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Full text of "Investigation of concentration of economic power. Hearings before the Temporary National Economic Committee, Congress of the United States, Seventy-fifth Congress, third Session [-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 of goods and services .."

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INVESTIGATION OF CONCENTRATION 
OF ECONOMIC POWER 



HEARINGS 

BEFORE THE 

TEMPOKARY NATIONAL ECONOMIC COMMITTEE 
CONGRESS OF THE UNITED STATES 

SEVENTY-SIXTH CONGRESS 

SECOND SESSION 
PURSUANT TO 

Public Resolution No. 113 

(Seventy-fifth Congress) 

AUTHORIZING AND DIRECTING A SELECT COMMITTEE TO 
MAKE A FULL AND COMPLETE STUDY AND INVESTIGA- 
TION WITH RESPECT TO THE CONCENTRATION OF 
ECONOMIC POWER IN, AND FINANCIAL CONTROL 
OVER, PRODUCTION AND DISTRIBUTION 
OF GOODS AND SERVICES 



PART 14 



PETROLEUM INDUSTRY 

SECTION I 



SEPTEMBER 25, 26, 27, 28, 29, AND 30, 1939 



Printed for the use of the Temporary National Economic Committee 




UNITED STATES 

OOVERNMENT PRINTING OFFICE 

WASHINGTON : 1940 



!nR:TBEASTERN UNIVERSITY SCHOOL of LAW LIBRARY 



TEMPORARY NATIONAL ECONOMIC COMMITTEE 

(Created pursuant to Public Res. 113, 75th Cong.) 

JOSEPH C. O'MAnONEY, Senator from Wyoming, Chairman , 

H.\TTON -W. SUMNERS, Representative from Texas, Vice Chairman 

WILLIAM H. KING, Senator from Utah 

WILLIAM E. BORAH, Senator from Idaho 

CLYDE WILLIAMS, Representative from Missouri 

B. CARROLL REECE, Representative from Tennessee 

THURMAN W. ARNOLD, Assistant Attorney General 

♦WENDELL BERGE, Special Assistant to the Attorney General 

Representing the Department of Justice 

JEROME N. FRANK, Chairman " ^C"! 

*LEON HENDERSON, Commissioner <fn 

Representing the Securities and Exchange Commission ^-^ 

GARLAND S. FERGUSON, Commissioner 

*BWIN L. DAVIS, Commissioner 

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 

Representing the Department of the Treasury 

JAMES R. BRACKET!, Executive Secretary 

•Alternates. 

II 



REPRINTED 
BY 

WILLIAM S HEIN «► CO INC. 

BUFFALO. N. Y 
1968 






CONTENTS 



Hearings on the Petroleum Industry are contained in 4 volumes, 
Parts 14, 15, 16, and 17. A comprehensive table of contents for each 
volume follows.^ 



PART 14 

Page 
Testimony of — 

Brown, Russell, general counsel, Independent Petroleum Association 

of America, Wa,shington, D. C 7306-7331 

Crowley, Karl A., Fort Worth, Tex. 7361-7387 

DaQey, John B., Houston, Tex..! ... ...- 7291-7305 

DeGolyer, E., Dallas, Tex_..__. -... 7389-7423 

Gill, John D., director, department of economies, Atlantic Ref\ning 

. Co., Philadelphia, Pa 7143-7162 

Ise, Prof. John, University of Kansas, Lawrence, Kans . 7100-7112 

Pew, Howard J., president, Suii Oil Co., Philadelphia, Pa 7163-7265 

Pogue, Dr. Joseph E., vice president. Chase National Bank, New 

York City 7112-7142 

Travis, Marion M., Southport Petroleum Co., Houston, Tex 7265-7291 

Walsh, Louis J., vice president. Eastern States Petroleum Co., New 

York City . 7333-7361 

Statement of — 

O'Mahoney, Senatpr Joseph C_- _-_ 7097-7099 

Economic importance of the study '.. 7098 

Importance and economic significance of petroleum industry -- 7100 

Peculiarities of the oil industry •-.. ^-- 7101 

Percentage of ownership or control by major con^anies in various branches 

of the petroleum industry ^ , . 7103 

Proration ...^ ,__, _. 7113 

Motives underlying proration ^ ^ 7116 

Necessity of utilizing natural forces in recovery ofoil__ 7117 

The, optimum rate of production 7118 

Necessity for proper subdivision of the optimum rate in an oil pool 7121 

Wide-open versus restricted production 7126 

Administration of proration.: ■ — 7127 

Effect of proration on price__,_^_ 7128, 7136 

Need for best obtainable engineering standards in proration. 7132 

Necessity of proration for conservation of unknown oil reserves ,; 7134 

State compact plan of proration ^^_- - — 7135 

Domestic consumption of petroleum products for preceding 12 years. . — 7143 
Decline in price of petroleum products compared with general price decline 

of commodities - — 7144 

Production of petroleum products. :. w..^ . 7148 

Petroleum industry's welfare closely allied with gfeneral economy 7149 

investment and income of 24 oil companies ^-- ^-- .--- 7152 

Petroleum industry inpome and the national income 7167 

Views of the American Petroleum Institute..; ._ -. .- 7164 

Services of the industry. _^ .....__ ,... 7165 

Integration held to be weapon against monbpoly :--. — 7168 

^ Certain exhibits, too voluminous to be published with the volumes in which they were 
introduced, are printed Separately as Parts 14-A, 15-A, and 17-A. 

m 



IV CONTENTS 

Pagre 

The industry's transportation systems 7175 

Integration ^ 7180 

The search for technological improvements . 7189 

Oil industry support of conservation, 7191 

Keenness of competition in retail marketing _. 7192 

Savings through mass production 7194 

Denial of monopolistic practices in the oil industry ■. 7195 

The Sun Oil Co 1- 7196 

Opportunities for independent contended in spite of competitive advan- 
tages held by larger integrated companies 7197 

Pipe lines ." _- 7201 

Possible economic consequences of proration 7204 

Contractual relationship between integrated companies and retail mar- 
keters 7207 

Cracking process patents i 7217 

Methods of distribution 72 19 

The Sun Oil Co. agency agreement 7221 

Sun Oil Co.'s acquistion and production of crude oil 7223 

Efforts of nonintegrated independent to compete with large integrated 

company . _- 7228 

Economic problems to be solved 7232 

Pipe line transportation, rates of return and the economic results 7233 

Gasoline prices ---_ 7241 

Transportation policies of integrated companies _- 7249 

Similarity in finished gasoline 7257 

Major integrated company's competitive advantage through transporta- 
tion - ^ 7261 

Shipping practices in the industry --- . 7263 

Major cohapany domination of the industry T 7266 

Losses sustained by independent company in competition with majors 7273 

Posted prices and competitive price reduction 7279 

Diesel and heating oils purchases and sales 7285 

Excessive marketing costs in distribution of gasoline and oil 7288 

Problems of an individual in obtaining drilling permit in Texas oil field 7292 

Problems and suggestions of smaller,' nonintegrated producers 7306 

Proposal for industry agreements now outlawed under present interpreta- 
tion of antitrust laws 7310 

Difference between viewpoints of large, integrated companies and smaller 
independents as to amount of government intervention necessary in 

business 1. 7317 

Interpretation of existing antitrust laws . 7321 

Sponsorship of the Connally Hot Oil Act 1 7325 

Formation,^nd history of Eastern States Petroleum Co_. ._ 7334 

Pipe line profits and rates of return 7337. 

Conservation differentiated from proration 7343 

Lower Mexican crude prices and transportation costs 7347 

Objections to existing method of proration and recommendation for con- 
servation on purely engineering basis 7352 

Monopolistic practices tending to "squeeze" out smaller independents 7362 

Oil production . _ ^ 7390 

Oil reserves . 7392 

Prospecting and conservation paramount problems in production 7394 

Opportunities for the independent producer diminishing for lack of capital- _ 7402 

Oil reserves and the effect of conservation ^ 7404 

Cost of production 7410 

Consequences. of proration regulations _-_ .7414 

Price posting and question of price leadership - 7417 

Schedule and summary of exhibits _. ix 

Monday, September 25r 1939 . ._---. 7097 

Tuesday, Septen^ber 26, 1939 7163. 

Wednesday, September 27, 1939.. _^ :_.__ , 7217 

Thursday, September 28, 1939 7279 

Friday, September 29, 1939 1 7333 

Saturday, September 30, 1939 _•__ 7389 

Appendix 7425 

Supplemental data 7676 

Index , : , I 



CONTENTS V 

PART 15 1 

Testimony of — 

Dow, Fayette B., attorney, Washington, D. C. 

Grisell, T. O., general sales manager, Kendall Rfefining Co., Bradford, Pa. 

Knox, Robert C, attorney. El Dorado, Ark. 

Orvis, Eugene L., attorney, Jersey City, N. Y." 

RamsdeU, Arthur W., New York City. 

Reitz, W. R., secretary, Quaker State Oil Refining Co., Oil City, Pa. 

ShatfOrd, John E., El Dorado, Ark 

Suhr, Charles L., chairman of the board, The Pennzoil Co., Oil City, Pa. 

Swensrud, Sidney A., vice president. The Standard Oil Co. of Ohio, Cleve- 
land, Ohio. 

Thompson, Hon. Ernest O., member, Texas Railroad Commission, Austin, 
Tex. 

Wilson, Robert E., president, Pan American Petroleum & Transport Co., 
New York City. 

Forces "squeezing out" the independent operator. 

Use of pipe lines denied the independent. 

Eflfect of pipe line profits on competition. 

Transportation rates. 

Economic consequences of crude oil supply. 

Suggestions for improvement of economic conditions in the industry. 

Administration of proration in Texas. 

Types of oil and gas leases. 

Pipe line rates and earnings. 

decentralization of industry. 

Rapid progress of trucking as a means of petroleum transportation. 

Pipe line transportation. 

Effect of pipe-line transportation on competition in the industry. 

Transportation rate regulation. 

Efforts to bring about discontinuance of truck transportation. 

Accomplishments of the industry. 

Lack of concentration of control contended. 

Use of patents in the industry. 

Advantages and disadvantages of integration. 

Reasons for diflSculty of "small" refiners to compete with integrated companies. 

Description of processes of modern refinery. 

Growth in production of refined products since 1918. 

Percentage of various products obtained from a barrel of crude. 

Cost of operating modern refinery. 

Crude pipe and refining costs. 

Cost of producing gasoline. 

Narrowing margin of profit in refined products. 

Reserves of crude oil and percentage held by 20 largest dealers. 

Shifting position of. 16 largest companies in the industry. 

Existence of competition in retail marketing. 

Marketing operations in the industry. 

Reduction in gasoline price from 1920 to date. 

Characteristics of gasoline marketing. 

Transportation element in marketing. 

GasoUne jobbers or wholesalers. 

Grades and specifications of gasoline. 

Jobbers' profit margin. 

Filling stations and retail pricing. 

The Pennsylvania oil industry. 

Present market control. 

Lease and sublease. 

Credit cards. 

Company-owned stations. 

"A free and open market wanted." 

Major-company concentration of control of retail market. 

Difficulties of the independent refiner in retaining market for products. 

Inducements offered to retailers for becoming exclusive dealeVs. 

Jobber contracts. 



^ For page references see table of contents in Part 15. 
' Mr. Orvis' subsequent testimony appears in Part 16. 



VI CONTENTS 

Acquisition of jobbing businesses by major company. 
Margin of profit to jobbers. 

Leasing and subleasing service stations to dealers. 
Publication of tank-car and service-station prices. 
Loaning of equipment to dealers and its effect. 
Gasoline prices. 

Mondav, October 2, 1939. 
Tuesday, October 3, 1939. 
Wednesday, October 4, 1939. 
Thursday, October 5, 1939. 
Fridav, October 6, 1939. 
Saturday, October 7, 1939. 

PART 16 1 

TestimonJ^ of — 

Anderson, H. H., vuce president. Shell Oil Co., St. Louis, Mo. 

Craft, Arnold W., manager. Craft Oil Co., Avoca, Pa. 

Crouthamel, Henry A., executive secretary, Maryland Association of Pe- 
troleum Retailers, Inc., Baltimore, Md. 

Culver, Irving B., sales manager, National Oil & Supply Co., Newark, N. J. 

Badlick, Paul E., secretary, National Oil Marketers Association, Washing- 
ton, D. C. 

Hall, Edwin S., senior counsel, Standard Oil Co. of New Jersey, New York 
City. 

Hartley, L. A., secretary. Petroleum Retailers Association, Kansas City, Mo. 

Hewett, A. W., president, Petroleum Retailers Association, Kansas City, Mo. 

Horton, James A., chief examiner, Federal Trade Commission. 

Ingram, George B., president, New Deal Oil Co., Canton, Ohio. 

Klein, Harry T., general counsel, The Texas Co., New York City. 

Orvis, Eugene L., attorney, Jersey City, N. J. 

Ruark, B. W., general manager. Motor and Equipment Wholesalers Asso- 
ciation, Chicago, 111. 

Scott, Lester S., manager, Loughborough Oil Co., Washington, D. C. 

Independent marketers. 

Costs of marketing and the difficulties of independent marketers. 

Divorcement of marketing recommended for integrated companies. 

Transportation rates. 

Divorcement of marketing endorsed by other associations of independents. 

Effect of proration on the independent. 

Inducements offered jobber to become exclusive dealer. 

Jobber net margin on gasoline. 

Basing-point system in the petroleum industry. 

Question of establishment of uniform gasoline price for whole United States, 

Integrated company versus the independent. 

Eflforts of integrated companies to discourage competition from independent 
.brands of Pennsylvania oil. 

Divorcement of marketing recommended. 

Difficulties of an independent in marketing products. 

Absorption of retail outlets by major oil companies disclosed by marketing survey. 

Use of service-station equipment as a device for obtaining exclusive control of 
marketing outlet. 

Recommendation offered to aid th'^i independent. 

Refusal of certain major companies to sell gas and oils to "split" dealer in Balti- 
more market. 

Discrimination, through price difi'erentia], between exclusive and "split" dealer 
and its effect on price to the consumer. 

Jobber contracts, margins, and posted prices. 

Contribution by the industry in employment and purchasing power. 

Interest and objectives of Petroleum Retailers Association. 

Incomes received by filling-station operators in Kansas City area. 

Handling of gasoline as "loss-leader" item by. retailer. 

The "blockade" method and other practices. 

Four types of retail outlets. 

Effect of major company domination of the industry upon the consumer. 

Tank-wagon price. 

' For page references see table of contents in Part 16. 



CONTENTS VII 

Suggestions to the committee. 

Transportation practices. 

Proposed transportation agreement. 

Question as to the legality of the proposed agreement. 

Federal Trade Commission report on marketing practices in the industry. 

Preferential discounts allowed commercial buyers. 

Price differences based on volume or trade classifications. 

Secret rebates. 

I<easing of service stations at alleged low and inadequate rentals. 

Granting of courtesy- or credit-card service to 100 percent stations or ac- 
counts only. 

Use of tying and exclusive dealing contracts. 

Retail price fixing in gasoline. 

Advertising. 

Contracts with motor accessories manufacturers. 

Pump and tank equipment as leased, sold, or loaned by marketers. 

Exchange or intersale of gasoline by major marketers. 

Conclusions of the Federal Trade Commission. 
Competitive marketing practices. 

Monday, October 9, 1939. 
Tuesday, October 10, 1939. 
Wednesday, October 11, 1939, 
Thursday, October 12, 1939. 
Fridav, October 13, 1939. 
Monday, October 16, 1939. 

PART 17' 

Testimony of — 

CatteU, Roscoe E., chief engineer, Petroleum and Natural Gas Division of 
the Technologic Branch, United States Bureau of Mines. 

Del Sesto, Christopher, special assistant to the Attorney General, Depart- 
ment of Justice. 

Farish, William S., president. Standard Oil Co. (New Jersey), New York City. 

Ferguson, W. H., vice president, Continental Oil Co., Denver, Colo. 

La Fleische, Pierre, Casp^r, Wyo. 

Loos, Mrs. Mary C, oflfice manager. National Association of Petroleum 
Retailers, Milwaukee, Wis. 

McLaughlin, Glenn E., assistant professor of economics. Hunter College, 
New York City. 

Schuh, Wilbur R., chairman, board of directors. National Association of 
Petroleum Retailers, Milwaukee, Wis. 

Soyster, Hale B., Chief of the Oil and Gas Leasing Division of the Conserva- 
tion Branch, United States Geological Survey. 

Stabler, Herman, Chief of the Conservation Branch, United States Geological 
Survey. 

Watkins, Ralph J., economic adviser, National Resources Planning Board, 
Washington, D. C. 

White, Alfred G., chief economist. Petroleum Economics Division, Bureau of 
Mines, Washington, D. C. 

Conditions peculiar to the industry in the Rocky. Mountain States. 

Importance of Wyoming as an oil-producing and refining State. 

Transportation methods used in exportation of petroleum products from Wyoming, 

Refining and marketing in Wyoming. 

Question of competition or price leadership in marketing in Rocky Mountain area. 

Wyoming gasoline prices. 

The petroleum industry in Wyoming. 

Production. 

Transportation. 

Refining. 

Marketing of Wyoming petroleum products. 
Aims and activities of the National Association or Petroleum Retailers. 
Income of the association. 
Conservation of oil and gas pools. 
Engineering aspects of conservation. 
Conservation of reservoir energy. 

' For page references see (able of contents in Part 17, 



VIII CONTENTS 

Fluid-energy relations. 

Unit operation. . 

Economic aspects of conservation and waste in oil production. 

Naval oil reserves. 

Passing of general leasing law. 

Operating regulations under the general leasing law. 

Conclusions. 

Bureau of Mines' estimates of national demand and methods used in calculation. 

Investment and earnings of the industry. 

Objectives and contributions of the industry. 

Preservation of free and open competition advocated. 

Costs, profits, ultimate prices. 

Benefits to the public claimed by the industry. 

Question of concentration of control. 

Ability and integrity of corporate management. 

Possible effects of integration. 

Opportunities for the independent in producing. 

Oil reserves. 

Opportunities for the independent in refining. 

Cost of building refinery. 

Transportation. 

Complaints of the retailer. 

Filling station leases. 

Profits and losses in marketing by Standard Oil Co. 

Pipe lines. 

Opportunities for the independent in marketing. 

Retailing. 

The Iowa Plan. 

Patented processes for refining. 

Retailing. 

Integration. 

Crude oil, posted prices, conservation. 

Question of Government intervention and regulation of conservation. 

Optimum production. 

The future supply of oil. 

Relation of optimum production to price. 

Meeting the indi'.stry s problems. 

Tuesday, October 17, 1939. 
Wednesday, October 18, 1939. 
Thursday, October 19, 1939. 
Friday, October 20, 1939. 
Monday, October 23, 1939. 
Tuesday, October 24, 1939. 
Wednesday, October 25, 1939. 



SCHEDULE OF EXHIBITS 



Number and summary of exhibits 



Intro- 
duced 
at page 



Appears 
on page 



1136. 



1320. 



List of companies to which the T. N. E. C. questionnaire 
for oil companies was sent ^ 

List of companies which answered the T. N. E. C. question- 
naire for oil companies 

1137. TheT. N. E. C. questionnaire for oil companies 

1138. Economic outline and data relating to tha^ petroleum in- 

dustry, prepared by the T. N. E. C. staff from oil com- 
panies' answers to the Committee questionnaire and from 
various other reliable sources as indicated throughout the 
exhibit 

1139. Charts and tables in support of "Exhibit No. 1138" 

1140. Prepared manuscript of Joseph E. Pogue, vice president, 
Chase National Bank, New York City: "Economics of 
Conservation and Proration in the Petroleum Industry". 
Copy of a chapter, written by Joseph E. Pogue, vice 

president, Chase National Bank, New York City, in- 
cluded in the book, "The Elements of the Petroleum 

Industry : 

Chart: Domestic consumption petroleum products, volume 

and values, 1938 related to 1929 

Chart: Domestic consumption petroleum products, 1938 

related to 1926 

Chart: Domestic consumption petroleum products, 1937 

related to 1929 

Chart: Domestic consumption petroleum products, 1937 

related to 1926__-. 

Chart: Volume and value of domestic consumption, 1927 
to 1938, difference resulting from price declines 

1146. Chart: Comparison of price indexes, v 1929-1938 

1147. Chart: Comparison of price indexes, 1926-1938 

1148. Chart: Comparison of price indexes, 1923-1938 

1149. Chart: United States crude oil production, 1923-1938 

1150. Chart: United States consumption of petroleum products, 

1923-1938 

1151. Chart: United States production of motor fuel, 1923-1938. 

1152. Chart: United States consumption of motor fuel, 1923-1938 

Chart: Manufacturing and refinery activity, 1923-1939 

Chart; Indexes of oil industry net investment and United 

States crude run to stills, 1923-1938.. 

List of companies comprising the 24 oil company group, as 
at September 21, 1939 . . . 

CJiart: Net investment, 24 oil companies and 400 indus- 
trials, 1927-1939 

Chart: Indexes of investment and performance, 24 oil 
companies and 400 industrials, 1927-1938. 

Chart: Indexes of investment and performance, 24 oil 
companies and 400 industrials, 1927-1938 

Chart: Profits, rate of return on net worth; comparison 
of all manufacturing, all industry and the oil industry, 

1923-1938 . . . 

1160. Chart: Profits and rate of return on net worth, comparison 
of 24 oil companies and 400 industrials, 1927-1938 



1140-A. 



1141. 



1142. 



1143. 
1144. 



1145. 



1153 
1154. 

1155. 

1156. 

1157. 

1158. 

1159. 



7099 

(0 

7099 



7108 
7108 



7113 

7113 

7144 

7144 

7144 

7144 

7144 
7144 
7144 
7144 
7144 

7144 
7144 
7144 
7144 

7144 

7144 

7144 

7144 

7144 

7144 
7144 



7425 

7426 
7426 






7435 

7457 

7492 

7492 

7493 

7493 

7494 
7494 
7495 
7495 
7496 

7496 
7497 
7497 
7498 

7499 

7500 

7501 

7502 

7503 

7504 
7505 



> Introduced in Hearings, Part 17. Printed in this volume in connection with "Exhibits Nos. 1136 and 
1137." ■ 

2 Printed, with "Exhibit No. 1139," as Hearings, Part 14-A. 
' Printed, with "Exhibit No. 1138," as Hearings, Part 14-A. 

IX 



SCHEDULE OP EXHIBITS 



Number and summary of ezcbibits 



1161. Chart: Net profits, comparison of 24 oil companies and 400 

industrials, 1923-1938 

1162. Chart: Indexes of profit per unit of output, comparison 

of 400 industrials and 24 oil companies, 1927-1938 

1163. Chart: Oil industry income, comparison of 1923 and 1937- . 

1164. Chart: OU industry service; crude runs to stiUs and pro- 

duction of gasoline, comparison of 1923 and 1937, 

1165. Chart: Oil industry income, comparison of 1923 and-1937- 

1166. Chart: Comparison by percentage of oil industry income to 

the national income, 1923 and 1937 

1167. Tabulation: Determination of data included in national 

income, 1923 and 1937 -. 

1168. Chart: Comparison by percentage of manufactures income 

to the national income, 1923 and 1937 

1169. Chart: Achievements of oil industry and of manufactures, 

1923 and 1937 

1170. Chart: Additional oil-industry income justified by compara- 

tive performance assuming that the industry's income 
grew relative to performance at the same rate as manu- 
facturing income relative to performance, as at 1937 

1171. Appears in Hearings, Part 5, appendix, p. 2304_ 

1172. Appears in Hearings, Part 6, appendix, p. 2748 -- 

1173. Service station data, Sun Oil Co., as requested by Dr. Isador 

Lubin - 

1174. Chart: Percentage of ownership or control by major oil 

companies in various branches of the petroleum industry _ 

1175. Letter, dated October 20, 1938, from Mar'^n M. Travis, the 

Southport Petroleum Co., to Axtel J. Byles, president, 
American Petroleum Institute, suggesting and recom- 
mending changes in the operations of the petroleum 
industry 

1176. Copy of the address made by Marion M. Travis, November 

1938, to the directors of the American Petroleum Insti- 
tute , . 

1177. Chart: Gasoline price structure of petroleum from crude 

oil to autoists' tank : 

1178. Prepared manuscript of John B. Dailey, Houston, Texas. . 

1179. Prepared manuscript of Harold B. Fell on behalf of Inde- 

^ndent Petroleum Association of America, submitted by 
RusseU Brown, general counsel of the Association 

Report of the special study committee of 36 of the Inde- 
pendent Petroleum Association of America, adopted at 
the called meeting of the Association at Dallas, Texas 
on June 6, 1939 1 

Prepared manuscript of Richard B. Kahle, president, and 
Louis J. Walsh, vice president, Eastern States Petroleum 
Co - 

Prepared manuscript of Karl A. Crowley, Esq., Fort Worth, 
Texas 

Prepared manuscript of E. De Golyer, Dallas, Texas 

SUPPLEMENTAL DATA 



1180. 

1181. 

1182. 
1183. 

1226. 



Data submitted by John D. Gill, Atlantic Refining Co., in 
response to questions propounded to him by members of 

the Committee, in amplification of Mr. Gill's charts 

Unnumbered. Letter dated November 22, 1939, from J. Howard 
Pew, president. Sun Oil Co., to the Committee, setting forth in 
response to questions by members of the Committee, instances 
of the Sun Oil Co.'s initiative in changing the price of crude oil 
in the various fields in which it makes purchases 



Intro- 
duced 
at page 



7144 



7144 
7144 


7507 
7508 


7144 
7144 


7508 
7509 


7144 


7509 


7144. 


7510 


7144 


7511 


7144 


7511 


7144 
7162 
7245 


7512 


7245 
7245 


7512 

Facing 

7512 



7288 



7288 

7290 
7292 



7306 



7329 



7333 

7362 
7390 



(') 



Appears 
on page 



7506 



7512 



7515 

7520 
7520 



7552 



7563 



7573 

7591 
7662 



7676 



769^ 



Introduced for the record on October 10, 1939. See Hearings. Part 16. 



