^dslssET 8 } SENATE COMMITTEE PRINT
INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER
TEMPOEAEY NATIONAL ECONOMIC
A STUDY MADE FOR THE TEMPORARY NATIONAL ECO-
NOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS, THIRD
SESSION PURSUANT TO PUBLIC RESOLUTION NO. 113
(SEVENTY-FIFTH CONGRESS) AUTHORIZING AND
DIRECTING A SELECT COMMITTEE TO MAKE A FULL
AND COMPLETE STUDY AND INVESTIGATION WITH
RESPECT TO THE CONCENTRATION OF ECONOMIC
POWER IN, AND FINANCIAL CONTROL OVER,
PRODUCTION AND DISTRIBUTION
OF GOODS AND SERVICES
MONOGRAPH No. 39-A
REVIEW AND CRITICISM ON BEHALF OF STANDARD
OIL CO. (NEW JERSEY) AND SUN OIL CO. OF
MONOGRAPH NO. 39 WITH REJOINDER
BY MONOGRAPH AUTHOR
Printed for the use of the
Temporary National Economic Committee
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1941
TEMPORARY NATIONAL ECONOMIC COMMITTEE
(Created pursuant to Public Res. 113, 75th Cong.)
JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman
HATTON W. SUMNERS, Representative from Texas, Vice Chairman
JAMES M. MEAD, Senator from New York
WALLACE H. WHITE, Jr., Senator from Maine
CLYDE WILLIAMS, Representative from Missouri
B. CARROLL REECE, Representative from Tennessee
THURMAN W. ARNOLD, Assistant Attorney General
•HUGH COX, Special Assistant to the Attorney General
Representing the Department of Justice
SUMNER T. PIKE, Commissioner
Representing the Securities and Exchange Commission
GARLAND S. FERGUSON, Commissioner
*EWIN L. DAVIS, Chairman
Representing the Federal Trade Commission
ISADOR LUBIN, Commissioner of Labor Statistics
•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics
Representing the Department of Labor
JOSEPH J. O'CONNELL, Jr., Special Assistant to the General Counsel
•CHARLES L. KADES, Special Assistant to the General Counsel ■
Representing the Department of the Treasury
WAYNE C. TAYLOR, Under Secretary of Commerce
•M. JOSEPH MEEHAN, Chief Statistician, Bureau of Foreign and Domestic Commerce
Representing the Department of Commerce
LEON HENDERSON, Economic Coordinator
DEWEY ANDERSON, Executive Secretary
THEODORE.J. KREPS, Economic Adviser
Monograph No. 39-A
REVIEW AND CRITICISM ON BEHALF OF STANDARD OIL CO.
(NEW JERSEY) AND SUN OIL CO. OF MONOGRAPH NO. 39
WITH REJOINDER BY MONOGRAPH AUTHOR
The accompanying reply submitted by Messrs. W. S. Farish,
president, Standard Oil Co. (New Jersey) and J. Howard Pew,
president, Sun Oil Co., to T. N. E. C. Monograph No. 39 and the
rejoinder prepared by Roy C. Cook, author of the monograph, are
printed in accordance with the rule adopted by the Temporary
National Economic Committee to give full expression to conflicting
points of view.
The status of the materials in this volume is precisely the same as
that of other carefully prepared testimony when given by individual
witnesses; it is information submitted for Committee deliberation. No
matti r what the official capacity of the witness or author may be, the
publication of his testimony, report, or monograph by the Committee in
no way signifies nor implies assent to, or approval of, any of the facts,
opinions, or recommendations, nor acceptance thereof in whole or in part
by the members of the Temporary National Economic Committee, indi-
vidually or collectively. Sole and undivided responsibility for every
statement in such testimony, reports, or monographs rests entirely upon
the respective authors.
(Signed) Joseph C. O'Mahoney,
Chairman, Temporary National Economic Committee.
TABLE OF CONTENTS
The alleged control of the petroleum industry — a reply to mr.
roy c. cook's monograph, "control op the petroleum industry by
major oil companies" 1
Letter of transmittal 1 — 2
Comments on Mr. Cook's Chapter on Basic Factors 6
Concentration of control 6
Competitive advantages of integration 11
American Petroleum Institute 16
Comments on Mr. Cook's Chapter on Production ' 17
Proration and conservation 19
Effect of proration on independent producers 21
Reserves of crude oil 24
Leasing of oil land 1 25
Drilling permits 26
Crude oil pipe lines 26
General comments 27
Comments on Mr. Cook's Chapter on Crude Oil Transportation 30
Crude oil pipe lines 30
Common carrier status 31
Crude oil pipe lines and the independents 33
Pipe lines and crude oil prices 35
Posted prices and price leadership 36
Comments on Mr. Cook's Chapter on Refining 39
Major companies versus independents 39
Refinery crude supply 41
"Price Squeeze" 42
Exchanges of gasoline 44
Comments on Mr. Cook's Chapter on Marketing . 45
Nature of competition in marketing branch 45
Price leaders 47
Basing point systems 49
Ethyl Gasoline Corporation 51
Service station operators 56
The Achievements of the Petroleum Industry 64
Table 1. Domestic marketing territory of 20 major oil companies, by
States, May 1939 69
Table 2. Summary statistics of pipe line companies reporting to Inter-
state Commerce Commission, 1929-37 70
Table 3. Estimates of petroleum reserves in the United States 70
Table 4. Deepest tests and deepest producing wells, by years 70
Table 5. Total gasoline production from refine i s in the United States,
1918-38 - 71
Table 6. Conservation of crude oil through oper ii ;on of cracking processes. 71
Table 7. Gasoline consumption, domestic c u le oil production, and
motor vehicle registrations, by ye r , 1900-38 72
Table 8. Changes in the volatility and an' 1: lock quality of gasoline
produced in the Unite<l . . 72'
Table 9. Indexes of United States retail pri e , gasoline compared with
other essentials .. 73
yj TABLE OF CONTENTS
Rejoinder By Roy C. Cook, Author of Monograph No. 39 75
Letter of transmittal y
General comments \%
THE ALLEGED CONTROL OF THE
A REPLY TO MR. ROY C. COOK'S MONOGRAPH, "CONTROL
OF THE PETROLEUM INDUSTRY BY MAJOR OIL COMPANIES."
LETTER OF TRANSMITTAL
30 Rockefeller Plaza,
New York, June 2, 1941.
Hon. Joseph C. O'Mahoney,
United States Senate, Washington, D. C.
My Dear Senator O'Mahoney: Through the courtesy of Mr.
Walter White of the Business Advisory Council* the undersigned have
placed in your hands a review and criticism of T. N. E. C. Monograph
No. 39, prepared by Mr. Roy C. Cook.
This review was undertaken early this year upon receipt of assur-
ances from Dr. Dewey Anderson, Executive Secretary of T. N. E. C,
that the Committee would publish our work along with any rejoinder
which Mr. Cook might care to make.
While members of the staff of the Standard Oil Co. (New Jersey)
and the Sun Oil Co. have collaborated in the preparation of the mate-
rial contained in the review, full responsibility for the conclusions
reached is assumed by the undersigned.
W. S. Farish.
J. Howard Pew.
Mr. Roy C. Cook's monograph entitled "Control of the Petroleum
industry by Major Oil Companies" calls for some reply, especially as
it has been published by the Government Printing Office and might
seem to have some of the authority of an official document. As a
matter of fact, Mr. Cook alone is responsible for this general attack
upon the oil industry. Although it has been published as No. 39 in a
series of monographs printed for the use of the Temporary National
Economic Committee, it is not an official report of the T. N. E. C.
Like the other monographs, it contains the following explicit disavowal
of T. N. E. C. responsibility:
The status of the materials in this volume is precisely the same as that of other
carefully prepared testimony when given by individual witnesses; it is information
submitted for committee deliberation. No matter what the official capacity of the
witness or author may be, the publication of his testimony, report, or monograph
by the committee in no way signifies nor implies assent to, or approval of, any of
the facts, opinions, or recommendations, nor acceptance thereof in whole or in
part by the members of the Temporary National Economic Committee, individually
or collectively. Sole and undivided responsibility for every statement in such
testimony, reports, or monographs rests entirely upon the respective authors,
The letter of transmittal by Mr. Thurman Arnold, Assistant Attor-
ney General, makes it clear that the author is speaking for himself.
Mr. Arnold wrote:
* * * This report originated and was completed by Mr. Cook as a private
research project in the department of economics of the George Washington
Mr. Cook has prepared this report, based upon public and privately published
sources independently of his official duties as a member of the economic staff of
the Department of Justice. The facts, opinions, and conclusions are solely those
of the author and are not to be considered as the opinions or policies of the Depart-
ment of Justice.
Although Mr. Cook is an "expert" in the Department of Justice,
he is clearly speaking, in his monograph, neither for the T. N. E. C-
nor for the Department of Justice. At the outset, it appears that he
is a self-constituted spokesman for the "independents." An inde-
pendent in the days of the old Standard Oil Trust was any company
outside that group, but Mr. Cook does not use the word "independent"
in that sense. Apparently, for Mr. Cook, an independent is anyone
outside the ranks of the 20 large companies he calls majors. In fact,
the "independents" are not a homogeneous group; they have as many
differences as they have similarities. The "independents" include
some companies with securities listed on the security exchanges and
some individual proprietorships; they even include some of the
companies which were divorced from the old Standard Oil Co. Some
are fully integrated companies which carry on all operations from
exploring for oil to selling to the consumers; others are specialists in
particular activities, such as drilling wells or transporting gasoline for
hire. In the production <r>i crude oil some independents produce
CONCENTRATION OF ECONOMIC POWER
thousands of barrels a day; others only a few. In refining some of
the independents have well-located plants with modern equipment,
while others have antiquated skimming plants located far from the
more important markets. Some of the independent marketers carry
on operations in several States, but others operate a gasoline pump as a
side line. The hearings before the T. N. E. C. and other investiga-
tions of the oil industry show that neither the points of view nor the
interests of such "independents" are identical.
Mr. Cook, in trying to speak for all such different sorts of inde-
pendents, has undertaken a most difficult role. By failing to recognize
frankly and fully the differences of interest among the independents,
he has been led to accept contradictory complaints. All the com-
plaints of all the independents cannot be added together to make an
impressive total, for some complaints cancel out. The most common
complaint in the oil industry, and perhaps, indeed, in any industry, is
about prices. The producers of crude oil quite commonly would wish
that its price might be higher, while the refiners, on the other hand,
would like to get their raw material cheaper. Either group may
sometimes wish to fix personal responsibility for their unsatisfied
desires and blame it all on a group of companies or another branch of
the industry. But obviously even the majors cannot at one and the
same time push crude prices down to oppress the independent producer
and push them up to squeeze the independent refiner. To give another
example, the major companies cannot simultaneously push product
prices down to hurt the independent refiner and keep them up to put
pressure on the independent jobber. To examine all possible com-
plaints and to select the more important ones (among the contradictory
claims) calls for clear, unbiased discrimination and intimate acquaint-
ance with the facts of the industry. Mr. Cook has failed to appreciate
the difficulties of his self-constituted role.
In his final conclusion, however, Mr. Cook abandons the point of
view of the independent oilman, for he concludes that regulation of the
oil industry on a public utility basis may be necessary. On this point,
the independents would promptly suppress their complaints against
one another and against the majors and would disown Mr. Cook as
their spokesman. No independent wishes for himself to become part
of a public utility.
In reality, therefore, Mr. Cock is not a spokesman for any official
agency, for any group of independents, or for all the independents.
His contentions are his own.
Mr. Cook's principal contentions, as they appear in his own intro-
duction, are: (1) Control is as complete today as in the days of the
old "oil trust." (2) There is definite evidence of cooperation and
uniform concerted action by adoption of identical business policies by
major companies. (3) The independent has become weaker.
These principal contentions are false. Although their falsity will
be shown more fully later in this reply, a brief statement may be made
Control cannot be so complete today as in the days of the old "oil
trust," for no one company has anything but a small fraction of the
share of the business that the oil trust had, and many companies, large
and small, are now in vigorous competition with one another. Mr.
Cook's first contention, like the second about uniform concerted ac-
tion, amounts to a denial that competition exists. This second con-
tention will be answered in detail in the following chapter.
CONCENTRATION OF ECONOMIC POWER 5
There are definite evidences of competition in the oil industry in the
record of the T. N. E. C. oil hearings. To cite just a few, the major
oil companies compete with one another in their efforts to locate new
oil fields and in the development of the techniques and of the tech-
nicians who give their finding efforts some prospect of success ; different
majors have recently developed rival methods of catalytic refining;
and some of them have been aided in their struggles by the successful
search for economies in transporting gasoline, by pipe line and tank
truck, from the refineries to the filling stations. But even the evidence
from the T. N. E. C. hearings is hardly necessary. In every market
area and from many radio stations, the public is familiar with the
efforts of rival oil companies to win and retain their patronage.
It is highly significant that little evidence from the T. N. E. C. is
cited to support the assertion of monopolistic conspiracy. If there
were a conspiracy, the T. N. E. C. record would have revealed it.
The T. N. E. C. record is a voluminous one. It contains many com-
plaints, but most of these arise -from the vigorous character of com-
The contention that the independents have become weaker is like-
wise without foundation. The T. N. E. C. record reveals that the
number of independent producers is increasing, that the independent
refiner can retain his position if he has a well-located and modern
refinery, that a recent development in transportation, the truck, has
opened up new fields for the small independent enterprise, and that the
independents now occupy most of the retail field. Contrary to Mr.
Cook's contentions, as we shall see in the following chapter, the oil
industry is not highly concentrated and concentration is not increasing.
This reply to Mr. Cook will follow the general outline of his mono-
graph. After first discussing his general chapter on "the basic fac-
tors" in the oil situation, we will deal with the "four" branches of the
industry— production, transportation, refining, and marketing. Fin-
ally^ we will submit a brief statement of the achievements of the
COMMENTS ON MR. COOK'S CHAPTER ON BASIC FACTORS
Mr. Cook's principal contentions in his chapter "Basic Factors"
are: (1) "Control" is concentrated in the oil industry. (2) Integra-
tion gives the large companies an unfair competitive advantage.
(3) The American Petroleum Institute is a means of holding the rest
of the industry subject to the domination of the major companies.
Let us look at the record.
CONCENTRATION OF CONTROL
Mr. Cook states that the 20 major oil companies considered in
his analysis had at the end of 1939 combined total assets of over
$9,000,000,000, ranging in size from 62 to 2,035 million dollars. He
gives the names of the companies and their total assets at .the end of
1939. This group represents about 60 percent of the investment in
the industry, but, he says, their degree of control is very much higher
than this percentage indicates.
This statement on the degree of control is somewhat obscure. In
the first place, Mr. Cook does not give any definition of control.
In the second place, he oilers no explanation of the bald assertion that
assets do not measure control. Moreover, he included in the total
assets substantial investments outside the United States and, in the
case of the Cities Service Co., public utility mvestments outside the
The principal criticism of Mr. Cook's statement on the alleged
concentration of control is that he selected 20 companies and gave no
reason for selecting so large a number. Ordinarily in discussions of
concentration a much smaller number is taken. For example, at the
opening of the T. N. E. C. hearings, Dr. Willard L. Thorp, represent-
ing the Department of Commerce, presented a comparison of the
concentration in various American industries. In no instance did he
use as many as 20 companies, but smaller numbers, 1, 2, 3, 4, and 5.
His figures were: Virgin aluminum, 1 company, 100 percent of output;
automobiles, 3 companies, 86 percent of output; beef products, 2
companies, 47 percent of output; bread and other bakery products,
3 companies, 20 percent of output; cans, 3 companies, 90 percent of
output; cement, 5 companies, 40 percent of output; cigarettes, 3
companies, 80 percent of output; bituminous coal, 4 companies, 10
percent of output; corn binders, 4 companies, 100 percent of output;
flour, 3 companies, 29 percent of output; plate glass, 2 companies,
95 percent of output; safety glass, 2'companies, 90 percent of output;
iron ore, 4 companies, 64 percent of output; oil wells, 4 companies,
20 percent of output; steel, 3 companies, 60.5 percent of capacity;
whisky, 4 companies, 58 percent of output; women's clothing, 4
companies, 2 percent of output; wood pulp, 4 companies, 35 percent
of output; zinc, 4 companies, 43 percent of output. 1 During the
• Temporary National Economic Committee Hearings, pt. 1, p. 137.
CONCENTRATION OF ECONOMIC POWER 7
T. N. E. C. oil hearings, a study published by the Twentieth Century
Fund entitled "Big Business: Its Growth and Its Place" was cited to
show that the degree of concentration in the oil industry is compara-
tively low. The study was based on the total wage earners in the
manufacturing end of the business; the 6 largest companies in the oil
industry and 6 in every other industry were taken to measure the
decree of concentration. Oil was forty -sixth in the list of about 80
industries. 2 The most comprehensive statistics on concentration
are those published in the study by the National Resources Com-
mittee, The Structure of the American Economy, Part 1 — Basic
Characteristics. Measured by persons employed, the 4 largest
producers in petroleum refining had, in 1935, 38.3 percent of those
employed in the industry. This figure is exceeded by 5 out of 21
large industries, those employing more than 100,000 persons; by 9
out of 44 medium industries, those employing 25,000 to 100,000
persons; and by 106 out of 210 small industries, those employing less
than 25,000 persons. 3
Further statistics on comparative concentration are given in
T. N. E. C. Monograph No. 27, The Structure of Industry, prepared
by Willard L. Thorp and Walter F. Crowder, of the Department of
Commerce. The Bureau of Mines of the Department of the Interior
prepared basic data for the products of mines analyzed for 1935.
According to tins analysis, the 4 leading companies employed 15.5
percent of the wage earners in petroleum. This percentage for pe-
troleum was exceeded by the percentages in 18 out of 24 mineral
products, and exceeded the percentages in 5 other mineral products. 4
The foregoing statistics clearly show that, on any comparable basis,
the concentration in the oil industry is not high, despite the fact that
many of the units in the industry are large corporations. Only by
using such a figure as the largest 20 companies can it be made to
Mr. Cook claims not only that control is concentrated but also
that concentration is increasing. He states:
the importance of the 20 major companies has grown appreciably in the past 15
or 20 years. From 1926 to 1937 their share of' total crude oil production rose
from 46.3 to 52.5 percent; of crude oil stocks from 76.6 to 94.2 percent; of refin-
ing capacity from 65.5 to 75.6 percent; and of gasoline production from 71.3 to
This conclusion must be challenged, for it is obtained by a fallacious
statistical procedure. The 20 companies selected are those which are
the largest at the present time. At the end of a race, the leaders
will have gained in rank over those who led at the halfway mark..
By selecting for comparison those who lead at the present time, the
group necessarily consists of those who have grown the most; a bias
is introduced in the direction of showing "increasing concentration.
The longer the period covered, the greater is the bias by selecting
for study the leading group at the end. If the group selected was
that of the leaders of an earlier period, a bias would be introduced
in the direction of showing decreasing concentration. The only ap-
propriate method is to compare the percentage controlled by the
leaders in each year, irrespective of which companies are among the
» Ibid., pt. 15, p. 8445.
3 Appendix 7, table I, pp. 240-248.
* Appendix F, p. 573.
CONCENTRATION OF ECONOMIC POWER
leaders. This was pointed out to the T. N. E. C. during its oil
hearings. 5 It is illustrated in the following paragraph:
The figures for refining capacity are used for purposes of illustra-
tion, because they happen to be the only ones in the T. N. E. C.
record which can be checked by the supporting data made public. 6
Mr. Cook asserts that concentration is increasing because the 20
majors' share of refining capacity increased from 1926 to 1938 from
65.5 to 75.6 percent. Consider the figures in the following table:
• Daily crude oil refining capacity
[Percent of United States total]
4 largest refiners in 1938
4 largest refiners in 1926
4 largest refiners in each year
If we compare the refinery capacity of the four largest refiners in
1938, we find from 1926 to 1938 that there was an increased concentra-
tion, from 29.2 to 31.6 percent; if we compare that of the (our largest
refiners in 1926, we find that there was- a decreased concentration,
from 32.9 to 29.4 percent; but, if we compare that of the four largest
refiners in each year, we find a small decrease in concentration from
32.9 to 31.6 percent.
Mr. Cook's assertion of increasing concentration is refuted in the
most comprehensive study of concentration trends, one made for
the T.'N. E. C. In T. N.* E. C. Monograph No. 27,'The Structure of
Industry, Willard L. Thorp and Walter F. Crowder include petroleum
refining among the industries with unusual declines in concentration. 7
According to their figures, concentration in petroleum refining reached
its peak in 1923. 8 The "proportionate index" reached 150 in that
year, and declined to 104 in 1929, 91 in 1935, and 88 in 1937. 9 They
note that "the 5 largest (companies) have lost position (in gasoline
production) , while the second 5 have gained slightly, and the rest of the
industry has gained even more. All these measures fall far below
the dominance obtained by the Standard Oil Co. prior to 1911." 10
Mr. Cook neglects to point out what is really the outstanding fact
about concentration in the oil industry, namely, that there has been an
enormous decrease since the dissolution of the old Standard Oil Co. in
1911. The old Standard Oil Co. controlled a greater portion of the
total oil business than is now controlled by all the 20 major com-
panies put together. Furthermore, not only are many companies
formerly parts of the old Standard Oil Co. now in competition with
one another but other companies have grown and many new com-
panies have entered the field. Mr. Cook declared that the 20 major
oil companies have developed from companies formerly parts of the
old Standard Oil Co. and "other large financial interests, including
those controlled by the Mellons and the House of Morgan." This
statement implies that the oil companies have been sponsored and
8 Temporary National Economic Committee Hearings, pt. 15, p. 8445.
•Ibid., pt. 14-A, table 28b, p. 7801.
' P. 69.
• P. 74.
• P. 90.
i° P. 262.
CONCENTRATION OF ECONOMIC POWER 9
are now controlled by large banking interests. As a matter of fact,
the majors which have grown up beside the divorced companies have
built themselves up largely through reinvestment of their earnings
within the growing oil industry and most directors of the major oil com-
panies are operating executives, not financiers.
Mr. Cook contends further that the officers of the larger oil com-
panies are in so dominant a position that they can disregard the
wishes of the stockholders. Mr. Cook states:
As is the case of most large corporations, the officers control voting stock so
completely that they need not consider stockholder approval of their decisions
and policies. In the meetings held by 17 of the major oil companies in 1938, the
officers voted an average of 99.3 percent of the common stocks voted.
The stocks of several majors is closely held. For example, the 100 largest
stockholders of Shell Union Oil Corporation and Sun Oil Co. held 88.9 and 84.9
percent, respectively, of the common stock at the end of 1938. Certain influen-
tial stockholders have interests in many companies. The Harkness and Flagler
group, original partners of Rockefeller, and the Rockefeller group have sub-
stantial interests in the 6 majors of the Standard group. This interlocking of
dominant stockholders makes it easier to pursue concerted action against inde-
pendent competitors and tends to establish a strong possibility of cooperation.
This is especially true of the majors that were a part of the Standard Oil Trust.
This statement could be most misleading. Mr. W. S. Farish, presi-
dent of the Standard Oil Co. (New Jersey), answered the first point
in Mr. Cook's contention when he stated to the T. N. E. C: "Any
implication that, because stockholders sign proxies rather than -attend
meetings, corporate managers in the oil industry are free to manage
without regard to the interest of stockholders is most emphatically
not true." " He elaborated this point during his testimony. 12 It is,
of course, true that a single stockholder who is all alone in his disap-
proval of corporate policies can do little about it; but with all the
modern publicity about corporate affairs, he is in an excellent posi-
tion to get attention if he has a plausible case.
The statement that the stock of some of the major oil companies is
closely held is misleading, for the T. N. E. C. hearings show that this
is the exception. The T. N. E. C. asked that the companies report
the holdings of the 100 largest shareholders. The reports 13 show that
among the large shareholders are many foundations and educational
institutions and many investment and banking houses. The last group
presumably holds the floating supply of the stock in which the equity
is scattered among many- customers. It is true that the Sun Oil Co.
is closely held, for members of the Pew family hold more than a major-
ity interest. The two other companies which Mr. Cook may have
considered as closely held, the Shell Union Oil Corporation and the
Skelly Oil Co., are really in a different position, for each of them is
better described as an affiliate of the corporation which holds a major-
ity interest in its common stock. Of the 20 major companies, only 1
is closely held without question, and 2 others are affiliates of other
The most serious assertion of Mr. Cook in the paragraph just quoted
is that the substantial interests of the Rockefeller, Harkness, and
Flagler groups make it easier to pursue concerted action against inde-
pendent competitors. There is no evidence at all that those interests
have led to any concerted action whatsoever. The T. N. E. C record
11 Temporary National Economic Committee Hearings, pt. 17, pp. 9931-9932.
> 2 Ibid., pp. 9663-9682.
" Ibid., pt. 14-A, tables 8 and 9, pp. 7775-7778.
10 CONCENTRATION OF ECONOMIC POWER
discloses only two instances in which officers of any corporation for-
merly part of the old Standard Oil Co. testified on this subject. Mr.
W. S. Farish, president of the Standard Oil Co. (New Jersey), testified
that his company had no group of stockholders who wants control of
operations. 14 Dr. Robert E. Wilson, president of the Pan American
Petroleum & Transport Co., an affiliate of the Standard Oil Co ; of
Indiana, testified that his company dealt at arm's length with other
oil companies in which there are Rockefeller interests. 15 Of course,
Mr. Cook's statement is very vague; he says only that the interlock-
ing of dominant stockholders "makes it easier" to pursue concerted
action and "tends to establish a strong possibility of cooperation."
But such vague statements might be most misleading.
At no place in his monograph does Mr. Cook offer detailed support
for his statement that there is definite evidence of "uniform concerted
action by the adoption of identical business policies." There are, of
Course, many points of similarity among the 20 major companies.
They are all integrated companies and are confronted with somewhat
similar problems. There are likewise many points of similarity among
the military, naval, and aviation policies of rival great powers. But
similarity of policies does not imply concerted action. Any large oil
company has to be on the alert to copy any improvement made by
any of its competitors. However, a careful study of the industry or
of the T. N. E. C. record would refute the statement that the policies
As a matter of fact, there are important dissimilarities among the
major companies. Space will permit mention of only a few of the
manv dissimilarities that might be cited. The Cities Service Co.
includes both petroleum and electric utility interests, and the Sun
Oil Co. has a wholly owned subsidiary which is engaged in shipbuild-
ing; but most of the majors have few jnterests outside the industry.
Some of the majors have important foreign operations, others do not.
^ There are also a number of important dissimilarities in the marketing
field. There are great differences in the marketing territories of the
20 majors; 7 operate in 38 or more States, 3 operate in from 28 to 33
States, 6 operate in from 17 to 21 States, and 4 operate in from 6 to
10 States. 16 There are substantial differences in the extent to which
the major oil companies sell to jobbers; the Gulf Oil Corporation made
7.34 percent of its total domestic sales to jobbers, whereas the Phillips
Petroleum Co. made 36.99 percent of its sales to jobbers. 17 In the
eastern section of the country, retail dealers who sell gasoline only
under the brand name of a single supplier receive from him a discount
of half a cent, but this practice is not universal throughout the United
States. Credit cards are widely used to permit the customer to
charge gasoline and petroleum products at the dealer stations, but
this practice is not nearly so prevalent in the Rocky Mountain area
as it is in other parts of the United States. 18 The major companies
do not generally act as distributors for the well-known brands of
Pennsylvania motor oil, but the Standard Oil Co. of Indiana does so. 19
Important dissimilarities among the major companies are also
found outside the field of distribution. The Sun Oil Co. manufactures
nibid., pt. 17, p. 9667.
•» Ibid., pt. 15, pp. 8374-8375.
'• Ibid., pt. 14--A., table 37, 7812-7813. The table' is reproduced in our" appendix as table 1, p. 69 infra.
i" Ibid., table 39a, p. 7818.
i«Ihi:1., pt. 17, p. 9404.
ie Ibid., pt. 15, p. 8513.
CONCENTRATION OF ECONOMIC POWER \\
and sells but one grade of gasoline, whereas the others have two or
three; the Sun Oil Co. also does not use any tetraethyl lead. There
are, moreover, important differences among the majors in the extent
to which they purchase gasoline. If imports of gasoline are included
with purchases and exports are included in sales, the Sun Oil Co. and
the Socony- Vacuum Oil Co., Inc., are seen to be large net purchasers
of gasoline, for they bought 28.2 and 18.9 percent, respectively, in
1938. On the other hand, the Texas Corporation bought only 2.5
percent. 20 Even more striking are the differences in the field of crude
oil production. Continental Oil Co., Skelly Oil Co., Ohio Oil Co.,
and Phillips Petroleum Co. are net sellers of crude; they produce more
than they use in their refineries. The opposite is true of the Standard
Oil Co. of Indiana and the Standard Oil Co. of Ohio, which are large
net purchasers of crude. 21 There are also differences in the year-to-
year changes in stocks of crude oil on hand. During the year 1936
the Sun Oil Co.' reduced its crude stocks by 14 percent, whereas the
Phillips Petroleum Co. doubled its stocks. 22 Finally, there are
differences in the financial policies of the different major companies.
All the major oil companies are financed chiefly by stock, although
most of them also have some funded and long-term debt. At the
end of 1938 three companies had obtained over 20 percent of the
total capital employed through funded and long-term debt, while two
companies had no funded and long-term debt. 23 The 20 major com-
panies also differ in the extent to which the net earnings applicable to
common stock are paid out in dividends. Based on the average for
the period 1929-38, inclusive, the Texas Corporation earned 4.8 per-
cent on the total book value of common stock and paid out in cash
4.6 percent, while the Sun Oil Co. earned 8 percent and paid out in
cash 2.4 percent. 24 But further elaboration is needless. There are
clearly important differences in policy among the major oil companies
and significant exceptions from policies commonly followed by them.
THE COMPETITIVE ADVANTAGES OF INTEGRATION
Mr. Cook gives four reasons why the modern majors are more inte-
grated than was the old Standard Oil trust. They are: (1) The pro-
duction end of the oil business is now, with the accumulation of under-
ground reserves, "quite advantageous"; (2) to insure adequate outlets,
the majors built their own filling stations which they continue to con-
trol and which makes it possible to advertise successfully on a national
scale ; (3) as a result of integration it is possible to lose money in one
division and show a profit at the end of the year on the entire activi-
ties; (4) a rigid price structure can be maintained. He concludes that
the major oil companies earned their profits largely in the divisions "in
which the monopoly position is most clearly indicated." This is a
most inadequate account of the lengthy discussions of integration
before the T. N. E" C.
The explanation that the majors went into production because it
was quite advantageous is doubtless correct. This is, however, the
branch of the business in which the combined total of the individual
20 companies' shares of the business or, to use Mr. Cook's language,
«« Ibid., pt. 14-A, tables 30-33, pp. 7803-7806.
»' Ibid., tables 10, 28a, pp. 7779-7800.
» Ibid., table 15d, p. 7788.
» Ibid., tables 46a-46t, pp. 7843-7862.
"Ibid., pp. 7880-7881.
304955 — 41— No. 39a 2
12 CONCENTRATION OF ECONOMIC POWER
their "monopoly position," is the weakest. Mr. Cook's own table 3
shows that the major oil companies had in 1937 only 23.7 percent of
the producing oil wells and only 52.2 percent of the crude oil production.
Mr. Cook's second reason for integration is not supported by the
evidence. Company-owned stations were never a large proportion of
total retail outlets and were never numerous enough in themselves to
justify national advertising. Without the distribution provided by
the far more numerous stations owned by independents, only a few
major companies could afford to undertake national advertising of
motor fuels. Furthermore, it might be remembered that nationally
advertised commodities are rarely sold only by retail stores owned by
the advertiser. This fact can even be illustrated by an example from
the petroleum industry: The manufacturers of Pennsylvania lubricants
are well-known as national advertisers, in spite of the fact that they
do not own any appreciable number of retail stations.
The third reason which Mr. Cook advances for integration is the
possibility of offsetting of losses in one division by gains in another.
He claims that the marketing division is operated at a loss and offers
the advantages of a rigid price structure as part of his explanation.
