The Oil Industry: A Case Study in Imperfect Competition

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The Oil Industry: A Case Study in Imperfect Competition

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VH8 OIL I H O T O T 8 A G A M OTUD5T IB IMPBHFSCT COKPSTITIOH

by Wallace Boyd Holson

A dissertation submitted in partial fulf illrnont of the requlrmenis for the degree of Doctor of Philosophy, In the Department of Economics, In the Graduate College of the State University of Iowa August, 1950

ProQuest Number: 10902180

All rights reserved INFORMATION TO ALL USERS The q u a lity of this re p ro d u c tio n is d e p e n d e n t u p o n the q u a lity of the co p y su b m itte d . In the unlikely e v e n t that the a u th o r did not send a c o m p le te m a n u scrip t and there are missing p a g e s, these will be n o te d . Also, if m a te ria l had to be re m o v e d , a n o te will in d ic a te the d e le tio n .

uest P roQ uest 10902180 Published by ProQuest LLC(2018). C o p y rig h t of the Dissertation is held by the A uthor. All rights reserved. This work is p ro te cte d a g a in s t u n a u th o rize d co p yin g under Title 17, United States C o d e M icroform Edition © ProQuest LLC. ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 4 8 1 0 6 - 1346

T

v^jso C o v

S-

ACEHOWLBEOKEM The waiter is grateful for the patience and assistance of Dr. C. Addison Hickman •

r

ii

TABLE OP CONTENTS

CIMptWP i II hi IV V VI VII VIII

Pnge introduction

............

i

SRB *83001 OP OLIGOPOLY.......

8

the sthuctuo! of m s industry ...........

49

THE STRUCTURE OP THE INDUSTRY (continued) ....

78

THE STRUCTURE OP THE INDUSTRY (continued) ......

120

AN ANALYSIS OP MARKET BEHAVIOR.........

144

AN ANALYSIS OP MARKET BEHAVIOR (continued) ........

183

A RECONCILIATION OP THEORY AND PRACTICE . 221 BIBLIOGRAPHY

................244

ill

TABER OF TABLES

Hm ber I II

III

IV V VI

VII

VIII

IX

X

Page Total Asoots of the-Major Oil Companies, 1959 and 1948 ................

80

Ocmaatle Freduction of Crude Petroleum, 20 Major Companies and All Companies, For Specified Years ........

86

Crude Oil Runs to Stills for All Companies and for 20 Major Companies, for Specified Years .................

58

Major Company Posted Crude Prices for Mid-Continent andOther Crudes .......... Percentage Yield of Major Products fro® Crude Oil Run to Still®

62 .*

81

Crude Oil Capacity, Crude Runs to Stills, Crude Production and Proven Reserves, Ten States^ for Specified Period® •••»».»•»

83

Ownership of Refineries by Crude-Distil­ lation Capacity and Company Siae Croup, October 1, 1946

85

Capacity of the 57 Largest Plants In Each of the Refinery Processes, and \of the 51 Gimed by the Major Companies

87

Refinery Operations of the 20 Major Oil Companies and All Other Companies, for Specified Years ......... •

92

Gasoline Sales by Major Companies and All Other Companies In the State of Indiana, 1935 and 1949 ....... V ......... 104

Iv

&B&B OF 1&8LE3 (continued) Number XI

XII

XIII

XIV

XV XVI

XVII XVIII

Page Gasoline Sales by Major Companies and All Other Companies in the State of low, 1035 and 1949

105

Gasoline Sales by Major Companies and All Other Companies in the Stats- of Minnesota, 1935 and 1949 ........

106

Price headers of Petroleum Products and the States in Which Ihey Post PrICeS ’|««*

Ill

hay*® Supply of Crude Petr oleum, Gasoline, Distillate and'Residual Fuel Oil, for Specified Years ■** *** * ** *•« ••* ****•* **«..*. Stocks of All Oils, Bnd of Year, for ...... Specified Years

175 177

Bureau of Minos Forecasts of Demand for Domestic Crude Petroleum Compared with Actual Demand and Actual Production, 1935-1941 and 1946-1948 187-190 Xnde&es of Crude Petroleum Production and Prices, 1986-1933 ..... 4 Costs of Producing Crude. Petroleum in the United States, by Mejor Regions ....

v

195 200

M B L8 OP C M RTS

Climber

Pe g©

X

lading® on Investor Capital of 20 Major Oil Companies Compared with 44 Oil Companies and with leading Msnuf&elwlng Corporations ** 106

2

Stocks of Gasoline Bearing Crude Petroleian at Beginning of Month for Specified Years *««• 169

3

Stocks of Finished Gasoline at End of Month for specified Years

170

4

Stocks of Heel dual and Bis tlllete Fuel Oil at End of Month, for Specified Years »«•*.•••• 171

5

Monthly Average Posted Prices for MidContinent Crude Petroleum Compared with 'Monthly Average Prices for Regular Grade Gasoline In 3te»k-Car Lots, £«o.b» Refineries in Oklahoma, 1928-1941 and 1946-1948 *.*♦ 192

6

Monthly Average Posted Prices'for MidContinent Crude Petroleum Compared with Monthly Average Servlee-Sfcatlon Prices, ex* tax*, of Regular Grade Gasoline in Fifty Representative Cities, 1928-1941 and 1946-1948 *•*.....

195

7

Monthly Average Posted Prices for California Crude Petroleum Compared with Monthly Average Prices for .Regular Grad© Gasoline in Utonk-Car Lots, f*o*b* California Refineries, 1928-1936..... •♦.*«•* 196

8

Margins Between the Quarterly Averages of Crude Petroleum and Wholesale and Retail Gasoline Prices, 1928-1941 and 1946-1948 ...... ♦..**.................... 203

Vi

m m s OF FI0HBB8

Humber

Pag®

1

Perfect Oligopoly, Bqxukl Cost® ,..«».».#»*

10

2

Perfect Oligopoly, IEfferent Cost Curve®

20

3

4 3 6

Th® Kinked Demand Curve as an Explana tion of Price Kigldlty In Oligopolistic Market® ................... The Influence of Safety Margin® on Pricing Decision®•#*»*.**••»*»«•»*•»***».

29 30

' The Influence of Long-Bon Considerations ............ on PricingDecisions The. Dse of Seller*® Demand Curves as a Measure of Monopoly Power >*•«»*.»•**»»» •» 160

vil

42

X

fthftptftr I

mmomca'iQM *

1% X® th® purpos© of th® present study to attempt to compeer® a segment of contemporary price theory with ac~ tual market behavior In a particular Indus* try*

Xhe segment

of price theory ^hleh 1® of Interact 1.® oligopoly*

The

industry against tihtoh the theory will bo ©craparod is petroleum. Oligopoly theory has boon selected for attempted verification becsus® it purport® to explain market behavior In what 1® on® of the most important, if not the most im~ portent, type of contemporary indue trial market*

In his

chapter on ^Monopoly mnd fee Concentration of Economic Power,!? Professor G&ilbr&ife declares oligopoly ”by all 1 evidence fee ruling market form in fee modern economy.” Professor Bain, In a sxicceoding chapter of fee same book, agrees feat oligopoly **in fact comprehends fee great majoro ity of actual cases.n ■ Shore is not, of course, unanimous g agreement feat oligopoly Is fee general ease.* Even go, there is little dispute as to its importance, or as to fee ineample tonese of a value theory felch gives only cursory treatment to fee economics of fewness. Xti© petroleum industry has been selected as an appropriate industry .against which _to comp®re fee theory

B reasons*

It appears to &®pre®mt a fairly

typAoal Oligopolistic. industry, and it la of basic Imporbftti#* to' Hi# American mommy•

Further, It la altar that

the frame of peferene© provided, by oligopoly theory Is being utilised in th* ease of t a 'petroleum industry as a basis of polity reeomftsmtifttions , not only by osonomlatt but by legislators as well* ; Frefeaeor tee tew finds that u the soiling of gaso­ line and of other petroleum products is e w r y t a r e chsraeberieed by the bind of competitive behavior which would be expected In a market of feu sellers,

and declares such

behavior to be Inimical to t a public interest.

His

recommendstioras t a t the major companies be separated Into smaller units, both vertically and horizontally, follows*

}

® » 'same view has been expressed by Senator Gillette of Iowa, who 1® the sponsor of proposals designed g to effect this dissolution, -and by a special congressional committee whose rsaenmsatatlon* to the same effect ©re now 7 before Congress * It 1© clear t a t the®© reocmmsnda tions am

based upon the scowl# tlon tat, in this case at least,

Wh# character of t a market structure is resulting in memopoly or near-monopoly b # m vi or * fhl®, as we shall see, is the central thesis of oligopoly theory*

Yet it is conceiv­

able Hist th# taepy is Inapplicable in the case of the petroleum industry, and t a t these reocmmendAtlons are

-5

eonetMgusntly., mXsdXrce ted * An ©valuation and ecraparison of ■oligopoly- theory and petroleum industry market behavior « Should suggest the extent to which the theory 1® w i l d a.® ft frame of reference for policy decisions in regard to

this indnatry*

A final utios for ®elootion of the petroleum indW'ti|’"ae a m m

study was because published source® of

information eomoernlng market behavior are apparently more complete in Vogard to this industry than for most ©there# fhts 1® #o partXy because the industry has.boon subject to almost eonbXmial investigs fcion by congress 1on® 1 committees inter®®ted in competition and monopoly and in the relation of petroleum res our© ©a to the public welfare* and partly because of well-deireloped trade association and trade publication coverage* Although It hf*a been suggested that the present study may throw light upon the .efficacy of oligopoly price theory ms an aid to policy fom®tlon, this study is not directly concerned with policy.

It assumes neither the

desirability nor the undesirability ©f competition a® a standard of eeomeBsi© performance* and does not attempt to classify the petroleum industry m either 'worXcahly COmpeia tttlve#* or ^hopelessly monopolistic. * it 1© merely an attempt to determine fee extent to which oligopoly price

4

theory affords a m % % o m X explanation of market behavior ■

la A l ls believed to be a fairly typical ollgopolia tie ImdUetPV* M t i i N i n w i i r »p w

j

w

there are at least two ways in which such a *ca« p&piaon of price theory and bwlnes® practice might proceed# the moat direct method involves an attempted gaeenatruft'tlen ■ of m > post coa t and demand c w w s # Although such a procedure la theoretically ©oiieeiirabla# tbs paucity of etudlee p » * porting t© us© this method suggests the passa tidal impossi­ bility of ©etabllsMhg on a quantitative level Hit© actual relationship of marginal costs to- marginal receipts, or ethenviee Implementing the precise analytical cons Auction®

ta a. jgisaei. the method of the present study involves an attempt to evaluate and classify p®troleum industry market structure as a detmslaa&t of such objective market characteristics as stocks, profits, prices., and outputs, and then to attempt to reconcile these findings with theory#

Because these

characteristics represent both the. most important and the most objective element®' of market behavior, theory should .afford some explanation of them#

If the theory is not veri­

fiable at this level, its usefulness as an old to prediction end control is at least questionable# f© make the proposed comparison, It will be neces­ sary to outline both Ihe theory of oligopoly and the main

5

etofeftetsrlstlotf'. of 'pwtrelau® Industry f t m t w e and market -behavior*

To thin end, Chapter XX I© devoted to the taste

of presenting ffc* main outline# of oligopoly theory, and with miking 'the s u m p t i o n s and gwdlafcione of that theory '

m m licit* CMp-tifs XXX , -'If#, and V m m concerned with #ao strueture of the pttvolatam Industry* and with the relation Of tel® a true tur© to price policy*

More spacifically,

CHbftptomi III and If are concerned with the extent of major

m m & p m f eentrel in the various phae©s of production, trans­ portation, refining, and marketing, and wli$i the manner in which ’this control la reflected a® a determinant of industry price polioy*

Chapter ? is concerned with the system of

federal and •tat® e-onaorv©.ticn statutes, with the signifi­ cance of these statutes a® a part of the industry structure, and with the manner In Which 'they implement and bulwark major company control* Chapters.?! and VX1 contain an analysis of pet*©** lettm industry market behavior, a® reflected in industry prefits, stocks,, prices and output®.