INVESTIGATION OF CONCENTKATION OF ECONOMIC POWER 



MONDAY, SEPTEMBER 25, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. C. 
The committee met at 10 :40 a. m. pursuant to the call of the chair- 
man, in the Caucus Room, Senate Office Building, Senator Joseph C. 
O'Mahoney presiding. 

Present: Senator O'Mahoney (chairman); Representative Wil- 
liams; Messrs. Arnold, O'Connell, Henderson, and Brackett. 

Present also: Willis Ballinger,' representing Federal Trade Com- 
mission; Clarence Avildsen and Robert McConnell, representing De- 
partment of Commerce; Hugh B. Cox, special assistant to the At- 
torney General, Department of Justice ; W. B. Watson Snyder, special 
assistant to the Attorney Greneral ; Christopher Del Sesto, special as- 
sistant to the Attorney General; F, E. Berquist, special assistant to 
the Attorney General ; Roy C. Cook, and Leo Finn,. Department of 
Justice. 

STATEMENT BY SENATOR O'MAHONEY 

The Chairman. The committee will please come to order. Here- 
tofore the public hearings which have been held by this committee 
have been conducted by one or another of the Government agencies 
represented on the committee. In each instance the material pre- 
sented has been gathered by representatives of the committee, either 
by active research in the field or by study of material already in the 
possession of Government bureaus or departments. Today we open 
a new type of hearing. 

The facts and opinions now presented have been selected not by 
the committee or any of the agencies represented on the committee, 
but by spokesmen of the oil industry who have graciously accepted 
our invitation to businessmen to present the story of the Nation's 
economic problem from the point of view of business and industry it- 
self. As the chairman announced last April, Mr. Axtell B. Byles, 
President of the American Petroleum Institute, which is the largest 
trade association in the petroleum industry, was good enough tc 
undertake on behalf of that organization to procure the cooperation 
of various experts and executives in setting forth the story of petro- 
leum as these men see it. 

As indicated at the time, these persons were given the opportunity 
to present prepared statements to the committee. The statements 
were then examined by members of our staff and a list of questions 
suggested by the statements was then in turn submitted by the com- 

7097 



7098 CONCENTRATION OF ECONOMIC POWER 

mittee to the prospective witnesses. All of this was for the purpose of 
enabling both the members of the committee/and the representatives 
of industry to discuss the problems in a fully informed manner. It 
was also announced that the committee would not confine itself to 
members of the American Petroleum Institute, but would in turn call 
on other witnesses in order to make certain that an adequate presenta- 
tion is made of all available information with respect to the manner 
in which the oil industry is conducted. 

ECONOMIC IMPORTANCE OF THE STUDY 

The Chairman. The committee also submitted questionnaires to cor- 
porations engaged in this industry in an effort to elicit pertinent 
information that would be helpful in pursuing the inquiry. To those 
who have so fully cooperated with the committee in furnishing the 
information thus sought, a contribution which the committee recog- 
nizes was not without its difficulties, and for the labors involved in 
the presentation of the statements which have been filed, I desire to 
express the gratitude of the committee. We feel that this labor will 
not have been in vain and that the result of these hearings will be 
beneficial to the people of the United States. It is appropriate to 
observe here that the problem of economic adjustment which this com- 
mittee is studying is one that demands the best efforts of all, wherever 
they may be placed, in government or in business. It cannot be too 
often repeated that unemployment — unemployment of capital as well 
as unemployment of men — is the central question mark that rises 
before us all. 

We cannot have completely satisfactory markets for the products 
of industry unless we find ways to guarantee the free and full invest- 
inent of capital and the free and full employment of labor. This is 
the task which was assigned to this committee. To what extent we 
shall be helpful in performing it remains to be seen, but the circum- 
stances in which we now find ourselves prompt me to say here that 
the importance of the task is only emphasized ; it is not minimized by 
the international situation. 

The European war itself is one result of the failure to find economic 
security in the Old World, and it must be clear that the outbreak of 
the conflict there only maRes more necessary our own determination 
to learn the facts which lie at the root of the economic problem. It 
will be recalled that the legislation which called this committee into 
existence laid upon it the duty not only to study the concentration of 
economic power in the production and distribution of goods and serv- 
ices generally, but to study particularly the effect of the existing price 
system, and the price policies of industry upon the general level of 
trade, upon employment, upon long-term profits, and upon consump- 
tion ; and also the effect of government policies upon competition, 
price levels, unemployment, profits, and consumption. This instruc- 
tion was in accordance with the recommendation made by the Presi- 
dent in his message to Congress of April 29, 1938. 

The task of the Committee with respect to prices becomes more 
important if that were possible, as a result of the conflict in Europe. 
Already fears of profiteering have been expressed. That artificial 
and unjust increases of prices make more difficult the task of eco- 
nomic readjustment is of course apparent to all. Profiteering in time 



CONCENTRATION OF ECONOMIC POWER 7099 

of war accentuates the evil effect of price exploitation in time of 
peace, and those who give way to the temptation to seize a quick 
profit at the expense of the consumption by raising prices when 
costs have not increased, make the problem of unemployment, both 
capital and labor, worse than it need be. It is also obvious that 
the Government departments and commissions represented on this 
Committee are in daily and intimate contact with the factors and 
activties that bear upon price levels. Necessarily, this Committee 
will be interested in any manifestations of this kind. While these 
remarks have no immediate bearing upon the hearings about to 
begin, it seemed to me to be worth while to point out that this com- 
mittee, which is charged with the responsibility of making recom- 
mendations to the President and to Congress, is necessarily in a 
position of advantage to watch changes in prices and to study their 
causes. 

The hearings which begin today are particularly timely. In a 
fully functioning economy it is probable that no industry has a 
more important place than the oil industry. Petroleum and its 
byproducts are utilized by every citizen in his home, in his work, 
and in his travels, whether by land, water, or air. In national crises 
the products of the oil industry are absolutely essential and war 
makes a special demand for petroleum. 

The Temporary Kational Economic Committee is fortunate, 
therefore, in having the expert and unstinted cooperation of so many 
executives in industry who have come here to give the Committee and 
the Nation the benefit of their first-hand information and knowledge. 
I desire at this point to place in the record a list of the corporations 
to whom the questionnaire to which I have just alluded was sent. 

(The list referred to was marked "Exhibit No. 1136" and is in- 
clded in the appendix on p. 7425.)^ 

And also a copy of the questionnaire. 

(The questionnaire referred to was marked "Exhibit No. 1137" 
and is included in the appendix on p. 7426.)^ 

The first witness this morning will be Prof. J. B. Ise of the Uni- 
versity of Kansas at Lawrence, Kans., and Mr. Ise has qualified 
as a student of the oil industry over many years, and has been the 
author of several books on petroleum. The Committee, therefore, 
will take the liberty of asking him to introduce the subject. 

It should be emphasized that this presentation is wholly a presen- 
tation of the committee, and while the Committee has requested Mr. 
Cox, of the Department of Justice, and Mr. Snyder and their assist- 
ants to assist in conducting some of the questioning, the Department 
of Justice, as- such, has no immediate responsibility for the study, 
for its presentation, or indeed for the manner in which it was 
undertaken. 

Dr. Ise, are you ready to proceed? 

Dr. Ise. If it is proper,! will read my statement. Will that be all 
right? 

The Chairman. Of course, we always prefer to have tnese statements 
made in a more informal way, but inasmuch as the Chairman has just 
read a statement, I don't see that I am in a position to deny your 
request. 

^Included ih the appendix, p, 7426, in connection witli these exhibits, is "Exhibit No. 
1320," a Jist- of companies which answered the Committee questionnaire^ 



7100 CONCENTRATION OF ECONOMIC POWER 

Dr. IsE. Well, I could put it more accurately, Mr. Chairman, if I 
could read what I wrote. 

The Chairman. Professor Ise, it has been the practice of this com- 
mitee to ask all witnesses whether they are expressing opinion or testi- 
fying as to facts to take ■•a witness^ oath. So if you will please be 
sworn : Do you solemnly swear that the testimony you are about to 
give in this proceeding shall be the truth, the whole thuth, and noth- 
ing but the truth, so help you God? 

Dr. Ise. Yes. 

TESTIMONY OF PROF. JOHN ISE, THE UNIVilRSITY OF KANSAS, 

LAWRENCE, KANS. 

IMPORTANCE AND ECONOMIC SIGNIFICANCE OF PETROLEUM INDUSTRY 

Mr. IsE. The oil industry merits the careful attention of this Com- 
mitee because of its great importance and because of its peucliar char- 
acteristics. Producing in 1938, from more than 350,000 wells, a total 
of approximately a billion and a quarter barrels of crude petroleum; 
transporting crude oil to refineries through a net work of 115,000 miles 
of oil-pipe lines, and by a fleet of several hundred oil tankers; refin- 
ing annually more than 550 million barrels of gasoline, and an 
equal amount of other products, in 561 refining establishments; 
transporting these to consuming centers through 6,640 miles of 
gasoline pipe lines and by thousands of tank cars ; and marketing its 
products through 27,000 terminals and bulk plants, nearly 200,000 serv- 
ice stations, and an almost equal number of other establishments selling 
oil products; performing all these functions^ the oil industry ranljs as 
one of the three or four most important industries. With an invested 
capital of between eleven and fourteen billion dollars, it ranks next to 
agriculture, railroads, and public utilities. The industry employs a 
total of approximately a million workerSj more than 500,000 of whom 
are engaged in marketing. 

Figures of investment, production and employment do not, however, 
picture adequately the economic significance of the oil industry. Just 
as the nineteenth century was to some extent dominated by the rail- 
roads and the use of coal, so the twentieth century is dominated Ijy the 
internal-combustion engines, in automobiles, trucks, busses, and trac- 
tors—using gasoline or other oil fuels;. and the economic revolution 
being wrought by these new sources of power and new means of trans- 
portation is perhaps as dramatic and as far reaching in its impacts as 
that ushered in by the coal-burning railroads of a century ago. As a 
result largely of the use of automobiles, trucks, and tractors, the urban 
population of the Nation grows steadily,, large cities absorb a constantly 
larger proportion of our people, ma,ny small towns dwindle to cross- 
roads service stations, while in some of the agricultural regions of the 
country the use of tractors has increased the productivity of labor 
many fold, with'a consequent displacement of a large proportion of the 
farmers once needed to produce the Nation's foodstuffs. The cities in 
the meantime are growing in new plans and desi^s dictated by the 
growing mobility of urban dwellers, and the necessity of providing foi" 
the millions of automobiles used in transit ; while thousands of miles of 
railroads are being abandoned, and thousands of miles of improved 



CONCENTRATION OF ECONOMIC POWER 7101 

highways are built every year, highways demanded by the new form of 
transportation and made possible by the new sources of power. The 
economic configuration of the country is being recast at a rate unprece- 
dented in history. Even the methods of warfare are' being revolution- 
ized, with the use of trucks, airplanes, and oil-burning naval vessels, 
to a point where it may well be said that oil is one of the first essentials 
of national defense. The difficulties encountered in Germany In the 
later period of the World War, as a result of scarcity of petroteum 
products, point the lesson clearly for us. 

The changes brought by oil and the internal-combustion engine 
have particular significance in the study being made by the Tem- 
porary National Economic Committee, for they are without doubt 
responsible in part for the growing concentration of economic power. 
Before the advent of the automobile, truck, and tractor the faum 
communities of the country were to some extent isolated and self- 
sufficient, centering about the small towns. Today, the entire country 
is, as Professor Watkins has well said, a "tightly welded nation of 
125,000,000 people, living 56 percent in urban communities, absolutely 
dependent upon mass production, intensive specialization (even in 
agriculture), and the interregional, transcontinental, even intercon- 
tinental, exchange of products — trade." ^ Tractor farming has so 
greatly increased productivity in agriculture, that farmers are forced 
to market an increasing proportion of their production, particularly 
since they must now buy, not only the tractor, which has partly 
displaced the horses which they once raised on their farms, but the 
motor fuel which has in part displaced the products which they 
formerly produced and fed to horses. With the steady displacement 
of horges by tractors, trucks, and automobiles, farmers are forced 
mpre- and more into Nation-wide markets, in which, since they sell 
in highly competitive markets and buy in markets which are more 
or less monopolistic, they aie at a ^eat disadvantage. The result 
of all this is a steady deterioration of the financial condition of most 
farmers, a steqidy rise in the rate of tenancy, a steady shift of farm 
ownership from the farmers themselves to banks, mortgage com- 
panies, and insurance companies, and a general decline in the amount 
of wealth in farm communities, while billions pile up in the great 
commercial and financial ceiiters. 

On that point, if anyone would care to checkup my general state- 
ment, there have been two careful statistical studies made, one in 
1919 and one last year; the one in 1919 was made by the National 
Bureau of Economic Research; the one in 1'989 was made by the 
National Resources Board, and a, study of those two statistical 
compilations in which the pel" capita income by States is indicated 
shows an alarming decline of the relative per capita incomes -in 
agricultural States. I think it is a most interesting study: and I think 
the facts brought out 'are really very ominous. 

PECULIARITlfiS or THE OIL INDUSTRY 

Dr. IsE. The oil industry is a peculiar industry in various respects. 
In the first place, it ift basedon an exhaustible resource, whose extent 
and duration ai« not known. In this respect it differs from some 

^ Myron W. Watkins' book; "Oil : Stabilization or Cduservation," p. 2. 



7102 CONCENTRATION OF ECONOMIC POWER 

other extractive industries, for instance lumber and coal. The proved 
oil reserves of the United States as of January 1, 1939 — "the amount 
of crude oil. that may be extracted by present known methods from 
fields completely developed or drilled or sufficiently explored to 
permit reasonably accurate calculations," have been estimjated at 
17,348,000,000 barrels by a committee of the American Petroleum 
Institute; but this estimate may prove to be too low or too high, 
Assuming its approximate accuracy, the total reserves will of course 
be much greater, for new areas will be tested, and new fields will 
be discovered, and methods of extraction will be improved in various 
ways; while improvements in refining processes will bring higher 
recovery of the more valuable oil products. And, when crude runs 
begin to dwindle, oil may be extracted from oil shale and from coal, 
probably at higher cost than prevails today; imports may be in- 
creased; and of course oil-driven engines can be made to use fuel" 
much more efficiently than they do now. Practical oil men are gen- 
erally optimistic about the future of our oil su;pplies, yet they evince 
enough pessimism to seek proved reserves with much zeal. Cer- 
tainly, our petroleum reserves are a dwindling asset, smaller each 
year, and production mounts at a disconcerting pace. It seems 
probable, if not certain, that some day, within a time which is short 
m the life of a nation, the decline in production will begin, and our 
supplies of fuel and lubricating oils will be obtainable only at rising 
prices. Bearing in mind the fundamental importance of oil in our 
national economy, and particularly in national defense, we cannot 
well be complacent about this question. 

A second peculiarity of the oil industry, and one which has been 
responsible for much of the troubles of the industry, arises from the 
fact that the supply comes largely from pools underlying land owned 
by many surface owners. When the problem of legal title to oil 
deposits first came up, the courts decided that the oil was like "wild 
animals," and subject to the "rule of capture"— that it belonged to 
the one who could get it out first. It was the application of this 
principle which brought the frenzied haste, and until recently the 
gre-at waste of oil, capital, and energy, which have characterized the 
exploitation of most oil pools; and it was in an attempt to avoid the 
evils of' the rule of capture that the Federal and State governments 
have instituted the schemes for unit operation and proration so 
widely discussed in recent years. 

From the unpredictable nature of oil discovery, and from the rule 
of capture applying to fields discovered, follows a third peculiarity 
of the oil industry, as it appeared before the days of proration — the 
fact that the supply showed little response to price. In most com- 
petitive industries, high prices elicit increased production and supply, 
and low prices bring reduced production ; but the production of oil 
has often shown little response to its price. A high price of crude oil 
tends to stimulate "wildcatting" to some extent, yet discoveries are 
generally the result of chance, and where the rule of capture applies, 
oil is produced as fast as possible regardless of price. Millions of bar- 
rels of oil have been sold for as little as 10 cents a barrel. Under pro-' 
ration schemes adopted in a number of States, this situation has been 
altered greatly, and production is to some extent restricted to con- 
form with an estimated public demand-; but of course. this is done 
under a State supervision. 



CONCENTRATION OF ECONOMIC POWl^^U 7103 

Viewed structurally, the oil industry presents another peculiarity of 
considerable significance. It is really, a succession of industries, 
integrally related in productioii of crude oil, transportation, refining, 
and marketing. Most of the oil business is done by large, integrated 
companies, which perform all the functions from derrick to service 
station. There are, it is true, some independent producers, refiners, 
and marketers, but they do only a small proportion of the total busi- 
ness, and they operate under very serious difficulties, in competition 
with the great integrated companies. It is for that reason, indeed, 
that integration has really been forced upon those in the industry. 
With integration has gone the growth of very large business units, 
units larger than are found in most fields of American industry. 

In some of its departments, the oil industry clearly does not fit tlie 
pattern of competitive business. In various respects the industry 
presents a picture suggestive of monopoly. In the first place, the oU 
business is largely in the hands of 20 large integrated companies. In 
1938 the investment of the 20 major companies was slightly in excess 
of $8,000,000,000, of a total of between 11 and 14 billions— or roughly 
two-thirds of the total. The dominating position of these 20 com- 
panies, or in some cases less than 20 companies, is indicated by the 
following table. 

PERCENTAGE OF OWNERSHIP OR CONTROL BY MAJOR COMPANIES IN VARIOUS 
BRANCHES OF THE PETROLEUM INDUSTRY 

Dr. IsE. Should I read that little table, Mr. Chairman? It is 
short; these are just summaries. 

The Chairman. You are the best judge. 

Dr. IsE. If I may, then, I will read these brief summaries, showing 
the position of the 20 large in_^egrated companies in the industry as 
a whole. 



Branch of industry 



Total investment, 

Domestic producing oil wells 

Production of crude oil -- 

Crude oil gathering pipe-line mileage. 

Crude oil trunk pipe-line mileage 

Total crude oil pipe-line mileage. 

Investment in pipe lines.. 

Pipe line operating income. 

Deadweight tonnage of tankers. .. 

Stocks of reflnable crude oil 

Daily crude oil capacity 

Daily cracking capacity 

Crude oil runs to stills 

Production of gasoline 

Stocks of finished gasoline 

Stocks of lubricants. . _ 

6 selected stoc'cs figures ■.. 

Gasoline pipe-line mileage..- --. 

Domestic sales of gasoline -( . . 



Date 



Dec. 31,1938 
Dec. 31. 1937 

1937 
June 30, 1936 
Jan. 1, 1938 
June 30, 1936 
Dec. 31, 1938 

1938 
Sept. 30, 1938 
Dec. 31,1937 
Jan. 1, 1938 
do 

1937 

do 

Dec. 31,1937 

do 

...Ldo 

Jan. 1, 1938 

1938 



Number of 
companies 


Percent 


20 


66.7 


20 


23.7 


20 


52.5 


20 


57.4 


14 


89.0 


20 


72.0 


15 


77.4 


15 


86.4 


15 


87.2 


20 


96.5 


20 


75.6 


20 


85.2 


20 


82.6 


20 


83.8 


20 


90.0 


20 


93.0 


20 


94.2 


16 


96.1 


18 


80.0 



SOURCE 

1. U. S. Maritime Commission and Petroleum Conservation Division, Department of the Interior. 

2. Moody's Manual of Investments, Temporary National Economic Committee questionnaire for oil 
companies, arW American Petroleum Institute. 

3. Interstate Commerce Commission. 

4. U. S. Btifeau of Mines. 

5. U. S. Bureau of Mines. Includes Richfield Oil Corporation. 

6. Temporary National Economic Committee questionnaire and AmtTicin Petroleum Institute. 

12"4491 — 40— pt. 14, sec. 1 2 



7104 CONCENTRATION OF ECONOMIC POWER 

In total investment, 20 companies had 66.7 percent of the total. 

In domestic producing oil wells, 20 companies had 23.7 percent. 

The Chairman. What is the source of this compilation ? ^ 

Dr. IsE. There are various sources. The United States Maritime 
Commission and Petroleum Conservation Division, Department of the 
Interior ; Moody's Analysis of Investments ; some figures were com- 
puted by the T. N. E. C., and some were taken from the American 
Petroleum Institute, some from the Interstate Commerce Commis- 
sion ; a great many from the United States Bureau of Mines and Stand- 
ard Statistics was consulted on a great many questions. Also, I might 
say that these figures are not all for the same year because it was im- 
possible to get the latest figures to correspond, that is for some one 
particular year. 

The Chairman. Do I understand that the figure represent your 
compilation from the sources that you have mentioned? 

Dr. IsE. A compilation of the staff of the Temporary National Eco- 
nomic Committee, 

In the production of crude oil, they had 52.5 percent of the total; 
that was nearly double the number of wells, which indicates that they 
had the larger proportion of the flowing wells. 

In crude oil gathering pipe-line mileage, they had 57.4 percent. 

In crude oil trunk pipe-line mileage, they had 89 per(fent — 14 of 
hem had 89 percent. 

In total crude oil pipe-line mileage, 20 companies had 72 percent. 

In investment in pipe-lines, 15 companies had 77.4 percent. 

In pipe-line operating income, 15 companies had 86.4 percent. 

In deadweight tonnage of tankers, 15 companies had 87.2 percent. 

In stocks of refinable crude oil, 20 companies had 96.5 percent. 

In daily crude oil capacity, 20 companies had 75.6 percent. 

In daily cracking capacity, 20 companies had 85.2 percent. 

In crude oil runs to stills, 20 companies had 82.6 percent. 

In production of gasoline, 20 companies had 83.8 percent. 

In stocks of finished gasoline, 20 companies had. 90 percent. 

In stocks of lubricants, the same number of companies had 93 per- 
cent. 

In six selected stocks figures, 20 companies had 94.2 percent. 

In gasoline pipe-line mileage, 16 companies had 96.1 percent. 

In domestic sales of gasoline, 18 companies had 80 percent. 

The Chairman, Of course, Dr, Ise, the significance of that com- 
pilation would be affected by a knowledge of how many companies are 
operating in each of these given fields, and whether or not there is any 
suggestion in what you say of control, concentrated control, among 
those 20 or 14 companies which you mention, I take it that you have 
not intimated any concentration of control, I mean concentration of 
management; though these figures do tend to indicate concentration 
of ownership, 

Dr, Ise. Yes, yes. I don't wish to suggest that there are any col- 
lusive agreements among the major- oil companies at this point, but 
merely to indicate' statistically what the position of the 20 companies is. 

The Chairman. That is what I thought you were doing and I wanted 
to make it clear. 

! Dr, IsE, I suppose if we wanted to indicate the power, the dom- 
inance of some of the larger companies, further details which I 
wouldn't have time for here, might be injected to show that in some 



CONCENTRATION OF ECONOMIC POWER 7105 

figures a few of the 20 have very strong positions. There are figures 
in this material here which will show that, however. 

The Chairman. Well, it occure to me to remark that for example 
you say 20 companies have 23 7 percent of all domestic producing oil 
wells, and 20 companies have 57.4 percent of all crude oil gathering 
pipe line mileage. I think it goes almost without saying that there 
are vastly more companies owning producing oil wells than there 
are companies owning gathering pipe lines. 

Dr. IsB. Oh yes ; oh yes. 

The Chairman. So that without figures showing the total number 
of companies in the particular field, this table loses some of its 
significance. ^ 

Dr. IsE. Yes; oh yes. I don't know whether the figures would be 
available to show the number of companies outside of the 20. I 
doubt if they could be gathered from, any material we have. In some 
cases we had the figures, for instance, of a number of independent 
refiners, but I don't think it would be possible to give the figures on 
the number of oil-producing companies all together, would it? 

Dr. LuBiN. May I ask a question ? The third item from the bottom 
of your table, "Six selected stocks figures," I take it is stock figures 
for six selected items. 

Dr. IsE. Yes; petroleum items. 

The dominant position- of the 20 major companies does not of 
course preclude the possibility of fairly vigorous competition among 
them, yet certain factors tend to establish a possibility of cooperation. 
In the first place, some of these companies are interrelated through 
common-stock ownership, and through the joint ownership of oper- 
ating subsidiaries and affiliates. As an instance of this, the outstand- 
ing stock of the Great Lakes Pipe Line Co. is owned by 8 large 
oil companies, all of them included among the 20 major units. If 
these companies should cooperate in their use of the pipe line, they 
might easily cooperate in other activities as well. In the second place, 
some of these companies are interrelated through stock holdings in 
patent companies ; and iii the third place, the officers of these com- 
panies, like the officers of most Jarge corporations, control the Voting 
of the stocks so completely that they need not consider stockholder 
approval of their acts and policies. The officers are generally absolute 
dictators of their companies. In the meetings held by 17 of the major 
companies in 1938 the officers voted an average of 99.3 percent of 
the common stocks voted. 

The relative importance of the 20 major companies has apparently 
grown appreciably in the past decade or more. Between 1926 and 
1937 their percentage of the total crude production rose from 46.3 tc 
52.5, their percentage of the stocks of crude petroleum and principal 
petroleum products rose from 76.6 to 94.2, their percentage of refining 
capacity rose from 65.5 to 75.6, and their percentage of the total 
gasoline production rose from 71.3 to 83.8. Their position in the 
industry appears to be growing stronger. 

The moderate earnings of the^ major units— for the years 1924 
to 1938, an average of 8.9 percent on the par or stated value of the 
common stock, of 5.6 percent on the book value of the common stock — 
do not suggest strong monopoly control; but it is significant that 
these companies earned their profits largely in the departments or 



7106 CONCENTRATION OF ECONOMIC POWER 

functions in which a monopoly position is most clearly indicated. 
Earnings were princely in the pipe-line departments, high in the 
refining departments, and fairly high in the producing departments, 
while the marketing departments, where competition is severe, suf- 
fered considerable net losses. Thus the earnings in the different de- 
partments correspond rather closely with the amount of monopolistic 
elements in each. Viewed from the point of view of structure, and 
from the point of view of earnings, the industry thus presents every 
shading from nearly pure monopoly, in pipe-line transportation, to 
fairly severe competition, in marketing. Perhaps the general pic- 
ture would approximate what economists have come to describe as 
monopolistic competition. 

