Page 698 699 701 702 703 704 706 709 710 711 Mr. Hansen was interested in trying to prevent a price rise. The safeguards were not instituted for the price alone, however, but were there "to prevent as far as possible companies getting together and taking advantage of the information that they obtained in forming this service to use in the future in possible violation of antitrust laws." "Senator KEFAUVER. Mr. Hansen, that is not what your statement says at all. What your statement says is that you had these general guides or protections for two things; insuring that no domestic shortage and resulting price rise stems from the operation of this plan. So you were interested and you put your safeguards in there partially for the purpose of preventing a price rise, didn't you? "Mr. HANSEN. No, sir." Mr. Hansen said he did not want a price rise, "but we had no control over it excepting where there would be a violation of antitrust laws." Senator O'Mahoney said anyone who knows anything about the oil industry knows "that prices in the petroleum market are a follow-theleader arrangement." That producers can't raise prices, in spite of the royalties paid to government bodies, until a major company in Texas raises prices first. Believes that if the agreement "is legal at all" there should have been assurances "that the oil companies which handle these prices in this manner would agree in consideration of getting an exemption from the antitrust laws that they would not victimize consumers, including the Government of the United States in defense.' In view of the fact that many MEEC members are being sued for overcharges, the question was why there could not have been an agreement to try to prevent the necessity for more suits in the future. Mr. Hansen said that before the companies would work on the plan they "demanded the immunity." No mention was made of price immunity. Understood the question to be whether or not there was an agreement not to violate the antitrust laws. Mr. Hansen, questioned as to whether he did or did not want a price increase, said he "didn't have sufficient facts to know whether a price increase was warranted or not, and I don't today." Has not considered asking Congress for legislation to handle problem. Is "not assuming that there has been any shortage of crude oil in the United States that would jusitfy an increase of price." Further commented, "Maybe you can say it was an excuse for it rather than a justification for it. I don't know." From the information he has, "there is no relationship between the operations of this plan and the increase in prices." Has "no jurisdiction or authority to do anything about it," unless there is possible violation of antitrust laws. 1955 amendments to the Defense Production Act form the basis for exemptions granted MEEC companies. Senator Kefauver, however, said that both Judge Hansen and the Attorney General had said they had to base the agreement "on the 1951 and the 1953 agreement, in order to make it legal"--predating the 1955 amendments. Judge Hansen said he meant 1953 instead of 1955. More discussion on this point followed. Another reason for not trying for a voluntary agreement on prices is, "The danger of setting up an estoppel in pending cases against some of the same defendants, or the same parties, that are members of the Committee, in pending litigation where in one instance we ask them to do that which in the other we condemn them for doing." The exemption granted for transportation arrangements is for one particular purpose and is not intended to affect any previous actions. Should not affect the pending cartel case. Senator Kefauver asked if he knew of a statute "that put a legal impediment in the way of trying, at least, to get them to enter into an agreement to hold the price at the same time they were pooling together their shipping resources?" Judge Hansen replied: "I can't point to any law that authorizes it, and I know it would be a viloation of the antitrust laws to ask for such an agreement." Page 713 714 717 721 722 724 725 Understands "that the companies that are members of the Emergency Committee control approximately 35 percent of the production and that an agreement from them would not be binding, assuming it might be binding to them, would not be binding on the rest of the industry.' Senator Kefauver asked if these companies are not the industry leaders and set price structure. Justice has alleged that this is so in the case of 5 of the companies. Article from the New York Times showing that concentration in the hands of the big companies has increased, all over the world, inserted at this point in the record. Even if these major companies controlled only 35 percent of domestic production it would still be helpful if they held prices down. Is not conversant with all reasons for price increases. If there were conspiracy, hopes to find it out in pending investigations. Knows of no way the Department of Justice could now be asked to take action on pricing. Senator O'Mahoney still does not understand why, in view of the exemptions it has already granted, the Government cannot say to the companies that "we want you not to fix prices but to agree with the Government that you will not improperly raise prices." The oil industry "should have had a rose pinned on it for what it did during World War II. "But that is not the situation now * * *” Senator O'Mahoney said he thought there could have been something in writing in an agreement not to raise prices unjustifiably. It could even be possible to introduce a bill requiring "that when the amount of industry in any particular line was controlled by less than 5 companies, and there are many such instances, that no price rise should be allowed until those companies filed an explanation of a reason for the rise with the Department of Justice or the Federal Trade Commission." In the haste of doing the necessary job, have "left loopholes that have brought about unnecessary and extortionate increases of fuel prices, of products prices." Working under the voluntary agreement, the only lever Justice has if they do not carry out the agreement to pool resources is to withdraw antitrust immunity. The same would be true in a voluntary agreement on prices. Upon the request of Senator Kefauver, Mr. Hansen said he would supply information on the status of