I 5> V uu / \J[ S fe 4. Wov kl \ **♦♦•♦***•♦♦♦#******* ***************** 1 THE PETROLEUM INDUSTRY A STUDY OF ITS INTERSTATE ASPECT by David Levine Under the Direction of Joseph Zisman, acting Supervisor. Prepared under the auspices of the Sponsoring Agency - New York State Dept. of Labor. Cooperating Agency- National Labor Relations Board, Dr. D. J. Saposg, Chief Economistr Official Project Number 461-97-5-7 7orks Progress Number 1040 New York, 1938. ♦ XXX KX-iHBHHt- * January 31, 1938. ACKNOWLEDGEMENT I wish to thank Miss Sarah Kaplan and Mr. Edward Brown for helping to collect the material and Miss Aimee 7/it- tenstein for cutting the stencils. D. L. CHAPTER I TECHNOLOGICAL ASPECTS OF THE. FETl^OLEUM..INDJISTRY. The domestic petroleum industry includes production, trans¬ portation, refining and marketing* Production: The producing "branch of the petroleum industry includes all the activities incident to exploration and location of oil lands, the drilling of oil wells and the extraction and storage of the crude product. Natural gas which is given off with the crude oil brought to the surface may be classified as part of the producing branch. Trie great bulk of the oil land is leased by the producing companies on a rojralty basis. One-eighth (sometimes one-sixth) represents the most common royalty portion. The producing company, if also a purchaser, usually runs the royalty portion with its own oil, paying the royalty owner the current market price. If the producer sells his own crude, it is customary for the purchaser to buy entire production, paying both the producer and royalty owner directly for his share.. The amount of oil that is recovered from the underground varies with the amount of utilized gas pressure., Natural gas is soluble in petroleum. The amount of gas dissolved is directly proportional to the pressure exerted on it. After the saturation point is reached gas appears in a free state, which contains suspended in it/; vapors of the lighter components of the oil. 2 'Drilling: Petroleum is recovered by boring through the earth's crust till the impenetrable seal holding the oil in restraint is broken. When the seal is broken the absorption of gas becomes very important. The equilibrium of the fluids is disturbed and the liquid follows to points of abstraction. Under the pressure of the gas,oil follows the path of least resistance. Pressure, thereby,decreases and gas is released in solution, carrying with it much of the lighter vapors of the petro3.eum constituents. As long as a sufficient amount of gas remains underground to bring the oil to the surface the oil flows freely through the sunken well. However, as the reservoir of gas is depleted, it becomes necessary to use pumps to bring the petroleum to the surface. The pumping process becomes more expensive with the increasing depths. If the well is sunk too deep, it becomes profitless to use pumps and the well is abandoned when natural flow subsides. The waste of natural gas leads, therefore, to a smaller recovery of petroleum, making the unrecovered deposits sheer waste. It is estimated that from 40 to 90% of the crude petroleum is unrecovered. J.O.Lewis estimates that under current methods 1 of recovery 80 to 90% remains underground." In order to bring petroleum to the surface the oil field must be located and a well drilled. 1, Stocking, Geo.W.,The Oil Industry and the Comnetitive System, (1925) pp. 142-3. 3 Oil lands arc located speculatively through "wild-catting" or through chance, supplemented by scientific methods. In the early days of the industry, and down to comparatively recent times, oil was located by adventurous individuals who took the risk of putting down test wells, sometimes in new areas and sometimes within the limits of areas in which previous test wells had defined certain limits of a pool. Later the geologists began, by scientific methods, to lessen the risk through the development of geophysical methods of determining the location of oil sands. These scientific methods have proven helpful but are not Infallible guides. Oil lands arc still discovered and developed by the method of "wild-catting" as well as by scientific determination. Whenever it is decided, by any method suitable to the promoter, to drill a well, the physical process consists of securing the necessary leases and land, the construction of rigs for drilling and the actual drilling operations. Two principal methods are employed in drilling wells; the standard or cable-tool method, and the rotary process. The former consists in alternately lifting and dropping the cutting tool, suspended by a cable from a wooden derrick, the weight of the tool pulverizing the encountered formation and literally punching its way through the earth's crust to tne desired depths. 2. Lapp,John A., Summary of the Application of the Wagner Act to the Petroleum Industry, (Tentative Draft lybo); p.2. 4 The hoia is drilled "wet" at first, by pumping water into it and later by the water being encountered at varying depths as drilling proceeds. Pulverized cuttings removed with water by means of a bailer with a dart valve lowered by a steel line. Because much water is a handicap in drilling, iron piping or casing is set at great depths to prevent hole from caving in and shut off water horizons. In addition, thore is the danger of flooding the oil sand, should It be encountered. From what¬ ever point the casing is set, the size of the hole is reduced and varies with the depth and character of the formations. It doos not taper, but is made smaller by substituting a smaller 3 tool or bit. In very soft and unconsolidated rocks the hydraulic rotary system is used. Drilling is accomplished by a bit at the end of a drilling stem, which is composed of lengths of pipe screwed together. The top length of pipe is square, the remainder is round. The drilling stem and bit is rotated by means of a rotary mechanism. It consists simply of a rotating table centered over the hole ana driven by a chain drive. The square section of the drill system is clamped into the rotary. The walls of the hole are kept from, caving by means of circulating mud, which forced by pumps through a shrivel at the top of the drill stem and back on the outside of the stem. The circulating mud "plasters up" the walls of the hole so that they will stand while 4 the drilling stem is being removed and the casing set. W.~ Stocking"/ Goo.W., op ,cit • p. 135 4. Stocking, Geo. W., op. cit. p. 136 5 Technological advance in crude oil recovers'":- Four means have "been developed to increase the amount of crude oil recovered 5 from underground deposits. These are: 1. Use of soda ash in freeing oil from porous reservoirs. 2. Water flooding of oil sands. 3. Use of gas and air pressure in pools. 4. Mining of oil sands. Transportation: At the end of 1935 the transportation system included: 112,000 miles of pipe lines 751 Tank vessels (427 of which were 500 tons or over). 150,000 Railroad Tank Cars 130,000 Trucks These means of transportation, except that of pipe lines," need no elaboration. The pipe lino system is unique to the petroleum industry and is generally characterized as a plant facility. While this is discussed in detail in the section on Transportation - the mechanics of ripe lino transportation will be discussed in this section. Pipe Line: The pipe line branch of the industry collects the crude petroleum from the producer's field or settling tanks through a system of pipes called gathering lines. Gathering lines are usually 4 inches or under in diameter. Much of the gathering line pipe is laid on top of the ground. These sraali pipes 5. For a full description of these methods, see the Federal Trade Commission's report or. Prices, Profits and Ccm.netition (1928) pp. 30-2. 6j American Petroleum Institute, American Petroleum Industry 6 connect with larger pipes and lead to gathering line pumping stations. In highly productive oil pools, particularly when different producers own or control small tracts of land. There is an extensive network of gathering lines leading from the oil pool. In many cases several pipe line companies have gathering lines in the same oil pool and sometimes on the same lease. The topography of the region in which an oil pool is located is the most important factor in determining the type of gathering line system that must be established. In some cases the topography of the country is such that a pipe line company can locate its gathering line pumping station so that the crude petroleum oil will flow by gravity from the producers' tanks to the receiving tanks at the pumping station. In other cases, however, much of the cruue petroleum must be forced through the gathering line by the extensive use of field pumps located on the producers lease, or be sucked into the gathering line pumping station. If the producer pumps his oil into the pipe line company's line, he is paid for this service. Practically all of the crude petroleum -oroduced in the United Stai.es is collected by gathering lines, and the great bulk of it is transferred to a trunk pipe line for trans¬ portation to nearby refineries, to inland or seaboard refineries, or for transportation to a seaport from whence it is carried to a refinery in a large tank steamer. Since 1923 large quantities of California crude petroleum have been piped to Los Angeles Harbor and from thence transported to the Atlantic Seaboard by 7 tank steamer. In times of temporary overproduction the crude petroleum may be transported to a large "tank farm" "/here it is stored for use when consumption exceeds current supply. The crude oil in storage, which for some time has been sufficient to supply refinery requirements for half a year or more, is largely owned by large crude petroleum purchasing companies or by petroleum refiners. Trunk line pipes have a much greater diameter than gathering line pipes. The trunk line pipes of the lar~e interstate pipe line companies range from 8 to 12 inches in diameter, and in some cases from 4 to 8 lines have been laid parallel to each other in order to handle the tremendous volume of crude oil which is constantly being pumped hundreds of miles to large refinery centers. Comparatively small quantities uf cruu- petroleum are transferred from gathering lines to tank cars for shipment to nearby refineries. Occasionally where a large refiner desires to secure a certain crude uni-axed with other crudes, tank-car shipments are made for considerable distances. Refineries: Thexie are three types of refineries operated in the United States. Some small refineries called "skimming plants", distill crude petroleum at atmospheric pressure and produce gasoline only, kerosene and fuel oil. Another type of refinery, which may be termed a complete refinery, carries the refining process much farther and obtains a wide range of refined products. A number of the smaller refining companies in the East produce a complete line of refined products. The third type is one equipped with a "cracking plant" which subject the ^us and fuel oil to very high temperatures under superatmospheric pressure, whereby the 8 molecules are broken up or cracked and the lighter products are given off. Certain refining oouipcUiiec have produced from 50 to 60 per cent of gasoline from ordinary grade of crude petroleum. Cracking plants are generally used by complete refineries and also by a large number of skimming plants. Tho bulk or the refining business of the country is done by large integrated companies and by concerns having subsidiary and affiliated companies engaged in the different branches of the business. BEfcoiasaTo. Marketings - The bulk of the wholesale business in gasoline, kerosene, gas oil, and lubricating oils and greases is done by large integrated companies, some of these companies extend their marketing activities throughout a large number of states, others market in a single state or in a few states.These large wholesale marketers generally divide their marketing territory into two or more pacts under the control of a divisional sales manager. The small wholesalers confine tneir marketing actiivities to a small section of a state, usually in the more populous parts. Most of the gasoline is sold to the retailer or ultimate consumer by the company manufacturing it, or by an affiliated or subsidiary concern. Extensive storage facilities are maintained in the large cities along the Atlantic Gulf ard Pacific Coast and at important interior refining points from which the requirements of the retail dealer are supplied. Shipment is made from, such points in tank cars, pine lines and barges to bulk stations from which point retail dealers are supplied by tank truck or tank wagons. The seasonal demand for gasoline necessitates the accumulation of large stocks during the winter months in order to meet tho requirements of tho henvier spring, summer and autumn trade. The bulk of the retailors' supply of gasoline is distributed by tank trucks or tank wagons from storage tanks located near railroad sidings. Tank truck and tank wagon, drivers usually sell at retail to anyone on the route who will buy 5 gallons or more at a single t ime. Kerosene is distributed in tho same way as gasoline but the quantities sold are much smaller; sales of gas and fuel oil and road oils are largely made direct from the main sales offices of refining companies. Lubricating oils and greases are sold in containers, such as barrels, cans and cases. Transportation **nd manufacturing companies buy these products in large quantities. The motor venicle consumption is supplied through the gasoline and kerosene wholesale and retail marketing organization. Retail Marketing: Gasoline is distributed to luiev- consumer in barges, tank cars, tank truck and tank wagons and to small consumers through service or filling stations,garages, repair shops, curb pumps,ate. and to a limited extent from tank wagons and tank trucks. Many imrgc wholesale marketing firms operate a large number of service stations, and many small wholesalers are also engaged in the retail business. Tna number of outlets and the control of these outlets will be discussed in detail under "Marketing", 10 CHAPTER II GROWTH AND CONTROL_OE_THE PR.ODUCTION OF CRUDE PETROLETJM. Growth of Volume and Value of Crude Petroleum: The production of crude petroleum, from 1859 to 1936 has been phenomenal. Petroleum was discovered in large quantities in the United States in 1852 when the Draxe ¥J»11 was drilled in north¬ western Pennsylvania, rear Titusvillo. Ever since 1659, with the exception of 1898 and 1901, the ^nitea States has ranked first 1 ■ in the production of petroleum. 'It Las ..reduced almost 65# of the total v/orld production. < The production of petroleum has increased from 26,286,000 barrels in 1880.to 202,557,000 barrels in 1910, to 770,874,000 barrels in 1926, and has reached a maximum of 1,007,323,000 barrels in 1929; since 1929, the production of crude petroleum was on the average about 900,000,000 barrels (see Table 1). The Value of the petroleum at the well has Increased from $24,6ul,000 in 1880 to $1,280,417,000 in 1922. In lv34 the value of the product at the well was 6904,825,000. The average price per barrel has greatly fluctuated. From 1859 to 1875 it was $2.21; in 1880 it dropped to v.94 per barrel. The price of petroleum reached a maximum in 1920 at $3.07 per barrel. In the period of depression this fell from $1.19 per barrel in 1929 to $.67 in 1933. During the period of 1931 to 1935, it has fallen to as low as $.10 per barrel. This drop w.7i. 7. IbJJ, 13 The technique of drilling wells has improved in another direction. In the early period a well 5,0d0 feet deep was considered on outstanding accomplishment — today, a well 10,000 feet deep is easily drilled, Tais issults in the discovery of 8 prolific horizons. Approximate Number of Producing Oil Wells In United States, As Of December 31, 1S27 - 1*3-..- YEAR NO. OF Producing Oil Weils InJJn: 1927 323,300 1928 327,800 1929 328,200 1930 331,070 1931 315,850 1932 321,500 1933 326,850 1934 333,070 Extensions or Oil Fields and Centralization of Production: Tne rapid expansion of petroleum production has been primarily due to two very important factors; first, the development of the automobile industry and second, the discovery of new prolific fields. In loo& petroleum production was limited to Pennsylvania. It rapidly spread to the adjoining part of New York State. Tie United States Geological Survey reports production in five states in 1876— New York, Pennsylvania, Ohio, West Virginia and 8. W.H.Voskuil7~op7 c~it 7 p." ~4b 9, Bureau of Mines, U.S.Department of the Interior. 