Regardless of possible cooperative action among the major com- 
panies, there are various monopoly elements in the industi-y. While 
in the market for products, the major companies compete among 
themselves, and with independent companies at other points they are 
in a position more or less monopolistic. Patents are essentially 
monopolies, granted and protected by the Government. In the buy- 
ing of crude oil from a given field there are seldom enough buyers 
to suggest a competitive market, and there may be only one — the pipe 
line running from the field, or a buying agency allied with it. Such 
a market situation is what economists call "monopsony" — monopoly 
on the buying side. 

Pipe lines, somewhat like railroads and other carriers, are generally 
in a monopolistic position with respect to producers; in fact, they 
may properly be regarded as natural monopolies. The Standard 
Oil Co. established its monopoly position largely through its control 
of transportation facilities, at first through railway rebates, and 
later through control of pipe lines. It is true that producers may 
use railroad tank cars to transport their oil to the refineries, but 
transportation in tank cars, at railroad rates, is much more expensive 
than pipe-line transportation. Theoretically, tank-car rates would 
set a limit to the extent to which the pipe lines or purchasing agencies 
might exploit their monopoly position ; but, actually, they might not 
even serve this function, for if the producers shipped their crude 
oil by railroad, they would often be obliged to sell, at destination, 
to the same interests that controlled the pipe lines or buying agencies 
in the field. It is true that the Interstate Commerce ■C9jnmission has 
general supervision of pipe-line rates, but the princely earnings of 
the pipe-line companies indicate that the control of the Commission 
is 7iot very strict. The incomes of all major-owned pipe-line com- 
panies reportmg to the Interstate Commerce Commission averaged 
26.5 percent on investment in 1938. 

Through their integration with pipe-line companies, and in other 
ways, the refiners are in a position to some extent monopolistic. In 
the marketing of their products, they must meet competition of other 
refiners, but in the purchase of their crude, they are often in a posi- 
tion more or less monopolistic. 

The marketing of crude oil is in some respects highly competitive, 
yet in other respects it shows distinct elements of monopoly. There 
is some price cutting by independent stations, but the general picture 
is one of uniform prices set by some dominating company and fol- 
lowed by most of the others — price leadership. Competition is so 
severe that the marketing business is carrie on at a general loss, but 



CONCENTRATION OF ECONOMIC POWER 71Q7 

the competition appears, not in terms of price, generally, but in 
terms of an agressive campaign for gallonage, with heavy emphasis 
on service and advertising. 

It ma.v be noted, finally, that competition between the major in- 
tegrated* companies, 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 
indepej\dents are in different businesses. The integrated companies 
are in tlie business of taking oil from the ground, or perhaps T might 
say in the businesses of taking oil from the ground, transporting and 
refining it, and selling refined products to ultimate consumers; inde- 
pendent refiners without production are in the business of buying 
crude oil from producers, refining it, and selling their p. >ducts to 
jobbers or marketers. To some extent the two groups are in dif- 
ferent businesses, and do not compete on even terms. The independ- 
ent refiners must make their profits on refining operations or not at 
all ; integrated companies might sufffer losses on their refining opera- 
tions 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 market- 
ing 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 theil 
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 com- 
petitive business. Crude petroleum, the raw material of the indus- 
try, is an irreplaceable natural resource, so essential to our economic 
life today, and so necessary in national* defense, that its conservation 
is almost inevitably a function of the State. This has been recog- 
nized more clearly in some foreign countries than in the XInited 
States: yet some of oui- States have gone far in their recognition of 
the public aspects of oil exploitation, and in their efforts to prevent 
the wasting of natural resources. There is little doubt that they must 
go much further, and that the Federal Government will have to 
render much more help than it has hitherto been able to offer. It is 
hoped that the information collected by the Temporary National 
Economic Committee will be useful in the formulation of a sound 
policy with respect to this very important industry. 

Now, Mr. Chairman, if it is proper, I would like to turn over to 
the committee the material which has been compiled by the staff after 
much hard work, and I can say careful work, as far as I have checked 
on it. I think I should say, in conclusion, that in offering this mate- 
rial the staffs tried to avoid pretense of offering a definitive and con- 
clusive study — a fin;il study; that they did not try to draw any very 
definite conclusions; that they have no intention of trying to offer any 
remedies but merely that they thought the material would be useful 
to this committee in formulating a really intelligent policy with 
respect to the oil industry. 

The Chairman. This represents a compilation of the information 
which has been gathered since the beginning of this study? 

Dr. IsE. Yes. 



7108 CONCENTRATION OF ECONOMIC POWER 

The Chairman. By the members of the staff. 

Dr. IsE. Yes ; of the staff. 

The Chairman. These are not offered to be printed in the record; 
they are offered, I assume, to be filed with the committee. They are 
rather voluminous for printing. Isn't that your understanding? 

Mr. Cox. Well, certainly as to this first document, which is entitled 
"Outline of Economic Data," we had hoped that that could be printed 
in the record. 

The Chairman. Tlie members of the committee have not yet had an 
opportunity to examine it and I assume that perhaps the decision upon 
that matter can go over for the present. 

Mr. Cox. We had hoped, as a matter of fact, that the material in 
the appendixes would likewise be printed because it contains a great 
deal of information that may be useful as a matter of public record, 
but, of course, that is a matter which the committee will have to 
decide. 

The Chairman. The material will be received and placed on file for 
the present.^ 

(The documents referred to were marked "Exhibit No. 1138" and 
"Exhibit No. 1139," respectively, and are printed separately as Hear- 
ings, Part 14r-A. 

The Chairman. Do you care to ask any questions? Do any mem- 
bers of the committee desire to propound questions ? 

The Vice Chairman. I would like to ask a question. Dr. Ise, 
you say that the selling activity of these oil companies is carried on 
at a loss? Is the selling activity carried on by a subsidiary, as a rule, 
of the major companies ? 

Dr. Ise. Selling activities are generally carried on through agents. 
I believe the companies own the station and lease the station generally. 

The Vice Chairman. But it is not conducted by subsidiaries 
operated by the company ? 

Dr. Ise. No; I wouldn't understand so. Of course, it varies from 
company to company. 

The Vice Chairman. Did you find any custom, any usual way 
of doing the business, in your examination, or did you go into that 
phase ? 

Dr. IsE. Yes; I believe the general procedure is that the company 
owns the station and leases it to a marketer who handles, I think 
generally exclusively, the products of the company. 

The Vice Chairman. What is the reason for conducting the selling 
activity of the company at a loss? 

Dr. Ise. Well, it isn't such a serious matter for the integrated com- 
pany, you see, as long as they make it up in some other division. 

The Vice Chairman. You mean, of course, that they must control 
their selling agency in order to dispose of their material. 

Dr. Ise. Yes ; but it is very important in a time of oversupply of 
oil products that a company should have some way, some outlet, for 
its gasoline and oil products. 

The Vice Chairman. Still it doesn't make it clear to me why it 
-is that that particular part of their activity should be conducted at a 
loss, whereas they seek to make a profit in other activities. 

* The documents were later ordered to be printed. 



CONCENTRATION OF ECONOMIC POWER 7109 

Dr. IsE. Well, a few years ago there was a very serious over-devel- 
opment of the marketing operations. Companies with heavy produc- 
tion of crude oil and heavy output of gasoline were anxious to get 
that into the market, and for a while with rapidly expanding markets 
they found it possible and I think perhaps profitable, even, to expand 
their marketing facilities. 

The Vice Chairman. What percentage of the distribution is con- 
ducted by what you woilld call independent distributors as distin- 
guished from the distributors that are controlled by the organization 
that produces the gas? 

Dr. IsE. I don't know. I will ask Mr. Cox if he has those figures. 
We have 80 percent of the domestic sales of gasoline. That, however, 
isn't 80 percent Of the number of stations, I presume. 

Mr. Cox. No; volume. 

Dr. IsE. Volume is 80 percent. 

The Vice Chairman. You speak of a monopoly in patents hav- 
ing to do with the establishment, I believe, of the status of some of 
these companies as monopolies. Did you make any detailed examina- 
tion? We had some examination of patents here before,^ and I don't 
know whether those two examinations have dovetailed or not. Have 
you made any examination to what degree that plays a part ? 

Dr. IsE. Not a sufficiently exhaustive examination to answer any 
detailed questions intelligently; as a matter of fact^ I didn't wis'h- 
to get into that very far. 

The Vice Chairman. If there is any reason why you shouldn't I will 
withdraw the question. 

Dr. IsE. It is partly that I didn't understand that was to be cov- 
ered today, and also it is an extraordinarily involved question. 

The Vice Chairman. I withdraw the question. The statement 
was made that patents had contributed toward the establishment of 
monopoly. * 

Dr. IsE. That statement I think is a safe one to make, but beyond 
that I don't think I would like to go this morning. 

The Vice Chairman. One other question. To what extent is the 
oil business carried on by that group whom you designate as in- 
dependents ? 

Dr. IsE. What business ? 

The Vice Chairman. I am talking about the oil business. 

Dr. IsE. It varies with the different branches of the business, of 
course. You see that in total crude oil pipe-line mileage they would 
have 28 percent. 

The Vice Chairman. The independents would ? 

Dr. IsE. Yes. That is other than the 14 integrated companies we 
have here. In the case of trunk pipe-line mileage they would 'have 11 
percent. All other than the 14 leading companies would have 11 
percent. 

The Vice Chairman. Now what percentage of refining is conducted 
or carried on by those whom you designate independents? 

The Chairman. According to these figures, 4.4 percent. 

The Vice Chairman. If he has already testified to that, I will 
not pursue it. 



^ See Hearings, Parts 2 and 3. 



7210 CONCENTRATION OF E(JONOMIC POWER 

The Chairman. Professor Ise, adverting to the testimony you gave 
with respect to the relative importance of these 20 major companies.^ 
I noted that your figures were based upon the increases in the per- 
centages controlled by these 20 companies in various branches of the 
industry in the period 1926 to 1937. Was it intended to imply that 
before 1926 the reverse might have been the case, and that inde- 
pendents occupied a more important position in the industry before 
1926 than after '26? Or was there a steady increase during the period 
of years? 

Dr. Ise. I don't know how far back — I think we have figures only 
from '26, not any earlier than that. Of course if you go back far 
enough you will find the reverse of this because at one time one com- 
pany controlled much more than all of the 20 companies control now. 

The Chairman. That is exactly what I had in mind. There was a 
period when one company was the dominant agency in the field, and 
then after the decision of the Supreme Court when the Standard Oil 
trust was broken up into its constituent members, the situation 
changed materially. 

Dr. Ise. Yes ; gradually, of course. 

The Chairman: Yes; only gradually. And then did you mean to 
imply that there is ange in the reverse procedure now ? 

Dr. IsE. Well, it would seem so from these figures, although it is 
still much more nearly a competitive situation because we are talkitng 
about 20 companies now and not 1. It is true, I believe, that 5 of 
these 20 companies are Standard companies, but there is competition 
among the Standard companies. 

The Chairman. In all branches of the industry, or only in the 
market ? 

Dr. Ise. Well 

The Chairman. Or do you care to express an opinion on that, from 
your study ? 

Dr. Ise. Well, I suppose to some extent there is more or less in 
various branches of the industry, but I wouldn't like to go into that 
too far. 

The Chairman. Are there any other questionsi? 

Representative Williams. Is there any reason why these companies 
shouldn't be put in the record — the names ? 

Dr. Ise. They are in the record somewhere. I haven't in my state- 
ment- — 

Representative Williams (interposing) . Have you a compilation of 
them there ? 

Dr. IsE. Yes; that is in the material which I am handing this 
committee. 

The Chairman. Well, the names of the 20 were included in the list 
chat I put in the record this morning, but not in such a way that they 
could be iclentified. Suppose you read the names of these 20 major 
companies, the ones to which you refer in this testimon}'. 

Dr. Ise. Standard Oil Co. (New Jersey) ; Socony Vacuum Oil Co. 
of New York; the Standard Oil Co. (Indiana) ; the Texas Corporation 
(Delaware) ; Standard Oil Co. of California ; the Gulf Oil Corporation ; 
Cities Service Co.; Shell Union Oil Corporation; Consolidated Oil 
Corporation, forme :ly the Sinclair Consolidated; the Phillips Pe- 
troleum Co. ; Tidewater Associated Oil Corporation ; Atlantic Refining 
Co.; the Pure Oil Co.; Union Oil Co. of California; Sun Oil Co.; 



CONCENTRATION OF ECONOMIC POWER 7111 

Ohio Oil Co.; Continental Oil Co.; the Standard Oil Co. of Ohio; 
the Mid-Continent Petroleum Corporation ; and the Skelly Oil Co. 
are the 20. 

Dr. LuBiN. Dr. Ise, can you define for the committee so that we 
could have the issue clarified just what you niean By "independent" 
as you use the term ? Do you use the term as meaning all companies 
other than these 20 integrated companies? 

Dr. Ise. "Weil, I think that one could hardlj^ give a definite definition 
of that term because that would shade off from somewhere perhaps 
not so different from these 20 companies to others that are, of course, 
in an absolutely independent position. Perhaps I might ask some of 
the staff if they could do that better. 

Mr. Berquist. The 20 companies as a ^oup have been called ihe 
major companies; there are other companies smaller than these that 
are integrated in much the same way and function much the same 
way. It is the 20 companies that represent more or less arbitrarily, 
and yet commonly accepted grouping within the industry. Now 
normally that is the practice. I might say that in this connection 
that each of the 20 companies have assets in excess of $25,000,000, 
ranging from that to well over $1,000,000,000, so there is quite a range 
within that grou]~ 

Dr. LuBiN. In other words, we are not to interpret the word 
"independent" as meaning independent of these companies, because 
among the remaining companies may be many which are subsidiaries 
in a sense, or controlled by these 20 companies. 

Mr. Berquist. That is not correct. The subsidiaries are repre- 
sented within these 20 companies as indicated. We have considered 
them as a part of the 20 companies when they have been subsidiaries. 

Dr. LuBiN. So that all remaining companies which under this 
arbitrary definition of "independent" are independent in the sense 
of ownership at least? 

Mr. Berquist. As far as these, 20 companies are concerned, and 
when we say "ownership" that is ownership of less than one-half. 

The Vice Chairman. What do you mean by "integrating" com- 
panies, using that word in connection with this business? 

Mr. Berquist. Well, you are anticipating, I believe, I might say 
this, however, that by "integrating" we mean 

The Vice Chairman. 'I withdraw my anticipation. 

Mr. Berquist (resuming). Operation in the four principal 
branches of the industry — production, transportation, refining, and 
marketing. 

The Vice Chairman. What do you mean by integrating? 

Mr. Berquist. Well, they control and operate, you might say in a 
vertical manner from the production of crude to the selling of refined 
products, whether it be gasoline or any other product. 

The Vice Chairman. You mean then by "integrated" a company 
that proceeds to handle the product from the ground to the auto- 
mobile ? 

Mr. Berquist. That is right. 

The Chairman. Are there any other questions ? Professor Ise, 
this outline of economic data relating to the petroleum industry,,^ 

1 "Exhibit No. 1138," printed separately, -njlth "Exhibit No. 11.39," as Hearings, Part 
14— A. . 



7112 CONCENTRATION OF ECONOMIC POWER 

which was the first of the several documents which you presented, 
represents, as I understand it, a summary of the analysis of all of 
the material which was presented to the committee ? 

Dr. IsE. Well, I don't know that it includes all. I will ask Mr. 
Berquist. 

Mr, Bekquist. That does include everything that was covered by 
the questionnaire, plus much other information of a public character 
that was pertinent on this inquiry. It is rather a synopsis or bird's- 
eye view of the operations and function of the petroleum industry. 

The Chairman. As prepared from the material which was pre- 
sented to the committee in response to the questionnaire. 

Mr. Berquist. And from other sources. 

The Chairman. But in the circumstances, if there is no objection, 
since Mr. Cox expressed the opinion that it ought to be printed, I 
shall submit this for printing in the record. I think it will be useful 
to everybody who is concerned in following this study. 

Professor Ise, you have nothing more to add ? 

Dr. Ise. I believe not. 

The Chairman. That being the case, the committee will call Dr. 
Joseph E. Pogue, vice president of the Chase National Bank of New 
York City. 

(Whereupon the witness, Dr. Ise, was excused.) 

The Chairman. Mr. Pogue, of course, is a well-known economist 
and an expert in this industry. Before asking you to state briefly 
for the record your experience. Dr. Pogue, may I ask you to be sworn ? 
Do you solemnly swear that the testimony yovi are about to give in 
this proceeding shall be the truth, the whole truth, and nothing but 
the truth, so help you God? 

Mr. Pogue. I do. 

The Chairman. Would you be good enough to make a preliminary 
statement as to your qualifications? 

TESTIMONY OF DR. JOSEPH E. POGUE, VICE PRESIDENT, THE 
CHASE NATIONAL BANK, NEW YORK CITY 

Dr. Pogue. Mr. Chairman and members of the committee, I appear 
before this committee as a student of the petroleum industry, rather 
than in my official capacity as an ofiicer of the Chase National Bank. 
My experience in the oil industry as an engineer and petroleum 
economist goes back for a matter of 25 years, or thereabouts. It 
started with work for the Federal Government, first with the Smith- 
sonian Institution ; next as a member of the Oil Division of the U. S. 
Fuel Administration during the World War. 

At that time I was assistant director of the Bureau of Oil Con- 
servation of the Oil Division. Following the termination of the war 
I spent some months in Washington engaged in writing a chapter 
analyzing the behavior of oil prices during the World War, pub- 
lished as a part of a larger study by the War Industries Board. 
In connection with that study I had the privilege and pleasure of 
the assistance of Dr. Isador Lubin, ^ho I understand is adviser 
to your committee. 

The Chairman. A member of the committee. 

Dr. PoGUB. I beg your pardon. Following that I spent about 2 
years as the manager of the department of ecoflomic research for 



CONCENTRATION OF ECONOMIC POWER 7113 

one of the oil companies. At the time of the depression in 1921 I 
opened a consulting office and was a consultant on petroleum matters 
from 1921 until the fall of 1936, when I went with the Chase National 
Bank to head up their department of petroleum economics. During 
this period and from the inception of the topics which I have been 
requested to discuss, namely proration and conservation, I have been 
. a close student of the development of those activities in the petroleum 
industry and on several occasions I have been drawn into their orbits. 

First, I was a member of the committee on economics appointed by 
the Federal Oil Conservation Board, which committee drew up the 
first production quotas used by the proration mechanism and initiated 
the technique which was subsequently taken over by the United States 
Bureau of Mines and continued to this day. 

Next, during the N. R. A. days I acted for a brief period as deputy 
economist for the N. R. A. as adviser to that body during the formu- 
lation of the petroleum control. Subsequent to that I was appointed 
to and still am a member of the advisory committee on economics of 
the Interstate Oil Compact Commission. I must ask your pardon 
for taking up so much time in presenting that background. 

The Chairman. It is quite all right ; you have done it at the express 
request of the Chair. 

Dr. PoGUE. I appreciate the privilege of appearing before this com- 
mittee. I do so at the request of Mr. Thurman Arnold, who, about a 
year ago, asked me to prepare and submit a statement for the use of 
the committee, which was done under the title "Economics of Conser- 
vation and Proration of the Petroleum Industry." This statement is 
some 60 pages long and has been filed with the committee. This 
statement was later supplemented by a published pamphlet which was 
prepared as a chapter in a forthcoming book to be publisTied by the 
American Institute of Mining Engineers, the chapter entitled "Eco- 
nomics of the Petroleum Industry," which gives a broader background 
to the statement. 

(The documents referred to were marked "Exhibits Nos. 1140 and 
1140-A," respectively, and are included in the appendix on pp. 7435 
and 7457.) 

This published document ^ has also been filed with the committee as 
part of my statement. It is obviously impossible in the few brief 
moments — nor would it be desirable — to read these documents. I hope 
that the committee, if sufficiently interested, will read them. I have 
prepared, however, a summary of these summaries, which I will not 
attempt to read, but. will attempt in a few brief moments to outline, 
which I hope will give in a broad and impressionistic fashion a con- 
ception of the proration-conservation concept, which, in my judgment, 
is a very complex matter and is not thoroughly understood by many 
who are engaged in its practice and is difficult to grasp without a 
concentrated effort to see below the surface and to visualize the under- 
lying trends and tendencies rather than the surface manifestations. 

PRORATION 

Dr. PoGUE. There are two ways to produce an oil well. It can be 
produced wide open or at a retarded rate. If the well is produced 

» "Exhibit No. 1140-i»" 



7114 CONCENTRATION OF ECONOMIC POWER 

wide open under flush conditions, as we say, the natural forces present 
in the oil wells are inefficiently utilized, the reservoir energy is ex- 
husted before it brings to the surface all the oil that it should, and 
the pool must be pumped prematurely. If, however, the flow of the 
oil is restricted the reservoir energy is more effectively utilized, much 
more oil is brought to the surface, Jess oil is left in the field when it is 
coimnercially exhausted, and pumping can be delayed until the last 
phase of extraction is necessary. 

Thus a restricted rate of production within the proper limits results 
in getting more oil and lowering the over-the-life costs per barrel of 
the field. Now, that is a simple conclusion, but it is of fundamental 
importance in this discussion. May I illustrate from exhibits which 
will be filed as part of my testimony to the committee ? 

Open-flow production in an oil well is obtained through a casing. 
This is a cross-section of a 6-inch piece of casing.^ You can 
imagine oil or liquid flowing through that orifice. In the old days 
before proration, our oil was customarily and invariably produced 
through orifices as large or larger in many cases than this. Under 
present practice what is known as a "choke" is introduced in the 
flow line of the oil well and the production is. obtained through an 
opening which in this case is % inch in diameter ; this is a choke 
sliced in half showing the opening through which the flow is obtained. 

The Chairman. The choke, then, is a piece of steel which is in- 
serted in the casing and blocks the casing to whatever extent may 
be desired. It contains in the center an opening which is controlled 
and varied according to the amount of oil that the operator desires 
to permit to issue. Is that correct. 

Dr. PoGUE. That is correct ; and it evidences, sir, that you are from 
an oil-producing State, because you must have seen these in opera- 
tion. Now, the point of particular interest is that any old rate of 
restriction from the point of view of efficiency of recovery, is better 
than open flow. Any old rate, except perhaps a trickle. But for 
every oil pool, depending upon the volume of oil in the pool, there 
is some best rate, some rate — and this rate can be determined by the 
engineers — some rate that gives the best results. This rate we have 
called the optimum rate. Now, it so happens that under proration 
the output of a great many of our oil fields approaches the optimum 
rate of that pool. This rate differs with every pool^ of course. 

Now, if all of our oil fields were limited to their optimum rates, 
their best, most efficient rates, we would then have the basis for the 
most efficient production of our petroleum resources obtainable un- 
der present knowledge. That statement can be made, and I think 
will be! verified, by the testimony of the engineers best acquainted 
with field conditions. , Now, up to 10 years or so ago it was the rule 
in our oil fields to produce wells wide open, and as rapidly as pos- 
sible. Why was this? This was the case because demand at that 
time, and up till that time, was growing so rapidly that the existing 
technique that we were in possession of failed to discover oil rapidly 
enough to support other than a hand-to-mouth policy. 

The open-flow capacity of our reserves just about kept pace with 
the requirements of the market. There were overages, which were 
quickly corrected ; there were underages, which quickly reversed 

^ Dt Pogue displayed a mechanical exhibit illustrative of his testimony. 



CONCENTRATION OF ECONOMIC POWER 7115 

themselves. Flush production during the period of the industry 
up to a very recent date was the only choice. Since the existing 
reserves are not adequate in size to support retarded rates of produc- 
tion, I say the only choice — that is not strictly correct — the other 
choice, the alternative, was not to meet the growing demands of the 
Nation. Since the middle twenties, however, something has hap- 
pened. A revolution in oil-finding technology has taken place. 
This is well known in geology and geophysics, and the rate of expan- 
sion in consumption has slowed down its pace; so finally the rate of 
discovery outdistanced the consumption rate by a wide margin. 

Now, this difference in relative movements of finding oil and con- 
suming oil made it possible to build up a reserve position larger than 
a hand-to-mouth one. Now, of course, it is obvious that the surface 
manifestation of this change has to make its appearance in the 
form of a chronic over-supply in terms of the old methods of flush 
production. Why? Because the so-called rule of capture and the 
costs of deferment always provide the impetus, naturally, for the 
conversion of a reserve of any kind as promptly as possible into 
marketable supply. Under these circumstances, and I am speaking 
now from the point of view of 10 or 12 years ago, and when I interpret 
and analyze what took place I do not mean to say that we knew or 
understood at that time as clearly as we do now, or if at all, what was 
taking place — but these things are responses to circumstances and 
sources that in our judgment developed in this w^ay. At that time 
the petroleum industry faced a dilemma. It could either attempt to 
exhaust this mounting supply by flush production with its traiji of low 
prices, storage above ground, and underground waste, or else devise 
some method of cutting back production in the hope of reestablishing 
economic equilibrium in the situation^ 

Now the differences in cost between flush and stripper production, 
big wells and small wells, was so great that if the industry had at- 
tempted to destroy or get rid of this mounting reserve position it 
doubtless, in my judgment, would have wrecked the industry finan- 
cially, destroyed a large part of the gathering reserve and given no 
insurance after the thing was over that we wouldn't have to go in for 
recurrent cycles of repetition. 

