Page 1020 1021 1022 1023 1024 1025 1026 1027 1029 1030 1031 1032 Although it was recognized these subjects were outside the scope of the committee's interest, they felt it was important to discuss them and bring them to the Government's attention. There were two Government representatives at this meeting but they were far outnumbered by industry representatives. These minutes showed that "it was the sense of the committee that the committee should recommend to the Administrator in connection with the problem of discontinuing imports to the United States from the Middle East that no Government action be taken at this time and that the problem be left to be resolved by the economics of the situation." This recommendation was made. This recommendation was made so as to utilize available tanker transportation to best possible advantage. It was realized, however, that some Government assistance might be necessary. Senator O'Mahoney asked if Congress should not now "step forward with the control of the tankers, which was so necessary in World War II, in the light of the fact that nobody can predict what will be the events of the next 12 months." Tanker rates have already risen substantially, resulting in increased cost of oil in Europe. In view of the cost to Government of the price rise in petroleum products, asked if "it might be wise for Congress to think of urging all the governments involved to take over the means of transporting this oil, which is the only way in which the oil can be delivered where it is needed." This would not be on a permanent basis-only for duration of emergency. Mr. Coleman said that if tanker rates were to be frozen it would have to be done on a worldwide basis, not by the United States alone. His opinion as an individual is that controls are not good except in actual war conditions. Also said you could not control one segment of the industry alone. Senator O'Mahoney said, "That was precisely the reason why, back in November 1956, I took this matter up with the State Department and the Interior Department and the Department of Justice, and protested against turning this program over to the 15 major companies engaged in foreign commerce as well as in domestic commerce, and why I advocated the representation upon the committee of other segments of the petroleum industry, particularly the domestic portion, which feels that it is being victimized by monopolistic pressures.' Mr. Coleman said they would have welcomed wider participation in the committee. That the 15 companies act "as an advisory group carrying out our Government's wishes." Mr. Rathbone said the Government did not ask them not to raise tanker rates or oil prices. Explained how tanker rates have been handled during the emergency. It is the spot charter rates that have zoomed, not the long-term charter rates, although the long-term rates have increased somewhat. The long-term rates are determined by three London brokers, on a quarterly basis. The London award rate is not affected by spot charter rate. "It is the evaluation of these three brokers of what the going long-term charters are, and long-term charters, as I say, are from 3 to 7 years, normally." Their ships operate under long-term rating system. Mr. Rathbone said that as far as he was concerned, "if there were any feasible way in which there could be some restraint on those kinds of rates under emergency conditions, I think it would be a very desirable thing." Does not know how it could be done. American-flag ships have been able to increase their tonnage but have not gotten the agreement necessary to have tonnage raised by foreign lines. The increased rates of Standard of New Jersey are due to the increased market for long-term charters. Believes there is cost justification for increased rates for their own tankers. Senator Neely noted that some members of the National Security Council have participated in MEEC discussions, including the Under Secretary of the Treasury, Mr. Burgess, representing the Secretary. Secretary of the Treasury George M. Humphrey retains interests in companies which also have holdings in oil companies. Page 1033 1034 1035 1036 1037 1038 1039 1040 1041 1042 1045 1064 Thought the matter of Secretary Humphrey's interest should be explored. Mr. Coleman said the Secretary had never attended a meeting of any of their committees or subcommittees. "Mr. Burgess' presence at this meeting was entirely in connection with the economic impact of this potential crisis that had not occurred at that time. ***" Further, to the best of his knowledge, "Secretary Humphrey has had nothing whatsoever to do with the activity of our committee." Also, oil imports are less now than they were prior to Suez closing. Senator Neely said that although that was true, they are still higher than in the base year of 1954. Mr. Coleman pointed out that Standard of New Jersey had not materially changed its oil imports in several years. Mr. Coleman read from minutes of MEEC meeting No. 4 showing Burgess' reason for attending this meeting. Oil shipments during the emergency "have not been limited by availability of dollar funds in Europe.' Standard did not receive any payments through the Export-Import Bank. Payments are made to the companies in Europe through normal commercial channels. Mr. Burgess' comments at the meeting had indicated the Export-Import Bank did not have the funds to finance oil procurement. This Mr. Rathbone attended a meeting at which there was a general discussion of the possibility of the United States Government "building on a rapid basis a large number of very large sized tankers.' meeting was attended by independent tanker operators as well as representatives of major oil companies and affiliates. A plan of this sort was never developed. Senator O'Mahoney read excerpts from a document entitled "Political and Economic Effects of Middle East Developments and the European Fuel Crisis" which was received from Jersey Sndard in response to subpena. Asked for comments. Mr. Rathbone commented. Mr. Bayles' (the man who wrote the document) purpose and his job in Europe is to report to the company on what is going on in Europe. There are about 225 subsidiary and affiliated companies in the Jersey group. "A great many of these are what we call paper companies, a great many of them are companies that we have to form to get a concession, to get a prospect." There are about 150 companies that are actually engaged in business carrying on operations. Their domestic companies and most of the companies operating in Latin America are