14 California. In 1883 Kentucky, and somewhat later, Tennessee began to produce petroleum. Up tu that period most of the oil came from what is now known as the Appalachian field. In 1887 Colorado was added to the producing states, and in 1889 Indiana, Illinois, and partly Kansas and Texas were added, Oklahoma joined in 1891 and Wyoming in 1894. Since 1900 three states have become important producers -Louisiana in 1902, Mo"tc'ud in 1916, and Arkansas in 1921. Michigan, Missouri, Now Mexico, and Utah have produced small quantities from time to time. At present, the oil producing region is divided into 10 seven regions: (1) Mic.-Continent - including parts of Kansas, Oklahoma, North Central Texas, Northern Louisiana and Southern Arkansas; (2) California; (3) Rocky Mountain - including parts of Wyoming, Montana and Colorado; (4) Gulf Coastal - coast country of Texas and Louisiana; ) Appalachian - includes part of New York, Pennsylvania,Eastern Ohio, West Virginia, Kentucky, Eastern Tennessee and Northern Alabama; and (7) Lima-Indiana - including portions of north¬ western Ohio and northwestern Indiana. Tne producing area has extended tremendously since 1859. The relative importance of each of these regions has changed quickly. As already described, the Appalachian field was the sole supplier of crude in the early stages of the develop¬ ment of the industry. At preset the California,Oklahoma mL Texas fields have assumed prime importance (See Table III ) 10. Geo.1//. Stocking, Competition in the_Pe;tpoleum Industry, p. 124. 15 From 1931 to 1935 the East Texas field alone produced a total of 794,000,000 barrels of crude. Since 1919, the Los Angeles Basin (Cel.) has produced 1,942,000,000 barrels. Moreover, the produc¬ tion of petroleum has been localized in a few states (See Table Texas, California and Oklahoma iu-jvo produced over 80%of tho total production since 1929. In 1929 tlm.se three states produced 83.8%, in 1932 they produced 82.0%, "while in 1935 they produced 78.9%, The ii«xt largest producing states are Kansas, Arkansas, and Louisiana with 4.3%, 2.5% and 2.0% of the total production respectively. Two states, Texas and Oklahoma, nrovide petroleum 11 to the refineries of thirty-one states. This crude petroleum must traverse the boundaries of these states and, when refined, is distributed to the forty-eight states of the Union. The interstate aspect of the producing end becomes quite obvious. Considering the United States as n whole, of the total 966,243,00C barrels of crude received at the refineries in 1935, 40.95% or 395,774,080 barrels were shinned in interstate commerce in order 12 to be refined in states which did not produce it. Competition ir: Production: The outstanding fact of the petroleum production branch of the industry is, that at no time had there been a monopoly, or oven an attempt at monopoly in production. In svite of the monopolistic control of all the branches of the petroleum industry by the Standard Oil prior to the dissolution by judicial action on May 15, 1911, no monopoly existed in the producing end of the industry. The Department of Lustice stated in the dissolution proceedings that, "It will be scon that the 11. S~ TaFiuTToT* 12. Idem. 16 Standard is doing from 85 to 97.5r/o of the business of transporting, manufacturing, and selling of petroleum and its products in this country." The briof continued, "In 19Uo, the total production of crude oil bythe Standard interests in the United States was only about one-ninth of the national output and about one-fifth of the amount of crude consumed by the Standard interns." Although the Standard controlled a comparatively small portion of the total petroleum produced, it was, nevertheless, able to establish a monopoly in the other branches by controlling the pipelines. This problem is dealt with in greater detail in the next section on transportation. It is evident that production enjoyed more or less free competition. During the early period, the hazards of drilling and locating oil fields wore tremendous and the great integrated companies were most reluctant to invest money in a doubtful enterprise, especio.lly when the control of the industry was not dependent upon the control of the raw material. "Wildcatting" played a prominent part in the production of petroleum. However, as scientific methods wore developed the big integrated connanies entered the producing branch to a greater extent. In suite of these competitive conditions, these companies were able to exert effective control over production by controlling the crude stocks. The discovery of prolific pools was the single greatest contribution to overproduction problems. The exploitation of the Huntington Bench, Long Beech, and Santa Be Springs fields broke the market immediately, ruined hundreds of producers, forced abandonment of thousands of wells and distressed the entire oil . . , 13 industry. 15*.J. "Tse. United States Oil Policy, p. 107. 17 The discovery of the East Texas field in October 1930 created a ter- fific panic on the market. Pricos dropped entirely and the posted price was taken off. In August 1931 all wells were shut down for three weeks and martial law declared. In Becember 1932, and again in April 1933, the wells were closed to reduce production and bring order in the 14 curde oil market. Control of Stocks of Crude Petroleum: The stocks of oil began to accumulate with the depression of 1921-22 and continued to increase with the expansion of the producing area in the Los Angelas Basin in California and Smackover field in Arkansas. Only 1926 marked a decline in crude stocks in the period from 1919 to 1929. In 1927 the expansion of crude production in West Texas and the Seminole field (Oklahoma), resulted in a further upward movement in tho total stocks of oils reaching a peak of 691,000,000 barrels at the end of 1929. L-.ter devolopmants in 1;he Kettleman Hills fields (California), and the East Texas field, have resulted in drastic 15 mo?.sures to curtail production. TABLE 16 Stock of Crude Petroloum as of Docembor 31 (in thousands of barrels) 1923 374,512 1924 417,619 1925 431,646 1931 370,194 1932 339,875 1933 3§4,223 1934 337,254 1935 314,631 14. U.S. Dept. of the Interior, Petroloum Adm, Board Report on the Producing of Crude Petroleum, Dec. 1935. 15. Mineral Year Book. 136, p. 673. 16. Ibid, p. 685. 18 Most of the crude stock is hold by the big refiners. The maintenance of a reserve supply of crude petroleum stocks to meet current requirements and forestall any possible temporary shortage is a precaution usually taken by all the larger op erating c onpanio s. TABLE Stocks of Crude Petroleum. Held by the Old Standard Oil Group and Stocks Held by all Other r. Companies,Dec.31,1923 to June 30,1926.1'' (In thousands of barrels) Date Total Standard Conn an ies All Others United Quantity "~Por Cent Quantity' Per Cent States-8 of of Total Total 1923 374,512 195,614 52.2 178,898 47,8 1924 417,619 207,014 49.5 210,605 50.4 1925 431,646 193,065 44.7 238,581 55.3 June 30) 1926 ) 410,623 194,980 47.5 215,643 52.5 The proportion of crude stocks now owned by the Standard groups is approximately the same; although recent statistics are not available for this period, there are no indications that anything has taken place in the industry to upset the ratio. The importance of the ownership of stocks played a permanent part in the setting up of regulatory measures to curtail production and establish equitable moans of distrib¬ ution. The constant accumulation of stocks accompanied by low prices has led the industry to take cognizance of the situation 17. Fed"eral Trade Commission (1928) op.cit. p.Ill 18. Idem. The total U.S.figures include fuel oil in Cal. Fuel Oil is not included in Standard totals but if included for Standard Companies ir. California would increase the Standard proportion by, from 4.9 to 9.6 per cent. 19 and stiumulated ths adoption of control measures to .void over-production, These wore in some cases voluntary and in othors initiated by the State or Federal Governments. Lundholdings of Intergr-atod Companies - Their Interstate Aspects: The interstate aspect of petroleum production is further brought out by the landholdings of the different integr.-tod comp.nies. although it vr.s pointed out that no one company attempted to monopolize production, the integrated compinios, nevertheless, entered the field of production quite extensively as the methods of locating oil fields improved. 19 The Federal fr.de Commission found that in 1926, fifteen companies held 62.6 per cent of the total proven average. The following list diov/s the location of the holdings of oil lands of thirteen integrated companies in 1935. This list shows how these hold¬ ings were located in several states and in some instances in foreign coun¬ tries. 1. The .xtlanta Refining Co. Through subsidiaries has producing properties in Tex..s, Louisiana, Oklahoma, .rkansas, Kansas, Kentucky, Mississippi, Mow Mexico and Vonzuola. 2. Cities Service Co. Has 1 ,rge producing acreage in ..11 important oil states, the nost important producing properties being in Oklahoma, Kansas, T.xas: crude oil production, 1935, approximately 30,000,000 barrels. 19. Fed ;ral Trado Commission (1928) op.cit. p. 23. Those comp.nies were; South Peon Oil Co., Ohio Oil Co., Standard Oil Co. of Now York, Gulf Oil Go. 6£ Pa., Pr.iric Oil & Gas Co., Pure Oil Co., Continental Oil Co. (M..ino), Standard Oil Co. of New Jersey, Empire Gas & Fuold Co. of Del., Standard Oil Co. of California, Phillips Pot. Co., Shell Union Oil Corp., Sinclair Cons. Oil Corp., Texas Co. are the Standard Oil Co. of Indiana. 20 3. Consolidated Oil Corp. Combined properties include several nil lion acres of developed and undeveloped oil and gas lands, containing about 3,500 oil wells in Texas, OKI :no;-.n, Kansas, Arkansas, Wyoming, Virginia, Now Mexico, California and Colorado. Also hrs important holdings in Mexico, Venezuela, in Portuguese Africa ••]V: ir> Central Ar.sric . As of December 31, 1935, the company had approximately 8,500 producing wells, of which approximately 240 were gas wells. 1935 net production was approximately 26,000,000 barrels. 4. Gull Oil Corp. of Pennsylvania.' Gulf Oil onerates in most ox tLw principal oil fields in Texas, Oklahoma, Kansas, Arkansas, Louisiana, New Mexico, one also h«s interacts in Kentucky, Michigan and California. Also hag considerable production in Venezuela and Mexico. Production uf crude oil from approximately 6,150.wells in operation in 1935 (including royalty oil) was 0C,031,341 barrels. Net Crude production (excluding royalty oil) 52,273,155 barrels. 5. The Pure Oil Co. Has 165,000 acres aevolop-G in Illinois, Kansas, Louisiana, Michigan, Oklahoma, Texas, New Mexico, and West Virginia, with 4,900 producing oil wells and 200 gas wells. Production for year 1935 totalled over 22,930,295 barrels. The company owns a 75$ interest in the Orinoco Oil Co. (Venezuole). 6. She 3^1 Union Oil Corp. Through subsidiaries has large oil landholdings in California, the Rocky Mountain states, Mid-Continent field and the Southwest, including the East Texas fioic, Production in 1935 by subsidiaries and affiliates was 43,279,537 barrels net. 7. Socony Vacuum Oil Co., Inc. The corporation owns leases and lands in many of the principal producing fields in the United States of which approximately 273,000 acres are being actively operated. Gross production of crude oil by wholly owned subsidiaries in the Unites. States uuriiiG 1933 averaged 111,237 barrels per day. 8. Standard Oil Co. of California. Subsidiaries own,lease, or control proved or potential oil oil lands in the United States, South America, Europe, Arabia, Persia, ana the Dutch East Indies. For 1934 (193d figures not available) production was 37,901,258 barrels; daily average was 103,839 barrels. 9. standard Oil Co, (New Jersey) Subsidiaries own, lease or control, several million acres of proven and potential oil lands, in the United States, South America, Europe, and the Dutch East Indies. Company produced 21 9. Standard Oil Co. (Nov/ Jars a:/) continue 57,131,000 barrels of crude in the United States in 1034. and combined domestic and foreign production was 179,330,119. Has 11,962 producing oil and gas wells, of which 8,585 were in the United Statos, There were also additional 1,087 shut-in wells. 10. Standard Oil Co. (Irnia::n) At the clusw of 1 93^ the company held all rights under 1,539,881 acres of land in nine states, of which 36,242 acres were producing leases, 4,510 proven but not producing and 1,499,129 acres were undeveloped. As of December 31, the company possessed 2,152 net wells'which during this year, produced a total of 19,316,683 net barrels of oil,compared with 14,205,530 barrels produced in 1934. 11. Sun Oil Co. 63,000 acres developed land in Ohlahor a, Kansas, Tones, New Mexico and Michigan} 2,«„54,CC0 acres undeveloped land in Oklahoma, Kansas, California, Ticas, Arkansas, Mississippi, New Mozico,Michiran. 12. Ten as Corporation, At the en a of y-mr 1935, acreage in the United. States owned in fee was 775,905 acres, under lease 5,823,531 acres and holdings in foreign countries 792,196 acres or a total of 7,391,632 acres; the number of producing wells was 7,265. Total gross crude oil production in 1935 was 4-5,706,858 barrels as compared with 37,418,308 in 1934. 13. Tide Water Associated Oil Co. Subsidiary and affiliated companies owned or leased 508,351 acres undeveloped land in twelve states; and 97,94-8 acres developed land in Pennsylvania,Illinois, Kansas, Arkansas, Oklahoma,Texas, Now Mexico, California, Louisiana. Has 3,352 oil producing wells with production for 1935 of 19,117,800 barrels or about^ 53,378 barrels daily. 22 SUMMARY From x small beginning in only ono stato (Pennsylvania) in 1859, oil producing has spror.d to tvranty-threo states. However, as we have seen, most of tho oil rofinod originates in throo states, Okla¬ homa;!, Texas end California. Those have produced on tho aver ego, over 8o|! of tho toal output in the Unitod States. Those throo states supply petroleum to rofinorois in thirty-one st?„tos. The total amount of petroleum in intor-stato commerce in 1935 amounted to 40.96^ of tho total product. In the e \rly stages of the de¬ velopment of oil fields competition was tho general rulo. The integrated companies, due to control of transportation and refining facilities, coup¬ led with a definite prico policy, v/ere able to control not only the output of these wells, but also their accumulated stocks. With tho development of scientific methods of locating oil fields and improved techniques of drilling wells, there is an increasing trend towardtho contraiization of holdings by the integrated companies. According to tho Petroleum Register of 1938, these holdings cut across stato linos. CHAPTER IIT 23 GROWTH AKD DEVELOPMENT OF 'lETDIDJCt I. portan ce of Ref iniril. Pruc e an ao: Crude petroleum is of relatively little value until it has been put through the refining process. It is through refining that we are ablo to extract from crude oil the more socially essential products, among which gasoline, fuel oil, 1 lubricants, and kerosene are most important; gasoline ranking p first and lubricating oil second. Refining of petroleum, as such, is not a separate proc¬ ess, but is part of an integrated process which includes production, marketing and transportation. The industry has made a constant effort to increase the percentage yield of refined products from petroleum. In 1859, petroleum was used chiefly for medical purposes, later kerosene became the principal product, With the introduction of the automobile, it was replaced by gasoline and lubricating oils. In 1880 kerosene accounted for 75% of the total. In IvSC it was only 5% of the total yield. While the importance of kerosene declined rapidly, the importance of gasoline increased at a tremendous rate. Its percentage yield 3 rose from 10% in 1909 to 40% in 1930, 1.Goo. W. Stocking, The Oil Industry and the Competitive System (l92o) up, 238-252, 2. Erich W. Zirmerrru, World Resources Industries (1933) pp. 508-510. 