The ultimate course was — whatever the merits or demerits in- 
volved — experiment with a new type of production control, and 
this thing that we are talking about has no counterpart in our economy 
or in any other economy ; it is new ; it is a new experiment. It was 
found that conservation laws of the oil-producing States gave the 
basis for a program of throttling the output of these flush wells. This 
was tried out in certain areas and eventually extended to practically 
all flush fields. This period of trial and extension lasted over a num- 
ber of years. In such wise a movement was launched which gradually 
became institutionalized in this form which we now call proration. 
The original motive of establishing proration was, therefore, an eco- 
nomic motive, a response to the urge to find means for solving a 
critical industrial problem. Accordingly the transition from the flush 
efa of production to the proration era was brought .about under the 
influence of the profit motive and may I add, it is fortunate that the 
restriction of production is such an effective conservation device, for 
this circumstance has raised the conservation concept, from an 
academic abstraction to a practical measure 



7116 CONCENTRATION OP ECONOMIC POWER 

MOTIVES UNDERLYING PRORATION 

The Chairman. Would it be proper, Dr. Pogue, interrupting you, 
to say that the motive which stimulated this program of retardation 
of production, proration, was to maintain the price of the product? 
You say there was an economic motive. 

Dr. PoGTJE. The motive, so far as I can judge, the motive, at the out- 
set was the economic motive of stabilizing the industry. 

The Chairman. And by stabilizing the industry you mean main- 
taining the price at such a figure that the industry could be operated 
profitably ? 

Dr. Pogue. I don't know whether one would say "maintain the 
price." Certainly I admit freely that the motive at the outset was 
economic. In any activity the economic 'motive is paramount. 

The Chairman. You described the situation which has two re- 
sults. First, from the point of view of conservation, as you have de- 
scribed it, it tends to preserve a field ; it tends to secure a larger 
amount of oil from the ground under the force of nature itself, with- 
out pumping, and thereby tends to make the supply obtainable, at a 
lower cost? 

Dr. Pogue. That is correct. 

The Chairman. And also preserves a larger amount of recoverable 
oil and makes it possible to recover a larger amount of oil in a par- 
ticular field. . Now that is the conservation motive. Then there is 
also another motive which you have, quite clearly described, flush 
production, without any retardation, was producing what you called 
an over-supply. Over-supply naturally results in lower prices, and 
the economic motive, altogether independent of the conservation mo- 
tive, was to reduce the supply in order that the price might be main- 
tained — was the word I ujSed. I don't want to insist upon that word. 

Dr. Pogue. I would rather, Senator — ^I think motive is a less prope^r 
word than incentive — ^but I would rather look ui*>on it as a matter of 
the effect on costs. Of course, the development was intangible at 
that time. We now know a great deal about the technology and 
economics of proration that were not known at that time. The thing 
started in a very small way; naturally the motive was there to pre- 
vent or to correct a chaotic condition. 

The Chairman. Well, of course, cost and selling price' are phases 
of the same-- 

Dr. PoGUB (interposing). Yes; but I think it is fairer to say that 
if a contemplated practice reduces costs, increases profits, and per- 
mits lower selling prices, it would be different than to ,say that the 
contemplated practice merely is thought to be one that would raise 
prices. 

The Chairman. Let me abandon the phrase ''maintaining prices" 
because I see you don't like the connotation, and I don't intend to 
imply any critical connotation. Let us say that the motives were two, 
conservation motive and the profit motive. 

Dr. Pogue. Yes, sir. 

The CiiAiRjNiAN. You will agree witli that statement? 

Dr. Pogue. Yes, sir. 

The Chairman. Very well. 

Mr. Henikcrson. May I ask the witness a question, Mr. Chainnan? 



CONCENTRATION OP PJCONOMIC POWER 7117 

\Vhere did the strongest force for proration arise, in the State author- 
ties, or did it arise among Federal authorities? Did it arise in the 
oil companies themselves, and if so, did it arise in the largest units 
or in the independents? Have you traced that at all? 

Dr. PoGUE. Well, that is an interesting question. The thing de- 
veloped as a sort of trial and error. It would be hard to pin one 
starting point. Many times in the past in the periods of temporary 
overproduction, proration has developed as an alternative to letting 
the oil flow down the creek, so to speak. The first formal or sus- 
tained use of this instrumentality, which was experimental, I dare 
say, was to meet an emergency that dleveloped in 1926 in the Seminole 
area in Oklahoma, and I think that was initiated by the operators, 
based on the experience with it, sporadic episodes, in the past, 
r don't know that I could answer whether there was any single brain 
that conceived this thing. I should doubt it very much. Those 
things don't develop that way. 

I don't think anyone visualized what it meant or where it was 
going. I am sure that no one thought at that time that they were 
initiating a new industrial device that would become as pervasive 
and important as the proration-conservation concept is today. May I 
add, Senator, that I would like to go into the point you raise further 
and in: 11 few moments I shall touch on that point again. I don't wish 
in any way to seem to evade that point. 

The Chairman. Very well. 

The Vice Chairman. Mr. Pogue, while you are interrupting your 
general statement, you state that putting the choke into the pipe 
enabled you to extract more oil from a given area than you otherwise 
would be able to. How do you arrive at that conclusion? I don't 
mean to go into it generally, but how do you know that is true? 

Dr. PoGUE. I am glad you brought that point up. . 

The Vice Chairman. 1 don't want to take you far afield. 

Dr. PoGUE. I am glad you brought up that question; it is very 
important. We could spend weeks 

The Vice Chairman (interposing). A couple of days is all we can 
take on it. 

NECESSITY OF UTILIZING NATURAL FORCES IN RECOVERY OF OIL 

Dr. PoGUE. But the proof of it would be engineering testimony 
from a wide body of engineers; perhaps I can give the proof that 
satisfies me in a very few words. The factor that makes oil in the 
ground of commercial value is not the oil itself ; dead inert oil is 
of no value; it is the pressure and energy that occurs, associated with 
the oil, which permits one to get the oil to the surface. Now,, tlmt 
energy is of two kinds, and this knowledge was discovered in part as 
a result of proration. Proration permitted us to understand— the 
engineers to understand — much more, about production. There are 
two forms of this energy; water that underlies the oil under hydro- 
static head tends to shove the oil out. Gas dissolved in the. oil tends 
to move the oil out when it comes out of solution, and second the gas 
itself doesn't occur as gas but dissolved in the oil it gives a liquid 
that is very much thinner and less viscous than oil as we know it. 



7118 CONCENTRATION OF ECONOMIC POWER 

SO that the crude oil which is a gummy, sticky substance on the sur- 
face, in the oil sand saturated with gas in solution is like kerosene. 
Therefore if you produce the well too fast you exhaust this energy 
faster than it brings the oil to the surface. 

The Vice Chairman. How does that come about? Here you 
have a great big pool and you put down innumerable wells. If you 
put down a few wells woild you get the same pressure? What is 
the relationship? I believe I will withdraw the question because 
these is not much we can do about it, I giiess. 

Dr. PoGUE. Go ahead with your question. 

The Vice Chairman. No; I think I won't. 

Dr. PoGUE. I am trying to explain in a few sentences the basic 
engineering principles of production, namely that the thing that 
makes the oil valuable is the natural force. 

The Vice Chairman. We understand that. 

Dr. PoGUE. Now can I make clear that those forces must be util- 
ized pari passu, or parallel with, the bringing of the oil to the surface. 
If you prodiuce the oil through an opening like this you produce 
two or three units of pressure for every unit of oil. Produce the 
gas too fast; the gas comes out of solution; you pull the oil out 
before the pressure of the incoming water has a chance to put in 
its work. If you put in a choke you produce it slowly and utilize the 
natural forces, and we know — and I think engineers will testify to 
this fact — that our reserves under proration have nearly doubled. 
That is due partly to the effect of the conservation attributes of 
proration itself, and the reserves which used to be ten or twelve 
billion barrels and are now officially estimated 

The Vice Chairman (interposing). We can't go too much into 
detail. Thank you very much, 

the OPTIMUM RATE OF PRODUCTION 

Dr. PoGUE. Now, to go ahead with this discussion. As soon as 
you have a body of information and experience of proration accumu- 
lated it becomes clear that not only did delayed production con- 
tribute to the enlargement of the crude-oil reserve, but— and this is 
important — a greatly augmented reserve was necessary to support 
the optimum or most efficient rate of production. You had to have 
a larger reserve before you. could have conservation 

In short, conservation cannot be attained except in the presence 
of a much greater reserve than is required for flush production, and 
furthermore — and this is important — the reserve cannot be stepped 
up from the flush size to a optimum without the aid of some sort of 
production control that will do two things; that will hold the surplus 
oil underground until wanted and at the same <^imo permit dis- 
covery to go on so as to help build up the reserve. That is a com- 
plex statement, but that is fundamental. The process of transition 
then from a flush reserve to an optimum reserve requires a mecha- 
nism of balancing supply and demand and that is where this market 
demand aspect of proration came into the picture as a device per- 
mitting the build-up period from a flush reserve to an optimum 
reserve. 

Now, the use of matket-deniand proration causes all sorts of diffi- 
culties in administration and all sorts of confusion of thought, I)e- 



CONCENTRATION OF ECONOMIC POWER 7119 

cause it looks like it is pretty far removed from conservation, but 
it must be clear upon close analysis that as a, reserve expands to- 
ward its optimum rate the closer the production quotas, evefi though 
they be based on market-demand, will come to coinciding with the 
optimum rate, or most elSicient, quotas. Accordn^gly, even the debat- 
able measure of market-demand instituted under the sanction of 
conservation, but having a stabilization effect, in reality turned out 
to be an essential step in the conservation process. 

Now, the reserve at the present time is fairly close to the optimum 
size, and hence market-demand quotas carry a high degree of conser- 
vation attributes. It is apparent that the evolution may soon reach 
a point where market-d.emand quotas can either be ^dispensed with 
or they will naturally grade into optimum rate quotas so that they 
will be scarcely distinguishable. They may still be called, as things 
often are, by the historical name, although the function itself has 
changed. At this stage, proration can be conducted as a full con- 
servation measure, with an eye merely to the most efficient rate and 
the preservation of property equities and the regulation of the system 
left entirely to the free play of natura.1 economic forces. I suspect 
that the evolution is in that direction and we are nearer there than 
is generally appreciated. 

The Chairman. Do vou feel that that result has now been ob- 
tained ? 

Dr. PoGTJE. This is an evolution. I think we are well advanced 
toward that goal. 

The Chairman. Of course, you are aware, naturally, of the fact 
that there is a great deal of criticism of proration ana of the manner 
in which the various proration laws are enforced; complaints are 
constantly made that the proration laws operate to the disadvantage 
of many producers. 

Dr. PoGUE. Yes: I am aware of that. 

The Chairman. I gather, from your statement, that you do not 
believe that a condition of wholly equitable and just -a^^ministration 
of proration has been attained as yet. Wlien I say administration 
by officials I mean the whole program of proration, the laws as well. 

Dr. PoGTJE. There are a good many imperfections in the adminis- 
trative device, and all that I can say is that it seems to me con- 
siderable progress is being made. 

Mr. Henderson. Would you say that the recent difficulties which 
led to action by various State authorities in Texas, and so forth, were 
better handled than some of the previous disturbances? 

Dr. PoGHE. Well, it seeii.s to me that the incident to which you 
refer was a very interesting episode— I would call it such— I don't 
think it is of fundamental import. The operators were shocked when 
the price declined 20 cents a barrel, and the regulatory authorities 
seem to me to have manifested an emotional reaction to the feeling 
and rebellion of the operators and we witnessed something that was 
in the nature of a sellers' strike. Those phenomena are not wholly 
unknown. It seems to me that at about the same time there was a 
sellers' strike among tobacco growers in North and South Carolina. 
They felt dissatisfied with the price, refused to bring their tobacco 
to market. I think this is an example of a little extraneous probleii. 
and I would designate it as an interesting example of mass psychology 
rather than anything fundamental in the conduct of the industry. 

124491— 40— pt. 14^«ec 1— — 3 



'7]^20 concentration' OF ECONOMIC POWER 

Mr. Henderson. Do you mean by that — let's see if I gather this 
correctly — if the move which was instituted by the 20-cent reduction 
had continued 9,nd sellers and buyers had gotten into an extra aiyiount 
of competition, we might have been moved toward a market control 
over proration and the action of the State authorities interrupted that? 

Dr. PoGTJE. I am not dear as to your question. 

Mr. Henderson. Well, I thought you testified that, through this 
progressive evolutionary movement we were reaching a point at 
which the ordinary market forces would take care of proration, and 
r asked the question in terms of the recent disturbance, and you said 
that was some what of an emotional outburst. Wliat I was trying to 
find out was whether or not the move which 'occasioned the emotional 
outburst was a move toward greater competition and toward greater 
reliance on the market 

Dr. PoGUE (interposing). No; I don't think so; no. I shouldn't 
say that was true. 

Mr. Henderson. It is just an incident along the highway? 

Dr. PoGUE. I would judge so; interesting, but not particularly 
significant. 

Dr. Ltjbin. Dr. Pogue, isn't there something inherently different 
between a given number of producers refusing to sell their product, 
as was the case in tobacco, and an institution that is created by the 
State, by government, to make it possible to forbid anybody from sell- 
ing his product, whether he wants to or not? In other words, in the 
tobacco situation John Smith could have sold his tobacco if he had 
wanted to, and there were many John Smiths who sold their tobacco 
nevertheless. In the case of the last episode in proration, even though 
individual producers may have wanted to sell their oil and felt that 
they Qould profit by the deal they were forbidden to do so because of the 
existence of an institution which was created by government. 

Dr. PoGUE. Yes ; I think your point is well taken. There is a differ- 
ence. The move evidently which lasted only a brief period, but could 
not in my judgment have lasted a long period, apparently met the 
almost universal support of public opinion in the States. There were 
practically no legal objections raised. There would have been^ I pre- 
sume, if they had gone on. It had very little economic effect. Perhaps 
it could be interpreted as undoing some of the overages in stocks that 
had previously accumulated. 

I have just a few more points to make and perhaps I am taking too 
much time. Senator. 

The Chairman. Not at all. It is very interesting. Dr. Pogue. I 
thought that we- would continue until 12-: 30 and then recess for lunch- 
eon, so you may proceed. 

Dr. PoGUE. I will hasten, then. It is very difficult, of course, to 
sketchily and quickly go over a thing as complicated as a new admin- 
istrative form such as proration. It is a matter that to he adequately 
considered would take a long period and would not be interesting to 
take that time, and when you condense it 

The Chairman (interposing). On the contrary, I think it is a very 
important subject matter, because as was suggested by Dr. Lubin's 
question, it is a plain illustration, of what we hear commonly called 
"Government interference with business " It is an interference with 
the free play of the desires of the owners of property to do what they 



CONCENTRATION OF ECONOMIC POWER 7121 

please with that property in an economic field, and it illustrates a furru 
of Government intervention which is exemplified in various lines. 
Here it is in a natural resource. 

Several months ago the Department of Justice was presentin<^ to 
this committee a study of the operation of the patent laws and how 
patents Avere used to control production.^ Later on we had a represen- 
tative of the Department of Agriculture before us and repi-esentatives 
of farmers who were discussing the control and production of milk, 
for example.- So that it represents a phase of a most interesting ques- 
tion, one which is constantly being presented to those of us who happen 
to sit in legislative positions, and one which is not always understood. 
We find, for example, that sometimes those who favor ^ne type of con- 
trol are absolutely opposed to another type of Government control, and 
therefore I say to you it is to my mind at least a matter of the greatest 
interest and I would like to see you develop it fully from your point 
of view. 

Dr. PoGUE. I will be glad to continue and come back to that topic 
later, if you wish. 

NECESSITY FOR PROPER SUBDIVISION OF THE OPTIMUM RATE IN AN OIL POOL 

Dr. PoGUE. There is one more point in the regulation of productioji 
from the point of view of conservation and efficiency. In order to 
have efficient production you must do two things : You must regulate 
the rate of output of the entire pool so as to get the best utilization 
of the forces provided by Nature. Then, in addition to that, if the 
pool and ownership is subdivided, as is usually the case, then it is 
necessary to set up rules for the proper subdivision of the optimitni 
rate of the pool, at the best rate or the rate selected among the different 
lessees of the pool. 

The principles for this subdivision are two in number: First, you 
have got to do equity, fairness to each operator; and, second, your 
conservation efficiency objective for the whole pool must not be upset 
by any individual action different from that of his neighbors. 

In the development of the proration technic, those two principles 
have only slowly emerged and the administration of those principles is 
still in the course of evolution, so that as we witness the methods of 
allocating the pool quotas to lessees, 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 combi- 
nation 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. The imperfections in the alloca- 
tion formulas formerly used and in part used today are the sources 
of many of the administrative difficulties, are the sources of many of 
the complaints that come in to you gentlemen and the Department of 
Justice, as well as the cause of economic unbalances arising from the 
overstimulation of drilling. 

The problem of regulating the operation of competing leases within 
the pool meets its most effective solution when the development of 

^ Hearings, Part 2. 

2 Hearings, Parts 8 and 7. 



7122 CONCENTRATION OF ECONOMIC POWER 

prei^sure differentials \Nithin the reservoir is minimized, thus inhibit- 
ing cross drainage from one property to the other. That is a simple 
thing to say; that is the fundamental principle involved; it is difficult 
to develop the proper administrative tool for accomplishing that with 
100-percent perfection, but the trend is definitely in that direction, 
the methocte are improving, and we are headed that way. By doing 
this, not only does each operator get his fair share of the oil, but he 
is able to do so without having to make an undue investment. In 
other words, you get a proportioning of the investment to the delayed 
production imposed for the sake of more efficient production. 

The Chairman. When you say "each operator," do you mean that 
the small operator as well as the large operator is treated equitably? 

Dr. PoGUE. I was discussing the principles underlying the treat- 
ment. So far as the actual treatment is concerned, I naturally do not 
have information on the thousands of individual cases. I think that 
by and large the small operator gets^-my frank opinion is that^^ 
gets a square deal plus, because naturally the administrative bodies, 
like all administrative bodies, are more interested in the small oper- 
ator than in the large operators, and I think that perhaps that is a 
desirable thing; I believe it works out that way. I do not think that, 
broadly speaking, the operator has any serious cause for complaint 
except in specific cases. Now, of course, most operators think in terms 
of how nice it would be if everybody else had to obey the rules and 
he himself could produce wide open. Of course, that contrast is gall- 
ing to many individuals, but that is only natural. 

The Vice Chairman. Dr., Pogue, are you approaching the limi- 
tation of the number of wells that go down in a pool? Is that what 
you have some leference to? 

Dr. Pogue. Yes. 

The Vice Chairman. Some sort of apportionment among tile own- 
ers of the pool ^ 

Dr. Pogue. No. I think the proper handling of that problem 
would be to set up rules and regulations that would create incentives 
such that operators would naturally drill the proper number of wells. 
I would like to envisage a system with minimum coeix^ion. I will 
admit the necessity of some measure of control in oil production, 
only because under the operation of the rule of capture and. the 
operation of the law of deferment, a pool subdivided cannot hold 
itself back, in other words the transient advantages of quick pro- 
duction are so great that part of the oil is sacrificed at a cost and 
society will then pay the penalty later on. 

The Vice' Chairman. If you had a limited number of wells flowing 
wide open in a given pool, are you able then to take advantage to a 
larger degree of these natural forces that bring oil up than you would 
be if you had a very much larger number of wells ? 

Dr. Pogue. Definitely , no. We tend to drill too many wells. 
There is another point there that is very interesting. In the old 
flush days., the idea Was to maximize the production from the indi- 
vidual property aind tlie only way to do that was to drill wells as 
fast as possible and produce them as rapidly as possible, but as 
soon as everybody did that, that advantage washed out. Now under 
conservation the objective is to maximize the recovery from the 
entire pool,' and that has io be treated differently. Everyone in the 
oil business admits the desirability of making the resource stretch 



CONCENTRATION OF ECONOMIC POWER 7123 

as far as practicable. This whole tiling is with that purpose in 
mind. Now it so happens that you canx smooth out a production 
curve, that is you can't have efficient production and have the pro- 
duction curve like a church steeple, flush and a big decline. 

The Vice Chairman. But the only way you extract the maximum 
amount of oil from the pool is to put this restricter in the pipe. 

Dr. PoGUE. That is the whole thing. There are a lot of details 
that we can forget, but if you want to get tlie concept 100 percent 
clear that is it. That is 90 percent of the whole probler. of conserva- 
tion. There will be a lot of little tricks and gadgets and complica- 
tions but why bother with them if that is practic ly speaking the 
whole point ? And any'old rate is better than on "pen rate and there 
is one best rate. How are you going to get taat? That is what 
the industry is striving to do. 

Mr. Ballinger. Do you determine that for every well. Dr. Pogue? 

Dr. Pogde. It isn't a question of determining it for the well. 
Engineers I believe can determine it within close or reasonable limits 
for every well. 

Mr, Ballinger. Determine open production for every oil well, 
engineers can do that? 

Dr. PoGUE. Under proration we have de^'eloped what is known 
as a device for reading the pressure of the oil reservoir,- and all you 
have to do is to take those measurements; they are not difficult to 
take, they are done periodically, systematically. The railroad com- 
mission has a staff of engineers doing it all the while, and you can 
measure to a nicety how much energy you are using per barrel of 
oil produced. I think the ideal, probably, in the end will be that we 
will keep the pressure level. There are two schools of thought on 
that subject. 

The Chairman. I am not altogether sure. Dr. Pogue, that I under- 
stood the question that Chairman Sumhers asked and the response 
that you gave. I understood his question to be whether — let's" make 
it specific — whether one well m a given field operating at full ca- 
pacity would not as effectively preserve the pressure, in that field as 
two wells of the same size, operating at one-half thp.ir canacity. 

Dr. PoGUE. No. 

The Chairman. It would not? 

Dr. Pogue. No ; there are a few unusual types of fields. We could 
go on a long time if we had to bring in all the qualifications but 
there are many types. There is one type of field prominent in 
Mexico, not very prominent in this country, that can best be com- 
pared perhaps to oil occurring in the Mammoth Cave, a great inter- 
locking single reservoir of oil. If you had th^t sort of thing you 
could pull it all out with one well as well as a number, but that is not 
typical and really is interesting to go into but I think doesn't bear 
on the broad problem, because almost all of our oils are of diffe^'ent 
types in tliis comitry. 

The Chairman. In other words, then, if you have a large number 
of wells each restricted below its capacity you more effectively control 
the pressure than if you had a small number of wells producmg 
exactly the same amount of oil. 

Dr. PoGUE. In general, yes ; because you have got to keep the pres- 
sure equalized through the pool. Now, in each pool there is a drain- 
age area that is optimum, at best; it is larger than we used to think 



7124 (CONCENTRATION OF ECONOMIC t*OWER 

but it is not as large as the whole pool. The best spacing would be 
1 well to 20 or 30 acres, sometimes 1 to 40, something like that. 

Representative Williams. Doctor, I am not clear at all what the 
formula is by which you can have an equitable distribution of the 
rights between the various surface owners, above the pool. 

For instance, here is one man who owns 10 acres and another a 
thousand overlying the pool. How are you going to distribute? 
Wliat is the formula by which the rights of each one of those surface 
owners is determined ? 

Dr. PoGUE. You mean the formula that I think is the best or the 
formula that is used in specific cases ? 

Representative Williams. How are the rights determined in a 
case of that kind ? 

Dr. PoGUE. Their rights are determined in an attempt to give each 
man his fair share of the oil, give him the same amount of oil that 
he would get if there was no restriction. 

Representative Williams. Is that in proportion to the amount of 
acreage he owns ? 

Dr. PoGUE. It isn't in proportion; it is more complicated than 
that. It is really in proportion to the size, the volume of his reser- 
voir. When we say the acre-feet, that is the number of acres 1 foot 
thick; that is, if one man has a sand twice as thick as the other in 
the same surface area, he would have twice the number of acre-feet 
and twice the volume in reservoir if the porosity and other condi- 
tions of the sands are the same. But the formula can be worked 
out by multiplying the acre-feet of each' man's property by the bot- 
tom-hole pressure of his property, then a very satisfactory and equi- 
table formula can be developed, and is in process of evolution in the 
oil business. At the outset, as a matter of convenience, because the 
engineering is not known fully, and because of the cost of admin- 
istration, the tendency was to give each man an allocation based 
on the initial gage of each well multiplied by the number of wells. 
Upon reflection you see that that is a bad formula because it 
forces a man, sets up competitive forces which induce a man to 
drill more wells than are really needed ; and as that has been learned 
and experience gathered on it, that is in process of improvement. 
The acreage factor comes in, and the pressure factor comes in. The 
thing varies in different States and different fields. Bear in mind 
that we speak and consider from the vantage point of pretty broad 
knowledge. This thing as it develops, this technical knowledge, 
these economic fnctors, have to be borne in on operators and on pub- 
lic opinion and on courts; and especially it has to filter through 
legalistic minds in which the equity concepts are finally broad in 
appeal; and the process of evolution — I started to say slow when 
we consider that this new form of administrative law and procedure 
is only 12 years old in a gross way, and in a net way, to use the ac- 
countant's term, has only been intensively applied in the last 5 or 6 
years; the marvel to me is that it works as well as it does and has 
as few complaints as it does rather than the contrary. 

The Chairman. What you have to say implies apparently almost 
exclusively to a field which has already been drilled before the pro- 
ration formula has been applied to it. What would be the situation 
with respect to a new field which had not been drilled in which the 
acreage was in several different titles? 



CONCENTRATION OF ECONOMIC POWER 7125 

Dr. PoGUE. Of course, the field has got to be drilled to some extent 
before it can produce and before allocation of demand has any prac- 
tical meaning, so that the thing develops with the drilling. 

The Chairman, The Department of the-Interior in administering 
the public domain frequently requires the permittees or lessees on 
a particular field to agree to enter into a unit plan before they know 
what the field is going to produce. So that the operation of the 
formula is altogether in the future. 

Dr. PoGUE. The unit plan is a very good way to operate a field. 
Whenever a field is a unit, automatically it will be operated in the 
best way. The development of units is a common procedure. In 
the oil industry itself most companies favor that where possible. 
It has an uphill fight, because the small operator fears to tie in with 
his neighbors. It is an individualistic industry. Each leaseholder 
thinks he can operate more efficiently than anybody else. They 
really think that, they believe that, and they hate to turn over their 
operations to a committee; and it means a slower development than 
otherwise would be the case. The procedure usually is to divide it 
up in advance and make flexible arrangements to be adjudicated peri- 
odically as the outlines of the field are determined by actual drilling 
facts rather than hypothetical interpretations of the geology in 
advance of drilling. 