These characteristic®,

and the maimer in which they react to demand shift® and cost change®, afford the only objective cheek of theory* As waa suggested above, if the theory is to be of immediate practical value a® a frame of reference for reliable policy

0

dooiaion®* it mrnt aifcwpd a fational *&&■ rmnomb ly pp«-0100 xxphat&ttm of thm® o M m o toriatic0 and thai* significant©. Otaapt©# v n x wwiwawacitti on mttmpt to moom&X® '13b® finding® in- **gfc*d to patpoliran industry market straw* tan?® and bfthat-vlor with th* th***y of oligopoly,

it will

t» ©wnswamtd with pointing out the avow® in wtiieh there ie an apparent agrwamaaat between fact and th««wy# th® area® in whioh ther© is an apparent disagreement, and tab.© as*** in WhMftg either by reason of -tto© limitations of the present study 02* the nature of the theory, no ©on®Xu®ion© are warpan tod.

7

FootftO'tft* » Cll&ptW X 1 * JT* &, OaXXbp<h, wlonepoly and Odneaataxation of Eooncmio Fo*e*,» la g w v g y of. 0*

Eugene ?* Roetow,

.

Sa.te!a3i .?pu*:r l a j^a. M .

P# 1 3 *

* t p* 113*

S*

Slat Congress, Xat Session, Sonata Bill® 571* §73, and S7S* January 18f 1940* m»

tS * *

«t j m

A'**

H H n rtwftaw tiiuhmm

in— i»h».

imiiMiiHfn •* « m * M W | w #

..

7#

Slat Congress, 1st So® a ion, n0il Supply and Distribu­ m t of. the Special Commit free tion ffcobXems,” A ness» ~ — to Study Problems of t>iw w w

«w » » ^ i w ti* hi

« m MP), where it will sell ©n output OM and where its marginal coat is equal to its marginal

is

m w m m * HUBU

total sales of fee Indus try will than

to® OK (* This la the m m

treated by/Chamberlain, after he

discards the classical models m

Incorporating unrealIs tic

a

assumptions *

In this ease, the monopoly solution Is the

©arrest on© so long as sellers take Into account their direct and Indirect Influence upop price* becomes large enough m

One© the number of sellers

that no one seller look® upon himself

as causing the break toward the competitive price, all will cut*

At whatever point this occurs, the barrier to the

downward movement .of price Is removed* the purely competitive one*

Hie price becomes

If one introduces the factor

■of uncertainty, the outcome will be indeterminate at a m & point between the pure competitive and the pure monopoly prices *

Tw® FIm ® wife Mfferont Post Curves The m m

of two firm's with different cost curves

is Illustrated in Figure $»

Suppose Firm A is a low-cost,

or high capacity firm* wife, a marginal cost curve, B^*

Firm

B lo a high-cost, or low-capacity firm, wife a marginal cost curve Bg.

Hie *capacity* of a firm is measured by the dis­

tance of its marginal cost curve from the vertical axis, for the far fear fee marginal cost curve lies to the right* fee greater fee output which can be attained at any given marginal

19

Y H

Price

N

3

O

M Output

Figure 1.

K

Perfect Oligopoly. Equal Costs. From K. E. Boulding, Economic Analysis, p. 582

Price

20

M' Figure 2.

M

Perfect Oligopoly, Different Cost Curves. From K. E, Boulding, Economic Analysis, p. 582

81 W© a.gain m m m ® equal ©hare# of the market* #© that the revenue curves &8P&#

ana n m have Oh® mm®' aigui*

fleam©* a® In Figure 1 * On tbt®®© be beet satisfied at th© output

Fima A will

cm,

m & r ® the price is mf,

st*& it© mrgiUttX-ceet ana .marginal revenue or© both equal t© ME.

9 i m B, on the ether hand, would /prefer to produce

at an output C8T1* with a price of H 1F *, where its marginal ©oet and marginal rowan® are both equal to M *Rf. H©r©# ttiea, is a conflict of policy between th® two firms.

fh®

hlgh~#apa©iby f l m , however, has a ear tain advantage, a© th© prie© it prefers, IP, Is lower than th© price preferred by the lo*«eap*©iby Ptaa, M*P*',

Si© high*eapacity firm (A),

therefore, will set the price to suit its own convenience, and the lew^aapueity firm (B) will be forced, to follow suit, as the prices charged by th© two firms cannot differ.

If

Firm B sets its price at M »P’, F l m k would be under no ob** ligation to follow it, for Firm A prefers a lower price. If Firm A sets the price at IF* however, th© other firm must folic® it, or lose all its'.sales*

If at the price MF,

Firm B- Is unprofitable, it will go out of business and leave Firm A with a monopoly. It i® qult© possible, however, for Firm B still to-be. making at least normal profit®

Q

when the price is MP,

even thou^a It la not a® profitable a® It would be If it could set th® price to-'suit itself.

In this case, th©

wmfotot of firm® in fee talus try will h© dependent upon th©

relation between th© price last by Firm A) and th© average tsetal’beet ©f Firm 21 (and ether'- firms in th# Industry) and the anticipated averago total ee»t of potential newcomer©.* If all f f m s In Hi© industry are making above normal profits, and. if new firms believe they ©an. produce and ©ell profit­ ably at the given ©net and prise,* new firms will (barring reefeletlonc) enter fee industry.

When sufficient firms

have been attracted* to that th# least profitable firm is at least normally profitable, fee industry will be in equi­ librium*

fhus wife different ©os t curves for fee various

firms, cquillbriWM* even wife complete freedom of entry* la entirely ©easiatent wife above-normal profit® for fee more efficient firms in fee industry* flies© appear to b© typical models Incorporating fee assumption ©f a homogeneous product* possible to suggest others •

It is, of course,

Boulding considers a ©as© in

which fee market share® of fee flam® are assumed to be dif­ ferent, while they have identical cost curves.

% l s gives

N

fee peculiar solution of market leadership being assumed by fe© firm wife the smaller share of th© market, since it prefers fee lower price. He suggests that feis situation frequently hold® in fee retail gasoline industry, where fee pfic© 1 ® set: by feose firm© not getting a very large share of fee market*^®

there seems to be no reason to assume,

25 hewbwvr* -that'-fMi identity of cost curves is a typical 11 ©itmtiogu % & t e the contrary* In addition, th® case #**»«'to Involve a centra diction, With a perfectly homo*' geneous product* tore would bo no reason to a sam e that firms would mot share the market equally except on the as12 sumption of different capacities * To assume that th® share -of the market possessed by each seller is determined is fcy %ibuati©nf (location?} is to belie the assumption of bmegenelty*

This objection holds* of course, only so long

as one Insists upon a very, rigid and inclusive definition of ♦homogeneous preduet*1 Bouldlng seems to haply such a definition v&im he assumes that wa cut in price by on© firm will immediately result In am identical price cut by all other firms in the Industry. hoeatloml advantage may make it possible for one firm to charge higher prices than another firm for th© ♦same* product.

Thus Professor Chamberlain la led to define

♦product1 as a *bundle of utilities j ^

if these utilities

are different,' the prices may differ, that la, the product is no longer homogeneous * It may be practical, however, to relax this rigid definition of a homogeneous product, pro­ vided the differentiation is not too marked. This is im­ portant, because it allows analysis in terms of the simpler perfect oligopoly models#

Snpe&feet oligopoly, to which we

now turn, Is considerably mere difficult to handle *

34

In the

o f differentiated products, m%if&m*

tty or price la 00% to Ittely to bo the- outoooo m

In the

m m of famm&mmom tonnodltlot. Professor Bouldlng sug~ 1*

goo to Hast in such an industry price totting will bo teamen. % i # doom not seem to- follow, although generalisation Isdiffleult in thit area*

3bt assumption that product® are dif­

ferent* and hooto allow for price differehtiaia» does not JL BS&fyl otggoot Hot neeeaelty for- price tutting*

A seller

mm increase bio eelee, and hsnce M s profits,, by p rim •tutting mXy so long as be Is not followed In these price tuts, or ,1s followed, only after a time lag of some constgutne#* Because product® are different under Imperfect oligopoly* and because buyers ere lively to be sore or less firmly attached to individual, sellers, price reductions by

mm ftpm may not result in a very greet increase in sales. If it does, it will be at the expense of rivals, assuming' no increase in overall demand*

Vi thout perfect knowledge,

these rivals imy not attribute their loss of patronage to

aggressive action (pries cuts), on the part of competitors# fb the extent that they to not, they will not retaliate because of the price cut* 2his reasoning;, howeverseems to eons very close

to- making imperfect oligopoly synonymous with the large group case of monopolistic competition*

In actual eases of

elUll^pety* Hill mot normal toutflguHut pmdtatsee demand that sellers ka$H utoafc th*t* rival# ay® doing? If th© price out *e that, rival# m® vm m r® of it, much of It# offootlvo&ess is loot* since potential buyer# are thus w m f # of It. Wot®mow Htlgltr sugge® to that price Hitting in isapsrf®#t oligopoly is only **slightly mor® realtatic* than under perfect oligopoly*1^ Ho attributes this to1price aensltiiriby on tan® part of competitor#» which In tarn i» occasioned by the foot that price# are the moat precisely measurable, end the moat highly publicised variable of market policy.

#fri®e ohlaelers * are very often denounced;

competitors oho engage In (for emsple) ’©xeessiv© advertlsmg* seldom are.

Quality of product and other non-price

variables are less easily measuredj empirical ©videne® la this ease supports the theoretlo&l generalisation thet eompetition Hill b# almost entirely non-price competition.

18

In fast* on® of Professor 0hamberlainfe most interesting con­ clusions, equilibrium with ® m m s capacity, Is a direct con­ comitant of dils absence of price competition in oligopoly i#

istic markets.■

^fortunately* It Is almost imposeIbX© to treat these problem® analytically% the non-price variables are al­ most infinite In amber* and subject to continual change* Professor Haley seems unduly optimistic shea he suggests that the recent studies taking differences in location of

26 mm'

tatlv# of product differentiation m m

uH I t m m l m m to reality.®0

Frofesscif Stigler seems to more

t o present status of import®®* oligopoly

^mrnwpf t o » to, top* t o t "no ® & m m l device has yet boon do** ^ l o p o d fot1 t o t o a t o n t of thin problem m & ■tef Xec&fcioml studies M m

t o t t o exist-*

very limited applicability**8*"

feSfWWaia »w. Kinked ^ ®. W SlMlSSvSPMlWWSSMW iDemand lSipeSS®SSf®iaie(S®8®'Curve ^WwSSSSaSWNSWa Analraia SIQ6f 1069* mush attention has boon given to t o se*#alle& 1kink©d demand c u m * cases , .suggested by Hall 22 and Hi bob and by Sweety almost aimult&neouely. this theory suggests t o t tore cadets a kink In t o demand curve for the produet of an oligopolist and that this kink goes far to explain observed price rigidity in oligopolistic indus­ tries.

the kink is due to the belief on th® pert of the

oligopolist t o t any price rise will not be followed by com­ petitors* while any price cut will be.

Us® marginal revenue

curve corresponding to this demand curve will possess a dis­ continuity the length of which is proportional to the dif­ ference between the slopes of t o upper and. the lower seg­ ments at the kink. /

Hits can be illustrated diagrams ties lly»

2h Figure

9# the sales curve is BD*Df** and the corresponding marginal revenue curve is M F G .

The

prevailing price is OF.

This

assumption is said to be appropriate in. periods of adverse

27 whan firm® are mot op®rating at capacity.

business

At wmfa a time m m enterprise might wall assume that Its rivals. (opeimtlng -at less than capacity) will h® in no mood to loot taoSMOt a#'a result of price tutting by o t o r s , nor 'averse to acquiring s&diticm&l toines® a# a result of price lnereases by store *

$hle* of ecmrwe, is not t o only possi~

M l l t y . Gas © t o r 1# of interest here# Sweesy suggests Mia possibility t o t the uppor part of the demand ourvo may ho' cone#iwed m

rela tlvely In-

elastic, t o % m m part as relatively elastic.

m i ® re-

float® m m belief on t o port of Mho ollgopoli® t t o t price increases by him m o likely to bo followed by similar price increases m

t o part of r i m Is, but t o t price decreases

are not likely to be followed*

"®3ds assumption may bo ap-

proprlabe In prosperity periods, t o m rivals are operating ales# to eapaeity* and are lflese worried about business ^efflifios

•*

Finally, it should be noted t o t in certain oases t o kink may temporarily disappear.

If t o oligopolist be-

Items t o t price outs will rtolsi secret, or if he is a price leader, this will be t o ease,

it will also b® t o

ca.. ©It., pp. 46-48,

0.