3. Idem. 24 The percentage yield of rvl irorl products has increased ' ith the discovery of scientific methods of refining; Methods of Rofinjn,-, and their Yields. t "Tominr" or "skimriinr" yields about 10$ of gasoline. "Straight run" " " " 25$ "Crackir.g" " " 65$. The r ost revolutionary innovation in the netroleun industry; is hydrogenation. Through ii"rnru«'Onntion it is possible to convert coal into oil. I u make s possible and reasonably economical a gasoline production from crude oil about twice as great as present production,leaving margin for the production of other petroleum products (this patent is controlled by I.G. Farbe'fnindustrie, Germany, n:u. St arm fa of New Jersey).5 The yield of lubricating oils was increased by polymerization which permits the recombination of molecules 6 and increases the recovery of lubricating oil greatly. The application of these methods of refininw was of great importance to the petroleum industry. Cracking alone has doubled the yield of gasoline per barrel of crude. It conserved in round figuros 7,000,000,000 barrels of crude, valued at $500,000,000. Furthermore, it enabled the industry to keep pace with the 7 rapid development of the automobile industry. Dependence of Refining on Trsui.spo.fetiOh: The number of refineries has increased greatly since 1914. The number of refineries in 1914 was 176; this increased to 320 in 1919, 362 in 1923, and 638 in 1935, 47" I bid", ~pp. 511-512 5. Walter H. Voskuil, Minerals in Modern Industry (1930) pp o120-121. 6. American Petroleum Institute, American Petroleum. Industry, p. 91. 7. Ibid, p. 94. 25 Tlio location of the refineries has changed with the intro¬ duction of pipe lino transportation of gasoline. As shown in tho previous section the difference between the cost of pipe lino transportation and any other inland transportation was very groat. Tho refineries found it, therefore, more economical to locate tho rofinorios nearer seaboards or tho market, rather than tho source of supply. However, tho shipment of refined products by pipe lino has changed tho situation..8 Interstate Aspect of Refining: The interstate aspect of refining is shown in the physical integration of tho industry, tho financial int -gration as well as tho location of tho refineries. Although petroleum is produced in twenty odd states, there are thirty-seven states that have refineries(see-Table 2). This means that petroleum must bo shipped from other states to be refined. The refinery capacity of the nation exceeds the crude oil production. In }922 refining capacity exceeded pro¬ duction by 35$^, in 1928 by 25$, in 1931 by 52$ and in 1935 by about 50$. ^ Tho cpaucity of Texas, California and Oklahoma, which produce over 80$ of the crude is only 55.4$ of the total United States capacity, This, howovor, does not mean that the three states actually refine 55.4$ of tho total; actually, in 1935, Oklahoma, Tern,- ?-.nd California refined 51.3$ of the total (see Table 4). 8.Erich"~W~Zinmo"rnan, op. cit. p. 515, 9. Idem 10. C pacify for 1935 was 1,486,426,000 barrels(see Tabled.), production was 999,942,000 barrels.The difference between those figures is slightly ov -.r 50$of the total production. 26 If we examine closely Tables 3 and 4 vo find that there was an extensive movement of petroleum across state lines. With the exception of California every state either received or delivered petroleum, or both, to other states. In 1934 Texas imported 59,442,000 barrels of crude from foreign countries, and from Arkansas, Louisiana, New Mexico and Oklahoma, while it exported 2,02,493,000 barrels to seventeen states. Furthermore, New Jersey, which does not produce any 11 petroleum, refined 60,135,000 barrels. It receives its petroleum from eight diffdrent states, Georgia, which did not produce anything, refined 13,712,000 barrels, while Indiana, which produced only 757,000 barrels, refined 58,767,000 barrels, Oklahoma, which produced 185,340,000 barrels, refined only 57,442,000 barrels and imported from Kansas and Texas 3,161,000 barrels, After a close analysis of these figures therecan be no doubt of the interstate nature of refining. This is nop only evident in the movement of petroleum from state to state, but also in the corporate control of the industry, (For detailed analysis, see Financial Section). Below is given the number of refineries and the refining 12 capacity of some of the largest integrated companies. 1. Atlantic fining Co. Operates 4; daily combined capacity - 97,000 barrels. 2. Cities Service Co. Subsidiaries operate 11; daily combined capacity 103,000 barrels. 3• Conso1idatod Oil Cere. Apprcxinatelyl87,000 barrels total daily capacity. TT7~NevFToroey~marked" fourth in the refining of petroleum, being exceeded only by Texas, California and Pennsylvania. 12. Petroleum Register (1933) 27 4. Gulf Oil Corn. of PennsyIvvii^ Operates 8, which rsfi.no.•' approximately 62,000,000 barrels of crude oil during 1985. 5 • The Pure 0i1 Cjo. Operates 7, daily combined capacity 76,500 barrels. 6.« dhel). Prior Oil Corn. Total iiitcJre of crude by t.v 3 refineries in 1935 was 77,539,727 barrels cormnrcd with 66,863,210 in 1934, 7. Socony Vacuum Oil Co., ire. The corporation and its subsidiaries operate 17 refineries in the United States, with a maximum daily capacity of 286,000 barrels crude oil and 131,000 barrels of cracking stock. These p1 ants produced approximately 72,000,000 barrels of refined products and 4,000,000 barrels of lubricating oils during 1934. 8• Standard Oil Co. of California Richmond, Calif., 100,000 barrels total capacity; complete refinery El Segundo, Calif., luG,C0C barrels, total capacity; complete refinery Bakersfield, Calif., 25,000 barrels total capacity; topping plant used in conjunction with Richmond refinery. El Paso, Texas, 14CC0 barrels daily aapacity. 9• Standard Oil Co. (N»w Jersey) Plants "owned and operated" by subsidiaries in the United States ran approximately 119,000,000 barrels of crude oil in 1934. Combined domestic and foreign refinery crude runs averaged 644,751 barrels daily. Operates refineries through subsidiaries in the United States, Canada, Cuba, Trinidad, Mexico,Venezuela, Columbia Argon tin 3, Peru, Norway, Bolivia, Pol or * , England , Rumania, * Frureo, Germany, Dutch East Indies and Dutch West Indies. 10. Standard Oil Co. (Indiaiia), Operates 5; Total capacity 226,000 barrels daily; total crude oil run was 66,520,212 barrels as against 51,294,427 in 1934. 11 • Standard, Oil Co. (Ohio) Cleveland," Ohio, 20,000 barrels capacity 17,000 barrels daily throughout; Toledo, Ohio, 12000 barrels, capacity 5,500 barrels daily throughput; Lima, Ohio, 7,500 barrels, capacity 3,500 barrels daily, throughput; Latonia, Ky., 8,000 barrels,capacity 6,500 barrels daily throughput. 12o Sun Oil Co. Marcus Hook, Pa., 63,000 barrels capacity; Toledo, Ohio, 14,000 barrels capacity; Yale,0kla. 5,000 barrels capacity.. 28' 13. Texas Corpora tj on Operates" 20"total capacity 236,000 barrels, 11, Ti^e Water Associated Oil Co. On a i* cites 4; crude capacitor 126,500 barrels, and 60,000 cracking up. Tho above list shows very clearly that the extent of the refining operations of the various ccPpanies obviously cannot be restricted to any one location. This can be especially seen in the case of the Standard group which, as shows above, operate plants not only throughout the United States, but also throughout the entire world. >jc jp jf: >jc CHAPTER IV 29 TRANSPORTATION OF CRUDE OIL AND REFINED PRODUCTS 1• Problem of Transnortation The areas in which crude petroleum is produced and refined, and in which the refined products are consumed, are not identical.. The preduein. areas are often very remote from the population or industrial centers which consuned0the refined products. The refining areas are much wider than the producing areas, while the consuming areas extend throughout the United Stares and foreign territories. For instance, production is limited to nineteen states,! with Texas, Oklahoma and California producing (in 1934) p 81.1% of the total production for United Suates , and refining was carried on in 28 states, with some of the non-producing states, such as New Jerssy, refining 64,247,000 barrels. Since the great bulk of the petroleum is not used in its crude form, but is sent to the refineries which, as was just pointed out, are not always located at the wells - - - there arises, therefore, a problem of transportation. „ 2. Methods of Transportation - Historical: Petroleum and its refined products are transported by means of pipe lines, tank ships,.tank cars and tank wagons. The oldest method of transporting petroleum was in wooden barrels, which were loaded on horse wagons. These soon gave way to the railroads. 1. Table I. 2, Table II. 30 However, the liquid character of petroleum. made it possible for the industry to devise a method of inland transportation of its own which from its very inception began to assume a monopolistic character. Until about 1927 the pipe lines wore utilized exclusively for the transportation of crude petroleum. Since then, however, they have also been used for the transportation of rz gasoline. In 1935 the entire system consisted of 112,000 miles of pipe line., 751 tank vessels (427 to 500 tons or over)., 150,000 railroad tank cars and 130,000 trucks(tank wagons). The pipe line system alone, with terminals, storage,etc,, represents an invest¬ ment of $2,000,000,000 or one- sixth of the industry's investments (pipe lines alone represent an investment of almost $1,000,000,000 and does not serve any other industry. 3• The Pine Line System - Its origin and development: The first successful pipe line, four miles long, was laid 4 in the oil pools of western Pennsylvania in 1865 six years after the discovery of the Brake Pool, and in 1879 the first interstate line was built by the Tide Water Oil Co. This line connected the 5 Pennsylvania fields to the Atlantic Seaboard . The economy of pipe line transportation has caused a shift in the refining area. Prior to 1876 crude petroleum was refined at the source of production,. But with the development of pipe lines., in order to reduce as much as possible the freight charges on the shipments of g refined products to the center of consumption^ 3. American PetroTeum Institute-American Petroleum Industry P.49 4. Federal Trade Commission, Report of Pipe Line Transportation of Petroleum, (1916) p.2. 5. American Petroleum Institute,American Petroleum Industry (1935) p.51 6. Federal Trade Commission, op. cit. p.3 31 the refineries were located near large consuming centers, such as Clove- land, -fottsbirgj. Biffz;p. Ba;to,pre. jo;ade5 ;joa amd Mew York. As the producing area shifted from the Appalachian field to the Mid- Continent field the pipe lines were extended to that region, creating a net of lines running from the Gulf Coast to the Great Lakes and to the Atlantic Coast. Since the construction of the first interstate line in 1879 the pipe line system developed at a very rapid pace. This development was accelera- 8 ted especially sinco 1916, marking the extension of the Mid-Continent field and an increase in production. 4* Growth of Pipe Line System; In 1920 there were 49,000 miles of line. This increased to 75,000 9 miles in 1927, to 100,000 miles in 1932, 89,000 miles af which were eng .ged in 10 ' "11 interstate commerce, and increased to 12,000 miles by the end of 1935. 5« Pipe Lines as Common Carriers; "A pipe line", as the term is used in the oil field industry, is not only a line or lines of pipe, but consists of the whole plant which is used to convey oil from one point to another including initial, intermediate and terminal. 7. George Ward Stocking, The Oil Industry and the Competitive System (1925) p. 226. 8. Federal Trade Commission, Petroleum Industry, Prices, Profits, and Competition (1928) p. 18. 9. Idem. 10. JDrick W.Zt amerman; :/orId Resources and Industries» (1933) p. 505 11. American Petrel sum Institute, cit. p. 49 12. George V. Stocking, op. cii», p., 213 (quotation from Towl, Piepolino, Existing Facilities and Future Needs, American Petroleum Institute, Key, 17, 1920) 13. United States v. Ohio Oil Co., et - 234, U.S. 548 v 32 tankage system., power plants., fitting, valves, system of communication between stations and all other things necessary to safely and expeditiously transport the oil from one point 12 to another-. In the main, the extensive pipe line system is like a railroad (see map) and its interstate character was recocgnized as early as 1906 when the pipe lines engaged in interstate commerce (and most were, as will "be shown later) were were declared common carriers and placed under the jurisdiction and regulation of the Interstate Commerce Commission in accordance with the act to regulate commerce, as amended June 29, 1906 ( the Hepburn Act). The Supremo Court upheld the act in a decision rendered on Juno 22,1911, as in the cases of the United States vs.Ohio Oil Co. ot nl,, in what are known as "The Pipe Line Cases. 6. .Competition of Pipe Linos with 0th Means of Transportation - Its Interstate Character. Although the pipe lines enjoy an advantage in inland trans¬ portation of petroleum, the competition between the various means of transportation is very keen. This is obvious when we consider that the industry contributes greatly to the total traffic of the railroads and freight shipping companies. In 1934 it paid the railroad companies about $230,000,000 in freight con stituting .. charges 10$ of their total revenue. In the same year oil tank ships of 1,000 tons or over constituted 26.5$ of America's entire seagoing merchant marine tonnage.15 12-.Georme W. Stocking, op.oit. p.213 (quotation from F.H.Towl, Pipeline, Existing Facilities and Future Needs,American Petroleum Institute, Nov. 17, 1920). 13. United States vs. Ohio Oil Co., et al 234, U.S. 548. 14. American Petroleum Institute, op.cit. p.49 15. Idem. 33 However, most of the tank ships are owned directly or indirectly by the lar large integrated companies. For instance, Standard Oil Co. of New Jersey in 1935 owned marine vessels having a dead weight tonnage of 838,239: Sun Oil had vessels of 200,000.^ By far, the cheapest method of transportation is by water. Ocean tanker charges from the Maracaibo Basin, Venezuela to points on the Atlantic Coast of the United States during the period of 1927 to 1930, averaged 250 per barrel, comapred with pipe line charges from Mid-Continent Gulf region to the Gulf ports amounting to 490 per barrel. The distance from Venezuela to United St tes ports is greater than the average distance from pro- 17 ducing wells to gulf ports. This lower cost has been a great f .ctor in in¬ creasing the transportation of oil by water, the chief destination of which is the atlantic Coast. In 1935, 509,000,0000 barrels of oil reached this Coast. In 1934 the pipe lines transported about 590 million barrels of crude and refined oil. Railrca ds transported 1,822,005 carloads and tank ships carried 18 259,000,000 barrels. TABLE Railroad Traffic Originated and Revenues from Petroleum Products (1934) A.C.C. Freight Commodity Statistics, Carloads Crude Sasoline Fuel and Road Oil Lubricant s 98,379 1,280,206 319,690 123,730 Revenues $ 9,406,266 172,517,432 33,393,764 17,003,160 TOTAL — 1,822,005 $ 232,320,622 As can be seen, the bulk of the traffic by rail is in the refined pro¬ ducts, The increasing importance of water transportation is .seen from the f olio rina d .ta: 16. Poor's ...inuul. Indu.str_.il Section, 1936. 17. U.S. Traffic Com. report to the house of Rep. on Crude Petroleum and Its Liquid Refined Products, Report ff30, 2nd Series ( iLshington 1932) p.2. 18. National Petroleum Nev/s. Feb. 5, 1934 pp. 385-390. (Tank c_.rs vary in capacity from 6,000 to 12,000 gal, while the most common is 5,000 gals, it is practically imp >ssible to reduce .11 the above figurs to a common unit). 19 Ibid p. 397, 34 In 1932, 185,000,000 barrels of crude wore shipped by water. In 1933, 233,000,000 " " " " " In 1934, 259,000,000 " " " " " In general, 31$ of all crude and 58$ of the refined products are transported by water, 12.7$ crude is transported by rail and the remain- 20 der, 57.3$ by pipe line. Corapetion becamo even more acute with the introduction of pipe lines and tank trucks as means of transporting gasoline. In 1928, the railroads carried 95..3$ of the gasoline production. In 1934, its share decreased 21 to 65.7$. ."/hen the motor carriers took care of 25.4$ and pipe linos 22 8.9$ , To meet this compction tho red lroads announced reduction their . ' 23 rates. Furthermore, they opposed the granting of permits to gasoline truck operators, arguing that it would endagger public safety as well 24 " as public interest. The most formidable competitor of the railroad, however, is the pipe lino with which the railroad can hardly compote. Although the trucking business took away about 25$ of their business, the truncks cannot compete mth the railroads on long distances. A.S.Junes 25 in an articles, in the Nation .1 Petroleum Mews, points out that the transport truck loses advantage over railroad at about 180 miles-. 20.. Ibid. P.. 393 21,. In an attempt to maintain a dominant position in tho transportation of gasoline, the railroads announced numerous reductions in freight ch .rges whichwore approved by the Interstate Commerce Commission, N..tion .1 Petroleum News, July 22, 1936, p. 24-D 22. National Petroluem News, July 29, 1936, p. 19. 