He does not explain what he means by a rigid price structure or show
its relation to marketing profits. If he means by this that the majors
are able to keep prices high to consumers, then might not one expect
to find high marketing profits? Apparently, Mr. Cook does not be-
lieve this, because he argues that the marketing divisions are operated
at a loss. If he means that the majors' refineries transfer products to
their marketing departments at high prices, how does he explain why
such arbitrary transfer prices would benefit the integrated companies? 25
The only explanation he offers is the statement that "the marketing
division is usually operated at a loss but it does make a dependable
outlet and extension of other divisions possible." This suggests that
the transfer prices do not fairly credit the marketing division with its
benefits to the entire business and that the "loss" is a matter of arbi-
trary accounting. The arbitrary character of the so-called marketing
losses was fully explained during the T. N. E. C. hearings, 26 and ac-
counts for the fact that most of the companies were unable to supply
answers to the T. N. E. C. questions on their earnings by divisions of
the industry. 27 '
If the marketing division were really -unprofitable, it would be to the
advantage of the integrated companies to withdraw from the field;
and no argument about offsetting losses and gains can obscure that
fact. The whole argument is extremely weak. If any branch of an
industry is regularly and persistently unprofitable, the average earn-
ings of a fully integrated company will be lower than those of com-
panies which engage only in the profitable branches. Only if the
profitableness of each branch varied greatly, frequently, and in
opposite, directions from the others would the integrated company
25 As a matter of fact, petroleum prices are not rigid but flexible. Space will not permit any discussion
of the various ways in which price sensitivity may be measured. A most careful study of the subject may
t>> found in Temporary National Economic Committee Monograph No. 1, Price Behavior and Business
Policy, prepared by Saul Nelson and Walter O. Keim, of the U. S. Bureau of Labor Statistics, under the
supervision of Prof. Edward S. Mason, of Harvard University. In this study the flexibility of wholesale
prices of commodities was measured by 14 specific tests and ranked from I to X, with X the most flexible
group. 10 prices of petroleum and petroleum products were studied. The 140 ratings of petroleum and its
products were as follows: Group I, 2 ratings; II, 0; III, 3; IV, 9; V, 21; VI, 13; VII, 20; VIII, 17; IX, 28;
X, 27. Over half the ratings were in the 3 groups with high flexibility, and less than 5 percent were in the
3 groups with low flexibility. Appendix I, Measures of Price Flexibility, table 26, p. 197.
J » Temporary National Economic Committee Hearings, pt. 14, p. 7182.
2 ; Jbid. pt. 17-A, pp. 10036-10043.
CONCENTRATION OF ECONOMIC POWER 13
have an advantage, and that advantage would consist solely of having
comparatively stable earnings, not higher average earnings over a
period of years. Mr. Cook offers no evidence that the profits of the
various branches of the petroleum industry do in fact vary greatly,
frequently, and in opposite directions. It is more probable that they
generally vary in the same direction, sharing in the gains and losses of
national prosperity and adversity.
It is especially unfortunate that Mr. Cook emphasized the weak
argument of offsetting losses and gains and ignored the ample testi-
mony in the T. N. E. C. record about the real advantages of the
integration in the oil industry.
Mr. J. Howard Pew, president, Sun Oil Co., testified:
The petroleum industry is necessarily an integrated one, whether through
common ownership of all the activities or because of contractual relations between
the several divisions of the industry. The producer of crude must have a market
for it and must have a transporter to carry it to that market; that is, to the
refinery. The refiner, in turn, must have a selling agency to dispose of his products
and he must have means of transporting them to that agency. If producer,
transporter, refiner, and marketer are all owned and operated independently of
each other, their common interest brings about what has been called contract
integration: they deal with each other through contractual arrangements based
on prices, rates, and so forth. Each activity makes the best bargain it can with
the other. The refiner, for example buys his crude as cheaply as possible and
sells his products for the highest possible price. That means that every unit of
activity in the line from the oil field to the filling station must have its own buying
and its own selling organization. This is- expensive.
Rut a greater difficulty is that among these multiplied buying and selling
agencies there is nobody who has his eye on ultimate results — the final cost of the
product and the price at which it can be sold to the consumer. Everybody is
thinking of how to make the best deal with the man next to him in the line;
nobody is worrying about the consumer dow f n at the end of the line. Yet the
consumer's ability to buy is bound to depend- on the price at which the products
can be offered to him. In the completely integrated unit of the industry an execu-
tive authority — president, chairman, executive director, board of directors, or
what you will — has its eye always on that party down at the end of the line: How
would he react if these various hagglers along the way should get costs and prices
up beyond his reach? After all, the consumer is the boss; he makes or breaks the
business; somebody must keep him in mind all the titne; and the hagglers can't
be expected to do it. They are too much engrossed with their own particular jobs;
too many removes from the consumer.
Thus management knows that its job is to coordinate all stages and processes
and bargainings to satisfy that consumer. , To make the price a little lower, the
quality a little higher, or the service a little better must be its constant effort.
Precisely because it is animated by this policy of consumer concern, integration
sets the pace for efficiency. It sees the industrial picture as a whole, which aw
one of the units, operating independently and at several removes from the con-
sumer, could do. Integration makes possible the reconciliation of all the con-
flicting interests along the line from the search for oil to the operation of the
gasoline pumps at a thousand filling stations. It insures support for research,
experiment, invention, improvement, in whatever department. Where differing
interests as between independent departments would frequently tend to dis-
courage improvements, the establishment of a common interest in general results
works for better methods all along the line. It was not a wagon hauler, anxious
to protect his job, who invented the pipe line; it was a refiner who wanted to get
his crude a bit cheaper.
* * * * * * . *
* * * competition among the companies has always been keen in the search
for better methods, lower costs, higher qualities, and the general satisfaction of the
consumer; and the industry as a whole has benefited by all the advances.
Integration, of course, is the essence of mass production, in which American
industry has led the world. Mass production reduces costs, makes lowe consumer
14 CONCENTRATION OF ECONOMIC POWER
prices. But mass production demands a mass market. To secure it the producer
must turn out a product good enough to deserve a mass market. You might
integrate until the cows come home, but if the product wasn't good enough or its
cost was too high, you just wouldn't sell it. So integration coordinates all the
stages of production in the common effort to get the right product. And when
you have that right product, you must let the consumer know about it. You
can't hide its light under a bushel. You must give it an identifying name, brand,
or label, and then you must advertise it under that name or brand. After that,
you must keep it good enough to deserve the claims you have advanced for it.
A brand name is a valuable asset — if you live up to your claims for it and the cus-
tomers' expectations of it. But it is a liability otherwise. If you advertise a
mouse trap as the best in the world, you must keep it the best, even if you have to
put out a new model every year. That brand name is your pledge to the buyer —
your honor is staked on it. The integrated business can make sure that all its
divisions and branches work in harmony to turn out a product always worthy of its
name and fame. The oil company, adapting its service to all varying conditions
of its wide flung market, produces gasoline and lubricants to fit season and region.
The integrated company, constantly studying all phases of its marketing problem,
recognizes these variations and adapts its products to them. 28
Dr. Robert E. Wilson, president, Pan American Petroleum &
Transport Co., testified:
Splitting up the integrated companies "would be very harmful,
because it is mainly the large integrated company that is doing the
forward looking research and development work, which requires the
assets of an integrated company and requires the interrelati6n, because
many problems involve both manufacture and sale, or manufacture,
sale, and transportation." 29
Mr. W. S. Farish, president, Standard Oil Co. (New Jersey), testi-
Integration is the uniting into one business of several of the stages through
which a material passes before it reaches the ultimate consumer. The conditions
under which integration is desirable are: (1) Large volume of business in a single
commodity group; (2) highly specialized production, manufacturing, transporta-
tion and distribution techniques; and (3) substantial advantages (at some stages)
in large-scale operation. These conditions characterize the petroleum industry,
and it follows therefore that the relations between any one of the stages of the
industry and the others next to it are peculiarly close. The refiner needs to be
assured of his market. The marketer needs to be assured of his supply. . Both
need a steady flow of products for efficient operation. Neither is interested in
other than the one major product and its related group of byproducts. Neither
can transfer his specialized equipment to the handling of some different product.
There is a high degree of mutual interdependence imposed by the facts. If such
relationships are not provided by common ownership, they must be provided by
contractual arrangements. When such close relationships take the integrated
rather than the contractual form, there is no need for secrecy or tactical maneuver-
ing between the parties concerned. Integration permits the full exchange of in-
formation and experience among specialists in the several divisions of the company.
Integration by and of itself does not, of course, automatically produce earnings.
But because of the close dependence of one phase of operation on another in the
oil business, the integrated form of organization does help very greatly to insure
the continuity of the enterprise and to stabilize such earnings as the skill of
management is able to produce. Not only the normal operating schedule, but
particularly the capital outlay need to be planned in advance; such planning
can be more effectively accomplished by an integrated company than a nonin-
tegrated one. Because of the rapid changes in oil technology, it is necessary con-
stantly to spend money or> research and to invest capital in replacement in order
to keep abreast of competition. Since the inherent risks of the oil business are
substantial, conservative investors as distinct from speculators, want to have
some assurance of continuity and stability of earnings before they put capital to
work. Without integration oil companies would not have been able to spend
such large sums on research and improvements. Integration, therefore, bears a
very direct relation to both progress and investment. 30
»• Temporary National Economic Committee Hearings, pt. 14, pp. 7188-7191.
"Ibid., pt. 15, p. 8373.
» Ibid., pt. 17, pp. 9748-9749.
CONCENTRATION OF ECONOMIC POWER 15
If even the sworn testimony of such witnesses is suspected of bias,
it might be noted that some of the avdantages of integration were
pointed out as long ago as 1907, in the Report of the Commissioner
of Corporations on the Petroleum Industry. The report said: "Each
of the stages in the industry can be more economically conducted
when it works in entire harmony with every other stage, and such
entire harmony can be secured only through a single control." 31
It is a mistake to assume that integration is found only among
large companies. Although the advantages of integration are most
important for large companies whose gr j,t investments require the
assurance of supplies and markets, integration is also found among
smaller companies. Mr. Pew stated to the T. N. E. C. that there
were 11 oil companies wliich were wholly or partially integrated. 32
Among these companies there are many whose assets put them far
below the ranks of the 20 majors. For example, some small refiners
produce their own crude and some jobbers have their own filling
At the other extreme from the integrated companies, whether
small or large, there are many prosperous units which specialize
narrowly in a particular activity. Examples of such specialists are
geophysicists, drillers, refinery construction companies, transport
truckers, and the like. There is no reason to assume that the
petroleum industry naturally falls into the four divisions of produc-
tion, transportation, refining, and marketing. Any such distribution
into four divisions is purely arbitrary. As the existence of narrowly
specialized units shows, the many activities of the industry could be
broken down into a great number of divisions. These specialists are
sometimes employed by major companies as well as by smaller con-
cerns. Mr. H. H. Anderson, vice president, Shell Oil Co., Inc.,
testified that there has been a definite trend toward the use of con-
tractors by the operators in the industry. He said:
The definite trend toward increased use of contractors by the operators in the
industry has continued. It has aimed principally at the promotion of stability
of employment amongst construction and maintenance workers. In certain
amas local labor conditions have made the practice expedient. It has in most
!8 proved beneficial and^ profitable to all parties concerned. It has been
found advantageous also to contract jobs where the work involved is- of such a
magnitude as to justify bids on "turn-key jobs," i. e., equipment delivered in an
operating condition, such as derricks and rigs, and in cases where the work is
urgently required and sufficient regu'ar forces or competent local labor is not
available. The relative amount of such contract work is estimated to have
increased between 25 and 30 percent from 1929 to 1938.
Much of the work described below has been or is increasingly- being handled by
specialty contractors in certain areas:
Producing: Drilling of wells, pulling of wells, construction of field plants and
pipe lines, other construction jobs, paint jobs, special repair work, teaming and
trucking, boating, etc.
Pipe lines: Construction, special repair and renewal of pipe lines, erection of
buildings and steel tankage, etc.
Refining: Construction and special repair of operating equipment and facilities,
teaming, trucking, etc.
Marketing: Installation of station dispensing equipment, maintenance work,
mechanical repair work, painting of service stat ons as well as bulk plant prop-
erties, etc. 33
In recent years, the larger compani s have generally withdrawn,
from the operation of filling stations. 7 he oil industry has room for
" Prfprs and Profit', pt. II, p. 635.
53 T 1 Economic Committee Hearings, (>t 14, p. 7245.
15 CONCENTRATION OF ECONOMIC POWER
large and small, integrated and nonintegrated. In fact, many of the
complexities of competition in the petroleum industry come from the
fact that there are so many smaller enterprises beside the great
THE AMERICAN PETROLEUM INSTITUTE
Mr. Cook charges that the American Petroleum Institute is "essen-
tially "engaged in activit'et to more eii ectively assist the major oil
companies in controlling the petroleum industry," that "the work of
the institute is largely accomplished through industry committees"
whose membership "indicates very conclusively that the majors do
predominate," and that the institute publishes "a weekly statistical
bulletin which covers crude oil production, runs to stills, stocks of
crude oil and refined petroleum products, imports and exports," and
which serves "the -purpose of lessening competition and making
integration more effective and profitable."
These contentions are not supported by any testimony before the
T. N. E. C. which heard no such charges and which had ample oppor-
tunity to question members of the institute about its activities. As
the 20 large companies occupy an important position in the industry,
it is only to be expected that they would have many members on insti-
tute committees. The fact that there are also many representatives
of the independents on the committees should be ample protection
against the use of the institute to further the interests of the majors
at the expense of the independents. It may be remarked in passing
that most of the institute's committees are technical committees,
dealing with the problems of a scientific or engineering nature.
The weekly statistical bulletin cannot be said to be a means of
lessening competition and making integration more profitable. The
information is not secret; non-members of the institute may subscribe
to the statistical bulletin for $12.50 per year; the information is avail-
able to buyers and sellers alike and to the newspapers, some of which
publish summaries of it as commercial information. Similar informa-
tion for other industries is commonly published by Government
bureaus, other trade associations, and commercial reporting agencies.
Mr. Cook quotes the director of the institute's statistical department
as suggesting in 1939 that runs to stills be restricted to facilitate a
reduction of gasoline stocks, and remarks that this statement obviously
had an effect on the price structure. Mr. Cook does not endeavor
to prove this claim; in fact, the runs to stills and gasoline stocks
remained high and the price structure continued weak. The size of
gasoline stocks was often discussed during this period, both in the
trade journals and in the general press. Whether for better or worse,
gasoline stocks cannot be controlled by publishing the views of the
In his chapter on "Basic Factors," Mr. Cook has failed to establish
his points. Control is not highly concentrated; and concentration
is not increasing. Integration has real advantages for the economical
supply of products for the use of the consuming public. The American
Petroleum Institute's activities are not carried on for the benefit of
the majors and at the expense of the independents. Mr. Cook's
following chapters, on production, transportation, refining and market-
ing, do not contain any additional support for the arguments he has
advanced in this chapter.
COMMENTS ON MR. COOK'S CHAPTER ON PRODUCTION
Mr. Cook's principal contentions in his chapter on the production
branch of the industry are as follows: (1) Proration is not true
conservation. (2) Control of production is unnecessary because there
is "no imminent danger of exhaustion of the petroleum reserves of
the United States" and "if the reserves should ultimately become
exhausted, there exist practically inexhaustible supplies of other
materials from which gasoline could be produced at prices only
slightly higher than the prices now prevailing for petroleum prod-
ucts." (3) Proration "works a hardship ■ on the nonintegrated
operator and works to the advantage of the majors who have many
sources of crude oil." (4) The major companies have a greater
percentage of crude oil reserves than their percentage of crude oil
production. Mr. Cook infers that the major companies deliberately
hold back production. (5) The policy of major companies is to
lease land "and then decline to drill until oil is discovered elsewhere."
(6) "When an independent has a minority interest in a field and
wants to drill his own well rather than pool his interests, or sell
them, he usually has trouble in getting a permit to drill." (7) "Since
the majors have a virtual monopoly of crude oil pipe lines, the only
practical overland means of transporting oil, they are able to post
uniform, noncompetitive prices for crude oil purchased in a particular
field, and the crude oil is definitely sold on a buyer's market."
These contentions will be discussed separately, but first it is desir-
able to present a brief background of the conservation problem to
supplement Mr. Cook's discussion of this subject.
The petroleum conservation problem cannot be understood unless
certain technological and legal aspects are kept firmly in mind.
These peculiarities of the petroleum problem make it considerably
different from the conservation problem of other energy resources, of
our forests, and of agriculture.
Three circumstances combine to bring the interests of the various
producers into conflict and to encourage waste: (1) Under common
law, as developed by the courts in this country, the producer who
brings the oil to the surface is the owner of the oil. (2) An oil well
can drain the underground petroleuxn reservoir over a considerable
distance, a distance often much greater than the property owned by
the proprietor of the land on which the oil well itself is located.
(3) The bulk of our land overlying petroleum reservoirs is in the
hands of many private individuals.
The conflict among individual owners of oil land or oil wells and
the waste of an irreplaceable natural resource have resulted from the
so-called "rule of capture." Our courts have established as our com-
mon law that oil and gas belong to the owner of the well from which
they are produced regardless of whether or not they have migrated
from a neighbor's land. The rights of the neighbors in the oil which
18 CONCENTRATION OF ECONOMIC POWER
was originally located under their land, the so-called "correlative
rights," are not recognized by the common law. State legislation has
been enacted to recognize the correlative rights, to do equity among
the several claimants, and to promote conservation. Under the rule
of capture there was frenzied competition among the various oil
wells in a given field to bring to the surface as much oil as possible
in the shortest possible time.
This hurried exploitation of an oil field resulted in a physical waste
of the oil reserve. In most of the oil fields of the country, the oil is
brought to the surface by the reservoir energy. Unless steps are taken
to preserve this energy, it may be used up before the entire oil pool is
drained. In the underground reservoirs a considerable amount of gas
is under pressure in the petroleum and constitutes an important part
of the reservoir energy. Unless steps are taken to prevent it, this gas
tends to come out of solution and flow from the oil well. With the
hurried exploitation of oil fields under the unrestricted influence of
the rule of capture, the premature escape of gas resulted in leaving in
the reservoir much inert petroleum fncapable of rising to the surface
without artificial aid. This loss of gas was characteristic of the early
period of operation of an open-flow well or gusher. The loss of gas
affected not only the natural lifting power of the oil but also its ability
to move through the sands from its original location to the bottom of
Two brief statements of the essence of petroleum conservation
were given to the T. J N. E. C. One witness, Mr. Ralph J. Watkins,
the economic adviser on the staff of the National Resources Planning
Board, said that the rule of capture needs "to be completely displaced
by a thoroughgoing law of ownership in place, which would allot to
each producer that proportion of the oil and gas in the common reser-
voir which underlies the land he owns or controls." *
Another witness, Dr. Joseph E. Pogue, a student of the petroleum
industry who appeared before the Committee at the request of
Mr. Thurman Arnold, Assistant Attorney General, testified —
Proration has been described in a single phrase: "No more gushers." 2
By preventing gushers, reservoir energy is conserved. Moreover,
one of the techniques employed by the proration authorities is to base
their limitation of output from an oil field upon observations of
reservoir energy. By watching the pressure within the reservoir, the
proration authorities can determine when production is proceeding too
rapidly. Limitation of production down to this point clearly serves
conservation purposes. To be sure, the oil which would be left in the
reservoir under conditions of flush production is not permanently lost,
but its eventual recovery can take place only at a much higher cost.
It makes little difference whether the preservation of reservoir energy
is justified by calling it prevention of physical waste or prevention of
excessive cost of recovery. The economic advantage of preserving
reservoir energy is so clear that it is not open to effective challenge.
The term proration has come to be applied to the States' oil conser-
vation programs because the States limit the output of the individual
wells within an oil field and limit the output of the various fields
within the State by orders which allocate or prorate the output. The
quota allocated to each oil well is called its "allowable" and this
1 Temporary Nation! ' E ::>mic Committee Hearings, pt. 17, p. 9512.
2 Ihid., pt. 14. p.
CONCENTRATION OF ECONOMIC POWER 19
allowable constitutes the maximum amount which that oil well may
legally produce within the period. The Federal Government has no
direct part in establishing quotas for the several oil-producing States
or for individual wells. The Bureau of Mines of the Department of
the Interior prepares monthly estimates of the market demand for
crude petroleum by States, and these estimates are used by the State
proration authorities as one of their guides in determining allowables.
PRORATION AND CONSERVATION
Mr. Cook makes a distinction between conservation and stabiliza-
tion, saying that, true conservation "of oil may be defined as an
avoidance of waste in its recovery or use," and that true conservation
"should not be concerned with production control based upon market
demand.'' The implication here is that proration does not embody
any of the elements of conservation, or prevention of waste, and that
it is solely designed to restrict production in accordance with market
demand. Testimony submitted to the T. N. E. C. does not support
this contention. A statement prepared by Mr. Harold B. Fell on
behalf of the Independent Petroleum Association of America contained
the following comments concerning production of oil from stripper
There are many of these natural laws which have thus necessitated the appli-
cation of statute laws and have also been a determining factor in the development
of economic laws. In illustration of this, one might point to the stripper wells
of the Nation or the wells of settled production. In these wells, there is no longer
enough gas left or sufficient water pressure to bring the oil to the well. The oil
can only be obtained by secondary methods of recovery. These are expensive
processes. They add to the cost of the oil. Eventually, it may be expected that
every well will become a stripper well or go dry. In most of the stripper well
areas the wells must be operated continuously. If they are capped or allowed
to remain idle for a long period, salt water intrudes and the deposits of oil beneath
those wells may be entirely lost or its recovery made economically impossible.
It is true that some of these wells could be redrilled or made to produce by the
application of some of the modern methods of recovery, but when the maximum
recovery of a well is only a few barrels a day or as little as one-eighth of a barrel
(as is the case in many instances) it is self-evident that the investment in new
equipment would not be recovered in any reasonable period. Such wells, once
closed, may be considered lost and the oil they reached as impossible of recovery.
The force of natural law has made it necessary for the States to adopt regulatory
legislation which will assure these stripper wells their proper share in the produc-
tion program. While it is true "that the large flowing wells could entirely supply
the total demand of this country for a brief period, during which time low crude
oil prices might be expected, this would mean the loss to the Nation of the greater
part of our known petroleum reserves, which underlie these wells of settled pro-
The Honorable Ernest O. Thompson, member cf the Texas Railroad
Commission, also stated that proration based on market demand was
necessary to prevent waste occasioned by shut-downs of stripper
wells. II is testimony was as follows:
We have in Texas about 50,000 of our 67,000 wells that are called stripper wells.
They produce less than 5 barrels per day, and we know from experience and from
records and studies made by the Federal Government that it costs around $1
a barrel to operate those wells. Those wells are owned and operated largely by
small independent operators, many times farm-outs, some fellow runs them
himself, and if you produce oil at less than it costs to operate it, those people have
no reserves in dollars to keep them going, and any time the price of oil gets below
the point where those wells, 150,000 of them in the Nation, producing 5 barrels
J Ibi<1., p. 7554.
20 CONCENTRATION OF ECONOMIC POWER
or less, have to be plugged and abandoned, then you would be causing the greatest
waste possibly known. Those wells are the backlog of our oil-producing industry
and you must protect the little stripper well. Everything that we have heard
in conservation, so far as I know, has been to conserve the stripper wells.
Now, when the price dropped so low that; the stripper well cannot operate, then
you are driving out these two or three hundred thousand wells, certainly 200,000
of them that could not operate, and cutting off forever the two or three thousand
barrels a day that they produce. 4
Mr. Glenn E. McLaughlin, assistant professor at Hunter College
and author of portions of the report entitled "Energy Resources and
National Policy", 5 prepared by the National Resources Committee,
concurred with this view, saying that: "The abandonment of wells
because of low price of crude has been estimated to constitute a con-
siderable economic loss." 6
In his testimony before theT. N. E. C, which was largely concerned
with a description of the methods used in preparing forecasts of market
demand, Dr. Alfred G. White, chief economist, Petroleum Economics
Division, Bureau of Mines, stated that production restricted through
proration on a basis of market demand served to prevent waste by
eliminating unnecessary storage above ground. 7 The waste referred
to by Dr. White is of two kinds: the waste of capital caused by invest-
ment in unnecessary storage facilities, and the losses resulting from
evaporation which, of course, are irrecoverable at any cost. Mr. Fell
also said, in his statement submitted for the record, that an unbalanced
condition of supply and demand caused waste by diverting petroleum
products into inferior uses. His statement on this point was as follows:
Out of all this there grew a recognition of the fact that any conservation pro-
gram for the petroleum industry must be extended to include provision for a
balance between supply and demand. The oil-producing States and the industry
alike thus came to understand that economic law also plays a vital part in the
avoidance of waste.
An irreplaceable natural resource must not be wasted. When there is an exces-
sive supply of the products of such a resource, these products are diverted into
inferior uses and may come into competition with the products of other natural
resources demoralizing both industries, without real or lasting benefit to the ulti-
mate consumer. This constitutes one of a number of types of waste. The petro-
leum industry has been definitely given to understand that wastes will not be
tolerated. On this economic plane the petroleum industry is confronted with two
conflicting forces. On the one hand the consumer wants the most possible for
the least money. On the other hand the advocates of conservation insist, that
petroleum shall be so produced as to avoid all waste. The industry has been
endeavoring to meet both of these demands. 8
In view of the above testimony, it is clear that the distinction made
by Mr. Cook between "true" conservation and stabilization resulting
from restriction of production on the basis of market demand is over-
simplified. Proration based upon market demand does prevent waste,
both physical and economic, and therefore has elements of true con-
servation under his definition.
Much of what has been said already serves to refute Mr. Cook's
implication that conservation is unnecessary, but some attention
should be given to the statements from which this implication is de-
rived. Mr. Cook refers to a study by Mr. Stanley Gill 9 who was
( Ibid., pt. 15. p. 8225.
« H. Doc. No. 160, 77th Cong., 1st sess.
• Temporary National Economic Committee Hearings, pt. 17, p. 9531.
1 Ibid., p. 9593.
« Ibid., pt. 14, p. 7555.
e A Report on the Petroleum Industry, Gulf Publishing Co., Houston, 1934.
CONCENTRATION OF ECONOMIC POWER 21
reported to have said that there is no imminent danger of exhaustion
of petroleum reserves in the United States and that there are inex-
haustible supplies of other materials from which gasoline could be
produced at prices only slightly higher than the prices now prevailing.
Mr. Cook also states that Mr. Farish, president of Standard Oil Co.
(New Jersey), supports this latter conclusion.
The statement that there is no imminent danger of exhaustion of
our crude oil reserves does not provide an argument for abandoning
conservation methods, because it is desirable to prevent any waste of
a natural resource regardless of its size. This view was expressed by
Mr. Ralph J, Watkins, economic adviser, National Resources Plan-
ning Board, in his testimony before the T. N. E. C, when he was
comparing the reserves of bituminous coal and crude oil. 10
Mr. Cook's statement that "there exist practically inexhaustible
supplies of other materials from which gasoline could be produced at
prices only slightly higher than the prices now prevailing for petroleum
products" is inaccurate. There is ample testimony in the T. N. E. C.
hearings to the effect that the cost of producing gasoline from coal is
three or four times as great as the cost of production from crude oil. 11
Furthermore, the statement that Mr. Farish supported Mr. Cook's
conclusion regarding comparative production costs is also inaccurate,
as reference to his source will show. 12 All Mr. Farish said was that
gasoline could be produced from soft coal for approximately 12 cents
per gallon. This figure would be compared with a cost from crude of
4 cents to 5 cents.
EFFECT OF PRORATION ON INDEPENDENT PRODUCERS
Mr. Cook states that, "Proration works hardship upon the nonin-
tegrated operator and works to the advantage of the majors who
have many sources of crude oil." With regard to independent pro-
ducers, his specific complaints are as follows: (1) Proration increases
the cost per barrel, because a longer time is required to amortize the
investment. (2) Proration often forces the small operator into
bankruptcy since he can operate his wells in only a limited way and
major interests then have an opportunity to buy these properties at
special prices. (3) Under proration the operator having a limited
number of wells is progressively subjected to lower allowables. (4)
Proration usually assures the maintenance of desirable prices and
tends to raise prices. (5) Effects of proration may reach back to oil
exploration and conceivably limit that function. (6) Allowables are
still based primarily upon a more or less constant allowable per well.
Mr. Cook also states that proration operates to the disadvantage of
independent refiners because it limits the production from their own
wells or those of independent producers.
With regard to production costs, it is possible that the immediate
effect of proration in flush fields may be to increase the production
cost per barrel, because the flow is restricted. The ultimate cost per
barrel will be decreased, however, since the effect of additional barrels
recovered in lowering unit costs will more than offset increases in
!0 Temporary National Economic Committee Hearings, pt. 17, p. P513. *»
" Mr. McLaughlin, Temperary National Economic Committee Hearings, pt. 17, p. 9536; Mr. Watkins,
ibid.., p, 0580. Mr. Watkins later sent the Temporary National Economic Committee a letter from A. C
Fieldner, Chief, Technologic Branch, Bureau of Mines, which confirmed his estimate of four times the cost
of gasoline from crude oil (ibid., pp. 9956-9957).
15 C S. Cong., Petroleum Investigation, hearings on H. R. 441, 1934, p. 748; also p. 752.
CONCENTRATION OF ECONOMIC POWER
capital costs resulting from a lengthening of the period of recovery.
The testimony of Dr. Joseph E. Pogue serves to substantiate this
It is difficult to imagine how proration would cause independents to
go into bankruptcy in view of Mr. Cook's statement that proration
brings stabilized crude prices and tends to raise them. Perhaps he is
referring to a field where proration was put into effect after the field
was partially developed, such as the East Texas field. In that field,
however, it is likely that there were more bankruptcies during the
period prior to proration when oil was selling for 25 cents per barrel
than there were after proration was put into effect and prices of crude
increased. No evidence regarding bankruptcies of independent
producers was given to the T. N. E. C; evidence was given to show
that the number of independent producers in Texas is increasing*.
Mr. Farish stated:
When the independent producer makes any complaint, his chief grievance is
that conservation restricts him from exploiting and producing rapidly all the oil
that he has. As indicated above, the small independent producer is likely to
take a short-run viewpoint; he does not always like to play the game according to
the conservation rules. This feeling, however, does not prevent numerous new
producers from entering the oil business. In the State of Texas, for instance,
operators of oil wells are required to file reports with the State Comptroller, and
I offer for the record the following certified analysis of the number of operators
doing business in Texas as of January 1 for the years 1930 to 1939: 14
1933 .. '..-.
Mr. Cook's implication regarding allowables is that the independent
producers are subjected to lower allowables than the majors. This
argument does not harmonize with statements made elsewhere by
him to the effect that the majors produce their reserves more slowly
than the independents. A lower rate, of production in relation to
reserves w r ould indicate that allowables of majors are restricted in
favor of the independents. Mr. W. S. Farish, -president of the Stand-
ard Oil Co. (New Jersey) threw .some light on this question when he
The subsidiaries and affiliates of the Standard Oil Co. (New Jersey) do not
produce their reserves as fast as some other firms. One important reason for this
situation is that these companies are making a genuine effort to use engineering
standards in the development of oil fields so far as competitive conditions permit.
They are seeking optimum output from all fields. They expect to be in business
many years; it is to their advantage to have a supply of oil at as low a cost as
possible for a long time to come; hence, they have every reason to produce accord-
ing, to the best engineering standards.
Another reason why the -oil production of major companies is not so high in
relation to their reserves as independent oil production is in relation to independent
reserves, is that in granting exceptions to spacing rules and in setting allowables
in fields in which independent producers predominate, State regulatory bodies do
not treat major companies as well as they do the independent operators. The
small independent operators are numerous. Not all of them are wealthy men,
u Temporary National Economic Committee Hearings, pt. 14, p. 7442.
"Ibid., pt. 17, p. 9934.
CONCENTRATION OF ECONOMIC POWER 23
They are more anxious to obtain their money now so that they can spend it while
they are living rather than to pass it on to their grandchildren. As a practical
political matter, the State regulatory bodies probably recognize that the corpora-
tion can wait better than the people who have votes to cast. This is only human.
When a major company is discriminated against too flagrantly, it can and does
resort to the courts.