A ’normal profit1 to defined as the least s u e which moat b® paid to the capitalist to p « m d e him to allow hi® capital to be used in the industry* Boulding, op. ©It* # P* 467*

p*

***•

B o u ld in ® , fteeftfeaift

l y s i s , pp. 501-584.

10.

Boulding, op* o l t . . p . 587.

11 *

Temporary national Economic Commltte© Hearings, Fart 15, "The Petroleum Industry," p. 8698 s^Wiereis a *great difference in unit ©oats” of "stations of different si a®'."

10.

I m p l i c i t l y , B o u ld ln g re c o g n is e s t h is c o n tra d i e t io n , d is c u s s in g I t as © a e p e ra te problem *

15.

Bouldlng, o£, fit*'* P* 587*

14.

I b i d . , p . 581,

15.

Chamber 1st i n , 0£* £ | t . , p. 8*

10 *

B o u ld ln g * 0 £ , ©It., p, 888#

17*

stigier# BE* SM;**

p*

48

18

«

Ohaptw'vixJ ~



CaapetlUoa- .specially

18. ChMtMWlAlfi*' o$* © I t . pp. 104-106. . M*

B* IV H&l#y» "f&lse^and I&afrlbutlon*” In Survoy of

'si*

stigie®** a # SIS,**

p

* &ss«

88 *

B. I»* Ball and C , J, S&titth, *Price Iheory and Busl»**« Behavior*" tofrftrd Beonottle F » - w«. May, 1988j fatal Sv lweaiy^ ^Kfian r Conditions of „ 47|668*575, A^Sa ^ - - - - - -^

85.

Sweesy, fgu elt*,

84.

ISM*

25. IjawpaMl WlT. 86

.

87,

William Pellmr,

AmP&fe the F©£.

S. E, ChamberlaIn„ "Buopoly: Valu© When Sailors are Few," -Qsaart©.l»ly. Journal of Beoncmica« 44s88, November,

.

88

Fellner, ©g*. fit*, p. 6*

29.

Ibid., pp. 24*26,

50.

Ibid.* p. 188.

SI*

|Md., p. 168.

82.

Ibid,, p. 185*

4tO

* 3. and Moodyfe Manual, 1949.

2

Formerly Con solid®, ted Oil Corp. May 19, 1948.

Hams changed on

51

1940* u$i&g &&mt& or sixty million dollar or- more m

JHmmfomap 31, 1 W , as a basis of class Iflea tion.

of

Sine®

H&ar® are new and sere at that time fully Integrated com­ panies with assets of less than Hals amount, the terms 4fully Integra ted 1, end *ms]erf are not synonymous.

never­

theless , that® are the most Important firms In the industry? they form the cor® of an oligopolistic market*

The fringe

of independent producers, refiner#., and marketers vhlah eo-exlat with Hals group are an important character is tic of the market structure, but they are not of sufficient importance to change the pre&minantly oligopolistic nature of Hie Industry* The industry is thus characterised by a relatively small mmber of large firms involving perhaps two-thirds of Hi® Investment in the .entire Industry-.

The remainder

of the Industry Is mad© up of thousands of small producers and marketer®., and sen* -500 independent refiners.

An

analysis of the relative positions of those two groups in the industry* and an ©valuation of their significance as a factor in Industry market behavior, can best be under­ taken by considering each of Hi© four divisions of the industry separately. Production iii»i;um*Mn«**if*

It is Impossible to understand Hi© workings of

m

integrated petroleum market without tracing petroleum

from Hi© producing field through a vertical sequence of market# and ppoeocea* until it reach©® the final consumer* At each of these stage®, the purchase and sale of petroleum and petroleum products affect® the price at every, other- v stage, hut not In any simple buildlng-bloek fashion.

A

major part of the transfer® between submarket® below the retail level are lntra-company transfers and essentially represent bookkeeping transactions*

A smaller part are of

non-Integra ted products, and Hie prices received and paid represent as tut 1 prices*

The significance of prevailing

prices is thus different for integrated and for non-in fee- . grated firm®, and with their preponderance of control, the pricing policies of the Integrated companies Is of consid­ erable significance in each of Hi® submarkets* Hie first of these submarkets I® that for crude

petroleum*

This section 1® concerned with the structure

of this market, with ©special reference to those of Its

aspect® which Impinge on the determination of crude price®. The most important of these factors seem to be Hie extent of major company control over production and proven reserves, the operation of a tm jor -amp© ny-domln© ted market mechanism through which purchase® and sales ©re made, and Hie charac­ teristics of crude production*

% I s latter factor partly

explains the first two, and, will be considered first.

The sequence of operation® Involved In the explor­ ation and

of oil reserve#, Hi® drilling of well®,

and the production of erode la ©o well known as to merit little- attention*

A factor of major concern, however, is

the relative importance- of majors- and independents' as pro­ ducers , and the effect which their operation® have on the crude price structure*

In the discovery of oil, independ­

ents have always been a potent factor.

They have led bo Hi

in the number of well® drilled and In the number of new pools found, having discovered, for example, both the great Kettleman Hill® and Bast Texas field®,

nevertheless, their

Importance In the discovery of oil is not reflected as an important factor of industry price policy.

The major reason

for Hi!s is to be found in major company control, but Hi is major company control in tuna la at least partly occasioned by Hie economies of crude production, which favors the large and financially well-entrenched firm* Hie eoCnanlcally moat significant aspect of crude oil discovery and production is that the original coat be­ fore oil begin® to flow is a very high proportion, and the current cost of operating an oil well a very low proportion, of Hie total cost of crude.

The Impetus which Hiis cost

structure, together with the rule 03? capture, give® to pro­ duction has occasioned. Has enactment of conservation law®

directed,toward preventing overproduction.

The- operation

of those laws, severely restricting the amount- of oil which m n bo taken from particular field® and wells, makes It difficult for the small local producer to exploit his dis­ coveries .

The majors, which have both a mors direct inter­

est in restricting production and the financial ability to carry substantial shut-in reserves, are almost always willing to buy proven site® from the Independents*

Much of

Hi© Independents1 potential Impact on the selling side of 'the crude market Is thus dissipated Immediately by the simple process of selling their leases to major companies* This factor in turn is supplemented by and subor­ dinate to a more important consideration working in the same direction*

The independents, even though remaining

nominally Independent, are carefully circumscribed by major company control of crude production and reserve®.

The Im­

portance of the major- companies a© producers of crude, but ©specially as buyers, makes their price policies virtually given data for Independent sellers and buyers.alike. Major Company Control of Production and Heserves It I® in the producing branch of the industry that major company control 1© least, and it has been Hi Is area in

which most of the difficulties of the Industry have

centered.

Without prorationing, the major companies were

restrict production sufficiently to sustain a iM U R N M * t & W price structure.

With the advent of probation*

Ing, the eemtrel of the major companies has bm n consider-

ably stxmgthe&ed, as mill he demonstrated* In 1037 , the- major companies owned only 23*7 per m n t of m e ftMStl* producing wells In- the 'felted States,

la la India*ted In. % b l @ XI, however, .their share of total aruda production was 32*3 per cent, Indicating that they

ant the moat productive wells..

It is on these wells, m

well a® the larger onaa.owned by independents, that the brunt of restriction falls*

Bespit© this fact, however,

these well© ©till supply close to 80 per cent of total domestic production.

In 1908, 'the crude production of the

major group was 46*5 per fsm*t In 1044 It m e 61*5 per cent, fhs trend of control has been steadily upward, and.;.is un­ doubtedly much greater today* Yet the fact that the major companies produce

slightly mere than 80 per cent of the total crude production does not represent the full extent of major company Influence in this branch of the Industry#

Hi© majors have never pro­

duced enough oil to supply' their own refinery requirement®,' and their buying aetiviti©s In the crude market represent an additional control feature*

In 1044, major company cmie

runs to stills .amounted to 1,584,001 barrels, while their

T a b le IX

Sonttetle Fi»odu#tlon ©f Crude P «t#elm & . 00 M ajor Companies, and All CcsapanXas„ for Specified Years (in bhousmsidB of barrels)

Year

All Companies

00 Major Cmpani®® tftaaber Per Cent of Total

1948®

a #oxe#0i0

1,124,049

56*0

1944®

1*367*709

1*029,891

61.3

671*992

52*5

357*157

46*3

1987 1926

1

770*874

Hearing, Sfert 1 H , p. 77X4.

fe OoMaP<sr Yearbook, 18.49* and Moody’ s Manuals» 1949. S

Hearin m * wXhe Independent Petroleum Company,* p. 55. (inslmea Biobfleld Oil Corporation)

57 jwedU&tlon was only 1,029,291 barrels, or 25 per cent below their requirements .

in so far as these requirements are

m tisfied by domes tic production, the major companies either buy or produce well over 80 per cent of the total domestic crude supply.

Crude rune to stills for the 20 major com­

panies and all companies are given In Table. III. The same element of preponderant major company control I® reflected in their ownership of reserve®.

In

January, 1989, the major coup*nice were estimated to hold 70 per cent of the total proven crude oil reserves.3" Senator ©■Mahoney reported in 1946 that the ownership of reserves In. the hand®, of the major companies was at that time ■’ reater © than it has ever been in history.® Most of the major fields 3 «[email protected] held, by the major companies,, and these fields are al­ most never sold.^

tn fact, the purchase by majors of pro­

ducing oil land® formerly supplying independent refineries was a major cause of independent refiner complaint during 5 1947-1948. While the majors have occasionally allowed independent producers to drill on their lease®, this is al­ ways on the condition that the majors have first call on any oil produced, and Is largely a post-war phenomenon oc­ casioned by an unprecedented demand which established fields could not meet.

It is thus clear that the major companies

exorcise significant eontrol over both crude production

58

Stable i n Crude Oil Huns t© Stills for All Companies ■and for 80 Major 011 Companies, for Speoifled Years^ (thousands of barrels)

All Companies

Year 2

80 -Ha jor Companies Humber Per Cent of Total

1,665,684

1,584,081

85*8

195?

1,185,440

977,0X6

82*6

1926

779,264

555,064

71.2

1944

^

WIK? Hearing» Part 14-A, p. 7714.

2

Hearings, "The Independent Petroleum Company.,” pT* %E,

iIncludes Richfield Oil Corporation)

and reserves, but there 1® also the additional factor of

export® and import®* It m m t ® possible to Ignore the a© as a major footor in Indus try price policy, however, for two reasons* they do net now constitute end have never constituted a

significant proportion of the total domestic supply, and they are almost completely controlled by the major companies. Hie percentage of crude oil exports to total pro*

duoticm was only six per cent In 1858; in 1948 it was only two per cent*®

Crude imports traditionally have constituted

a very small percentage of domestic production, amounting to six. per cent in 1948*

7

Further, import© of crude petro­

leum have definite political implications, and are carefully controlled by th© majors for that reason*

During 1946-1947-

1948, when transportation facilities were acting as a bottleneck to expanded production, the major companies sup­ plied part of their east coast refinery requirements by im­ porting.

Despite the fact that these imports were never

significant percentagewise, and had no visible effect on the ©rude price structure, Independent producers have been vociferous in demanding import restrictions.

As e result,

legislation to raise, the tariff on imported crudes from the present 10*5 cents per barrel to #1.05 per barrel is now pending.

The major companies, In an attempt to forestall

such action, have voluntarily cut their imports into the

60

% ! $ * & States.®

Thus with a major portion of all imports

and exports, ecmparablwly insignificant to begin with, in the hands of tfcus majors, these imports and exports affect major company policy, if at all, in a manner almost coupletely subject to tiselr control*

It thus seems possible to

analyse the effect of their domes tie control apart from foreign operations, The Crude Mark© t Mechanism Shis control is clearly reflected in th© unique market mechanism of crude production and sale.

Hie dominant

characteristic of the crude mark©t is th® concentration of crude purchases in the hands of a few major company buyers. As was suggested above, the major field® are predominantly owned by the major companies, so that In any on© area, these producers are already major operators*

As such, they will

have constructed a system of gathering lines for their own production, which Is in turn tied into trunk lines running either to refineries or to tidewater# Although th© independents who also operate in these fields may be ©bl© to afford the cost of building gathering line®, they seldom if ever can afford a trunk line.

Th©

simplest and most convenient expedient is to contract to sell to th© majors, who are already investors In this equip­ ment.