23. IBID, July 22, 1936, p. 24-D. 24. National Petroluem News, July 29, 1936, p, 19. Under tho ^otro Curriers Act, gasoline truck operators must apply to the Inster- steta Commerce Commission for a permit. ^'S. James, N .tional Petroloum News, Nov. 27, 1935, pp. 18-20o 55 This conclusion is contained in a report on an analysis of truck¬ ing costs in several southern states prepared by the Traffic Depart inert of one of the major oil companies operating in that area. It suns up the situation as follows; "1 - A truck cannot make more than a round-trip of 180 miles a day; after this distance is reached, it is necessary to either place two drivers on the unit, or allow the truck to remain over¬ night at the destination end of the journey. "2- a truck's..life is not based on time, but on usage. These long hauls run up mileage in an astounding manner. Counting 300 operating days a year, a point £50 miles distant,if supplied daily, would put 150,000 miles per year on a unit. It would be almost fully depreciated at the end of the year. "3 - Rail rates start at a high figure, and progress rapidly up to 100 miles; thereafter they progress sldWly. The high rates for short distances charged by rail carriers make trucking profitable. If this condition is remedied, investments in trucking equipment becomes unnecessarj?-, - Once the investment is made and equipment and facilities charged off through depreciation, the cost of operation becomes less; instead of having total costs to apply against the equipment, only out-of pocket costs are chargeable." 7. Ownership and Control of Pino Linos: From the earliest beginning there ensued a struggle for the control of the means of oil transportation. G.H.Montague points out that from 1870 till 1877 the struggle of the refiners was 26 chiefly for transportation facilities. 26. MnrtnniH. G.K. The Rise and Progress of the Standard Oil 3o. passim. " ~ 36 "From 1874 to 1877 the large refiners sought hoth to obtain special rates fron the railroads and to organize into systems for their own advantage the bewildering network of pipo lines that had been building since 1869." In the struggle for control of the means of transportation the Standard Oil group has cone out victorious, "In the beginning crude petroleum, destined to be shipped to more distant points was gathered by pipe lines and transferred to railroads at points near the oil pools for shipment to such cities as Buffalo, Now York and Philadelphia, The Erie, the New York Central and the Pennsylvania Railroads had branches in the oil fields and there was keen competition fob this business. The South Improvement Co, which was controlled by the Standard interests, obtained railroad rebates varying from 40 to 50$ on the freight rates for crude and from 25 to 45$ rebates on refined products. The gross freight rate at the time on crude from common points in the Pennsylvania oil fields was 80 cents per barrel to Cleveland and Pittsburgh, $2.56 per barrel to New York City, $2.41 per barrel to Baltimore 27 and Philadelphia and $2.71 per barrel to Boston." Obviously a company paying regular freight rates could not compete with the Standard. Furthermore, the railroads usually feJl short of tank cars when such were requested by independent 28 companies, but never when requested by the Standard group. The South Improvement Cumo-my created such a scandal that the 29 Pennsylvania legislature was forced to revoke its charter. 27. Federal Trade Coi^.iission (1928) op cit. p.34 28. Geo. W. Stocking, op. cit. p. 29. The South Improvement"Ho. was organized in 1872 and was dissolved a few months later in the same year. 37 In 1874 the Pennsylvania Railroad interests formed a combination of pine lines which was absorbed by the Standard group. By 1877 30 the Standard dominated the pipe line.business. In 1878, the independents in an attempt to free themselves from the Standard domination formed the Tide Water Pipe Co.(Ltd.) « This was the first important trunk line which transported petrol¬ eum long distances. No sooner did it prove profitable than the 31 Standard stepped in and secured an interest in it. By 1900 the only important line not under the control of the Standard was that of the Pure ^il Co. which ran from the 32 Appalachian field to the Delaware River. The advantage of pipe line over rail transportation is so great that no refining company has been able to attain any importance in the industry without the use of pipe line 33 facilities, 30.Federal Trade Commission, op. cit. p. 34 31, Idem 32. Idem. 33, Comparison of Railway Tariffs with Pipe Line tariffs, on Crude Oil in 1915 from the Crushing Pool to Specified Points (a). Shipping Point Destination R.R.Rate Trunk per Pipe bbl. Line per bbl. Margin Crushing Pool Neodesha,Kan. Sugar Creek,Mo. Wood river, 111, Whiting, Ind. Cleveland,0hio Pittsburgh,Pa. Buffalo,N.Y, Philadelphia,Pa ✓ Marcus Hook, Pa, Baitimore, Md. Bayonns, N.J. Constable Hook, N.I New York (Brooklyn) Wost Dallas,-Texas Fort Worth,Texas Port Arthur,Texas (aj ttspflW1 1 i'UHfxFeceral Trade Commission. Pipe Lino Transportation of Petroleum,Feb, 28,1915, p.23, $0,311 $0,200 $0,111 .373 .280 .093 .544 .340 ,204 .522 .420 ,202 „ 979 .580 .399 1.054 6590 ,454 1,054. ,590 .464 1.348 ,700 .648 1.348 .685 .663 1,320 ,700 .620 1.403 .700 .703 1.403 .700 .703 1.403 .700 .703 ,392 ,200 .192 .329 .275 .054 .465 .400 .066 38 The emctment of the Hepburn Act in 1906 making pipe lines common carriers and the validation of this act by the Supreme Court was an attempt to check the Standard's control over pipe lines. However, these were of little help to the independents. The pipe line companies' regulations requiring minimum shipments of 25,000 to 100,000 barrels, in effect, destroyed the very thing the Herburr Act tried to accomplish. Furthermore, they accepted deliveries only to certain established delivery stations usually located at points at which their affiliated refineries were located. Previous to 1911 Standard's domination of pipe line was indisputable. With the dissolution decree, the Spaniard continued to dominate the pipe line branch. From 1911 on i«-t owned and controlled from two to three times the pipe line mileage of all independent companies combined, while from 1920 to 1926 the independent companies'interstate mileage increased.31$, that of the Standard companies increased 60$, TABLE Pipe Line Mileage of Interstate Pipe Line Companies Showing Standard and Independents Separately, with Index Lumbers based upon 1920 as 100, December 31,1920-26.34 Standard Independents Total Year Miles Index No. Miles Index No. Miles_ Index . 1920'33,504 100 15,208 ' 1C0„ ' 48,712 " 100 1921 40,238 120 15,022 99^D 55,260 113 1922 41,505 124 15,844 104 57,349 118 1923 49,264 147 15,496 102 64,760 133 1924 49,359 147 18,826. 124 68,185 140 1925 50,819 152 19,190 126 70,009 144 1926 53.442 160 19,859 131 73,301 150 34,Federal Trade Commission (1928) op.cit. p. 35. 35,The decline of mileage for independ. lines in 1921 was due to the purchase of one-half interest in the Sinclair Pipe Line Co, by the Standard Oil Co.(Indiana).In this table oZ% of the mileage is credited to the independents and 50$ to the Standard group. 59 Tha Rayburn House Committee on Pipe Linos in 1932 reported that twenty large and medium size integrated units and their subsidiaries (among whom were included the Standard group, Shell-' Union Oil Corp., Texas Oil Corp. and others) owned and controlled 78$ of the mileage transporting crude petroleum and 100$ of the rz £ mileage transporting gasoline. 8• Effect of Control of Pine Line on Interstate Commerce: The importance of pipe line transportation to the industry is such that it is perhaps the most important branch in an integrated unit. Any company without such facilities is at a great competitive disadvantage and runs the risk of being forced out of business. The exorbitant rates charged by the pipe line companies plus the high minimum shipment requirements has resulted in a complaint being lodged with "the Interstate Commerce Commission in 1934. An investigation of conditions was ordered and was conducted by Examiner I,P. Kelley. The pipe line companies immediately requested a voluntary 25$ reduction in rates. However, Examiner Kelley, on the basis of his findings recommended a 65$ reduction of the rates nrevailing on December 37 31, 1938. He stated that: "The margin between the costs of pipe line transportation and the published rates, must be narrowed, or else, those refiners who do not own pipe lines 38 will be forced out of existence." Mr. Kelley further pointed out that the records show dividends paid by seventeen pipe line companies from 1929 to 1933 inclusive equalled 98$ of the total 36. Renort on Pipe Lines. House Report No.2192(72nd Congress, 2nd Session, 1933) Part I, p. 27. See also Supra, p. 37. National Petroleum N .-ws, April 1935, p. 11 38. Idem 40 aggregate investments of all those comoanios, as of 39 December 31, 1933. Ho also recommended that the minimum shipments be reduced to not more than 10,000 barrels. The effect of this relationship of pipe lines to the other branches of the industry was summed up by Congressman Marland as follows: "Producers lose money. The pipe lines of the integrated units make money. What does it mean to an integrated company to lose 15 cents a barrel,.even if the pipe lines that are part of the integrated units transport only half the 40 production? Nothing." 9, Divorcement of Pine Linos - Application of Commodity Clause: In 1935 a mov«uwiit started afoot to divorce pipe lines from the industry, Senator McAdoo and Representative Ford of California introduced bills applying to pipe lines the princi¬ ples of the commodities clause of the Interstate Commerce Act, Sect, I (8) intended to prevent the transportation of petroleum oil or any liquid product thereof owned by the pipe line or owned and produced by any one having an interest in the pipe 4-1 line. Momentum to this agitation has been given both publicly and privately by railroad executives anxious to control a larger share of this transportation business than at the present is afforded them. In various oil producing states legislative measures to accomplish these results have been proposed and each 42 year the support of such proposed legislation increases. 39. Ibid. July 15, 1936, p.20 40. Ibid, April 19,1933 pp. 21-22 41. Ibid May 10, 1932 p. 15 42. Ibid duly 17, 1935, p. 28. 41 On April 3, 1933, President Roosevelt requested the enactment of emergency legislation divorcing pipe lines, engaged in inter¬ state commerce, from the other branches of the industry. Section 9C of the National Industrial Recovery Act embodied the request which empowered the President to institute proceedings to divorce pipe line companies from any holding company which by their high rates tend toward monopoly. Charles I, Francis, lawyer, in an address before Mineral Section of the American Bar Association, Los Angeles, Jul;' 15, stated that, "It nay be considered as settled that the power of Congress is ample, if properly exercised, to accomplish a practical divorcement of the interstate transportation of oil from the business of producing, refining and marketing crude 43 petroleum and its products. In 1933, Congressman Marlard has gone even a step further and demanded that United States control the oil pipe lines. According to Marland the Interstate Commerce Commission should be empowered to say what field, or even what well may be connected with the interstate transportation system of til pipe lines, whose oil should be moved, in what quantity and 44 under what conditions. 43. Ibid, July 17, 1935, p.30. 44. Ibid, April 19, 1933, p. 21, A.E.Heiss,United States should control the oil pipe lines, believes Congressman Marland. 42 CHAPTER V MARKETING,ITS PROBLEMS AND ITS ASPECTS. 1. Interstate Charge tor of an Intom-atad Industry: The petroleum industry is peculiar insofar as it is cne of the most, if not the most, integrated industry. Most of the important firms, such as the Standard Oil Co. of New Jersoy, .Indiana, etc., the Texas Corporation and others, with the aid of their subsid¬ iaries, engage in producing, transporting, refining and marketing without the aid of middlemen. The physical integration of the petroleum industry has become an established fact and accepted, not only by experts in the 1 field, but also by high officials in the petroleum industry.. W.T.Holliday, President of the Ohio Standard, in an address before the Kentucky Oil and Gas Association, August 7, 1935, stated:2 "Another peculiar characteristic of the industry is the 'liquid' quality of its raw material and its products. Pipe lines carry the oil to the refineries, the liquid flows continually through the refineries and pipe lines or tank cars, or trucks, carry the product in a 'steady flow' to distributing outlets in every town and at almost, every street corner. When a barrel of oil comes from a well it almost literally may be said to push a barrel of finished products onto the markets.. 1. Dr„ Stocking, in an affidavit presented to the Justice Depart¬ ment in a case involving the question of interstate commerce in petroleum, said:"Crudo petroleum normally moves into interstate commerce in one continuous process. It is not feasible to establish a point where it can be said that a definite stoppage in transit from well to market occurs." 2. National Petroleum News. Aug.7,1935, p.19 (single quote ours). 43 "No other industry has such complete integration, such intimate contact among production of the raw material, manufacture and sale. This is » natural integration, physical and economic in character, and not due to any mere vertical integration of particular corporations. The reservoir energy of an oil pool and the force of the law of capture, exert an hydraulic pressure through the stream of liquid, directly upon the ultimate markets." John A. Lapp, a member of the Petroleum Labor Policy Board 3 states: "Petroleum is in one continuous stream from the time of its production until it is resolved into its various products, at the refineries and thereafter continues, as a rule, in an uninterrupted stream to the retailers," The interstate aspect of the petroleum industry becomes evident from its high degree of integration,. As we have seen,, it is indicated not only in the physical and vertical integration, but also in the geographical distribution of oil,. Petroleum,which is produced in about twenty states, is refined in some thirty odd states, and the final product is distributed to all the forty-eight states of the Union. Of the twenty states that produce petroleum, Texas, California and Oklahoma produced in 1934, 83.6% of the total, refined about 50% of the total and consumed only 15.4% of the total refined products. New York consumed 10% of the refined product but produced merely 0.4% of the crude. The six big industrial states, New York, Pennsylvania, Ohio, Michigan,Indiana, &j-d Illinois,. consumed 36.4% of the total gasoline produced, but produced only 4% of the crude petroleum.4 3. Application of the Wagner Act to the Petroleum Industry - John A., Lapp (Tentative Draft, 1935). 4.Hearing before Sub-Committee on Interstate and Foreign Commerce, House of Representatives, 73rd Congress. 44 It is obvious that petroleum which, next to coal, is the greatest source of power, will be consumed largely in the industrial states while the bulk of it is produced in more or less agricultural centers* It is again evident that a product which is essential for the national economy, and whose production is quite localized will have to pass in interstate commerce before it reaches its destination. In the previous chapters, it was shown that eao'k branch of the industry is engaged in interstate commerce. It therefore, follows, that the whole of the industry is engaged in interstate commerce. The whole industry, one may say, is crystallized in the marketing branch of the industry. Because of the nature of the industry, the marketing problem can best be discussed in two sections: (1) Marketing of crude petroleum, and (2) Marketing of refined products. 