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Mr. Vaughey. I am also attaching, as appendix II, a detailed statistical table showing the increased cost which oil producers must now pay for some 30 different items of oilfield equipment and tools. All of the items shown on this table are from official Government statistics published by the Bureau of Labor Statistics. These items appear in appendix II and in the preceding charts, of course. They do not represent all the costs of finding, developing, and producing crude oil. They do, however, represent the major elements.
In October of 1956, the United States Bureau of the Census released a report showing a total of about 12,000 oil and natural-gas producers in the United States. Except for 32 integrated oil companies which comprise the so-called major companies, these oil producers represent individuals, smaller companies, and partnerships primarily engaged in the production of oil.
The domestic oil producer is unlike most other American businessmen in that he has no control over either the volume of his production or the price paid for his oil as previously pointed out.
The price of oil is determined in the competitive market place by the purchaser of crude oil, and not by the seller.
And that is an illusion I would like to dissipate, if I may. In some of these things that have been printed and stated, it would lead anyone to believe that we, as producers, determine and establish the value that we are to receive for our oil. Unfortunately for us, that is not the case.
In the petroleum industry there has developed a system of “posted” pricing, wherein purchasers of crude oil determine the amount they are willing to pay for certain types, grades, and gravities of crude oil, by fields.
The quality of crude oil and the relative yields of products from the crude has been the basis of varying prices paid, as I mentioned earlier, in my first part of this testimony.
Other factors are distance to markets and transportation costs. That is why everyone did not receive the benefit of the maximum 35 cents.
For example, certain grades and types of crude oil in west central Texas command less in price than comparable crudes on the Texas and Louisiana gulf coast, near the centers of refining.
The competitive nature of oil buying and selling is revealed in the short-term commitments made by purchasers. The buyer of crude oil is free at any time to increase or reduce his posted price for crude oil in any field or area. The seller, likewise, is not bound to any purchaser, but is free to negotiate outlets of his choice on short notice.
As a result, there occur many spot or area changes in crude oil prices which affect large areas and groups of producers. That is why many of them today are in distress.
Many changes of this nature took place during 1956. Some of these are revealed in the analysis on the following page of crude oil price changes during the past year, and again there, as a part of the record, is a reflection of the price changes that did take place all during 1956 both domestically and from foreign sources.
Senator OMAHONEY. This is the reprint from the Oil and Gas Journal?
Mr. VAUGHEY. Yes, sir.
Senator O’MAHONEY. That would be made part of the record.
(There follows, reprinted from January 28, 1957, issue of the Oil and Gas Journal, data captioned "Price Changes in United States and Foreign Markets”:)
(Reprinted from January 28, 1957, issue of the Oil and Gas Journal]
PRICE CHANGES IN UNITED STATES AND IN FOREIGN MARKETS
February 1: Gravity scale with top price of $2.83 for 40° and above made effective in Denver-Julesburg, Colo., field.
February 2: Creole Petroleum Corp., reduced Jusepin, Venezuela, crude 8 cents to $2.72.
February 6: Bradford, Pa., crude oil advanced 15 cents to $4. Other 1956 advances were: March 16, $4.20; May 16, $4.45; July 16, $4.57 ; August 16, $4.68. Other lower priced grades of Pennsylvania grade crudes advanced same dates in varying amounts.
February 7: California crude oils of 25° gravity or lower advanced 1 to 5 cents. Maximum advance of 5 cents was in crudes of 14° gravity and below.
February 10: British Petroleum Co., Ltd., reduced Iraq crude oil for export at Fao, Persian Gulf, 5 cents to $1.87 and advanced Iraq crude at Tripoli, Lebanon, and Banias, Syria, 10 cents on Mediterranean to $2.49.
February 11 : Arabian crude oil delivered to Sidon, Lebanon, by pipeline advanced 10 cents to $2.46.
March 1: Pembina Cardium, Alberta, Canada, crude advanced 3 cents to $2.32, with adjustments upward in several small fields. There were no general price changes during the year in the principal Alberta fields. New fields were added to the pricing schedules with postings reflecting quality of crude and transportation costs.
April 17: South central Texas crudes shifted flat price of $2.79 to 2-cent gravity schedule with price of $2.83 for 40° and above.
