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Discussion on the increased imports of Latin American oil into the United States.

The Government program of shipping 500,000 barrels of oil a day to Europe could have been increased if transportation facilities had been available. More transportation facilities would have been available if the tankers carrying oil from the Middle East to the United States had been diverted.

There is a stepped-up program of supertanker construction at this time. If we were ever dependent upon outside sources of supply we would have to rely on these tanker fleets which are not regulated.

Because the cost of Middle East oil production is so much less than that in the United States, the majors make a larger profit shipping oil from the Middle East to Europe than shipping from the United States. This might explain, in part, their reluctance to divert tankers from the Middle East.

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Statement of W. M. Vaughey, chairman of the executive committee of the

Independeni Petroleum Association of America Statement of identification. His association represents oil and gas producers throughout the United States.

Testimony will be concerned solely with crude oil prices.

Although recognizing that mistakes have been made, believes "that the industry on an industry level as one of our basic industries has done a very commendable job for this country * * *”

Outlined the processes by which crude oil is produced and sold in the
United States."
Crude prices are set by the buyers-not the sellers.

"The producer's only influence on price is his access to capital. That determines the amount of oil that he will find and make available for the market.

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“The tremendous need for capital is illustrated by the fact that total expenditures for goods and services by the oil producing industry is in the neighborhood of $8 billion per year.” The industry is also subject to the same price increases as the other consuming groups in the economy.

Believes the “recent crude oil price adjustment was a result, and not a cause, of inflationary pressures."

Charts showing correlation between drilling and total value of production inserted at this point in the record.

It is necessary to increase drilling if domestic needs are to be met while, at the same time, retaining a reserve for emergencies.

The recent price increase of 35 cents per barrel of crude is not a unanimous increase, as crudes of lower quality bring lower prices.

“The history of the industry has shown that the amount of new oil reserves found is dependent upon the number of wells drilled. It is important to note, however, that more drilling is now required to find the same amount of new oil reserves than has previously been the case."

Table showing increase of expenditures versus the value of oil and gas production inserted at this point in the record.

Cited figures on expenditures and income for industry.
Contends they are selling at a price lower than the cost of production.

Many independents have sold out to integrated companies that have other income than just that from production.

The independents drill about 75 percent of the wildcat wells. “To be completely fair and factual about it * * * we receive money or contributions and support from the majors, or otherwise we would not be drilling them on that scale * * *.!!

There are frequent sales to the majors.

“There have been just two overall increases in the prices of domestic crude oil since December 1947. One, in the amount of 25 cents per barrel, took place in June 1953 and the other, with which you are most conversant, in January 1957.” Costs of materials have increased considerably.

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Page 392 Charts showing cost increases in comparison with crude oil prices in

serted at this point in the record.

"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.'

There are many local changes in crude prices "which affect large areas and groups of producers. That is why many of them today are in distress."

Data showing price changes inserted at this point in the record. 395 Not all purchasers met the Humble-instituted price increase of 35 cents

per barrel in January.

Need for price increase is shown by diminution of oil well drilling in 1956, and by the decrease in exploratory work done in that year.

Also, “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."

In conclusion, listed facts he had "attempted to show." Senator O'Mahoney expressed the belief that what Mr. Vaughey 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.”

WEDNESDAY, FEBRUARY 13, 1957
Statement of Aler Radin, general manager, American Public Power

Association, presented by James L. Grahl, assistant general manager,

American Public Power Association 400 Statement of introduction by Mr. Grahl,

In 1954 fuel expense amounted to 68.5 percent of total production expenses of class A and B local publicly owned electric utilities, and 72.7 percent of total production expenses of class A and B privately owned utilities.

“Because of the need of many member utilities of the American Public Power Association for adequate supplies of fuel oil at reasonable cost, our organization for several years has opposed repeated efforts to place limitations upon imports of residual fuel oil into this country.” Mr. Grahl said they do not agree with the "import” of previous testi

mony that there are adequate supplies of domestic fuel oil. 401 Senator O'Mahoney asked if they wanted to obtain cheap imported

oil "even though the independent domestic producer might suffer at the hands of the major worldwide operators.' Mr. Grahl said they did not subscribe to that idea but they had simply found that frequently members could not obtain oil, and that at one time Los Angeles was down to about a 1-day reserve. That is why they oppose restrictions on

imports. 402 Mr. Radin's statement pointed out some of the additional costs the

oil price increase would impose on member systems. 403 A resolution adopted by APPA's executive committee "urges an

immediate investigation by appropriate Federal Government agencies and committees of Congress of (a) the necessity and reasonableness of these recent price increases; (6) whether or not such increases represent collusion among the oil producers; and (c) whether price controls should be instituted, after a rollback prices, if it is established that the aforesaid price increases are unwarranted and unreasonable * * *"

Increases in electric rates affect not only individual consumers but

industry and business as well. 405 Various newspaper articles and reports "have led us to believe that

your joint subcommittee hearings should thoroughly explore the need for price controls on fuel oil.” If controls were found advisable, prices should be rolled back to the pre-Suez level.