2. Marketing of Crude Petroleum - "Posted Price." i As wo noticed before, the integrated companies were not too eager to control production, so long as the hazards connected with locating oil wells were great. However, scientific discoveries soon lessened the risks and the companies began to invade the producing branch of the industry. In the early years crude petroleum was bought and sold on Oil Exchanges. This method, originated in Pennsylvania in the early seventies and continued 5 through the early nineties. During this period the market was wildly speculative and gradually the proportion of crude sold upon the Exchange decreased until - "On January 23,1895, the 5, Federal Trade Commission, Prices. Profits & Competition. (1928) p. 101. Soop Purchasing Agency of oil City, on behalf of tho Standard Oil Co., posted a notico th.it thereafter tho prices paid by it to oil producers will bo such as the market of the world will justify but will not necossarily be the price 6 bid on tho Exhcango for certificate oil." Tho Soop Purchasing Agency pur¬ chased for the Standard Oil Co. 80 per cent of tho crude oil produced in Penn¬ sylvania and Ohio, and through its position fixed the price of crude oil in the oil regions, This led to the new method of marketing crude petroleum, ifposting prices" by which the companies posted the price they were willing to pay for crude oil at the producers' tanks. " Tho bulk of the crude petroleum, not produced by companies th-.t refine their own crudo production, is regularity sold at posted prices to a comp .ratively small number oflargo crudo oil purch asing companies are also eng..god in tho branches of tho petroleum industry, such as crudo po- 7 troleua production, rofining and marketing. Posting the price is not tho only method of purchasing crude. In Califor¬ nia, for inst.jico^ it is quite common to purchase crude on contr.ct. Tho con¬ tract may call for .fixed price, or -.How for fluctuations with changes in tho 8 posted price. It extends usu.-lly over . year. 3. Dominance of Integrated Groups; The groat bulk of crude is bought from tho producers at the price posted at the oil wells by the 1 .rge crude petroleum purchasing companies. In 1926 the Federal Trade Commission found 6. C.H. Montague, "The Pi so and Progress of the St'ind ird Oil Co." p„ 131 7- Federal Trade Commission (1928) op, cit-, 8, Ibid ^ pp • 101-1021. 46 that there were ten important crude purchasing companies "belonging to the Standard group, seven large independents and a number of smaller independents. In 1924 the Standard purchasing companies bought 32. oh of the total output of the country; in 192b, 30,5-,i and in the first half of 1926, 31.1^. (These figures include only one- half ofthe purchases of the Sinclair Company.^ The independents purchased 17.5-5 of the crude in 1924, 17.2h in 1925 and 20, in the first half of 1923. It becomes obvious that, irrespective of the number of producers, the product is controlled by a few companies and especially by the Standard group. The importance of the Standard in the control of the raw product cannot be exaggerated. Prior to the dissolution decree, the Standard, according to Dr. Stocking, controlled OOyS of the business carried on in the field of transportation, refining and marketing.*0 rjy virtue of such a control, it was able to exert a dominating influence over the prices of the crude ^roduct. The dissolution decree^id not affect the supremacy of the Standard in the petroleum industry. It still is the price leader of petroleum and its products. "The producer of crude petroleum, and the consumer of gasoline, are both at the mercy of the Standard interests. The crude petroleum supply and demand conditions were suoh in '.yarning during 1921 that, had there been free competition, the refinery prices of gasoline and other products xvould have been as low, or lower, than those in the mid- Continent field. "H 9. Standard Oil Co. of Indiana had purchased one-half interest in the Sinclair Oil Co. in 1921. Ibid p. 107. 10. Stocking, G.a. The Oil Industry and the Competitive System (1925) p. 02 ■q. nv.qde Commission Report on the "etroleun Trade in and mompara. 47 The leadership of the Standard is not only recognized by government agencies but also by the petroleum industry itself, **" t • In an inquiry before the Joint Legislative Committee investigating the gasoline industry in New York,- E, Waldo Emerson, New York Division Manager for the Gulf Oil Corporation testified that the Socony-Vacuum Co, is tho prico leader and all others follow.^-2 At present the question of prices is more or less settled. The price of crude was set at $1.00 per barrel in 1933 and has been at that level ever since, 4f Marketing of the Rofined Products: The problem of market/^rude petroleum is not as involved as that of marketing the refined products. Crude petroleum is marketed only wholesale and is mostly purchased by the refiners. However, the marketing of the refined, and more especially that of gasoline, presents a greater problem and, therefore, the machinery set up to distribute it is more complicated. Although there are many aspects to the distribution of gasoline this sectiofr will concentrate chiefly on retail distribution since the different methods of marketing are described adequately in other 13 sources, As already pointed out,, the Standard, prior to its dissolution, distributed approximately 90fo of the refined prod¬ ucts. As long as kerosene was the chief product the question of marketing was more or less simple. However, with the advent of the automobile, the methods of marketing have changed radically. In order to get the automobile trade, service stations were erected on almost every crossroad and street corner. The chief problem became the control of these outlets. 12. New York Times. Jan., 12, 1957. 13. Federal Trade Commission, (1928) op.city up.136-182 and pna-gfiK- 48 5. Territorial Division of Markets for Rr-ifined Products - Interstate Aspects: In the attempt to eliminate competition between the different Standard Divisions and gain control of the marketing branch of the industry, the Standard divided the United States into eleven marketing districts, each district being placed under the control of a marketing subsidiary. Each division was then divided into sections supervised by local agents. The control of the eleven companies was vested in the parent organization, each company confining its activities to a territory allotted to it by the parent organization. The territories did not overlap and in the main followed political rather than economic lines.For in¬ stance, the New York Standard was the sole distributor for New York and New England states; the Ohio Standard the solo distributor for Ohio; the Indiana Standard for a group of ten North Central states and a small section of Oklahoma. The price for the product was determined by the parent organization making the allowances for transportation charges. The dissolution decree did not affect this setup to any large degree.^5 The Federal Trade Commission found in 1920 that this marketing arrangement was not disturbed by the dissolution 14. Geo.W. Stocking, ou, cit. p.70 15. Recently two or more Standards marketed their product in the same territory; e.g., The Magnolia Petroleum has service stations in New Mexico(territory of Continental Oil Co.) and in Arkansas (Standard of Louisiana territory). The Atlantic Refining Co. has outlets in New England spates(Geo.W. Stocking, op.cit. p. 69) The Standard of New Jersey entered the St.Louis territory to market "Esso Products" only.It had three outlets (National Petroleum News,April 24, 1935, p. 31.) 49 16 decree to any considerable extent. However, this much is true, that the larger independent companies have extended the scope of their operations, while important new companies have become important factors in the wholesale distribution of 17 gasoline and kerosene. However, the term "independent" as generally used is very ambiguous. Should one consider the Sinclair Oil Co. an independent company? The fact tin-it the Standard of Indiana has acquired a 50$ interest in it has led certain government agencies to classify it as half independent and half Standard, but such a classification is merely false bookkeeping (see financial section for detailed analysis). Furthermore, the supposedly independent companies have followed the same procedure as the Standard. Every important integrated company markets its product in more than one state. The interstate aspect of marketing becomes immediately evident. Sinco a company markets its products in more than one state it must be engaged in interstate commerce, and every integrated company has outlets in more than one state. The Texas Company, for instance, has outlets in all forty-eight states. The petroleum industry is so extensively engaged in interstate that it is hardly possible to say when interstate commerce ends, since the petroleum industry, as was pointed out, markets its products without the aid of middlemen. 16. Federal Trade Commission, Report on the Advance in Price of Pnt.rolmin Products, pp. 50-54. 17. It should be noted, however, that the ftanuard group distributes at present about 50$ of the total refined product as against 90$ of the total, prior to the Dissolution Decroe. 50 6, Control of Distribution Outlets by Integrated Companies - Their Methods: " It has been pointed out that the largo integrated companies control the distribution outlets. The Federal Trade Commission found that in 1926 these companies sold to the retailer or 1 P ultimate consumer 75 to 85% of the gasoline consumed. The practices by which the companies obtained the control of the retailer were varied and very costly. Those were: 1, Loaning of equipment 2, Secret rebates 3, Price policy 4, Advertising 5, Lease and agency 6, Lease and license 7, The Iowa Plan, Loaning of Equipment: The 170,404 service stations now 19 in existence were made possible oy the practice of loaning equipment to the letailers, With the advent of the automobile and the development of the service station, the marketing company, in an attempt to secure the exclusive use of the station, leased and installed pumps at its own expense. While they made a nominal charge of |1, it was understood that the retailer could not sell 20 any other brand but the one bearing the company trade name. This practice enabled any one, even without capital, to become a retailer and, what is more important, it enabled companies capable of large capital outlays to get the upper hand in marketing their products. At the end of 1922 the Now York Standard leased or loaned equipment in Now York and New England States, to 19,000 21 dealers, at a cost of v^,500,0u0. 16. Federal Trace Commission (1926) on. cit. p.G 19. U.S.Census, 19oo. 20. Geo. W. Stocking, op. cit. p. 27 21. Ibid, p. 271 51 Tho Atlantic Refining Co. loaned £,122 pumps in 1920, 2,056 pumps 22 in 1921 and 2,513 pumps in 1922. The Sinclair Refining Co. leased a total of 1,619 units of equipment up to 1922 at a total investment of $370,000, The effect of such practices, common to most integrated companies, was to crowd out the poorer companies unable to carry such an added burden. H.W.Dodge, vice-president of the Texas Company, New York, in address before the Ohio Petroleum Marketers Association, Columbus, February 25-27, 1936, stated that from 1914 to 1933, 1,800,000 gasoline pumps were purchased and installed. He further referred to a survey which found that there were then 1,500,000 in use of which 1,000,000, according to estimates, are owned and loaned by the oil 23 companies. Tho practice of loaning equipment was prohibited by the Federal Trade Commission as a violation of the Federal Anti- Trust laws, in that it tended toward monopoly. Tho industry,, in order to avoid trouble, decided to discontinue the practice. In 1929, when the oil industry established a voluntary code of self regulation, (soe appendix I ) one of the paragraphs (Rule 1 of group 1) stated that "the practice of loaning or leasing gasoline pumps, tanks and other equipment is unsound and uneconomic and should be discontinued at the earliest possible moment consistent with existing conditions." It then went on to say that equipment could be loaned or leased to old dealers but shouldnot be given to new establishments. 2 a I ^ on* • 23! National Petroleum News. March c, 1936, p„44. 52 The N.R.A., Code of 193d, in Article V, Rule 7, prohibited the leasing or loaning of equipment, except pump globes and the usual advertising signs. After the N.R.A. was declared unconstitutional the companies did not go back to the old practice. Sun Oil Co., announced that it will sell new pumps at the full list price and other 24 companies, it was understood, would follow suit,. 2. Secret Rebates; In an attempt to secure additional business, companies resort to making concessions from the market price.. "The kinds of concessions most widely used are: Secret discounts or rebates; payment of fixed amounts per month to filling station operators as station rental, sign rental, or salary, and making free improvements to the filling station 2d property " P.N. Miskol, vie-.-: president ofthe Umpire Oil and Refining Co. in an. address before the Western Petroleum Refiners Association, April 3-6, 1933, made a severe attack on secret rebates and concessions. "With this additional money (additional amount not included in the declared policy) received in the form of excessive rentals or commissions, the dealers, through the use of open price cuts, as well as secret rebates, take business away from our company-owned retail outlets, continually carrying our company owned into a lower average gallonage., with consequent sacrifice of opportunity for normal 26 profit. Those concessions, although they may not appear as an item charged to the consumer, led, quite often, to price wars. 24.National Petroleum News'] July T, 1936, p. 19 2d.Federal Trade Commission, on. cit. p.242. 26.National Petroleum News. April 5, 1933, pp. 20-22. 53 3. Price Policies; It was already pointed out that the Standard group sets the price for each section of the country. However, more important than this, is the fact that the price of gasoline bears no relationship whatever to the cost of production. Jame3 C. Dyer, vice-president of the Richfield Oil 9 Company, testifying before the Joint Legislative Committee (previously referred to) pointed out that increases in the price of gasoline were 27 arbitrary and in no way reflected an increase in the cost of production. Furthermore, the industry recognizes a differential between the well known and the lesser known brands. However, the industry found ways and means of getting around this. In 1933, after the Code of Fair Competition was adopted, Article V prohibited the sale of the same product at two different prices. In order to circumvent this, the companies sold the same brand at a lower price under a different name, through the affiliated companies. This practice brought an indictment of four principal California oil 28 companies, their marketing affiliates and directors. The companies were; Standard Oil Company of California and Signal Oil and Gas Co. and nine officers and directors. Associated Oil Co. and Seaside Oil co. and twenty-two officers and directors. Shell Oil Co. and Guardian Oil C0. and officers and directors. William C. McDuffie as receiver for the Richfield Oil Co. and the Rocket Oil C0. The indictment alleged that all gasoline sold as Signal Brand was made by Standard; that the competition between the Signal and the Standard was illusory and created by a device of contracts. It' ~ charged that Standard's Flight Brand was sold as Signal's Peerless Brand at lower prices constituting fictitious competition and actual price cutting. It went on to say that the 27~.~New York' Times, Jan. 12, 1937. 28. National Petroleum News, March 26,1934. pp. 11-12. 54 seme was true of the other companies. The practice was carried on for years in California and was a common 29 practice of the Pacific Coast gasoline cartel, which was one of the reasons why the Department of Justico at Washington held up the approval of the cartel. The Department of Justice demanded that the affiliates and the parent organization sell each brand at identical prices. This practice of fictitious competition was not only common to California. The practice was quite general throughout the nation. The Joint Legislative Committee (previously referred to) examined 150 samples of gasoline and found that 80 of these were substantially the same. The Committee further found that some stations were selling the brand at 17-1/2 cents per gallon while others were selling the same gasoline under a different label at 14-1/2 cents r gallon. All the trade went, however, to the higher priced gasoline, due to the psychology created by the mass 30 advertising of the large companies. An important factor in the price policies affecting interstate commerce is that of price wars, which are quite common in the industry. The object of price wars is to o lit if hate competition. It must be realized t&e.t the demand for gasoline is quite inelastic. The difference of 1 cent, or even 2 cents, per gallon will not increase or decrease the number of gallons sold. The 31 amount of gasoline sold is directly proportional to the number of cars used. It is obvious that a temporary differential of 1 to 3 cents per gallon of gasoline will not cause an increase in the number of cars used in the United States. An interplay of more forces, than the mere price of gasoline,is necessary to increase the number of c< rs which would increase the gallonrge sale. 29.Ne^York Times, Jan. 10,,.1937. 