chartered in the United States. In Europe most of the companies are chartered the countries where they operate. It is his belief that the majority of the companies operating in Africa and the Middle East are also chartered in the United States. They have about 11 refineries in Europe. It is Mr. Rathbone's guess that the 15 major companies on MEEC control about half the world market for crude oil. Correspondence received by Senator O'Mahoney from Representative Bruce Alger and J. D. Wrather, Jr., an oil producer, inserted at this point in the record. WEDNESDAY, MARCH 6, 1957 Statement of Stewart P. Coleman, Chairman, Middle East Emergency counsel Much of the material contained in Mr. Coleman's prepared statement had been covered in questioning on previous day. His complete statement inserted at this point in the record. Resumption of oral testimony. Said he wanted to clear up "some of the misconceptions that seem to have arisen as to what the Middle East Emergency Committee is and as to what it can do more importantly still, what it cannot do-and as to how it operates." Page 1065 1066 1067 1068 1069 1070 1071 1072 1073 1074 1075 1076 Initially, the Government chose to limit the membership of MEEC to those companies having overseas operations. Later on companies having only domestic operations were admitted. The reason for inviting only companies with foreign operations was, primarily, the possession of transportation facilities. Does not know whether or not all companies with foreign operations were asked to cooperate. Neither MEEC nor he, as Chairman, has made any recommendations to the Government concerning any participants. He was once asked his views on participation of domestic companies, and approved. All MEEC activities are under Government supervision. MEEC has no authority to exercise power over production of oil in the United States or to allocate petroleum supplies. Any action taken must be taken pursuant to one or more of the schedules or upon the request of a foreign government that has been designated by our Gov ernment. Mr. Hamilton said the only foreign governmental body that has been designated by our Government is the Organization for European Economic Cooperation. Participants in MEEC should cooperate and coordinate their actions with OEEC. They cannot, however, “just take any kind of action, it has to be an action pursuant to the objective of the plan of action. And the further condition *** is that the participants must maintain such records and make such reports of any action as our Government may require." This designation can be withdrawn at any time. Mr. Coleman said that in addition to dealing with OEEC, they are also permitted to deal with OPEG, the OEEC Petroleum Emergency Committee. MEEC and OPEG exchange observers for their meetings. There are only two sources "of authority for action. One is the schedule, and the other is action under the OEEC Government allocation program. Those are the only two authorities for action as distinguished from the authority to get information and make recommendations to the Government.' Standard of New Jersey has no affiliation with any of the companies on OPEG. They do have observers at OPEG meetings, however. No domestic producers have observers there, but activities of MEEC and OPEG are available to consultants of Oil and Gas Division. Mr. Coleman believes this gives representation to domestic industry. Listed consultants of Oil and Gas Division. Assistant Secretary Wormser, Administrator under the plan, issued a directive that no action could be taken under schedule 4 until 72 hours' advance notice had been given him. This schedule allows changes in transportation facilities, including pipelines, within the United States. Know of no opposition by any member of MEEC to the building of a pipeline from Texas to the east coast, although there might be opposition from other quarters. Mr. Rathbone said he and others in the company "feel basically that the importation of a reasonable amount of foreign crude oil into the United States is a desirable thing from the long-range standpoint of the United States as a nation and of the consumers as individual consumers." However, "an unreasonably high level of imports is undesirable." Ever since the Reciprocal Trade Agreements Act was extended the Office of Defense Mobilization has been unable to reach a voluntary agreement with importers to curtail oil imports. Standard of New Jersey is ready to come to an agreement with Dr. Flemming, Director of ODM, on import limitations. Their imports have always been lower than recommended levels; they import no Middle Eastern oil at all. The actions of most of the MEEC members regarding crude oil imports are pretty well in line with Dr. Flemming's recommendations. The difficulty has come from the actions of some newcomers too importing and "1 or 2 of the older importers." American companies having production abroad get depletion allowances on their foreign reserves, including Standard of New Jersey. They feel that if imports reach a level high enough to have a "bad effect, a damaging effect, upon the domestic industry, either leading to a cessation of the proper level of activities or to a loss of underground reserves, that is was an extremely bad thing for the United States." Page 1077 1078 1079 1080 1082 1083 1084 1086 1087 1088 1C89 The question of imports is a very difficult one to deal with, particularly in the case of the companies that want to start importing crude. Senator O'Mahoney said the standard of living in the country was high and it should be maintained. "There should be no discrimination against property, but we should not, as a policy, protect property and profits against people. "The income-tax returns seem to be indicating the fact that small companies and small individuals engaged in various businesses, and particularly those independents engaged in the production of petroleum, are finding it extremely difficult to compete against the integrated company, which not only produces oil but transports it and refines it and then delivers it to the consumer. "There is a basic problem that we have to settle some way, and * * * I am firmly of the opinion that the leaders of business are sufficiently aware of big-business technique, are sufficiently aware of their responsibility to the people at large, that they will help to find the solution." Mr. Rathbone concurred with most of the Senator's remarks. However, he felt "that if whatever were done to help keep small business in the picture properly, were damaging to the