the cartel case. Approval of immunity will not interfere with prosecution of the cartel suit. Have been no efforts toward "specific negotiations" for settlement of the cartel suit, although some of the companies have indicated "the case should be dismissed because we had no case." Has not been considered seriously. Believes it necessary to have schedule 4 for effective operation of the plan. Without it, the rearrangement of pipelines in this manner might violate antitrust laws. Promised to submit information on these arrangements referred to in the Attorney General's report of February 9, 1957. Senator O'Mahoney read from the testimony on this subject given by Mr. Wormser and Mr. Stewart. Questioned the legality of the Government's granting antitrust immunity "without the consent of Congress to any agreements among the committee that affect the operation of the petroleum industry in the United States itself." Congress should have been asked for necessary authority. Minutes of MEEC meeting of January 4, 1957, indicated actions of the kind described in schedule 4 had taken place prior to the schedule's approval. 728 Justice will look into it to see if there had been any violation of the law. Page 729 730 731 732 733 734 736 752 760 761 THURSDAY, FEBRUARY 21, 1957 Statement of Hon. Margaret Chase Smith, United States Senator from the She is appearing on behalf of the New England Senatorial Conference. Because of its rugged winters and its conversion from coal to oil heating in recent years, New England is heavy consumer of fuel oil, if not the heaviest. "To that extent, we of New England are at the mercy of the oil producers *** "As one who believes in free enterprise, I would ordinarily be impressed with the policy of permitting the law of supply and demand to be applied to the adjustment of this situation. Unfortunately, that respected law is not completely applicable to this situation for the simple reason that the situation existing at least borders on, or approaches, a monopolistic condition." Foreign imports have provided only "appreciable element of competition" giving some protection to New England in the past. There may have been some justification for price rise, but they "cannot justify the recent raising of oil prices on the law of supply and demand for production and storage statistics reveal oil supplies and inventories at their highest levels in history." Cutoff of imports may be the reason. From January 1956 to January 1957 fuel oil rose almost 1 cent a gallon in New England. Rose 1 cent a gallon from January to February 1957. The people are paying not only this increase but, since they are also the taxpayers, they are paying the increased cost to the Government. If this rise is maintained, "it will mean that the relatively captive consumers of New England will have had to pay out of their pockets over $22 million more for fuel oil than they did in 1956." May even be more because some claim a further raise may be necessary. Senator O'Mahoney pointed out that Congressman Heselton had introduced a bill "to make the petroleum industry a public utility and subject it to the control of the Government through a new commission." Although more Government controls are unwanted, things like this result when an industry acts irresponsibly. Letter from constituent of Senator Wiley's showing increases in fuel oil prices from 1941 to 1957 inserted at this point in the record. Although these hearings may not induce the companies to reduce prices, if they only help prevent further price increases they will be of great value. Various pieces of correspondence received from the Independent Oil Men's Association of New England, Inc., regarding oil consumption and prices, and the remarks of Secretary Fred A. Seaton before the National Petroleum Council, December 14, 1956, inserted at this point in the record. Series of exhibits showing oil prices (part of the above-mentioned correspondence) inserted at this point in the record. Speech by Jake L. Hamon, oil producer, before the IOMANE. Tables showing distillate and residual fuel oil supply and demand. Senator Smith does not believe in price discrimination favoring any segment of the industry. Senator O'Mahoney said that "the small refiner and the small producer have been victims of monopolistic practices in the past. There have been many instances of it. So it is most important to bear in mind that we are not dealing here solely with the question of price increases ***” Statement of Hines H. Baker, president, Humble Oil & Refining Co. 762 Statement of identification. Standard of New Jersey owns about 87 percent of Humble's stock. Humble has a wholly owned subsidiary, the Humble Pipeline Co., one of the large transporting pipeline companies. It operates under a separate charter. Page 764 765 766 767 768 770 771 774 Also operate a refinery. On January 3, 1957, Humble announced a price increase for crude oil in Texas by about 35 cents a barrel. Reason: **** the sharp increase in demand for domestic crude oil * * *” Another cause is the "substantial rise in unit costs since the previous general price increase in crude oil prices in June 1953." In November 1956, the demand for Humble's production rose more than 50 percent. "Humble was asked to use its best efforts to provide the maximum possible quantity for export to Europe although it does not normally supply oil for Europe." The company procured and shipped as much oil as possible, although it did not meet the demand. Its "inventories at coastal terminals for tanker loading were virtually exhausted by the end of December, so that its ability to meet requirements in 1957 depended on the supplies that it could secure from current production and from spot purchases from other companies." Asked for higher allowables, but did not get as much increase as they wanted. In December they bought what oil was available, some of which they bought "from inventories held by several companies only by agreeing to make available an equivalent amount of oil in 1957 at the same prices they charged Humble." Did this at the risk of "having to buy oil at higher prices in 1957 to take the place of oil exported to Europe at lower prices.' "Efforts to make available additional oil on the gulf coast appeared highly desirable in the situation that existed at the end of December. We concluded that