18:1 30.lfbw"'Y "rV" Times, 'Jan. 10, i937. 31. Annual" Demand of_ On so1 _ine_. (a) 1900 - 8","OOO motor cars consumed 3,360,000 gallons 1918 - 6,000,000 " " 3,360,000,000 1925 - 20,000,000 " " " 9,744,000,000 1935 - 26,000,000 " " 18,000,000,000 » (ad American Petroleum Institute, American Petroleum Industry, 1935. V ' 1 ' ' J I I ■ ■ ■ ■ PIL I I " I I I 55 Tho only conclusin, therefore, that ono can roach with rospoct to prico wars is that thoy are moans of shifting tho consumption of gasoline from ono brand to another. A cut in prices v/ould moan only diverting tho trado from ono company to anothor; all othor effects would be slight compared with that. The effect of prico wars on interstate commerce is well illus¬ trated in tho cas-s brought by several Detroit servico station operators against Secretary Ickas as Administrator of the Codo, who tried to enjoin tho operators from tho giving proinms as an inducomont for tho pruchaso of gasoline. Justice Hitkins hold that Congress had tho power, under tho commerce clause of tho U. S. Constitution, to doal with practices affact¬ ing intorstato commerce, sinca prico was spread statebordors; " From tho ovidonco I find as a fact that tho practice of giving premiums with tho sale of gasoline in interstate commerce in Detroit has imposed a direct burden upon intorstato commerce and tho necessary offoct of such a practice is to substantially end unduly obstruct tho intorstato commerce betwoon Michigan and othor states in gasoline and to substantially reduce the amount of such interstate commorco." In 1931, 1932, end the early part of 1933, there wore sovoro and Arttojic prico wars in Detroit and othor Michigan citios. The affidavits submitted in this caso give a vivid picture of tho origin, duration and offoct of some of tho wars . One war was brought by tho f ct that tho competitor of Sunny Service Oil Co. in tuguratod a system of giving premiums with gasoline. 56 This form of price cutting is difficult to meet because no one else knows the cost of the premium the dealer is giving. The Sunny Service Oil Co. net this competition by reducing prices, and other conpetitors were compelled to do likewise. This competition was so severe that sixteen distributors in Detroit were driven to bankruptcy. The Sunny Service Oil Co. distributed more gasoline to tho public than anybther single retail marketer in Detroit. In order to continue price cutting and stay in business, it was compelled to purchase low price gasoline from abroad and import the same into this country. An effect of this was to substantially restrain the flow of gasoline from other states of the union into Michigan and substitute for many millions of gallons of such gasoline the cheap gasoline imported from abroad. One of the companies forced out of business, the Liddleton Oil Co., distributed in Michigan approximately two and one-half million gallons of gasoline per ye:r purchased from refiners in Indiana. Durin^ this war the business of the Thite Star Refineries Co., which operate two refineries in Michigan v/as so adversely affected, that it sold one of the refineries and the purchasers later were compelled to shut down the refinery. 'This refinery in three months of 1931 ran 520,000 barrels of oil, all of which moved in interstate commerce. The system of giving premiums has in effect led to drastic price wars and has resulted in a reduction of wages, the growth of unemployment and indirectly encouraged the waste of exhaust¬ ible and irreplaceable natural resource, by demoralizing the market structure; all of which affected the broad question of the 57 national wolfare. In order to eliminate price warn two proposals were made:- (1) to eliminate fixed margins; (2) to fix prices. Both were advocated by smaller and sometimes bigger independents. Both were never put into effect. >7.1.1. Harrison, president of Star Refining Co., wrote to Secretary Ickes during the Code period, demanding 32 that the following points be considered: 1. Establishment of some sliding scale in place of flat selling margins. 2. Dealer should, participate in the losses due to decline of prices. This would tend to lessen price wars. 3. Dealers should be permitted to carry split accounts. Refiners working only one grade of gasoline should have the right to solicit the business of dealers* outlets on an equal basis with major companies. 4. A price differential between the products of major and minor companies should be r-Pcognized, . to offset advantages that major companies enjoy, such as multiple outlets, courtesy cards, road maps, advertising,etc. While the N.R.A. Code for the petroleum industry was being drawn up, the matter of price fixing was hotly discussed. It was expected that after the price of crude oil was fixed the gasoline price wars will be eliminated. Unfortunately, that was not the case. The American Petroleum Institute, the representative of the Standard interests, opposed price fixing by the government. The Standard group was eager to fix prices itself. On this subject, H.F.Sinclair, president or Consolidated Oil Corporation, expressed 33 himsolf as follows: The origin and purpose of the propaganda that is being circulated against the price regulation section of National Petroleum News. Aug. IB, 1934 p.50 33. National Petroleum News. Aug; 30, 1933 pp. 11-12. 58 the code is evident to any one who has had any part in the making of this code, "Coupled with propaganda are the small increases in crude oil prices posted this week by those who oppose what they call price fixing. These are the sane forces who, up to this time, have defeated all recent efforts to establish a living price either on crude or refined products. "These elements in the industry arc determined that they, not the President, acting under the code, shall be the price fixers If these elements dominate, we shall have a continuation of the ruinous conditions of the past. It was to cure these conditions that the price control features of the code were formulated. I have no doubt that these provisions will be strengthened and extended rather than emasculated. "Examinations of yesterda}?f s outgiving on this subject shows the insincerity of the argument against the code. This argument talks of overproduction and asserts that the code will encourage further excess outputs under the assurance of higher price. This entirely ignores the fnct that even the limited controlled provisions are only to be put into effect when the production of crude oil is within the quotas recommended by the federal agency set up by the President. "The concern expressed over the fate of the small refiner and distributor under price regulations is entirely misplaced. These smaller units have had tneir prices fixed at starvation levels by the major companies that now insist on a continuation of this prerogative. "The independents are equally determined that this shall be ended. They so expressed themselves in no uncertain 59 terms during the meetings in Chicago and Washington. They know, as I do, that their extermination would he the result, if it is not the deliberate purpose of eliminating price control from the code. I believe that the administration can be depended upon to deal with this question fairly and wisely." "The "Lamp" (House Organ of the Stan-herd Oil of New J jrsov in an article.The Real Guarantor of Price,n .opposing price fixing 34 by the government, said: "Prices may be improved artificially under the oil code for a time, but the industry today is burdened with oxcess stocks which will soek to find an outlet at any price. Withdrawals from storage will be limited under the f plan to 100,000 barrels daily. The pressure of this huge oversupply is tremendous and until it is relieved, we will find a normal law of supply and demand working at cross purposes with any attempt to improve prices by proclamation," However, to forestall any action by the federal author¬ ities with respect to price fixing and at the same time bill price fixing by the federal government, the major oil companies entered into a pooling and marketing agreement. Companies which signed the marketing agreement were: Atlantic Refining Co. Socony-Vacuum Corp. Barnsdall Corp. Standard Oil Co. of California Cities Service Oil Co. Standard Oil Co. of Indiana Continental Oil Co. Standard Oil Co. of Kentucky Gulf Refining Co. Standard Oil Co. of New Jersey Ohio Oil Co.' Sun Oil Co. Phillins Petroleum Co. The Texas Co. Pure Oil Co. Union Oil Co. of California and Shell Union Oil Corn, H.N.Grois and B.L.Mnjewski as Sinclair Refining Co. Receivers for Deep Rock Oil Corp. 34.This article is reproduced in the National Petroleum News Aug. 30, 1933, pp. 10-11. 60 Tho Pooling agreement was signed by the same companies with the exception of the receivers for the Deep Rook Oil Corn., and tho addition of the Amerada Corp.,Mid-Continent Petroleum Corp., Plymouth Oil, Simms Oil Co., Skelley Oil Co., South Pern Oil Co, and the Standard Oil Co. of Ohio. The two agreements set up a gasoline marketing program which included, first, the establishment of a $1C,000,000 gasoline equalization pool to take surplus stocks off the market and second, an agreement to recognize uniform and defined margins in all classes of gasoline trade. The duties of carrying out the provisions of both agreements were in the hands of the refining companies - the source of gasoline supply. The marketing agreement provides that it shall become effective only when signed by refiners whose aggregate run of crude during November amounted to at least 85$ of the total runs of stills in the country of that period. Control of the policies of resale agencies of various kinds was provided through standard forms of contracts, refiners signing the agreement were to use. These contracts, in accordance with a ruling in the code, contained a provision controlling prices of products to the ultimate consumer. On January 20, 1934, the Pooling ana Marketing Agreements 35 were approved by Secretary Iekes. The purpose of tho Pooling Association as stated in the agreement was to "hoi'" and in an orderly way, dispose of surplus gasoline which threatens the stability of the oil price structure in an effort to bring the prices of gasoline into a proper relationship with the present price of crude oil and to maintain and support such relationship." 35. National Petroleum News. Jan.24, 1934 pp. 7-9. 61 Tho Marketing Agreement dealt with prices and resale policies. In the formation of the Pooling and Marketing Agreements v/e have witnessed the formation of one of the biggest cartels in the United States in direct violation of the anti-trust laws. However, the legal aspect does not concern us in this study. \ The interstate aspect of such a combination is evident. The Marketing Agreement was stronrly attacked by the 36 jobbers. On August 15, 1934, the Standard Oil Cc. of New Jersey, Ohio and California, and the Sun Oil Co.withdrew from the National Marketing Agreement, Their claim was that conditions 37 changed, and a different point of view should be taken. One of the strongest cartels was formed on the Pcacific Coast, The signatory companies were estimated to represent 95,32% of the total gallonage sold in the marketing area, which includes California, Oregon, Washington,Arizona, and Nevada, and the territories of Hawaii and Alaska. The ag. re error:: governed 38 prices and resale policies. It was approved by Secretary Ickes on February 14, 1934, to make the agreement effective; it was revifed on April 19,1935. The signatories were required tu put up $10,000 as security, which was used to prosecute violators of terms of the agreement. A Judiciary Committee of three was given arbitrary power to impose penalties of $d00 for each day 39 a violation was continued. 36. National Pet.News,Feb26,1934,p.21;March 7,1934—p.17-Apr.4*34pJ7 37. National Petroleum News. Aug. 15, 1934, p. 9 38. National Petroleum News. Fob. 21, 1934, pp. 17-18 39. National Petroleum News. Nov. 24, 1935, pp. 41. 62 Me rubor companies ware divided into three groups: A - Major Companies B - Secondary or affiliated companies C - Independent companies. Classification of member companies into these groups was intended primarily to effect price stabilization through maintenance of price differential. Companies in Group A wore required to maintain the base price on all grades of gasoline. Those in Group B were to maintain base prices on all gasoline of 63 octane and above, but were allowed a half cent differential below the base price on products below 63 octane. Those in Group C were to maintain base prices on gasoline above 70 octane, but were allowed a half cent differential from the base price on octanes from 63 to 70 and a 1 cent differential from the base price on products below 63 octane. A governing committee of seven was elected, three members representing Groups A and B combined, three members representing Group C, and a chairman chosen by the six members. The committee was given power in all marketing and distributing operations of member companies. It supervised sales under a monthly quota system and enforced the penalties designed to insure the effectiveness of the assigned quotas. Committees required to notify oach month companies under¬ selling or overselling their quotas and at the end of each 3-month period, to request adjustment. In making those adjustments, overselling companies were required to purchase from underselling companies; and on the other hand, companies that had undersold wore to sell to those who had oversold. At the end of each six months penalties were imposed for 63 either underselling or overselling. Overselling a quota by more than 3$ involved a penalty of 1 cent per gallon in excess of 3$ but less than 4%; 2 cents per gallon for each gallon of oversales from 4 to 5$; and an additional 1 cent a gallon for each additional 1% of oversales. The agreement was terminated with the invalidation of the N.R.A. 7. Advertising: The interstate implications of advertising have been fully discussed in the treatment of price policies. It is clear that advertising of such brands as "Esso" "Mobiloil" "Fire-Chief", "Socony", "Texaco", and others, result in the national distrib¬ ution of refined products. Lease and Agency: The major companies did not only control prices of gasoline and the equipment used to dispense it, but also the outlets.This is one of the most important factors in the interstate aspect of the industry. Tho number of stations in the United States has grown very rapidly with the expansion of the automobile industry. As a matter of fact, it grew much faster than it was economically desirable. In 1907 there were some half dozen or more gasoline stations. In 19S0 this number grew to 15,000 stations and in 1933 t^g U.S. Bureau of Census reported a total of 170,404 stations. The investment in service stations amounted to $1,250,000,000. The building of stations has slowed down to a standstill in 1934 and continues now to expand at the rate of 5% annually. The average investment in a new service station is $15,000,. Be Tore proceeding to ai: analysis of the ownership of stations it must be pointed out 40 national Petroleum News Feb. 3, 1935, pp. 23G-242. 64 that thore is a difference between the ruir.ber of stations as reported by the census and the number of stations as reported by the oil/companies. The reason for the discrepancy is a lack of uniformity in the definition of a service station. Tho Bureau of Census classifies an establishment as a station when the sale of petroleum products is the chief item, while the companies incl^ ude establishments where the sale of petroleum products is not the chief item but constitutes a considerable proportion of their sales. The service stations now in existence may be divided according to ownership or control as integrated stations, jobber stations, independent stations and cooperatives. Prior to 1911 the problem of competition in refined products was almost non-existent, However, the picture has changed since. 