In fact, in the substantial absence of common carrier

pipe line and ta-uker'facilities, the typical small producer, has virtually no other ©holes than te deliver his.oil into the pipe line® of a major company buyer# This In turn give® rise to a physio©1 connection of fac ill ties at the well, which In most oases Is move or lees permanent*

A buyer-soiler relationship, once est&b-

lished, is seldom broken, despite the fact that these con­ tracts contain short-term cancellation clauses which the seller may exercise In the event of price reductions*

This

leads directly to th© most important aspect of th© crude market mechanisms prices ar© *sm&©1 by quotations of the major buyers* One or more of the major companies quote prices at th© field for all th© principal selling fields, and stands prepared to buy at this price, generally both under contract and otherwise*

Th© significant point, however,

is that th© prices of all major buyers at any field are identical, and change virtually sImultan©ously.

Th© iden­

tity of major company prices is indicated in Table IV. This on© table represents price quotations for a varying number of major company buyers In ©very important oil pro­ ducing state east of th© Rocky Mountains.

In ©very state

there' is a major company price leader who initiates the noticeably Infrequent price changes*

Between April 1, 1946,

and December 17, 1948, the price of Oklahoma -Kansa s 36°

62

*mb%® IV Major Company Posted Crude Prices, toy Gravity, for Mid "Continent; &nd Other Crudes2Price Price Per • Per BEL Gravity BEL Gravity

Price Price Per Per BBL Gravity B3L

Belov BO 3.35 25-25.9 8.35

31-31.9 3.47

37-37.9 2.59

20-30*9

2.25 36-36.9 8.37

32-38.9 3.49

38-38.9 2.61

31-21..9

8.27 27-87.9 2.39

33-33.9 3.51

30-39.9 2,63

23-22.9

3.29 88-33.9 8.41

34-34.9 2.53 40 & shave 2.65

33-33.9

3.31 29-29.9 2.43

38-33.9 2.58

34-34.9

2.33 30-30.9 2.45

36-38.9 2.57

^

Platte Oil Price Handbook, X948, p* 256* Prices on f Kansas, Texes, Louisiana, Arkansas, Colorado, Montana, and Wyoming crude® *

65 gravlty crude changed teven .tinea* With eight me;}or comtA petty buyers, prices differed for more than a few days only in one case *

On Hovestber 24, 1047, Sinclair raised

Its posted price 5® cents per barrel, fro® $8*57 to $2.98. On November 28 9 Hi 11 lips followed*^

Apparently the other

majors did not feel that the rise was warranted, and on Siesaber 17, both {Sinclair and Phillips returned to the posted price of $2*57 per barrel**® There is thus no competition between major com­ pany buyers, and hence no advantage to the Independent seller of breaking an established connection with such a

major.

Further, with th© relatively large proportion of

crude purchases and integrated crude production which these few large buyers control, it is possible for them to make

their quoted prices effective for era®11 independent buyers. They can prevent sporadic price reductions by purchasing sufficient crude and, if necessary, adding it to storage. Premium offers by small buyers above major company quoted prices cannot become large or important so long as the majors hold produot prices down.

Thus the high degree of

concentre tion of crude output and purchases In the hands of a few major firms is a major factor in accounting for their ability to set prices, within Uralts, at virtually any desired level*

15

64

Th© e x t m t to which this market mechanism is e££©ctlv©, however, is only partly a function of major company control over production and reserves.

Supplementing this

control is the major company ownership of strategic trans­ portation facilities, principally pip© lines.

Without

access to these lines, the independent must sell his crude at th© well, and aside from a few sms.ll independent refin­ ers, the only local buyers are the major companies.

Control

of transportation facilities thus represents another, and perhaps th© most important, link in the chain of control exercised by the major companies.

Shis strategic phase

of the industry deserves detailed consideration. The Competitive Advantages of Pipe bines and Tankers Ihe liquid form of crude petroleum and petroleum products makes these commodities especially amenable to transportation through pip© lines and by tankers, and it is a significant fact that these special forms of transporta­ tion were in large measure designed by th© industry itself, and are largely owned, by the major firms.

Because crude

petroleum. Is of no value until It has been refined, the transportation system designed to move this crude from leases to the refinery Is strategic. The cost advantage of pipe line transports^on

ever eti&e# £©$»* of overland movement la so great that no oil cccap&ny has boon able to attain much Importance In th© Industry without .such facilities.

They are a major factor

determining refinery location, and have been largely respon­ sible for the tendency of major company refineries to locate near market ©enters and for Independent refineries to remain near the s.-©ureas of crude supply* A 1946 estimate of the comparative costs of trsmsporting petroleum products by the several types of carriers was submitted to the Presidents Advisory Committee 14 on fit© Merchant Marin® by the Sun Oil Company. -These costs are as follows? Carrier

Costa per ton-mile

Btllvoad #0.01695 .00445 Pipe line (gasoline) .. *....... * Pipe line (crude)•*••••***••«*■• .00344 2*uck ...... *06125 Water .00082 While water carriers have the lowest transporta­ tion costs, pip© lines have a considerable advantage In cost over other land carriers.

In 1946, rail costs were approx­

imately four time© th© cost of utilizing gasoline pip© lines and nearly five times the cost of utilising cruel© pipe line®.

Today, as in 1939, wno natural competition 15 can persist between oil pip© lines and, the ra' lroads *?? Actually, th® competitive advantage of pip© lines over rail transportation ha® been Increasing,

lb© following comps.risen

06 of the a o t m l Bill and pip® line rate© on crude oil from McCamey, T 0 m * g

to Wood River, Illinois, reflects the dif-

forene© between ami! and pipe-line rates? Mil, r&W (Cents

Date g f / « - w 5 / y IO/I3 /4 7 -I2 /5 I/47 1/1/48-1/4/48 1/5/48-1/81/48

Pl^line

rate

Rate in mills

"per fon^SII®

(Cents ^

36 35 38

is

8r - l 35 82 38

g s » 7*20 7.82 7*82

y y 2*47 2*26 2.26

Here the ton-mile rate fey rail was two and onehalf times as high as the pipe line rate, during the summer of 1947; and three and one-ha If times as high, during Janu­ ary, 1948, following an increase In the rail rate and a de­ crease In the pipe line rate.

Although an Important factor

affecting th© cost of transporting petrolem fey pip© Iln© is the size of th© pipe, th® Shell pip© line between MeCamoy, Texas and Weed,River, Illinois, Is predominantly ten Inches i

in diameter, and thus represents an average-size crude oil pip® line. An appreciation of the saving in operating ex­ pense gained fey a relatively small increase In the size of th© pip® can be obtained from the following tabulatlon which shows th© average'operating expanses on crude oil lines of 17 more than 130 miles In length in 1959? Prevailing' Inside dlsmeter Tinch©,©)

~w*w‘” 8 10 * 12

Average (median) unit operati m expense .(/ per fefeX. mile)

.T.7«"T7..... ...... ....

7034™* 032 024 ...016

67 GjWt'Mo; :o of the Big. Inch end Li ttle Big Inch pipe line®' during th© war, cons true tod to carry crude oil and refined product© from Terns to th© East Coast, suggest Mi© possibility of competition, from the standpoint of costs, between large

pipe linesand

tankers.

An estimate ofthe

awwrag© cost of transporting petroleum by pip© line on a straight-line ■mileage basis has been placed at 1,34 cents per barrel per 100 miles for the Big Inch line as compared with 1*76 eents per barrel per 100 miles for tankers from Mi® Gulf Coast to Hew York.

On a rout®-mil© basis, however, IS tankers would have the advantage. It is obvious from the above consideration of

relative costa that those shippers who have access to pip© lines and tankers enjoy a substantial competitive advantage over those who do not. Major Company Control of Tankers and Pip© Lines laeMHMMkN»

i»i

«n *»«n

u iMWMfaii«»HH

w m yni.THWi—

p^i

Tankers« It Is clear from the above 'that the tanker provides the lowest-cost transportation, with crude pipe line transportation costs being about four times the cost of tanker transportation.

Except for the Big Inch

lines, ther© are no pip© lines running from the Hid Conti­ nent fields to th© East Coast, so East Coast refineries are entirely supplied either by tanker shipment from the Gulf Coast and Louisiana or by imports.

Tie feet that in

58 tte last t m year® there tm& been only one small Independent refinery on the Seat Coast la a reflection of the dependence of this densely populated marketing area rn a type of trans­ portation facility not available to Independents.

Sbls re­

finery was taken over by the 3 tends yd Oil Company (New Jersey) in 104®# so that there are now no independent re­ finers on the Bast Coast. On September 50# 1958, IS major scmpsnies owned tQ 87*2 per sent of .the deadweight tonnage of oil tankers. f A letter written by the Chairman of fee Federal Trade Com­ mission to Senator Q'Mahoney on April 27, 1945, indicated that these figures were substantially unchanged at feat time Pipe lines.

The same concentration of control

is evident in respect to pipe lines.

Iher© were an esti­

mated 114,866 miles of crude pipe lines in 1958.

Of this

total, 61,308 miles were trunk lines, of which the majors owned 49,371, or 85.4 per cent; and 53,558 miles were gafe­ aring lines, 30,284 miles or 57.4 per cent of the total 2i being owned by the major companies. Major company control of gasoline pip© lines is even more pronounced.

In 19S8,

the major companies owned 96.1 per cent of the mileage of g& solIn© 1inos.22 Although there is no breakdown between gathe ring and trunk lines, or between crude and. gasoline, as of any

date, overall figures are available which suggest that there has been no sign if leant change. In major company ownership of pipe'line facilities.

Of the 70 pipe line

carriers reporting to t&ie Inter®t® t© Commerce Commission in IM8, 51 were owned or controlled by 10 major ©11 companies, these 51 carriers accounted for 84 per cent of the total mileage, 94 per cent of the total investment in carrier property, 98 per cent of the total operating revenues, and handled over 90 per cent of the volume of oil received in ^h© pipe line system*83 Common Carrier Status of Fipe lines Theoretic&Xly, petroleum and petroleum products pip© lines are common carriers, and as such the independent producer and the independent refiner both have access to them at rates subject to Interstate Commerce Commission review. This common carrier status of oil pipe lines was legally 24 established in the Hepburn Act of 1906. In 1912, the Interstate Commerce Commission under took a study of the E

status of oil pip® lines as common carriers.

Finding that

tli©

Hepburn Act required interstate oil pipe lines to accept

the

obligations of common carrier status, oven thoughthey

were built over and

their own privately acquired right of way

transported only their own oil, the Commissionentered

an order requiring the interstate pipe line companies to

70

flleaeh© dules of their ra tea for the t r a m porta ti on of oil %n compliance with the provisions of Section 6 of the Xntereta t© Comm©re® Act. Xh® pip© lino companies immediately Instituted proceedings before the Supreme Court to sat ©side' the Comm * S'6 mission*© orderf but their petition was denied* The Supreme Court in 1959 reaffirmed its decision in th© Pipe l»ine Cases i holding the t a company opera ting a pip© ■lin© across state lines and carrying oil whloh it purchased from producer© at the mouths of their wells is a common carrier and may be required to furnish map®, charts* and schedules of Its pipe-line properties for m e in valuing such properties * It was clearly established by th® time of the Temporary Matlonal Economic Committee investigation that interstate oil pip© lines were legally common carriers*

It

was also established In the eours® of that investigation that they war© not* at that time, actually being operated a® common carrier®.

Several of the major companies In1the

period after 1914 con bonded that their pipe line® were plant facilities, and refused to file rates with the Inter28 ©tat® Commerce Commission. Those who complied with the rate-filing requirements wither posted exorbitant rates or excessive minimum tender requirements* or both.**®

She cost

71 bf appealing

Interstate Compere® Commission, perhaps

together with the fear of m J - w company reprisal,50 pr®~ -mats th® indepe&dent from doing anything about these rates and m!.nlmum tenders • It has been an oft-repeated charge that th© ad­ mittedly high profits of the trana'porta ti on itisse of 'th© integrated companies1 operations h a w boon used to finance losses in th© Marketing stage, where the major a are often accused of selling below costs in their scramble for gal* 31 loaage. Whether or not this Is the case, these profit® typify major company control in the transportation segment of the industry, and testify to the substantial competitive disadvantage under which Independent shippers must opera to« In June of' 1954, the Interstate Commerce Commission upon its own motion began an Investigation of Hi© lawfulness of charge® for the Inter®tat© transportation of crude oil by pipe-line#

Th® Commission mad® thirty-seven carriers re­

spondents and required them to furnish data ©bowing their corporate and financial structure and certain statistical and rat® data over a period of year®.

