Senator O'MAHONEY. Thank you very much. You may proceed. Mr. ROBINEAU. Basically also, we think alike on this problemI am referring to all the independent refiners-as evidenced by the discussion at the annual meeting of our association as long ago as November, and the voluminous exchange of correspondence which we have had on this subject since the closing of the Suez Canal. The views expressed today, then, are those supported generally by all small independent refiners. There are about six times as many independent refiners in this country as there are major oil companies. But the aggregate plant capacity of this large number of refiners represents only one-sixth of the total refining capacity in the United States. While small in the dimensions of the oil industry, by any other standard the independent refiner is an important part of the total United States industrial machine, an important part of this country's total national wealth. His plants and facilities represent an investment at present-day reproduction costs of almost $2 billion. I do not need to explain to this committee the importance of the independence refiners' role in the maintenance of a healthy, competitive, and dynamic petroleum industry. Without him, by definition, petroleum products for the consumer would be made available only through major company plants. In short, the elements of competitive restraint now causing so much national attention will be immeasurably aggravated if the independent refiner is lost to the economy. I do want to explain to this committee, however, the peculiar and difficult economic circumstances in which the independent refiner operates. For the most part, he must purchase on the open market the raw material, crude oil, which he puts through his refinery. He sells refined petroleum products competitively on the open market. He must meet his cost of operation and make his profit out of the difference or margin between the price he pays for his raw material and the price he receives for his refined products. In this respect, he is not much different from many other manufacturing enterprises. The particular and important difference between the independent refiner's position and that of most other manufacturers is that large quantities of his raw material are held by, and its price is largely set by, the companies who are also his competitors in the sale of finished products. For those integrated competitors, a change in the price of crude oil can be primarily a bookkeeping item-an allocation of aggregate company profit to one or another division of the integrated business. For the independent refiner, however, a change in the price of crude oil means business survival or death. Senator O'MAHONEY. Will you explain a little more at length what you mean by "a bookkeeping item"? Mr. ROBINEAU. Well, with an integrated oil company which owns its own production and has his refinery and has his marketing division, goes direct to the consumer or to the dealer; if he raises the price of crude oil and does not raise the price of gasoline, he will still be making the same profit he was making before they raised the price of crude oil, but it will be allocated to a different department in his business. But in the case of an independent refiner who has to buy that crude oil and does not have that profit in that crude oil, then unless he raises the price of gasoline, he is squeezed. Senator O'MAHONEY. In other words, the independent refinery which does not have a source of its own crude oil is at a disadvantage as compared with the integrated refiner who possesses not only the opportunity of making a profit from producing oil, but also from refining oil, from transporting oil, from transporting the oil products, and from finally selling those products. Mr. ROBINEAU. That is correct, Senator. Senator O'MAHONEY. With respect to the independent refiners for whom you speak, what do you want the committee to understand to be their status as producers as well as refiners? Mr. ROBINEAU. Many of them have no production at all. Some of them have some. My own particular company produces probably a thousand barrels a day and we refine 16,000, so that is about the percentage. Senator O'MAHONEY. You produce only one-sixteenth part of the amount of crude oil that you refine? Mr. ROBINEAU. That is correct, sir. Senator O'MAHONEY. That places you at a disadvantage with the integrated refiner who has a very much larger percentage of the raw material, that is to say, the crude oil, which is refined in such an establishment? Mr. ROBINEAU. That is correct, Senator. Mr. ROBINEAU. The position of the independent refiner, squarely in the middle between the production of crude oil and the marketing of refined products, is at all times a difficult one. It is even more precarious today because of present large surpluses of gasoline. These cannot help but have a depressing effect upon the market prices. It is uncertain how long he can pass on to the buyers of his products the recent increases in his costs represented by the hike in the price of