EMERGENCY OIL LIFT PROGRAM AND RELATED OIL PROBLEMS TUESDAY, FEBRUARY 12, 1957 UNITED STATES SENATE, SUBCOMMITTEE ON ANTITRUST AND MONOPOLY, OF THE COMMITTEE ON THE JUDICIARY AND SUBCOMMITTEE ON PUBLIC LANDS OF THE COMMITTEE ON INTERIOR AND INSULAR AFFAIRS, Washington, D. C. The subcommittees met, pursuant to recess, at 10:30 a. m., in the caucus room, Senate Office Building, Senator Joseph C. O'Mahoney presiding. Present: Senators Kefauver (chairman of the Subcommittee on Antitrust and Monopoly), O'Mahoney (presiding), Neeley, and Dirksen, of the Subcommittee on Antitrust and Monopoly, of the Committee on the Judiciary. Senators O'Mahoney (chairman of the Subcommittee on Public Lands) and Carroll, of the Subcommittee on Public Lands, of the Committee on Interior and Insular Affairs. Committee and subcommittee staff members present: Donald P. McHugh, cocounsel, Antitrust; James De Maras, Jr., research consultant, Public Lands; Gareth Neville, assistant counsel, Antitrust; W. B. Watson Snyder, consultant, Antitrust; Peter Chumbris, counsel for minority, Antitrust; Carlile Bolton-Smith, counsel to Senator Wiley; Louis Rosenman, attorney, Antitrust; Paul Banner, economist, Antitrust. Robert Murphy, professional staff member, Senate Interstate and Foreign Commerce Committee; and Stewart French, chief counsel. Committee on Interior and Insular Affairs. Senator O'MAHONEY. The committee will come to order. Mr. McHugh, are you ready to proceed with the first witness? The first witness, Senator, is Rear Adm. O. P. Lattu, Executive Director, Military Petroleum Supply Agency. Senator O'MAHONEY. Admiral Lattu, we are glad to have you with us this morning, and we will ask you first to identify yourself for the record, in your own words, and then proceed. STATEMENT OF REAR ADM. O. P. LATTU, EXECUTIVE DIRECTOR, MILITARY PETROLEUM SUPPLY AGENCY, SUPPLY CORPS, DEPARTMENT OF THE NAVY; ACCOMPANIED BY COMDR. H. H. BLACKMAN, J. H. COLLINS, AND R. E. SCHATTMAN, DEPARTMENT OF THE NAVY Admiral LATTU. I am Rear Adm. O. P. Lattu, Supply Corps, United States Navy, Executive Director of the Military Petroleum Supply Agency. 90507-57-pt. 1- 22 Commander Blackman is the Director of the Purchase Division in the same Agency. Mr. Collins is Assistant Director (Civilian) of the Purchase Division, and Mr. Schattman is Assistant Counsel of the Agency. I have been requested to appear before this subcommittee to give information regarding the effect of recent price increases on the future expenditures of the military services for petroleum products. I am the Executive Director of the Military Petroleum Supply Agency, an agency under the jurisdiction of the Secretary of the Navy charged with the responsibility of procuring the petroleum requirements of the military services. In preliminary information furnished to your committee on January 30, 1957, we estimated that the recent price increases would add from 80 to 100 million dollars to the expenditures of the military services for such petroleum products. Since then we have had an opportunity to examine our recent purchases and conclude that the volume of petroleum products procured in fiscal year 1956, if procured at present price levels, would result in additional costs to the military services of approximately $85 million during the next 12 months. Enclosure (1) breaks down by product our annual petroleum purchases. In 1956, we bought 223 million barrels of product. The cost for this was approximately $1,060 million. We have applied to that 1956 expenditure those price increases which have been experienced in calendar year 1957. The prices quoted in the last half of 1956 are our base for determining the percentage of increase. Aviation gasoline represents approximately one-third of our total dollar expenditures. Examination of commercially posted prices indicates an increase of 4.46 percent. Our experience in limited procurements during this year-our major purchase of aviation gasoline will not be made until April-indicates that these postings are not realistic and that aviation gasoline will cost the military services approximately 6 percent more than in fiscal year 1956. Jet fuels represent another one-third of our expenditures. The commercially posted prices for jet fuel have increased approximately 13.1 percent. We have estimated that the cost to the military services will increase approximately 7.8 percent. Enclosure (2) compares the prices it is anticipated the military services will pay in the next 12 months as against those prevailing in the last half of 1956. Motor gasoline, heavy fuel oils, diesel, and all other products represent the final one-third of the dollar expenditures by the military services for petroleum. Commercial postings for motor gasoline indicate a price increase of approximately 5 percent. Based upon limited procurement to date, prices to the military services have increased by some 2 per cent. Commercial postings on diesel fuel show an increase of approximately 14.3 percent. It is our best estimate that increases in price to the military services will be some 11.5 percent. Commercial postings for heavy fuel oils comparable to those purchased by us have increased by approximately 23 percent. Navy special fuel oil, the basic fuel for naval vessels and characterized as a heavy fuel oil, has increased approximately 22 percent while other heavy fuel oils used by the military services have increased approximately 19 percent. Lubricating oils and packaged product prices have increased some 8 percent in the commercial market. The military services have experienced only a 2 percent price increase. For the information of the committee, there is attached as enclosure (3) an analysis of commercially posted price increases for the major products purchased by the military services. The Military Petroleum Supply Agency has exerted its best efforts to obtain the cooperation of petroleum suppliers to minimize the effect of price increases on the expenditures of the military services. In furtherance of the President's appeal for a "holding of the line" on prices, I issued both verbal and written instructions to the petroleum