In reviewing these

questionnaires, the Commission found that practically all of the companies Involved had in th© period from 1929 to 1958 returned in dividends to their owners all of th© moneys In* 52 vested In the pip© lines* 'ill® annual rat® of return ranged a® high as 46,9 per cent of value, with an average rate of

72 return of 14*0 per cent for thirty-flv© companies.®^ On ftoeembe? 23, 1941, -the Department of Justice,

after a stellar Investigation of Its own, secured a consent decree to its claim that the distribution of pip© line profits as dividends to- th®. shipper~ownere constituted a rebate on the published rate, and hence a violation of the rebate previsions of the Eltelns Ac

Shippers with no

financial interest in th© lines had to pay the full rates for the use of these facilities. Ch&er th© terns of th® decree, the defendant com­ panies ©greed to Iteit their dividend distributions to seven per cent of the valuation of th© property.

Burnings in ex­

cess of seven per cent were to b© ©©marked as not available for distribution as profits. In answer to a letter from the Chairman of the Senate Small Business Investigating Committee., inquiring as to whether th© pipe line companies war© complying with tli© provisions of this decree, Assistant Attorney Ceneral Peyton Ford on May 26, 1948, wrote the Chairman of th© 35 Committee to the effect that: ... .study .. .is being mad© to determine th© question of compliance. In this connection, It Is felt that com© postwar experience with respect to the operation of Hi© judgment might well bo accumulated. The Interstate Commerce Commission also advised

75

this same

committee

th&i

it active ms

in several cases

Involving product lines, but they ley® principally valua­ tion proceedings to

compel

tho filing of tariffs-36

Forty-

too years after oil pipe lines were declared common carriers, the Interstate Commerce Commission was still trying to compel these carriers to

file

tariffs -

Although the action of the Interstate Commerce Commission and the Department of Justice has succeeded In reducing seme rates, as well as seme minimum tenders, the control of the major companies has remained substantially unaltered.

Major company representative* make no secret

of th© fact that pip© lines ©re still opera.ted largely as the "mere plant facilities" of their organisetlons.^ Commissioner Altchlaon of th© Interstate Commerce Commission in discussing th© common carrier aspects of pipe line regu­ lation ha© susaaed up th© present status of the ♦common *n carrier1 pipe lines s It Is too much of a strain of human good' intentions to expect that the owner of a line, chiefly interested in his own shipments, will to his own disadvantage deal with a rival who wishes to use his conaaon carrier line. Summary ^ 'lb© major companies own between 80 and 90 per cent of both crude oil trunk lines and tankers, both of which

74

offer by f&r the lowest coat tfans po rta11on* Even though interstate.pipelines hay© been declared' common cannier© by law* dipping restrictions In th© m.j of excessive rates and high minimum tenders h a w prevented most of tho inde­ pendent© from using them. Ihla ©octroi of transport©tlon facilities, toge­ ther with major ©mpany oimership of reserves and with their ©rude buying program.* makes the price policies of these major companies virtually given data for the smaller inde­ pendent producers and refiners alike.* At the first level of price determination, the major companies clearly act in ©oncert to set the price of crude.

As will be shown, this ability is of no small

consequence in th© subsequent -stage© of refining and mar­ keting, and It also serves to place fee large companies in an advantageous position in regard to prorationing.

75 Footnote* * Chapter III 1.

2

.

fompomry' national Me on am io Committee Monograph Ho. 39, Company Control of th© Petoolomi^S^usfcr,11 T % Hoy Cook), p. 10. 78th Congress, 2d Session, Hearing© Before a Sp&cf ecial C o m it te© I,ny*tig»tlng Pe trole^HQ© cure e© , wWw~ xnaepa'ndontFe trbl©uti.iJ"Compaliy,l1,n,np .

3*

Temporary national Bconcmlc Committee 14, wfh© Petroleum Industry," p. 7386*

4.

H e a rin g © , "!3h® In d e p en d e n t Petroleum. Company," opVn:elf7i p* 48*

5.

80th Congress, 1st and 2d Sessions, Hearing* before th© Special Committee to Study ProblcK or Ikerlcan' •ft*********©*!

ny y w w rm wtiii» »i *

mtmmr

A

**

Part

v

6.

Bureau of line©, Minerals Yearbook, 1939, and Monthly --- -— * Petroleum StatemeiriloT^grilR^r ----

7.

Monthly .Petroleum Statement, op* clt.

8,

Sinclair, Carter, Continental, Gulf, Shell, Sohio, Standard of Indiana, and Tbx &s , Platt,*8 0,11 Price Handbooks for 1947*1948. *~—

9.

"Truman Want© hong Look at import© Before Administra­ tion Cutback M o w , 11 national Petroleum Hews, 42s 14, June 14, 1950. — —*

10

"Truman Move Seen Likely In Oil import© Dispute," . Hatlonal Petroleum Hews, 42s 13-14, May 3, 1950.

11

.

Platt*s Price Service, Pla111a Oil Price Handbook, 1948, p. 236. * *“ ~

12.

Ibid*

13.

Jo© Bain, The II % Price

14.

Heoort of the President's Advisory Cozamlttoe on the — -------- * ---- -------- ,~T5377p.— ----- --------

Coast Petroleum Industry, Part I vozupetition, p. jlxo.

76 15.

WM0

.. H v t 14, 0£. olt.. p. 7474.

10.' Department of Commare©# Indus try Export, Domes tip f m m ®pofte tion. F© troleu^T W^mpov'MWon .“7557 w” B

w r ”"5""* --- * — —

17 o Ibid., p. 28. 18.

Ibid*» p. 31*

15.

W B O Monograph Ho, 5©, 0£. elt«,. p. 20*

50.

S»»ytoaWA w!5ifli Independent P©troleum Company,” % » l U V , p. 625*

tl.

gapqt U p n o ^ p h yp. 39, op. clt.. p. 21,

22 *

Temporary latlonal leenemle Committee Hearings, Fart tAgA, wf&© Petroleum Indue try/' p. 77907 ’ '

23.

fodtt* try Report. Domestic Trans porta tl on, Petroleum iTanspbrt^tionT opT^W t T T p T n'¥l7

34.

Ibid., p. 32,

35.

Ibid., pp. 32 ££*

26.

ISie Pip® Line Oases, 234 U.S. 548 (1914)

27.

Valrolln© Oil Co. vs. H,S.» 308 U.S. 141 (1939).

28.

TK5C Monograph Ho. 39, £|>. pit., p, 24.

29.

Federal Trade Commission, Petroleum Indus try: Prices , Profits and Competition. l9’ 2 0 , “pT'^'ls,rY3rd con^ress, MTeisionT HR 9676 and m 8572, "Oil and Oil Pipe LInes 22* £it.• pp. 7208, 7338, 7386, 7^ST!*78S6.

30.

, Part 14, op. clt., p . 7385.

51.

Temporary Hatlonal He anomic Committee Hearings Fart 10, ”Th© [email protected] Industry,” p. 9881,

32.

Indus try Report. Domestic Trans,por ta tl on, Petrolem

35.

Ibid

77

84*

a©.

8eMp*8»k 1st Session, A Pinal Hopes?t of th© M to Study g g o T O g B r f e l w T " " os'®V1' * ' PIT Supply enc

36. Xbld«, p* $&* ' ©7.

80th Goagvwft! 1 s t and 2d ©ess Io n s , Wmp ’ "*L SpoM &I OogBattto® to ©tudy FrQbl®mT: & *

v

kr*,#-^

a*'«T|,

‘Vfju-a*

***

**- j

,■ pp. m i * 2109, 8111.* 88.

01yd® B« Aitchiaon, M3om© Observ®tlons Concerning Pip© Lines,fl Address before Annual Mooting of the Amorlean Peta?pleura Institute, Chicago, Illinois, Hovember 11, 1948.

78

Chapter I? the stetjcm m of the j j s w & s w (Continued) As ha® been suggested, th© refining phase of the petroleum industry is strategic, a® crude oil ha® virtually no commercial value before being refined.

Ihe present

Chapter is concerned with this and the final, or marketing, phase of the industry, and with the extent end significance of major company control In each.

Th© chapter is divided

Into two section® s section one will deal with refining, section two with marketing.

M3&$a&r Tbs present section Is concerned with pointing out the complexity and major divisions of the refining process, with the ■location and ownership of refinery capa­ city, and with th© various reasons for and significance of major company control in this branch of the industry.

Crude Pis tills tion. In th© Grud® distillation process, th© crude is rim into or *charge d T to th® distil­ lation unit, in which the different products naturally found in petroleum are separated into their, respective types ■through- the use of heat.

Gasoline, thigh comprise a th©

79 lightest hydrocarbon, m p m t z m first and 1© separated from tli® remainder of th® crude, ing arc recovered m

Th© gasoline vapors after cool­

a liquid,, which is referred to m

the

gasoline ’fraction1' or ’cut.* .With the application of more heat the next fraction, kerosene, is separated.

The gas-

oil fraction boil© Immediately below the'kerosene fraction, and is th® raw material moat desirable m

feed stock for

the thermal and catalytic cracking units. This was th® type of plant used to convert petroleum to products at the Titusville plant, and the only one used up to about the time of' World War X* In this process, thepercentage of different products that can be converted are dependent upon the char­ acteristics of th® crude oil,

Generally, only IB to 2b

per cent of ©rude petroleum can be converted to gasoline with octane ratings between 40 and 60 by tl © crude distilla­ tion method*

This octane rating is not sufficiently high

for modern motors, so 'that much of th© straight-run gasoline must be further processed to raise its octane rating. Thermal Cracking.

Th© oldest such commercial

process is thermal cracking, which was developed in res pons® to th© increasing demand for gasoline.

In thermal cracking,

sum® of the heavier hydrocarbons in th© fuel oil fractions are broken into the lighter ones of the gasoline type through the combined use of heat and pressure*

Thermal-cracked

so gasoline ranges d o ® © to 70 in octane rating* CafrElytic Cracking» Catalytic ©racking was first put into conmrciftl operation in 1956, some twenty-three year® after the introduction of thermal ©racking.

In this

process, a catalyst Is employed to promote or accelerate th® reaction or confera Ion involved.

Catalytic cracking

produces greater yields and higher grad© products than can be obtained lay thermal cracking* The summary of percentage yields of refined pro­ ducts since 1918 is given in Table 'V.

Except for the war

years, when th© demand for heavy fuel oil pushed th© gaso­ line yield down, th© percentage yield of gasoline during th© decade 1950 to 1940 was quite steady ©t approxlmately 44 per cent*

There is, however, a wide range of yield for

different areas and refineries*

Further, refining capacity

will vary from day to day, even in the same refinery, de­ pending upon the type of crude run, manner of operation, and other variables* Th© liocaticn of Refiner las On January 1, 1949, there were 575 refineries in th© United States* a doorcmso from th© 590 of the previous 1 year* This decline- continued a trend to fewer units, of larger individual capacity, that M s persisted since th© peak in number of plants was recorded on January 1, 1956*

2

Table ¥ lereentag© Yield of Sfejo* Products From Crude'Oil Hun to Stills-

tar 1918 1919 1990 1921 1922 1920 1924 1920 1926 1927 1928 1929 1930 1931 1938 1933 1934 1933 1936 1937 1939 1209 1940 1941 1042 1943 1944 194© 194© 1947

Oftftf Oil & Total •Other Bis tilIsle Residual Fuel Prod­ Oil ucts OUtfMB# t a c m n . ; Fuel O U 2 Fuel Oil 85*3 13*3 53.5 7.9 20+2 15.4 50+2 9*2 26*1 18.7 48+0 18*6 87.1 10*6 51 +9 10.5 28*8 11.0 (5) 50+9 9.3 30*0 9*6 10*9 49.5 51.2 9 +3 9.7 49*8 52.4 8.X 10.2 49 +5 7.9 54*9 46*8 10,4 56*0 6.8 47.4 9*6 6*5 37*4 40.8 9.3 5*7 59.0 45.5 9 +5 40.2 42 *0 31 *4 5.5 S.8 12*5 4*7 44.3 9 *4 57,7 28.3 13,3 27+5 35 +9 14.0 5.4 44*7 8+4 5+7 43.7 9+2 36*7 27.5 13+9 6*0 10*6 26*8 43.4 13.2 37.4 12+7 44*2 5*8 26.9 10+4 37*3 27*0 44 .0 5 +3 12+0 11-7 38+7 5*5 43.9 12.4 26*4 38+8 11*8 5*5 13.0 11.9 25*3 38.3 44*3 45*0 24*7 5*6 11+7 13*1 37*8 5.7 14«2 38.6 43 +1 12.6 84*4 37.7 5.2 15*4 12,9 24.3 44*8 26*9 41.7 3 +1 14 +8 13.4 39.8 15,8 14*8 20+2 37*2 5+0 44-0 42.0 4.7 27,7 13,9 14.3 59.4 13*7 41*9 39+2 4* 4 28*2 14*5 41 +5 12.9 16*6 6*0 24.9 39.6 12.7 6*0 16.9 24+2 41*1 40.2

1

Hearings, wPetroleum Requirement©-Postwar,51 and Bureau oF**lfH©e, Minerals Yearbook, 1947.