In spite of the practice of cashing in on some of his discoveries and selling them
to a major company, thus increasing the major company's proportion of total
proved reserves, the small independent has really enlarged slightly his proportion
of proved reserves in recent years. By and large, the independent has held
about the same proportion of proved reserves for the last 20 years, but for the
year 1938 as compared with the year 1937 the independent has increased his share
of total proved reserves. 15
Mr. Thompson's testimony, quoted above in connection with
stripper wells, also indicates that the small operators are protected,
as restriction of production applies only to flush fields.
The statements that proration on the one hand tends to raise prices
and on the other hand tends to limit exploration for oil are inconsistent.
Obviously, if prices are higher because of proration, exploratory effort
should increase. Furthermore, there is no reason for concluding that
over the long run proration brings about a high price for crude.
The initial effect of proration on prices may be, as in the case of a
flush field like East Texas, an advance. On the other hand, proration
adds appreciably to the total recovery of crude oil, thus lowering the
ultimate cost per barrel which in turn tends to lower the price. With-
out proration, quite the opposite result would appear. The initial
price would be lower due to the heavy flow of wells during first stages
of their life, but the ultimate recovery would be less and the cost of
production per barrel greater. The basic fact is that, over a period
of time, proration increases the supply of crude oil and tends to lower
prices, not raise them.
It is probably fair to state that proration tends to reduce the wide
fluctuations in price which accompany flush production. This, in
turn, tends to increase exploratory effort, even though the average
crude price may be lower; the greater price stability reduces the risks
involved and makes bank loans more easily obtainable. The growth
in the. number of operators and in the size of petroleum reserves. indi-
cates that exploratory effort has not been reduced by proration.
Mr. Cook's -statement that proration "allowables are still based
primarily upon a more or less constant allowable per well" is not
accurate. In his testimony before the T. N. E. C, Dr. Joseph E.
Pogue said, regarding allowables, "the course of evolution is from
those faulty methods based upon the well itself, which put a premium
on too much drilling and investment, to those involving some com-
bination of number of wells and acreage, which is the present status,
with the concept moving in the direction of more advanced procedures
involving the recoverable oil itself". 16 This" view was also shared by
Mr. Robert C. Knox, of El Dorado, Ark. 17
Mr. Cook also complains that an independent refiner is at a dis-
advantage because proration limits the production from his own
wells or those of independent producers who supply him with crude
oil. While the answer to this complaint does not properly belong in
a discussion of producing, it involves a description of regulations
which apply to the production division of the business.
11 Ibid.,, pp. 9691-9692.
14 Ibid., pt. 14, p. 7121.
' 7 Ibid., pt. 15, p. 8570-8571.
24 CONCENTRATION OF ECONOMIC POWER
In all States where production of oil is regulated by law such
regulation includes the requirement of "ratable takings." This
requirement is designed to prevent purchasers of oil in a given field
from taking oil from their own wells at the expense of other producers
in the field and serves to provide an equitable distribution of the total
purchases among the producers, generally in accordance with their
allowables. Therefore, neither major companies nor independent
refiners can obtain all the oil they might like to have from their own
wells, but there is no regulation which prevents either majors or
independent refiners from purchasing oil from independent producers,
which, of course, is what they do.
RESERVES OF CRUDE OIL
Much of Mr. Cook's chapter has to do with the production of the
major companies relative to their reserves of crude oil. He draws
the inference that the majors deliberately produce less crude oil
in relation to reserves than do independents.
Mr. Cook's inference is based upon the testimony of Mr. E. DeGol-
yer, an independent petroleum producer, geologist, and petroleum
engineer. 18 There is nothing in Mr. DeGolyer's testimony to the
effect that major companies deliberately held back production. He
merely said that major companies did produce their reserves more
slowly than independents and that he didn't know why. 19 Nor did
he say, as attributed to him by Mr. Cook, that major companies
"maintain these reserves to protect their other investments in the
integrated form." He did say that independent producers have no
real reason to have much of a feeling about maintaining reserves. 20
Mr. Cook also states- that the difference between the percentage of
total reserves and the percentage of total production of the major
companies "is made possible through their control of the crude oil
market through pipe lines." This statement is not substantiated.
No connection is apparent between the alleged control of -pipe lines
and the disparity between reserves and production.
In his section on oil discovery and production methods, Mr. Cook
emphasizes the fact that independents do a large part of the explora-
tory work, but that most of the crude oil reserves are owned by the
majors. Apparently Mr. Cook believes that this indicates the
dominance of the majors to the detriment of the independents. Mr.
Cook said elsewhere that "very few independent producers are engaged
in other divisions of the industry," whereas majors by definition are
engaged in all branches. Independent producers, therefore, have
little need for large crude reserves, since their sole interest is to dispose
of the crude oil On the other hand, majors have refineries and estab-
lished markets for which a continuous supply of crude must be
obtained. After the discovery well has been completed, but before
the field has been developed, independents frequently sell all or part
of their holdings to major companies, because many of them do not
wish to risk large amounts of capital relative to thei means. They
prefer to cash in on their discoveries and turn to new ventures else-
'» Ibid., pt. 14, p. 7389-7423.
"Ibid., p. 7393.
"Ibid.,- p. 7394.
CONCENTRATION OF ECONOMIC POWER 25
Much of Mr. Cook's section dealing with oil discovery is based upon
testimony of Mr. DeGolyer before the T. N. E. C. Throughout the
discussion, the implication is that independent prospectors work under
handicaps as compared to the majors but in spite of this they do very
well. The statement is made through reference to Mr: DeGolyer's
testimony 2I that "independent prospectors, known as 'wildcatters,'
are willing to take chances on a venture whose odds have been from
30 to 40 against striking oil. On the other hand, under the best
modern methods used by majors in special areas, the odds are as low
as 8 to 1." It should be pointed out that when presenting the figures
on odds Mr. DeGolyer was referring to all prospectors and not to
independents as compared with majors. Furthermore, the odds of
30 or 40 to 1 applied to all prospectors during the history of oil ex-
ploration, while the lower odds applied to a more recent period and
assumed the use of the most modern techniques. In connection with
oii discovery, it should also be said that the term "wildcatter" applies
to any prospector, whether major or independent, who drills a well in
unproved ground, and is not restricted to an independent prospector.
As to the assertion that majors use more scientific technique and
equipment than do the independents, Mr. DeGolyer's comments con-
cerning the availability of such techniques to the independent are of
* * * There are many competent and independent geologists whose services
may be engaged in order to assist in selecting the site; there are many competent
and independent geophysical service organizations who can map the structure
of the prospect in order to determine whether or not a trap is present; there are
scores of competent and independent lease brokers who can take the leases; there
are dozens of competent and independent drilling contractors who will engage to
drill the well to the required depth and complete it properly and in a workmanlike
manner. There are independent service organizations to case, cement, per-
forate, electrically log, or perform any other required service. Scores if not
hundreds of wells are being drilled currently at any time with the assistance of
these independent service organizations of unquestionable competence. 22
LEASING OF OIL LAND
Mr. Cook's principal contention regarding leasing practices of the
majors is that "their policy is to lease this land and then refuse to drill
until oil is discovered elsewhere." No attempt is made to substantiate
this charge, and testimony presented before the T. N. E. C. contains
no grounds for this assertion. In view of the dominant position that
leasing has played, and is still playing, in the development and day-
to-day operation of the petroleum industry, and in view of the fact
that leases are familiar to many people in different walks of life, it is
difficult to see how any company or group of companies could afford
to let such a practice exist. If such practices ever did exist, it is
likely that they were shortlived, because the keen competition for
leases would make them very costly to the persons who employed
Some attention is also given by Mr. Cook to changes in the Form 88
lease which he says were instituted by the majors to the detriment of
the landowner. Apparently the source of. this information was the
testimony of Mr. Robert C. Knox before the T. N. E. C. The
source reference is attached to the first sentence of the discussion on
21 Ibid., pp. 7664-7665.
"Ibid., p. 7665.
26 CONCENTRATION OF ECONOMIC POWER
the Form 88 lease, while the remainder, which is not documented,
contains the complaints concerning practices of majors indicated
above. An examination of all the testimony submitted by Mr.
Knox reveals that he did not charge that "the major oil companies
have been instrumental in changing this lease." The comments of
the witness dealt generally with oil companies which lease land for
purposes of drilling, and at no time did the witness purposely draw a
distinction between independents and majors. In fact, Mr. Knox
made his position very clear at the outset when he said:
Nothing which I shall say is "intended to question the good faith of any of the
people engaged in the business of acquiring oil and gas leases or the methods
employed or the types of the contracts which they use. I am merely trying to
point out the effect of some of the newer forms of leases which I think are being
used because of this tremendous overproduction of oil and the potential supply,
and that many in the industry feel that these changes in the types of leases have
become necessary for their protection. 23
I The case of John W. Dailey is used by Mr. Cook as a basis for
generalizing about the independent's difficulty in obtaining drilling
permits. He contends that the independent "usually has trouble in
getting a drilling permit." He makes a general allegation and offers
only one instance in its support. He states particularly that a drilling
permit was refused to Mr. Dailey by the Texas Railroad Commission
( through the influence of majors, and that Mr. Dailey was therefore
/prevented from drilling on a 20-acre tract in the Old Ocean field which,
' according to Mr. Cook, was controlled by major interests.
The statement that the Old Ocean field was controlled by major
company interests is inaccurate, because all the interests in the Old
Ocean field were independent. 24 Regarding the complaint that Mr.
Dailey was prevented from drilling, Mr. DeGolyer testified:
Mr. Dailey^ was offered, as I understand from him, and as I understood at
the- time, an opportunity to combine 20 of his acres with 20 acres of the partner-
ship in order to. get the 40-acre basis and drill the well. That was done probably
in more than a dozen cases within the field. In all of these other cases, which
I cite but one, the land was already under lease, so it was only a combination of
the royalty interests, but in the one other case where the land was not under
lease, this same combination that was offered to Mr. Dailey was carried through.
I have no other comments to make on this matter, except to say that in my
opinion equity was Offered to Mr. Dailey, and that this is just one of the type of
problems that will recur from time to time in an attempt to produce fields as
CRUDE OIL PIPE LINES
In Mr. Cook's summary and conclusions on production, the state-
ment is made, "Since the majors have a virtual monopoly of crude oil
pipe lines, the only -practical overland means of transporting oil, they
are able to post uniform, noncompetitive prices for crude oil purchased
in a particular field, and the crude oil is definitely sold on a buyer's
market." Discussion of these charges properly belongs under the
heading of crude oil pipe lines where it is discussed at-greater length,
but it is desirable to show, here that the presence of uniform prices is
proof neither of monopoly nor of competition. Uniform prices may
23 Ibid., pt. 15, p. 8252.
» Ibid., pt. 14, p. 7293.
"Ibid., p. 7415.
CONCENTRATION OF ECONOMIC POWER 27
occur under either set of conditions. Where several buyers are com-
peting for the same kind of crude oil in a given field, prices should be
the same to all sellers, otherwise the producers would sell only to the
highest bidder. If the purchasers got together and agreed upon a
price, uniform prices might also prevail. On the other hand, dis-
crimination in prices among sellers would suggest monopoly on the
buying side, as it would mean that one buyer was strong enough to
purchase from one producer at one price and to pay a different price
to others. This is a situation which the sellers would not tolerate if
they had any control over it. It is fair to ask what Mr. Cook would
have said had there been evidence of discriminatory prices rather
than uniform prices.
Perhaps the most satisfactoiy answer to Mr. Cook's complaint
that prices of crude oil in a given field are uniform is the fact that the
T. N. E. C. hearings include no evidence of complaints on this score
by independent producers.
Nor does the substantial ownership of trunk pipe lines by majors
constitute proof of monopoly. The fact is that most of the pipe lines
are in competition with each other, as a glance at chart XIV in the
appendix to the monograph will show. 26 The fact that independents
use the pipe lines to a small degree relative to the total is also not
damaging evidence. The important fact so far as the independent
producer is concerned is that interstate pipe lines have a common
carrier status and are regulated by the Interstate Commerce Commis-
sion. They are also regulated by many of the States through which
they pass. The common carrier status assures the independent pro-
ducer that the difference between the price of crude at one end of the
line and at the other will reflect only the transportation charges.
Because of this, he always has the choice of selling his crude at the
well head or at some other market of his own choice. The inde-
pendent's right to ship is valuable to him w r hether he elects to ship
or elects to get parity prices in the field. In practically all cases,
however, independent producers sell at the well head since they
prefer to let someone else provide the capital necessary to seek the
markets. The choice as to where he will sell his crude is open to him,
nevertheless. If the independent producer elects to sell at the desti-
nation of the crude, he must, of course, comply with the minimum
tender requirements of the pipe lines which are established at amounts
sufficient only to prevent excessive diffusion of the different kinds of
crude oil passing through the pipe line. The size of the mininnxrv
tender requirements w r as one of the chief complaints of Mr. Cook in
fiis chapter on pipe lines. These charges are answered in the discus-
sion of that section.
Before leaving the discussion of crude oil production, one important
inference should be refuted. The general theme of this and other
sections of Monograph No. 39 is that independents are in one line of
trenches facing with drawn pistols another line of trenches occupied
by majors who are armed with cannons. It is perhaps unfortunate
and certainly misleading to paint a warlike picture of 'the relations
between independent producers and major companies, because it is
M TNEC Monograpn No. 39, chart XIV, facing p. 80; see also Temporary National Economic Com-
mittee Hearings, pt. 15, chart facing p. 8543.
304955 — 41— No. 39a 8
28 CONCENTRATION OF ECONOMIC POWER
common knowledge that these groups are not best described by a
scene presenting them ready for battle. On the contrary, there is
considerable cooperation between them and each group realizes that
depression and prosperity will treat them alike. The majors will-
ingly admit that the independent is an important and necessary part
of the production division of the business and have no desire whatever
to eliminate him from the industry. Mr. W. S. Farish made these
comments before the T. N. E. C:
The credit for the discovery of America's oil fields goes to the small exploratory
enterprise rather than the large organization; It is the individual, the small
company, the so-called independent, the itinerant wildcatter who has found
America's oil. This has been true in the past and it is true today. In my judg-
ment, it will be just as true 10 years from now. The truth of this statement, that
the discovery of new oil fields is usually made by the small fellow rather than the
integrated company, is borne out not only by the statistics kept by our own com-
pany, but by the observations of others outside our organization. 27
There actually is much cooperation between majors and independ-
ents in prospecting for oil, as is shown bj^ the following testimony:
Mr. Farish. That may be true; but the so-called small man seems to be grow-
ing larger, and the ability of the so-called small man to join with other small men
seems to be facilitated, to the end that this discovery of new areas by the inde-
pendents — I go back to the word "independent" — is just as good today as it ever
The Vice Chairman. They block out an acreage and then get other people to
help contribute .the money to make the exploration.
Mr. Farish. Yes, sir. To give you one practice that is common in the oil
country, some entrepreneur' — I don't, like to call him a promoter, but "promoter"
is probably a little more familiar to the oil man than the other one — some pro-
moter will get the idea either from the study of geology or from getting a hunch,
if you will, or a tip from somebody who had studied the geology and maybe has
used new geological methods, that a certain area is favorable, and he looks at
that area and he sees that it 4s a very divided ownership. In other words, two
or three or four major companies will own some acreage on it; some of it will be
open, and some independents will own some; This fellow says, "I am going to
promote a well on that prospect." The well may cost 10 thousand, 20 thousand,
even 50 thousand dollars, depending on the probable depth you have to go to
So this promoter goes to this company and that company, another one, and so
on, and he says, "I want to drill this prospect. I have 160 acres there of my own.
Obviously, I can't drill a wildcat well on 160 acres, so are you interested in seeing
the prospect drilled," and by one way and another. he will get contributions of
acreage from other owners and he will get some contributions, of what we call in
the industry dry-hole money. In other words, somebody will say, "I don't
want' to give you any acreage but I will give you $5,000 to pay for a dry hole if
you drill i^ there, in order to prove whether this prospect is productive or not."
We, vtill assume that this promoter gets several hundred acres by donation,
several thcrasand dollars, fifteen or twenty, maybe, and he launches out and starts
his welh Of course in drilling that well he will have opportunity may be to sell
some of his acreage to others who think there is going to be oil discovered there
and he would like to have a piece of acreage in the field, and he drills his well
and pays for it, frequently without any cost to him whatsoever. That is a com-
mon practice in the oil industry and it is going on every day, all over.
So this business of the little fellow,. Senator, if I may go back to it just a little
bit, gets back in the final analysis to how much ability he has got, how hard he is
willing to work and how good a salesman he is in getting somebody else to pay
part of his bill.
The Chairman. And your testimony is that the door is as wide open to the
little fellow today in the petroleum industry as ever, in the search for oil.
Mr. Farish. I think so. I honestly think that is the truth, sir. 28
" Temporary National Economic Committee Hearings, pt. 17, pp. 9687-9688.
« Ibid., pp. 9688-9689.
CONCENTRATION OF ECONOMIC POWER 29
On the whole, Mr. Cook's chapter on crude oil production gives an
inaccurate picture of the position of the independent produoer. None
of his principal contentions are borne out by testimony presented
before the T. N. E. C. Mr. Cook's discussion of proration amounts
to a rejection of all conservation efforts. In his eagerness to prove
that the majors are oppressing the independents or nonintegrated
operators he protests that proration is not true conservation and that
anyhow there is no need to regulate production, because there is no
danger of exhaustion of crude supplies and because, even if they were
exhausted, practically inexhaustible resources still remain in 'shales,
coal, and other substitutes. In thus taking up the cause of those who
oppose all conservation efforts, he places himself in direct opposition
to the whole policy which the National Government, and the govern-
ments of the oil-producing States have adopted after many years of
consideration and 'experience. The Interstate Oil Compact was first
approved by Congress in 1935. for an experimental period of 2 years;
it was renewed by Congress in 1937 for 2 years more; and renewed
again by Congress in 1939. Likewise the Connally hot oil law was
first enacted for a limited period, and then reenacted. These measures
have been considered in the utmost detail both at Washington and
in the compacting States. They have been accepted by all except an
unimportant minority as a great forward step.
COMMENTS ON MR. COOK'S CHAPTER ON CRUDE OIL
The principal contentions of Mr. Cook regarding crude oil trans-
portation are: (1) The control of crude pipe lines at present is "in
many respects similar to that found to exist by the' Commission in
1906." (2) Interstate pipe lines, though legally common carriers, in
effect are not common carriers because of restrictions as to their use.
(3) Pipe line ownership is to the advantage of majors at the expense of
independents. (4) Through ownership of pipe lines, majors control
crude prices. (5) The use of tankers is not open to the independent
refiner as he must have excessive storage facilities. These conten-
tions will be discussed in the order presented above, after a brief
description of petroleum transportation which was given by Mr.
Fayette B. Dow in the introduction to his statement to the T. N. E. C:
Petroleum is unique in that it employs in large volume all of the important
facilities of transportation — railroads, ships, pipe lines, and trucks.
Petroleum, except for such byproducts as greases, wax, and asphalt, is liquid in
form and it therefore adapts itself to any agency capable of moving a iiquid from
one place to another. It can be loaded into a container and carried on wheels or
in a water-borne vessel, or it can be pumped through pipes. Whatever the
vehicle — tank car, ship, pipe line or tank truck — the loading and unloading are
done by pumping, a fact which greatly reduces transportation costs because the
process is mechanical, rapid, and continuous until completion. It greatly reduces
the idle time of the vehicle. The tank car or tank truck is loaded or unloaded in
a few minutes, the tank ship in a few hours. They are then ready for the next
trip. Thus petroleum, whether as crude oil on its way to the manufacturing plant
or as gasoline from the plant into the avenues of distribution, is virtually in con-
tinuous movement and has attained the economies of that continuity. The pipe
line movement is in fact continuous. ,
It may be said also that modern petroleum transportation is unique in that it
has not been furnished primarily by outside agencies whose business is transpor-
tation itself. Had the industry waited for professional transporters to solve its
transportation problems, to invent, devise, create the improvements needed to
meet rapidly changing demands of a rapidly growing industry, it is clear that the
present efficiency would not have been attained. Anyone who studies oil industry
transportation finds as the first outstanding fact that the industry, from the very
beginning, has created and supplied a very large part of its own transportation.
He finds also that the transportation so provided has been remarkably efficient,
both in service and economy, and that it has contributed a substantial part toward
the progressively lower prices at which petroleum products have been made
available to the public. 1
CRUDE OIL PIPE LINES
Much of the material referred to by Mr. Cook as evidence of control
of pipe lines by the majors was published 25 to 35 years ago. Refer-
ence is made to investigations of the oil industry by the Interstate
Commerce Commission in 1907 before the dissolution decree, which
separated the old Standard Oil Co. into many companies. The reader
might get the impression that the conditions referred to still exist.
1 Temporary National Economic Committee Hearings, pt. 15, p. 8584.
CONCENTRATION OF ECONOMIC POWER 31
On one occasion, Mr. Cook states, "The system as it exists today is a
virtual monopoly of the majors." A reference is attached to this
assertion indicating that it was drawn from an investigation made by
the Bureau of Corporations in 1904. Obviously, evidence of 37 years
ago cannot be used to support allegations of monopoly today.
The only current evidence submitted by Mr. Cook to indicate
control of pipe lines by majors consists of figures of the I. C. C.
showing the number of miles operated b^ majors in relation to the
total. These figures showed that 14 majo cc mpanies reporting to the
I. C. C. had 89 percent of the total trunk line mileage. While this
is a substantial percentage, it by no means shows that conditions
are similar to those found to exist in 1906, when one company com-
pletely dominated pipe line operations. Control of pipe lines today
is certainly not comparable with the period prior to the dissolution
decree. Today many companies operate pipe lines; and, as shown
by the map, chart XIV in the appendix to the monograph, 2 many of
these lines are parallel and compete with each other. The testimony
of Mr. Walsh, an independent refiner, confirms this statement. He
said that his refinery was connected to the pipe lines of three major
COMMON CARRIER STATUS
In Mr. Cook's opinion, pipe lines "are common carriers in name
only and not in fact." His chief argument here is that they are
operated solely for the benefit of the majors and that independents
are unable to use them because the minimum tender requirements
are excessive. Most of the discussion presented deals with conditions
in the industry 10 to 30 years ago as did his presentation of the extent
of the majors' control of pipe lines. As for the present minimum
tender requirement, he states that an examination of tariffs on file
with the I. C. C. today reveals that the typical minimum tender on
crude oil is 50,000 barrels. This conclusion does not correspond to
facts concerning" minimum tender requirements of pipe lines in Texas
given in testimony before the T. N. E. C. by Mr. W. S. Farish, and
supported by testimony of Mr. Fayette B. Dow. 4 Mr. Farish's
comments were as follows: ,
Mr. Farish. The general system of any industry, of any producer, who wants
to move his oil through a pipe line to somebody else rather than the owner of
the pipe line, is to ask the pipe-line company to connect up to his lease and run
his oil, which they do, 100 barrels a day or 500 barrels a day, whatever the amount
is, and deliver it in certain quantities at the end of the line, subject to the rules
and regulations of the system, which are under supervision by the State author-
ities and by the I. C. C. That oil is gathered and accumulated and delivered
as he orders it.
The Chairma v. Then you are telling me and the committee that various
statements which are made to this committee, some of them formally and some
of them informally, that the pipe lines are not actually in practice operated as
common carriers, are without foundation?
Mr. Farish. To anyone who wants to use them; yes, sir, I make that statement.
The Chairman. That the pipe lines as far as your experience goes are free and
open common carriers operated without restra'ni upon any'person who offers?
Mr. Farish. That is true; I think it is tn a in law and I think it is true in
! See TNEC Monograph No. 39, chart XIV, facing p. 8
3 Temporary National Economic Committee Hearings, t 14, p. 7337. This testimony is quoted later
on p. 33.
• Summaries to tables, exhibit 1192. Temporary Nation? F onomic Committee Hearings, pt. 15, pp. 8617
•Ibid., pt. 17, p. 9705.
32 CONCENTRATION OF ECONOMIC POWER
Mr. Farish also said:
* * * In the State of Texas, since, I think, the year 1914 or 1915, I have for-
gotten which, we have a minimum tender of 500 barrels a day, and they take less.
I know this is a fact because in 1915, operating this same little plant I described
to Mr. Sumners awhile ago, when my well went dry I had some production in
north Texas and I got the Texas Co. to deliver me my production in north Texas
at Humble to keep this little plant running, and I had about 300 barrels a day
production up there. I ran the oil, put it in a tank, pumped it over, and they
got a tankful and kept going. I want to register very definitely on this charge
that th«re is a restricted use of pipe lines; there is absolutely nothing in it. 6
Our own examination .»f 'ie interstate pipe-line tariffs on file with
the I. CX C today .give? different remits from those of Mr. Cook.
The following table gives the results of our own study of the official
file of minimum tender requirements of 48 interstate crude oil pipe
Minimum tender requirement in barrels: companies
500 . . 1
1,000 , 1
10,000 to 7,5,000 1
Total . 48
These figures cannot support the statement that "the typical minimum
tender on crude oil is 50,000 barrels" The most common requirement
is 10,000 barrels and is used by over one-third of the 48 pipe-line
companies. Furthermore, some pipe-line companies will store free of
charge the daily output of a shipper until the amount accumulated is
equal to the tender requirement. Free storage is provided by some
pipe-line companies for as long as 59 days. 7
Minimum tender requirements are regulated by the I. C. C, and
any shipper may complain to, the Commission if he believes require-
ments to be unreasonable. In his testimon}^, Mr. Fayette B. Dow,
an attorney of Washington, D. C, who is chairman of the American
Petroleum Institute committees on railroad transportation, on pipe-
line accounting regulations, and on pipeline valuation, and who
represents various oil and other interests in Washington, could re-
member only one case where a complaint was made by a shipper about
minimum tender requirements of crude oil pipe lines. 8
Regarding the common carrier status of pipe lines, it should be
remembered that pipe lines are regulated and the producers are thus
protected against exorbitant rates. The tender requirements are also
regulated so that the crude producer can ship if he wants to. The
important question to raise is why he does not exercise his right to
use the common carrier. As was pointed out in the preceding chap-
ter, his right to use the pipe line assures him that the crude oil prices
at the two ends of the line differ only by the transportation charges,
aid these parity prices commonly lead him to take the more con-
venient course of selling his crude in the field.
1 Ibid., p. 9701.
' Testimony uf Mr. ]>ow, ibid., \>t. 15, i>. 8298.
» Ibid., p. 8301.
CONCENTRATION OF ECONOMIC POWER 33
Mr. Cook also failed to mention why a minimum tender is required,
thus possibly leaving the impression that it is merely a device used by
the majors to force independents to sell at the well head. The
reason is simple. There are many types of crude oil which have
different properties. When different crudes travel through a pipe
line at the same time there will be contamination or mixing at points
where they are in contact. Obviously, the smaller the quantities
shipped, the greater the contamination per barrel of oil. Therefore,
minimum quantities are set to avoid excessive mixing of the crudes. 9
Mr. Cook admits that the independents do not complain about
current tender requirements and present-day pipe-line rates. He
explains this by asserting that complaints cost too much; he says
that it is "very costly for the independents to bring cases before the
Interstate Commerce Commission." In the first place, complaints
to the State and Federal administrative bodies are not difficult.
Colonel Thompson, speaking of the practice of the Texas commission,
insisted that complaints could be made cheaply and easily; 10 and
Mr. Dow stated that the proceedings before the Interstate Commerce
Commission were not expensive. 11 In the second place, the public
press and the hearings of the frequent governmental investigations
of the oil industry give ample opportunity for voicing complaints.
Mr. Cook cannot explain away the absence of complaints, which is
the strongest possible evidence against his claim that the current
pipe-line situation is essentially the same as that of 30 or 40 years ago.
CRUDE OIL PIPE LINES AND THE INDEPENDENTS
The general inference intended by Mr. Cook in this chapter is that,
because of pipe-line control, major companies have the advantage
over independents. A particular inference is that major companies
are able to locate refineries near markets because their pipe lines assure
an adequate supply of crude at all times. One might gain the impres-
sion from this discussion that an independent could not locate where
he wanted to and be assured of an adequate supply of crude so long
as he had to make use of the majors' pipe lines. In tins connection,
the testimony of Mr. Louis J. Walsh, an independent refiner from
Houston, Tex., is of interest.
Mr. Walsh. * * * Our" position as an independent refiner in the Gulf
coast is this: We own no pipe lines, we have no production. We are connected
to the pipe lines of three of the major companies. We have available to us
crude from practically every field in Texas.
Mr. Henderson. You don't have any trouble getting crude?
Mr. Walsh. None whatever.
Mr. Henderson. At your Houston refinery?
Mr. Walsh. None whatever.
Mr. Henderson. Do you have any trouble with these three major companies
with their pipe lines?
Mr. Walsh. None whatever. We have available crude from practically all
the fields in Texas, New Mexico, and some fields in Louisiana. 12
It should also be pointed out that many independent refineries own
and operate their own pipe-line facilities. In his testimony before the
' It should also be pointed out that diffusion of gasoline is greater than the diffusion of crudes, a fact which
accounts for the larger minimum tender requirements of gasoline pipe lines. It is also more important to
prevent diffusion in the case of gasoline because it is a refined product, the differing characteristics of which
have f»pn used as a basis of advertising- to obtain consumer patronage.
unorary Xational Economic Committee Hearings, pt. 15, p. 8248.
" Ibid., pp. 8283-8284.
» Ibid., pt. 14, p. 7337.
34 CONCENTRATION OF ECONOMIC POWER
T. N. E. C, Mr. Fayette B. Dow presented statistics showing that
of 31 independent refineries in the Wichita Falls, Tex., area, 19
refineries owned and operated their own pipe-line facilities and 9 were
connected with pipe lines of major companies. A similar analysis of
18 independent refineries in the Corpus Christi, Tex., area showed that
8 used their own pipe-line facilities while 7 were connected with pipe
lines of major companies. 13
Mr. Cook's principal objection to the ownership of pipe lines by the-
majors is that pipe-line rates are too high and that the earnings of pipe
line companies are excessive. He indicates that the rate of return
was 26.7 percent of the investment in 1938 based upon compilations
from .1. C. C. figures. It should be pointed out, however, that this
percentage was derived by dividing the earnings by the book or de-
preciated value of the plant investment, a method which will give a
substantially higher figure than if the capital investment accepted by
the I. C. C. for rate making is used as the divisor. Mr. Farish's
testimony on this point was as follows: 14
In regard to pipe-line earnings, one further point should be made. Earnings are
not in fact so high as they were made to appear by the method used by the Depart-
ment of Justice. It appears from table 22 in "Exhibit No. 1139" 16 that the De-
partment of Justice calculated a percentage rate of return which used "net invest-
ment" as the base. This term "net investment" was defined as "the investment in
carrier property after depreciation". This basis unfairly excludes some of the
assets of the pipe-line companies; the total current assets, for example, are omitted,
although they are surely part of the business. How may a pipe-line company get
along without operating oil stock necessary for operation, warehouse material and
supplies, and a working cash balance, just to cite some major items?
Mr. Farish also stated that the pipe line companies of his organiza-
tion were not earning over 8 to 9 percent on the pipe line investment. 18
Mr. Cook neglected to say that pipe line rates have been reduced
considerably in recent years. Mr. Farish commented as follows on
The continued reduction in pipe line rates during the last 8 years has been brought
about by three principal causes. In the first place, proration, by extending the
life of oil fields, has also extended the life of the pipe lines to those fields. The
capacity of some pipe lines is not taxed. In the second place, a number of new
sources of crude oil have been discovered. The most influential discovery was in
East Texas, which because of its location within a comparatively short distance of
Gulf coast refineries, enabled the refiners there to secure crude oil supplies at
low pipe line cost. The first indication of the importance of this East Texas
competition was given in an announcement on April 21, 1931, by the Humble
Pipe Line Co., of an average reduction of pipe line rates affecting its entire sys-
tem. * .* * Since that date there has been continuous pressure on pipe line
rates in Texas, and several reductions in pipe line rates have taken place. East
Texas best illustrates the significance of new sources of oil supply because it was
the most important. It does not, however, stand alone, for other new discoveries
have had a similar impact.
