

Mr. RHOADES. No. The requirements are that the reporting of the action taken, any arrangements made are reported and submitted to the Government through the companies making the arrangement.

Mr. MCHUGH. You are simply required to make a report of it?
Mr. RHOADES. Yes.

Mr. McHUGH. Does MEEC, after making any review of this, ever question the method in which it is handled, or ask for any details concerning it?

Mr. RHOADES. Not to my knowledge, no. As I understand, the Committee's function, it is to specify how this emergency may be met, by moving oil from the Middle East that comes to the States to Europe or by diverting other oil to Europe in the emergency, and there are schedules under which that can be done.

The Committee then is finished. It is up to the individual companies who, after examining their situations, find that there is an arrangement between them that could come within that schedule.

Mr. MCHUGH. Before the particular transaction referred to in 1 was entered into, did the two companies communicate that information to MEEC or your plans for making the type of exchange?

Mr. RHOADES. Well, I think the Committee in its subcommittees did have information that here were two companies that had a situation and they could get together. Now, the Committee was not concerned with which companies did what, but only to examine the situations and see where these pieces could be fit together.

Mr. McHUGH. Were the details of this particular exchange discussed at any of the subcommittee meetings of MEEC?

Mr. RHOADES. I would not know that because I am a member of the Committee, but not a member of any subcommittee. So I would not know that that actual transaction was discussed as such. I would rather suspect that it was not in the details of it because that isn't the way the committee functions.

They do submit material from the various companies so that the subcommittee knows what the situation is with respect to supply and requirement. But actually whether they examine what kind of a deal Mr. McGranahan here made with Esso, I am not aware of the facts on that.

Mr. MCHUGH. Where were the details of the commercial transaction arrived at? Where were they made?

Mr. RHOADES. They were made between representatives of our company and representatives of Jersey.

Mr. MCHUGH. Where?

Mr. RHOADES. It might have been done in New York; it might have been done between New York and Pittsburgh by telephone, or other discussions. Mr. McGranahan may indicate what his part of that is, so far as transportation is concerned.

Mr. McHUGH. Will you tell us, Mr. McGranahan?

Mr. MCGRANAHAN. Yes.

Members of the Tanker Subcommittee of the MEEC furnishing schedules, you could see that certain adjustments could be made. Mr. McHUGH. Are you on the Tanker Subcommittee?

Mr. MCGRANAHAN. No, I am not. We have a representative on that committee.

Mr. MCHUGH. Who is he?

Mr. MCGRANAHAN. Mr. H. B. Brown, and Mr. Thompson. We have two representatives.

And, in looking at those schedules, you could see there was a possibility of making adjustments along the line the MEEC wants, to help improve the situation in Europe, and everybody was asked to try to work that out.

Representatives on the Tanker Subcommittee and Esso's representative got together to discuss the possibilities of trying to improve the delivery situation in Europe by this exchange, and that is how the matter started and came about.

Mr. McHUGH. Your representatives, I assume, did discuss that at the meetings of the Tanker Subcommittee?

Mr. MCGRANAHAN. They discussed the desirability of such moves for the industry, and for everyone to try to get behind and improve it. Mr. MCHUGH. You are speaking of these particular transactions?