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Mr. Grahl said a chart presented the previous day by Mr. W. M. Vaughey of the Independent Petroleum Association of America, which showed that there was a close concurrence between the increase in the number of total oil wells drilled and the total value of petroleum production” was a “misleading representation.” Statement of Bradley Cozzens, assistant chief electrical engineer of the

department of water and power, city of Los Angeles Statement of introduction.

Whereas formerly the department received most of its supply from hydroelectric sources most of the energy required is now received from fuel-fired plants. This condition generally prevails throughout the State. There have been many reasons for this decline in hydroelectric power.

Their available gas supply is very variable.

In 1955 when fuel oil was in good supply on the Pacific coast they were negotiating with a major oil company to supply fuel oil for a proposed new steam plant. At that time future supplies seemed to be good, when without any previous notice "eastern oil companies came to the Pacific coast and because of the excess oil in storage and the relatively low prices at that time, as well as the low tanker rates, made large purchases of fuel oil for shipment to eastern United States and other areas.

Graph showing fuel oil supply and demand and table showing petroleum production in district No. 5 inserted in the record at this point.

These exports in 1955 "of over 18 million barrels above previous years, plus the increased utilities' use of over 11 million barrels, or a total of over 29 million barrels, created a fuel oil shortage of near famine proportions on the Pacific coast. The offers received in response to the department's request for bids “fell far short of meeting our requirements even at prices $0.50 per barrel above the posted

New pipelines would be of help.

After the poor response to their request for bids they were authorized to negotiate directly for oil, which resulted in their obtaining the needed oil but "some purchases were nearly $1 per barrel above the posted price.'

The reason for the increases of prices paid over the posted prices is that they had to buy through brokers instead of directly from the oil companies as they had previously done.

Knows of no brokers that are subsidiaries of the majors.

Appendix I of Mr. Cozzens' statement inserted in the record at this point.

Senator Kefauver said that he did not understand why "during the time of squeeze, the majors have less oil to furnish you and the brokers have more, which means that instead of paying the posted price, you have to pay a premium to the brokers."

One supply of oil cost them more because they had to pay the differential freight rate from the Persian Gulf to Japan, where the oil was originally slated to go.

Believes the company that diverted the oil from the west to the east coast was Esso or Standard of New Jersey, but is not sure.

Started discussion of some of the matter contained in appendix I previously submitted.

Graph showing fuel oil posted price and price range of purchases and bids rejected by the department inserted at this point record

Previously they did not feel it necessary to make long-term contracts to insure oil supply, but are doing it now.

price *** *"

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Even after negotiation of long-term contracts there still is an inadequate supply of fuel oil.

The 3 "specific points” that give rise to their complaints are:

"1. The oil companies, as marketing agents for a commodity almost as essential as water and electricity, most assuredly must keep abreast of the growing demands for their product in the fuel oil field and be better prepared to meet this demand.

"2. The release from the Pacific coast of the excessive quantities of residual fuel in 1955 in the face of increasing requirements by electric utilities for such material, we believe, should have been avoided.

“3. The utility companies of California should have provided more information to the oil companies regarding their growing demand for fuel oil."

Feels the companies are not providing an adequate supply of fuel oils.

Although recognizing the necessity of the European oil lift, believes the Federal Government "should have set up * controls or some related price adjustment or other means whereby the companies should have been compensated for the added cost of production of this fuel oil if such did develop.” The burden of the price rise has fallen unequally on consumers of electric power.

The price rise will cost Los Angeles power users about $4 million this
year. The increase to industrial users will in turn be passed on in in-
creased prices for their products.
Statement of William H. Curry, president, Rocky Mountain Gas & Oil

Association, Casper, Wyo.
Statement of introduction.

They now must drill many more “wildcats” to find new wells and fields than formerly. Added to the "increased cost due to greater dryhole ratios," they now must drill deeper for new oil.