the only possible method remaining by which we might secure such supplies was to raise our price for crude oil***" Suez crisis emphasized the need for development domestic oil supplies for the future. "Although drilling has continued to increase, it is a matter of concern that in recent years proved domestic reserves of crude oil have increased at a considerably slower rate than domestic demand ***" Chart showing relation of proved reserves to domestic demand inserted at this point. There are two important facts" in connection with the oil price increase: "(1) Petroleum prices have not kept pace with the increase in costs, and (2) the rate of earnings on domestic petroleum operations has been declining and is relatively lower than it should be as compared with other industries considering the risks involved." Chart showing wholesale commodity price indexes for petroleum and other groups inserted at this point. Drilling costs are much more here than in the Middle East because more wells have to be drilled to get the same amount of oil. "Despite the popular impression of greatly increased profits in the petroleum industry, our studies indicate that the rate of return on investments in domestic petroleum operations has been declining during the past 10 years ***. Table showing rate of return on net assets of leading corporations by major industries inserted at this point. The problems of "sharply rising costs and decreasing returns on investments and the slower rate of increase in the reserves of petroleum as against the growth of demand, are not a new matter of concern" with them. Because of increased costs, "a much higher investment is being made per barrel of oil developed currently than was paid for the oil now being produced. In other words, current replacement costs are much higher than the cost of reserves accumulated in the past." "Despite increasing risks and costs," intends to continue expansion and exploration. However, "This can be done only if market prices respond to changing conditions in the domestic industry and if the longestablished and reasonable tax provisions applicable to petroleum production in recognition of the peculiar risks of the business are continued in effect." Humble's stock value increased from 1951 to 1956, due in part to capital investment and in part to the finding of additional oil reserves. Page 775 777 779 781 786 788 789 790 791 The 271⁄2 percent depletion allowance was not included in the statement showing $179 million net income for 1956. Did not know how much had been received as a result of this depletion allowance in 1956. Noted that "average returns on total petroleum investments substantially overstate the rate of return being realized on current investments because of the much higher level of costs now being incurred than was the case for reserves acquired in earlier years." Decided at the end of 1956 that a price rise was necessary. The amount of the January 3 increase "was a matter of judgment. The general increase we made seemed to us the minimum warranted by the circumstances." Any price increase is determined by factors existing at that time. Have been times "when others initiated price increases that in our judgment were not warranted by the economic circumstances then prevailing, we have resisted making any changes." Humble does not sell crude to Standard of New Jersey but to Esso Standard Oil Co., an operating affiliate of Standard of New Jersey. The average sold to Esso is approximately 30 percent. Gasoline prices were raised approximately 1 cent per gallon. Chart showing how gasoline prices are related to hourly earnings inserted at this point. Graph showing gallons of regular gasoline purchase with an hour's pay in manufacturing inserted at this point. Not only will an hour's pay buy more gasoline now, but the quality is "far superior to that in earlier years.' "The question has been raised why gasoline prices should increase at all in view of current level of inventories considerably higher than a year ago. The level of inventories is only one factor affecting prices. Costs and the current relation of demand and new production, taking into account seasonal facotrs, are far more important influences on prices than inventories." Gasoline stocks usually increase in the winter while heating oil stocks usually increase in the summer. The price increase of January 3 has not increased availability of supplies for shipment to Europe, as had been anticipated. Did not know whether other purchasers would follow their lead in increasing prices or not. Believes price would have increased even without Suez crisis. Suez may have caused "slight" increase in transportation cost, but pointed out "that the influence of the Suez situation is not related to the cost. It had to do with the short-range forces of supply and demand and their effect upon the market. We were short of oil.' Chart entitled "Net Income and Net Assets of Eight Important Oil Companies with Relatively Large Production and Without Substantial Income from Foreign Operations" inserted at this point. Chart entitled "Percent Return on Net Assets of Leading Corporations in Selected Industrial Groups" inserted at this point. Graph entitled "Net Return on Net Assets of Leading Corporations in Selected Industries" inserted at this point. Graph entitled "Prices of Petroleum Products and Major Costs of Petroleum Industry" inserted at this point. Mr. McHugh read from subpenaed memorandum from Standard of New Jersey setting forth increases in income that would accrue from increased prices. Has no estimate of the increase in Humble's income as a result of the price rise. Does not believe the figures in the Standard of New Jersey memo resulted from talks with Humble people. Knows there were "no discussions previous to December 12 in regard to any effect of the price increase. (Memo dated Dec. 12.) Memo from executive committee of Standard, dated December 13, also estimated increased earnings. Mr. Baker knows not how these calculations were arrived at. Had no instructions from Standard, although in a discussion with Mr. Rathbone of Standard in late December mentioned the contemplated price increase for crude. Mr. Rathbone thought "a price increase was in order, and that he could see no objection to a price increase of the order or magnitude we were talking about." |