41 The Federal Trade Commission states, "While there has been a tremendous improvement in competitive conditions in the petroleum business since the Standard Oil dissolution in December 1911, there are still certain practices which prevent effective competition. Some of those practices are remnants of the days of almost complete Standard monopoly; others have developed among the independents, particularly through their Association activities, some of which have been very active in attempting to maintain high prices. Prior to 1927 the companies attempted to control the outlets through ownership. However, as the number of stations have increased enormously because of such expenditures as Workmen's Compensation and Liability Insurance, and more recently 41. Federal Trace Commission (1926) op. cit» p„ 204. 65 chain store tax, it became very uneconomical to own stations; moreover, this became unnecessary. About 1927 thu integrated companies began to divest themselves of the ownership of their stations. At the same time, they brought under their control, not only the stations they formerly owned but others as well. This was accomplished by the following methods: Lease and license, lease and agency, and the Iowa Plan. The method employed varied with the company. 42 Lease and License Agreement of the Toxas Co. "The Texas Co.'s method of inducing the exclusive handling of its products consists of two or three contemporaneously executed instruments in the form of (1) 'lease' from the filling station operator to the Texas Co. covering the filling station property; (2) J . ? .1 'license" agreement whereby the Texas Co. 'licenses' the operator to operate his stations, leased by the Texas Co. for tne handling of the Texas Co.'s products exclusively; (3) 'sales agreement' stating terms and conditions upon which the Texas Co,, agrees to furnish the products to the operator. The restrictive clause may appear in any one or more of these three. "In effect many of the service station proprietors who desire to handle Ecxas Co. gasoline must lease their station to the Texas Co. for a rental which is generally based on the estimated sales of gasoline to be made at the station. For example, if it is expected that the station will sell 5,000 gallons per month, the Texas Co. must pay $50. per month rental, based on 1 cent per gallon. The Texas Co. grants the original proprietor a license to operate the station which he has rented to the company, and for the license the operator usually pays $1 per year. In consideration for the monthly rental which Is 42~IbT?T""~p7gbw 66 practically a pries concession, and for the license to operate his own station, the operator agrees to handle the petroleum products of the Texas Co, exclusively, This latter agreement is sometimes embodied in the so-called 'license' and other agreements and is generally identical with that of 'lease' and carries a provision that should the lease or other agreements be terminated before itfe expiration, the license automatically terminates simultaneously," As an example of the restrictive clause, we may quote from a 'license' agreement between the Toxns Co, and Paul R, Schwarz of Milwaukee, Wisconsin, dated Januarv 2, l924 3-4 2.3 25.4 0.8 - 0.2 0.7 1-5 1859- 1880 1890 1900 1910 192C 1925 1926 1927 1928 1929 1930 1931 1932 1933 193* 1935 % or DOMESTIC PRODUCTION Petroleum produced in the United Spates,1855-1934, by St ..tea (Thousands of barrels of 42 gallons) t KANSAS TEXAS : OKLAHOMA WYOMING MICHIGAN LOUISIANA NEW MEXICO MONTANA 1 (*) 75 836 6 6 (5) 1,128 8,899 52,029 115 (5) 6,8*1 39,005 96,868 106,206 16,831 35,714 (5) 3*0 38,357 144,648 176,768 29,173 4 20,272 1,060 *,091 41,*98 166,913 179,195 25,776 94 23,201 1,666 7,727 *1,069 217,389 277,775 21,307 439 22,818 1,226 5,058 36,596 257,320 2*9,857 21,461 594 21,847 943 4,015 *2,813 296,876 255,004 19,314 4,528 20,554 1,830 3,980 *1,638 290,457 216,*86 17,868 3,911 23,272 10,189 3,349 37,018 332,*37 180,574 1*,83* 3,789 21,804 15,227 2,830 34,8*8 312,478 153,4*4 13,418 6,910 21,807 12,*55 2,457 41,976 402,609 182,251 11,227 7,9*2 25,168 14,116 2,273 46,*82 381,516 180,107 12,556 10,603 32,869 16,864 3,603 54,787 391,097 185,348 13,650 15,256 49,869 20,586 * ,59* *.5 22.9 22.3 2.3 0.2 3.3 0.5 0.3 Km LE I-b DOMS STIO FROJUCTIOM petroleum produced in the United Btates,,1859-193., (thousands of barrels of t.2 gallons) Year Gtho r TOTAL Quantity Value at wells Total(Thous¬ ands of dollars) Avera&e per Barrel 185S-75 -- 7 ,,072 215,781 i—1 C7» • I860 — 25,285 24,501 .94 1890 a-5,82^ 35,365 .77 19 00 2 53,521 75,989 1.19 1910 "A* 209,5^7 127,900 .61 1920 13 442,929 1,360,745 3.07 1925 • 12 753,7*3 1,28-;, 960 1.68 1925 8 770,874 1,^7,760 1.68 1927 7 901,129 1,172,830 1.30 1928 r U 901,H-7'i 1,05^,880 1.17 1929 7 1,007,323 1,280,417 1.27 1930 7 698,011 1,070,200 1.19 1931 7 851,061 550,630 .65 1932 15 785,lo9 660,460 .87 1933 30 905,556 608,000 • 67 1934 dl 906,055 90*.:, 82 5 1.00 1935 44 943,9a2 994,000 1.00 /.of Total Production 100.0 1. statistics Appendix to minerals Yearbook, 1935 - Bureau of -ine 2..rvew York included with fannsyivania 3. Tennessee included with Kentucky 18S3-1907 inclusive 4.Less t' an 500 barrels 5. Included *i»3ix under Other. 85 TABLE II Percentage of Crude Petroleum produced By Principal States,1929-35 (1) . 1929 . 1930 . 1931 . 1932 . 1933 .1934 1935 Texas 29.5 32,4 39.1 39.8 44.5 42. 0 39.4 California 29.0 25.3 22.2 22.2 19.0 19.2 22.9 Oklahoma 25.3 24.1 21.2 19.5 20.1 19.9 18.6 Total, 3 States 83,8 61.8 82.5 82.0 83.5 81.1 78.9 Kansas 4.3 4.7 4.4 4.4 4.6 5.1 5.5 Louisiana 2.0 2.6 2.5 2.8 2.8 3.6 5.0 New Mexico .2 1.1 1.8 1.6 1.6 1.9 2.1 Michigan .4 .4 .4 .9 .9 1.2 1.5 Pennsylvania 1.2 1.4 1.4 1.6 1.4 1.6 1.6 Arkansas 2.5 2.2 1.7 1.5 1.3 1,1 1.1 All Other 5.6 5.8 5.2 5.2 3.8 4.4 4.3 Total United States 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (1) Ms. Yr- Book 1935 - p. 593 'Table 111 DISTRIBUTION OF CRUDE PETROLEUM IN 1935, by States* (In*'1",000 of barrels) Receipts from other States Deliveries from Other States State .Production Imports . Quantity State Run t o Stills . Exports ; . Quantity State Ark. 10,973 1,643 Texas 7,410 4,767 La.,N.J. & Texas Gal. 207,832 - - - 177,849 16,918 - - Colo. 1,549 - 517 N.Mex .& Wyo. 1,139 - 823 Utah & Wyo. Georgia - 576 1,514 Texas 13,712 - - - Illinois 4,305 " 31,826 Indians ,Kas .Ky La.,N.Mex.Okl. 35,469 587 100 Ohio .< r "" " & Texas Ind. 757 58,189 Kas .La .Mich. N.Mex.Okla.& Tex. 58,769 \ 794 111. & Ky. Kas. 54,787 - 11,923 Okla.&Texas 44,304 - 21,9^ Ill.Ind.Ohio, - ' '".I- — Okla.&W.Va. Ky. & Tenn. 5 , a 6 5 — 1,999 Ind . & Okla. 7,203 2 365 111. La. 49,869 1,529 35,510 Ark.Okla.&Tex. 253,021 29 , 5 6 9 Ill.,Ind.,Md. Mass.,Miss.,N.J. Pa. & Texas Maryland - 2, 539 9,237 La .,N.Mex.&Texas 11,744 - - - Mass. - 3,617 39,512 La.,N.Mex.&Tex . ^13,722 - - - Mich. 15,265 — 3,275 Oklahoma 8,772 175 8,219 Ind. & Ohio Miss. (4) _ 6,004 Kas.,Okla.,Tex 6,006 - - - Mont. 4,594 - 1,540 Wyo. 3,293 2,797 13 Wyo. N.J. 5,256 55,627 Ark ., La .N .Mex. N .Y.,0kla.Pa. Tex. &W'.Va. 60,133 N.Mex. 20,586 132 Texas 1,403 19,267 Colo . ,111.Ind.,Md Mass.,N .J.,Pa. Texas and Utah New York 4,237 3,669 7,356 Okla. ,Pa .Texas 14,374 - 352 N.J. & Pa. Ohio 4,070 _ 26,526 111. & Ka. Mich. 29,428 - 1,303 Penn. & W.Va. Okla.Tex.&W.Va • TABLE 111 (Cont'd) DISTRIBUTION OF CRUDE PETROLEUM IN 1935, by States* (in 1,000 of barrels) 86 : Receipts from other States DELIVERIES FROM OTHER STATES State Production . Imports : Quantity State Run to Exports Quantity State • stills Okla. 185,248 3,161 Kad. Tex. 57,442 7,264 135,906 111. Ind. Kas.Ky.La.Mich. Miss.N.J. N.Y.Ohio,Pa. Texas,W.Va. Penn. 15,830 8,766 70,134 La.,N.Mex.,N.Y. 91,433 - 4,939 N . J • & N . i • - Ohio,Okla .,Tex. & v/.Vu. R.I. - 287 (3) Texas' (3) - - - S. Car. - 557 (1) - (1) - - - Texas 391,097 . 4,383 55,057 Ark.,La .N .Mex. & Okla. 262,493 23,495 162,122 Ala.,Aek.,Ga.,Ind.,Ill., Kas.,1a.,Md.,Mass.,Miss., N.J.,N.Mex.,N.Y.,0hio,^kla., Pa.,R.I. Mich. Utah (4) - 2,346 Calo.,N.Mex., 2,427 - - - Tex.,flfeWyo. (1) Va. - 1,060 - - - - - W. Va. 3,903 — 2,687 Kas.,Ohio,Okla. 3,942 - 2,082 N.J.,Ohio, Pa. 7yo. 13,650 59 Colo.,Mont. •10,767 140 31,197 Colo.,Mont. & Utah Other 34 — - - - - - - TOTAL 82,239 395,774 966,243 51,378 395,774 1. Georgia includes Del., So. Carolina and Va. 4. Mississippi, Mo. and Utah included in "Other" 2. Includes Alabama & Mississippi 5. Includes Iowa 3. Massachusetts includes Rhode Island 6. Includes Nebraska & So. Dakota *U.S.Bureau of Mines Minerals Year Book,Statistical Appendix, (1936) pp. 682-683. Table ^ ( continued) gjODTCgCIu FOREIGN AND INTERSTATE MOVEMENT, AMOUNT RUN TO STILTS - -hZ-L_ CONSUMPTTO?' OF REFINED PRODUCTS FOR I^TTaT ~ (In thousands of barrels) Interstate and Foreign Commerce of States Production Crude Petroleum Crude Run Rec'd Jrom Del'd to Foreign Foreign to CONSUMPTION 0 w \J\J ViKJ UP ^her States Other States Imports Exports Stills Gasoline Fu61 Oil TOT-Uj (t) N.J. 50,509 New Mex. 16,915 202 N.Y. 3,800 6,109 N. C. N. D. Ohio 4,232 23,009 Oklahoma 180,624 2,532 Oregon Penn. 14,516 67,091 R.I. (4) S.Car. S. Dak. lemi* (*} (*) r) (*) (*) 5,049 500 5 549 Texas 380,820 43,721 170,940 2,275 20,188 211,359 20.834 38.368 Rp'pnp Utah — 2,111 Vermont Virginia Washington West Va. 4,096 6,212 Wis. Wyoming 13,065 16 14,492 64,249 17,489 30,646 16,241 1,318 1,337 753 289 3,342 13,587 37,548 30,367 6,652 334 —— 2,451 199 1,251 65 26,463 22,749 5,393 123,304 6 ,908 53,317 7,153 9,836 3,952 6,079 4,059 7,733 86,295 27,056 21,871 466 (4) 2,592 6,412 543 (2) 3,151 549 2,607 353 (*) (*) (*) 5,049 500 170,940 2,275 20,188 2 41,359 20,834 38,368 2,098 1,527 254 — 1,156 v 353 1,034 (2) 6,170 1,108 -— 6,204 8,485 1,685 3,321 3,515 576 10,017 2,415 3,200 144 5d,601 1,047 1,264 48,135 2,090 67,915 6,996 2,650 28,142 6,989 10,031 48,927 9,004 3,700 2,906 5,549 59,202 1,781 1,509 TOTAL 909,345 368,045 368,045 35,558 41,123 895,636 395,123 330,321 725,46^ For Footnotes see next page. TiiBLE IV (Continued) *Figures for Kentucky and Tennessee are combined far all phases except for consumption. (1) Includes shipments to Alaska, Hawaii and Puerto Rico (2) Goorgia includes South Carolina and Virginia (3) Includes Alabama (4) Massachusetts includes Rhode Island (5) Includes Nebraska and South Dakota. (a) Figures for the first six columns are taken from U.S.Bureau of Mines, Mineral Yearbook,1955. p. 736; the figures for gasoline consumption are taken from V.S.Bureau of Mines, Minerals Yearbook, 1955, Statistical Appendix, p. 408; the figures for fuel oil consumption are from^the orneT source, p.. 419.» ~ (b^ Fuel oil consumption figures include cnxle oil used as fuel. Total Demand for Lubricants for 1934 was 18,488,000 barrels. es 34 535 5 2 34 20 32 551 52 10 20 12 228 ■ 1 • 9 9 - 4 1 ■ 5 91 152 152 10 Table » SUMMRY OF CRUDE OIL RECEIPTS AND CONSUMPTION AT REFINERIES 1935* J (Thousands of Barrels ) .RECEIPTS OF REFINERIES a. — INTERSTATE Oklahoma Texas Other TOTAL Change in Refinery Foreign Stocks Crude Rune to Stills -- 1,643 - 1,643 - 158 7,410 — — -- - -636 177,849 -- — 517 517 - 38 1,139 — 1,514 5,695 1,514 2,193 -7 3,712 23,054 3,077 19,209 31,826 - -141 35,469 31,196 7,784 - 58,189 - -549 58,767 11,759 164 148 11,923 - -356 44,304 1,851 -- 3,566 1,999 - - 63 7,203 3,937 28,007 1,163 35,510 1,529 -1,443 53,021 — 8,074 146 9,237 2,539 - 20 11,744 — 9,366 — 9,512 3,904 - 316 13,722 3,275 — 1,797 3,275 — 39 8,772 3,548 659 1,540 6,004 -- 2 6,006 — — 9,226 1,540 — - 89 3,293 6,590 39,811 — 55,627 5,256 - 522 60,133 — 132 1,272 132 — 7 1,403 1,766 4,318 — 7,356 3,669 259 14,374 __ 4,318 1,272 4,318 3,669 14 7,973 1,766 -- 8,596 3,038 -- 245 6,401 17,021 909 860 26,526 — - 227 29,428 7,043 — 7,736 7,903 -- - 39 9,681 9,978 909 1,777 18,623 — - 188 19,747 — 1,384 10,146 3,161 — -1,169 57,442 5,044 54,944 7,990 70,134 8,766 - 300 91,433 3,454 52,753 2,156 64,197 8,766 - 182 72,993 1,590 2,191 30,581 5,937 __ - 118 18,440 TABLE V (Go nt' d) SUMMARY OF CRUDE OIL RECEIPTS AND CONSUMPTION AT REFINERIES I9..5* (Thousands of Barrels) 88 RECEIPTS OF REFINERIES INTERSTATE Change in Crude runs Fuel STATE Intra- Oklahoma Texas Other TOTAL Foreign Refinery to and State stocks : Stills Losses • • • « • • • Texas 203,661 24,476 - 2,010 55,057 4,383 176 262,493 432 Utah — — 366 298 2,346 - - 88 2,427 7 Jest Va. 1,241 2,389 - - 2,687 - 3 3,932 - 1 Wyoming 10,041 21 I 59 59 - - 741 10,767 - 74 TOTAL U.S. 537,462 135,906 162,122 97,746 395,774 32,239 -4,951 966,2*3 4,183 Daily Avg. 1,472 372 44* 268 1,08* 88 14 2,647 11 •^Minerals Year Book 1936, p. 681 1. Includes Delaware, So. Carolina and Virginia 2. Includes Tennessee 3. Includes Alabama and Mississippi. *. Includes Rhode Island. 5. Includew Nebraska and South Dakota. TABLE VI Total Capacity of Refineries by Statds -and by Years (Asj of January 1st, of the following years) (Capacity Barrels per day) 1926 {1933 1934 1935 1936 Alabama - 6 ,000 6,000 4,000 4,000 Arkansas 28,590 44,800 .43,550 48,750 47,700 Arizona 600 - - - - California 720,900 900,735 854,710 840,635 859,110 Colorado 1,700 7,220 8,330 7,930 7,420 Delaware - - - 2,000 2,000 Georgia 4,500 9,000 9,000 9,000 9,000 Illinois 84,200 134,700 128,050 130,250 131,500 Iowa 2,000 1,500 - - - Indiana .76,800 197,050 . 186,400 192,700 203,200 Kansas 134,500 163,505 170,761 171,045 178,750 Kentucky 19,500 29,400 28,500 28,500 29,300 Louisiana 179,580 209,650 211,650 205,300 217,350 Maryland 45,200 55,000 55,000 55,000 55,000 Massachusetts 52,500 48,000 30,000 30,000 34,500 Michigan - 22,500 27,400 38.550 47,100 Minnesota 1,000 - - - - Mississippi - _ 3,000 3,000 1,050 Missouri 15,500 23,500 22,000 22,000 23,500 Montana 18,250 31,300 27,623 25,413 26,600 Nebreska - 60 335 473 570 New Jersey 237,000 290,000 263,500 267,000 262,100 New Mexico 3,300 6,250 7,500 7,400 7,500 New York 34,500 55,600 57,450 57,550 57,850 Ohio 46,075 100,110 107,420 111,920 110,430 Oklahom ■. 300,450 324,700 315,989 309,259 289,859 Pennsylvania 152 ,675 254,100 293,100 304,900 310,475 Rhode Island 15,000 6,500 11,000 7,000 7,000 So. Carolina 10,000 6,500 6,500 6,500 6,500 So. Dakota - 40 80 287 253 Tennessee 500 58 50 50 100 Texas 554,730 914,035 1,010, 269 1,106,299 1,155,749 Utah 4,750 8,350 8,850 9,000 8§Q00 Virginia 5,000 1,500 2 ,000 2,000 2,000 Vest Virginia 10,000 18,000 18,000 18,000 17,000 Washington - - — — — Wyoming 98,967 51,392 48,650 50,189 51,430 TOTAL 2,858,467 3,921,055 3,926,667 4,072,4009 4,163,946 L. Bureau of Mines " Bulletin", $28$) P« ^7. 2. » » » " Information Circular", $I-C. 6728, p.6. 3] ti it ii " " " 6807, p.6. 4^ it ii » '• " " $I.C. 6850, p.5. c ii it " " " " ffI.J. 6906, p.5. 90 TABLE VII PISTRI3UTI0N OF MOTOR FUEL IN 1935, BY DISTRICTS* (la thousands of barrels) Receipts from Other Districts R.'Ck} - Totsl DISTRICTS : PROD. East Coast • • Ind. Qkla. Kas. 111. • * Texus • La* Moun¬ tain Cal. • Kecei. t • East Coast 74,150 - 10 68,650 7,150 7,110 82,920 Appalachian 19,250 14,000 9,000 20 30 110 80 - - 23,240 End. 111. 76,480 - - 14,360 6,770 7,380 4,790 - - 33,300 Ofea.Kan. Mo. 63,950 - 1,450 6,820 20 600 - 8,890 Tex^s 125,250 - 160 - 1,610 150 170 2,040 Ark.-La. 24,300 - 410 80 7,130 - - - 7,620 Rocky Mt. 10,900 - 800 1,000 - - - 1,610 3,410 Calif. 71,240 - _ 170 - - - 170 TOTAL 465,520 - _ - - - - - Shipment la,000 10,450 1^780 7,880 90,260 13,650 750 8,840 161,590 to other districts •"Mineral Year book (1936) p.714 91 TABLE VIII production of crude oil in leading fields, 1935 in Barrels (i) Approximate FIELD PRODUCTION Increase or in 1935 Decrease com~ _ pared with 1934. East Texas, Texas 175,918,000 - 5,622,000 Oklahoma City, Okla. 54,359,000 - 8,470,000 Seminole, Okla. 47,509,000 9,326,000 Kettleman Hills, Calif. 27,607,000 6,217,000 Long Beach, Calif. 26,563,000 3,775,000 Midway Sun at Calif. 19,713,000 527,000 Bradford-Alleghany,Pa. N.Y. 16,798,000 1,874,000 Pecos County,Texas 16,472,000 29,000 Santa Fe Springs, Calif. 16,159,000 1,437,000 2 uo.'iroe, Tex-.s 15,269,000 - 1,874,000 I-Iuntingto^ Beach, Calif. 15,133,000 27,000 Vaus, Teatas2 14,265,000 368,000 Hobbs, N. Mexico"^ o 11,063,000 - 1,375,000 6 Rice County, Kan. o 8,059,000 4,164,000 6 Boscoe, La. 6,356,000 5,342,000 All Others _522,68_9JL000 71,922^000 TOTAL 85,877,000 1. I,an. Yr- L--. 1936. a. 593 2. From Oil ana Gas Journ .!• TABLE 9 92 PRODUCTION AND CONSUMPTION OF GASOLINE BY .STATES IN 1934* (Thousands of barrels of 42 gallons) STaTE production consumption** 3,692 1,743 3,337 31,766 4,113 6,070 989 2,470 5,038 5,702 1,566 24,427 11,082 9,614 9,019 4,390 4,249 2,786 4,911 13,995 18,618 10,275 3,125 11,652 2,035 5,318 588 1,682 17,489 1,337 37,548 6,662 2,451 22,749 7,153 3,952 27,056 2,592 3,151 2,607 5,049 20,834 1,527 1,156 6,170 6,209 3,515 Alabama Arizona Arkansas 2,982 California 61,599 Colorado 740 Connecticut __ Delaware — District of Columbia -- Florida ( Georgia l,510v Idaho — Illinois 18,319 Indiana • 32,394 Iowa — Kansas 24,430s Kentucky 3,5193 Louisiana 21,2834 Maine — Maryland 5,117 Massachusetts 5,215 Michigan 3,102 Minnesota — Mississippi (4) Missouri (2) Montana 1,058 Nebraska -- Nevada -- New Hampshire — New Jersey 24,985 New Mexico 1,932 NewYork 5,063 North Carolina — — North Dakota —- Ohio 14,812 Oklahoma 31,194 Oregon Pennsylvania 38,900 Rhode Island South Carolina » — South Dakota Tennessee Texas 111,679 Utah Vermont Virginia Washington 1,921 West Virginia Wisconsin 6 5,178 Wyoming TOT.