2

Includes home h a t i n g furnace ells,

0

Wot possible to separate light and heavy fuel oils prior to 1930*

82 w®r* m t & n m i m located In 37 sfcstes, but

In 1948,

moat of the refining capacity la concentrated in ten states. Actually, these ten states have th® preponderance not only of refinery capacity, but of crude oil production, ©rude runs to stills,, and proven reserve®. Is indicated In Table VI.

This concentration

Texas leads In'crude distilla­

tion refinery capacity, with 28*4 per cent of the tJ* 3* total*

California, Pennsylvania, and Louisiana folio®, in

that order* As was suggested in connection with th® a m lysis of transportation, th® development of pipe lines has in­ fluenced to a considerable extent the location of refining Centers*

Generally, but with certain exceptions, th© major

company refineries are located near th© market, and are supplied with crude-'by pipe lines and tankers.

Th© inde­

pendent refiner®, who have access to neither of thee© forms of transportation, are for th© most part effectively r©atrie3 ted to field locations, near a supply of crude. In 1946, there were 78 independent company refineries In Texas, 37 in California, and 18 in Oklahoma, the three leading oil 4 producing states* Th® states of Maryland, Massachusetts, and Hew Jersey, all in the center of a densely populated marketing area-, produce no crude, and rely almost 100 per cent on tanker imports*

There is not a single independent

refiner in any of these states, nor is there one on th© entire

83 $• *# 8* 3* 8* 1 8,3.3T 8? 10 JSE*- £&£•*

p

* ^a *

SI.

latter from Mr* H* H. Loverf Circulation Manager, QllMram wows, to the u t i w , April 6, 1950.

58.

SIS.

53.

HSenate, BJ B ern Ready to $hrow .One^®w> Punch at a®sol Inc Prices,w national Petroleum Hews, 49 $11, June 14, I960* *-*--

54.

*Sena tor© Ask $50,000 to Find Out Why Gasoline Price® ‘Keep Riaing*t^1s6ESri^iiB Murphy, 0£. elt», Chapters 7, IS, IS, 16, 21 and 26* California dally production In February, 1948, vat 931,800 barrels par day; th© Bureau of Hines ©stimai© of market demand for the state for February, 1948, m u 966,618 barrels per day. Book. 1949, p. 550 Alabama, Arkansas, Colorado, Illinois, Indiana, Kentueky, Mississippi, Montana* Mew York, Ohio, Pennsyl­ vania , Tennessee, and lest Virginia. See Chapter ¥1. Murphy, o&* £&&*'*

677.

Ibid.*, p* 468* 80th Congress, 1st and Ed Seesions, Hearings before the Spec la1 0 osfftiitte© to Study Problems -o?*'l'£jrfcan Small

BuSln©ssTrK r lr'l£7j’^^lT^BuppIy anS^ Dls tFTBuWon HofeSX* W TTBfV* , | l "'m

1 ta oa

171

£■/a j - i a g

jo

s u o /iifiA j

ir4

*4

.r~

« «JrH| o

jo ruofft!IM

03 .
ZEi££

.

m * p. 673*

.Iftftlfle Coast Petri.,^.... tea m ter i M i 3 S ,‘e b ^ ^ S bs 1 I S S 7 , w5‘ '

IS.

Bureau of Min®a. Mineral® Yearbook* 1936* p. 674*.

19.

m & *

00

.

SI.

V' ***+

XMLd». p. 688* Department of Com®*®®* Industry Hoport. Jkp@& tie "* " *" J‘‘*■ig F®_trolftm'"nXfftHspo3 ■■'' ..... -

02* American Petr©low infttdtuW* Petrolenm Fftofee and

FigWea, 1941* and ^anapbrtaifon, Petreleum 23.

American P®troleum Institute, Petrol.eusa Facte and Fi&ureft. 1939* p* 108*

185

Chapter VII AH AHALtBIS OF MA REST BEHAVIOR (Continued) She net effect of th© analysis of Chapter VI in regard to stock levels and p2*oflts was to suggest the exercise of restrictive measures, presumably designed to prevent excessive stock accumulations from acting as a price depressant*

lhe extent to which this tentative

conclusion is correct should become clearer after an ana­ lysis of actual Industry price and output policies over the same period*

Such an analysis will be undertaken in

the present chapter* l £ m r aB(i

Ms 1or Company Respons Ibjllty for ffrora felonjag Statutes r Ih®r© has clearly bean an attempt In th© petroleum industry to regulate production to market demand, and any analysis of output must necessarily b® an analysis of th© effectiveness of this program In accomplishing that objec­ tive*

it should be pointed out, however, that any success

which this program has enjoyed, particularly in Its earlier stages, Is due in large part to th© support of the major oil companies*

184 ■The last 'P&xa® field is a ©lassie example of feotii the difficulty of controlling a west number* of sma 11, independent producer®, and of tbs power Whleh the major ©ianpanlaa wield by virtue of their- control over crude prices* y-Thia field, was disc owned by an independent wildoat driller In October# 1930, after.the major eenpftnies had ‘ declared th® whole'area to be non-productive *

By the time'

th® majors realised their error and began to move in, inde1 pendents owned half the leases. She result was a flood of independent crude.

From 87,800 barrel® in 1930, production

increased to 105,786,036 barrels In 1931*

a

Hi® major com­

panies, already enforcing their own allowables by refusing to purchase more than a certain percentage of potential pro­ as

duo tion from each field,

began to. reduce posted price®.

'Four months after the first well was drilled in this field, the price of crude ranged from 73 cents to 98 cents a barrel*

When th® fight,for th® enactment of prora­

tion laws began in December, 1938, these prices were reduced to 80 cent® per barrel, ®nd shortly' thereafter to 10 cent® per barrel**

Hi© objective of these reductions is simply. s stated by a major company represent®tiv©: By raising th© allowable of 700,000 barrels daily for the Bast Texas field, th® authorities In Texas hav© claimed for th® t field the right to produce approxlma tely cm®-third of th© U* $. requirement®*v..Th© oil industry’s answer was to cut price In Bast f & m ® .

185 We eve probably at th®' point where th© Industry will have to speak Its piece with prices me til th© state authorities, particu­ larly in Teams* devise some more efficient means of control than they have brought for­ ward. to d®te* The ©11 Industry cannot live without fair profits, and it can not earn profit® so 'lww|r** a few non-conformist® -are able'to .w&eek ©ay kind of price schedule that is set up.

Th® effectiveness of these price reduction® is reflected in the-passage of Teams* present prorationing laws.* In the immediate drastic reduction in allowables for this field, and in the restoration of crude price® to #1*00 6 per barrel In September, 193$. While in few other oases has major company In­ sistence upon effective prorationing taken so direct a course, their support and endorsement of production control in other major producing areas is obvious*

She important point is

simply that these state prorationing laws, while administered by state authorities as conservation statutes, serve to bul­ wark the major companies * position In the industry*

They

should be thought of .not simply as conservation statutes, which impinge incidentally upon oil industry structure and market behavior,, but as a major institutional arrangement for which th© major oil companies are at least in large measure, if not wholly, responsible*

Th® Bureau of Mines le.tlma tea There Is but little question, despite th© denials

186

Of induatfty mot government representative®, that th© regula tion of.production to market demand Is designed to stabi­ lise, the industry at profitable l e w la by preventing overproduction*

Th© major questions at issue seem to concern

the Bureau of Mines * estimates, through which this goal is sought*

m©s© question© relate to th® accuracy of thee©

reports, the extent to which they are respected by the several states, ©nd their actual effect, in so-far ss it can be determined, in helping to maintain prices* The origin of these estimates has already been discussed.

Initiated by the Federal Oil Conservation Board

In th* w r l y 1950b , ttoair prepim. tioni w 3 takan over by the Bureau of Mines during th© cod© period.

The®® estimates,

their accuracy, and th© extent to which they are adhered to by the oil producing states, is indicated In Tabl© XVI.

It

Is clear from this table that these estimates are remarkably accurate* While these estimates, since January, 1958, have been estimates of market demand, and not of required produc­ tion, it is clear from Table XVI that the state© regard them as required pr oduetion figures.

This Is important, sine© de­

mand requirements may b© supplied either from stocks or from new production, and any con tempi® ted withdrawal© from stocks must be deducted from the Bureau of Kin©©1 estimate of demand to determine the amount of new crude required.

187 Gpjb^Maoto.fXJ^co to ^ c o S fto iiS E S S j? !?

# * * « . * * « it. a*,,*'*

05 rl ©

^ 2> (Wcsaoaoi^^iotot^toio^t tff5 eo *o no to to no to #o to no bo to o ^ to

£>« tft C Q O > • ft*

< # Q * 0 < £ < 8 < J > ,**6 o o a * O q 5 0 a H C 0 0 5 t0 6 0 Q « 5 {*0 0 « 0

O 60

iOtQS0 j>S>CX>COCOeD fr* * » A ft . K A . A » . A A A

£ Srt^*

a

03 0J03C 303 0 3 0 3 0 3 0 3 0 3 0 3 0 }

“^ *o1■» 3 '

a

03 Q •Cl.,

MJ «. cs

to O 03

tOit£**m f0^i0e0*060«0t0t0t0t0t0

10

%

0

Wt to

^O S*#s.1 o i thhl t « l i « t « | 4 l t > S % « V % « h «d ^u^ioiotntotoiototoioto tO lOHOOtOOOOOO to «0 03 CO ^

60 ©

e3eOtO*^^iO®«£)«? tOiOtOiOtOtqtOtQtOjOtOiO to C P fe ^ S d feDA-P {> o 0 0 © P» ^ fc£] < ,« .55 S3 p © o »oS R©

h m J?

r-J

•p © © p © & o

pT4 ~t 45*0 §3 o o !h ^

0

04 O

m

*

o r*f

rd «FP* o © & •P «H 45

£J^q ra © © o © *& © © Pi 0 Pi O Ai Ai &

191 From th© time the Bureao of Mines took over those estimates until January, 1938, the estimates were of **•* r

/&&£

rn 4*

m 4»

f$tSOft05 © /~) j o

f S J-JOfg

30 t.j^i

< O 0rtfa I I rS^fc fa> fa CO • s wf 030» r-t43 © i*trt■ 43$ « -P4t S 3 P fa* . J? © _ © « * 0 ft faA M © '©

• fa • t© • jtt 1 4f* I* © fa ©J«j a-0 * © **41© © tafatfa**p| 43 o

195 H i

** 0& *rk

M

$

m

0.H

c ju a D

Lit 'XBf -j-s> ’u o / / e > 3

~ /a d

u o /^ a jp

«»

ft H

&04 r4t>

10

a p /s u a g

•'die

%«r< CO

ri m



Q r*i

tJ §.3 w ° .2 43 >'& ©

a 43 much as ■one cent, per gallon, and never more than on® mnd on©-half c©nts*

She same stability is evidenced by the

course of retail prices in Chart 6.J %hue th© course of both crude and gasoline prices over th© period 1954-1941, when compared with Hie preceding s£x**y®ar period, clearly suggests stabilisation*

An equally important question which

remains unanswered, however, is the level at which this stabilisation has taken place* —

v

Cost of Producing Crude Petroleum Wi i M nm .ilim .n - w w rtw *

mm i li mill I iW » l

■ « « |ii|»iiii ■»wu ii i .