large businesses, that we would be just as badly off. We want a combination of both.' Gave a brief history and explanation of the depletion allowance. History has shown that it is as desirable to have available supplies in other strategic countries as well as in the United States. National interest as well as economic justification requires the continuance of the same depletion allowance of 271⁄2 percent for domestic production and American foreign production. Although foreign production is low cost in some areas, it is high cost in others. Senator Carroll pointed out that past Presidents and Secretaries of the Treasury had requested a cut in the depletion allowance. Senator Dirksen said the small producers in Illinois, not the majors, were the ones who profited from the depletion allowance. In discussing this problem, Senator Carroll said that perhaps the answer might be to limit the depletion allowance to independent producers, and to limit it to the continental United States. Senator Dirksen, discussing exploration costs, asked where the line would be drawn. Senator Wiley said there were circumstances involved that make the common man feel "that there is a distinction and we, as representatives of the Government, must take into consideration, when we need more taxes to keep our budget balanced, that perhaps some of you people who are trustees of great wealth may have the answer." He is not opposed to big business, but rather thinks it is necessary. However, he understands why some people turn against the companies that raised the price of oil at a time of crisis in the world. Mr. Rathbone said there was a justification for the price increase, although he agreed the timing was bad. Senator O'Mahoney read a document obtained from Jersey indicating the anticipated increase in earnings. Jersey has no trouble in borrowing money, Mr. Rathbone said, “except in the countries where there are very limited capital markets." Like the Government, they also are paying higher interest rates now. There has been a steady decline in the returns on invested capital for the last 4 or 5 years. "This is a situation which we feel is one that cannot continue too long." If they do not increase earnings each year they will not be able to meet the demand for oil products. Senator Kefauver said that contrary to Mr. Rathbone's contention that their return on net worth had been declining, Federal Trade Commission figures showed it had been increasing. Mr. Rathbone said the company's figures gave a different picture. Mr. Rathbone's prepared statement inserted at this point in the record. 1094 The FTC document inserted at this point in the record. 90507-57-pt. 2——2 Page 1096 1097 1098 1099 1100 1102 1103 1104 1105 1106 1107 The Jersey document dated December 13, read by Senator O'Mahoney previously, had shown that an estimated increase of 25 cents per barrel of crude would increase earnings by about $100 million per year if products rose correspondingly, on a world-wide basis. Mr. Rathbone said they had not risen in many parts of the world. It was a Jersey subsidiary, Humble Oil, that instituted a price increase of about 35 cents per barrel. A Jersey document dated December 12 and previously referred to had indicated that a price increase and production increase resulting from Suez crisis would raise Humble's net income by $46 million. Senator Kefauver said the implication of these two documents was that the decision was made at that time to increase crude price. Mr. Rathbone refuted him. Said it was a "normal year-end financial review" that they make every year. Humble had no representation at the meeting on December 13 and knew nothing about the forecast indicating increased profits for Humble. On December 26 Mr. Baker, president of Humble, visited Mr. Rathbone in Louisiana-not to discuss a price increase of 35 cents a barrel on crude but to discuss "the increased cost figures that his people had prepared and to tell me that he felt that he should raise the price of crude oil that he posted in Texas and the other States where Humble posts prices of crude." Baker did not ask Rathbone's approval. "He acted on his own initiative." Senator Kefauver asked if he didn't think "the fact that you saw all this additional money coming in, which would enable you to buy tankers without having to issue new capital or to secure new capital on an expensive money market, had anything to do with your judgment that it would be a good thing for Standard to have its subsidiary make this price increase?" Mr. Rathbone said his approval was based on the decline of returns on new investment in recent years. Discussed the previously referred to memorandums of December 12 and 13. Studies of this type are made all the time, and are based on reports that come in regularly from affiliated companies. With this increase Standard will be able to enlarge its tanker program without having to obtain new capital, at least for 1957. However, "the tanker questign is only a small part of our total capital program, and the picture that may be after 1957 is completely unclear yet.' Jersey did not suggest to Humble that the time had come for a price increase in crude. "Mr. Baker and I presume his associates arrived at that decision completely independnent of any suggestion from the Jersey company." They make suggestions some times, but did not in this instance. Is not true that Jersey was not interested in price rises because they had a supply of cheap crude from Middle East and Venezuela. Document entitled "Standard Oil Company (New Jersey) Extract From Executive Committee Memoranda, December 4, 1956" inserted at this point in the record. It concerned the 1957 capital budget of Carter Oil Co., a wholly owned subsidiary of Jersey Standard. Mr. Brice, president of Carter, had anticipated a crude price rise in the gulf area, to be followed by rises in the midcontinent and Rocky Mountain areas. Mr. Brice had expressed the hope that price changes would be selective, not across the board. That is the way it was done. Mr. Rathbone said this did not mean that higher price rises would go into effect where Humble had wells than in areas where they bought primarily from independents. It is unsound economically to raise prices the same amount on all types of crude in all areas. Senator Kefauver noted that they always refer to having had only one previous price increase since 1947. Then asked if, because oil companies greatly underestimated the postwar demand for oil, there had not been a very sharp increase in prices in 1947. Mr. Rathbone agreed. |