buyers on my staff, directing that they take all possible action to limit price increase. I feel that our efforts have been, to a certain extent, successful. The McGill Commodity Service, as quoted in the National Association of Purchasing Agents Bulletin of January 30, 1957, estimates that there has been an 11 percent increase in fuel prices since October. In the same period, we estimate that the price increase to the military services has been approximately 8 percent. Mr. Chairman, there is one point I would like to make: In our estimate, we state that if the prices remain as we have experienced the last 2 months, it will be at a cost of approximately $5 million to the military; but, naturally, we are going to buy a lot more products between now and next December, and we don't know what the final price will be. Thank you. Senator O'MAHONEY. You are a pretty large buyer, are you not? Admiral LATTU. Yes, sir. Senator O'MAHONEY. Are you in charge of the procurement of petroleum and petroleum products for all the military services? Admiral LATTU. Yes, sir. Senator O'MAHONEY. There has been unification, then, among the services so far as the purchase of petroleum products is concerned? Admiral LATTU. Yes, sir. Senator O'MAHONEY. I introduced a provision in 1952 to the defense services appropriations bill, requiring the unification of all of the purchasing services in the belief that it would save money. Since that time it has become permanent law, but the evidence taken this year before the Joint Economic Committee indicates that that unification has not been completed, except in this field concerning which you are now testifying. Do you have any knowledge of that? Admiral LATTU. We have, in the military services, the food, medical, and dental, the clothing, the traffic, and a few other such things combined under one of the three departments. How far along they are today, I do not know, sir. Senator O'MAHONEY. Secretary of the Treasury Humphrey, at a press conference shortly after the President's budget was submitted, and later in his testimony before the Joint Economic Committee, warned against inflation and declared that unless positive steps were taken to cut the expenditures, we would have a dangerous inflation that would not only unbalance the budget but have a bad effect upon the country as a whole. You have referred here, in your testimony beginning at the bottom of page 2, to your efforts to respond to the President's appeal for "holding of the line on prices," and you say that you have issued both verbal and written instructions to the petroleum buyers of your staff, directing that they take all possible action to limit price increases. What action can they take, Admiral? Admiral LATTU. In some of our products, for instance aviation gasoline, where we are unable to obtain sufficient by advertising, we have to negotiate. And in those particular items we can argue with the companies, and come down to a price which we think is reasonable, based on our past experience. Senator O'MAHONEY. Is that only one line? Admiral LATTU. No, sir; we also have Navy special fuels; we are unable to buy sufficient quantities, and that is another commodity which we have to negotiate. Senator O'MAHONEY. Are you successful in these negotiations? Admiral LATTU. Yes, sir. We have had 4 or 5 instances where we have been successful in bringing the price down from what they offered the product to us. Senator O'MAHONEY. Can you give the committee instances of those? I don't suppose you can give them offhand, but will you supply them for the record, giving us the names of the companies with which you have negotiated? Admiral LATTU. Yes, sir: I will be very happy to supply it. (The material referred to follows:) Mr. DONALD P. MCHUGH, MILITARY PETROLEUM SUPPLY AGENCY, Chief Counsel, Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary, and Subcommittee on Public Lands of the Committee on Interior and Insular Affairs, Washington, D. C. MY DEAR MR. MCHUGH: When I recently testified before the subcommittees, I was requested to provide certain additional information. It is furnished as enclosure (1) through (3). If additional information is required, I shall be pleased to furnish it upon request. Enclosure (1) presents certain specific instances in which my agency has been successful in reducing initial offered prices through negotiation. I should like to point out that negotiation is permitted only under certain limited conditions by the provisions of title 10, United States Code, sections 2301 and following. The most typical of these conditions is where the available supplies of a specific product are insufficient in quantity to insure adequate competition by means of formal advertising. The very shortage of product which precludes formal advertising as being impracticable also, of course, renders it difficult to obtain price reductions. As you can see from enclosure (1), our efforts to obtain price reductions were generally successful, although to varying degrees. I was also requested to furnish information indicating the degree of competition existing among bidders for the supply of petroleum to the armed services. In this connection two points must be borne in mind: first, very small differences in the per gallon price, fractions of cents, may indicate very real competition because of the large quantities involved; secondly, the range in prices is limited in residual-oil bids and relatively wide in other products such as jet fuel. This is so because in residual oils the Government is in very close and direct competion with commercial buyers for an inadequate supply of product; there is, therefore, no incentive to give Government a price differential from the posted price as is the case in jet fuels where the commercial market is limited. Euclosure (2) contains examples of this. Information was requested concerning comparison of prices for various products in the Persian Gulf and the United States gulf. In this connection, the term "basing-point prices" was used. To the best of my knowledge, and that of my staff, this term is not applicable to the petroleum industry. To clarify |