The Chairman. In any event I suppose it might be said that the 
formula is in the process of development and that it will be rather 
difficult to say that it had reached perfection as yet. 

Dr. PoGUE. Not at alL I would say definitely it hasn't reached 
perfection. I think that I could write a pretty good formula. I 
think it would take some time to get it applied in every place. I 
think some of the formulas are fairly good, some are better than 
others. 

The Chairman. Would you say that the problem ©f "hot oil" as it 
is popularly called may be a result, to some extent at least, of a feel- 
ing on the ]}art of some operators that proration does not operate 
equitably? 

Dr. PoGUE. Well, I would think the main motive would be 'the very 
obvious one, that if your field is restricted, there is such a tremen- 
dous monetary reward to the man who can produce his oil wide open 
and if his moral strength is not of the proper caliber he will go 
around in the night and do it. 

The Chairman. That is quite a problem, isn't it? 

Dr. PoGUE. It is not a practical problem at the moment. I don't 
think there is a great deal of "hot oil." I mean it is a problem of 
human nature of course. 

The Chairman. Dr. Pogue, it is now quarter of one. If it is 
satisfactory to you we will recess now until 2:30 o'clock. 

(Whereupon, a recess was taken at 1 : 45 o'clock until 2 : 30 o'clock 
the same day.) 

afternoon session 

The committee resumed at 2 : 35 p. m. on the expiration of the 
recess. 

The Chairman. Will the committee please come to order? Dr. 
Pogue, you are ready to resume, I presume. Please proceed. 



7126 CONCENTRATION OF ECONOMIC POWER 

WIDE-OPEN VERSUS RESTRICTED PRODUCTION 

Dr. PoGUE. Mr. Chairman, to resume the testimony perhaps it 
would be desirable very quickly to review the main points that were 
covered this morning. I attempted to show that there were two 
ways to produce an oil well, wide open or restricted, that restricted 
flow gave more efficient recovery and a better cost curve over the life 
of the property, that any degree of restriction was better than open 
flow, but there was a best degree of restriction called the optimum 
rate which gave the most effective results. However, to gain the most 
effective optimum rate requires a much larger reserve than the old 
flush method of production. We call that reserve the optimum 
reserve. Therefore, in the process of stepping up our reserves from 
a flush size to an optimum size, it is necessary, logically necessary, 
physically necessary, to have a production control that will hold the 
oil in the ground and Jteep the incentive for discovery going. 

That means that proration being the device that evolved for meet- 
ing this situation, starts out as a production control with conserva- 
tion attributes. As it goes on, the conservation aspects increase and 
the end point, as I see it, is a device where conservation predominates 
in the production control aspect, and finally it recedes into the 
background. 

That, in a few words, is my conception of this new instrumentality, 
this new administrative form, this new industrial type of activity 
that is represented by this changing thing called proration, and the 
fact that it is a changing thing, it has various attributes and com- 
ponents which in turn are shifting in time, means that you can get 
every type of opinion on it and there will be justification for that 
particular opinion, because most of the opinions will derive from the 
particular point of view from which this moving thing it looked at. 

The Chairman. You have discussed it chiefly from a technical 
point of view, but your statement just now implies that it has a very 
practical aspect also. That must necessarily be true since it is a 
growing technique, so to speak. 

Dr. PoGUE. Precisely. The instrumentality, the means that are 
used, are technical and legal. The resultants from it are physical 
and economic. 

The Chairman. Well now, are, there any devices or methods of 
applying the engineering principles involved whereby what might 
seem to be an equitable application of the principle could be made 
to work inequitably? In other words, if I were a prodiicer, could I 
apply technique that would give me a larger proportion out of my 
well than some other operator in the same field could get if he didn't 
use the particular device that I use ? 

Dr. PoGUE. I don't believe that the differences or the differentials 
that might be established would be derived from that source so much 
as from administrative imperfections or evasions of other types. I 
think that the technology itself would not be primarily the cause of 
inequities. 

The CiiAiKivrAN. Well, there is such a thing as introducing gas into 
a field for the purpose of stimulating the productivity of the well, 
is there not ? 

Dr. PoGiiK. Oh, yes. 



CONCENTRATION OF ECONOMIC POWER 7127 

The Chairman. How would that operate upon a proration plan? 
What would be the eflfect of it ? 

Dr. PoGUE. The reinjection of the gas is an advanced procedure to 
which we are tending on a broader and broader front where the gas 
is not commercially needed, or has a market; and even in some cases 
where it has; the reinjection or the recycling of the gas maintains 
the pressure, helps maintain it, and gives a larger recovery of the 
oil. Where that- happens it requires a cooperative action and a care- 
ful accounting to see that the equities are preserved. Of course, 
equities have to be established by the courts. The customary redress 
is that each owner always has recourse to the law and these new 
formulas and advanced methods get into action gradually through 
being validated by the legal procedure. That is the reason that the 
practice must lag behind the theory. The engineers have learned — 
in fact the whole profession of petroleum engineering is derived from 
the practice of proration. Before we had proration there was no 
way to understand the production of oil except in the flush stage 
but delayed production created a tremendous body of engineering 
■knowledge. We well know any new technique takes some time before 
it gets a following, even among the technicians. The opinions 
develop by experimentation, finally get adopted by a sufficient group 
and then they, begin to be tried out and have to be validated in the 
courts, and that procedure takes time and when that is established 
the engineers have advanced a steo further and the thing goes forward 
in that recycling manner. 

Now to come back more to the finishing up of the summary story. 
The mechanism by means of which proration directed consists, 
as we know, of the State conservation commissions, the Interstate 
Oil Compact Commission and certain functions performed by 
the Federal Government, such as the enforcement of the Connally 
Act and the promulgation of advisory estimates of demand on the 
part of the U. S. Bureau of Mines. These bodies and functions, in 
my judgment, are adequate in scope and need no amplification, al- 
though I think there is room for improved effectiveness and more 
advanced technique, which time should bring about. 

ADMINISTRATION OF PRORATION ^ 

Dr. PoGUE. Now the administi ation of proration is a very diffi- 
cult problem, speaking now of the administration of this technique 
which is in process of change itself. The administrative matter is 
a difficult problem, not only because the principles of the movement 
are in process of evolution but also because of the many special 
interests involved which bring pressures to bear upon the adminis- 
trative bodies for preferential treatment. The administrative diffi- 
culties, I think, will abate as standards of conservation become more 
thoroughly understood and established, and as the reserves permit a 
more complete coordination between the effective optimum rate and 
market demand. 

In the transition period, however, it seems to me that the very 
imperfections of State control, owing to limitations of authority and 

1 Ernest O. Thompson, member, Texas Railroad Commission testified on this subject 
before the commitvee on October 3. 1939. His testimony is included in Hearings, I'art l:"*. 



'7]^28 CONCENTRATION OF ECONOMIC POWER 

to interstate rivalries, are in a measure a good thing because they offer 
protection against abuses. They leave enough competition in the 
system so that we have the advantages of competition, although those 
advantages are often very unpopular with operators, large and small 
alike. So long as market demand must be an integral part of the 
system, before we get the optimum reserve, the market demand can 
be put to one side, I believe that a too perfect regulation of supply 
might be undesirable because it would create undue confidence in 
the price stability of the industry and would encourage unwise 
investments. 

Under present conditions business must remain continuously alert 
on the competitive front and it can't afford to rely heavily upon 
the States and the Government to maintain a profitable condition 
for it. I believe that is 'a healthy condition. So that I wouldn't be 
disposed to worry too much about the imperfections of the system; 
I would worry a little more if the system was too perfect and if 
human nature at the same time was no more perfect than it is. 

Mr. O'CoNNELL. When you spoke of competition a moment ago 
did you mean competition in the industry or competition between 
the various States ? . 

Dr. PoGUE. I was speaking at the moment in reference to the 
presence of competition between the States. 

Mr. O'CoNNELL. Not in the industry? 

Dr. PoGUE. I would be suspicious of a perfect quota system 
where each State was given a fixed quota of production ; if it 
couldn't be altered and no State had a word to say about it, it would 
be too rigid a system. I would prefer to have somewhat imperfect 
quotas with the States competing. I see no objection to now and then 
the whole system breaking down, to take an extreme example. We 
could come back again. So these periodic crises don't seem to bother 
my view of the subject as much as it seems to bother the more popular 
view of it. 

I think, too, that consumers are protected by the manner, in which 
proration functions, although not represented in the meetings of 
proration authorities. Proration insures against scarcity prices in 
the future by creating reserves far greater than necessary to maintain 
current production. If our thesis of conservation is correct, that it 
creates more oil, obviously it creates a greater future supply than we 
would have without it. 

EFFECT OF PRORATION ON PRICE 

Dr. PoGUE. Prices are dependent upon the relations of supply and 
demand; with a larger supply our cost should be lower and our prices 
should be lower, and I believe that has been the case up to date. I 
believe it will continue to be the case. I think that the petroleum in- 
dustry, because of its peculiarities, is one in which the worries might 
be that prices would be too low, rather than too high. In respect to 
price movements, proration exerts its influence only within a narrow 
economic zone. I don't deny that the operation of restricting supply 
doesn't have an effect upon price. It has an effect upon price and an 
effect upon cost, of course, but I think the effect upon price is confined 
to a very narrow economic zone, and the affect is too smooth out 
extreme fluctuations in price, rather than to create artificial price 



COll^CENTRATION OF ECONOMIC TOWER 7129 

levels or to valorize, as we say — that is, artificially create values. 
There are two automatic safeguards against uneconomic prices under 
the operation of proration. First, uneconomic prices would encour- 
age overinvestment in producing capacity, and the pressure of capital 
for return under those circumstances would affect a breakdown of the 
controls in the State where the pressure was greatest, and the strength 
of resistance was less ; in breaking down then State competition would 
enforce the lower price throughout the other States. 

Proration doesn't destroy enough of the functional aspect of price ; 
it leaves price perfectly free to influence search and discovery and 
drilling and those things that build up the elements of supply right 
down to the well. They are simply throttling the supply at the well- 
head ; that isn't sufficient to affect price, except within a very narrow 
and o]^.e might say innocuous zone. This is counter, perhaps, to the 
prevailing view. I believe that many people think that it can affect 
price on a grand scale and they are disappointed that it doesn't. I 
don't think it can We need have little worry about it creating much 
of a price effe. 

The Chairman. Well, the amount of effect which it has is dependent, 
is it not, upon the gravity of the crisis, to use the word you employed 
a few moments ago ? 

Dr. PoGUE. Well, I think what it does — it is an effectual guarantee 
that you won't have these extremely chaotic dips in the price struc- 
ture that we used to witness and for that I don't think anyone would 
advocate a system or a system could survive which would give us these 
extremely wide amplitudes of swing. In the old days in a given year 
the price of oil would repeatedly move over a zone of 100 percent; that 
is, it would go up 100 percent on the up side of the cycle and come down 
60 ]:)ercent on the down side, or even greater extremes of movement. 

Now, apparently, judging from what has been the history of the 
price movement in the proration period, it moves up 10 or 20 cents and 
down 10 or 20 cents; a very narrow zone, and apparently in pretty 
close conformance Avith the movement of general prices. It has been a 
smoothing effect. In price discussions we are too prone to look upon 
price as a result of something, something that affects the welfare of 
the people. Perhaps the most important aspect of price is what we 
call the functional aspect of price ; that is the use of price or the func- 
tion price to regulate the system itself, to regulate the flow of capital 
and the relations of supply and demand, and that functional aspect 
is almost unimpaired; it is shifted a little in time; it takes a little 
longer for it to manifest itself, but it works, nevertheless, and it will 
work. 

In the second place — and I think this is quite important — the inte- 
grated character of a large segment of the petroleum industry would 
also prevent the transmission of an abnormal price. Suppose the 
price goes too high. What happens? The integrated character of a 
portion of the industry transmits the pressure of the crude supply 
behind the proration barrier right through to the consumer because 
of the fact that the integrated operator sticks closer to the costs of 
the whole operation. 

Inevitably, then, it is unintegrated. 

The Chairman. All the way through the operation ? . 

Dr. PoGUE. Yes. 



7130 CONCENTRATION OF ECONOMIC POWER 

The Chairman. That is to say, production, transportation, refining, 
and distribution? 

Dr. PoGUE. I would say it is the over-all effect that would keep 
the production in line with the costs of the best practice. In other 
words, I don't see how it is possible, even under proration, to get any 
substantial degree of valorization in the oil business that would last 
for any length of time. I think attempts to do it would be short- 
sighted ; I don't believe the industry, by and large, would attempt to 
do it. If they did, if they were shortsighted enough to attempt that, 
I think the natural economic forces would defeat theai in the purpose, 

I feel quite sure of that. In other words, proration under the sys- 
tem we now have, under State-coordinated control and with a semi-in- 
tegrated industry and with a degree of competition present, doesn't 
destroy enough competition to have much effect on price. The smooth- 
ing effect on price is not due wholly to proration. It is due just as 
nuich to the conservation aspect of it. For example, take a given 
pool, which is a unit in our production. In the old days, under flush 
conditions, production in a few months would rise to church steeple 
peaks and in a few months decline 50 or 75 percent and trail off to a 
slower rate of decline. Naturally the cost curve would be somewhat 
similar to the production curve. If I take that curve and cut off the 
church steeple, smooth it out into a long, flat curve, naturally you 
affect the cost curve, and if that transpires for the industry as a 
whole, the cost curve of the entire industry is smoothed and the price 
curve must follow with some degree of conformance to the cost curve. 
You give it that smoothing effect. You get it under conservation. 
You can't conserve oil without retarding rate of flow. You can't 
retard the rate of flow without having a smoothing effect on price. 
Fortunately, the smoothing effect on price is something that I can see 
no one objecting to, because who wants the wild gyrations of price 
that you have in an industry such as oil if it is left to the free opera- 
tion of the rule of capture. What you are after is a more even price 
movement and a price level that conforms pretty closely to cost, 
leaving just enough profit in the system to keep the requisite growth 
in volume and in efficiency and in technology actively at work. 

The Chairman, The conclusion then is that if the hills and valleys 
of production are smoothed out, then the hills and valleys of price 
likewise are smoothed out, 

Dr, PoGUE. You can't help it. It derives from the physical nature 
of the production curve itself, and to attribute all of that, or the 
majority of that, to the administration of proration I think is to 
take a rather superficial view of a rather complex and involved pro- 
cedure. 

Mr. O'CoNNELL. With what you have said about smoothing out 
the curve of production being a desirable thing, would you say that 
was also applicable in other fields than oil? I take it the statement 
was very general. 

Dr. PoGUE. I am glad you brought up that point, I am not 
familiar enough with the costs in other commodities offhand to citf^ 
examples on the flush of the moment, bu' you have a cost amplitude 
in oil that is a difference between the lowest cost and the highest 
cost that is wider than any other commodity, I think, whatsoever. 
The reason of that, when we stop to think, is tied in with this rate 



CONCENTRATION OF ECONOMIC POWER 7131 

of production. You can take an oil well and produce it wide open 
and the cost during the flush period is tremendously low. It may not 
be but 2 or 3 cents a barrel. The cost in the later period may be 
$1 a barrel. You have an amplitude there of — what is it? — 1,000, 
maybe several thousand percent, tremendous amplitude. Then at 
the same time, geographically you have these flush fields with these 
low costs competing with the settled fields with the high costs, so 
that the nature of the production curve of oil which is derived from 
its liquidity and the rule of capture on the legal side, creates a price 
situation that is disastrous if we find the oil too rapidly. And when 
we find the technology for finding the oil as we have, it comes along 
too rapidly and the price mechanism breaks down and needs help, 
or appears to need help. 

I explained this morning how, if you left the price mechanism to 
solve the problem alone, it will solve it by preventing conservation, 
using up the reserve wastefully and getting the thing in balance 
that way. That was one way in which the development would have 
gone. It didn't elect to go in that direction. It went in the other 
direction and we have what we are discussing today, this new 
mechanism. 

But the price thing is involved in the conservation part of it, as 
well as in the production-control part of it. At least this dual con- 
cept emerges. Physically, you can devise no way of conserving oil 
without retarding the rate of ilow, and you can devise no way of 
retarding the rate of flow and have exactly the same price reaction 
that you would have had if you did none of these things. You have 
got to take it. It isn't a question of whether the price reaction is 
right or wrong, it is a question of whether the conservation reaction 
is what you want to retain or not. 

Furthermore, this question arises : Is the price of oil today higher 
or lower under proration than it would have been if we had had 
no, proration? Now, usually the question is phrased: What would 
happen to the price of oil if you would open up all our production? 
Obviously, it would go down. But is the price of oil higher or lower 
now than it would have been had we had no proration ? It is a more 
realistic question, a more interesting question, and a question, of 
course, that can't be answered. No one knows unless he went back 
and. tried an experiment, which is obviously impossible. 

But on theory, and on such knowledge as I have of the price struc- 
ture, I am- of the opinion that the price of oil today would have been 
higher if we had never devised this proration mechanism. Our 
reserve would have been lower, also, and our costs would have been 
different.^ 

The Chairman. You feel that proration has been a' distinct benefit 
to the industry ? 

Dr. PoGTJE.' I do' but I think it has been more of a benefit to the 
country — that is, to the consumer — than it has been to the industry. 

The Chairman. I used the phrase meaning the industry in relation 
to the public. 

Dr. PoGUE. Sometimes the distinction is made; I appreciate that. 

^ This subject is resumed on p. 7136, infra. 



7132 CONCFNTRATION OF ECONOMIC POWER 

NEED FOR BEST OBTAINABLE ENGINEERING STANDARDS IN PRORATION 

The Chairman. But you feel, do you, that a standard formula of 
proration would be a desirable thing ? 

Dr. PoGUE. No ; I don't think that. As I see any economic organ- 
ism, I think it is in constant course of change. I think that the 
formulae and practices should be improved as rapidly as feasible. 

The Chairman. You misunderstand me. 

Dr. PoGDE. I think there should be standards and those standards 
should be the best obtainable. 

The Chairman. And they should have universal application. 

Dr. PoGUE. Oh, yes ; and I think they tend to be standardized. As 
a matter of fact, the thing that comes first is the conservation law. I 
have read and studied the conservation laws of the various States. 
The conservation laws of the latest States to pass them are far better 
documents than those of the earlier States. The more advanced con- 
servation laws are splendid documents. The laws contain everything 
that the engineer needs. 

Now, the engineering procedures have advanced toward the concept 
of the laws. These engineering procedures lag, of course, in getting 
into application because the administrators of proration take them up 
and apply them and then they have to go through this period of 
litigation. 

The Chairman. There are differences, then, in the laws of the vari- 
ous States? 

Dr. PoGUE. Yes; but the differences in the laws — I think that the 
administrative law difl[ers more than the statute laws. The statute 
laws are very broad. The laws are adequate to accommodate perfec- 
tion in this field, if one can imagine such a thing. 

The Chairman. A moment ago you said, or I understood you to 
say, that competition among the States in the production of oil — that 
is, in the rate at which they allowed the oil to come from thfe 
market — was a good thing. 

Dr. PoGUE. Yes ; I think com]^etition between the States 

The Chairman (interposing). Isn't there a little conflict there 
between the two statements : First, that there should be a standard of 
universal application; and, second, that the competition among the 
States which arises from the differences in the administration of the 
proration law is also a desirable thing ? 

Dr. PoGUE. I am glad you raise that point because I think I can 
resolve the apparent conflict. I think that the engineering criteria 
should be standardized; that is, should be the best obtainable, and, 
so far as possible, the best in every location. I wouldn't standardize 
that perfectly because we don't know what the best is, and the laws 
of competition mean that a lot of things that we don't think much of 
turn out to be the best. You must have sonie divergence, otherwise 
you stagnate. 

But the thing where! think competition is important is on the 
economic side in this intermediate expedient of balj^ncing supply and. 
demand through market-demand quotas. I am quite willing to see 
some degree of imperfection in that because I think that is an expedi- 
ent, and I dont think perfection can be obtained, nor do I think it 
desirable. I think those who want perfection in those things are 
interested more in price than in conservation. 

The Chairman. The approximation of perfection, then, rather than, 
perfection is the desirable end ? 



CONCENTRATION OP ECONOMIC POWER 7133 

Dr. PoGUE. Well, that isn't quitfe the idea. I want to see the 
thing advance. I want enOugh competition in it to be sure that 
the good old system of trial and error is at work, because I think 
that no one of us knows the answer. I think the blend of the effort 
of everyone under the competitive process gives a final end point 
that is better than anything one can plan for earlier in the stage, 
just as I think this thing has worked out better than anyone imagined 
it would, despite the fact that there are plenty of flaws in it, and 
that there are plenty of complaints about it, and that it may not be 
the final answer. It may not work out. I see grave dangers in the 
path. If it is interfered with too much or if it is turned into eco- 
nomical control, diverted from its conservation objectives, or if it be- 
comes a regulation of production control, and there is an attempt to 
use it for price-fixing purposes and that gets uppermost, why then 
T think the thing will go the wrong way. I think it is somewhere 
between 50 and 100 in its evolution. Whether it keeps going in 
the right direction or gets diverted is partly in the hands of this 
committee that I am addressing, it is partly in the hands of the oil 
industry, it is partly in the hands of the State commissioners. 
What these three groups of people will do with it, I don't know. 
I think they have its fate within their control so far as groups can 
control the destiny of a movement. Perhaps it is even broader in 
its implication than that. 

Mr. O'CoNNELL. Doctor, I have a little diflBculty in seeing why 
you feel that competition between States is the desirable type of 
competition which by trial and error will result in a better situation, 
let me say. 

Dr. PoGUE. On the supply-and-demand side I don't want to see 
too much rigidity in the attempts to artificially balance those things. 
I think all the troubles and complaints and difficulties that we have 
with the thing are because of the balancing of supply and demand 
that enters into the picture. That is something that is normally 
done by the free interplay of the market place. 

Mr. O'CoNNELL. I understood — I may be wrong — that you feel 
there are" two desirable things attained by proration ; one being con- 
servation and the other one being the bringing of the supply into 
some reasonable relationship to the demand. Is that a fair state- 
ment? 

Dr. PoGUE. That is a fair statement, but not quite what I have in 
mind. We don't have to worry about supply, balancing demand. It 
is bound to, always. What we mean when we say it should balance 
demand is that it should balance demand and not wreck the activity 
in the way of doing it. 

Mr. O'CoNNELL. Let me give you a hypothetical question. If the 
supply of oil were inexhaustible would you believe there was any 
justification for proration? 

Dr. PoGUE. I have thought of that question, and that is a hypo- 
thetical question- It would depend upon the bearing on cost. If I 
thought that the cost could be lowered 

Mr. O'CoNNELL (interposing). The reason! asked was because you 
did discuss the leveling off of the prices. 

Dr. PoGUE. I don't see that one should answer a hypothetical ques- 
tion, because one's answer is hypothetical, and therefore useless. 

Mr. O'CoNNELL. I will withdraw the question then. 



7134 (U)nc;entration of E(;onomic power 

NECESSITY OF PRORATION FOR CONSERVATION OF UNKNOWN OIL RESERVES 

Dr. PoGUE. Because I don't know, we shouldn't proceed on the basis 
that the supply is inexhaustible. It may be. I doubt if it is. I see 
no evidence of exhaustion, but as long as we have the option, let's 
assume that it is exhaustible and act on that premise and then if we 
are wrong we haven't done as much harm as the other way. 

Mr. O'CoNNELL. I gained the impression from something you said 
a little while ago that you felt there was a valid reason for proration 
quite apart from the aspect of conservation. 

Dr. PoGUE. No ; I said the pricersmoothing effect of proration-con- 
servation was something that one couldn't object to, that it was not 
an antisocial attribute, and whether you like it or not, you can't get 
conservation without it. You have that as a byproduct and you can 
either accept it or not. You cannot accept it because you have got it. 
You have to destroy your conservation to get rid of it. 

Mr. O'CoNNELL. I understood you to say you. believe that was a 
desirable byproduct of the conservation aspect of tlie problem and if 
we eliminate the conservation aspect I take it we have the same theory 
espoused by all people who advocate control of production. 

Dr. PoGUE. I will answer the hypothetical question. If I were 
convinced that the supply of oil was inexhaustible, and if I were 
convinced that the costs would equal under the two circumstances, 
then I would see no occasion for proration. If I thought there were 
some device to lower costs, even, though the supply were inexhaustible, 
I would tend to favor that if it left enough freedom of competition 
and individual effort. 

Mr. O'CoNNELL. Isn't that another way of saying you would not 
be willing to let free and untrammeled competition prevail unless it 
would necessarily result in a lower price ? 

Dr. PoGUE. No ; my philosophy doesn't involve price fixing. I ^p-> 
pose it. I fought it very actively in my short experience with the 
N. H. A. when I was adviser on the N. R. A. on the code and, to my 
great disappointment, it got into the code. But it was never, invoked. 

My record is absolutely clear. I am definitely opposed to the arti- 
ficial manipulation of prices by anyone, by any group. I think it is 
undesirable. 

The Chairman. Private or public. 

Dr. PoGiTE. Private or public. 

The Chairman. Twenty years or more ago it was quite usual to find 
scientists and engineers predicting that our sources of oil were about 
to be exhausted, was it not? 

Dr. PoGUE. Quite so. 

The Chair]\ian. And now you testify that you see no evidences of 
exhaustion ? 

Dr. PoGUE. That is correct. 

The Chairman. A very interesting change. It seems "to harmonize 
with the facts, of course. 

Dr. PoGUE. The reasons are these: The force of technology is so 
powerful, so tremendous, and the technological achievements under 
the petroleum industry have been positively so brilliant, so tremend- 
ous — I don't like to use large terms unless the concepts to be conveyed 
are equally large— that those of us who are close to those developments 
can scarcely appreciate the magnitude, of them. 