The third cause of the reductions in pipe line rates has been the development 6f
other means of transportation of crude petroleum and its products. These have
directly or indirectly affected the demand for the services of the pipe lines. Both
ocean and river transportation have greatly increased in importance. They may
reduce the barrels of oil carried by the pipe line systems. Pressure from regula-
tory authorities was of relatively little importance, although the investigations
and orders of the Interstate Commerce Commission of recent years have doubtless
been of some weight in rate reductions.
>» Ibid., pt. 15, exhibit 1192, pp. 8616-S618.
"Ibid., pt. 17, p. 9759.
"Tbid., pt. 14-A,p. 7796.
i« Ibid., pt. 17, p. 9756.
CONCENTRATION OF ECONOMIC POWER 35
Successive reductions in rates have brought the present earnings of pipe lines
down to a point where the return may well be inadequate in some instances. The
risk in pipe lines has by no means disappeared. Oil fields become exhausted and
demands shift. 17
The summary statistics of pipe line companies reporting to the
Interstate Commerce Commission, for the years 1929 through 1937,
show the loAveiing of the return on investment as a result of the reduc-
tions of pipe line rates and show also that the rate of return is not
really so high as Mr. Cook made it appear by leaving out part of the
Mr. Cook also states that the independent operator is at a disad-
vantage because he must pay the published tariff for pipe line trans-
portation whereas a major company owning the facility ultimately
pays only the cost of operation. Surely, Mr. Cook does not expect
rates to be sufficient only to cover costs. He would certainly concede
that the owner of the facility should receive some return on his invest-
ment. There are risks involved in any capital investment, particu-
larly a pipe line investment, because the development of new producing
areas may reduce the amount of crude taken from existing fields serv-
ing those areas. The development of Illinois production serves as a
recent example of this. Additional crude oil produced in Illinois dis-
placed crude produced in Oklahoma and Kansas which was moved
through pipe lines to refineries serving the North Central States.
The volume of these pipe lines was seriously reduced, as indicated by
Mr. Farish in his testimony regarding the Ajax Pipeline Co. 19 In
some cases also pipe lines are actually removed because new fields do
not produce as much crude as was expected when the lines were con-
structed. This point was brought out by Mr. Fayette B. Dow in his
testimony regarding pipe lines in north Texas fields. 20
PIPE LINES AND CRUDE OIL PRICES
In his treatment of crude oil transportation, Mr. Cook included a
discussion of the purchases of crude by the majors who own the pipe
lines. He states that the presence of uniform prices in a given field
suggests "an agreement to work together to control crude prices,"
and that posted prices of all majors in a given field change at the same
In our discussion of his chapter on production, it was pointed out
that uniform prices are proof neither of monopoly nor of competition
but that uniformity can exist under either set of circumstances.
Different prices to different producers, in other words discriminatory
prices, would suggest monopoly. Therefore, uniform prices do not
suggest "an agreement to work together to control crude prices" any
more than-they suggest that competition is keen. Mr. Cook made no
attempt to describe the influences affecting the price of crude in a given
field, nor did he attempt to show how prices are established. To
facilitate an understanding of this subject by the reader, some atten-
tion will now be given to the crude oil market and the determination
of crude oil prices.
" Ibid., pp. 9942-9943.
"Ibid., pt. 14-A, table 17c, p. 7792. Th» table is reproduced in the appendix of this reply as table 2, p.
"Ibid., pt. 17, p. 9731.
'"Ibid., pt. 15, p. 8302.
36 CONCENTRATION OF ECONOMIC POWER
The following characteristics of the product and its buyers and sellers
need to be borne in mind:
Crude oil is of many different qualities. Crudes differ as to the type
and amount of impurities which they contain, as to the yield of gaso-
line and other products which can be secured, and in many other
ways. Similarly, crude is found in many different locations, some near
refineries, some distant from refineries. These differences among
crudes affect importantly the value of the crudes to buyers.
The buyers of crude oil include both large and small concerns, but
large enterprises predominate. The sellers of crude oil also include
both large and small concerns, but the small enterprises are somewhat
more. prominent on the selling side than on the buying side.
Many buyers of crude oil are also producers from their own wells.
This is true of both large concerns and small concerns. Most large
concerns are net buyers of crude: That is, they do not produce all
that they use in their refineries. Even the large companies which
are net sellers of crude buy substantial quantities, either because they
require particular grades which they do not themselves produce or
because they need oil at particular locations where they do not have
Crude oil is commonly purchased at the point of production; field
storage is ordinarily reduced to a minimum. Sellers of crude normally
make constant and continuous deliveries to buyers.
POSTED PRICES AND PRICE LEADERSHIP
Over a period of years a posted price system has developed for the
purchase of crude oil. This system, which superseded purchase by
long-term contracts, was described by Mr. Farish in these words:
* * * Tli e posted price system needs a careful explanation, because it is a
system which well suits the peculiar economic and technical needs of the oil indus-
try but is not a system of price protection that is suited to the needs of other
industries. The entire industry would oppose any tampering with the system,
however much dissatisfaction there may be with the prices themselves.
Crude prices are posted by the purchasing interests in the oil fields. Sometimes
the price is posted by only one purchaser, and the others either buy at that price
or offer premiums or discounts based on it. In larger fields, the pi ices are posted
by several purchasers.
The posted price system has three functions. It serves to tell the producer the
price at which the company will take the oil. It serves as a basis for settling with
royalty interests, who are also sellers of oil. The royalty interest in a single well
may be divided between many individuals. The posted price system also serves
to tell purchasers of oil from an oil merchant (who has bought crude from a pro-
ducer) the terms on which the merchant will sell. A large oil company has to make
thousands of settlements, and some common basis for them all is needed for both
equity and economy. The same basis, the posted price, is used for settlements
with both large and small sellers and purchasers.
The posted price system of quoting prices has no necessary connection with
either monopoly or competition. If either the buying or the selling of the crude
oil produced in the fields were concentrated in a single hand, the monopolist might
post a price. He might also make contracts for long term deliveries. A monop-
olist might post the same price for all or he might discriminate among his sellers or
customers. The system of quoting posted prices in the oil fields may have some
slight effect on crude prices, because almost everything that happens in the indus-
try and even outside the industry may have some effect on crude prices. But if the
posted system is not necessarily connected with either monopoly or competition,
the peculiarities of this method can best be understood by studying the system as it
exists — under competition. Under the posted price system the purchaser ordi-
narily stands ready to take all the production which a producer may legally obtain.
Usually a large purchaser does not find such rapid changes in his requirements
CONCENTRATION OF ECONOMIC POWER 37
that he has to make short term inci eases or decreases in his takings. He sometimes
has to do so, and always reserves his right to do so.
The emphasis placed upon the fact that in some fields there is only one or only a
few purchaseis is entirely unwarranted. The fact is, of course, true, but it has
little or no economic significance. All of the oil wells of the United States are
really a part of a common market, and the United States market is only a part of a
world market. In the whole market there are many buyers and many sellers.
In the testimony before the T. N. E. C. there is abundant evidence that there are
many economic interconnections between the various petroleum markets. In
effect, then, the posted price system brings the world market to the door of the
Of course, the various parts of the world market are not always in precise aline-
nient. The very effects of the slight inequalities between'markets are part of the
process by which those inequalities are constantly tending to disappear. 21
There is no evidence in the T. N. E. C. testimony of collusive
agreements among either buyers or sellers of crude in regard to prices.
Mr. Farish denied flatly that such collusive agreements exist, and this
testimony was confirmed by Mr. Shatford with the emphatic state-
ment, "the problem is not one of conspiracy and collusion." 22
In discussing price leadership in his formal statement, Mr. Farish
Suspicion about conspiracies to control prices also arises from misunderstand-
ing the significance of so-called price leadership. The power of the so-called price
leader is greatly overestimated. This exaggerated picture develops because the
general public, and even men in the industry, get in the habit of looking only at
the changes in the posted published prices. These are the conspicuous changes,
but they merely follow unpublicized changes in the prices actually paid, or other
developments which clearly foreshadow a market trend..
When the crude market tends to be weak, unpublicized discounts from the
posted price appear; that is. some sellers offer oil to some buyers at prices below
the posted figure. If these discounts are small and scattered, little attention is
paid to them. But when they spread so that a substantial quantity of crude is
moving below the prevailing market price, some one company, usually but not
always the largest buyer in the territory, finally accepts the responsibility of
recognizing formally the change that has taken place. Essentially, then, this
so-called price leader merely takes the lead in announcing a change in market
pricecthat has, to all intents and purposes, already occurred.
In the opposite situation, when the market is tending to be strong, there have
been times when premiums over the posted price were paid. Premiums today
are infrequent, but there are many other indications when the market is strength-
ening, such as sales running far beyond estimates, high market prices for finished
products, short inventory positions, activity of crude buyers in closing contracts
and making connections, disappearance of any substantial volume of -crude
moving under the posted market, aud, particularly, a strong attitude of the regu-
latory authorities toward maintaining firm allowables and not granting special
favors to producers. Perhaps the most important evidence of all is an advancing
cost of getting the oil from underground. When an individual company, usually
one that is a large buyer of crude, interprets these various signs as indicating that
basic conditions are tending to require a higher price, it takes the step of formally
recognizing the changed market situation by means of an advance in the posted
Thus the so-called price leader is merely the interpreter of market conditions.
He is by no means a necessarily infallible interpreter, and if he guesses wrong, he
finds himself out on a limb. The price leader is not always the biggest buyer,
and it is not always the same company which takes the initial action in each
instance. In general, changes in the posted prices of crude lag behind changes in
gasoline prices. There is no formula for determining the one right ratio of crude
prices to gasoline prices and no formula for determining the one right lag of posted
crude prices behind product prices. The existence of the lag is inevitable
because the price leader is really the price follower. He announces the changes
which have taken place. Somebody always criticizes any price change; that is
only natural, and that is why the situation of the so-called price leader is not a
11 Temporary National Economic- Committee Hearings, pt. 17, pp. 9943-9941.
»»Ibid.,pt. 16, p. 7.
38 CONCENTRATION OF ECONOMIC POWER
happy one. But there is much more criticism of price decreases than of price
increases. As Mr. DeGolyer remarked, it is practically an article of faith with
producers that crude oil is worth more than they get for it. The company which
takes the lead in posting a price cut is distinctly unpopular. After all, the sellers
are in close contact with the buying company; they are the people that the com-
pany has to live with from day to day. Hence the posted price of crude shows
less responsiveness to market changes which point toward a lower price than it
does to market changes which point toward a higher price. In other words,
the downward price changes tend to be delayed; and it is an elementary fact
that after, the market situation has become clear any delay in a price change
increases the size of the eventual adjustment. 23
Mr. Cook was concerned about the control of tankers by the major
companies. Some space was used to describe a plan for pooling of
tankers by major companies which was commented upon by Mr.
Louis J. Walsh in his testimony before the T. N. E. C. The condensa-
tion of Mr. Walsh's testimony was reasonably accurate except that
Mr. Cook omitted Mr. Walsh's important statement that the plan
was never put into effect. 24
Another complaint concerning ownership of tankers by majors is
that, "similar problems to pipe lines are encountered by independ-
ents in that it is necessary to build excessive storage facilities so as
to store enough crude oil or gasoline to make a shipment." The word
"excessive" is improperly used in this connection. So long as trans-
portation by tanker is cheaper than any other form (and it is admitted
to be cheaper by Mr. Cook), the storage necessary to take advantage
of water transportation is not "excessive." Independents do not
have to own tankers, as they may either charter them to move their
products or crude, or sell products to others for loading at the Gulf.
In any case, an independent refiner selling products to majors or to
others requiring movement in tankers does not necessarily have to
provide enough storage to load a large tanker. He may provide
enough storage to load one compartment in a large tanker or he may
use a small tanker. At some points, he may find storage facilities not
owned by any other refiner available for hire. There is no evidence
in the T. N. E. C. record to support the claim that the independent
refiners .are handicapped by having to provide excessive storage.
In the foregoing pages, the principal contentions of Mr. Cook
regarding crude transportation have been stated and discussed. It
has been shown that much of his argument was based upon state-
ments made many years ago and that other generalizations are
refuted by the statements of witnesses beforo the T. N. E. C. The
general implication that independent refiners and producers are being
abused because of ownership of crude transportation facilities by
major companies is not substantiated.
In no part of his monograph has Mr. Cook -failed more conspicu-
ously to present an accurate picture of current conditions of the oil
industry than in his discussion of crude oil pipe lines. There is now
competition among pipe lines. Thanks to the protection of equi-
table taking laws and of regulated tenders and rates and thanks to the
posted price system, the independent oil producers now have effective
access to the world market.
23 Ibid., pt. 17, p. 9945.
«Ihid., pt. 14, p. 7335.
COMMENTS ON MR. COOK'S CHAPTER ON REFINING
Mr. Cook's chief contentions regarding refining activities are:
(.1) Major companies have advantages of mass production and of
location in refinery centers, whereas "independent refiners are usually
located in or near the oil field because of transportation disadvantages,
and their market is limited." (2) Major companies "can buy oil
from many sources and the effects of proration are not the same as to
the independents, who could not buy or produce enough of their own
oil under the laws to keep their refineries going." (3) Majors
"applied what is known as the refinery .'price squeeze' " in order to
control or eliminate independents. ' (4) Majors have control of
patents, and this control constitutes one of their "strongest weapons,"
since the independents must pay "substantial," "high," and "con-
siderable" royalties for the use of these patents. Independents are
harassed by majors for alleged infringements, and they cannot afford
to defend themselves in litigation. (5) Exchanges of gasoline by
majors lessen competition!
MAJOR COMPANIES VERSUS INDEPENDENTS
Independent refiners do have the opportunity to locate at the sea-
board or consuming centers. It is true that many independent
refineries are located in or near oil fields ; some small refineries owned
by majors are also located there. It is also true, as pointed out by
Mr. Cook, that there are 16 independent refiners located on the Gulf
coast. One of these, Mr. Walsh, testified as • follows before the
T. N. E. C. regarding refinery location:
* * * We checked the whole situation over and decided that we would build
our refinery at Houston. We chose Houston because Houston was at that 'time,
and still is, the greatest single refining center in the world, both from the number
of refiners and the barrels of crude handled every day. Houston is also an
excellent refiner center because of its transportation facilities. From Houston
you can compete with world markets any place.
In 1935 we went ahead and spent about eight or nine hundred thousand dollars
and built our refinery at Houston. ' We built the best plant we could build. It
was modern, as up to date as anything we knew of at that time. Our plant
there has a capacity of 15,000 barrels per day, of which 10,000 barrels is cracking
capacity, the remaining 5 being topping capacity. 1
This testimony is also of interest because it shows that an inde-
pendent refiner can have as much cracking "capacity as he wants.
Mr. Walsh also stated that he had no trouble in obtaining crude
Mr. Cook produced no evidence to support his general inference
that the independent was being forced out of business by the majors.
His discussion consisted mainly of the presentation of some figures
1 Temporary National Economic Committee hearings, pt. 14, p. 7336.
> Ibid., p. 7337. This statement is reproduced in the discussion of crude oil transportation, p. 33, supra.
40 CONCENTRATION OF ECONOMIC POWER
showing the size of majors as compared with independents, the mor-
tality of independent refiners in East Texas, and the percentage of
capacity operated by independents as compared with majors. One
might conclude from Mr. Cook's picture of East Texas that inde-
pendents never made any money and that their activities were on the
wane. As to the first point, it should be noted that abandonment of a
refinery in itself does not prove the refinery was unprofitable. Many
independent refineries made money even though they were short-
lived. Regarding the point that independent refineries are decreasing,
the facts indicate quite the opposite. Dr. R. E. Wilson, president of
Pan American Petroleum & Transport Co., testified as follows concern-
ing the growth of independent refineries:
May I add that to go to the other end of the picture and give the small refinery
picture in Texas, I have taken independent refineries, that is, companies that are
not in the first 20, operating in Texas, by years, under 10,000 barrels a dav;
there were 44 in '29, 56 in '31, 71 in '33, 79 in '35, which is about the height of the
East Texas small refinery, and 74 in '38. In other words, while there have been
many refineries shut down in p]ast Texas, there have been enough more built in
other points during that period, and incidentally during the period of proration,
to keep the total very close. That applies only to the refineries below 10,000
barrels a day. There are a number of independent refineries, above 10,000
barrels a day, and those are the companies which you might say are growing and
getting into the semimajor field. In 1929, 2; '31, still 2; '33 there were 5; '35 there
were 5; in 1938 there were 7. In other words, quite a number of these companies
which started small are growing. This refinery that I mentioned in northern
Kansas which was shipping so much by truck I think has twice doubled the size
of that refinery; I believe it started out 4,000, they raised it to 8, and then they
raised it to about 15, and they are still going. Again and again if you get a
favorably located, well-managed company, it is able to go ahead, but not every
company that enters can go ahead. 3
The above testimony is quite the opposite of the picture painted
by Mr. Cook and indicates that something must be wrong with the
statistics presented by him in his table 10 on page 33, which present a
comparison of the capacity of majors and independents over a period
of years. Careful study of the text immediately preceding the table
shows definitely that something is wrong with it. The two sets of
facts, one concerning majors and the other having to do with inde-
pendents, are not comparable statistically. The capacity figures for
the majors include refineries in "territory where the supply of crude
from the East Texas field was available." This is an ambiguous
statement, but presumably the area includes the Texas Gulf, part of
all of the interior of Louisiana and Arkansas, and East Texas, because
the figures are somewhat greater than he formerly attributed to majors
on the Gulf Coast. Capacity figures for independents, on the other
hand, include only those in East Texas. The only comparison worth
anything statistically would be one comparing independents and
majors in the same area. Were this done, the independents on the
Gulf coast and other parts of the territory would be included, and the
answer would be similar to that given by Dr. Wilson.
Dr. Wilson also described the conditions in a wide-open field such
as East Texas which lead to the construction of more refineries than
can economically exist. Excerpts from his testimony follow:
The remaining point I wish to cover was the situation with regard to the East
Texas refiners, of which a Considerable number have, as you know, gone out of
bi'siness in recent years. Does that mean that the way is no longer open for the
small man to get started and make a profitable entry into business, or just what
does it mean? To understand that situation I think it is necessary to jucture the
3 Ibid., pt. 15, p. 8377.
CONCENTRATION OF ECONOMIC POWER 41
conditions in an oil field that comes in when there is a diversity of ownership and
no effective proration. That is, a large, flush field of the type' we have had quite
a number of in the past. The wells, in general, start coming in faster than pipe
lines can be built to take care of the oil. That means that everyone is scrambling
for an outlet. He is willing in order to give an outlet to sacrifice the prices of
his crude because he realizes that every barrel he can get out of his property before
the other man, his neighbor, can get it out is velvet, so to speak. That is, it
really costs him nothing because if he doesn't get it then his neighbor will get it
at some later time, and therefore there is a tremendous scramble to get oil to
market at any price, practically.
* * * Now when you have this situation of overproduction, some producers
having difficulty in getting rid of their crude say, "Let's build a refinery and sell
the product." They realize that in that immediate locality there is demand for
gasoline, and if they can build the first refinery or second refinery they can save
the freight two ways, because up until then the crude has been going to a refining
area and has been refined and shipped back as gasoline. They build a small refin-
ery, generally first only a skimming plant. The minute they do that, the other
producers realize +hat man is getting more than his fair share of the crude and
they think the only thing to do is to build a refinery, so in almost any field you
get a number of refineries of that size built rather promptly, and of that general
characteristic. As soon as you get four or five you begin to have so much com-
petition that they can't sell their products in that local area. They must sell
farther and farther afield.
A refinery located in an oil field is advantageously located so far as a limited
market in that vicinity is concerned, but it is poorly located if it has to go far
afield to sell its gasoline, especially if it makes a low yield of gasoline and has a
lot of fuel oil to sell, because fuel oil is generally pretty much of a drug on a market
in an oil field, because there is always gas available for ordinary fuel requirement.
And so when the crude, when the price of crude, gets up to a normal figure,
these refineries just can't compete. They are built to operate on very cheap
crude. They have in the value of their products a. disability against them of
something like 20 cents a barrel. That is the difference between the value of the
barrel of products made with cracking and the value of a barrel of products made
by a simple skimming plant. The quality is poor, not competitive, in general,
with the demands of the modern motorcar. 4
REFINERY CRUDE SUPPLY
Mr. Cook's complaint that proration prevents the independent
refiner but not the major company from buying or producing enough
oil to run his refinery is really an argument against proration. It has
already been shown that if there is any discrimination in the adminis-
tration of proration laws it is in favor of the independent, who is given
proportionately greater allowables. Therefore, Mr. Cook must .be
complaining about proration in general. The conservation aspects
and benefits of proration have already been presented and need not
be reiterated. It is necessary, however, to point out again that the
reason a refinef is not allowed to take as much oil as he wants to is
because he is prevented from doing so by ratable taking laws which
are designed to provide equitable distribution of the total purchases
of oil among the various producers in a field. No one refiner, whether
independent or major, should be allowed to take oil from his own wells
at the expense of other producers, and he is not allowed to do so.
Mr. Cook's figures on percentages of capacity operated by majors
and independents are interesting because they show that majors oper-
ate at a higher rate. Apparently these facts are designed to show how
the majors have the advantage over independents. They serve to
* Temporary National Economic Committee Hearings, pt. 15, pp. 8338; 8339-8340.
42 CONCENTRATION OF ECONOMIC POWER
remind one, however, of Mr. Cook's complaint that, because the
major's percentage of reserves is greater than their percentage of pro-
duction, they are deliberately holding back production. Mr. Cook
complains both because the majors produce at a low rate and because
thev refine at a high rate.
Mr. Cook had something to say about the refinery "price squeeze,"
stating that it was applied by the majors "in order to control or elimi-
nate these independents." Refinery price squeeze is the term he used
to describe a situation where product prices are low relative to crude
prices and where the jefiner has a smaller margin to cover his costs.
Such a condition can and does exist from time to time either because
product prices are abnormally low or crude prices are abnormally
high. The reverse situation, where crude prices are low in relation
to product prices, has also existed. It is during such periods that
most independent refineries are constructed, because refinery margins
are more than adequate to cover costs.
For the charge to be true that the ma joes are responsible for the
so-called refinery price squeeze, majors as a group must be guilty either
of forcing crude prices up or forcing product prices down. Examina-
tion of the T. N. E. C. testimony reveals no proof that there are any
collusive agreements among refiners to bring about either artificially
high prices for crude or artificially low prices for products, nor is there
any evidence of agreement regarding the amount of refinery runs or
the size of inventories to be carried. Furthermore, there is no evidence
that price reductions apparently caused by excursion of small refiners
into new markets are deliberate. Undoubtedly, the small refiner
entered the newmg.-ket, in part at least, on the basis of price reduc-
tions; and what he objects to is the fact that the major compaiies
meet the price reductions when their volume is sufficiently affected
to make it worth while to reduce prices to regain volume.
> There is considerable price competition in the marketing of petro-
leum" products, and this competition undoubtedly exerts pressure upon
the margins of refiners generally and also upon crude prices. The
small producing interests assert that the price of crude is reduced as
a result of excessive product inventories, whereas the small refining
interests maintain that crude prices do not respond to the pressure of
such inventories promptly or adequately. Both sides^cannot be right.
Mr. Cook's contentions concerning the control and use of patents
are not well founded. He claims that patents are used to "harass
independent refiners for alleged infringement of patents" and that
royalties paid to majors for use of patents are "high," "substantial,"
and "considerable." There is no evidence whatever in the T. N. E. C.
testimony that patents are used by majors to harass the independents;
there were no complaints about either the availability of patents or
royalties for their use; and Mr. Cook offers neither proof nor authority
for his statements. On the contrary, the testimony indicates that
ownership and control of patents is not a major problem in the oil
business. No single patent pool exists, no closed patent pool is used,
CONCENTRATION OF ECONOMIC POWER . 43
and some trading among companies with valuable patents is char-
acteristic of the industry. The small refiner who wishes to use several
patents which are owned by a number of different companies and
which are necessary to employ a particular refining process does not
have to go to all the different companies for a separate license. Any
one of the companies is permitted to grant a license on all the patents
necessary for the process. Since one company rarely obtains all the
patents that are used in one refining process, companies usually ex-
change rights to use patents; and as a result pf these agreements the,
small refiner obtains convenient access to a variety of patents, -^.s
to the availability and cost of the_ patents, Dr. Wilson's -testimt*$y'
before the T. N. E. C. was as follows: »
The Vice Chairman. To what degree do patents on processes of cracking oil,
and so forth, controlled by some of the major companies interfere with the
opportunity of the small man to go into the business?
Dr. Wilson. Practically every patent that is owned by the industry is available
for license on a reasonable rate. Further than that, when I say a reasonable
rate I mean a rate which is figured to be a small percentage of the savings that
he can make by vfsing that process. Furthermore, in order to simplify the matter,
where patents that are owned by a number of different companies are necessary
to practice a particular process that he wants to, he doesn't have to go to ah those
different companies to get a separate license, he can got a license to use every
patent of a substantial number of companies for that particular process if he
wants to do it.
The Vice Chairman. The effect of your statement, then, is that patents and
the opportunity to use them doesn't interfere substantially with the opportunity
of the independent man to go into business.
Dr. Wilson. That is correct.
Dr. Ltjbin. Is the license fee charged to all people alike?
Dr. Wilson. Generally there is a sliding scale with the size of operation or the
total amount processed. It starts out on the same basis. Of course there are
special arrangements whereby some companies which have patents turn in those
patents and get a credit on their royalty rate. There are a great many special
deals of that sort, because there are comparatively few companies in the industry
who have done research on cracking that don't have some developments that
are of importance.
Dr. Lubin. But all people, all refineries, pay exactly the same rate, and where
there are differences it is based upon volume?
Dr. Wilson. No. Some refiners have free licenses because they exchange
cross-licensing agreements, so different companies which have got a substantial
amount of patents will get free licenses under some other companies. There is,,
quite a bit of exchange among the industry of that character.
Dr. Lubin. Is there a patent pool in the industry?
Dr. Wilson. No single patent pool.
Dr. Lubin. It is just a bargaining between different companies?
Dr. Wilson. On each different type of process there are different arrangements.
It is very seldom that one company gets all the patents that bear on some one
process they want to operate. One man gets certain- features, another man gets
certain features, and they find that to operate successfully they must make an
agreement. They get together and do it.
Patents have not been used to build up monopolies or to keep other people
out. As I say, practically every patent in the industry is available for license. 5
There is no evidence in the T. N. E. C. testimony regarding the
profitableness of patents to companies which own them, but Mr.
J. Howard Pew, president of the Sun Oil Co. ventured the following
I should point out that the cost of developing these processes is probably greater
than all the royalties that have ever been obtained from them. I suggest that as
something you gentlemen might look into. I don't know, but I think that is
probably true. 6
4 Temporary National Economic Committee Hearings, pt. 15, pp. 8328-8329.
•Ibid., pt. 14, p. 8218.
304955— 41— No. 39a 4
44 CONCENTRATION OF ECONOMIC POWER
Patents in the oil industry are the results of long and costly research.
Such technical advances, particularly in the field of chemical engineer-
ing, require large expenditures beyond the resources of small units.
By payment of royalties, however, the small companies are able to
use the results of expensive research and indirectly contribute to the
costs of the research sums consistent with their smaller resources.
EXCHANGES OF GASOLINE
In connection with exchanges of gasoline, Mr. Cook uses as a heading
to the discussion "Lessening of Competition Through Exchanging of
Gasoline." Nowhere in his discussion, however, does he explain how
exchanges lessen competition. In fact, exchanges of gasoline increase
rather than decrease competition. There are certain to be some areas
in the marketing territory of a major company where its delivered
costs are higher than at other points because of the distance from its
refinery. A competing major company may have a refinery more
advantageously located to serve such an area, but it may be at a
similar disadvantage as to refinery location in an area of the first
company's territory. By exchanging gasoline, each company is able
to deliver gasoline to these particular areas" more cheaply than if no
exchange were made.
If exchanges were not possible, the company in a disadvantageous
location would have to either withdraw from the market or build
another refinery so that it could compete with the, competitor more
favorably situated. Either of these alternatives would be to the dis-
advantage of the consumer. If the company withdrew from the mar-
ket, competition would be lessened, and the addition of an unneces-
sary refinery would be an economic waste. Perhaps the best way to
counter Mr. Cook's claim' is to ask what he would think of a marketing
system where the majors deliberately avoided the exchanging of
In the foregoing discussion, it has been shown through testimony of
witnesses before the T. N. E. C. that the independent refiners have a
place in the'industry and that their numbers have increased. They
are not necessarily at a disadvantage in location; they generally have
readily available crude supplies; and they can obtain the right to use
patented processes from a variety of sources at reasonable cost. There
is, however, ample evidence of pressure on badly located or antiquated
refineries. If all the badly located or antiquated refineries were able
to make profits, a claim could plausibly be made that there was a
conspiracy to exact monoply profits from the consumers. Under the
circumstances as they actually exist, it is to be hoped and expected
that the elimination of wasteful gusher production will prevent the
waste of capital involved in erecting short-lived field refineries. The
majors are not responsible for the refinery-price squeeze, and, with
their relatively large stake in refining, they generally suffer from mal-
adjustments between the prices of crude and the prices of products
just as much as do the independents.
COMMENTS ON MR. COOK'S CHAPTER ON MARKETING
Mr. Cook's chief complaint concerning the mi.rk^ting branch of the
industry is that majors control jobbers and service station operators.
He also makes- several general allegations which are related to his
statement that "there is virtually no price competition among the
majors," but most of his discussion is devoted to the alleged control
over jobbers and-operators of retail outlets. He gives no attention to
the factors which influence prices and to the processes through which
prices are established. This omission affects Mr. Cook's whole argu-
ment, because an explanation of these influences and processes would
serve to nullify many of his complaints concerning jobbers and
retailers. For this reason, Mr. Cook's general allegations will be dis-
The value of Mr. Cook's monograph is impaired by the fact that
he sometimes states conclusions in his chapter summaries about
subjects which are discussed nowhere in his text, and it is in the
summary to this particular chapter that he says "there is virtually no
price competition among the majors." Almost in the same sweep of
his pen, in fact in the preceding paragraph, he also states that "the
marketing division is overbuilt and the most competitive of all divisions
of the petroleum industry," and that "the majors account for 85 per-
cent of the domestic sales of gasoline." If the majors account for
85 percent of the sales of gasoline and do not compete with each other,
how can the marketing division be the most competitive? Or, if the
marketing division is the most competitive, how can there be "vhtually
no price competition among the majors"? One of these statements
must be wrong, and examination of the testimony before the T. N. E.
C. shows that it is erroneous to conclude that there is no competition
among majors. On the contrary, the testimony leads to the conclusion
that the marketing of petroleum products is so competitive that
complaints from those engaged in that branch of the business are to
be expected. Not everyone engaged in an extremely competitive
business can prosper. Some are bound to be affected adversely by
aggressive action of others in the general scramble for a share of the
NATURE OF COMPETITION IN THE MARKETING BRANCH OF THE PETRO-
In the petroleum industry, as elsewhere, the word "competition"
means many things to many men. A suitable common denominator
for the many forms taken by competition ma ■ oe found in the phrase
"a conflict for advantage." Enterprises anr ndividuals in the mar-
keting branch of the petroleum industry cc 1 >ict with each other in
lowering prices to obtain greater gallonag* , n extending service to
motorist uring choice locations for fill n; stations, in adverjising
46 CONCENTRATION OF ECONOMIC POWER
their products and services, and in improving the effectiveness of their
salesmanship. These points of conflict are illustrative only; the list
could be expanded.
The T. N. E. C. testimony showed that no company or group of
companies remains aloof from conflicts for advantage and that no
clear-cut lines of demarcation separate companies -as to their desire
to gain advantages over competitors. Division of the industry into
the categories "big and little," or "integrated and nonintegrated," or
"Standard Oil companies and independents," is of no use in defining
the intensity of <, indict. Large companies compete against each other
and against noni\tt^rated enterprises; and the old pattern of competi-
tion, which was that between the Standard Oil Trust on the one hand
and the independents on the other, has been supplanted by a new
pattern of competition in which companies once parts of the old Trust
are in conflict with each other and with other enterprises, both large
Certain fundamental characteristics of the market for gasoline seem
to have shaped the character of competition. The use of the automo-
bile has become so much a habit of the American people that moderate
price changes do not materially influence aggregate consumption. On
the other hand, the volume of any single supplier is extremely sensitive
to any difference in price. Because the purchaser is in a moving
vehicle, there is ordinarily no inconvenience involved in traveling
from a station quoting a higher price to one quoting a lower price.