June 1: Wyoming sweet crude reduced from $2.90 to $2.83 for 40° and above with 2-cent differential scale for lower gravities.
June 14: Illinois basin crudes reduced from $3 to $2.90 and Plymouth, Ill. crude from $2.67 to $2.57.
June 15 : Lance Creek, Wyo., crude reduced 7 cents.
June 28: Low-cold-test gulf coast Texas crudes advanced 10 cents. South Texas (Mirando type) advanced 15 cents.
July 1: West central Texas crudes reduced from $2.90 to $2.83 for 40° gravity and above with 2-cent differential scale for lower gravities.
July 1: Virden, Missippian, and Woodnorth, Missippian, Manitoba, Canada, advanced 3 cents. New price for Virden $2.39 and Woodnorth, $2.28.
July 12: Creole Petroleum Corp., advanced Tia Juana, Venezuela, crude 10 cents to $2.62.
August 4: Several fields in north and central Texas reduced 7 cents..
October 5: Flat price for Arkansas, Mississippi, and north Louisiana distillates reduced 5 to 10 cents. All south Louisiana distillates reduced 10 cents.
November 19: Most grades of California crude of 36° gravity and lower advanced 1 to 40 cents. Maximum advance applied to crude of 14° gravity and below. Smaller advances in higher gravities on graduated scale.
November 21: Creole Petroleum Corp. advanced Lagunillas heavy crude 15 cents to $2.20; Bachaquero, 15 cents to $2.05; Quiriquire, 14 cents to $2.35; Temblador, 16 cents to $2.21.
November 23: International Petroleum Co., Ltd., advanced Cabimas, Venezuela, 5 cents to $2.10 for 20° gravity and Bachaquero and Lagunillas, Venezuela, crudes 15 cents. New price for Bachaquero heavy is $2.01 and Lagunillas $2.20.
November 29: Oregon Basin, Wyo., crude advanced from $1.75 to $1.85; Hidden Dome, Wyo., from $1.65 to $1.85; Hamilton Dome, Wyo., $1.75 to $1.85.
November 30: Richmond Exploration Co. (Standard Oil Co., Calif.) advanced Bajo Grande, Venezuela, crude 20 cents to $1.72.
December 1: Wyoming and Montana sour crude advanced 1 cent for 35° gravity to 40 cents for 15° gravity.
December 1: British Petroleum Co., Ltd., withdrew quotations on Iraq crude at Tripoli and Banias until further notice because of shutdown of northern Iraq pipelines.
December 8: Arabian crude oil delivered to Sidon, Lebanon, by pipeline adranced 23 cents to $2.69. Arabian crude oil at Ras Tanura was posted at $1.97 thronghout 1956 by Socony Mobil Oil Co., Inc.
December 27: Creole Petroleum Corp. advanced Lagunillas heavy crude 13 cents to $2.33; Bachaquero, 13 cents to $2.18; Quiriquire, 5 cents to $2.40, and Tia Juana heavy, 1 cents to $2.12. Several other fields advanced varying
December 28: Richmond Exploration Co. (Standard of Calif.) advanced Bajo Grande, Venezuela, crude 13 cents to $1.85. Senator O'MAHONEY. Now, it is 4:15. Mr. VAUGHEY. All right, I am willing to stop whenever you say so. Senator OʻMAHONEY. I am afraid we have got to do that. Mr. VAUGHEY. All right, sir.
Senator O’MAHONEY. If you want to discuss this further, we will give you a later opportunity. But, except for three pages now and the exhibits, if you would go to your conclusions at this moment-suppose you read them into the record.
Mr. VAUGHEY. All right, sir, I will be glad to.
Because of changing competitive conditions, crude oil prices in many sections of the country were reduced during 1956, covering wide areas, and a substantial volume of the crude oil produced in the United States. They preceded the general increase in crude oil prices, and nullified much of the benefit of the general price adjustment for many producers.
The competitive nature of the crude oil market was illustrated in the general price advance in January. The initial increase as posted by Humble Oil & Refining Co. amounted to 35 cents a barrel. Some of
companies buying in competition with Humble, in order to maintain their connections, met this increase. However, other major purchasers subsequently posted increases of only 25 cents per barrel for the same quality of crudes.