CONCENTRATION OP ECONOMIC POWER 7135 

When I first began studying the oil business, 3,000 feet was a deep 
well. Today we are going down to 15,000 feet, and my friends among 
the engineers concerned with that phase of the technology talk confi- 
dently about 20,000 feet shortly. When you go from 3,000 to 15,000 
feet, you multiply the depth fivefold. The Kettleman Hills oil field, 
one of our tremendous fields, was known — that is the structure was 
known or suspected to be an oil field for many years before the tech- 
.lology, metallurgy permitted the industry to drill that field. 

That was a discovery that would have been made earlier had the 
technology advanced. We have invented entirely new methods of 
finding oil. We have invented new methods of producing oil, of 
using the natural forces, of making two blades of gr^ss grow where 
one grew before. There was an interesting book that came on my 
desk just before I left for Washington the other day, published by 
the W. P. A., quite interesting, in which they have some charts showing 
the discovery of oil fields by methods of technology used and the 
geophysical aspects at that stage. We are developing new methods 
of soil analysis; we are finding that the oil fields around the 
edges leak mild traces of gas; technicians have developed methods 
tof sampling the soil and analyzing the gas and determining the 
traces of special hydrocarbons, plotting it on a map. That is a new 
instrumentality that is just coming in. 

The whole thing is advancing in every phase and form, and the 
point is that in the last few years. finding results per effort has been 
greater than at any time in the industry. That may change tomorrow ; 
I mean to say that up to date there is no evidence at all that our 
ability to find oil is weakening. They are merely estimates based on 
the failure to properly appraise the technological factor. 

I am not impressed, likewise, with the ability of anyone to forecast 
conditions. I don't know of anyone who has been very successful 
about it. Those things always fail. One can only detect the trends 
and directions or perhaps judge the ways and movements. 

STATE COMPACT PLAN OF. PRORATION 

Dr. PoGUE. May I conclude my more formal statement and then open 
myself for any further questions that the committee may wish to place 
with this final idea? In proration, the petroleum industry has pio- 
neered in the development of a new administrative forih for the solu- 
tion of one of the most difficult problems that has taxed the ingenuity 
of our industrial system. Through the medium of State conservation 
commissions, working in close contact with field conditions, responsive 
to developing technological knowledge, and coordinated by the Inter- 
state Oil Compact Commission, we have seen created a new mechanism 
which constitutes one of the most significant experiments in our entire 
economy today. This is a new administrative form^ gentlemen, that . 
we are seeing develop before our eyes. In this time of economic 
change, when hundreds of experiments in centralized planning are 
being carried on, many of them in the city of Washington, I think 
it is fortunate that the States and the oil industry have been left 
unimpeded and even have been encouraged in their efforts to perfect 
this new decentralized administrative instrument, which may not only, 
not necessarily, but which may not only yield such fruitful result^ in 

124491— 40— pt. 14, sec. 1^ 4 



7136 CONCENTRATION OF ECONOMIC POWER 

the specific field of oil, but, in my judgment, may also point the way 
to the solution of some of our other great industrial problems. 

After all, I am a technician, and with all of our technical knowledge, 
with all of our planning, with all of our much-vaunted ability to 
managg, we still rely on the good old system of trial and error to find 
out what is good and what is bad. Our society, our Nation, is experi- 
menting today with new forms of industrial control. . The overwhelm- 
ing majority — in fact, all but one — of these experiments head up in 
Washington, are centralized in this city. Here is a lone experiment, 
older in experience than any of these others, more advanced, seeming 
at least to some of us to be doing a good job, having plenty of flaws, 
plenty of errors, but, nevertheless, evolving apparently in the right 
direction. Isn't it important wholly aside from the issue at stake to 
see this experiment develop further? May it not prove to be a more 
potent and useful instrument than some of these other things that are 
being developed? Whether or no, if we are experimenting, let's ex- 
periment on a broad front. Lets see what this device of the States 
coordinated by a compact between the States will do. Surely it hasn't 
failed. It is changing this great industry. The way the industry has 
initiated this thing and is following through, I think the results viewed 
today against the objections and flaws balance the latter. I think 
something is to be said on the score of trial and error over a broader 
front entirely aside from the merits and demerits of proration viewed 
narrowly as an oil problem. I didn't mean to get into that peroration, 
but, nevertheless, I did. 

The Chairman, It is quite interesting. The State-compact plan, 
of course, is recognized by the Constitution~of the United States, and 
it is a method for the adjustment of problems that affect groups of 
States and regions which is favored by many observers, so that it is 
quite all right to indulge in the peroration. 

Mr. Cox, did yoii care to ask Dr. Pogue any questions? 

Mr. Cox. Dr. Pogue, is it your considered opinion that the pro- 
ration laws of the several States have been administered ^ primarily in 
the interest of conservation and in indifference to the question of 
price ? 

EFFECT OF PRORATION ON PRICE " 

Dr. Pogue. I think the administration of the proration laws has 
been administered, broadly speaking, with improving effectiveness. 
I can easily conceive that the price resultant may have been exag- 
gerated. I will put "it this way : there is a misconception on the 
price effect of proration. I think that there is room for improvement 
in the administering conduct. I think that improvement is'in proc- 
ess; the problem is infinitely complex, more complex than appears 
to the general observer, because it has to proceed in coordination 
with existing public opinion, knowledge, and the willingness of the 
courts to go along. There are occasional actions on the part of the 
administrative authorities that seem to indicate that for short times 
and for emergency periods price is quite uppermost. I don't think 
it. matters much. I. think the important thing is the underlying 
evolution of this instrumentality. Wliat people think and what they 

1 Col. Ernest O. Thompson, member, Texas 'Rnilroad Cmnmissinn, tesiified on the ad- 
ministration of proration in Hearinss. Part 15. 

2 This subject is resumed from p. 71.^1, supra. 



CONCENTRATION OF ECONOMIC POWER 7137 

have in mind when they do it and what they think they are doing is 
not so important as what comes out of it. 

Mr. Cox. Do you mean by part of that answer that although the 
State authorities may have thought they wgre affecting price they 
weren't affecting price? 

Dr. PoGUE. No ; I don't mean that. I don't know what goes on in 
the minds of the State authorities. I don't know anything more 
about that aspect of it than anyone else. I suppose everybody is 
interested in price. I see no reason why anyone shouldn't have it 
in mind when any action is going on on price. The only point I 
believe, to go back to first principles, is that the price resultants 
don't seem to correspond with price plans and ideas ^n this field or 
any other. I think the finest way to get prices down is to try to put 
them up, and vice versa. It so happens (and this is one great diffi- 
culty today with planning in economics) that anything you do has 
a series of effects, primary, secondary, tertiary, and for some strange, 
inscrutable reason the secondary results are usually the reverse of the 
primary, therefore you usually get just the reverse of what you plan 
to get. That is the reason why we don't get along better in our 
managed economy. That is the fundamental reason. In a political 
setting you have got to respond to public opinion. Any elected officer 
is going to respond to the pressure of his constituents. I have never 
been an elected officer, but I assume they act in that way or they don't 
long remain elected officers, and that is part of the democratic process. 
Naturally, every producer of oil is interested in a good price. If 
you let him have his way about it you will have nothing l3ut price, 
but I think that the industry by and large is mature enough to 
realize that it is a mass production industry. I think that any 
examination of this industry indicates that the prices are very rea- 
sonable; you don't even have to look at the figures to know that. 
There couldn't be the number of people riding around in cars if that 
were not the case. 

There is the technology of this industry, I forgot this morning 
to mention perhaps the greatest safeguard. You don't have to worry 
about price valorization in an industry that has such a vital and 
dominating technology as this. All the brains in the oil industry, 
even if they were intent on doing it and had the cooperation of the 
Government, couldn't valorize this price and get away with it very 
long. These economic forces, I think, are greater than the power 
of everyone working in the same direction. Fortunately, they don't 
all work in the same direction. The thing works out all right. 
I can't see what all the shouting is about on this price thing. You 
can stop a hundred oil men on the street and half of them will tell 
you, "Of course it is a price-fixing measure." I don't think they 
know what they are talking about. They want it to be, they would 
make it one if they could, but they can't. 

Mr. Cox. It is a mistaken belief? 

Dr. PoGUE. It is a mistaken degree. I have explained — it is ob- 
vious, of course — that you have a different price when you level 
the supply, hut to hear some people talk you would think that the 
objective of our society is to have ten-cent oil. It. would be fine if 
the cost were eight cents. It would be pretty bad — well, you couldn't 
have price below cost very long; you can't have it above cost very 



7138 CONCENTRATION OF ECONOMIC POWER 

long unless you have a completely regimented economy. The only 
advantage, I tried to illustrate, on the economic side of the effect on 
price is the ability to abuse this thing. Of course anything can be 
abused. A certain degree of imperfection is a pretty good t^ing. 
I want to see it perfect on the technical side. I don't want to see it 
perfect on the other sidfe. As the thing evolves you can get away 
from, say, the aspect of economic control. I don't like market 
demand because it raises all these questions and there is no resolve- 
ment of these questions; it makes the thing appear different from 
what it is. 

Mr. Cox. While you are on that point, do you think it would be a 
good thing, then, Mr. Pogue, to stop those estimates of market de- 
mand which the Department of Interior puts out ? 

Dr. Pogue. I drew up the first estimates in market demand and 
I have got to be pretty stalwart to object. No; I do not think so. 
I have tried to explain, and it is very hard to so quickly get these 
points, but for full consen^ation you have got to move from a flush 
reserve to an optimum reserve, you have got to move from, let us 
say, a 10-year supply of oil to a 20-year supply. I don't know what 
the optimum is. If you give me 100 engineers and a year's time, 
I can come back and tell you; it is a big engineering job to do. We 
have got to move from a 10-year reserve to a 20-year reserve or a 25- 
year resei-ve. Let us soy we have got to move from 10 billion barrels 
to 25 billions, just for the sake of the argument. Two or three years 
ago we had 12 billion barrels. This year, according to official esti- 
mates, we have 17 billion. According to the work we have done in 
our little shop it is our opinion that we have got 22 billion. Some- 
where between 25, 27, 28 is the optimum. Now, how can you move 
from, a 10-year reserve to a 20-year reserve unless you artificially 
balance supply and demand so long as the rule of capture is func- 
tioning and so long as it is more advantageous for a man to get 
his stuff quick than to wait for it? You just can't figure out a way. 
Maybe conservation is too much trouble to get. I don't think so. 
You have either got to reject conservation or you have got to have 
artificial help in tliis transition period, and that is all we are going 
through. The thing doesn't take shape as you look at it, quickly 
and superficially. This thing is terribly involved. It is hard to 
see what it is, because if you look at it too close you see a lot of 
trees, you see a lot of objections, you see flaw after flaw. The 
surprising thing to me is not that there are so many objections to it 
but that it functions as well as it does^ I don't think you could 
have planned a thing that would have worked. Somehow or other 
the thing is working and it is progressing: Why are these reserve 
estimates going up? Why are the experts, tKe engineers, each time 
they get together in the last 2 or 3 years, getting higher figures ? It 
is because in part we are finding oil more rapidly and because in part 
they are realizing that this delayed production gives you larger 
recoveries. You haven't called many engineers. This oil is a techno- 
logical, engineering industry. You perhaps have one or two engi- 
neers out of 30 witnesses, t haven't counted them. You could call 
a hundred engineers and, if you got the best ones, you would get 
the same story, I think, from every one of them. You would ge!t 
differences of opinion on the minor details, to be sure, but on the 
broad principles the same. 



CONCENTRATION OF ECONOMIC POWER 7139 

Mr. Cox. One more question, Dr. Pogue. In this transition period 
which you say we are moving through to the point where we have 
an optimum reserve, do you Uiink it is desirable or necessary at any 
time to completely slmt down the production in any oil field? 

Dr. PoGUE. No; I don't think it is necessary to do that. I ex- 
plained this morning that I thought that was an interesting emotional 
reaction. I don't sec what it has to do with what we are talking 
about. 

Mr. Cox. I was just curious to see what your considered opinion 
was of that sort of action as a conservation measure. 

Dr. PoGUE. I think it is an episode — there are thousands of epi- 
sodes — a rather interesting one, extraordinarily interesting. 

Mr. Cox. There seems to be a series of episodes. 

Dr. Pogue. But unrelated episodes don't constitute a development. 

The Chairman. That was not a conseryation episode so much as 
a price regulation episode, wasn't it ? 

Dr. Pogue. I nuist say that I don't see the conservation bearing of 
it very strongly. 

The Chairman. That was the impression that I got, while your 
statement was the other way, maybe inadvertently. 

Mr. Cox. Suppose instead of that situation you shut down all the 
wells for, say, 2 days, Mr. Pogue, would you say that was a legitimate 
conservation measure? 

Dr. Pogue. Two days? 

Mr. Cox. Instead of shutting them 4own completely. 

Dr. Pogue. You are referring to the so-called Saturday and Sun- 
day shut-downs. That is simply another way of curtailing supply to 
demand. It is just more convenient to_do it that way. That isn't 
really a shut-down. 

Mr. Cox. You don't regard that in the same way as a complete^, 
shut-dow^n. ' 

Dr. Pogue. Oh, no ; I think in certain fields it probably does the 
wells a benefit by rest, maybe; maybe the pressure is equalized, but 
all the wells weren't shut clown. I think some of the marginal wells 
were left over. 

Mr. Berquist. I would like to ask a question with regard tS-^e 
balancing of supply and demand. Supply and demand as you indi- 
cated aren't in balance at any given time, are they? It is a matter 
of consideration of balancing clemand with suppl,y at an accentable 
price or at a price, isn't it? 

Dr. Pogue. Of course price is implied in every balance of supply 
and demand. That goes without saying. Fortunately in oil the 
price of the main product, gasoline, is very inelastic. If you were 
dealing with a highly elastic commodity you would get into sonie 
difficulties there that aren't very practical in oil. In other words; this 
qi^ota system involves estimating demand a month ahead and theji 
the estimators of demand " never consider price because the price 
fluctuations that take place within that period are so mild that we 
don't know the effect they have on -demand, if indeed they have any 
effect, so as a practical matter that doesn't enter in. Also, as a practi- 
cal matter, you could run this thing just as well without ever esti- 
mating demand. There would be a technique that I think is superior 
to the one now used. We use the one simply because it was estab- 
lished that way and things don't change too rapidly if they get 



7140 CONCENTRATION OF ECONOMIC POWER 

institutionalized, but you could work on inventories and just keep 
inventories from piling up and pay no attention to demand. That 
would be automatic. i i • x 

Mr. Berquist. Wouldn't it be franker to refer to balancmg of 
supply and demand at a dollar a barrel or a dollar and a qtfarter 
a barrel for crude, or some known figure? It seems that a shut- 
down was rather a reflection of 20 cents below what the price had 
been, was an occasion for cutting it off, and naturally there was a 
withdrawal of supply. , ^ , ^ • 

Dr. PoGUE. Your fir^t question, whether it would be fairer to 
do that, I don't know how to bring in the fairness in a problem 
of this kind. I think, at least it is my observation, that in the 
range of price fluctuations that have taken place in recent years the 
demand hasn't altered very much. 

Mr. Berquist. That is very true, but you had the other side of 
supply being adjusted so that the price kept at a fairly constant level. 
Of course we had a dollar or a dollar ten, a dollar thirty-five crude 
for a long time. That was because a pretty good job was being 
made of keeping back the supply, so that your demand was adequate 
to keep the price at that level. 

Dr. PoGUE. Well, I think there is too much emphasis placed on 
the price of crude. It doesn't make much difference to the consumer. 
It is the price of gasoline that counts. The price of crude is an 
intra-industry problem and as a matter of fact when these quotas 
are calculated you don't calculate the demand for crude directly. 
The procedure followed by the Bureau of Mines is to estimate the 
demand for gasoline and then figure back from gasoline and see 
how much crude it would take to balance out in view of stocks and 
everything. It so happens that your crude is $1. The raw 
material cost of a gallon of gasoline is 2i/2 to 3 cents, and don]t you 
see that a 10- or 15- or 20- or 25-percent variation in the price of 
crude gets damped down, just mathematically damped down, not 
through any action of anybody, but there are so many fixed charges 
in a gallon of gasoline by the time it gets to the consumer, in view 
of the 5-cent tax, that .theoretically you could double the price of 
crude and it wouldn't run the price of gasoline up, it wouldn't double 
the price of gasoline to the consumer, it would be damped down. 
There would be a very important change to it, but I am pointing 
out the purposes of setting quotas and bringing in this implicit 
price aspect of supply and demand ; as a practical problem we don't 
bother with it very much. I am convinced when the boys in the 
Bureau of Mines draw up their monthly estimates they don't pay 
any attention at all to price. I don't know that, I haven't asked 
them, but I venture to say they don't. I don't see any reason why 
they should. 

Mr. Cox. That can't quite be literally true, Dr. Pogue ; they must 
make some assumptions. 

Dr. PoGUE. They do it from month to month. Eight' now, what 
is this, September? They are probably drawing up the October, 
maybe the November, estimates at the present time, or they will 
shortly. 

Mr. Cox. All I mean is they must have to assume a sort of gping 
price, because if gasoline were a dollar and a half a gallon it might 
have an appreciable effect ? 



CONCENTRATION OF ECONOMIC POWER 7141 

Dr. PoGUE. If you are going to make unnatural assumptions- 



Mr. Cox. They have to make some natural assumptions, don't 

they? ' .'.... 

Dr. PoGUE. The consumption of gasoline is so inelastic that a half 
a cent or quarter of a cent change doesn't make any difference in- 
the period under study. You don't have violent changes. 

Mr. Cox. Then would it be fair to say they would simply assume 
a price within 2 or 3 cents of existing price? 

Dr. PoGUE. I have made up hundreds of those things myself 
and I don't know what runs through anybody else's mind, but 1 
know I wouldn't waste any time on thinking about a price if I 
were drawing the thing up. 

The CHAiRnr'AN. What factors would you take into consideration ? 

Dr. PoGUE. Well, as a matter of fact they have developed very 
elaborate, involved technique, some of which I had a hand in using, 
but I think if I were doing it now I coulq get just .about as good 
results using a 12-month moving average of tjie preceding 12 months' 
consumption, just project it a month and call it that; you don't 
have to be exact on the thing. 

Mr. Cox. When you finished you would have an estimate of the 
market demand for gasoline, is that correct ? 

Dr. PoGUE. When I finished I would convert it back into crude 
oil. ■ 

Mr. Cox. At one point, you would have an estimate of the demand 
for gasoline ? 

Dr. PoGUE. Oh, yes. 

Mr. Cox. And that would be an estimate as to market demand, 
completely detached from any considerations of price? 

Dr. PoGUE. Well, there is no such thing as a market demand 
without price. For i:)ractical purposes consumption wouldn't be 
affected materially by any changes in price that would be likely to 
transpire. That is an interesting academic concept but from a prac- 
tical standpoint you don't have to bother with it much. 

The Chairman. Well, at least it is clear, Dr. Pogue, that the pro- 
ration plan as administered under the various conservation laws 
does have the effect of increasing the reserves of oil. 

Dr. PoGUE. In my judgment, yes; undeniably so. 

The Chairman. And would it be a proper inference to draw that 
as the reserves of oil increase as a result of this method, and also 
as a result of improved technology in the search for oil, that "the 
normal effect would be a lowering of the price of crude ? 

Dr. PoGUE. Yes; I think that is correct. It would almost have 
to happen that way, everything else being equal; I mean if you 
didn't have some other 

The Chairman (interposing). In other words, as science improves 
the methods of extraction and uncovers new reservoirs, and we have 
a larger supply on which to draw, the natural effect, everything else 
being equal, would be a reduction of the price, since the supply 
increases ? 

Dr. PoGUE. Precisely. It is the same old force of technology 
which is so powerful in this industry, giving you a declining price 
level and whether you like it or not that is going to continue unless 
you stop the competitive forces that create this technology. That is 
all there is to it. We have got a problem in oil not of worrying about 



7142 CONCENTRATION OF ECONOMIC POWER 

the consumer being gypped by an artificially high price. If we 
have any problem it is a problem of overage and keeping the industry 
together by avoiding too low prices. I mean there is more danger 
of the price level of oil being too low than being too high. So power- 
ful is the technological factor that it leaves human nature out of the 
equation. 

The Chairman. It is inevitable that we must have some considera- 
tion for price; we must have some consideration for profit. As a 
matter of fact, when President Roosevelt sent his message to Con- 
gress recommending the appointment of this committee,^ he stated 
in that message over and over again that the purpose of the study 
as he saw it was to maintain the system of free private enterprise 
for profit, so personally I see no objection to the profit motive in 
business. We must have it if we are going to maintain business. 

Dr. PoGUE. Unless Ve change our system. 

The Chairman. Private enterprise under this system. 

Dr. PoGUE. I think the problem in oil is likely to be how to make 
a sufficient profit rather than to have the consumer worry about too 
much profit. This technological factor ig unbeatable. I don't think 
anybody knows how to change it. 

The Chairman. But \the question which is constantly rising is 
whether or not any parMcular system of administration in this or any 
other industry or any particular system of control of operation works 
to the disadvantage of some and the advantage of others. 

Dr. PoGUE. Precisely. 

The Chairman. So the concentration of power over the use of com- 
modities as well as the production an^ distribution of them 

Dr. PoGUE. I think that is quite right. The committee is quite 
wise in being concerned with those very considerations. I is(ierely 
have attempted to sketch the economic forces which I believe are 
adequate safeguards against the abuse of this thing. Now, any 
instrumentality is subject to abuse. I would like to see this instru- 
mentality evolve along sound and constructive lines, and what I 
mean by sound and constructive lines are those of maximizing the 
value of the resource to society, makihg this a good, effective industry, 
profitable but not too profitable; stable but not too stable; but 
making headway and furthering the objective of mass production, 
• which I believe has been the history of the industry to date. 

The Chairman. We are very gi-ateful to you. Dr. Pogue, for a very 
interesting morning and afternoon, I may say. I^ assume you have no 
objection if we print in the record the formal statement which you 
presented this morning? 

Dr. PoGUE. I would be very happy to file that as part of the record. 

The Chairman. While you had it before you, you did not use it. 

Dr. PoGUE. I am glad you brought that up, because I wish fqrmally 
to file that. ' 

The Chairman. Without objection, it will be printed as part of 
your statement.^ 

Dr. PoGUE.. And may I express appreciation for the courtesy, con- 
sideration, and patience of the committee? 

The Chairman. We were all very much benefited, I think, by your 
statement. 



1 "Exhibit No. 1," included in Hearings, Part I, appendix, n 185 
Mntroduced, supra, p. 7113; appears in appendix, p. 7435. 



CONCENTRATION OF ECONOMIC POWER 7143 

Dr. Gill is the next witness, I believe. Do you solemnly swear that 
the testimony you are about to give in this proceeding will be the truth, 
the whole truth, and nothing but the truth, so help you God ? 

Dr. Gill. I do. 

The Chairman. Will you be good enough to give your full name 
to the stenographer, Dr. Gill? 

Dr. Gill. Would you do me the favor of just addressing me as you 
do any other ordinary man ? 

The Chairman. On the list I have here you have the title of 
"Doctor" and I was just following the list. 

TESTIMONY OF JOHN D. GILL, DIRECTOR, DEPARTMENT OF 
ECONOMICS, ATLANTIC REFINING CO., PHILADELPHIA, PA. 

Mr. Gill. My name is John D. Gill. I am a citizen, resident in the 
city of Philadelphia; have been in the oil business for 27 years; 
schooled as a chemical engineer; worked as a chemical engineer in 
research; as director of a control laboratory; as assistant super- 
intendent of Pittsburgh refinery of the Atlantic Eefining Co.; as 
manager of sales personnel of that company; as director of the de- 
partment of economics of that company. 

The Chairman. Is that your present position? 

Mr. Gill. That is my present position. 

The Chairman. The committee will be very glad to listen to you. 

Mr. Gill. In your statement at the opening of this session, Senator 
O'Mahoney, you referred to a certain new form of presentation be- 
fore your committee. You mentioned particularly the cooperation 
of the American Petroleum Institute and a number of men who are 
working with Mr. Byles, president of that Institute, in the presenta- 
tion of the story of the petroleum industry. I know that my 
colleagues in that particular group, of whom I happen to be one, 
have taken great pains to regale you with detailed descriptions of the 
operations, the processes and procedures of the industry. 

I understand it to be my job to sum up in a numerical way their 
findings and their work. In other words, to present to you in the 
form of a series of very simple charts the net results of the opera- 
tions of the petroleum industry, taking into consideration the effect 
of all their technological achievements, all the <?ood and all the bad. 
With your permission I would like to proceed with that presentation. 

The Chairman. That is quite satisfactory, Mr. Gill. 

DOMESTIC CONSUMPTION OF PETROLEUM PRODUCTS FOR PRECEDING 12 

TEARS 

Mr. Gill. Last year the petroleum industry provided the American 
public with 1,112,000,000 barrels of petroleum products for which it 
received at wholesale $1,963,000,000. At the beginning of what has 
been called the present proration era, specifically in 1929, the industry 
provided the American public with 905,000,000 barrels of petroleum 
products and received for them at wholesale $244,000,000, less than 
it received in the earlier year for a much smaller quantity. If the 
experience of 1938 be compared with that of 1926, we notice that in 
the more distant year there were delivered to the public only 
756,000,000 barrels of oil, which brought the industry at its refinery 
gates $2,343,000,000. 



7144 CONCENTRATION OF ECONOMIC POWER 

That is, last year the American industry supplied the American 
public with products to the extent of 356,000,000 barrels more than 
in 1926 and received for those products $380,000,000 less than it re- 
ceived for the smaller quantity in 1926. Now, there might be some 
objection to these statements on the ground — these comparisons — 
that last year was a poor business year. Prices generally were de- 
pressed and therefore it is not a thoroughly sound comparison; to 
overcome such difficulty there have been prepared these additional 
charts that show 1937 in juxtaposition with those earlier years. In 
1937 the industry supplied to the public 26 percent more of petroleum 
l^roducts and received only 6 percent more in dollars for the larger 
quantity. If a similar comparison be made with the earlier year 
1926, and from a general economic standpoint, 1937, 1929, and 1926 
afe quite comparable. In 1937 the industry supplied 51 percent 
more of products than in 1926 and received 2l^ percent less in dol- 
lars for that very much larger quantity. And that despite the fact 
that in the more recent year a barrel of production contained 19 
gallons of gasoline, whereas in the earlier year a barrel of produc- 
tion contained somewhat less than 15 gallons of gasoline. The dif- 
ference between those two factors representing costly conversion of 
gasoline from heavier and less valuable petroleum products. 