It is this factor which serves as an incentive for each seller to move
quickly to meet a lower price of a competitor and which makes for
the substantial uniformity in the quoted prices of gasoline. There are,
moreover, in any territory a sufficiently small number of sellers so that
each competitor can readily know what actions others take. Indeed,
because of the open and public character of the transaction, it is well
nigh impossible to offer lower prices without the fact becoming known
These facts relate directly to price competition at retail, and they
are paralleled in the wholesale market. Suppliers recognize that an
open reduction in the tank wagon price has the effect, if the price
cutter is of any importance in the market, of making necessary a similar
reduction by all competitors. Recognition is general that an open
price reduction is not an effective means of gaining gallonage. On
the other hand, the urge for increased gallonage is very strong because
of the proportion of costs which are fixed.
Special attention should be given to the place in the market occu-
pied by the seller of unbranded or unadvertised gasoline. To obtain
business such concerns must offer price concessions, particularly if
they operate in locations inconvenient for most motorists. Many-
so-called trackside stations are of this character. In most communi-
ties a fairly well-defined differential in price exists between these
concerns and the stations selling branded, advertised gasoline. If
this differential increases or decreases, substantial gallonage is shifted,
the amount depending upon the location of the cut-price station, the
income level of the community, the public demand for car lubrication
and other services in addition to gasoline supply.
CONCENTRATION OF ECONOMIC POWER 47
With this background in mind, we may now proceed to an examina-
tion of the specific allegations made by Mr. Cook. Unless his words
are studied carefully, one might gain the impression that the majors
have divided the United States into sections and that each section
is dominated by one major company, which acts as the price leader
and generally controls operations with the consent of the other majors
operating therein. That this may be Mr. Cook's purpose is indicated
by use of such phrases as "quite similar to that set up after the 1.911
decree" and "the effect of this division of territory." In fact, as
already noted, many of the companies once parts of the old Standard
Oil Co. have expanded their operations and are .now competing with
one another. At the same time Mr. Cook states that "the number of
major oil companies operating in the different States ranges from 5
to 16, the model number being 11." Therefore, to be true, his impli-
cation concerning division of territories would require the cooperation
of not less than 5 majors in any State and as many as 16 in some States.
How as many major companies, all of them aggressively competing
for gallonage, in territories where thousands of independent retailers
operate, could get together so that one company would be price
leader and would be able to "maintain the^price structure" is very
difficult to understand.
Because of the thousands of independent retailers, the price leader
is not an all-powerful figure. He is under many sorts of competitive
pressures, and has to adjust his prices to meet the developments in
the competitive situation. He leads only in publishing price changes
which market conditions have made inevitable; he is really more of
a follower than a leader.
To Mr. Cook price leadership apparently means some great and
perhaps even dangerous power to control the level of prices. Since
price leadership is often misunderstood by the layman, and apparently
sometimes by the expert, it is desirable to call attention to the best
explanation of price leadership and the marketing operations of major
companies in general with respect to posted prices; the best explana-
tion on this subject was'presented to the T. N. E. C. by Mr. Sidney
A. Swensrud, vice president of the Standard Oil Company' of Ohio.
His testimony follows:
* * * Over the lasts 20 years the gasoline market has been a down-pric©
market; that is, price reductions have been more frequent than price advances
or they have been of longer duration or they have represented a greater change
(for example, a 1-cent cut followed by a J4-cent advance at a later date). The
reasons for this down trend will not be treated at this point in the memorandum;
but there is no question of the fact. Let us look first, therefore, at how price
reductions come about.
In any territory all suppliers are watching the same things. They watch the
statistical position of the industry as a whole, that is, production of crude oil
and gasoline, sales of petroleum products, and stocks of crude of. d gasoline.
They watch these same statistics for the part of the industry whicu is directly
serving the specific territory. They watch the ambitions of competitors to in-
crease their share of the business in the territory. They gage these ambitions
by reports of salesmen on price concessions to commercial customers, by obser-
vations of the amount of business done by trackside operators and sellers of un-
branded and locally branded gasoline, by the reports of salesmen as to competi-
tive offers being made to dealers, and by reports of salesmen as to the extent of
secret price cuts, discounts, and the like being offered by retailers. All these
'facts are tioftstantly before local managers and central organizations.
48 CONCENTRATION OF ECONOMIC POWER
Now suppose that secret price cutting by dealers in some particular area breaks
out into the open in the form of a cut in the posted price because some dealer
becomes disgusted with the uncertainty as to how much business he is losing to
competitors granting secret discounts. As the openly admitted price reduction
operates, the local officers of all suppliers are assailed with demands from dealers,
relayed and in some instances emphasized by salesmen, for a reduction in the
tank-wagon price. The local managers of all suppliers face the problem of what
to do. The local manager of the leading marketer of course faces more demands
than any other manager. He attempts to gage the permanence of the retail cut.
Frequently local managers elect to make no change in the tank-wagon price.
Ordinarily this decision springs from the conclusion that the local price war will
soon run its course because it is not supported by weakness in basic markets.
On other occasions the local manager concludes that the causes of the retail
price cutting rest primarily on the availability of sufficient low-price gasoline so
that the condition may be considered deep-seated, and he therefore authorizes or
recommends a local reduction of the tank-wagon price.
Again, a company boring into the territory may be offering unpublicized con-
cessions to secure dealers. The company most affected by such efforts is ordi-
narily the company with the largest share of the business. The local manager
of that company must therefore meet the situation if he is to hold his dealers.
He may elect to reduce the tank-wagon price in a particular area to recognize
and meet intensive unpublicized price competition. When he does so, all other
companies meet the. price reduction because long experience in the industry has
proved that failure to do so will result in a substantial loss in business. Thus
the particular local territory becomes a subnormal territory, that is, one in which
prices are out of line with those generally prevailing in the marketing area.
The major sales executives of all companies watch carefully the number and
size of the subnormal markets. These executives are naturally reluctant to lower
prices, because, profits are thereby adversely affected. The sales executives re-
frain from reducing prices generally as long as it is possible to do so, because
they are anxious to secure as much business as possible at the higher price. But
if the number of local price cuts increases, if the number and amount of secret
concessions to commercial consumers increase, if the secret unpublicized conces-
sions to dealers increase, it becomes more and more difficult to maintain the
higher prices. In other words, the so-called subnormal prices are becoming the
normal prices: Finally some company, usually the largest marketer in the ter-
ritory, recognizes that the subnormal price has become the normal price and
announces a general price reduction throughout the territory. As in the local
situation, all other suppliers meet the price reduction because they know business
will flow to others if they do not.
The reverse situation, the price advance, is rarer because of the many forces
working to reduce prices. Price advances may be either local increases which
represent a reversal of a previous price reduction or a general price advance. Local
price advances come about when dealers' struggles have spent themselves. The
salesmen, therefore, constantly gage the attitude of dealers. All companies
serving the particular territory are anxious to raise the price in the subnormal
market, but the leading marketer in the territory is naturally most anxious to get
the price up because the territory is more important to him than to the other
companies. But the local manager of the leading company does not know
whether his competitors are ready to advance the price. He fears that they may
seize upon any price advance by him as an opportunity to gain volume at his
expense. He therefore asks his salesmen to gage the attitude of competitors
"■through the reports of customers as to actions and comments of the salesmen of
competitors. Finally, the local manager for the leading company decides that
the decrease in the ambitions of dealers and his competitors makes possible a
price advance in the local area, and a price advance is announced. In some
instances the decision is correct; in other instances, it is incorrect. If the decision
Is incorrect and competitors do not follow, the local manager has to decide whether
he should sit tight, lose gallonage, and hope competitors will soon follow, or reduce
the price again. Occasionally the local manager makes the wrong decision;
but if he makes the wrong decision too often, his company does not remain the
leading marketer in the territory and he does not remain the local manager very
The central sales organization of the leading marketer has been watching
throughout the period the statistical position of the industry and the sum total
of all the local situations of the character just described. When the number of
'subnormal markets is small, when basic gasoline prices (Gulf cargo market and
CONCENTRATION OF ECONOMIC POWER 49
Midwest tank car market) are firm and showing a tendency to rise, when produc-
tion and stocks are in balance, when costs are increasing, conditions are ripe for
a general price advance. Under such conditions the industry generally will be
eager for an advance but will be afraid to take the step before the leading marketer
in the territory for fear of losing business. The leading marketer will also be
anxious to go up but will also be afraid of losing business. For example, in 1937,
the company which is the leading marketer in a certain Midwest area observed
that the statistical position of the industry was strong. Basic market prices for
gasoline were firm. All these considerations pointed toward a price advance,
but a tabulation of the whole territory showed that many areas were below the
generally prevailing price; i. e., the number of subnormal markets was large.
From long experience the executives of the company knew that such conditions
forecast that many competitors would fail to follow the price advance. Therefore
they concluded that an advance in the price was impossible.
In the same period in 1937 the executives of the Colonial Beacon Oil Co., a
subsidiary of the Standard Oil Co. (New Jersey), saw the apparently strong basic
position of the industry and announced a general price advance on July 13, 1937,
throughout the New York and New England territories. In that territory the
leading marketer by far is the Socony- Vacuum Oil Co. In spite of the fact that
the advance was based on a sharp increase in transportation cost from the Gulf,
on a firm Gulf cargo market, and on a strong statistical position in the industry,
competitors failed to follow. These competitors apparently had a different
appraisal of the situation. On July 15, therefore, the Colonial Beacon Oil Co.
reduced the price throughout the territory by the amount of the advance. Failure
to have done so would have resulted in heavy loss of volume. Subsequent events
showed that the competitors' appraisal of the situation evidently was sounder-
because the demand fell off shortly thereafter as the depression in the fall of 1937
deepened and the basic Gulf price began a slow decline.
In summary, therefore, the so-called price leadership in the petroleum industry
boils down to the fact that some company in each territory most of the time bears
the onus of formally recognizing current conditions. With increasing frequency
companies other than the leading marketer prove too impatient to await the
action of the leading marketer. If this description is accurate, the lot of the
executives of the leading marketer — th£ local executives and the central office
executives — is not a happy one. They must always consider themselves a target
for the rest of the industry; they must always be subjected to criticism; and they
are always in danger of taking a step with which competitors will not agree, with
the penalty for misjudgment a sharp reduction in profits unless the misjudgment
is rectified at once. In short, unless the so-called price leader accurateh- interprets
basic conditions and local conditions, it soon will not be the leading marketer.
Price leadership does not mean that the price leader can set prices to get the
maximum profit and force other marketers to conform. 1
BASING POINT SYSTEMS
Besides giving a clear picture of how and why price changes take
place,, Mr. Swensrud's statement is interesting because it points out,
through the example of the Colonial Beacon Oil Co., that prices on the
Atlantic seaboard are not based on the Gulf quotations plus freight
to Atlantic coast points. Nevertheless, Mr. Cook, in the course of
his general discussion of basing point systems, said in regard to tank
car or tank wagon prices on the Atlantic coast, "The Gulf coast price,
plus transportation charges, is the tank car or jobber price at New
York Harbor and other eastern seaboard cities." His basis for this
contention is a statement in the Buffalo Courier-Express of January
29, 1930, describing an announcement of a new price policy by the
Standard Oil Co. of New York. It would seem a serious weakness in
the force of Mr. Cook's argument on the basis of pricing gasoline today
that he f.ccepts a statement made in the year 1930, 11 years ago, by
only one of the many companies operating on the Atlantic seaboard.
The fact of the matter is that tank car prices in New York Harbor
' Temporary National Economic Committee Hearings, pt. 15, pp. 8700-8702.
50 CONCENTRATION OF ECONOMIC POWER
and other Atlantic coast cities are not always equal to the quoted
prices in the Gulf plus transportation charges. This equality is
seldom found and, if it does occur at any time, it is a result of accident,
because prices in the various areas along the Atlantic seaboard are
based upon the conditions of supply and demand in those areas. A
comparison of Gulf coast prices plus transportation charges to New-
York Harbor with New York Harbor quotations will show no identity
nor will the differential be constant. There is, of course,, a general
relationship between these two sets of prices, and this is to be expected
because both places are parts of a common market, where the Gulf
coast represents the source of supply and the contact with the world
market and New York Harbor represents conditions of demand in a
very large area of domestic consumption.
Mr. Cook also has something to say about pricing in other parts of
the. country, particularly the interior. He claims that the group 3 or
Tulsa plus basis "is one of the best known basing points used by the
major oil companies" and that "they (basing point systems) are used
to maintain the price structure of majors and to realize price advan-
tages from their control of transportation and strategic refinery
locations." In regard to this contention also, Mr. Cook is dealing
with situations which changed so many years ago that they have no
present significance. In earlier days of the petroleum industry, the
so-called group 3 or Tulsa plus basis was a factor in the marketing of
gasoline. Before the gasoline pipe line came into existence and before
Texas became the largest source of crude oil, the Mid-Continent area
was supplied with crude and products chiefly from Oklahoma. Be-
cause of the importance of Oklahoma as a source of crude and the
fact that products were consumed outside that State and necessarily
moved by rail, the railroads quoted a single rate for the movement of
gasoline to any one destination from any one of several refinery points
in the Mid-Continent area. These facts provided the basis for the
Tulsa plus basis of pricing. As crude oil from other areas began to
compete with that from Oklahoma and as gasoline pipe lines were
constructed, the importance of Tulsa quotations tended to become less.
Tulsa quotations do not determine quotations elsewhere in the interior
nor does "Tulsa plus transportation by rail" provide the basis for
' quotations, of tank car lots in Chicago or other Mid-Continent con-
suming areas. T. N. E. C. testimony on this point was presented by
many different people. Excerpts are presented below:
The following exchange of comments took place during the testi-
mony of Mr. Paul E. Hadlick, secretary, National Oil Marketers
Association, Washington, D. C:
Mr. Snyder. "Have you been familiar with the so-called jobber contracts over
any period of time?
Mr. Hadlick. Well, I have watched the development from 1924, on, yes.
Mr. Snyder. Take the Middle West area, for instance. At what price does
the major company jobber buy gasoline from the major company under those
Mr. Hadlick. Usually it is 5% cents under the Tulsa price in the publication
known as Oilgram, or under the Midwest market of the Chicago Journal of
There has been a tendency recently for those contracts not to Yefer even to that,
but simply to the 5% cents under the supplier's tank car posted at the point, not
of shipment, but of delivery, in both cases 1 " with a provision for a split in case
of a local price war. 2
» Temporary National Economic Committee Hearings, pt. 16, p. 8886.
CONCENTRATION OF ECONOMIC POWER 51
Mr. Swensrud in his testimony said that sales to jobbers in his
company (Standard Oil Co. of Ohio) were made at prices tied to the
price to dealers. 3 He also made the following statements concerning
price quotations in general :
At the outset it is desirable to explain and destroy two widely prevalent mis-
conceptions in regard to prices in the petroleum industry. In the first place, it is
necessary to make a clear-cut distinction between posted or published prices,
on the one hand, and the prices at which goods actually move, on the other hand.
As will be pointed out in detail in the course of the discussion of particular kinds
of prices, a substantial proportion of the business is done at prices which are not
those posted or published. The assumption that all or almost all the business is
done at posted prices has led many investigators into completely fallacious
reasoning. For example, comparisons have been made of posted tank car prices
with posted tank wagon prices, purporting to show the spread or margin available
to jobbers. In fact, for many companies and for many territories the great bulk
of the jobbers do not pay the posted tank car price. Again, one encounters com-
parisons between posted retail prices and posted tank wagon prices which purport
to show the spread or margin available to retailers. Actually, as many motorists
will testify, a considerable share of the retail business is done at less than posted
prices; and it is by no means certain that dealers consistently and uniformly pay
posted tank wagon prices.
In the second place, it is essential for an understanding of the price-making
procedure to distinguish between the form in which prices are quoted, on the one
hand, and the considerations which are taken into account in arriving at the figure
on the other hand. The need for this distinction can best be made clear by an
illustration. Assume a refinery located at Coffeyville, Kans., and a jobber
located at Clinton, Mo. The jobber calls the Coffeyville refinery for a price
quotation. The refiner replies that the price is 5 cents plus }i cent freight from
Coffeyville to Clinton. The jobber replies, "That doesn't mean anything to me;
what is the price, group 3?" The refiner calculates the equivalent of his Coffey-
ville price at group 3. If the transportation rate from group 3 to Clinton is 0.8
cent, the refiner replies that his price is 4.7 cents group 3 plus transportation
charges. In other words, he has adjusted the form of his price quotation to that
most convenient for his customer who wants price quotations on the same basis
to facilitate comparisons. But this form of price quotation does not in any way
indicate how the price is actually made. Even if through long experience and many
repetitions of the request for Group" 3 prices the refiner in Coffeyville is led
in the first instance to quote his price in the form of 4.7 cents group 3 plus trans-
portation, it is no more than a form of price quotation and has no significance in
the question of how prices are made.
There are, of course, many kinds of prices in the petroleum industry; Gulf cargo
market prices, group 3 tank car prices, consumer tank car prices, refinery tank car
prices, tank wagon prices, undivided dealer tank wagon prices, divided dealer
tank wagon prices, retail prices, crude prices. In addition, of course, there are a
variety of prices for petroleum products other than gasoline. 4
It is clear from the above discussions that basing point systems at
present play no significant part in the pricing of gasoline. With
regard to "Tulsa plus" Mr. Cook was referring to an era long past in
the petroleum industry. With respect to Atlantic c^ast prices, there
is no foundation for his statements.
ETHYL GASOLINE CORPORATION
Another contention of Mr. Cook not specifically related to the
question of control over jobbers and dealers had to do with the Ethyl
Gasoline Corporation. His chief contention here. is that the use of
the fluid (tetraethyl lead) is contingent upon an agreement to main-
tain a differential price between grades of gasoline including ethyl
fluid and those not including it. It is true that the Ethyl Gasoline
•Ibid., pt. 15.
* Temporary^rotional Economic Committee Hearings, pt. 15, pp. 8691-8692.
52 CONCENTRATION OF ECONOMIC POWER
Corporation insisted upon such a differential and became involved in
litigation on this account. This controversy involved the question
as to how far a corporation granted a monopoly through the Patent
Office could go without running afoul of the antitrust laws. The
courts found against the corporation, and the use of such contracts
was abandoned. The Ethyl Gasoline Corporation was trying to
establish a brand preference for its product and insisted upon the
maintenance of a price differential as a part of a program to achieve
There is no evidence that independents were prevented from use
of the fluid so long as they complied with the agreements embodied
in the contract. In fact, there is ample evidence that it is widely
used both by independents and majors. It is also a fact that one
major oil company (Sun Oil Co.) has never used the fluid but markets
an unleaded product obtained through processes of its own "
Mr. Cook also makes a point of showing that the cost of the differ-
ent amounts of tetraethyl lead in regular and premium gasolines is
less than the suggested difference in selling price. He implies that the
only difference between regular and premium grade^ motor fuel is the
amount of tetraethyl lead content. Close examination of the specifi-
cations 5 for the two grades, however, shows that there are other
differences between them. The difference- in lead content does not
measure all the differences in manufacturing costs, including crude oil
costs. Furthermore, differences in manufacturing costs are not the
only differences in total costs, because distribution costs are higher
owing to the smaller quantity of premium gasoline handled.
With regard to jobbers, Mr. Cook's claims are: (1) Jobbers have
been eliminated Vy maiors; (2) jobbers' margins have been narrowed
by actions of majors; (3) the elimination of bulk plants through U9e
of oil tank trucks has been detrimental to jobbers. This listing of
complaints is the one used by Mr. Cook, and, after the comments
under each heading have been read, these complaints can be consoli-
dated into one, namely, that the majors are forcing the jobbers out of
business through a variety of practices. The practices referred to by
Mr. Cook are by and large the same practices which, in his opinion,
give the majors control over retail outlets. Therefore, much of the
discussion concerning jobbers will also have to do with service stations.
Mr. Cook uses the term "jobber" to mean any wholesaler of petro-
leum products in the ordinary sense of the word. The jobber is the
person who operates a bulk terminal and performs the function of
buying products from refiners and selling them to service stations or
to ultimate consumers. Sometimes the jobber operates his own serv-
ice stations. Mr. Cook is most particularly concerned about the status
of the independent jobber who buys his supplies from independent
refiners. In fact, one of his complaints is that many independent
jobbers have been forced to become distributors of the major com-
panies. According to Mr. Cook, the "jobber squeeze" is forcing the
jobber out of business and it is brought about by deliberate action of
major companies through a reduction of margins.
» Ibid., pt. 14-A, pp. 7824-7827.
CONCENTRATION OF ECONOMIC POWER 53
Testimony before the T. N. E. C. indicates that the jobber margin
in cents per gallon has tended to become less. The proof given by-
Mr. Cook in table 13, page 43, is by no means conclusive, however,
because the figures used for his computed delivered price in Des
Moines were based upon tank car quotations in Tulsa plus freight,
and there is no assurance that these were the actual prices paid by the
jobbers and, therefore, no assurance that the jobbers' spread or
margin is correctly stated. In spite of doubt about the correctness
of the figures given by Mr. Cook, it may be admitted' that jobber
margins in cents per gallon have tended to decrease. Nevertheless,
it is by no means certain that .the margin expressed as a percentage
of the price has decreased. As indicated by Mr. Swensrud [quoted
below], there is a difference between talking of margins in terms of
cents per gallon and in terms of percentage of price.
Since Mr. Swensrud also discussed some of the other complaints of
jobbers referred to by Mr. Cook, most of his statement about jobbers
There arc some differences between the complaints of the two types of jobbers,
wholesalers and distributors. Basically, wholesalers complain that it is difficult
to make a profit. Some of them even argue that the integrated companies
deliberately endeavor to "squeeze" wholesalers out of the industry. To evaluate
this complaint, w)e must look at the conditions under which wholesalers operate.
They sell their own private brands of gasoline, not the brands of the large inte-
grated companies. Because of advertising, product improvement, and service,
the public generally accepts the brands of the integrated companies as the stand-
ard of value, and ordinarily does not buy less well-known private brands without
a price inducement. This means that wholesalers' private brands of gasoline
usually must be sold on a price-appeal basis. This, of course, is a situation quite
common to a great many other industries, such as groceries, drugs, and cos-
metics, for example. Since wholesalers must sell their private brands at prices
below those of the brands of major companies, the problem is how to do it and
still make a profit. Wholesalers ordinarily are not able to undersell on the
basis of lower costs of bulk plant operation. Hence, if wholesalers are to under-
sell, they usually must accomplish this end by reducting retail costs through
high^olume at cut prices or by buying at lower prices. Thus there are two
situations in which wholesalers get along very well, namely, periods of business
depression and periods of rapid exploitation of new sources of crude petroleum;
for in both these situations there are plentiful supplies of cheap gasoline.
When States adopted proration laws, supplies available at distress prices may
have been reduced, even though there was considerable gasoline available which
had been made by^small refiners from so-called "hot oil." With the passage of
the Connally Act prohibiting interstate shipment of products made from "hot
oil" and with the improvement in business and gasoline demand, the supply of
lower-priced gasoline available to wholesalers has probably decreased. Some
wholesalers opposed the passage of the Connally Act because they thought it
would result in a small supply of lower-price gasoline. Continued agitation for
repeal of the act comes from the .same source.
One of the factors which has put the wholesalers under pressure has been the
long downward trend in gasoline prices. The prices of the brands of the major
companies have moved downward over a substantial period, to the great benefit
of the consumer, but^of course, to the disadvantage of wholesalers who have to
maintain a price differential below the prices of advertised brands. It is also
important to keep in mind the. fact that the large integrated companies have
the most up-to-date refining equipment and have thus been able to improve the
quality of gasoline to a very marked degree, whereas wholesalers buy much of
their gasoline from small refiners who do not have the cracking equipment from
which the abetter gasolines are ordinarily obtained. This quality difference
increases the pressure on the wholesaler to maintain a differential between
prices of better-known brands and his own prices.
Another development in the oil industry during the last 10 or 15 years has
contributed to the difficulties of the wholesalers. The integrated oil com-
panies have given more attention to the development of brand demand. In
54 CONCENTRATION OF ECONOMIC POWER
the early stages of the industry, executives were busy with the pressing technical
problems of producing and refining. When these problems were well on the
road to solution, the companies sought to create a greater brand demand by in-
creased advertising and sales promotion and particularly by the provision of
stations and service which pleased customers and brought increased patronage.
Alert wholesalers recognized the values of service and location ; nevertheless, they
did not possess the advantages of advertising. Not only did the company with
widespread geographic coverage of stations receive business because of its brand
advertising; but the fact of its coverage helped strengthen its brand position, for
many customers like to use the same gasoline wherever they travel. The brand
position of the large integrated companies was, of course, strengthened by the
public recognition that such companies were taking the lead in the quality im-
provement already mentioned.
Turning now to the distributors, those jobbers who handle well-known brands,
complaints from them are to the effect that the large integrated oil companies
have deliberately reduced the margins of distributors in an effort to eliminate
them from the industry. This idea of elimination is a false concept. Some re-
finers rely almost entirely on distributors and most refiners sell through dis-
tributors in parts of their marketing territory. Distributors therefore are con-
sidered by their refinery suppliers as an essential part of the distribution system
for their gasoline. Because of their local standing, distributors frequently are
preferred so long as they can operate at least as effectively as the companies
themselves can. Naturally, it is true in the oil industry, as in any competitive
industry, that manufacturers contract with distributors to perform wholesale
functions only so long as the latter can do fully as effective a job as the manufac-
turer when he performs his own wholesale function. When a distributor fails to
keep pace in methods of selling or in facilities for physical handling or when his
costs or volume are out of line with what the manufacturer can obtain, the manu-
facturer usually undertakes the job of wholesaling himself.
For both wholesalers and distributors there has admittedly been a decrease in
the margin or spread during recent years. In this connection, one peculiarity of
the oil industry should be kept in mind. It is customary to think of margins or
spreads in this industry in terms of so many cents per gallon* In many instances
marginal contracts are used which provide that the price to'the distributor is to
be a certain' number of cents off the posted tank wagon price in the territory; but
whether marginal contracts are used or not, it is customary throughout the
industry to think of margin or spread in terms of cents per gallon. This is quite
a different-point of view from that of a majority of other lines of business, where it
is customary to think of margins in terms of percentages either of cost or of selling
price, such as 16%, 20, 33% percent and so on. Such percentage margins, of course,
are not directly affected by price changes; but where margins are in terms of cents
per gallon, it is manifest that the declining price structure of the petroleum in-
dustry must inevitably have exerted pressure on these margins.
The other chief factor which has exerted pressure on the margins of wholesalers
and distributors is the decrease in the cost of performing the wholesale function,
that is, the decrease in the cost of operating bulk plants. The major integrated
companies have taken the lead in developments which have made this cost re-
duction possible. New transport trucks and new typqs of trucks for making
deliveries from bulk plants to filling stations, coupled with improvements in high-
ways, have brought lower unit costs directly and have made possible other savings
from the consolidation of bujk plants. Many large integrated companies have
been steadily reducing the number of bulk plants and increasing the quantities
handled in each. Under the pressure of the last few years, intensive study has
been devoted to the best methods of loading trucks at bulk, plants and unloading
them at service stations. Similarly, careful studies of truck routes have mini-
mized backtracking and have reduced the number of trips with less than capacity
loads. One company, for instance, has recently reported an increase of sales
between 1933 and 1937 of $90,000,000, while it was reducing its market expenses
$8,000,000. No one company has had a monopoly of these efforts, and it' is
therefore not surprising that competition among the companies has forced them
to pass a large share of the savings on to their customers.* . ,
As Mr. Swensrud has pointed out, there is no policy on the part of
majors to make life more difficult than it used to be for the jobbers
and there are definite reasons why the jobbers' spread has narrowed.
Mr. Swensrud's statements regarding the improvement of distribution
6 Temporary National Economic Committee Hearings, pt. IS, pp. 8689-8690.
CONCENTRATION OF ECONOMIC POWER 55
facilities, resulting in the elimination of bulk plants, are of particular
interest, especially in view of Mr. Cook's complaints on this score.
These improvements in transportation facilities are of direct benefit
to the consumers, and it is surprising that Mr. Cook should have any
complaint about changes which have such results.. The elimination
of bulk plants through oil tank trucks is part of the explanation of the
lowering of the cost of the jobbing function which Mr. Cook found
"difficult to understand." Furthermore, Mr. Swensrud also presented
facts showing that jobbers are not being eliminated but on the con-
trary are increasing in numbers:
' The best available evidence of the trend in the number of jobbers is found in
the listings published by the Petroleum Register, owned by the magazine World
Petroleum. This publication listed 1,580 marketers and jobbers in 1918, 2,259
in 1923, 4,508 in 1928, 8,273 in 1933, and 9,926 in 1938. These figures show a
steady and substantial increase in the number of jobbers over the years. There
has even been an increase between 1933 and 1938, a period during which com-
plaints have been heard that jobbers were disappearing from the industry. It is
the opinion of the writer that a more accurate indication of what has been happen-
ing is to be found in the public statement of the Socony- Vacuum Oil Co. to the
effect that the number of its gasoline jobbers has steadily increased since 1931
and has more than doubled. 7
A more recent statement concerning the place of the jobber in the
oil business was made by Mr. Paul G. Blazer, president of the Ashland
Refining Co., an independent refinery in Kentucky, in a speech given
on February 3, 1941, before the Tennessee Oil Men's Association.
For many years I have been interested in ascertaining the extent to which the
large integrated oil companies subsidize their operations in certain branches of
the industry at the expense of their earnings in other branches. I have discussed
the subject with hundreds of different people representing almost every phase of
the industry. Almost invariably the person I am talking to assures me that the
particular branch of the industry in which he is engaged, is being ruined by the
competition- of the major oil companies which are subsidizing their unfair com-
petition in that branch by drawing on their huge earnings from other branches of
their-fcusiness. Further questioning, however, often discloses that the profits of
the person speaking are far larger in proportion to his investment than the overall
return on the investments of the large integrated oil companies. I would say
that almost invariably that is true in the case of independent marketers.
Of the hundreds of oil jobbers I have known, I do not recall, at this time, a
single one who has become bankrupt, but I know of scores of them who have
made small fortunes. If a young man with little capital but plenty of energy
should come to me for advice concerning going into business for himself, I would
advise him to become an oil marketer. One of the best arguments in support of
that advice is the fact that the company with which I am associated sold a number
of million dollars of petroleum products last year to independent jobbers without
losing a dollar on credits. In more than 15 years of selling to independent jobbers,
we have yet to lose pay for the first car of gasoline. That record would not be
possible except for the fact that the independent jobbers, in the area where we
market the output of our refinery, have always made money. 8
Thus, Mr. Blazer iinds that he as an independent refiner has been
able to prosper by selling his products exclusively through independent
jobbers who have also prospered.
The general royiew of the position of the jobbers given above does
not show that they are being run out of business. Jobber margins
measured in cents per gallon have in fact been narrowed, but this
fact does not mean that percentage margins have decreased. In the
face of a constantly declining retail price level, excluding taxes, it
would not be expected that the spread of the jobber would remain
7 Ibid., p. 8689.
• National Petroleum News, February 19, 1941, pp. 24-25.
56 CONCENTRATION OP ECONOMIC POWER
constant. Part of the explanation of the lowered margins is to be
found in the better methods of distribution which have been devised
and have lowered costs. Credit for the cost reductions does not
belong solely to the majors but is shared also by independent jobbers
SERVICE STATION OPERATORS
With regard to service stations, Mr. Cook's chief complaints are:
(1) There are too many service stations. (2) Major companies
through lease restrictions and other means control service station
operations. As to the first contention, Mr. Swensrud's statement to
the T. N. E. C. contained the following pertinent comments:
People have been more conscious of the increase in the number of service sta-
tions than of the increase in the number of other kinds of retail stores because
the service station stands apart from other buildings on a relatively large plot of
land, and has an unmistakable appearance. The increase in the number of service
stations, moreover, has taken place in a relatively short period.