crude oil. Already there is some weakening in the price structure of gasoline and some reductions from the recent increase in gasoline prices have been reported. Let me emphasize that the independent refiner does not profit from the recent hike in gasoline prices. He is merely passing on an increase in costs of the raw material with which he works. If the price of that raw material were raised without a corresponding increase in the price of refined products, it would turn his operation into a losing one. Let me give you a personal example. My company, the Frontier Refining Co., has a replacement value in my opinion of something over $25 million. In our last fiscal year ending May 31, 1956, we made $600,000 net after taxes-not an excessive profit against our value. During the calendar year 1957 we will process 6 million barrels of crude oil. The 25-cent minimum increase in the price of crude oil in our part of the country increases our annual costs $1,500,000-$1 million more than we made last year. Obviously, we had to raise cur gasoline and product prices to cover this increase or go out of business quick. To state the arithmetic of this matter in another way, an efficient independent refiner should earn from 20 to 30 cents per barrel of crude before taxes-and the recent crude price increases of 25 to 35 cents must turn his operation into a loss unless he passes that increase on. Senator O'MAHONEY. I understand you to mean by this testimony that the independent refiner who does not have his own source of crude must increase the price of his product when the price of his raw material is increased or go out of business. Mr. ROBINEAU. That is correct, sir. Senator O'MAHONEY. Or at least, if not go out of business, suffer a loss in the operating enterprise? Mr. ROBINEAU. That is correct. Senator O'MAHONEY. Whereas the integrated refining company, which has many segments of the industry in which it engages, stands in a much better position to absorb any increase in the price of crude? Mr. ROBINEAU. That is correct. Senator O'MAHONEY. And might indeed absorb the entire increase in the price of crude? Mr. ROBINEAU. Some of the companies could; I do not know whether all of them could, but some of those, particularly those who have foreign production, might be able to do that. Senator O'MAHONEY. Of course, one of the principal purposes of this investigation by this committee is to determine what the effect of the oil lift to Europe is, first, on our domestic economy and, secondly, upon the world economy. We start with a statement from fiscal sources in New York that the crude-oil operations and the refining operations of major companies which are members of MEEC are most profitable in the Middle East; is that correct? Mr. ROBINEAU. That is my information; that is what I understand. Senator O'MAHONEY. What sort of information did you get? Was it good information or poor information? Mr. ROBINEAU. I believe it is good information; at least, I have had nobody dispute that statement in the industry, and my many friends in the industry, but what the Senator O'MAHONEY. The reports that come to us are uniformly that the operations in the Middle East are extremely profitable to the companies that operate them. It is known, for example, that American operating companies that develop crude oil in the Middle East get the same benefit of the 2712-percent depletion allowance which is granted to domestic producers; is that a fact, as you know? Mr. ROBINEAU. That is correct; yes, sir. Senator O'MAHONEY. So that, with the lower costs of operating in the Middle East, the production of a barrel of oil in that area is much more profitable than the production of a barrel of oil in domestic areas within the United States with higher production costs all along the line? Mr. ROBINEAU. That is correct, sir. To put it another way, they can produce a barrel of oil in the Middle East at anywhere from 50 cents to $1 a barrel, or maybe cheaper, than a like barrel could be produced in this country. Part of the reasons are the ones you have given, the lower costs of operating, the lower labor costs, but probably the prime reason is the enormous size of the reserves and the larger size of the wells. In other words, the rate at which they can be produced per day reduces the integral cost per barrel. Senator O'MAHONEY. The testimony before this committee yesterday was clearly to the effect that the Government of the United States itself in its military operations is a customer of the petroleum industry and must pay a higher cost because of the increase in the price of crude. Mr. ROBINEAU. Yes, sir. Senator O'MAHONEY. It has been suggested that the independent producers are responsible for the failure, if there has been a failure, of the oil lift to Europe by not producing enough crude oil, and that the increased price was announced and posted by the Humble Oil Co. for the purpose of stimulating the production of oil at the same time that some of the major companies, members of MEEC, were transporting Latin American oil to their own