If this situation is summed up from 1926 to the present, we find 
that in the 12 years 

The Chairman (interposing). Mr. Gill, may I ask you what the 
source of this information is? From what sources were those sta- 
tistics gathered? 

Mr. Gill. Certainly. The volumetric data are based directly on 
the issued statements of the Bureau of Mines, located in this city. 
The values are based directly upon the published statements of the 
United States Bureau of the Census. 

The Chairman. Thank you. You desire to have these charts for- 
mally presented for the record, do you not ? 

Mr. Gill. If you please. 

The Chairman. It will be so understood. 

(The charts and documents referred to were marked "Exhibits 
Nos. 1141 to 1170," inclusive, and are included in the appendix on 
pp. 7492 to 7512.) 

decline In price of petroleum products compared avith general 

PRICE decline of COMMODITIES 

Mr. Gill. In the 12 years since 1926 the industry has supplied the 
American public with 11,000,000,000 barrels of petroleum products. 
It received for those products $21,000,000,000. Had it repeived for 
the same volume of products prices for these 11,000,000,000 barrels 
equal to those prices which prevailed in 1926, it would have received 
$35,000,000,000. What I am trying to call to your attention, there- 
fore, is that in the interval there has been a decline in the prices 
of petroleum products that represented to the American public a 
saving over 1926 prices equal to $14,000,000,000 on the consumption 
which they actually enjoyed. 
■ Now, there ihight be an additional objection raised at this point 
by students of this kind of thing on the ground that prices of com- 
modities'generally have declined since 1926. I think such an objec- 



(^ONnENTRATION OF ECONOMIC POWER 7145 

tion is a sound one, and I would propose to meet it. If we compare 
the prices of petroleum products at wholesale with the prices of 
commodities in general at wholesale since 1926, we find that they 
follow a course as indicated by these graphs. The solid black line 
represents the movement of prices of commodities in general. 

The Chairman. You. are now referring to chart No. 6? 

Mr. Gill. Chart No. 6.^ 

The Chairman. I make that interpolation for the benefit of the 
record. The reader wouldn't know to what you were pointing. 

Mr. Gill. Thank you. And, to save time, I shall probably skip 
over one or two charts. The dash line on this ("Exhibit No. 1146") 
represents tlie prices of petroleum products at wholesale. 

The Chairman. Now, these figures are taken from the index of the 
Bureau-of Labor, do I understand? 

Mr. Gill. The data from which the heavy black line is drawn were 
taken directly from the data of the United States Bureau of Labor 
Statistics. The dash line data were taken from the data of the 
United States Bureau of the Census, in those years for which the 
census published data and from calculations for the other years, the 
even years of the series in which the calculated results tie in directly 
every second year with the data of the Bureau of the Census. These 
lines mean essentially that between 1929 and 1938 commodities in 
general declined in price 17^^ percent, whereas petroleum products 
declined 27.1 percent. 

If the comparisons (referring to "Exhibit No. 1147")- are to be 
made on the basis of 1926, which is the base adopted by Federal 
statistic bureaus some years ago, the shape of the curves are similar 
and the over-all result is that commodities in general declined At 
wholesale 21.4 percent, whereas petroleum products declined 42.3 
percent. 

The Chairman. And that decline is between what periods? 

Mr. Gill. 1926 and 1938. 

Representative Williams. Isn't it true that lower line declined 
almost altogether during the year 1926, and from that time they are 
fairly parallel, aren't they? 

Mr. Gill. Much of the decline was just subsequent to 1926. 

Representative Williams. From that time on they are fairly 
parallel. 

Mr. Gill. Well, I suppose it might be said that those lines move 
together to a degree. 

The Chairman. In other words, the percentage of decline from 
1927 to 1938 is practically the same in both lines. 

Mr. Gill. It isn't quite the same, Mr. Chairman and Mr. Con- 
gressman, as indicated on the previous chart, if we may have that for 
a moment ("Exhibit No. 1146"). We saw on the chart on which 
1929 is taken as a base, and between that year arid 1938, that whereas 
commodities ift gei^ral declined 17.5 percent, petroleum products 
declined 27.1 percent. This is the chart to which I referred ("Ex- 
hibit No. 1146"). This chart is based 3 years later than the one we 
were looking at a moment ago, and it shows that over this period, 
which has now eliminated that decline to which Mr. Williams re- 

1 "Exhibit No. 1146", appendix, p. 7494. 
'Appendix, p. 7495. 



7146 CONCENTRATION OP ECONOMIC POWER 

f erred a moment ago, just after 1926 — that the decline between 1929 
and 1938 was 17.5 percent in the case of commodities in general and 
27.1 percent in the case of petroleum products. 

. Mr. O'CoNNELL. May I ask a question on that point ? In this chart, 
too, practically all of the decline appears in the year 1930 to 1931 ; 
isn't that correct? 

Mr. Gill. That is I think a reasonable statement, that a large part of 
the decline appeared in that period. 

Mr. O'CoNNELL. Do you know whether there was any particular 
reason for tliat decline taking place at that particular time, any pecu- 
liar reason ? 

Mr. Gill. Well, you notice that in the first place there was a very 
sharp decline in the prices of commodities in general that same year. 

~ Mr. O'CoNNELL. I understand, but the decline in the petroleum prices 
was even sharper. I wondered if you knew the explanation of that. 

Mr. Gill. There were things happening in the petroleum industry 
in that time. The East Texas pool had been discovered in October of 
the previous year. 

Mr. O'CoNNELL. The East Texas pool was opened Up at that time ; 
is that correct ? 

Mr. Gill. A few months before the beginning of that year. 

Mr. O'CoNNELL. And that largely explains the rapid decline? 

Mr. Gill. I think that plus the fact that the whole economy was in a 
downward movement at that time. 

Mr. O'CoNNELL. But the more precipitous drop in petroleum prices 
than the general index prices would be explained largely by new dis- 
coveries of oil rather than anything else. 

Mr. Gill. I think that helped very greatly in explaining that par- 
ticular decline. 

The Chairman. In other words, it would appear from a comparison 
of the two lines that the decline of commodity prices from the begin- 
ning of the year 1930 to the end of the year 1932 was not as great as the 
decline of petroleum products from the beginning of the year 1930 to 
the beginning of the year 1931. In one year the decline of petroleum 
prices was greater than the decline in 2 years of the commodity prices 
generally. 

Mr. Gill. That is a reasonable statement for this particular portion 
of the chart. 

The Chairman. It is not only a reasonable statement ; it is an accu- 
rate statement; isn't it, Mr. Gill? 

Mr. Gill. I think so ; yes. A reasonable statement ought to be an 
accurate statement. 

The Chairman. That is right. 

Now, I observe with a good deal of interest that beginning in 1933 
the prices of petroleum products, as well as the prices of commodities 
in general, did steadily rise until the end of 1937, when both fell off 
practically in the same proportion. 

Mr. Gill. Yes; I think that is fair. 

The Chairman. Now, reverting to "Exhibit No. 1147,"^ can you 
tell us what explains that precipitant drop in the year 1926? 

Mr. Gill. That is between the' year 1926 and 1927, that is from 
1926 to 1927. In the year 1926 — let me go back a little ; in the year 

^ Appendix, p. 749ri. 



CONCENTRATION OF ECONOMIC TOWER 7147 

1925 there had appeared on the oil industry's horizon a shortage of 
crude petroleum. It led to very intensive prospecting and develop- 
mental activity in the year 1925 and the year 192G. The effort culmi- 
nated in the discovery of the great Seminole pool of Oklahoma in the 
latter year. That discovery was in terms of ordinar}^ economics, over- 
whelming. It brought about a depression in the prices of raw mate- 
rial from an average of $1.88 in 1926 to $1.30 in 1927. That downward 
movement in the posted price of raw material was followed by a cor- 
responding movement in the downward price of petroleum products. 
That is the movement, Senator O'Mahoney, to which you refer. 

Mr. O'CoNNELL. May I ask a question? Would it be fair to say, 
then, that the substantial decrease in the total price, or in the average 
price of petroleum products from 1926 to 1938 is explainable by the 
greatly increased supply of crude oil ? 

Mr. Gill. I think, Mr. O'Connell, that was an important factor, 
but by no means the sole factor. The technologic improvements 
which will be discussed in considerable detail by those who are to 
follow me I think will make that clear as these meetings proceed. 

Mr, O'Connell. I see. For our purposes I guess it is enough 
to realize .that the precipitous drops were in major part caused by 
substantial expansions in the supply of the commodity. 

Mr. Gill. I say "an important factor." But, if you will notice from 
"Exhibit No. 1147"^ in which 1926 is taken as a basis, there is still 
a considerable- movement from 1927 to 1938. 

The Chaiirman. Yes; but you have already explained that the 
East Texas pool was the reason for the drop to the end of 1931, and 
as I pointedT)ut from an examination of "Exhibit No. 1146," ^ the price 
of petroleum products after the effect of the East Texas pool had ex- 
hausted itself, has been upward until 1937 when it dropped down 
again. In other words, from 1931, after the effects of Seminole and 
East Texas pool was the reason for the drop to the end of 1931, and 
practically a parallel line with the price of other commodities. 

Mr. Gill. Yes, sir. I think it might be said that these curves indi- 
cate clearly that the petroleum industry has endeavored to pass on to 
its public the full benefit of the fortuitous discoveries of raw material. 

The Chairman. Does that statement imply that the industry could 
have declined to pass that on, had it wanted to? 

Mr. Gill. I don't believe I got that question clearly. 

The Chairman. I say, does your statement imply that the petro- 
leum industrr could have reframed from passing on the reduction if 
it wanted to? 

Mr. Gill. I don't believe, Senator O'Mahoney, that it either wanted 
to or that it could have done so. I believe that the competitive con- 
ditions within the industry would have presented the retention di 
those benefits to itself. 

This is a similar chart, "Exhibit No. 1148," ^ letting 1923 equal 100, 
similar to the two preceding ones, presented solely for the purpose 
of overcoming the objection before referred to that in a few years 
after the post-war boom of the 1920's prices in general had declined 
and therefore it was to be expected that the prices of petroleum 
products also should have declined. 

1 Appendix, p. 7495. 

2 Appendix, p. 7494. 
' Appendix, p. 7495. 



7148 CONCENTRATION OF ECONOMIC POWER 

These lines for commodities in general — the two upper lines — and 
petroleum products show a relative movement over this still longer 
period, with a net effect that between 1923 and 1938 the prices of 
petroleum products declined relative to the prices of other 
commodities 19.7 ^percent. 

This is a chart (No. 9) ^ that I think we can desist from discussing. 
It is superfluous. 

The Chairman. Then chart No. 9 is omitted from the record. 

Mr. Gill. That is right. 

PRODUCTION or PETROLEUM PRODUCTS 

Mr. Gill. We have been talking for a few minutes about the 
petroleum industry's contribution to American welfare in terms of 
volume of products and declining prices. I should like to present 
in a few moments' time on these few charts the record, volumetricly, 
indicating the growth of the service which the petroleum industry 
has rendered to its American public. 

This is chart 10, United States crude-oil production.- In 1923 the 
industry produced in this country 732,000,000 barrels of crude oil. 
In 1929 it produced 1,007,000,000 barrels of crude. It 1938, 1,213,- 
000,000 barrels, as shown by chart No. 10. 

In 1923 the industry supplied for domestic consumption 634,000,000 
barrels of petroleum products (chart 11)/ in 1929 it suppplied 
905,000,000 barrels of petroleum products, and in 1938 1,112,000,000 
barrels of petroleum products. 

In the first year of this 16-year period, the industry produced 
181,000,0000 barrels of gasoline, chart No. 12, United States produc- 
tion of motor fuel,^ in 1929 it produced 439,000,000 barrels of gaso- 
line, and last year 567,000,000 barrels of gasoline, as shown by chart 
No. 12. 

The Chairman. When you use the term "motor fuel," then yoil 
mean gasoline? 

Mr. Gill. No, sir; not exactly. Motor fuel includes all gasoline, 
plus what is known in the trade as natural gasoline, not blended at 
refineries, plus benzol which Tias been blended with gasoline. 

The Chairman. The reason I asked the question was that the 
chart was labeled "Motor fuel" * but you referred in each instance 
to the number of barrels of gasoline and I wondered if you meant 
to imply that fuel oil, for example, was not included. 
' Mr. Gill. That was my mistake, Mr. Chairman. For example, 
there is a difference on the last chart between 567,000,000 barrels of 
motor fuel and 555,000,000 barrels of gasoline. The difference is not 
great but I would make the technical distinction. 

In 1923 (chart 13, United States consumption of motor fuel)** 
the industry supplied to its American public 175,000,000 barrels of 
motor fuel, in 1929, 383,000,000 barrels of motor fuel, and last year, 
522,000,000 barrels of motor fuel. I would call to your attention 
particularly the striking advance in the supply of motor fuel to the 
American public, representing in large measure an improving tech- 
nique in the production of gasoline from heavy components of crude 
oil. 



1 Not introduced for the record. 

2 "Exhibit No. 1149," appendix, p. 7406. 

3 "Exhibit No. 1150," appendix, p. 7496. 
* "Bxhibit No. 1151," appendix, p. 7497. 
6 'Exhibit No. 1152," appendix, p. 7497. 



CONCENTRATION OF ECONOMIC POWER 7149 

PETROLEUM INDUSTRY'S WELFARE CLOSELY ALLIED WITH GENERAL 

ECONOMY 

Mr. Gill. One of the aspects of this short summary of the Ameri- 
can Petroleum Institute group which devolves upon me, as I under- 
stand it, is presenting the petroleum industry situation against the 
background of the general economy. That is, after all, the welfare 
of the petroleum industry and of the petroleum industry's customers 
is bound up in the welfare of the entire economy. I call that fact 
to your attention particularly in introducing Chart 14,^ which shows 
over the period from 1923 to 1938 the movement in the crude-oil run 
to stills within the United States, and the movement of the Federal 
Reserve Board's index of manufacturing products. The latter index, 
as well perhaps as anything can do, portrays the movement of manu- 
facturing activity of the production of things which people use 
directly or indirectly within the United States, and perhaps as well 
as any other single figure can, at least it appears that a reasonable 
and conservative representation of the activity of the petroleum in- 
dustry is the factor, crude run to stills, which represents in one 
figure essentially the primary result of production, of transportation 
and of manufacture within the petroleum industry. 

I would like to call your attention to the facts that, first, the index 
of manufacturing production moved in a generally sidewise direc- 
tion over this entire 16-year period, whereas the movement of crude 
run to stills has been on the whole, and excepting during the de- 
pression period, generally upwards. The result of that all is that 
between 1923, which was a ^ood industrial year, and 1937 which was 
a good industrial year, the index ^f -manufacturing rose from 101 in 
the earlier year to 109 in the latter year, an increase of approximately 
7.9 percent, .whereas between those two periods crude run to stills 
rose from 591,000,000 barrels to 1,183,000,000 barrels, or an increase 
of 104 percent. 

Chart 15, indexes of oil industry net investment and United States 
crde run to stills.^ Before leaving the question of prices, I would 
like to refer to a comment that is sometimes offered, that the declino 
in petroleum product prices was solely the result of the enormous 
Tricreases in demand for petroleum products. To the extent 1 hat tho 
industry operates as a mass-production industry, and it docs in cer- 
tain of its aspects and probably does not in certain others, I think 
that comment is entirely valid. 

I am offering the commentary that the decline in product prices, 
which was* abetted by that factor of growth of demand, was also 
largely implemented by the technologic improvements of the industry 
which in the first instance reduced costs, reduced prices to be paid 
J3y the consumer, enlarged his demand, and so enlarged the industry's 
ability to make further improvements and further reductions in 
cost and price. 

It is also said at times that this very large growth of demand for 
petroleum products, probably larger than that of any big industry 
except, possibly, the electric light and power industry, has been 
accompanied by unjustifiable* expansion of capital employed in the 
industry and by extraordinary and almost extortionate returns on 

1 "Exhibit No. 1153," appendix, p. 7498. 
a "Exhibit No. 1154," appendix, p. 7499. 



7150 CONCENTRATION OF ECONOMIC POWER 

that capital. I should like to present as nearly as possible some 
facts that deal with both of those matters. There are no figures, 
I believe, authoritative, accurate, reasonable, that portray the total 
investment of the petroleum industry. The subject must be ap- 
proached by the method of sampling. The samples should be as 
representative as possible and certainly as large as possible. The 
sample that is presented on chart 15 shows the net investments of 
the industry as that net investment is represented by the net worth 
and long-term obligations of 24 oil companies whose histories could 
be traced back in detail from the present to 1923. 

The data show that between 1923 and 1929 the net investment as 
thus expressed rose just a little less than 55 percent and then in 
common with business investment in general in the United States, 
declined in the subsequent years in the depression as shown by this 
graph, recovering subsequent to 1935 and stands at the end of 1938 
at 40.7 percent above the level at which it stood in 1923. Those 
facts are significant, particularly in view of the size of the sample, 
which represents a group of companies standing for upwards of 80 
percent of the total crude-oil run to stills in the United States. But 
data of that sort alone convey very little meaning and have com- 
paratively little si^ificance. The significance of the data is greatly 
increased when it is understood what has resulted from that invest- 
ment, and still further increased when the investment has been 
compared with investments in other lines of jictivity. 

"Exhibit No. 1154" ^ not only shows the trend of investment in the 
industry over this period as represented by this group of 24 com- 
panies, but it shows also the simplest and perhaps the most reliable 
measure of the over-all activity of the industry as represented by 
crude run to stills. There is, then, a movement from 1923 to '29, an 
investment of 55 percent, a movement in the activity of the industry 
of 70 percent, and over the entire period a rise in investment a, 
little less than 41 percent, and a rise in the activity of the industry 
of a little more than 100 percent. 

The Chairman. Before you move the chart, would it be proper to 
draw the conclusion from this chart that these particular companies — 
how many of them are there, 24 ? 

Mr. Gill. Twenty-four; yes, sir. 

The Chairman. Are today presenting a much smaller opportunity 
for new investment than was formerly thfe case, although the amount 
of business which they do has apparently greatly increased? 

Mr. Gill. I cannot answer that question. Senator O'Mahoney, per- 
haps in a way in which others might be able to answer it or that you 
would like it answered. 

The Chairman. I have no choice as to the answer, Mr. Gill. I just 
want the facts. 

Mr. Gill. Your question deals with something that is just a little 
beyond us. I can't therefore, answer the question regarding some- 
thing that is oflf a little beyond. I can say this. 

The Chairman. ' You have a line which shows net investment. I 
assume that that must take into consideration the amount of new 
capital which has been invested in these 24 companies. 

Mr. Gill. Yes, sir. 

1 Appendix, p. 741)9, 



CONCENTRATION OF ECONOMIC POWER 7151 

The Chairman, And since the net investment declines, as indicated 
by this line, I am wondering whether that means a decline also of the 
amount of new capital ; in other words, whether you are here demon- 
strating to the committee the problem of the unemployment of capital, 
which is one of the two factors of unemployment that this committee 
is studying. 

Mr. Gill. I think I can get at the answer to your question this way, 
and say that the petroleum industry in the United States is making 
very good use of its capital today, and is asking, or has the expectation 
of, a smaller return for wliat it does than it had at the beginning of 
the period. 

The CHAIRMAN. Yes; I think that might be true^ but testimony 
which was presented to this committee before the adjournment of 
Congress tended to show that many of the larger companies are 
becoming more and more self-sufficient, as it were, dependent upon 
the savings of the people for expansion and relying more and more 
upon their own earnings, depreciation, and the like.^ So it is a very 
significant thing if the chart which you now present to us indicates 
that in these 24 instances that also is the case. I wonder if you would 
be good enough to give us the names of these 24 companies. 

Mr. Gill. Yes, sir; I will give you a list of them, if that would be 
satisfactory. 

The Chairman. I think it would be very helpful to have it in the 
record. 

Mr. Gill. That will be done directly. 

(The list referred to was marked "Exhibit No. 1155" and is 
included in the appendix on p. 7500. ) 

Mr. Gill. I should be afraid of digressing much too far to get to 
this very big question that you have raised. I think in the first in- 
stance there is j)erhaps some confusion between the unemployment of 
labor, on the one hand, and the unemployment of capital, on the other. 
I think there. is also a great confusion about unemployment in general. 
I can illustrate that without digressing very far in this way. We have 
today possibly in the country nine to ten million unemployed, accord- 
ing to best estimates available. We don't stop to think that in terms 
of actual labor exercised by human beings there is unemployment in 
this country today compared to what might be if the conditions of 
1870 prevailed today, equal to the number of persons who are em- 
ployed, about 44,000,000, multiplied by the difference between the 
present workday or workweek of approximately 40 hours and the 
workweek of about 1870, or a little later, when I was a small lad, when 
men worked from 60 to 72 hours. In other words, there is a great 
volume of unemployment there represented by the shortening of the 
workweek which is not thought of because it still provides 44,000,000 
persons with places on pay rolls, but we think only of the concentrated 
unemployment. 

The Chairman. Of course, if all were employed, particularly those 
employed in hard labor, were to work as long hours today as they 
worked in 1870, then the unemployment problem in terms of indi- 
viduals would be vastly greater than it is today, wouldn't it ? 

Mr. Gill. It might be. That would depend a great deal upon other 
circumstances — the mechanization of industry, for example — but the 

1 Testimony on "Savings and Investment" appears in Hearings, Part 9 
124491— 40— pt. 14, sec. 1 5 



7152 CONCENTRATION OF ECONOMIC POWER 

point that I am trying to make in answer to your question, or, rather, 
the approach to the answer to your question, is that our attention is 
focused not on employment, but, rather, upon a concentrated form of 
unemployment, and if that unemployment could be dissipated by 
spreading all the employment over 54,000,000 persons instead of con- 
centrating the employment in 44,000,000, and concentrating the unem- 
ployment in another nine or ten million, the, situation to which you 
referred would not exist. The problem is a very big one. I repeat I 
might have to digi'ess very far from this subject, and I am not sure that 
I am wholly competent to discuss it. 

Do you wish me to go on ? 

The Chairman. That is quite all right. You may proceed. 

Mr. Gnii. I have suggested that the affairs of a singly industry 
could not be understood except as they were presented against a 
background of industry in general. I think that is absolutely sound, 
whether you call it economics or ordinary business or plain common 
sense. These movements to which we have to adjust ourselves, or 
which represent adjustments, affect all industry and therefore the 
appraisal of a single one can only be made adequately and fairly 
and reasonably when there is some attempt at correlation between its 
affairs and the affairs of others. 

This is a very difficult thing to do in the present state of economic 
statistics. We do not have good and accurate measures of all of the 
factors that we should like to have, and again resort must be made 
to samples, and with your permission I will proceed with such 
samples. 

INVESTMEJSTT AND INCOME OF 2 4 OIL, COMPANIES 

Mr. Gill. The investment of the 24 oil companies is shown on 
chart 16 ("Exhibit No. 1156")^ in juxtaposition with the investment 
of 400 industrial companies as compiled by the Standard Statistics 
Co. of New York. We have in the 24 companies a growth from 1927, 
the earliest year for which this set of figures is available, from six- 
billion-two-hundred-odd million dollars to $6,855,000,000, or a net 
change in the net worth and long-term obligations of 9.7 percent for 
the oil group, representative here of the oil industry in the United 
States. The upper line showing figures for 400 industrials carries the 
net worth and long-term obligations from $24,566,000,000 in 1927 to 
$25,745,000,000 in 1938, a net increase over that period of 4.8 percent. 

You will observe that there is not a vast difference in the absolute 
rate of growth between the two groups. But again, as in earlier 
comparison^ that one lacks significance that it should have because 
it does not relate the investment of those groups with their physical 
performance. I should like to make such a comparison on the nest 
chart. No. 17 ("Exhibit No. 1157").^ 

We have, in the case of the oil companies a net increase in invest- 
ment of 9.7 percent;, we have an increase in their performance as 
measured by crude run to stills of somewhat over 40. percent. In the 
case of the 400 industrials, which must act here as our background, 
that is the nearest big group — and incidentally that represents about 
fourteen-twentieths of all manufacturing corporations within the 

^ Appendix, p. 7501. 
•Appendix, p. 7502. 



CONCENTRATION OF ECONOMIC POWER 7153 

United States; that is, it is a very large sum — we have here a net 
increase in the investment of that group of 4.8 percent and we actu- 
ally had a decline of nearly 21 percent m performance. It happens, 
however, that that was a depression or recession year and I should 
prefer to go back to 1937 and call attention to the fact that in 1937 
the output of the industries of the country as represented by the 
Federal Reserve Board's index of manufacturing production, was 
2.8 higier than it had been in 1927. 

The Chairman. What were these 400 companies ? 

Mr. Gill. These 400 companies are a group, including that many 
separate corporate entities, compiled currently by the Standard 
Statistics Co. of New York. 

The Chairman. In other words, that list was not compiled for 
this particular comparison. 

Mr. Gill. No, sir, it was not. I have not a list of that group 
available for presentation because it is available to anyone who de- 
sires to get it. 

I will pass over this one quickly because it is a composite. Chart 
No. 17-A ("Exhibit No. 1158")^ brings together the two sections of 

Chart No. 17 ("Exhibit No.-1157") .^ It shows the investment of the 
400 industrials, the production of all manufacturing as represented 
by the Federal Reserve Board's index of manufacturing, the invest- 
ment of oil companies and the physical performance of the oil com- 
panies as represented by crude run to stills. 