It is not possible, principally by reason of the lack of ©dequeto cost data, to answer this question conclu­ sively*

All the c-Oft figures which are available on the

cost of producing crude petroleum are in terns of average cost and are for fields and districts.

Although, such data

are useless .as a measure of monopoly power, they are highly

suggestive when coupled with figures which purport to he sufficient -to keep the small, high-cos t stripper wells in operation* A # tudy conducted by the P©trolemn Administration Board* -end covering the period. 1951-1934, Indies ted that the average production cost of crude p©troleum for the T?*5* as a whole was 86 cent® per barrel In 1931, 81 cents per barrel in 1938, *71 cent® per barrel in 1935, @0 cent® per barrel in 1934, end 30 cents .per barrel as the average from 1951 to 1954*

for the entire period, covering the produc­

tion reported, it w

found that 10 per cent of the oil had

a production cost of under 40 cents per barrels 50 per cent of the oil, from 40 cents to 79, cent® per barrel % 83 per cent of the oil, from 80 cent® to #1*19 per barrel, and 15 per cent of the oil, from- #1*20 to #4*40 per barrel and

average price of crude petroleum for the TJ,S* as a whole during this period was 65 cent® per barrel 'in 1931, 87 cents per barrel in 1952, 67 cents per barrel in 1933, #1 *00 per barrel in 1934, and 80 cents per barrel as the average from 1931 to 1934*

16

Hie most recent account of the relation between costs and prices in th® production of crude petroleum is presented in Table XVI11*

It is notable Mi©t at no time

from 1951 to 1941 for which data are available has average

mm ftbl« xviii Coit of Producing Crude Petrolem In The Ifetted fttnfeet*87 Major E*gtO»|*r Period

-------- 1 --- ~----All "KH* fora la 10\m~ tinent- Illinois Eastern States .Gulf .rw f .904

193® 1940 1941 Jan-Sep 1st Qir. 2nd Qtr • 3rd Qtr#

.908 *948 .991 1*023

1939 1940 1941 fttn-tep 1st Qtr* 2nd Qtr• 3rd Otr.

*397 *607 *592 *587

1939 1940 1941 3&n~Sep 1st Qt#. 2nd Qtr. 3rd Ofcr.

ce value W bap: il at well* pv# la069 1*610 1,008 #803 1.089 *862 1*001 *901 1*111 *082 JU2SS __

1*264 1 *144 1*280 If365

1*858 1*704 1.838 1.992

1.108 1*027 1.119 1071 > *1 at well'2 Average net seat p < •785 •617 .088 ■ .854 ,t . W i " 1-r" "ITSo© 1.347 *75® *61® .473 *554 .838

*486 *385 *451 .512

*81® .827 .816 .828

*570 *521 *564 .027

1.463 1.431 1*477 1*458 2/s Average margin, per barrel at well 7 .140 . ,480 "' .825 ‘ .144.. '.378 *80® *59© .347 .263 ♦104

.391 .341 .59® .438

*469 *477 .430 *470

•277 .174 .295 .330

*088 .023 *722 .708

.395 .273 .381 *534

.75© *754 *781 ♦704 «237 .259 .34® .273 *308 .407

1

W m i Onited States Tariff

2

Baaedm company-in

3

Excess of average value per barrel over average net cost per barrel.

C e r a m la s ia a , Beport on tbe Post of Predueing Crude Fetroleuia, l®4jS* p* fe#

teres t .produo tlon.

mi' cost been higher than 86 ©ants par barrel, except for t o , $u«mt&tafclv©ly unimportant. EMfcsrn area, and that for t o res trio tod production ©f the Mid^Contineri t die triet in 1989 • Tot from 1 9 M to 1941, the average price of crude potoo&ftum'h*t never been, lees t o n |1*00 per barrel* Cost of FroduclnK Cktsoilne 13kto on t o coat of producing gasoline are m m less satisfactory than 'tot for crude*

She- only such cost

figures available are for the year 1998, and were supplied the Temporary national Economic Committee by the major com** panics, who maintained that they were especially prepared, highly subjective, and virtually worthless*

The industry

does not pretend to set1prices on the basis of costs, which it contends are impossible to determine*

‘Bier© are thus no

refinery cost figures against which to compare gasoline prices. Foe ted Crude Prices §& a Measure of OCe te It seems possible, however, to make some rough but perhaps useful eaaparlsoae by .substituting tie price of crude petroleum as a measure of costs* is of course highly unsatisfactory, m m

Such a measure though raw material

represents t o major item of refinery costs*

It undoubtedly

overstates the actual cost of raw material for refining operations for the major companies-

Although it represents

a better Index of Independent refinery costs, as the Inde­ pendent Is almost always m net buyer of crude* the volume of Independent gasoline Is comparatively small* a 1Plough perhaps all-Important as a factor in Industry price policy* Nevertheless, in lieu of a better measure* posted crude price® will be used* °n th© rather dubious assumption thfct posted crude prices are representative of-refinery costs, Chart S shows the retail and \nholesale margins which gasoline prices af­ forded over the period 1928-1941 and 1946-1948*

Bxeept for

the decline from the 1928-1929 peak levels, neither of these margin® has shown any tendency to go either up or down*

Clearly stability exists, but at what level?

As

Chart 1, Chapter VI, Indicate®, the 1987-1928 prices were sufficiently high to provide the industry with record profits * In only two of the IS year® from 1924 to 1937 were percentage return® on invested capital greater, and then by only a very ana®11 margin*^

Wot until 1937, When

both these margins were a® high or higher than at any time from 1934 to 1941, did profits exceed the 1988-1929 high®, and again only by a very slender margin# While there are no cost figures available for this period other than the makeshift crude price series, the wholesale and retail margins, together with the rate'of

203

uouoq

uad &4U33

I I

I

uof in Q

j&d

sy u s j

fli

204 return es® Invested capital, point to the axis tone© of a pries above averag© ©e®t tea* at least a substantial &©@nsnt of. the industry*

Although, the 1950 depression brought

prises down from their 1008-1939 levels, the industry-has failed to show a profit in but one- y©sr-~19Sl* Aside 'from their reflection in profit margins,, and from the fact that they have been reduced only from apparently highly rammer® fctv® post "depress ion levels and have remained virtually unchanged since that time, there simply is no way of ©cnelu&ing whether gasoline prices over the period 1931-1941 reflect a significant degree of monopolistic restriction or not* The success of the industry in achieving stabili­ sation la undisputed, however, and there is no reason to assume that it has been stabilised at an unprofitable level.# Clearly if there have been any cost reductions since 1931, they have not been passed on in the form of price reductions either at wholesale or retail* It perhaps should be pointed out that the appar­ ently low wholesale margins are entirely consistent with excessive profits, at least for the major companies * fhis is so for the same reason that posted crude prices are a poor Index of cost for the major company refineries * At least half the erud© petroleum processed is not bought in

BOB fee mark©fc but is pro&iioed by fee integrated refiners at a eo©t per barrel presumably lower than fee posted prices at which, independently produced petroleum is' sold*

If

this Is so, then clearly the margins shown on Chart 3 materially understate the comparative yield of gasoline sales* Before turning to an analysis of the extent to which production has been restricted, end Is time respon­ sible for fee stability evidenced above, fee period 19461948 merits consideration*

It was during this period feat

fee charge of monopoly, dormant at least during fee war period, began to com© to the front again* As Charts S and 6 indicate, and as a Senate in­ vestigating committee succinctly phrased it, price increases on both crude and gasoline were during this period*

frequent and substantial*1

Th& oil producing states were charged

with restricting production below maxima efficiency rates; Dr. White of fee Bureau of Mines was accused of ..maintaining his estimate© of market demand for "no ofeer purpose than to have an effect on prices >■* and fee whole ays tern of Bureau of Mines estimates, major company control, and fee state and federal statutes regulating pro-duetion to market demand, taken together, were described as forming tfa perfect pattern, of monopolistic control over oil production, fee distribution

206 m t i m m and distributors, and ultimately

thereof

t o price paid by the public in3*^ It las ironic t o t t o so charges war# mad© at the on© time in to' past 14 year® when t o states wort.

*

apparently not re© trie ting production below maximum effi­ ciency rates, and when*"to price increases m m

apparently

in major part attributable to t o operation of t o forces of supply and demand* to' shortages and price Increases during this period were almost entirely ©ecasioned by a bottleneck in transportation., with crude being hauled from Montana and Wyoming to t o midweajbam refineries In normally prohibig

Q

tlvely expensive tank-cars*

rIhe major company refineries

were operating at or close to 100 per cent of rated capacity, although the Independents, forced to operate’at only 60 to 00 per cent-for lack of ©rude,

21

forced t o total refinery

utilisation figure down to 86 per cent,

illthough the major '

companies apparently took ©very advantage of t o existing situation, more often than-not to Hie detriment of independent refiners, Jobbers, and d e a l e r s t o post-war price increases seem to have been occasioned more by an unprecedented demand coupled with inadequate facilities t o n to monopolistic S< ^»T3«:gy. ■ 4at

iMdft jliijfti . . i n

Sis slseabl® post-war price increases thus cannot be cited as evidence of' monopoly power.

Yet the rate of

207 output before and after this period definitely can b@#

It

seem®' well to start from 1050, which marks the beginning of the systematic regulation of production to ss&rket demand* f lt a t r ic t ie o o f Froddo%lon to Market

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It is possible to cite at least two el**r~eut inetanoes In which pnsmtioning was definitely invoked to prevent the price of crude petroleum from falling or to von tore it to a previously higher level*

In both cases, the

level at which crude prices war© stabilised was clearly higher than competitive condition® would have allowed* The first such case is that of California during the latter part of 1900.

As has been noted earlier, Cali­

fornia has a voluntary prora tionlng system, opera ting with­ out the benefit of state laws*

Working within Mi® framework

of Mils system, the major Facif 1c Coast companies,, through the se-*©aXled Baelflc Coast Petroleum Agency, had succeeded in raising gasoline ■prices from 5*2 cents to 7*5 cents, per gallon, and maintaining them at that level for nine months* As Chart 7 Indicates, this artificial price structure col­ lapsed in the latter part of 1905, and this collapse was at least partly because of a breakdown of prorationing.

While

California production for the first five months of 1955 ex­ ceeded the estimates of the Bureau of Minos by only 26,000 barrels, the excess of production m m

the Bureau*s es time fees

fo r the' la tt e r seven months of that year ms 0Of,OOO M m l * *' A® Professor A tkina grudge©ts, 1*sft©r several months- of un­ restrained flow of crude*...the parties in Interest were sufflclently ©hastoned, to reconstitute the Central froration C omnl ttee*- thereupon1'a more hue in®m ■«24 resumed*”

ike policy was

'$ba situation m s well in hand by the end of' 1936, with actual production for the- whole of that year exceeding og the Bureau of Mines1 estimate® by only 31,000 barrels* Aside from this single adverse experience, California produc­ tion has closely followed the Bureau1© reco^iendatlone * In ■ 'vfact, the seven major oil companies operating on Mi© Pacific Coast war© recently indicted by the Department of Justice on anti*trust charges, the Department contending that this voluntary system of proratiming* among other things, oper­ ated in such a manner a® to nsubstantially lessen compotljsd tion.” A ©cmewhst similar situation developed in the MidContinent area during 1038-1939, largely as a result of the uncontrolled flush production In" Illinois*

From a relatively

In©lgnlfleant 4,473,000 barrels in 1936, Illinois production ©limbed 500 per eent, to 24,075,000 barrels In 1938.

In-

1930, production was almost 400 per cent above 1938.

3h*

state output reached Its peak in June, 1940, and thereafter

di#Xtned rapidly, but during t o interim the whole MidOonMne&t: price structure was threetenod, and the leading ©11 states fsee ted hr res trie ting: supply In the mate of ■ eensswtttlittu During practically the whole of X938, ferns shut down production in certain fields completely for two days a week*.