This latter increase was generally followed by buyers competing for crude oil in the upper Midcontinent, in west Texas, Oklahoma, Kansas, north Louisiana, and the Rocky Mountains. For most producers and producing areas, the price increase amounted to 25 cents per barrel, or about 9 percent, rather than the 1212 percent figure which has been so widely publicized.
Need for price increase: It is important that the Congress and the public be fully informed as to the disruptive effects of depressed crude oil prices over extended periods. The experience of the domestic industry in the past year illustrates those effects in terms of definite signs of deterioration.
For example, the drilling of wells—the most important and essential activity in maintaining our oil supplies--did not keep pace with either the production or consumption of petroleum in 1956. Drilling increased 2.6 percent, while production and consumption both rose over 5 percent.
Exploratory activity, as measured by the numbers of geophysical and core drilling crews active in the United States, declined 6 percent in the past year.
This was the third consecutive year in which exploratory work has dropped. This is highly significant and disturbing because such preliminary exploration precedes actual drilling, and is an effective barometer of the volume of future drilling.
In 1956, the number of active rotary drilling rigs in operation declined 2.2 percent. A further evidence of decay was a substantial and abnormal increase in well abandonments. In the past year, well abandonments in Kansas, Oklahoma, and Texas increased 37 percent. This indicates great numbers of wells may of economic necessity have been prematurely abandoned because the price of the oil failed to offset lifting costs.
These are not the signs of a healthy industry.
These deteriorations illustrate that funds have been insufficient for exploration, drilling and development, and for proper maintenance of existing wells for the full cycles of their productivity.
For a period of 2 years prior to the Suez crisis, these effects of depressed crude-oil prices were discussed publicly by dozens of industry spokesmen and others who expressed serious concern over the inadequacy of income from the sale of crude petroleum.
For the information of the committee, there is attached as appendix III a chronology of some of these statements, from oil-trade association officials, company spokesmen, and financial analysts outside of the industry.
For my conclusion, the facts that I have attempted to show are
First, that crude-oil-price increases since World War II have not been commensurate with increasing costs of finding, developing, and producing crude oil, and that statement can be qualified a half dozen ways.
Second, the recent adjustment in price was years overdue and was inadequate to offset cumulative increases in cost, some of which I have commented on today.
Third, the insufficiency of crude-oil prices has already caused serious deterioration in essential industry activities.
In the national interest, crude-oil prices must at all times be commensurate with the trends of our general economy, and adequate to offset the rising costs of those industry activities which determine the amount of oil found, developed, and made available for peace or war.
And in the final conclusion, I wish to thank you for your patience. I am sorry we did not have more time. I will be glad to submit to any questioning if time permitted. I would come back if the Chair desires it.
Not knowing whether or not I will have an opportunity to speak to you again, though, besides thanking you, I just am here to say this. I hope that perhaps the evidence that I have offered today might help you in analyzing a problem, a problem affecting the welfare of many people in our country as a whole.
If not, at any time that I might be wanted in the future, should you care to have me come back, I will.
Senator O’MAHONEY. I assure you your testimony this afternoon is most helpful. It could not be otherwise. I think what you and Mr. Brown have said has pointed up in a very significant way the problem which is developing between individually owned and managed business and highly concentrated managed business by integrated corporations.
It has been a growth that has been going on for years and huge corporate organizations that carry on business efficiently and well are becoming political institutions as well as economic institutions.
I think there can be no doubt about that by anybody who studies the activities. They do have an effect upon business here and abroad, and it is necessary for us all to learn the facts about them.
You have contributed a great deal to laying the facts before us and we are very grateful to you for them. Mr. VAUGHEY. Thank you, sir.
Senator O’MAHONEY. Let that one of the witnesses whom we expected to call this afternoon, in addition to Mr. Curry, was Mr. Bradley Cozzens, assistant chief engineer of the Department of Water and Power of the City of Los Angeles. I am advised that Mr. Cozzens has a date with an airplane to return to California tomorrow about 12:30.
So, Mr. Cozzens, if you are in the room, be here at 10 o'clock in the morning and we will start with you.
The committee now stands in recess until 10 o'clock tomorrow morning in this room.
(Whereupon, at 4:25 p. m., the committee recessed, to reconvene at 10 a. m. Wednesday, February 13, 1957.)