In addition, they have problems that are peculiar to the Rocky Mountain area.

Turned to a discussion of “the effect that an increase in crude-oil price will have on some of the public-land States of the West.”

Said the "crude-oil price increase within itself, without additional taxation, would yield the Rocky Mountain States of Montana, Wyoming, and Colorado nearly $1,500,000 more than last year from their Federal and State lands."

Costs of production have outstripped crude prices so the search for new reserves cannot be adequately financed.

Cost increases have affected the independent much more than the integrated companies because if one part of an integrated company is not doing well it is compensated for by another departinent.

Believes there would have been a crude oil price increase even if there had been no Suez crisis, but even this increase is inadequate.

When prices are increased by one company others usually follow close behind.

Of the 475 memberships in the Rocky Mountain Association, 24 are integrated companies.

Although the association has taken no official position on imports, he believes they restrict exploration in this country.

Resumed discussion of price increase.
Statement of Leo H. Miller, superintendent of utilities, Lenox, Iowa.

Statement of identification. Is testifying on behalf of the Iowa
Association of Municipal Utilities.

The increased cost resulting from the oil price rise "jeopardizes the economic existence of some 85 municipal generating plants in the State of Iowa alone. Further, it tends to discriminate against these individual diesel-powered plants as compared to the larger central stations, operating either by steam or water power.”. The association feels' "they should not be sacrificed to privately owned utilities.”

They "seriously question the need for this price increase.” Read an item from the publication of the Oil, Chemical, and Atomic Workers Union showing that labor costs have not gone up as much as some have testified; that wage increases could be granted without increasing prices or deferring profits.

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Does not believe increased prices are necessary to obtain more crude or "for the economic good of our major oil companies.”

“The municipal powerplants are the same as an industry to the towns in which they are located. The increased cost of this fuel is going to force some of the plants to close and cause excessive rates in others. It is imperative that we keep our rates comparable to those of REA, other public-power firms and private power which have opportunity for purchase of Federal power or have their stations geographically located for cheaper types of fuel.

"It should therefore be apparent that we cannot increase our rates to offset the increase in operating costs in this case

* * *". Believes it necessary for the Federal Government to intervene in this matter. Also, "oil prices should be cut to those prices in effect as of December 1, 1956."

"Prices and unfair profits were controlled by ceilings during World War II and proved workable in most respects. Now, at a time when the Middle East is in a state of ferment, when there is unrest in the countries of Eastern Europe, when relations with our own allies are strained as a result of these disturbances, it becomes increasingly clear that these conditions exist basically, due to the enormous oil reserves centered in the Middle East."

"Gentlemen, the struggle for the control of these oilfields has only begun, and we certainly are living in time of conflict, and times when it is fair and just for Government intervention at home."

Further cost increases on top of the drought and declining prices will greatly affect the farmers. Statement by Mr. Miller concerning the effect the price increase had on the Lenox utilities inserted in the record at this point. Statement of Thomas A. Walsh, manager, light and power department,

town of Hudson, Mass. Statement of introduction. Represents the Municipal Electric Association of Massachusetts.

“Our average cost of No. 2 fuel oil was 11 cents per gallon in 1956, but the present cost of fuel oil is now 12.44 cents per gallon. This means that our fuel costs will increase $24,360 this year over the 1956 costs." Have had three price rises since October 1, 1956.

They think the available evidence very definitely points to the possibility that these increases in fuel cost are due to collusion, Never in history has there been as much products and crude in storage as when the price of crude and products increased in January * *

Mr. Walsh appeared as a witness at the hearings held by the Office of Defense, Mobilization concerning, oil imports. He told the committee, “We opposed the petition of the Independent Petroleum Association on the grounds that we felt sure that it would result in an increase of fuel oil prices."

Believes there is no difference in the cost to him of domestic or im-
ported oil.
Statement of M. H. Robineau, president, the Frontier Refining Co., and

president, Independent Refiners Association of America
Statement of introduction.

Frontier is a member of MEEC—the 16th member, not one of the originals. Thinks they were made a member because of Senator O'Mahoney's efforts to have an independent added to the list.

Views he will express are those, in general, of the small independent refiners. "There are about six times as many independent refiners in this country as there are major oil companies. But the aggregage plant capacity of this large number of refiners represents only one-sixth of the total refining capacity in the United States.” These independents are very important to the economy and to the industry.

The major difference between the independent refiner and other manufacturing enterprises 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 the majors a change in price of crude "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."

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