The prime reason for the very rapid growth in the number of service stations
in the United States is, of course, the great increase in the demand for petroleum
products. A nation went on wheels in the space of a generation, and that develop-
ment called forth the means of making the necessary products available. To
induce the prompt provision of facilities for serving the demands of motorists,
suppliers of gasoline assumed a part of the burden of making equipment available
and established through wide retail margins an opportunity for substantial prof-
its. Landowners and banks contributed to the rapid increase of service stations.
Owners of land bordering on highways came to believe that the ideal use for the
land was for a service station. Banks readily advanced money for erecting sta-
tions, and not infrequently urged owners of mortgaged property to erect stations.
To thes'e reasons for the rapid growth in number of stations must be added two
others which became increasingly important between 1929 and 1935. It is not
too much to say that the Nation's highway system has been rebuilt during the
last 15 years. Much of the rebuilding has taken the form of new routes without
complete abandonment of the old. New stations were necessarily erected on
the new highways, but in a large number of instances the stations on the old
highways were not abandoned. Since a substantial proportion of the investment
in a service station is fixed and immobile, the stations were retained, although
with a smaller scale of operation, so long as the receipts provided any margin
over the direct costs incurred. In urban sites, particularly, the tendency to retain
stations after important changes had taken place in the flow of traffic was reen-
forced by the failure of alternative uses for the land to develop.
A second additional reason "for the growth in number of service stations ap-
peared during the depression which began in 1929, when extensive unemploy-
ment in industry provided a potent factor making for the increase. Between
1929 and 1933, for example, there was an increase from 98,976 to 156,538 in the
number of proprietors of filling stations reported by the census." A large number
of people, unable to find employment in their accustomed occupations, sought, a
livelihood by opening retail stores. The tendency was particularly pronounced
in those retail trades where the investment required is relatively low and where,
in the general belief, the problems involved are not complex. Restaurants and
filling stations meet these requirements particularly well, and the number of
these two types of retail outlets increased greatly between 1929 and 1933
This summary leads to the question, "Are there too many filling stations?"
As has been noted, the statement is frequently made that there are too many
stations, and many people within and without the industry have accepted the
statement as" wholly valid. As the figures cited above show, there can be no
denial that the increase in the number of stations was very rapid. Throughout
the late 1920's and early 1930's, at least, the increase in number of stations outran
the increase in consumption of gasoline. But does this mean that there are too
many filling stations today? What is the yardstick by which too many is to be
measured? ' The answer depends upon the point of view. Critics often refer
to the high gallonage per station of the earlier years of the industry as evidence
of the more effective utilization of capital at that time. But that contrast pre-
sents only a part of the picture. It entirely disregards the economicjoss and the
inconvenience involved through customers having to seek out the relatively few
CONCENTRATION OF ECONOMIC POWER 57
stations. Almost all automobile drivers of the period which is extolled because
of the high gallonage per station testify to the need in those days for carrying a
reserve supply of gasoline, for planning carefully where purchases would be made,
and the like. In other words, maximum utilization of filling station equipment
alone is by no means the whole test. The point may perhaps be illustrated by
the parable of the pair of scissors. If one were seeking to secure«the maximum
utilization of the capital investment represented by a pair of scissors, there would
be on any street a single, cooperatively owned pair. Each housewife would
borrow the pair of scissors from the existing holder when she needed them. In
this way the scissors would be utilized a very large proportion of the time. In
contrast, the actual situation is that each household on the street has its own
scissors with the result that the capital investment is used only a very small
percentage of the time. Hut the low utilization is willingly endured because of
the extreme inconvenience of securing high utilization.
The importance for gasoline marketing of catering to customers' convenience
cannot be overemphasized. Time spent by salesmen and truck drivers in waiting
for service at a filling station is an economic less. Even more important, incon-
venience in gasoline supply -*■ cts from the pleasure of automobiling. The
assurance of many and convenient sources of supply is an important stimulant
to long-distance touring in unfamiliar sections of the country. It is therefore a
mistake to assume that all the gasoline sold in one filling station reduces the amount
sold in others. The convenience of many filling stations has increased the total
The casual critic of the number of filling stations, moreover, seems to be misled
in several ways. He is very likely to cite the instances where there is a station on
each of the four corners of intersecting highways as the typical example of the
uneconomic capital investment and the uneconomic utilization of manpower.
Such a critic, we presume, would grant the desirability of two stations at the
intersection because traffic moves in two different ways. If this assumption is not
correct, the critic ignores the very strong reluctance of most motorists to cross
traffic to enter a filling station. Many companies have placed stations on opposite
sides of the same highway and found both stations profitable. The critics also
neglect the readily observable tendency of all types of retailers to congregate in
order that they may reinforce each other in inducing the customer to buy. There
is no intention to overstate the importance of this consideration, but it is of some
significance. That is, if the four stations were each a quarter of a mile from the
intersection, the impression of a multitude of stations would be less; yet experience
justifies the observation that many motorists will travel past a single station
whereas if there are several stations they will stop and purchase.
Furthermore, the critics who see that equipment and manpower in filling sta-
tions are idle much of the time assume that this idleness is the result of extensive
duplication of facilities. An, example of such criticism is the study made some
years ago in which it was computed that the gasoline requirements of American
motorists could be served by one-third the number of stations actually in opera-
tion. This conclusion was arrived at by determining the length of time required
to complete a transaction, estimating the number of transactions represented by
the total consumption of gasoline, multiplying the two figures, and dividing the
number of station-hours so determined by the number of hours the typical station
was open. Such computations and such reasoning neglect entirely the fact that
traffic and custom move in waves. Perhaps the outstanding study of traffic and
trade movements has been published by Paver and McClintock, reporting on the
studies of the Bureau for Street Traffic Research of Harvard University. 8 As the
studies show, there is a very sharp hourly variation in the movement of motor
vehicles. Since the purchase of gasoline is an incident of travel for other purposes,
the fluctuations in traffic movement are paralleled by fluctuations in transactions
at filling stations. If the number of stations were notably less than the number
actually in existence, there would still be a substantial part of the day during which
there would be little utilization of equipment and manpower; on the other hand,
during the hours of heavy traffic there might well be much congestion at stations
and inconvenience to the public.
But the hourly fluctuation in traffic is not the only fluctuation. There is a
distinct rise in traffic during the latter half of the week. That is, as shown by the
Paver and McClintock studies, if the average traffic is taken as 100 percent.
Friday traffic typically represents nearly 110 percent, and Saturday 115 percent.
• John Paver and Miller McClintock, Traffic and Trade, New York, McGraw-Hill Book Company,
58 CONCENTRATION OF ECONOMIC POWER
There are, moreover, distinct seasonal fluctuations in vehicular traffic. For the
country as a whole, traffic movement in January and February is slightly less
than 90 percent of the average month; whereas the movement in June, July, and
August is 1 10 percent of the average month. These figures for the country as a
whole do not fully reveal the significance of seasonal fluctuations. In many
sections of the country, notably those characterized by extensive tourist movement,
the fluctuation is even more pronounced. The Survey of Current Business for
January 1939, showed, for example, that while 16,441 cars visited the national
parks in December 1937, the high for the next year was 238,139 cars, or more
than 14 times as many. Again, during the summer months the motor traffic on
Cape Cod in Massachusetts is very congested. If the needs of the public are to
be served, there must be heavy investment in service stations on Cape Cod to
meet a demand which lasts for no more than 3 months of the year. During the
remainder of the year the investment in service stations is clearly greatly in excess
of any "requirement of need or convenience." But unfortunately service stations
cannot be put in and taken out at will.
These considerations should at least be weighed before accepting the conclusion
that there' are too many gasoline retailers in the United States. On the whole,
Ivpwever, it is believed that, while in some instances in the past the criticism of
excess building of service stations may have been justified, yet the charge can be
and" often is greatly exaggerated. Now that we are reaching the stage when many
older stations are being eliminated through deterioration and obsolescence, the
problem of excess cannot be considered a serious issue. It must be remembered
too that gasoline consumption in 1939 is running approximately 45 percent above
1929 and 43 percent above 1933, so that the growth factor has tended to cure a
good deal of whatever excess may have existed. There is no intention to deny
that there is unused capacity in petroleum retailing, just as there is in every other
form of retailing. A nice adjustment of equipment to need and convenience may
'be the ideal of the theorist, but it is hardly to be expected in a trade where decisions
are made by -thousands of people and where ease of entrance is relatively great.
In this connection it should be noted that gasoline retailing is' easily and naturally
combined with other retail enterprises, such as roadside restaurants, general
stores, garages, and tire and automobile accessory stores. 10
Mr. Cook furnishes no data to prove his allegation that the market-
ing branch of the industry is overbuilt. He failed to take into con-
sideration the reasons for constructing service stations pointed out
above. Apparently his conclusion was based merely upon the opinion
that 200,000 service stations was a large number ol retail outlets,.
Mr. Cook registers many complaints concerning relations between
major companies and service station operators. He criticises having
service station operators use one company's products exclusively, and
he asserts that major companies use "certain tactics" and "threats"
to obtain 100 percent stations. He also contends that dealer's have to
bear the cost of any price war because the majors will not reduce tank
wagon prices in such cases. He asserts that "virtually all leases made
by the majors" have 10-day cancelation clauses in them. 'He appears
to believe also that pressure from major oil companies through the
railroads has worked toward the elimination of trackside operators.
Most of these complaints serve as evidence that the retail division
of the petroleum industry is extremely competitive, and lead to the
conclusion that Mr. Cook's basic complaint is that major companies
compete unfairly. Since Mr. Cook appears to be particularly con-
cerned about 'exclusive contracts with dealers, that topic will be
In the first place, the exclusive contracts of which Mr. Cook com-
plains apply*only to those stations owned by the oil companies and
leased to operators or to those held on relatively long-term leases by
the oil companies and subleased to operators. A service station
operator who owns his station or who leases from an Outsider is not
>° Temporary National Economic Committee Hearings, pt. 15, pp. S678-8681.
CONCENTRATION OF ECONOMIC POWER 59
bound by contract to purchase all the products he sells from or through
the supplying company. Mr. Cook's short quotation from Mr. Farish's
testimony gives a higldy misleading impression of the true state
of affairs, as is indicated by the more complete quotation given below:
The Vice Chairman. Now, when they go out of business an'd lease those
plants of theirs, is it the custom now to require that the lessee shall deal only
in the products of the company that owns the property that is leased?
Mr. Farish. Not in our company; no, sir.
The Vice Chairman. You just make a straight lease?
Mr. Farish. A straight lease. But, obviously, that lease has taken on a basis
that he wants to handle our products, but there is no prohibition in the lease.
The Vice Chairman. He wouldn't last very long, would he, if he got to selling
the other fellow's product?
Mr. Farish. He has a year's contract; he has a year's lease, and many of them
do sell lubricating oils and other accessories that we don't sell.
The Vice Chairman. And you sell to the independent man on the sane basis
that you sell to him?
Mr. Farish. Yes, sir.
The Chairman. Could we say, then, that testifying before the Temporary
National Economic Committee, the president of the Standard Oil Co. (New
Jersey) said todaj* that no lessee of that company is under any obligation to sell
only the products of the Standard Co. at his station, and that at the expiration
of his lease if he did sell such products, he would not be in any danger of ancela-
Mr. Farish. Please separate your question. If vou leave off the last phrase,
the answer is "Yes."
The Chairman. That is what I thought it would b«.
Mr. Farish. If you add the last phrase, I think it nnght be different.
The Chairman. I think that is a very frank answer, Mr. Farish, and it goes to
the heart of the control of retailing. That is exactly the complaint that the re-
tailers made— that if they exercise their independent judgment to sell products
other than those furnished by the lessor company, their leases would be in danger,
and you tell us that is the fact.
Mr. Farish. I think that is the fact, certainly. If you wilJ permit me, I don't
seo anything wrong with that, morally wrong with that.
The Chairman. I am not trying to imply anything wrong. I am n .ereiy trying
to get the facts.
Mr. Farish. There is nothing unfair about it. The number of owner's stations
that are leased out is so relatively small a number of the total that it is not a serious
question; it doesn't affect the economics of the retailing of gasoline in this country.
Senator King. How many stations sell the products of your companies?
Mr. Farish. How n any
Senator King. How many of these filling stations?
Mr. Farish. How manv filling station outlets do we sell to? Approximately
Senator King. What proportion of that 25,000 are ow r ned by ok leased by your
Mr. Farish. That are owned and leased by our company — a little over 2,000 —
2,200, I think it is — or twenty-one-hundred-and-something.
Senator King. So it would be two twenty-fifths.
Mr. Farish. Yes, sir.
Senator King. And those persons who have their own filling stations, not yours,
either by ownership or lease, they are at liberty to sell to whom they please, and
if they care to buy from you they may, or if they care to buy from some other
oil company they may do so.
Mr. Farish. Certainly."
From the above testimony it is clear that Mr Cook has carried Mr.
Farish's testimony considerably further than it actually went. Only
2,200 of the 25,000 outlets served by Mr. Farish's company were sub-
ject to lease agreements.
11 Temporary National Economic Committee Hearings, pt. 17, pp. 9723-9724.
304955— 41— No. 39a 5
gO CONCENTRATION OF ECONOMIC POWER
Mr. Cook attaches arj- unwarranted meaning to the word "control"
when he speaks about "control" of service stations by majors. A
more accurate description of the relationship between them is that it
is close. Both Mr. Farish and Mr. Swensrud 12 presented testimony-
explaining the need for close relations between suppliers and service
station operators. Mr. Farish's comments were as follows:
* * * This relationship involves a mutuality of interest of considerable im-
portance. The gasoline retailer handles a limited range of products from which
he often obtains his whole livelihood, and his place of business carries the sign
and trade-marks of the supplying company. The latter wants each outlet to be
a good advertisement for the brands of the supplier as a result of good standards
of service, equipment, and display. The supplier depends upon these highly spe-
cialized individual businessmen to make his wares available to the public. He
cannot be wholly indifferent to their welfare, because he wants them to remain in
business. The oil industry is not unique in this latter respect. There is no point
in some comparisons that have been made between retailers of gasoline and re-
tailers of groceries, drugs, and the like. A much more pertinent comparison may
be made between retailers of gasoline and retailers of automobiles. As Mr. Pew
said, the Chrysler Corporation would be in an absurd position if it filed complaints
that Ford dealers do not carry Chrysler cars or parts. Large investments in in-
ventory and in service equipment prevent small businessmen from carrying several
brands of cars. From the sales and service standpoints, the oar dealer whose
organization concentrates on the problems of one brand does a more effective job
and makes more profits for the capital invested than if several makes are carried.
The car manufacturer, on his part, has an outlet that pushes his make of car.
The car maker helps his dealers with training courses for salesmen and service men,
and he provides .them with local promotional material as well as a national adver-
tising program. The analogy between automobile retailing and gasoline retailing,
of course, is not complete, but certainly it is more apt than a comparison with
grocery stores which carry products of hundreds of manufacturers, no one of
whom has a prime interest in the success of a particular store. Both automobile
makers and the oil companies want to keep their customers in business, but neither
group can guarantee a profit to every retail outlet. 13
It is evident that there is a need for a close relationship, both from
the standpoint of the supplier and from that of the operator of a
service station. But such cooperation does not provide a basis for
concluding that there is control by the supplier in a dictatorial sense.
Furthermore, if the major companies failed to do many of the things
they do for the service station operator, they could be accused of being
indifferent to his welfare and to that of the consuming public.
To Mr. Cook's charge that virtually all leases have 10-day cancela-
tion clauses in them, it should be said that in the days immediately
following the time when most major companies discontinued the oper-
ation of service stations such leases were common. Today, however,
most leases are made for 1 year or more. Furthermore, there was
at the earlier period a logical Teason for reserving a cancelation privi-
lege. Mr. Farish testified on this point as follows:
Retail marketing has always been predominantly in the hands of small-scale .
independent businesses, and it appears that they will not be displaced in the
future. Sinee the extension of the so-called Iowa plan, the ranks of independent
businessmen have been augmented by the addition, of former salaried managers
of company-owned stations. Several witnesses before this committee have testi-
fied that these men are not really independent because they are continually
threatened by salesmen who suggest that 5-day cancelation clauses in as. ^f
company-owned stations will be invoked if the lessee does not do this or th. .
No doubt such tactics have been used by some salesmen in some companies, but
I state emphatically that one cannot generalize on the basis of incidents which
not only are exceptions but which also directly violate the established policies of
"Ibid., pt. 15, p. 8681.
is Ibid., pt. 17, p. 9739.
CONCENTRATION OF ECONOMIC POWER Q\
the managements concerned. Oil companies had numerous business reasons for
5-day clauses originally. Many salaried employees do not have the capacity to
become independent businessmen, and as a matter of self-protection the oil com-
panies wanted to be able to find new proprietors for stations if the former managers
did not succeed on an independent basis. Today most leases are made for the
period of 1 year or longer and contain no cancelation clause whatever. For in-
stance, leases for 1 year or longer without cancelation clauses are now used by
my company. 14
Mr. Swensrud's testimony 16 substantiates tLe views on the leasing
question presented by Mr. Farish. Mr. Pew 16 also stated that leases
were made for a year and that there was no general right of cancelation
on a certain number of days' notice.
Mr. Cook makes the charge that major companies use "certain
tactics" and "threats" to obtain exclusive contracts with dealers.
Among these "tactics" is the practice of charging one-half cent more
per gallon of gasoline delivered to a service station which sells more
than one brand. Mr. Cook gives no explanation of the reasons for
this differential. He simply characterizes it as one of many practices,
the primary aim of which is to keep independent products off the
market. He ignored the explanation of the differential given in the
T. N. E. C. record. Mr. Pew, Mr. Swensrud, and Mr. Farish all
testified that it costs more to serve a split account. The storage
capacity of the tanks which a service station can have is limited in
many cases by zoning restrictions and fire regulations, and deliveries
to split accounts may have to be made in smaller quantities. Mr.
Pew said the difference in delivery costs to serve a split dealer was
greater than one-half cent. 17 Air. Swensrud stated that one company
calculated the difference in delivery cost alone to be one-fourth cent
per gallon. 18
Mr. Cook also asserts that service station operators have to stand
the cost of price wars because service statior- prices are competitive
while tank car prices are rigid. The influences affecting prices and
the processes by which they are set have already been described, and
it is clear from this testimony that tank car and tank wagon prices
must and do reflect changes in retail prices. They are not rigid any
more than retail prices are rigid. Suppliers suffer from the effect of
price wars just as do retailers. The demand for gasoline is inelastic,
as stated by Mr. Cook, and drastic reductions reduce the income of all
parties concerned. If tank car prices were really rigid, it is likely that
many dealers would be forced out of business. Such a result would
certainly not be to the advantage of the supplying company since
outlets would be lost. In this connection, Mr. James A. Horton,
chief examiner, Federal Trade Commission, said in his testimony
before the T. N. E. C:
* * * but generally the Commission is in possession of no convincing proof
that any major company has, as a matter of policy, intentionally brought economic
ruin upon its own retail dealers. 19
The use of credit cards by majors is also condemned by Mr. Cook.
The cqmplaint is that their use "makes it m< r ; difficult for the inde-
pendent jobber or refiner to compete, since he usually sells in a vary
" Ihifi.. pp. 9738-9739.
[bid . pt. IS, p. 8*584.
"Ibid., pt. 14, p. 7209.
'■' Ibid., p. 7208.
I., pt. 15, p. 868.1.
52 CONCENTRATION OF ECONOMIC POWER
limited area and does not have reciprocal dealings with other companies
for credit." By Mr. Cook's own admission, it is the use of credit
cards by motorists on long trips about which he is particularly con-
cerned. Now it is obvious that most motorists on long trips would
not be likely to purchase a brand of gasoline they never heard of.
Therefore the seller of locally branded gasoline has little opportunity
of attracting such customers whether or not they can buy on credit.
The reciprocal agreements among many companies with respect to
credit cards came into existence because such companies did not have
national distribution a~nd desired to meet competition of companies,
such as the Texas Coloration, wh.ch did. Also, the independent
jobber selling a locai brand of gasoline and confining his activities to
a local area can offer credit locally and probably does in many cases.
He is not under any severe handicap because of his local scale of op-
eration. Mr. Blazer, an independent refiner quoted above in connec-
tion with the discussion of jobbers, did not believe that either his own
opportunities or those of the indej ndent jobbers were lessened by
the fact that they' were all operating in a. local market.
The last specific allegation of Mr. Cook to be discussed has to do
with the "elimination of trackside stations." The contention here is
that the Association of American Railroads and 13 major oil companies
had a working agreement which would operate to the disadvantage of
the trackside service stations. Mr. Cook referred specifically to a
letter written by Mr. J. J. Pelley, president. Association of American
Railroads, to 13 major oil companies.
The so-called "Pelley letter" is claimed to have been an outgrowth
of a conference between railroads and oil companies for the purpose
of discussing rates. Mr. E. S. Hall 20 senior counsel for Standard Oil
Co. of New "Jersey, and Mr. H. T. Klein, 21 general counsel for the Texas
Corporation, testified before the T. N. E. C. that so far as they knew
the subject matter of the Pelley letter had never been discussed
during the conferences on railroad rates. They also testified that
these two companies wrote letters to Mr. Pelley saying that the sug-
gestions contained in his letter could not be considered. 22
In the foregoing pages it has been shown that there is no valid
foundation for the claims made by Mr. Cook with respect to the
marketing division of the petroleum industry. Jobbers are not being
eliminated as he stated, but are increasing in number and, as shown
by Mr. Blazer, have a definite place in the industry. Service station
operators likewise are not "controlled" by the majors and are not-
being forced out of business. Prices are extremely competitive, and
this fact alone accounts for many of Mr. Cook's complaints. There
is nothing iniquitous about price leadership. A price leader is merely
the marketer who publicly announces the changes in price brought
about by market conditions. He cannot and does not control prices.
The foregoing discussion of marketing concludes the examination of
Mr. Cook's treatment of the conditions in the four principal branches
of the petroleum industry. In each part of his discussion, he has
.ignored much of the testimony before the T. N. E. C. and he has
analyzed inadequately much of the testimony which he does not
2° Ibid., p. 9100.
'i Ibid., p. 9118.
a Ibid., Mr. Hall, p. 9095; Mr. Klein, p. 9121.
CONCENTRATION OF ECONOMIC POWER 63
ignore. By attempting to prove or suggest a gigantic conspiracy
among the majors to oppress all the independents, by attacking the
industry at e\erj point, he has failed to make a thorough study of the
facts and a careful appraisal of the arguments. By attacking every-
thing, by not concentrating on the most troublesome problems of the
industry, he has failed to make any constructive suggestions to deal
with the conflicts of interest and to develop a program which will do
justice to all parties in the industry and advance the national economy.
He has failed to appraise the industry from the standpoint of the
national economy. He has ignored the fact that the T. N.E. C. was
primarily interested in ways to increase the employment of men and
capital and to add to the national purchasing power. Unfortunately
perhaps, Mr. Cook did not look at the problem from the' consumer
point of view; he was little concerned with efficiency _of operations.
As he stated in his preface, "the consumer aspect of the problem of the
majors' control of the industry is not developed in this survey." Mr.
Cook has ignored all the achievements of the industry and its great
contributions to national welfare and strength. The following chapter
will try briefly to make up for so serious an omission.
THE ACHIEVEMENTS OF THE PETROLEUM INDUSTRY
If the results of an industry's activities are to be called achieve-
ments, if it is to be called a success from the point of view of the well-
being of the whole national economy, the results have to be measured
by generally accepted standards. What are those standards? Clearly
they are something more than sales, costs, and profits, which deter-
mine success from a private financial point of view. The most com-
monly accepted standards evaluate the industry from the point of
view of the consumers, the employees, the competitors, the investors,
and the Government. From any point of view, an industry has to be
progressive in technology and management to meet the other stand-
ards. From the consumers' point of view, the standards are good
and improved products, sold at low prices, distributed in a con-
venient manner. From the employees' point of view, the standards
are. high wages, reasonably short hours, stable employment, and fair
and courteous treatment of the individual. From the competitive
point of view, all that can fairly be required is the standard of free
opportunity for efficient enterprises to enter into and remain in the
field. From the investors' point of view, the investment should be
reasonably safe and adequately rewarded, and the financial results of
the operations should be clearly reported. The Government's stand-
ards should embrace all the others and look especially at conservation
of irreplaceable natural resources and adequate support to national
defense in times of emergency.
The petroleum industry meets these standards so well that its
results may well be called its achievements. Whether we look at the
quantity, quality, and prices of products, at technological progressive-
ness, at labor conditions, or at adequate preparedness, the industry
meets the standards of success from a public point of view. Achieve-
ments are conspicuous in every branch of the industry and in every
phase of its activities.
In the production branch of the industry, the majors and the
independents have been so successful in finding new oil reserves that
it is now possible to satisfy the demand for crude oil without doing
violence to conservation and robbing the future by prematurely
exhausting the reservoir energy and leaving recoverable oil in the
ground. For 1926, proven oil reserves were estimated bv the Federal
Oil Conservation Board to be 4,500,000,000 barrels; for 1938, there
were estimated by the American Petroleum Institute to be 15,856,-
000,000 barrels. In 1926, the proven reserves were somewhat less
than 6 times the annual domestic production of crude oil; in 1938 the
proven reserves were over 13 times the annual domestic production
of crude-oil. This increase in oil reserves is a result of the application
of the modem scientific methods which Mr. DeGolyer outlined to the
T. N. E. C. Much of the gamble has been taken out of exploration
effort. The figures for the growth of crude oil reserves are given in
table 3. 1 As a result of the technical improvements in drilling, it is
1 See p. 70 infra.
CONCENTRATION OF ECONOMIC POWER (35
now possible to drill to depths long thought impossible. Both the
deepest drilled depth and the deepest producing depth have increased.
In 1928, both of these were 8,523 feet; in 1938, the deepest drilled
depth was 15,004 feet and the deepest producing depth was 13,206
feet. These and other figures may be found in table 4. 2
As a result of proration, which the industry and State governments
have developed and which the Federal Government has aided through
authorizing the Interstate Compact and passing the Connally Act, the
wastes of competition engendered by the rule of capture have been
checked and the industry has learned the technique of orderly produc-
tion. These developments in the production branch of the industry
have greatly strengthened the whole American economy, both in time
of peace and in time of defense.
In the transportation branch, the industry has developed its special-
ized and economical forms — the pipeline, the tanker, and the transport
truck. By its prompt extension of crude pipe lines to newly developed
oil fields, it has brought the world market to the door of all the pro-
ducers. The number of miles of petroleum pipe lines of the companies
reporting to the Interstate Commerce Commission increased from
81,676 in 1928 to 95,973 in 1938. 3 By reducing the costs of transporta-
tion, the industry has found economies which competition has passed
on, partly back to producers in the form of better prices for crude oil
which encourage new finding effort and partly forward to consumers in
the form of lower prices for refined products.
In refining, technical developments have reduced costs and increased
gasoline yields. In 1928, 15.7 gallons of gasoline were obtained from
a barrel of crude oil on the average ; in 1938, 18.6 gallons were obtained.
More figures on gasoline yields are given in table 5. 4 As a result of
improved processes, the demand for gasoline can be satisfied with less
drain on crude oil reserves. The annual quantity of crude oil con-
served by cracking has been estimated to have reached 1,283,437.000
barrels in 1938. The figures for earlier years back to 1920 are given
in table 6. 5 The old process in which crude oil was refined in batches
was succeeded by the continuous process; later the cracking processes
were introduced to break down the heavier Irvdroearbons and to
increase gasoline yields; and more recently catalytic cracking has been
developed to cut cost, increase gasoline yields, and improve quality.
These technical developments have made possible great improvements
in the design of automobile and airplane engines and have increased
the supply of quality fuels for the vital needs of national defense.
The achievements of refinery technology also may be seen outside the
production of motor fuel ; of the other improvements, that in motor oil
is perhaps the best known and best appreciated. In addition to the
products for use in automobiles, the industry has manufactured many
other products from crude petroleum; of the hundreds that might be
mentioned, toluol for use in explosives and synthetic rubber are those
that have most recently attracted public attention.
In the marketing branch of the industry, vigorous competition has
led both to improved services and reduced costs. The improved
services are well known to the public. The car owner can patronize
any of the numerous conveniently located filling stations; usually he
' Petroleum Facts and Figures, f>th ed.. 1939, p. 09. For summary statistics of pipe line comr-.>nie*, Me
table 2 in the appendix, p. 70 infra.
1 See p. 7i infra.
66 CONCENTRATION OF ECONOMIC POWER
does not even have to run his car across the street. At almost any
hour the motorist can find a station that is open. He is accorded
courteous treatment by well-trained attendants, and finds available
the facilities of modern equipment for dispensing gasoline and motor
oil as well as for lubrication and minor adjustments and repairs. He
finds carried in stock supplies and accessories, such as tires, batteries,
chains, polishes, antifreezes, and the like. He is assured of reliable
products of standard qualities. The reduced costs are less well known
to the public. Economies have been made in wholesale marketing,
both in the operations of bulk plants and terminals and in the trans-
portation of products from refineries to filling stations. The econo-
mies have been so great, in fact, that the total cost per gallon for
marketing, both wholesale and retail, is now less than before, even
before marketing services have been so conspicuously improved.
As a result of the improvements in all branches of the industry, the
public has been given a wide variety of petroleum products in increased
quantities, in improved quality, and at lower prices. Gasoline con-
sumption increased from 79,949,000 barrels in 1918 to 338,881,000
barrels in 1928, and to 521,657,000 barrels in 1938. 6 The great increase
in gasoline production has far outstripped any other commodity in
general use. The public is familiar with the improvements which
result in easier starting, quicker pick-up, and reduced knocking, and
with the greater power of the motor engines which have been designed
to take advantage of the kinds of gasoline now available. The
general public is little concerned with such technical characteristics
of gasoline as volatility and antiknock ratings, although they measure
important technical advances. The figures on these characteristics
available in the T. N. E. C. record are given in table 8. 7
With all the increased consumption and improved quality has gone
a great reduction in the cost of gasoline to the consumer, although this
reduction is somewhat obscured by the large increases in gasoline tax-
ation which have made the industry one of the greatest contributors
to the Public Treasury. 8 This great reduction in the cost of gasoline
is of the utmost significance; it not only immediately affects the
pocketbooks of millions of Americans but also indirectly increases
their power to purchase other commodities and thus acts to reduce
idleness of men and machines. The average annual price of gasoline,
exclusive of tax, at service stations has declined from 29.74 cents per
gallon in 1920 to 17.9 cents in 1928 and to 14.07 cents in 1938. 9 The
course of retail prices for the period from 1919 to 1939 is given in
Exhibit 1208. 10 The prices to the consumers have been lowered more
than the cost of living and more than wholesale prices generally. Table
9 n gives comparative indexes of the United States retail prices of gaso-
line, foods, clothing, houskfg, fuel and light, and sundries for the period
1920-38. From 1928 to 1938, the retail price of gasoline (exclusive of
tax) declined over 21 percent, while the cost of living, according to
8 Figures for the intervening years are given in table 7, p. 72, infra, along with motor vehicle registrations
and domestic production of crude oil.
7 See p. 72, infra.
8 Petroleum is one of the most heavily taxed industries. According to Mr. J. Howard Pew's testimony,
the petroleum industry's contribution to public revenues was about $1,000,000,000 yearly (Temporary
National Economic Committee hearings, pt. 14, p. 7175). For some comparative figures of taxes as percent-
ages of sales, see Temporary National Economic Committee Monograph No. 9, Taxation of Corporate
Enterprise, especially pp. 103-104.
6 Petroleum Facts and Figures, fifth ed., 1937, p. 162; sixth ed., 1939, p. 118.
io TNEC Hearings, pt. 15, p. 8716.
ii See p. 73 infra.
CONCENTRATION OP ECONOMIC POWER g;
the National Industrial Conference Board index, declined slightly
more than 14 percent. Prices of petroleum products have declined
more than wholesale prices generally and more than any of the major
groups of commodities included in the indexes of the United States
Bureau of Labor Statistics, which use 1926 as the base year. 12 From
1928 to 1938, the wholesale index of petroleum products declined
from 72.0 to 55.9 while the "all commodities" index declined from
96.7 to 78.6; in percentage terms, the decline of petroleum products
was over 22 and the decline of all commodities was less than 19.