east-coast refineries, instead of to Europe for use over there. Am I right in assuming, from your testimony and from the testimony which has heretofore been given, that the operations of these giant, integrated companies which are worldwide interests are very different from the operations of both the independent producer in the United States and the independent refinery in the United States? Mr. ROBINEAU. You are correct in that assumption, sir. Senator O'MAHONEY. Thank you, sir. Mr. ROBINEAU. I am confident that this pattern is repeated over and over again among independent refiners throughout the country. Living in this precarious environment, the independent refiner has developed an awareness for potentially adverse change. He could see as soon as the Suez crisis broke that some of the proposed methods for solution could destroy him. The significantly dangerous and destructive element could be, he foresaw, a total emphasis upon shipments of crude oil with the attendant probability that the price of crude would be raised in response to the increased demand for it, particularly in an emergency atmosphere. He could also see that such a destructive solution to the problem was wholly unnecessary in view of the availability of refined products in the United States to meet Europe's need. Any program to solve a Suez crisis had to be, and in fact has been, developed under Government supervision. We therefore took our views to the appropriate Government officials. We asked for a chance to participate in the development of the program. We asked that the effect upon the independent refiner be considered in that program. But, from July until early January, the program design apparently proceeded without regard to the refinery position. We were foreclosed from access to the data which would permit us to help or to make specific, informed, and constructive suggestions. As far as I know, our warnings and our specific recommendations were never considered. Until the announced hike in the price of crude oil, they were not reflected in the program as it developed or as it was put into operation. As near as I can see it, we tried, and the Government failed. In my telegram of July 27, 1956, we offered the cooperation of the Independent Refiners Association of America in the Suez emergency. Mr. Stewart, Director of the Office of Oil and Gas, promptly acknowledged the association's offer. His reply of July 31 said: I am certain that in the future, as in the past, the independent refiners of this country will assist their Government whenever so requested. 90507-57-pt. 1—33 On January 4, 1957, the proffered cooperation was for the first time accepted by the Government. Senator O'MAHONEY. May I say at this point that Secretary Seaton, of the Department of the Interior, the administrator of this program himself, assured me in his office that an effort would be made to obtain independent refiners and independent producers to become members of the MEEC. The Frontier Refining Co. was the only refinery that was willing to accept. I understand an effort was made to get others to take the responsibility. The producers did not accept. And yesterday Mr. Russell Brown testified before this committee, as counsel for the Independent Producers Association of America, that it was the policy of the producers not to accept invitations to become members of MEEC because of the divergent conditions which applied to the independent producer and the integrated companies. So that as of this date, the Frontier Refining Co., of which you are the president, is the only independent refinery, the only independent corporation, which is on the MEEC. May I ask you, do you have any associations of any kind in Europe? Mr. ROBINEAU. No, sir. Senator O'MAHONEY. In the Middle East? Mr. ROBINEAU. No; we have none. Senator O'MAHONEY. Do you have any refineries in Great Britain? Mr. ROBINEAU. No, sir. Senator O'MAHONEY. In France? Mr. ROBINEAU. No, sir. Senator O'MAHONEY. Anywhere else in Europe? Mr. ROBINEAU. No, sir. Senator O'MAHONEY. Where are your refineries? Mr. ROBINEAU. We have one refinery in Cheyenne, Wyo. Senator O'MAHONEY. That is all your company has? Mr. ROBINEAU. Yes, sir. Senator O'MAHONEY. Your total crude-oil operation amounts to how much? Mr. ROBINEAU. About a thousand barrels a day, sir. Mr. ROBINEAU. From which 800 barrels is in United States, and we do have about 200 barrels in Canada. Senator O'MAHONEY. Would you say that your situation is typical of the situation of the independent refiners who belong to your association? Mr. ROBINEAU. I believe it is. There are a few larger independent refiners that have a large percentage, might have 20 or 25 percent. Most of them do not have any. Senator O'MAHONEY. 25 percent of what? Mr. ROBINEAU. Of their crude run; they produce 25 percent of their crude run. Senator O'MAHONEY. Thank you very much. Mr. ROBINEAU. I thank you. On January 4, 1957, the proffered cooperation was for the first time accepted by the Government. For the record I should like to introduce the offer and Mr. Stewart's reply. |