-vL 395,123 (Cont'd). TABLE 9 (coat' u,) 92 PRODUCTION AND CONSUMPTION OF, GASOLINE_BY_S.TATSS IN. 1934* (Cont'd) (Thousands of barrols of 42 gallons) * Minerals Year Book,Statistical Appendix (1935), p. 407-408. ** American Petroleum Institute figures. 1. Includes Rhode Island and South Carolina 2. Includes Missouri 3. Includes Tennessee 4. Includes Alabama and Mississippi 5. Includes Utah 6. Includes Nebraska and South Dakota. APPENDIX I (Text of Marketing Cuuc Approved by Trade Commission in 1929.) Groun I. Rule I. The practice of loaning or leasing gasoline pumps, tanks, and other equipment is unsound and uneconomic, and should be discontinued at the earliest possible moment consistent with existing conditions. Until such a time as this situation can be brought about and only in those states in which the practice is now observed, gasoline or "kerosene pumps and tanks, motor oil equipment and grease outfits (the grease outfits not exceeding in cost $50 each) it may be loaned or leased for the exclusive storage and handling of the products of the lender or lessor,but the borrower or lessee shall not be prohibited from handling in other equipment the products of another supplier. Where no equipment is at present installed by any company, or where additional locations, the borrower or lessee shall be required to pay for the installation of each loaned or leased equipment, the actual cost of installing ■- said equipment, and for this purpose shall make a cash deposit of at least $100 in advance for each underground unit to be installed, and shall pay, as or where due all privilege taxes attaching because of the installation or maintenance of such equipment. (Interpretation of Rule I.) The commission approves of the provision in the above mentioned rule that gasoline or kerosene pumps and tanks, motor oil equipment and grease outfits may be loaned or leased for the exclusive storage and handling of the products of a lender or lessor solely and, further holds, as a Group I Rule, that the action of dealer in marketing through such equipmentfthe products of a supplier other than those of the lender of the equipment, constitutes an unfair method of competition. The remainder of this Rule has been placed in Group II by the commission. The purpose of Rule I is to restrict the practice of installing and loaning equipment free of charge. This rule was not intended to change the custom in those states in which it is now the practice to install and loan equipment free of charge. In every case of the installation of equipment in new locations of additional installations or installations for increased capacity at an odd location, the actual cost of installation of such equipment is to be paid by the lessee and a deposit of $100. cash in advance is to be made on account of such installation cost. Such advanced payment to be adjusted to actual installation cost Upon completion of installation. This rule does not prohibit 100% dealer accounts. In cases where pumps are substituted for existing equipment of other companies, the present practice of exchanging or selling such existing under¬ ground equipment to the installing company is not be changed. Replacements can be made of leaky or defective tanks or lines and con¬ nections where capacity is not increased. Any increase in capacity is to be indicated as a new installation. This rule applies to laons to consumers as well as loans to dealers. Some applications of the rule are illustrated by the following examples: Example I; When a dealer or consume r is loaned equipment for installation at the place of business where prior to the loan no equipment has existed the lender must require the borrower to pay the cost of installing the equipment. Example 2: When a dealer or consumer is loeaned equipment, in addition to that already existing at the place of installation, the lender must require the borrower to pay the cost of installa¬ tion! For instance, if the dealer X, already having two of wholesaler B's pumps installed, applies to wholesaler B or any other whoelsul.Gr for the loan and installation of a third pump and tank, the cost of installation must be paid by dealer X. Example 3. .'/here the proposed loan is to replace existing equipment, whether belonging to the new lender, or to someone else, the borrower need not be required to pay the cost of in¬ stallation. 7or instance, if dealer X h-s two fo whole¬ saler B's pumps and arranges with wholesaler B to replace one of the existing pumps with another, or with wholesaler C to replace vholesoler C's, dealer X need not be required to pay the cost of installation. Example 4: Where the borrower, himself, installs the equipment at his own expense, the lender need not collect any installation cost, evon though the unit instilled may be an additional unit • RULE II. Refining companies, wholesalers, distributors, and/or jobbers, nuy require by bona-fide leasos or subleases, service and fil¬ ling stations or sites for s.amo, .and such stations and/or sites may be leased or liconsod by such company to dealers for the purpose of distributing its products. Such stations and/or site shall not bo acquired at one rental and then sub-leasod or li¬ censed at i. reduced rental for the purpose of rebating. In the ovent the company makes imporvements to such proportios prior to sub-leasing same, such sub-lease sh_.ll provide in addition for reasonable roturn upon the cost of such imporvements, in order that tho transaction may not result in reb .ting. 3, IntorT/retation of 3ulo_2 * This rule prohibits the rental by refining companies, srime property to the lessor, or third parties, at a reduced rental. If the refining companies, wholesalers, distributors and/or jobbers place any improvements on said leased properties, such subleases shall provide, in addition, for a reasonable return upon the cost of such improvements. In event of a change in traffic conditions or physical surroundings after acquisitions of the property by the company, either increasing or diminishing its value, a reason¬ able return • ' •> "V« on the fair value of the property for filling station purposes at the time of leasing should be required. The cost to install such gasoline or kerosene pumps or tanks, motor oil equipment and grease outfits(grease outfits not to exceed ybC.CO each) ordinarily loaned to customers, need not be included in the fair value of the property for filling station purposes. The purpose of this rule was to prohibit the le .se -lid license agreements, known generally in the trade. For examle, if a refining company, wholesaler,distributor, and/or jobber rents a service station site at a substantial rental. The purpose of this rule was to prohibit the sub-leasing or licensing to a dealer at a materially reduced rental. The same rental or substantially the same rental shall be collected from the dealer as is paid by the refining company, wholesaler, distributor and/or jobber. RULE 5: ho company shall paint over any sign or colors of another communicated with the company whose signs or UI.jLlC-1 U -LUIA O.J'.U 11 X U uviu o ^ V/ /.'XJ. xuii 'vvux^ violated, shall offer to submit it for inspection at its off. [f the contract so submitted discloses that the proposed painting /Quid constitute a breach of the contract, the painting shall not be lone, Interpretation of Rule 3; The restriction of painting the companies' standard signs For dealers is understood to mean the customary standard signs if the various companies with such border painting as may be necessaiy to give the Standard sign proper display qualities; but this does lot include the painting of gorgeous service stations or other lull d ings or large wall signs or other unusual painting, although such painted matttr may be the design of the company's stanuard 4 sign or the company's colors. This is not intended, no orohibit the painting of stations owned or leased by refiners.distributor^, jobbers and wholesalers. RULE 4: No refiner,distributor, jobber or wholesaler shall knowingly induce, attempt to induce, or assist a party to break an existing written contact for the sale of petroleum products between that party and another. RULE 5: Above-ground equipment for refined products shall boar in a conspicuous place the name or trade-mark of the owner or lessor; and no refiner, distributor,jobber, wholesaler or retailer shall knowingly deliver into suc^equipment any refined product other than the brand designated, or in any Way be a'party to the substit¬ ution of one grade or brand of refined products for another. RULE 5: Lotteries, prizes, wheels or fortune, and/or other games of chance shall net be used in connection with the sales of gasoline or motor oils3 RULE 7: The selling of refined petroleum products below cost for the purpose of injuring a competitor, and with the effect of lessening competition is an unfair trade practice. Group a: RULE 8: On account of tho special nature of service uuirod in supplying "oetroleuip products to airports, no dispensl g op storage equipment Of any kind shall be luted, loaned, or c nerwise furnished to airport operators or resellers of petrol- am products except at full cost, including cost of equipment and storage of installation. RULE 9; A lender or lessor of equipment shall neither extend credit to the borrower or lessee for installation costs, nor advance money to him to cover payment of privilege taxes, or any other expense in any manner related to the installation of loaned or leased equipment. It is not the intention of Rule 1 and Rule 9 to require the payment of installation costs from the borrower or lessee for exchanges and/or substitution in existing equipment on locations where gasoline, kerosene or lubricating oils are being sold upon the date of the Federal Trade Commission's approval of this code. Tho privilege of exchange or substitution of equipment is declared to extend to all dealers not merely to the original lenders. 5 APPENDIX IX A Potltio'n to tine Congress of the Unitod States. A petition submitted by the American Petroleum Institute adopted unanimously by its Board of Directors, Meeting at Chicago, May 3, 193o. We respectfully submit: First; That there should be a minimum of regulations by governments, state or federal, to the end that private industry may be free to serve the public most efficiently and economically. Second: That the state government,having the power to regulate production of crude oil and natural gas to prevent waste and so conserve a valuable natural resource, should be encouraged in that effort. Third: That/the Federal Government having the power to deal with interstate and foreign commerce, and to authorize interstate compacts, should supplement the production control effort of the state. By making permanent arc rigidly enforcing the Connally Law (S. 1190) prohibiting the shipment in interstate and foreign commerce of oil produced in violation. By approving the interstate compact of state laws which has already been ratified by the legislatures of five of the principal oil producing states. By directing the U.S.Bureau of Mines, a competent fact¬ finding agency, to ascertain the crude oil production necessary to meet the consumptive demand of the nation and to make its findings available to the interstate compact commission and the respective conservation authorities of the oil producing states. By exercising control of imports to a proper ratio to domestic nroduction for such a time as is necessary. Fourth: That as concerns marketing, the field of greatest competition, there is no reason to single out the oil industry for special federal intervention. That understood pacts and agreements when voluntarily made by any industry for the purpose of elimination of unfair methods of competition should be permitted» Fifth: That any such economic straightjackets as contained in S. 2445 * or similar proposals for the enlargement of the N J.R.A. 6 would servo to increase tho price of gasoline and demoralize the industry. In support of the forogoir** we point to the record of the oil industry during the last fifteen years as one of outstanding public sorvioe. But for cheap gasoline, many industries which have contributed substantially to American economic progress could not have enjoyed such remarkable developments, hotable among those are automobile and tire manufacture and modern road building, with the related industries such as steel, textiles, plate glass, leather and numerous accessories. The production, transportation, refining and distribution of petroleum and its products go hand in hand with the automotive industry. Important as it is, that automobiles should meet all reasonable demands upon them, it is equally important that the car owner, wherever he mayntravel* should have access to a plentiful supply of gasoline and oil, of good quality and at reasonable prices, During the last fifteen years the efficiency of American made automobiles has steadily increased while their prices have steadily declined. Today, the U.S. makes 25 par cent of all the automobiles in the world. During the same period the petroleum industry has supplied the c 113967/ner with gasoline and oil in ample quantities, of constantly improved quality and at steaciiljr decreasing prices. In 1920 the average selling price for* gasoline,exclusive of tax, in fifty cities, representing all the states, was 2S.7$ts. per gallon; in 1934 the figure for the same cities was 13.6 cents -- a drop of 54.2/,. A barrel of crude petroleum now .yields about twice as many gallons of gasoline as it'did fifteen years ago. Because it has grown so fast, the oil industry has constantly needed large amounts of new capital. Its investments increased from „6,350,000,000 in 1921 to 312,200,000,000 in 1933. During these twelve years 42.94 of new capital,was put into the industry for every dollar that was earned and the annual average earning of the oil industry on its investment was only 1.66/. It is inconceivable that political management could operate a fast growing and hazardous business on so close a margin as/this. In transportation, particularly, which is such an important factor in cost, the oil industry has devised and developed its own unique systems, giving incomparable cheap movements by pipelines, ocean tankers, and by barges on inland waterways. Every/Resource of science and technology has been enlisted in the search for new sunplies of oil in the earth. Intact the chief offense imputed to the industry is that, it has all been too successful in finding now pools. With such a record it is apparent that the lands of the oil industry should rot be tied by governmental bureaucracy. The issue between government and private responsibility for this vast industry should not "be observed by vague declarations that the petroleum industry has become affected with a public interest justifying governmental control just because conservation has come to be recognized as a responsibility of the government. The distinguishing characteristic of petroleum and natural gas is their liquid and fugacious nature. In other mining industries, the situation is entirely different. For instance: the owner of coal land is not subject to drainage, for he keeps his coal if he likes and his neighbors cannot take it. But when a well is drilled into an oil producing area the "law of capture" permits the surface owner to draw the oil from the oven though it may drain the supply of the adjoining land owner. Therefore, the neighbor must drill and produce his share of the oil or lose it; and his neighbor in turn must do likewise. This was a situation beyond the power of the industry, and in all flush pools, before the conservation efforts of the states were effective. The "law of capture" resulted in unscientific and wasteful practices and overproduction, Tho oil producing states and the industry itself have to come to an intelligent conception of what real conservation means. The industry believes that true conservation means the scientific control of production making for greater recovery, as well as efficient and economic utilization of crude oil. It is the duty of the oil producing states, in a public interest as well as in the interest of the industry, to prevent waste of crude oil and thereby conserve the supply. This duty is the obligation of government and when that obligation- shall have been discharged, there is nothing in the inherent nature of petroleum, or in the conduct of the business which requires op