These reductions in price have not been made at the expense of
the. labor employed by the industry; on the contrary, the industry's
employees have been paid good wages and have had their hours of
labor reduced. Employment through the year has been stable, labor
turnover is low, accidents have been reduced, and the industry has
had little labor strife. In all these important aspects, the industry's
achievements put it in the front rank of American industries. The
detailed evidence of the industry's accomplishments with regard to
its emplovees can be found in the testimony of H. H. Anderson, vice
president, Shell Oil Co., Inc., before the T. N. E. C. 13 The record
was so convincing that it called forth the comment from Dr. Isador
Lubin, Commissioner of Labor Statistics, who represented the Depart-
ment of Labor on the T. N. E. C: The conclusion is self-evident,
that the labor conditions in the industry are very, very good. 14
In view of all these accomplishments, the ' industry's rewards to
capital have certainly not been excessive. Figures on investment and
income are not available for the entire industry, but the T. N. E. C.
record has figures for some of the larger companies. Mr. John D.
Gill, vice president, Atlantic Refining Co., presented to the T. N. E. C.
a chart which compared the earnings of 24 oil companies and 400
industrials and which showed that the rate of return of the oil com-
panies was below that of the 400 industrials in every year save one. 16
Standard Statistics was quoted in the T. N. E. C. record as saying
that "the stockholders' cash return on the aggregated invested
capital of 21 leading oil companies for which comparable data are
available averaged about 4 percent a year for the 15-year period
1922-37. Returns for 135 leading industrial corporations for the
same period averaged better than 5 percent." 16 Mr. Cook admits that
the earnings of the majors for the years 1924 i,o 1938 averaged 8.9
percent on the par or stated value of the common stock, or 5.6 percent
on the book value of the common stock. 17 ' Modest though the
earnings have been, they have sufficed to bring additional capital
into the industry to finance its great expansion.
The success of the petroleum industry, when judged by the stand-
ards used in the discussion thus far, has not been obtained through
any suppression of competitive opportunity. On the contrary, the
industry must be judged successful when the standard used is that of
freedom for efficient competitors to enter into and remain in the field.
" Petroleum Facts and Figures, sixth ed., 1939, p. 123.
'» Temporary National Economic Committee Hearings, pt. 16, pp. 8987-9022; pp. 9245-9304.
"Ibid., p. 9006.
"Ibid., pt. 14, pp. 7154. 7505.
'•Ibid., pt. 14-A, p. 7706.
" Monograph 39, p. 6. His statement is based on his table 4, p. 61, which is taken from the Temporary
National Economic Committee Hearing*, pt. 14-A, table 47, p. 7863#
68 CONCENTRATION OF ECONOMIC POWER
Mr. Cook would deny this; but this whole reply to his assertions and
arguments is essentially a refutation of such a denial. Details of the
refutation need not be repeated here. In exploration, drilling, pro-
duction, refining, transportation, jobbing, and retailing, there is
abundant evidence that the competitive field is open and that the
number of independent competitors is increasing.
Thanks to the vigorous competition in the petroleum industry
which is so amply shown in the T. N. E. C. testimony and in which so
many enterprises take part, the industry can point to a long list of
great achievements. No well-informed person would claim that all
the achievements can be credited to the major companies. The
independents contributed their share; so also have the research agencies
of universities and technical schools and of governments. The State
conservation commissions, the Interstate Commerce Commission,
the. Department of Commerce, the Department of the Interior, the
Department of Justice, and the Federal Trade Commission have all
made their contributions to the success of the industry. The oil
industry has been aided also by the automobile industry, another
great and progressive American industry. No one will deny that the
vigorous competition in the industry has led to friction and complaints,
although some of the complaints contradict one another and many
others are voiced only by very small minorities. But the complaints
which arise from competition in the oil industry have to be appraised
in the light of the other results of competition. Mr. Cook failed to
make such an appraisal.
Mr. Cook's whole appraisal of the petroleum industry stands in
marked contrast with that presented in another T. N. E. C. mono-
graph by Dr. Theodore J. Kreps, the economic adviser to the T. N.
E. C. In his Monograph No. 7, Measurement of the Social Perform-
ance of Business, Dr. Kreps gives petroleum refining either third or
fifth rank among the 22 industries he studied, depending on the
standards applied. 18
The achievements of the oil industry are not the sort of things the
American public expects of group monopoly. They are, in fact, not
the results of monopoly. They are the results of vigorous competition
in which both majors and * independents take part and in which
efficient business units of either sort can survive and prosper.
'« Pp. 44-45.
CONCENTRATION OF ECONOMIC POWER
Table 1. — Domestic marketing territory of 20 major oil companies, by States,
Kansas. _ ..
1 1 >
Source: Temporary National Economic Committee Hearings, pt. 14-A, table 37, pp. 7812^-7813.
70 CONCENTRATION OF ECONOMIC POWER
Table 2. — Summary statistics of pipe-line companies reporting to Interstate
Commerce Commission, 1929-3?
Number of miles
1935 1 53
1933.... | 49
1931 1 51
1 As of Dec. 31 ol the year indicated.
Source: Temporary National Economic Committee Hearings, pt. 14-A, table 17c, p. 7792.
-Estimates of petroleum reserves in the United States
[Millions of barrels]
Year of estimate
U. S. Geological Survey.
• Petroleum Geologists.
U. S. Geological Survey.
V. R. Garfias, of H. L. Doherty Co.
1934 i 1
V. R. Garfias and R. V. Whetsel.
Baker (Oil Weekly).
"The Lamp," Standard Oil Co. (N. J.).
A. McCoy (Oil Weekly).
H. C. Weiss, Humble Oil"& Refining Co.
J January 1 of the year indicated.
Source: Temporary National Economic Committee Hearings, pt. 14-A, table 3b, p. 7772.
Table 4. — Deepest tests and deepest producing wells, by years
1933 . . .
'ata prior to 1926 from records believed to be approximately correct.
Source: Petroleum Facts and Figures, 6th ed., 1939, p. 68, which gives as its authority the Oil Weekly.
CONCENTRATION OF ECONOMIC POWER J\
.Table 5. — Total gasoline production from refineries in the United States, WlS-38
p.,, H . „:i I from crude , Percent
mocked 1 oil straight j gasoline
(hou-Snds 1 ™ n P lus Product.on
ofbamte) ' crackcd from crude
of barrels) (thousands oi i
of barrels) .
refinery crcase ln
of barrels) ^
1,165.01.^ 515,889 ' 44.28
1,183,440 519,760 j 43.92
1,068,570 ; 470,994 44.08
965,790 : 426.817 44.19'
895,636 i 388,770 ! 43.41
861,254 376,245 r 43.69
819,997 , 366,291 44.67
894,608 396,394 44.31
927,447 ' 389,071 41.95
987, 708 1 388, 621 j 39. 35
913,295 1 341,722 1 37.42
828,835 ! 298,273 \ 35.99
779, 264 ; 272, 038 1 34. 91
739,920 239,965 j 32.43
643,719 200,655 1 31.17
581,238 1 174,416 i 30.01
500,706 ; 144,010 ! 28.76
555,850 ! -0.59
559, 141 ' 10 8
504,811 • 10 2
457,842 , 9 8
416,932 1 3.8
401, 991 i 2 3
392,623 : -9.0
431, 510 — 17
432,241 ' -.65
435,078 15 4
376,945 ' 14 1
330,435 10 2
299, 734 15 5
259,601 ; 20.5
147,672 ! 20.3
443,363 120,187 ' 27.il 2.517
433,915 : 113,098 i 26.06
361,520 ! 91,278 ! 25.25
326,025 ; 82,556 , 25.32
116,251 ! 23.4
94,235 ; 10.9
Source: Temporary National Economic Committee Hearings, pt. 15, table 1, p. 8648.
Table 6.- — Conservation of crude oil through operation of cracking processes
yield of '
tity of gaso-
run to stills
4 and 3)
2, 448, 452
2, 444, 779
2, 175, 492
1, 656, 737
1, 606, 404
1, 567, 652
1, 254, 830
1,283,437 i 52.42
1 261 339 51 59
21. 26 519, 760
21.65 , 470,994
23. 04 388, 770
22.71 1 376,245
23.83 ' 366,291
24.59 ! 396,394
24.22 | 389,071
24.00 ' 341,722
23. 77 ! 298, 273
23.16 ' 239,965
23. 40 200, 655
22.77 144 nin
1,106,922 ■ 50.89
914,461 ; 48.64
296, 198 i 28. 59
213,781 | 24.93
172,830 • 22.92
131 749 i 2u 83
66 297 ; 13 w
Source: Temporary National Economic Committee Hearings, pt. 15, table 2, p. 8648.
CONCENTRATION OF ECONOMIC POWER
-Gasoline consumption, domestic crude oil production, and motor-vehicle
registrations, by years, 1900-38
Gasoline j Motor ve- Domestic !
consump- i hicle regis- production h Year
tion ' I trations ! of crude oil ' I i
29, 485, 680
24,115, 129 :
23, 133, 243 j
15, 092, 177
12, 258; 375 '
7. 565.446 !
1 . 279,
4, 983. 000
3, 513, 000
2, 446, 000
of crude oil '
1 Unit is thousands of barrels.
2 Authoritative figures prior to 1918 are not available.
Source: Temporary National Economic Committee Hearings, pt. 14-A. table 2, p. 7771.
Table 8. — Changes
in the volatility and antiknock quality of jja^oline produced in
the United States
Volatility as Fahien- ]
heit temperature at
which the indicated j
percentages distilled |
10 per- ] 50 per- ! 90 per- '
cent i cent ! cent '
Volatility as Fahren-
heit temperature at
which the indicated
138 243 1 351
139 ; 244 j 353
140 1 244 j 353
139 1 254 366
144 i 258 369
151 1 263 ; 379
151 263 '' 379
154 I 266 382
271 1 384
269 j 386
268 i 379
269 i 376
261 1 377
1 Octane number estimated.
Note— All figures evcept the estimated octane numbers are from Bureau of Mines publications. Figures
for the years 1920 to 1930, inclusive, and for 1936 and 1937 are unweighted averages for sets of samples ob
tained in winter and summer. The 1931 figures are for winter samples only.
The 1936, 1937, and 1938 series of samples differentiated between samples representing grade designated
as "Premium." "Regular," and "Third grade." Weighted averages were computed on the basis of the
assumption that the total volume of gasoline represented was 7.5 percent premium, 80 percent regular,
and 12.5 percent third grade.
Source: Temporary National Economic Committee Hearings, pt. 15, table 11, p. 8655.
CONCENTRATION OF ECONOMIC POWER
Table 9. — Indexes of Umt&d States retail prices, gasoline compared with other
1931 . . .
Source: Petroleum Facts and Figures, Sixth Edition, 1939, p. 119. which gives as its authority: "National
Industrial Conference Board, all indexes except gasoline; gasoline index, American Petroleum Institute."
REJOINDER BY ROY C. COOK, AUTHOR
OF MONOGRAPH NO. 39
304955— 41— No. 39a 6
LETTER OF TRANSMITTAL
Washington, D. C, June 30, 1941.
lion. Joseph C. O'Mahoney,
Chairman, Temporary National Economic Con
Washington, D. C.
Deak Senatoe O'Mahoney: I was advised by you in May that
Messrs. William S. Farish and J. Howard Pew had sponsored and
supervised the writing of a criticism on Monograph No. 39 in the form
of a reply and had requested that it be printed under congressional
authority. The nature and extent of the comments contained in the
reply necessitate a rejoinder. Accordingly, I have prepared a re-
joinder to this reply, which I am transmitting herewith.
Roy C. Cook.
REJOINDER BY ROY C. COOK, AUTHOR OF MONOGRAPH
The introduction to the reply to 1 N. E. C. Monograph No. 39,
"Control of the Petroleum Industry by Major Oil Companies," begins
by offering some reasons on why a reply was made. Chief among
these is the fact that the monograph was printed by the Government
Printing Office and was prepared by me in my individual' capacity.
The authors of the reply emphasize that "like the other monographs"
the one I prepared had neither the approval nor disapproval in whole
or in part of the members of the Temporary National Economic Com-
mittee. The purpose of tins emphasis is not very clear, but I do not
feel that the reply needs such an excuse. The fact that a publication
is written by a single individual, or by a staff of individuals, should
not serve as the basis of its evaluation; it should stand on its merits.
However, it is to be noted that my critics apparently soon forget
their emphasis of the fact that T. N. E. C. monographs were not
officially approved or disapproved by the committee, since they proceed
in the early part of their reply to quote from other T. N. E. C.
A considerable part of the reply is devoted to comments and
analyses of premises not raised in the monograph. A complete chap-
ter is given to a general discussion of "The Achievements of the
Petroleum Industry." Most of the quotations used in the reply
are from witnesses appearing before the T. N. E. C. under the spon-
sorship of the American Petroleum Institute. 1 In most cases the
comments represent the personal views of the writers concerning the
problems of control by the majors over independents, rather than a
criticism of my own analysis. The reply does not offer any proof of
inaccuracy of the basic considerations I advanced to show the control
of the petroleum by the majors. The contention that "no indepen-
dent wishes for himself to become a part of a public utility," as stated
on page 4, is no denial of my conclusion that the continuance, of
present practices and conditions in the petroleum industry may
lead to its regulation on public utility principles,
I shall now discuss briefly the more important factors and points
discussed in the reply as it deals with the chapters: Basic Factors,
Production, Crude Oil Transportation, Refining, ancl Marketing.
No comments were made on my chapter on Gasoline Transportation.
Since the reply so far as its recital "The Achievements of the Petroleum
Industry" is concerned does not appear "to be a reply to the mono-
graph, no comments are here made an.it.
The reply claims that "many companies, large and small, are now in
vigorous competition with one an •'her," and offers the explanation
that the majors compete "to loca' e new oil fields," and in the search
for economies in refining and tran p >rting gasoline. Since the majors
have virtual control over transpo t .tion and refining facilities, as wa9
1 See Temporary National Economic Committ* I earings, pt. 14,,pp 7163-7164, for a list of witnesses.
Thev wore .1. Howard °ew,-E. DeGolvcr, Robert IS. >Vilson, Fayette D. Dow, Sidney A. Swensni'l, John
D. Gill, H. II-Anderson, and William S. Parish.
gO CONCENTRATION OF ECONOMIC POWER
developed in the monograph, there is no evidence of any real competi-
tion between the majors and independents. On the question of com-
petition in the oil industry, Prof. John B. Ise, of the University of
Kansas, gave the following testimony:
It may be noted, finally, that competition between the major integrated com-
panies, on the one hand, and independent producers or refiners, on the other,
is not such as would be found in a genuinely competitive market. In a sense,
the integrated companies and the independents are in different businesses. The
integrated companies are in the business of taking oil from the ground, or perhaps I
might say in the businesses of ."aki^e oil from the ground, transporting and refining
it, and selling refined products t • u> Imate consumers; independent refiners without
production are in the business < i buying crude oil from producers, refining it, and
selling their products to jobbers or marketers. To some extent the two groups are
in different businesses, and do not compete on even terms. The independent
refiners must make their profits on refining operations or not at all; integrated
companies might suffer losses on their refining operations and yet make fair profits
on their business as a whole, by recouping their refining losses in other operations.
The significance of this may be seen in the present marketing situation. The
marketing of oil products is apparently carried on at a heavy loss, which for
independent marketers is a serious matter; but the high earnings of the integrated
companies in other operations make up for their losses in marketing.
The oil industry, in conclusion, carries some of the earmarks of a public utility.
The pipe lines are recognized as common carriers, and other monopoly elements
in the industrial pattern of the oil industry emphasize its divergence from the
forms of private competitive business. 2
The allegation on page 5 of reply that the T. N". E. C. did not reveal
any evidenccof a conspiracy is misleading and inaccurate. I referred
to some of them on pages 34, 35, 42, 45, and 47 of the monograph.
A Supreme Court decision of 1940 (310 U. S. 150), involving a large
number of the majors, gives some interesting facts about an oil con-
spiracy that was held to be illegal. The complaint (No. 8524) filed
by the Attorney General in September 1940 against the American
Petroleum Institute and the major oil companies alleges over 30
unlawful agreements and combinations entered into by the defend-
ants pursuant to conspiracy. While the T. N. E. C. Hearings were
primarily a part of an investigation with respect to the concentration
of economic and financial power, the authors of the reply may w r ish
to argue that neither the J. J. Pelley memorandum 3 nor the oil
tanker pool arrangement 4 of 1932 were evidence of conspiracies.
On page 6, it is asserted that I "offer no explanation of the bald
assertion that assets do not measure control." I pointed out that
the real measure of control per se is not in the major's share of total
assets, but in their position of control in the different branches of the
industry. A good example of this is found by considering the propor-
tion of oil acreage leased as against the quantity owned in fee. The
majors leased 93.9 percent of the acreage of oil lands held by them
on December 31, 1938. 5 They have under lease and fee interest over
2 Temporary National Economic Committee Hearings, pt. 14, p.. 7107.
3 See Temporary National Economic Committee Hearings, pt. 15, pp. 8315-8323; sec also r>t. 10, pp. 9090-
1 See Temporary National Economic Committee Hearings, pt. 14, p. 7574. Mr. Louis J. Walsh, vice
president, Eastern States Petroleum Co., Inc., testified as follows on the purpose of the oil tanker pool:
"A number of the independent oil companies, including our own, objected to this proposed agreement and
asked an investigation by the Attorney General in the fall of 1932. As a result of this investigation the plan,
which most certainly was illegal, and most certainly was designed to produce monopoly, was dropped.
The Attorney General's office is fully conversant with the facts in this case, and we feel certain would con-
firm to you that the plan proposed was obviously designed to produce monopoly." It is true as stated
on p. 38 of the reply that the pool was not put into effect, but this fact does not mean it was not a con-
spiracy. The fact that agreements were not carried out or accomplished is immaterial in determining
whether a conspiracy existed, according to the opinion of Justice Stone in V. S. v. Trenton Potteries Co.,
273 U. S. 394, 402 (1927).
» 1 emporary National Economic Committee Monograph No. 39, p. 04.
CONCENTRATION OF ECONOMIC POWER gX
70 percent of the proven crude oil reserves of the United States. 6
A summary of the major's share of control was given on page 5 of the
monograph, based on public sources of information.
Some reliance seems to be placed by the reply on the figures given
by Dr. Willard Thorp in Monograph No. 27 as controverting my
conclusions witli respect to concentration of control. I have no
reason to question the accuracy of Dr. Thorp's figures on concentra-
tion as quoted on page 7 or to place any interpretation upon them
other than that contained in the reply, but they deal lor the most part
with non-integrated, manufacturing industries. The tact that four
companies have 20 percent of the output of oil wells, as pointed out
by Dr. Thorp, is certainly not an adequate measure of concentration
in the petroleum industry. The replj tails to' inform the reader that
Dr. Thorp also made analyses of control based on 20 major integrated
oil companies. 7 Consideration must be given to the fact that the fully
integrated major oil companies are engaged in production, transporta-
tion, refining, and marketing, and, relatively speaking, they are
unusually large corporations, owning 440 subsidiary and jointly owned.
companies as was pointed out in my chapter on "Basic Factors."
The smallest major considered is fullv integrated and has assets of
For some reason satisfactory to him, Dr. Joseph E. Pogue, economist
of the Chase National Bank of the City of New York, in his study
entitled "T>onomics of the Petroleum Industry" 8 used 20 companies
in his analysis of the degree of concentration of production and refining.
His percentages on control differ only slightly from mine.
Mr. John E. Shatford in his testimony before the T. N. E. C.
(pt. 15, p. 8518) gave an accurate description of the concentration of
control when he stated:
At one time the activities of this business were conducted in four relatively
irate branches or divisions, but to a very large extent this is no longer true.
Today these activities have become so inter-dependent in operation, and the
boundaries which once divided them have become so rubbed out by common
ownerships that more than 85 percent of the business of this twelve to fourteen
billion dollar industry, comprising several thousand separate ownership.-,, is carried
on by 20 widespread integrated companies known as the major group.
In considering whether or not a few companies should be used to
measure control, it is fair to remind the reader that the old Standard
Oil Co. was divided into separate companies whose operations were
allocated to different areas of the United States and. generally speak-
ing, each of the Standard companies is today the dominant factor in
each of the 11 marketing areas. The effect of division of territory
should certainly be considered in any picture of concentration, espe-
cially with reference to the number of companies to be included.
Likewise, the study "Big Business: Its Growth and Its Place,"
quoted in an attempt to show jthat the degree of concentration is
comparatively low, is irrelevant. I do not accept wage earners in the
refining division as being the measure of concentration for a group of
major integrated oil companies. The wage earners in the refining
or manufacturing division represent only 13 percent of the petroleum
industry total, as was given in table 1 on page 1 of the monograph.
5 Ibid, p, in
r;iry National Economic Committee Monograph No. 27, "The Structure of Industry," p. 2fil.
1 Temporary National Economic Committer Hearings, pt. 14. p. 7458.
82 CONCENTRATION OF ECONOMIC POWER
Moreover, it is significant that the 17 largest industrial corporations
in terms of their total assets on December 31, 1939, included 9 oil
corporations, representing over 50 percent of the assets. The majors
are unique in that respect.
The statistical tables and charts included in the text and appendix
of the monograph contain individual company figures so that one can
make comparisons of any group of major companies. Thus, on page
27 it is shown that two majors have 36 percent of the oil tankers and
on page 83, four majors have over 50 percent of the crude-oil pipe-line
mileage. Some consideration must also be given to the fact that the
petroleum industry 9 is a comparatively large one and is composed of
many. thousands of individuals and small companies outside the major
group. Furthermore, Standard Oil Co. (New Jersey), the largest
major, has total assets of over $2,000,000,000. Compared to this,
the. Federal Trade Commission found that —
The entire investment of the Standard Oil combination as represented by the
investment of the holding company, Standard Oil Co. (New Jersey), on December
31, 1906, soon after the Standard Oil dissolution suit was brought, was $359,-
The Securities and Exchange Commission in their study, "The Dis-
tribution of Ownership in the 200 Largest Nonfinancial Corporations,"
T. N. E. C. Monograph No. 29 (p. 126), found in reference to the
Rockefeller family influence in the oil industry that —
The aggregate assets of the five corporations regarded as under control of the
Rockefeller family amounted to nearly $4,500,000,000 or 6}i percent of the total
.assets of the 200 corporations and nearly 3 percent of those of all nonfinancial
corporations. The Rockefeller interests thus ranked first in total assets.
From an industrial point of view the Rockefeller empire is the most compact
of the three, practically all the investments of the family among the 200 cor-
porations being in the oil industry and almost all of them going back to the
old Standard Oil Co. dissolved in 1911, of which John D. Rockefeller, Sr., was
the largest stockholder.
It is said on page 7 that I selected the largest 20 companies "at
the present time," causing the percentages of control to be biased,
and the argument is made that "the only appropriate method is to
compare the percentage controlled by the leaders in each year,
irrespective of which companies are among the leaders." This
comment is not based on an analysis of the 20 largest companies in
1926 or any other year but is based on percentages of control for the
"four largest refiners" in each of several selected years. Obviously
the four largest refiners' percentages of daily crude oil refining
capacity is not the same as comparing the four largest integrated
majors in terms of their total assets and control of the industry.
It is admitted that there have been some changes in relative positions
of the majors within the group since 1926, but this does not affect
the total percentages of control. According to Poor's and Moody's
Industrials, Sun Oil Co. and The Standard Oil Co. (Ohio) were not
included in the 20 largest integrated companies in 1926, but two
large companies, Vacuum Oil Co. and Prairie Oil & Gas Co., with
combined assets of $310,000,000, were included in the 20 largest.
The latter two companies were absorbed by two majors, Standard
Oil Co. of New York, and Consolidated Oil Corporation since 1926,
which would certainly not indicate decreasing concentration. In
9 $l. r >,000,()"i> •■''• Lhe recognized investment fl fc ure; see p. 57 of the monograph for investment In other
10 Federal Trade Commission, Petroleum Industry: "Prices, Profits, and Competition" (S. Doc. No. 61,
70th Cong., 1st sess.), p. GO.
CONCENTRATION OF ECONOMIC POWER
view of these considerations, I feel the implication that the 20 major
companies today are no! the same as in 1926 is not a valid one.
It is certainly true in measuring the trend of concentration that one
should consider acquisitions and mergers.
The discussion on pages 10 and 11 on the dissimilarities of the major
companies represents an attempt to confuse the issue. I did not state
or imply that the companies have similar policies with respect to stocks
of crude oil, capital employed, sources of crude oil and gasoline,
amount of sales to jobbers, extent to which earnings are paid out, etc.,
as was implied on pages 10 and 11 of the reply. However, their policies
toward the adoption of uniform contracts with jobbers and differ-
entials between "split" and " 100 percent" dealers may be considered
as some of the identical business policies toward independents. Others
were discussed in the monograph.
I did not state in the monograph that the "monopoly position" of
the majors was weakest in the production division; neither did I infer
that the measure of the majors' control of this division was in the fact
that they have 23.7 percent of the producing oil wells and 52.5 per-
cent of the crude oil production. As I pointed out on page 4 of the
monograph, the majors purchase approximately one-third of their
requirements of crude oil in a buyers market, owing to their control
of crude oil pipe line. The practical effect of this control is that in
virtually all cases the only alternative available to the oil producer
is to sell his oil in the field to the particular pipe line company.
The attempt is made to limit my argument to company-owned
stations. It is very true that the percentage of major-owned stations
is comparatively small, but the percentage of stations controlled by
the majors is 85 percent, according to a study made for the Temporary
National Economic Committee in 1939. n
Though my argument on marketing losses is condemned as extremely
weak, it is not denied that on the whole the marketing division is
operated at a loss. The majors' own figures n submitted to T. N. E. C.
show that most companies carry on their marketing operations at a
loss. Mr. W. S. Farish, president of Standard Oil Co. (New Jersey)
and one of the sponsors of the reply, himself submitted to the T. N.
E. C. the following table 13 which gives an interesting record of profits
and losses of the marketing departments of four important subsidiaries
of Standard Oil Co. (New Jersey).
Co. of New
Co. of Penn-
$9, 862, 480
8, 641, 895
3, 451, 540
6, 532, 242
4, 340. 688
3, 221, 410
3 4, 217, 994
' 3, 199, 716
3 2, 261, 990
3 342, 800
3 662, 000
3 $680, 597
3 380, 251
3 1.771, 147
3 1, 138. 686
3 330, 197
3 967, 200
( 2 )
3 $2, 133, 657 1
3 860, 804 1
3 1,008, 092
3 3. 19
$10, 977, 904
6, 772. 949
3 3, 719, 062
3 5, 829, 106
3 2, 758, 164
3 1, .541,268
' Organized June 29, 1928.
2 Not available.
Departmental earnings not available.
" Hearings, pt. 15-A., p. 8735.
12 See Temporary National Economic Committee Hearings, pt. 17-A, pp. LOO also pt. 16, p.
9155 for a summary of net profits and losses 1927-29 and 1931-34 made by Mr. Paul H
13 Temporary National Economic Committee Hearings, pt. !7. p. 9726. During the same period the
annual reports to stockholders for Standard Oil Co. (New Jersey) shows profit 1 ; for every year.
84 CONCENTRATION OF ECONOMIC POWER
Again, Mr. J. Howard Pew, joint sponsor with Mr. Farish of the reply,
in his discussion before the Temporary National Economic Com-
mittee of the 117 completely or partially integrated companies stated:
"Forty of them are substantially integrated; but not over half of these
could be rated as majors." 14 Therefore, since there are not more than
20 fully integrated independent companies, the inference that the in-
dependents are integrated is not supported by evidence. Furthermore,
the combined assets of the integrated independents represent Jess
than 2 percent of the total investment of the petroleum industry.
Full integration is definitely not a characteristic of the independent
group, composed of thousands of companies and individuals engaged
in only one branch of the industry.
It is true that the weekly statistical bulletin of the American
Petroleum Institute as such may not lessen competition, but, as was
pointed out on page 7 of the monograph, the chief complaint is that
recommendations and forecasts of amounts of petroleum products to
be produced and maintained in storage are made by the Institute.
This does tend to cause price rigidities. A portion of the report of
the Institute's Committee on Petroleum Supply and Demand, dated
March 26, 1936, is as follows:
Statistics covering a representative percentage of the industry are published
each week, and from these figures a close check on the trend of inventories and
output can be obtained. If the industry will study these weekly reports and so
conduct its opera' ions that the trends recorded therein will be in harmony with
those indicated in the forecast for the quarter, sound economic inventory and
production levels will result.' 5
I do not know what the membership of this committee is today, but it
may be significant that in 1936 it was limited to the following repre-
sentatives of majors and two trade associations: 16
Sidney A. Swensrud, chairman.. Standard Oil Co. (Ohio), Cleveland, Ohio.
Fred Van Govern, secretary American Petroleum Institute, New York, N. V.
W. C. Allen ' The Texas Co., New York, N. Y.
Oliver S. Ambrose Tide Water Oil Co., New York, N. Y.
W. B. Case Shell Union Oil Corporation, New York, N. Y.
A. H. Hand Union Oil Co. of California, Los Angeles, Calif.
E. T. Knight The Atlantic Refining Co., Philadelphia, Pa.
D. F. Leary _ Cities Service Co., New York, N. Y.
Clarel B. Mapes Mid-Continent Oil and Gas Association, Tulsa,
A. J. Mcintosh Socony-Vacuum Oil Co., Inc., New York, N. Y.
Charles N. McNeese : Continental Oil Co., Ponca City, Okla.
J. M. Sands Phillips Petroleum Corporation, Bartlesville,
E. P. Salisbury Standard Oil Co. (New Jersey t, New York, N. Y.
Earl W. YVagv Standard Oil- Co. of California, San Francisco,
As late as July 1939, the Institute through its department of statis-
tics made the following recommendation:
Among the things that have been wrong with the industry, during the period of
confusion through which it has been passing, has been that in the aggregate it has
produced too much crude oil and gasoline, and that the stocks of crude oil and
gasoline have been burdensome * * * and again will be under a severe
operating handicap if economically desirable inventory levels as of March 31,
1940 are not to be greatly exceeded. 17
It may be asserted that the majors do not comply with the forecast,
but this is doubtful, in view of the comparatively rigid prices of crude
'■' Temporary National Economic Committee Hearings, pt. 14, p. 7173.
15 American jvtroleum institute, Quarterly, April 193G, p. 6.
n [bid., p. 7.
'" Ibid., .July 1939, p. -'I.
CONCENTRATION OF ECONOMIC POWER §5
oil and to a lesser extent gasoline. In the case of gasoline, Standard
Oil Co. of New Jersey made no changes in its posted tank wagon
(dealer) price for Washington, D. C, from October 3, 1938, to Sep-
tember 10, 1940— a period of almost 2 years. 18 Other tank wagon
markets have been comparatively rigid.
The comments to be found in the reply on the production chapter
of the monograph are essentially only modified restatements of my
findings, supplemented by an analysis of some of the economic prob-
lems covered in the chapter, but in virtually every case no specific
denials of my basic conclusions are made. It is not denied that there
exists a considerable disparity between the majors' percentage of
crude oil production and their percentage of crude oil reserves, but is
merely claimed that such disparity has no connection with, and does
not result from, the majors control of transportation. It is a matter
of record that the majors purchase oyer one-third of their net crude-oil
requirements from independent producers. There is no free market
for crude oil, since virtually all of it is sold at the producers' wells
because of the majors' control of pipe lines.
On the question of proration, I did not deny that physical waste as
such should be restricted. But, as I pointed out, it must be recognized
that many measures urged under the guise of conservation are not
motivated by considerations of conservation. They are in effect based
on stabilization and price considerations. The study made by the
National Resources Committee, "Energy Resources and National
Policy" (p. 201) supports this view. The report states:
Although State oil laws have been passed and sustained as conservation meas-
ures, their primary purpose, by and large, seems to have been stabilization of the
There is overwhelming evidence to the effect that the economic
motive is the primary aim of the majors in sponsoring proration laws.
The fact that proven crude-oil reserves have been steadily increasing
does not off et any argument for sponsoring proration. Mr. 'John E.