Although the majority of producers, independent as

well as majors* favored Mbs shut-down®, many of W m in&ependents objected to to. allowables for'the Scot fosse •field, in which most of them were located*

it was their

contention that the major eomip&ny~eontroiled fields wore being favored*

27

3h«*» was also considerable complaint in

regard to loss of market® to neighboring states.*

One In­

dependent producer, condemning the shut-downs, ©explained that Wwe have set here holding t o price up, and have -lost our market***^ ih* extent of restriction was made evident by an last faxes operator before the Texas E&ilno&d Commission in 29

February* 1939J

We have gone along with the Commission and have taken our' allowables in order to avoid price reductions• fhe last fexas field is now producing but an average of 13 barrels per well and many of these well® arc capable of yielding 13,000 to 20,000 barrels a day. While restriction in Texas was clearly more severe than in the other oil producing states, those states with

210 regulatory bodlaa assisbed In the curtaiipent program#. During 1938*. ■the decline In Oklahoma more Warn.®, offset the ■50 gain in Illinois. it is interesting to not© that the ©hut-down in Arkansas, coincident with the nfa4t&&mn orders of the other stab#*, wa© issued because wm a t © m s occw© '• ring ,* although ©tat©: engineers had testified lees than a week earlier that there was no waste in the state ■■ a ’' ; .... Xtesplt© these restrictive m e & w m w $ ta$jp&v©r, in '

August* 1959* the major empanlwe reduced their posted ©rude prices* and* as Colonel Thompson put it, r?w© promptly «32 shut down two or three days afterward.f* This was the famous two-week ©hut-down in which Texas* Oklahoma, and Sanaa* all particlpa ted.

Hi® cut-back amounted to over

200.000 barrels per day in ferns aim©*,

The total drop in

average daily production, oooaaloned by shut-downs in Texas, Oklahoma, Kansas, Louisiana* Arkansas, and lew Mexico, was 33 1.500.000 barrel®. The effect of this shut-down upon stocks is clearly evident in Chart 8, Chapter VI.

At the

same time the shut-down was ordered, Colonel Thompson, who was also Secretary of the Interstate Compact Commission, called a special meeting of that body to discuss ffthe drastic cut in the price of

q IX.*,s^

Meanwhile, Illinois was being severely criticised, both by representatives of indue try and the federal govern­ ment, for failure to © m e t a conservation law.

Secretary

211

Xefe**» Isa an address in Washington*. speaking of th© situ­ ation m

fee.-fell conservation in Illinois, so Ids

In tbftt1state m find a ll@utsna.nt governor, theoretically else ted to'serve the Interests of the whole people of hi® state,, hiooking a much needed end sound Conservation law«.*«»-we find a nauoe-ous mixture of oil and politic,®* An editorial fin the Oil and Gas Journal of August, «

1950, discussing the .-prise out® In crude and the market situation generally,'statedi^5 In the- matter of controlling production from these reserves, the application of con­ servation regulations must b© based on an equitable withdrawing among leases, field®, and states. Illinois hoc been the out®tending violator of these rules. In insisting on maintaining the position of an outlaw,,'the state ha® much to'answer for In the unsatis­ factory market development® of the past two year®, affecting not only Its omi operators but the entire industry* Its blind policy has given the supporters of federal control a strong argument* And again in September, when the enactment of conservation legislation appeared almost certains It has taken a near debacle in which the entire country shared, to cause Illinois to see the light* It Is now considered probable that the state will shortly enact a law which will materially contribute to the stabilisa­ tion of the operations in Illinois' and directly benefit th© Mid-Continent and middle western area« Illinois did not enact such a law, but shortly thereafter production at the big Salem field began to fall off, and by the middle of 1941 the threat of Illinois* flush

*

tm production m s gone *

fh#®e are clear ins tames in which

# 1© Indus try engaged in restriction of produo tlonf or the purpose of stabilising or maintaining prices# Ihev© is virtually no question but that \Jftreatrie~ ted production w o u l ^ If allowed, result in expanded pro** duciton and lower prices,

Shat this was true for th©

period 1958 to 1940 has been demonstra ted*

In 1941, even

with gasoline demand ISO per cent of the 1929 level, pro-* duet Ion was restricted to the extent of 180,000 barrels dally below the maximum efficient rat® of production#^ ^hia represented a rat© of production of only SO per cent of shat could have been produced had allowable® been set on the basis of engineering principles rather than restricted to market demand.

During the same period, 1958-1941, refin«Q ery capacity was only 10 per cent utilised. As has already been suggested, the 1948-1948 period represent®, aside frcei th© m r years of 1943-1944, the only period during which the oil producing states were apparently allowing production si mximim efficiency rates. Although there 1® no question but that production during this period, never varying more than 2,2 per cent from th© Bureau of Mines estimate®, was not keeping up with the rapidly expanding demand, there were at least two reason® for th* lag, one of which seems largely justified, but both of which are evidence of monopoly power#

BV$ In t o first place, both to' Bureau of linos srnd tftt. industry over-ostlma tod t o extent of the reduction in demand which the shift from wartime operations- to civilian ecara&ptloa was to ©ntalX#^'' fth® shift wtt# accomplished with a Moline In total demand of lee# than on# per cent*

Even

*o# pro&uofelon In 194© m s $51 million barrels*, or 24 per cent gape* to? t o n In 1941, and this expansion In production had taken plane "with slightly loss than a s o w n per cent increase in prove® reserves* In t o second place* despite the pretests Hon* of Ooogreeeloasl inwstlga tors, the Industry was producing w r y close to maxtosa efficiency rates in- 194#-, and at or aSPTO * « ■ 115 19*7-1948.

«*• very feet t o t vt.trlotlon

m s present*, however* Is evidence of monopoly power.

Whe­

ther justified in the interests of conservation or not, and a -good ease can be made for the proposition that it was* such restriction is entirely inconsistent with a com­ petitive market* In any case, any such justification allowed by maximum efficiency rates of production could no longer be claimed by 1949*

When the -record breaking demand of 1948

failed to hold* the Bureau of Mines overestimated actual demand by almost five per cent, to. widest margin of error g# since 195©* With proven reserves at record breaking levels at the end of 1949

the mag#sine World Petroleum reported

214 1k m % n tkm country *©. oil wells could supply perhaps © million barrels daily m o w t e n they a w allowed to pro41 duo* ®t present without Impairing the is? efficiency*” Texas had out back its allowable production S3 per cent from December, 1948f.to June, 194$*^

With that state* a

production shut -down eleven days m month, Cmimical oner Thompson testified before another congressional investigating committee thatt*® We produce two million barrels per day and we have the wells" shut down tight half the time because cur statute says t M t produc­ tion of oil in excess of market demand is waste.•* .**© h a w wells that can produce 50,000 barrels of oil per day if opened wide* But they are only allowed -to produce 12-f barrels per day because the market demand is such that we can only .make room for 18i barrels from a 50,000 barrel well. Although the price increases of 1946-1948 are thus not properly attributable entirely to monopolistic con­ trol, clearly monopoly power is being exerted to keep those prices at their present levels*

The oil industry 1ms

clearly restricted production for at least nine of the past 10 years, and the net effect of this restriction hss been to stabilise prices*

Again, without adequate cost

date, the degree of monopoly 'Which these price levels evi­ dence is a matter of subjective judgment*

Although short

m m prices are certainly higher than competitive conditions would allow, a long-run generalisation to this effect 1© not

215 itaummfeNL*

are too many variable® to which it is

not possible to assign values*

For example 2 How long

would th© proson t fields last without pror&tloning?

Would

fe© price® occasioned by w NMtrlettd production disc our®go •xplarattlon and drilling* and if «e# to wha t ©aetent? How many new fields remain to be disc owerod?

What of Indus try

technology and the production of oil from coal and shale? in ‘ inability to answer these questions prevents even a ■ qualitative judgment as to the long-run competitive level of oil price®*

The only cmelusion which is warranted Is

that restriction of output is occurring and that 'this restriction is holding prices'above short-run competitive levels *

An analysis of Industry price and output is neces­ sarily an evaluation of the effectiveness of proratinning, but the major 'ccmpanies are in large part responsible for 'the present ays tern of prorationing statutes, so that this system of regulation Is properly considered as simply a part of the major company ay®tern of control.

The Bureau

of Mines estimates of market demand, wife which these statutes are implemented, are closely followed by the oil producing states, and are another Important part of fee

2X6

system of control which make© It possible for the major companies to sot thft pa ttcrn of Indus try prices • W ith in t h is c o n te x t, o i l p r ic e s c le a r ly have boon s t a b i l i s e d , ' b u t the absence o f c o s t d a ta e f f e c t i v e l y p r e ­ vent© a n y b u t th e roxighesst © v a lu a tio n o f the le v e l a t w h ich t h is s t a b i l i s a t i o n has taken p la c e * w a rra n ts o n ly two c o n c lu s io n s .

The a n a ly s is o f p r ic e s

The f i r s t I© t h a t p r ic e s

have a p p a r e n tly been above average t o t a l -cost for a m a jo r p a r t o f tii© In d u s tr y a t le a s t sine© the I9 6 0 d e pre ssio n # Ih e second 1® t h a t these p ric e s ' a re above s h o r t- r u n cempe* tltiv ©

le v e ls #

Hi© f i r s t o f these c o n c lu s io n s , In and o f

i t s e l f , ' is o f l i t t l e

s ig n if ic a n c e .

A d is c re p a n c y between

a ve ra g e c o s t and price I© n o t evid en ce o f m onopoly power. Taken w it h the second c o n c lu s io n , how ever, l t \ s t r o n g ly

suggests the e x is te n c e o f such power, p a r t i c u l a r l y s in c e t h is d is c re p a n c y has a p p a re n tly e x is te d f o r the p a s t 17

years# T h is c o n c lu s io n la su p p o rte d by an a n a ly s is o f o u tp u t-

th e r e is no q u e s tio n b u t t h a t maximum e f f ic ie n c y

rate a of p r o d u c tio n w ould liv ® a llo w e d , and w o uld now allow, a s i g n i f i c a n t expansion o f o u tp u t. r e s t r ic t io n is It

The f a c t t h a t

o c c u rr in g 1© In I t s e l f e vid e n ce o f m onopoly.

is s t i l l n o t p o s s ib le , how ever, to c a r r y the above co n­

c lu s io n s f u r t h e r #

M onopoly power e x is t s , and is r e f le c t e d

217

in restriction of production and prices above the short** run competitlvo level, but this is all that can bo said with any degree of assurance.

Uncertainty with respect to such

factors as the extent of presently undiscovered reserves and th© fruitfulness of industry technology in developing substltutes, together with th© largely speculative effects of unrestricted competition, effectively preclude® a comparison of present with long-run eompetltslv* prices*

2IS

Foothotes - Chapter ¥11 * 1*

Temporary He tlcma 1 Sc anomie Committee Hearings, Fart 14, w®xe Petrolenn Industry,* p* 7598+ ' " "*

2.

IbM*, p. 7598*

3.

Federal Trade Commies ion.•Beport on t o Coat of IVoduoih^ Crude Fa r,,w''*L " ' 1

4*

THHC gearing#» Fart 14, og. olt* , p. 7597.

5.

Ibid.

6.

Ibid.,

7.

Bureau of Min©a,. Monthly Petroleum Forecast Ho. 6, November 21, 1 9 S 5 7 p T W 1 ‘ ~ *

'8#

Bureau of Mines, Monthly Petroleum Foreoaats, 1936-1948.

9.

Temporary National Eaahamio-Committee Hearing©» Fart 16, ”Th© Petroleum Indue,try,” p. 8244-

10.

A, B. Burns» Ttm 23®elt m1 of Competition,, p* 94*

11.

Ibid., p. 52.

12.

national Industrial Conference.Beard, Hi© gconqmlo Almanac, 1949, p, 52'..

15.

American Petroleum Institute, Petroleum Facts and Fi^jarea, 1937, p. 02.

14.

M. W«. Watkins, Stabilisation of Conservation, pp. 128-30.

15.

T O O Hearings. Part If, o£. eit., p. 7473.

16.

American Petroleum Institute, Petroleum Facte and Figures, 1947, p. 190*

17.

Temporary Ha felons1 Be on endc Ccarnalfete© Ilea.rings, Fart 17-A, 51The Petroleum Industry, pp. lOOW-ibllS*

'

« C .!.n



fr* —

'

219

18.

Ifm p. 7865$ American Petroleum Institute toon Facts trad

* 1947

19. I m s 7 t,wwp 80.

80 th 0 angress * 1st and 2d. Sea si ©a#, 'Hearings before the Special committee to 8 tody Protolem¥ a^meViiln

mm W sW l nW v mM ^ mo mrr rwo KiT m.B f f pp. 11^5*1117, 2®34, 3697*3740, 3782*3787. 8 1 . A Final Report of the Special Committee to Study Problems of American Small Buai n m i * op. elt.» p. 4. -mm

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