Shatford made it clear as to the motives of production control laws
in his statement prepared for the T. N. E. C. He stated:
As has been intimated, it was necessary, at the outset, to introduce price
maintenance .and other economic objectives under the label of conservation.
Early statutes were outright physical waste prohibitions and the customary
method was to extend indefinitely the definitions of waste, out of the field of public
interest into the field of private economic benefit. And so waste came to have so
many phases and definitions that today it is easily possible for an experienced
commission limited strictly to physical waste prohibitions to exert full economic
control over the production of oil from a pool or from a State so as to avoid com-
petitive drilling; small ownerships of leases and royalties; adjust up or down or
destroy values in leaseholds and royalties; create or destroy supplies of oil for local
industry; enforce partnership operations while naming which partner shall con-
trol; raise or lower production quotas and well allowables or withhold the right
entirely to produce and to influence, up or down, the market price of oil. 19
Any proration program should be viewed from the effect on the con-
sumer welfare and the small producer. Proration does not affect the
independents the same as majors. The majors can obtain adequate
supplies of crude oil, supplemented by their purchases at their own
posted price, to operate their mass-production refineries at almost full
!• National Petroleum News, "Oil Price Handbooks," for 1939 and 1910.
• '• Temporary National Economic Committee Hearings, pt. 15, p. 8524.
86 CONCENTRATION OF ECONOMIC POWER
capacity. On the* other hand, independent refiners operate at only
50 percent of capacity on the average owing to their lack of crude
oil pipe lines and inability to obtain adequate supplies of crude oil
from their own wells and from other nearby sources, because of pro-
There is no dispute that proration is based on forecasts of "market
demand." Therefore, since prices of crude oil are stable for long
periods, it is obvious that the regulation of crude oil production on
"market demand" is primarily price stabilization, rather than true
conservation. Concerning the effect of proration, Mr. Farish stated
before the T. N. E. C:
Just one word in closing. I do not want to claim for 1 second that proration
is against the interest of the large oil companies. It is in their interest; but it is
also in the interest of the citizens of the producing areas, in the interest of the
State and local governments in those areas, and in the interest of the consuming
public. It is also most emphatically in the interest of national defense. Further-
more, as regards my own company, the Standard Oil Co. (New Jersey) is a big
company in the oil industry, and I have not the slightest hesitation in saying that
we are iii business to make a profit. But we are in business not merely today
and tomorrow, but for a long time to come, ana we want to make profits not
merely today and tomorrow, but also for a long time to come. Therefore,, we
can and do look at our problems with a long-run perspective; and in the long run
we know that for a company as big as ours its welfare, that is, the welfare of its
stockholders and its employees, is unavoidably bound up with the welfare of the
country as a whole. When the big oil companies accepted the idea of proration
they voluntarily submitted to restraints which they frequently did not like,
restraints which made them forego many opportunities for immediate profits,
restraints which were directly contrary to their ingrained habits of thought.
But they- did it because they figured that in the long run these restraints were
going to be good for them. They .sacrificed immediate profits in order to gain
greater assurance of stability for the future. In the light of all the circumstances,
I think it is not an overstatement to say that the present proration program
sponsored by the oil industry, imperfect though it may be in many respects,
represents an important act of real industrial statesmanship. 20
The reply to my chapter on crude oil transportation begins with
the charge that my "evidence of control of pipe lines by the majors
was published 25 to 35 years ago." This accusation is definitely not
supported by the monograph. I made an analysis of the controls of
today. However, I still think it is of interest. to the reader to be
reminded of the fact that the Standard Oil Trust established its
control over the industry through its control of transportation.
That fact is especially pertinent, in view of the majors' control over
pipe lines and tankers today. The argument of the critics that pipe
lines are geographically located parallel to one another does not deny
that they are used mainly as plant facilities, transporting their own
oil. Furthermore, they do not deny that 14 major companies reporting
to the Interstate Commerce Commission have 89 percent of the total
crude oil mileage which they characterize as "a substantial per-
centage," but add that conditions are not "similar" to those in 1906.
As far as the independent producer or refiner is concerned, his lack
of transportation facilities is due to control by his major competitors,,
in whatever form the control may be.
The authors of the reply disagree with my statement that "the
typical minimum tender on crude oil is 50,000 barrels," which I based
20 Temporary National Economic Committee Hearings, pt. 17, p. 9951.
CONCENTRATION OF ECONOMIC POWKK
on tariffs in effect in 1940. The table on page 32 of the reply repre-
sents an attempt to convey the impression that a 10,000 barrel
minimum is the typical requirement . li is not clear whether "today"
used in reference to their examination of the tariffs on file with the
Interstate Commerce Commission is as of 1940 or 1941. At any rate,
I have no reason to question the accuracy of the statistics as given in
the table since they are substantially the same as my own. However,
the critics do not point out that on the average the large pipe line
systems have the highest tenders, and I doubt that the critics could
argue that the tenders should be weighted on the basis of mileage or
barrel-miles transported in order to obtain a representative picture
of minimum tenders for all companies. The following table shows
that five subsidiaries of major oil companies with minimum tenders
of 100,000 barrels have 34.5 percent of the crude-oil pipe line mileage
reported to the Interstate Commerce Commission.
Crude-oil pipe line mileage of 5 companies having minimum tenders of 100,000
barrels Jan. 1, 1940
Crude-oil pipe line
Gulf Refining Co .
Illinois Pipe Line Co
Magnolia Pipe Line Co
Oklahoma Pipe Line Co
Gulf Oil Corporation.
The Ohio Oil Co.
Socony-Vacuum Oil Co.,
Standard Oil Co. (New Jer-
Consolidated Oil Corpora-
(a) Total for 5 companies .
(t>) Total for all companies
Source: Interstate Commerce Commission.
The weighted average minimum tenders for all companies, using total
crude-oil pipe line mileage as the weighting factor, is 54,199 barrels.
This was the basis of my statement in the monograph that the ''typ-
ical" minimum tender in 1940 was 50,000 barrels. It is true that the
Interstate Commerce Commission on December 23, 1940, ordered
that crude oil minimum tenders be reduced to 10,000 barrels as a result
of its investigation started in June 1934 (Docket No. 26,570) but it is
not known to what extent the respondents have complied with that
provision of the order.
The comments as to earnings of pipe line companies convey the
impression that the high earnings do not restrict independent compe-
tition, but do not deny that they are too high. * It is no longer a ques-
tion for argument that crude-oil pipe-line earnings are unusually high,
and do not bear a proper relationship between tariff rates, investments,
and costs of operation. Owing to the fact that the pipe lines are used
largely as plant facilities and transport only the majors' own oil, why
are the tariff rates and earnings so high? Since the reply fails to
answer tins question, it is only logical to conclude that the major
owners maintain the high tariff rates to exclude competitors from
§8 CONCENTRATION OF ECONOMIC POWER
using the common carrier lines and have their enormous dividends
for use in meeting competition.
It is true that some reductions in crude oil pipe line rates have been
made since the investigation started in 1934, but as stated in the report
of the Interstate Commerce Commission:
Pipe lines that have been in operation for more than 10 years have long since
earned sufficient to recoup the entire amount, 'invested therein by their owners.
This is especially true of those lines which are directly affiliated with some one of
the large oil companies.
The amount of dividends paid by pipe line companies to the parent
company is definitely an indication of their earniiigs. For the 10-year
period ending December 31, 1939, the average annual ratio of divi-
dends declared to capital stock was 32.6 percent. 21 At this rate it is
very obvious that a pipe line does not take long to pay back the
The reply contends that independent refiners have the opportunity
to locate at the seaboard or consuming centers. Since by and large
pipe lines have not been common carriers in fact and have served
generally as plant facilities, it would certainly appear that the opposite
is true. This aspect of the problem has already been covered in the
monograph and rejoinder. The fact that there are 16 independent
refiners on the Gulf Coast is no proof of their contention. Those
refiners have a large portion of their requirements of crude oil in
nearby oil fields. 22 Dr. Robert E. Wilson in his testimony before the
committee stated, "The Gulf Coast is a very logical place to build a
refinery because there are many different sources of crude available
and a large market that is served out of the Gulf Coast area." As
stated by Mr. Pew, 23 most independent refiners are located in the field.
Even the small group of independent refiners that were located on
the eastern seaboard about 10 years ago were bought out by the
majors, as was pointed out on page 30 of the monograph.
With reference to the exchanges of gasoline between the majors, the
reply does not claim that the majors pass these savings on to the
consumer; it merely says they can deliver the gasoline more cheaply,
which is no doubt true. If the savings were passed on to the pur-
chasers, how could tank wagon prices be so uniform? Exchanging
gasoline is somewhat analogous to a division of territory where savings
may result through more concentrated selling. Also, it might be well
to remind the reader that the radio programs of the majors do not call
the public's attention to the great savings passed on to them as a result
of exchanges of the gasoline which is so highly advertised as a specially
manufactured branded product. Does not the admission of the
practice of exchanging gasoline supplies indicate that there is really
21 Interstate Commerce Commission: "Statistics of Oil Pipe Lines, 1921-27," Statement No. 396, and
"Statistics of Oil Pipe Line Companies for the year ended December 31, 1939," Statement No. 4044.
22 Temporary National Economic Committee Hearings, pt. 15, p. 8343.
'" Ibid., pt. 14, p. 7201. The following testimony supports this point:
"Mr. Cox. I assume from what you said a moment ago that in your opinion there aren't many of the
small independent refiners whose refineries are located near the market as distinguished from near the oil
field. Is that correct?
"Mr. Pew. There are a number of refiners that are located, small refiners, on the Gulf Coast.
"Mr. Cox. On the Gulf Coast, but by and large I assume from your answer a moment ago that you said
most of them were in the field?
"Mr. Pew. Most of them located in the field."
CONCENTRATION OF ECONOMIC POWER gg
not much difference in the qualities and characteristics of the various
I do not feel that the reply has offered any denial of my summary
and conclusions of the chapter on refining.
I do not wish to argue that the independent refiners are of the
average size and efficiency of the large, mass production refineries of
the majors. An attempt was made to point out the disadvantages
which faced the independent group made up of the few larger efficient
refiners and many plants of only a very small capacity.
At the outset in dealing with my chapter on marketing the reply
states on page 45 "If the majors account for 85 percent of the sales of
gasoline and do not compete with each other, how can the marketing
division be the- most competitive? Or, if the marketing division is
the most competitive, how can there be virtually no price competition
among the majors?" Since the adoption of the Iowa plan in marketing
as was explained on pages 45 and 46 of the monograph, the majors
operate comparatively few stations, less than 5 percent of the total.
In addition to sales to service station operators, the majors do the
bulk of the commercial consumer business, at prices lower than to
jobbers or dealers for resale. The majors sell the greatest part of
their gasoline to service station dealers at rigid tank wagon prices.
The competition in retail marketing is among the 240,000 service
station operators, 85 percent of whom are supplied with petroleum
products by the majors.
The following testimony before the T. N. E. C. shows that price
competition comes from the independent dealer rather than from
stations operated by salaried employees of the majors:
The Chairman. In other words, the story is that there are three classes of
filling-station operators, and the clear tendency is for the independent to sell at
the lowest price because he is the one who is most actively seeking business. He
is the most competitive element in the business. The lessee-operator is less
competitive, and the salaried operator is least of all.
Mr. Swexsrud. Yes; I think that is right; except that this middle category
gets more and more into the other side.
The Chairman. That is the impression I have picked up from my own obser-
vation, and I am interested to have you confirm it, because it seems to indicate
that the major integrated company has a tendency to maintain the price, and that
the price competition comes from the independent dealer.
Mr. Swensrud. Yes; that is correct, I should say * * *. 24
The competition of the majors is limited almost exclusively to ad-
vertising of quality and service and the building of new stations to
increase their gallonage, the cost of which is eventually absorbed by
the consumer. With further reference to the question of "price com-
petition" Mr. Pew stated before the T. N. E. C:
Mr. Cox. Then the competition you offer is not price competition primarily,
but service and quality competition?
Mr. Pew. In connection with the sale of our gasoline through the stations; yes.
Mr. Cox. There have been occasions when you have resorted to price compe-
tition in order to get a position in the market?
Mr. Pew. I don't think we ever did much of that.
Mr. Berge. You don't think you engaged in price competition?
Mr. Pew. I dor't think we ever tried
m Temporary Nationa Economic Committee Hearings, pt. 15, p. 8424.
H Ibid., pt. 14. p. 7243.
90 CONCENTRATION jDF ECONOMIC POWER
The service "station operators are the ones who sell in a competitive
market. "I did not contend that the majors made 85 percent of the
sales of gasoline at retail. There is unlimited support for the conten-
tion that there is virtually no price competition between the majors
in reference to their dealer tank wagon prices. However, the control
of the majors over these operators is another question which will be
The reply argues that the number of majors operating in a given
area is so large that any one of them would be unable to be of value as
a price leader. » The consistent posting of tank wagon prices by a
single major for a given territory makes it convenient for the remaining
majors' to change prices promptly with the leader, which tends to
It is not denied that the price leaders post prices in their particular,
areas but they argue that such price poster is "more of a follower th' .
a leader." If this be true, why does the division of territory exist at
all? Mr. Sidney A. Swensrud, vice president of the Standard Oil Co.
(Ohio), indicated one reason for price posting by his company by the
Mr. SwENSRtrD. If you got all our dealers here and asked them if any one of our
salesmen had "ever made some suggestion to them as to their price policy I don't
frankly know what they would say, but we don't attempt to advise our dealers
what price they should charge and one reason for that is that they know what we
think the price should be, because we post the price at our service stations, and
we don't deviate from it one iota. 26
•The "principal" company.is usually the price leader which posts the
prices, as may be seen from an examination of the tables on pages
46 and 92 of the monograph, giving the names of the price leaders and
their domestic sales of gasoline. Sales figures for Standard Oil Co.
(Kentucky) were not included. Furthermore, an analysis of the
percentages shown in table 23, page 94/ reveals that the sales made by
the principal company in each of the 48 States and the District of
Columbia averages 23 percent of the total. This percentage is
Great reliance is placed in the reply upon the argument as to the
ability of a major price leader to influence prices at which service
station operators sell petroleum products, but there is no satisfactory
explanation why the posting of tank wagon prices by a market leader
is not all the more valuable in areas Where a larger number of majors
♦operate than where only a few operate. The larger the number of
'majors in an area the more convenient it is to have a recognized
The inference that my comments on the basing point system were
founded solely on the practices of the industry many years ago is
inaccurate. It may well be that some of them are not so important
today as formerly. In Mr. Swensrud's discussion of how and why
gasoline price changes take place he refers to the "Gulf cargo market
and Midwest tank car market" as being "basic gasoline prices." 27
As I stated in the monograph, all the independent refiners on the
Atlantic seaboard have been purchased by the majors, and prices are
• M Temporary National Economic Committee Hearings, pt. 15, p. 8422.
27 Ibid., p. 8701. He stated: "When the number of subnormal markets is small, when basic gasoline. prices
(Qulf cargo market and Midwest tank car market) are firm and showing a tendency to rise, when production
.and stocks are in balance, when costs are increasing, conditions are right for a general price advance."
CONCENTRATION OF ECONOMIC POWER 91
now based primarily on quotations given to the trade journals by the
Gulf Coast independent refiners. The answer of Standard Oil Co.
of New Jersey to T. N. E. C. on "basing points used" (question No.
29) shows that its Bayonne, N. J., and Atlantic seaboard refinery
prices are arrived at by considering the Gulf Coast market. This
price policy was stated as follows:
The ordinary basis of determining prices by this company is as follows: First,
the basic figure is established at such refineri i or ocean terminals as Bayonne,
N. J.; Baltimore, Md.; Richmond, Va.; Sewt s "'oint, Va.; Wilmington, N. C.J
and Charleston, S. C. This basic figure is arrived at by taking into consideration
such factors as the Gulf cargo market, transportation, terminating handling
expense and a quality differential. 28
The statement made on page 50 of the reply that gasoline prices
on the Atlantic seaboard "are based upon the conditions of supply
and demand" is not an adequate statement of the real pricing policy.
The reply also claims that "group 3" (Tulsa plus) basis plays no
significant part in the pricing of gasoline, and claim that I "was
referring to an era long past in the petroleum industry." The answers
of the majors made in Mav 1939 to the T. N. E. C. on "basing points
used" show very definitely and clearly that the Tulsa plus basing
point system is used. The following are excerpts from answers to
T. N. E. C. question No. 29, "Basing points used" M which are quoted
to confirm my contention:
Empire Gas & Fuel Co. (p. 8124). — In respect to tank car deliveries: The
primary price basis for deliveries in all States to which tank car shipments are
made is f. o. b. Oklahoma group 3 freight area, (for deliveries within the area
itself f. o. b. a specified point therein, and for deliveries to Colorado f. o. b. Ponca
City therein). * * *
The Ohio Oil Company (p. 8129). — The group 3 price is what is commonly known
as the price posted by the refineries in Oklahoma. These refineries have also
obtained the benefit of an established rail freight rate by the railroad companies
which makes them on an even transportation cost basis when shipping north
beyond the points of Kansas City, Mo. and St. Louis, Mo. or any point on jor
north of the Chicago, Rock Island & Pacific Railroad extending between Kansas
City and St. Louis. This makes it possible for the refineries to ship their products
beyond the normal trade area or territory they serve into other marketing terri-
tories on an equal basis so far as transportation cost is concerned, regardless of
the relative location of the. refineries; that is, a refinery in southwestern Oklahoma
can ship to Kansas City for the same price per gallon as a refinery in northeastern
Oklahoma can ship to Kansas City, a much lesser distance.
Phillips Petroleum Company (p. 8130) — tank car. — Freight rates for most of our
tank car sales are based on the group 3 rate. Other freight rate basing points are
Okmulgee. Okla., Borger, Tex., Wichita, Kans., Judkins, Tex., and group 2.
We have four refineries, as follows:
1. Okmulgee, Okla.: This refinery is located in the group 3 area. Shipments
from this refinery into the Midwest States are based on the group 3 freight rate.
On Bhipmenta within the State of Oklahoma the Okmulgee rate is used.
2. Borger, Tex.: On shipments from this refinery into the Panhandle area of
Texas and the States of New Mexico and Colorado the Borger rate is used. On
shipments from this refinery into the Midwest States the group 3 rate is the base
rate. On shipments into central and western Kansas the Wichita, Kans., rate is
used as the base.
* Temporary National Economic Committee Hearings, pt. 14- A, p. 8135.
"Ibid., pp. 8124-8139.
304955 — 41— No. 39a-
92 CONCENTRATION OF ECONOMIC POWER
Shell Union Oil Corporation (p. 8131.) —
CALCULATIONS FOR TYPICAL DESTINATIONS
In the Mid-Continent area mentioned above, a jobber at Decatur, 111., would
purchase his gasoline at the lower of the two prices determined as follows:
Cents per gallon
(a) Shell's posted normal dealer tank wagon price at Decatur ' 9. 6
Resulting price __ 7. 6
(b) Shell's posted tank car pri' a— Tulsa 4. 875
Add rail freight Tulsa-Decatur, 111 2. 574
Resulting price _ 7. 449
Under the above conditions, the jobber would buy at the 7.449 cent price.
Shelly Oil Co. (p. 81 3&). — 1. Freight rate basing points for tank car deliveries:
(a) Refinery, Tulsa, group 3, for shipments to points in Missouri, Illinois,
Indiana, Wisconsin, Michigan, Minnesota, North Dakota, South Dakota, and
Standard Oil Co. (Indiana) (p. 8133). — Again, and for the purpose of attempting
to place the company's normal prices in line with such competition and to keep
said prices orderly and uniform, the company adopted a method of establishing
a base price at group 3, which was composed of the average published tank car
price plus a spread and which, when added to the freight from group 3, would total
the price previously determined to be necessary in the field. Group 3 was selected
because freightfrom that point represented the one element that was common in
the price of nearly all competitive gasoline, and it was these competitive gasoline
prices that the company was obliged to meet. Subject to one modification, this
is the current method. The modification referred to is this: When the company
first established the group 3 method for its normal tank wagon prices, such normal
prices were permitted to fluctuate with the published spot tank car markets in
group 3. This automatic fluctuation has long since been abandoned, and the
company's current normal price basis in no respect bears any fixed relationship
to the spot tank car market in group 3 or elsewhere.
Standard Oil Co. of Louisiana (subsidiary of Standard Oil Co. (New Jersey))
(pp. 8136 and 8137). — In establishing prices, the Standard Oil Co. of Louisiana
considers the price of competitive gasoline in group 3, Shreveport, Eldorado,
and East Texas and adds to these prices the freight rate from each point to the
destination bulk plant. The lowest laid down competitive cost determines the
basis for posting prices at each bulk plant. In setting the final prices, Standard
Oil Co. of Louisiana adds a quality differential for its gasoline, selling and general
expenses incident to a tank car business, the gasoline taxes paid by it, and rounds
off the figure to the nearest quarter of a cent. Earlier, group 3 was the principal
source of competing gasoline, but Shreveport, Eldorado, and later East Texas
have become the principal sources. A large portion of the gasoline which the
company sells on the Shreveport and Eldorado bases is produced to company
specifications in these centers, not in its Baton Rouge, La., refinery.
Examples of price structure, Standard Oil Co. of Louisiana, build-up of posted Essolene
tank car price as of July 6, 1939
Fort Smith, Ark.:
Group 3 quotation $5. 00
Freight, group 3 to Fort Smith 1. 19
Car service T . 08
Inspection . 05
Allowance for quality miscellaneous costs and profits . 1. 00
Total 7. 32
Posted tank car price at bulk plant 7. 25
* . * * * * * ' *
Incidentally, the group 3 basing point plan grew out of the practice of the
railroadr and not of the oil industry. The railroads some 20 years ago named a
tariff for refined petroleum products originating in Oklahoma and southern Kansas
CONCENTRATION OF ECONOMIC POWER 93
and going to Chicago and other Middle Western points or to the southeastern sea-
board and intermediate points. The current practice is to establish a rate from
Tulsa to various destinations and to grant that rate to all shippers irrespective of
whether the haul from points of origin to destination is longer or shorter than the
haul from Tulsa to that destination.
The Texas Corporation (p. S1SS). — In certain sections of the United States, The
'lVxas Co., in order to meet local competition existing there, has employed con-
tracts whereby reference is made to a published price for spot transactions f. b. b.
The f. o. b. group 3 published spot price is a price established in the spot market
by refiners' sales to jobber and consumer purchasers. In consequence the f. o. b.
group 3 published spot market price is more in the nature of a reference price to
which is added freight from group 3 to point of distribution in order to determine
the laid down price to purchaser- .under contracts containing clauses referring to
the spot group 3 price.
Tide Water Associated Oil Co. (p. S139). — In the Mid-Continent marketing
territory, tank car |>rice> for Oklahoma are f. o. b. refinery point (Drumright) as
posted by Tide Water Associated Oil Co. Outside of Oklahoma, tank car prices
are based f. o. b. group 3.
It is claimed on page 52 of the reply that independents were not
prevented from using tot methyl lead "so long as they complied with
the agreements embodied in the contract." This i& no doubt true.
However, it is significant that one of the basic provisions related to
price maintenance, as was explained in the monograph on page 45.
This question of price control was stipulated by the Ethyl Gasoline
Corporation in the litigated case according to the following paragraph:
21. Defendants have refused to issue licenses to a number of jobbers who, in-
vestigation showed, were not abiding by the marketing policies prevailing or
ostensibly prevailing in the industry or who were not maintaining the retail prices
on gasoline posted generally in the industry or whose retail dealers were not main-
taining said prices. Such marketing policies and posted prices were those adopted
by the major oil companies or the market leaders among such companies, the
major oil companies refining about 85 percent of the gasoline sold in the United
States and distributing the major portion of the gasoline sold throughout the
United States through their own outlets and through jobbers. * * * 30
Some comments are made in the reply on the status of jobbers-
On page 53 it is admitted that margins to jobbers have been decreas-
ing and on page 55 it is claimed, based on Mr. Swensrud's testimony
and opinion, that the number of jobbers "has steadily increased since
1931 and has more than doubled." There is an apparent conflict
between those opinions even if one considers gasoline consumption
increased 28 percent from 1931 to 1938.
It is significant that Mr. Swensrud does not point out the number
of so called "jobbers" who are exclusive distributors of the branded
products of a major company and in addition the number of concerns
owned by the major companies but doing business as independent
units and so listed in the petroleum directories.
Mr. Blazer's statement quoted on page 55 of the reply is
interesting, since it is an argument that independent jobbers can
operate profitably when doing business with independent refiners.
In this connection it is significant that a large proportion of the major
oil companies were convicted of a conspiracy to buy up independent
refiners' gasoline with the result that the independent jobbers' source
of supplies was limited. As to the 80 percent of the jobbers who
handle major branded products 3I it is interesting to call attention to
30 United States v. Elhi/l Gasoline Corpotntion el at. Stipulation in equity No. E. 84-321, District Court for
the Southern District of New York.
3 ' See Temporary National Economic Committee Monograph No. 39, p. 42.
94 CONCENTRATION OF ECONOMIC POWER
the so called Madison margin case in which 19 major companies and
16 of their officials plead nolo contendere and paid fines and costs
totaling $462,500 on antitrust charges that they fixed the maximum
margins of 2 cents per gallon gross profit for their jobbers and adopted
agreed upon uniform jobber contracts. 32
The comments on service station operations begin by quoting
Mr. Swensrud's argument that the retail marketing division is not
overbuilt It would appear from past studies that we could get along
very well on less service stations, and possibly get lower prices. The
tendency in the grocery field is for superstores, and the location of
service stations is not so important as grocery stores. The emphasis
the majors have made on brand names and the policy of having mainly
100 percent stations for advertising such brands has contributed to
the overexpansion and duplication of needless service station outlets.
Mr. E. G. Seubert, president, Standard Oil Co. (Indiana), said in
September 1934 that "* * * in my opinion we have too many dis-
tributing outlets in the industry"; 33 Mr. Frank Phillips, of Phillips
Petroleum Co., said in November 1934, "I think there are too many
filling stations." 34 Hon. Harold L. Ickes, Secretary of the Interior,
also gave some testimony in reference to the overbuilt nature of service
station outlets in the petroleum industry, according to the following
Mr. Mapes. We talk about the tremendous waste existing in the production
of oil, but what about the filling stations? We have three or four at every cross-
roads, it seems. Does not that result in tremendous waste there?
Secretary Ickes. I think, Congressman, when we talk about what private
industry is doing and consider what private industry has done in building and
encouraging the building of unnecessary service stations, we are led to wonder
whether there is so much competency among businessmen as is frequently claimed
to exist. But I do not see what we can do about the service stations at this time.
We know that we are protecting the industry in keeping in existence a great
surplusage of unnecessaiy service stations. But at a time of economic depression
we have got to go along. We cannot deprive men of their investments, nor can
we throw men out of work if we can avoid it.
That is a future problem that will have to have very careful consideration. 36
Mr. Ickes also made a speech before the American Petroleum Institute
on November 14, 1934, in which he made some comments regarding
the excessive number of service-station outlets. A portion of his
speech is quoted as follows:
You have all read, I hope, that delightful little skit 'Tigs is Pigs." If you have
not read it, please do so, and then you will understand my paraphrase, "Filling
stations is filling stations." Surely no one with eyes with which to see, will deny
that there must be some kinship between guinea pigs and filling stations. One
would think that the chief end and aim of the oil industry is to spawn service
stations along the highways and the by-ways of this country. Here is private
initiative with a vengeance, an initiative that is putting such a constantly increas-
ing load upon the industry which, unless it is checked, will in the end break down
the industry. I recommend to the oil industry that it put some curb on the
reproduction of service stations. In your own interest as well as that of the
public, you might well consider the advisability of operating this important
branch of your industry on some other than the guinea pig theory: It might be
well to establish a birth control clinic in an effort to control an output that has
already put a severe strain on our whole economic system.
32 See indictment and docket in Case No. 11364. western district of Wisconsin
33 Petroleum Investigation, Hearings on H. R ; 441, 1934, vol.1, p. 484.
3i Ibid., vol. 3, p. 1621.
38 Ibid., vol. 1, p. 195.
CONCENTRATION OF ECONOMIC POWER 95
Service stations are not being produced in this country merely singly or even
by way of twins or quadruplets. They come in litters. Nor is the competition
confined to mere numbers. Our prudent and conservative businessmen, in
deciding upon the type of filling stations that pockmark the roadside at a rate,
which, if continued, will soon mean that no one on a road in any part of the country
will ever be out' of sight of at least one filling station, have adopted that well-
known American policy of "keeping up with the Joneses." If one man builds a
modest filling station in a pure Colonial type of architecture, the filling station
next door, or across the street, must be Georgian or English country home style.
If "X" builds a miniature Moorish palace, his competitor will not be satisfied
with anything short of something Romanesque. Gasoline may be bought for a
song at dwarf Greek temples or abortive Gothic cathedrals. Why go to France to
visit the famous chateaux country when one may visit that classical and soul-
Uplifting American institution, the "greasing palace"; or to Washington to stand in
patriotic admiration contemplating the Washington monument or the National
Capitol when perhaps right at home he may have a "lubrication emporium" to
satisfy his aesthetic needs? At the rate filling stations are being built it might be
well to adopt the necropolis type of architecture in anticipation of the day, shortly
to come, when groups of filling stations will be in very truth cities of the dead.
While your architects are working on adaptations of Westminster Abbey or the
Acropolis in order to cater to the discriminating and exacting tastes of aesthetic
automobile owners who insist upon buying their gasoline only at those stations
where, with each purchase of a gallon, they can get a spiritual uplift, you are
reaching out in other directions and contriving by other means to extend your
gallonage at the expense of your rivals. 36
According to the Bureau of the Census there were 170,000 service
stations in 1933 compared to 241,000 in 1939, an increase of 41 percent.
There is no indication that the overbuilt nature of service stations is
becoming less, even with due consideration* to increased consumption
The latter part of the comments contained in the reply on control
over service station outlets is a denial that such control exists. It is
argued that a one-half cent price differential between exclusive and
nonexclusive dealers is justified by differences in delivery costs.
This is an- arbitrary assumption since many split stations purchase
more gasoline of One brand during the year than many exclusive
stations. It would appear that, if costs of delivery are the real
considerations, tank wagon price differentials should be based on
quantities delivered, which would be more equitable. Credit cards
are used as an inducement for service station dealers to become and
remain "exclusive." The service station contracts submitted to the
T. N. E. C. by the majors show that the short term cancelation
provision is quite characteristic. Usually the minimum quantity
provision in the contract precludes the possibility of the operator
selling competitive products. Perhaps the best way to realize that
competitive products are not usually sold at major leased service
stations is to inquire at these stations for competitive motor oil.
The answer is invariably that the lease would not permit it.
One of the most recent studies of control o.ver service station opera-
tion is that made" under the direction of Mr. Arthur W. Ramsdell
"Report on Marketing Practices in the Retail- Distribution of Motor
Fuel and Motor Lubricant Products" and printed as part 15-A of the
T. N. E. C. Hearings. Mr. Ramsdell concluded:
That urgent action is essential to arrest the practices of the major group is
emphasized by the analysis of our findings presented in the statistical section,
•• Address by Hon. Harold -L. Ickes, Administrator of the Petroleum Industry and Secretary of the In-
terior, befbre the American Petroleum Institute, Dallas, Tex., November 14, 1934, pp. 23-25.
96 CONCENTRATION OF ECONOMIC POWER
for during the years 1936 to date the findings indicate that the major oil com-
pany group have intensified their drive to obtain 100 percent or other type of
exclusive dealing, control, of the retail outlets.
The statistical data indicates that practically 85 percent of the retail outlets
are controlled by the major group and that the practices of more recent date
are to concentrate upon enforcing control for exclusive sale of all major oil comr
The investigation indicates that coercive tactics are now rigidly applied to
force dealers to go "exclusive" for major oil company products. Letters of the
type reproduced in the following pages deliver a most threatening ultimatum.
With the power to follow through in the hands of the major group, a more re-
stricted market is in the offing. 37
The above mentioned report gives substantial support to the con-
tention that service station operators are controlled by the majors.
The extent to which service station operators want to be controlled
in their marketing policies is not known.
37 Temporary National Economic Committee Hearings, pt. 15-A, p. 8735.
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