What has been presented I think substantially demonstrates the 
fallacy of the allegation that has been made from time to time, per- 
haps loosely, that over recent years the petroleum industry has been 
profligate in its use of capital. Even though it might have been said 
that in 1923 the industry had too much' capital invested, there is cer- 
tainly evidence here that in the meanwhile.it has been making efforts 
to employ capital funds with the highest possible degree of efficiency. 
But I would like to say further parenthetically that on this question 
of investment no one knows what the investment in the petroleum 
industry ought to be. There is no standard, there are no absolute 
values; we are in a competitive industry, and competition to a large 
degree controls the investment. If it has been satisfactorily demon- 
strated that there have been no extraordinary advances in the em- 
ployment of capital, I should like to proceed with that other section 
of the allegation to which I referred earlier following the descrip- 
tion of the growth of service of the industry, namely that the in- 
dustry has drawn extortionately from its public for its profits. 

Chart No. 18 ("Exhibit No. 1159") ^ would tend to disabuse the mind 
of anyone who had such an idea and would seriously study this 
chart. It contains three graphs, the dash line representing the rate 
of return on net worth of a very large group of petroleum companies. 
The group is not thoroughly consistent throughout this period. It 
contains as many as 217 companies in certain parts of the period. 
This curve, however, if I may draw upon your statement of a moment 
ago, was not made for this particular presentation. It was the best 
job that could be done for the largest groups of companies available. 



1 Appendix, p. 7503. 
^ Appendix, p. 7502. 
=* Appendix, p. 7504. 



7154 CONCENTRATION OF ECONOMIC I'OWEU 

This dot-and-dash line represents the rates of return on net worth 
for all kinds of manufacturing companies. And the solid line repre- 
sents the rates of return on net worth for all kinds of industry, in- 
cluding manufacturing, other industrial railroads, et cetera, as' pub- 
lished by the National City Bank of New York, 

That line contains in Certain parts of the series more than 2,000 
units. They are the most comprehensive lin^s portraying the rate of 
return on net worth known to me or to my associates., 

I should like just to call your attention to these facts drawn from 
this chart. Of the first, that in general the average rate of return 
for the petroleum group lies below the rates of return for either of 
the other two groups; parenthetically, that the movement of the 
petroleum group seasonally is greater than that of the other two 
groups, but you can readily understand how that might come about, 
first that the petroleum industry has a greater seasonal effect largely 
due to the consumption of gasoline in the summer as contrasted to 
the gasoline con.sumption in the winter; and secondly it would be 
expected that very large groups might have compensating influences 
tliroughout the year. I do not wish to stress that point. In the 
third place, that at certain times the petroleum industry's rate of 
return drops abruptly belov. that of the other two groups, not only 
in general below that of the other two, but there are times when it is 
extraordinarily depressed. Mr. O'Connell referred a while ago to 
1927, Senator O'Mahoney to 1931, and we have here the reflection of 
the drop in prices which was extraordinary in both of those years 
reflectecl in an extraordinary depression of profits, so much so that 
the profit in 1927 was only half of what it was in 1926, and in 1931 
the profit declined below the zero line, that is the profit was a nega- 
tive aiantity. 

This is alternate chart 18 ("Exhibit No. 1160"). ^ It brings us 
back to the data that we had been dealing wtih previously, i^amtely, 
that for 400 industrials, and for 24 oil companies, both of whi-ch repre- 
sent very large segments of their respective categories. % is to be 
seen from this chart that for the 24 companies, the rate of return ^was 
below that of the 400 companies in every year save one, but that in 
a ^^ener.il way the graphs move together. Chart 18a ("Exhibit No, 
ll'U")- is similar to alternate 18, excet that the data are plotted in 
terms of dollars of profit for the two groups. The scales have been 
chosen in order to facilitate comparison and they show a great degree 
of parallelism between the two graphs. These are dollar profits. 

The scales are millions of dollars for the 400 group and hundreds 
of millions of dollars for the oil group. I am calling your attention 
particularly to the similarity of the movements between these two 
dollar-profit lines. Now that kind of comparison again lacks the 
fullest significance because it does not relate the reward to the com- 
panies and the service which they perform. Chart 18b ("Exhibit 
No. 1162")^ does make that relationship; it attempts to show the profit 
of each of these two 'groups in terms of the performance : that is the 
dollar of profit per unit of performance. The dollars of profit need 
iio explanation. The units of performance in the case of the 400 
group were the indexes of manufacturing output as compiled and 

* Appendix, p. 7505. 
" Appendix, p. 7506. 
" Appendix, p. 7507. 



CONCENTRATION OF ECONOMIC^ POWER 7155 

issued by the Federal Reserve Board of New York, and the barrels 
of crude oil run to stills as published by the Bureau of Mines for the 
petroleum industry. This chart, 18b, should show clearly that oyer 
virtually all of the period under consideration, which is the period 
for which data are available, the petroleum industry relatively has 
performed more service than that measured by the dollars of its 
reward. 

If the profit of the manufacturing industry Avith respect to its 
service can be taken as a standard, there is one thing that this chart 
does not show that I should like to call your attention to, and that 
is that while the chart brings the profit per unit of output of both 
groups together in 1929, that actually if one were to use instead of 
such a base the' rate of return on net worth, then the solid line repre- 
senting the profit per unit of output of the 400 industrial group 
would stand appreciably above its present position, because in that 
base year of 1929 the profits of the oil group were a little less than 
10 percent on net worth, whereas the profits of the 400 group were in 
the neighborhood of 13 percent on net worth, or 30 percent higher. 

It would appear that the profits of the oil industry as they may 
be judged from the profits of a very large segment of it, have not 
been extortionate; on the contrary that they have been rather less 
than more than comparable groups of the economy, and, that the 
history of the petroleum industry over the period under consideration 
with respect to profits has been conservative, as has been its invest- 
ment policy. But there is another and perhaps more fundamental 
Avay of making appraisals of econoniic situations than those which 
have been presented so far. Up to this point we have been dealing 
with facts, solely, and not with estimates of any sort. 

With your permission, which I ask because I think from this 
point on the facts and the estimates to be combined present helpful 
];>ictures of the econoniic situation, I would like to present a tool for 
the appraisal of segments of the economy that might be useful in 
determining which industries were laggards and which were pro- 
gressive. I should like first to present the overall picture of the 
rewards to the American petroleum industry for the service whicli 
it has performed, and by overall I mean the total income of what 
may be defined as the petroleum industry, predicated upon the same 
combinations of factors as those which are involved in the Depart- 
ment of Commerce's estimates of the national income. 

Following, then, such a formula (referring to "Exhibit No. 
1163")^ and bringing into one picture salaries and wages, rents and 
royalties, interest moneys paid, and intramural income, dividends 
paid out and business savings in the one lump sum, we have for the 
petroleum industry, as so defined, a net income in 1937 of $1,680,000,- 
000, an increase between the 2 years, and both were good industrial 
years ; although this was not such a good year for the oil industry, ti 
difference of $534,000,000, or about 47 percent. You will recall that 
during that period there was an appreciable increase in the service 
performed bj' the industry. 

Mr. O'CoNNELL. May I ask a question at that point? Would il 
be fair to compare that chart with the chart introduced a little earlier 
indicating that in the same period of time there was no substantial 
increase in investment? 



^ Appendix, p. 7508. 



7156 CONCENTRATION OF ECONOMIC POWER 

Mr. Gill. May we have that chart? 

Mr. O'CoNNELL. I wouldn't want you to go to that much trouble ; 
a chart you introduced indicated that over that same period there 
was substantially no increase in investment in oil companies. Do 
you recall that chart ? 

Mr. Gill. No ; there was an increase of 9.7 percent in investment 
over that period, that is from 1927 to 1938. With 1923 taken as 100, 
representing these 24 companies, we have a net investment as defined, 
of just under 141 in 1938. 

Mv- O'Connell. Those charts are comparable? 

Mr. Gill. Those charts are comparable. 

Mr. O'CoNNELL. I mean they have about the same companies in- 
volved ? 

Mr. Gill. You mean this chart? ^ 

Mr. O'CoNNELL. Yes. 

Mr. Gill. Yes, sir; this graph represents 24 oil companies as of 
1938, whose histories could be traced in detail. I emphasize "in 
detail" becaiise they include throughout companies that had been pur- 
chased in the latter years, which were separate entities in the earlier 
years. 

All corrections have been made on this graph for that kind of 
change. 

Mr. O'CoNNELL. Thank you. 

Mr. Gill. Just by way of momentary review as to the performance 
of the industry over this period under examination, chart 20 (Exhibit 
No. 1164)2 shows that in 1923, the industry ran and distilled 581,000,- 
000 barrels of crude oil, and in 1937 it ran 1,183,000,000 barrels of oil, 
having increased its through-put 602,000,000 barrels, or 104 percent. 
If the production of gasoline were to be used as the standard of per- 
formance instead of crude run to stills, and there are some reasons for 
using the production of gasoline, the outstanding one being that it 
represents an expensive conversion of a product provided by nature 
for which there is only a low value, to a much higher value, that com- 
parison would show that in 1923 the industry produced 181,000,000 
barrels of gasoline and in 1937, 572,000,000 barrels, an increase of' 
391,000,000 barrels, or 216 percent. 

However, because there are doubts in the minds of those students 
who have been dealing with this subject, regarding the propriety of 
using this basis of comparison as the standard of physical perform- 
ance, crude run has been employed in subsequent charts exclusively. 
Now, in the preceding chart ^ the income of the industrv was shown to 
1923 as $1,146,000,000 and in 1937 as $1,680,000,000, but certain 
students of the subject might object to that comparison as a measure 
of the reward ; they might be perfectly willing to accept the measures 
of physical output which have been presented just a moment before 
on chart 20, but because there had been a decline in prices between 
'23 and '37 maintain that the one billion and one hundred forty-six 
and one billion six eighty were not comparable. 

For that reason there has been just this momentary digression to 
make a correction here which will not be necessary to employ here- 
after "Exhibit No. 1165")* for the change in price level. According 

1 "Exhibit No. 1156," appendix p. 7501. 

2 Appendix, p. 7508. 

3 "Exhibit No. 1163," appendix, p. 750S. 
* Appendix, p. 7509. 



CONCENTRATION OF ECONOMIC POWER 7lbl 

to the Federal Keserve BanTc of New York's general price level, a 
most authoritative issue, the change in the general price level be- 
tween 1923 and 1937 was 1.4 percent. If adjustment is made for 
that change in price level, we have then t6 compare not a dollar in- 
come but a purchasing power income of $1,720,000,000 in 1937 com- 
pared to $1,146,000,000 in 1923. Whereas the earlier comparison gave 
a dollar increase of $534,000,000, or 47 percent, the $1,720,000,000 is 
just about 50 percent above the income of the earlier year. Now in 
that earlier year, 1923 (chart 22), the national income as measured by 
an extrapolation of the data of the Department of Commerce of the 
United States, with the aid of data of the Brookings Institution, and 
the National Industrial Conference Board showed that the oil industry 
income as defined was 1.71 percent of the national income. 

PETROLEUM INDUSTRY INCOME AND THE NATIONAL INCOMIL 

Mr. Gill. In 1937, as indicated also by chart 22 ("Exhibit No. 
1166"), 1 the oil industry's income of $1,680,000,000 represents 2.41 per- 
cent of the national income of that year of $69,775,000,000. And now 
since the price movements are applicable to both series, the^e is no 
occasion to make correction in one. The figures show that the dollar 
income of the petroleum industry increased just short of 47 percent in 
that period, while its position increased 41 percent, or from 1.71 to 2.41 
percent. 

The Chairman. And tlje increase of the national income during 
that same period was only 4.1 percent? 

Mr. Gill. Yes, sir; and we will see why that is, Senator 
O'Mahoney, in just a moment, if you please. 

Mr. Cox. Before that chart goes ("Exhibit No. 1166"), may I 
ask a question ? What i^ that figure "Salary -Wages of 1937" ? ^ 
What does that mean? Is that the amount paid by the industry in 
salaries and wages to those persons employed? 

Mr. Gill. That is right, Mr. Cox ; in the producing branch. Just 
a supplementar}^ statement in the producing branch in the transpor- 
tation, in the refining, in the marketing. 

Mr. Cox. In all the branches? 

Mr. Gill. In all the branches of the industry as an. industry. 

Mr. Cox. Are you prepared to hazard any opinion or estimate as 
to how many persons were so employed, that is, how many tliat figure 
was divided among? 

Mr. Gill. Yes ; I can give you that statement. I can't ^va it to 
you with the accuracy I should like out of mind, but I can give it to 
you with a considerable degree of firmness. 

Mr. Cox. What figure would you say, what estimate would you 
make? 

Mr. Gill. It is a matter of several hundred thousand. 

The Chairman. What is the estimate today of the number of 
persons employed in the oil industry? 

Mr. Cox. Take '37. 

Mr. Gill. Well, the figures are scqittered through this memo- 
randum; it would take several minutes to pull them together. I 

^ Appendix, p. 7509. 

* A supplemental statement, submitted by Dr. Gill in explanation of his testimony ano. 
charts, was introduced into the .^cord on October 10, 1939, marked "Exhibit No. 1226," 
and is Included in the appendix on p. 7676. 



7158 CONCENTRATION OF ECONOMIC POWER 

have, for example, thei figure of wholesale distribution, number of 
employees 110,074 in one of the years of this series. I can give you 
all of the figures. 

The Chairman. Suppose you make that calculation at your leisure 
and transmit it to the committee. 

Mr. Gill. I should be very glad to do that, sir.^ 

The Chairman. And make the comparison also, then, with the 
1923 figure, the number of persons employed in 1923 in the oil in- 
dustry as compared with 1937 and the per capita distribution. 

Mr. Gill. I shall do that also. 

Mr. Cox. Senator, how would it be — I suggest this be off the 
record. [Discussion.] 

Mr. Gill. Is there anything further on this ? 

Mr. Cox. Would you mind telling us how you made up your 
estimates on rents and royalties there? 

Mr. Gill. To save time I have had that put down on a memo- 
randum which I shall be glad to hand to you, or I will read it if you 
wish. 

Mr. Cox. I would like to get that for the record; we have been 
interested in that. 

The Chairman. Let it be put in the record, Mr. Gill. 

(The memorandum referred to was marked "Exhibit No. 1167" 
and is included in the appendix on p. 7510.) 

Mr. Gill. Now, we have been comparing the manufacturing in- 
dustry as the best background for the petroleum industry and con- 
tinue with that comparison with the National Industrial Confer- 
ence Board's figures on the income of the manufacturing industry in 
1923 (chart 23) ^ which is recorded as $15,285,000,000, which was 22.8 
percent of the national income of that year of $67,021,000,000. In 
1937 the income of all manufactures of the United States, as so 
estimated by the same authority, was $16,629,000,000, which was 23.8 
percent of the national income of that year as reported by the 
Department of Commerce, $69,775,000,000. 

The Chairman. Now, before that is removed, what are these per- 
centages of increase? 

Mr. Gill. They show that the dollar income of all manufactures 
increased 8.8 percent; the national income increased 4.1 percent; 
that is the figure to which you referred a few minutes ago. 

The Chairman. And then the low^er line, "Manufacturers' percent 
of national," does not include the petroleum industry? 

Mr. Gill. Yes, sir; it does to the extent that the petroleum 
industry is an element in all manufactures. 

The Chairman. That is what I wanted to find out. 

Mr. Gill. The petroleum industry tends to enlarge this figure of 
23.8. 

The Chairman. That is it, exactly. The story that you are telling 
us, then, Mr. Gill, is that manufacture as a whole increased its in- 
come 8.8 percent, while the national income was increasing only 4.1 
percent. 

Mr. Gill. Yes. 

The Chairman. But referring to the chart which you have just re- 
moved, the petroleum industry increased its income during the same 
period by what percent? 

^ See footnote 2, preceding page. 

» -Exhibit No. 1168," appendix, p. 7511. 



CONCENTRATION OF ECONOMIC POWER 7159 

Mr. Gill. Forty-seven. 

The Chairman. By 47 percent, so that the petroleum industry was 
vastly more prosperous than manufacturing as a whole. That is 
correct, is it not? 

Mr. Gill. To answer tlWt would require a definition of what is 
meant by prosperous. 

The Chairman. Well, I am using itNmerely to express the facts 
which you have shown on your chart. \ 

Mr. Gill. Yes, sir; but I don't think that you can put it that 
way, Senator O'Mahoney. 

The Chairman. All right, I will put it any Avay that you would 
like to have it put, merely to indicate the situation Avith respect to 
profit. 

Mr. Gill. Well, I think I can get at your Question very quickly 
by jumping into another field altogether. 

The Chairman. Let me complete the picture as I see it and then 
perhaps you can correct me if I don't see it as you desire us to see it. 
You have demonstrated that the income of the petroleum industry 
during the period from 1923 to 1937 increased 44 percent. 

Mr. Gill. Forty-seven percent. 

The Chairman. Forty-seven percent. That during the same period 
the income of manufactures, of all manufacturing, increased only 8.8 
percent. 

Mr. Gill. Yes, sir. 

The Chairisian. Less than a fifth of the increase shown by the 
petroleum industry, but that the national income in this same 
period increased only 4.1 percent, or less than 10 percent of the 
increase of income shown by the petroleum industry. Have I cor- 
rectly described it? 

Mr. Gill. Yes, sir; you have correctly described the facts. Now 
it is your conclusion that I want to follow. 

The Chairman. I am not making any conclusion. I merely want 
to ask a question. Could you advise this committee what it could 
recommend to the President and. the Congress that would enable the 
national income to show something like the increase that has been 
shown by the petroleum industry? 

Mr. Gill. I see, Senator O'Mahoney, by the smiles and laughter, 
that the audience recognizes that would completely over\\'helm me, 
and really it does; but I think the answer to your question is that 
if all industry would up-and-at-it and produce as much relatively in 
the years to come as the petroleum industry has in '37 over '23, the 
national income would go up accordingly. 

The Chairman. Well, of course one interesting conclusion that 
might be made from this — and I don't want to make it because I 
haven't seen enough of the facts that are to be demonstrated — is that 
production, increase of production, increase of performance, by the 
oil industry, may have been one of the principal factors in its in- 
creasing income. In manufacturing there has been a decrease of 
production or a decrease in performance, and of course theie has been 
a decrease of production and performance in national enterprise as 
a whole, and that may be the lesson which we should learn f rom wdiat 
has been said here this afternoon ; butj on the other hand, Dr. Pogue 
was on the stand for a few hours telling us how production at least 
per well has been restrained and restricted by the pro rata method, 



7160 CONCENTRATION OF ECONOMIC POWER 

but that of course I recognize is only a proportion of the total output. 
You will pardon me for interjecting this comment in your testimony. 
Mr. Gill. A hundred years ago the share of the national income of 
what we today call the public-utility industry — that is what there 
was of electric, power, and light, and gas at that time — was only one 
twenty-third of what the income of that group is today; and to go 
back still further, say, to 1790, at the beginning of the Nation, you 
think of the agricultural income of the agricultural fraction of the 
population as representing 85 or 90 percent of the national income. 
That is, the lines are changing. The agricultural income has been 
declining for a great many years. The manufacturing income has 
been increasing for a great many years. The oil industry's income, 
as a total, has been' similarly affected as a result of its greater 
performance. 

Giart 24 ("Exhibit No. 1169")^ brings some of these pertinent fac- 
tors together. The oil industry's income in 1923 was 1.71 percent 
of the national income. The performance was 581 units, so stated 
here for simplicity, that is 581,000,000 barrels of crude run to stills. 
I said we would not use production of gasoline because it was not as 
conservative as run to stills, but rather would stick to the crude run 
to stills as the more conservative figure. We have, then, that the 
industry's performance for 1 percent of the national income is repre- 
sented by 340 units of output. In 1937 when it enjoyed 2.41 percent of 
the national income and performed 1,183 units of service ; it performed 
491 units of service for each percent of the national income. The 
manufacturing industry in 1923 received 22.8 percent of the national 
income and it performed 101 units of service as measured by the 
Federal Reserve Board's index, or it performed 4.43 units of service 
for each percent of the national income. In 1937, when the manufac- 
turing industry received 23.8 percent of the national income, it per- 
formed 109 units of physical service, or it performed 4.58 units of 
service for each percent of the national income. That is, the oil in- 
dustry's income as a fraction of the national income increased by 41 
percent — the dollar figure, you recall, was 47 percent. The oil in- 
dustry's performance increased 103.5 percent. I have been calling 
that 104 percent. The unit performance per share of the national 
income increased 44 percent, whereas the manufacturing industry's 
percent of the national income increased 4.4 percent. That compares 
to 8.8 percent on the dollar basis. Its performance increased from 
101 to 109, or 7.9 percent, and its performance per unit of national- 
income share rose 3.4 percent. That is, the oil industry's performance 
per unit of national income increased 44 percent, all manufacturing 
increased 3.4 percent. 

Chart 25 (''Exhibit No. 1170")- attempts to equate the oil industry 
with its background of all manufacturing to see how these great in- 
dustrial enterprises or groups of enterprises might have moved had 
they moved together with respect to the reward standing out against- 
the service performed. In 1937 the oil industry received $1,680,000,- 
000. It performed in the earlier year of the period 1923, 340 units 
of service for each 1 percent of the national income. Had it increased 
its perform:) nee per share of the national income in the samp mfin 

^ Appendix, p. 7511, 
- Appendix, p. 7512. 



CONCENTRATION OF ECONOMIC POWER 7161 

as the manufacturing industry as a whole did, it would have increased 
its performance by 3.4 percent, or from 340 units to 352 units. Actu- 
ally, in 1937 it did perform 1,183 units of service, for which it received 
2.41 percent of the national income. If, to match the rnanufacturing 
industry as a whole, it had performed 352 units of service for each 1 
percent share of the national income, it would have received 3.36 
percent of the national income. The national income in 1937 was 
$69,775,000,000. It would have received 3.36 percent of $69,775,000,- 
000, or $2,344,000,000, but actually it received only $1,680,000,000. 
Therefore, the technologic advances, the conservation in the use of 
capital, the fortuitous discoveries to which reference has been made, 
all of those things have been combined to permit the industry to pass 
on to its public essentially for that year the equivalent in values of 
$664,000,000. 

The Chairman. Did it occur to you, Mr. Gill, in preparing these 
charts, that an interesting comparison might have been developed had 
you prepared a showing for the automobile industry comparable to 
that which you have prepared for the petroleum industry ? I say that 
because obviously the increased use of automobiles has been one of 
the reasons for the increased use of petroleum and petroleum prod- 
ucts ; and if my experience is not unusual, I think it can be said that 
wherever one goes one finds people saying, particularly persons who 
are engaged in other industries than the motor industry or the pe- 
troleum industry, that there is a great disposition among people to buy 
a car and buy gasoline when they won't buy anything else. It is 
frequently alleged that people go without proper housing in order to 
have a car and travel; that they sometimes even go without proper 
food in order to do that. A comparison of the output in the motor 
industry, a comparison for these same years, 1923-37, a comparison 
of the prices charged by the motor industry for automobiles, otherwise 
for the units produced, would make a very interesting comparison 
because the two go so closely together in our life. 

Mr. Gill. Yes, sir; I believe it would. I must plead, Senator 
O'Mahoney, that I don't have the resources of your committee. This 
was a long job. 

The Chairman. Yes; I realize that; and I feel that it is quite 
obvious you devoted a great deal of time to the preparation of this 
material, and the committee is grateful to you for the work and the 
labor and intelligence that have been devoted to preparing it. 

Mr. Gill. On your second point, I don't believe that I should be 
prepared to tell people what they ought to buy. I think we ought 
to leave that up to them. 

The Chairman. I agree with you on that. May I say that the 
story as you have presented it, very interestingly, conveys to me the 
feeling that one of the objectives toward which we should all work 
is to increase the capacity of the masses of the people to purchase the 
products of industry. You have demonstrated that in this industry 
at least increased production has been accompanied by increased 
profits, and that increase of production and increase of profit has 
been due to the fact that people for one reason or another have pur- 
chased the products of this particular industry. Now if we could 
enable them to purchase the products of all industry, not on a piece- 
meal basis, not on a miserable scale of W. P. A., for example, then 



7162 CONCENTRATION OF ECONOMIC POWER 

perhaps the manufacturing profit would be more nearly equal to that 
of the profit of the petroleum industry alone. 

Mr. Gill. I should like to see that; but may I say, Senator 
O'Mahoney, that I think the automobile industry and the petroleum 
industry, separate industries it is true, but cooperating in such a way 
as would be practical, have brought untold benefits to the whole 
American public. 

The Chairivian. There can be no doubt about that. 

Mr. Gill. For example, look what the automobile, the bus, the 
truck, have done in our rural districts to consolidate schools, to give 
graded schools the place of the famous little red schoolhouse, with 
however its inefficiencies, and how communities are being served by 
transportation formerly lacking, and how resources that formerly 
were unavailable have been reached by means of this mobile form of 
transportation, and so on. I am saying things that perhaps you 
know much better than I. 

The Chairman. Not at all ; that is quite all right. 

Mr. Gill. Senator O'Mahoney, this is the last of the charts which 
we have prepared in this series. 

The Chairman. Are there any questions? 

Mr. Gill, we are very much indebted to you for a very interesting 
presentation. 

Mr. Gill. You have been very patient with me. 

(The witness, Mr. Gill, was excused.) 

The Chairman. I have here a response from the American Brass 
Co. to a question that was propounded by Mr. Aj^nold during the hear- 
ings on the beryllium industry. . It is herewith admitted for inclusion 
in the record of those hearings. 

(The letter referred to was marked "Exhibit No. 1171" and is 
included in Hearings, Part 5, appendix, p. 2304.) 

The Chairman. Tomorrow morning the committee will assemble at 
10 : 30 o'clock and Mr. J. Howard Pew, president of the Sun Oil Co., 
will be the first witness. It may be that thereafter we shall be able 
to hear from Marion M. Travis and Mr. H. B. Fell. I am told that 
Dr. Lubin may be heard tomorroAv. 

The committee will now stand in recess until tomorrow morning at 
10:30. 

(Whereupon, at 5 : 45 p. m., a recess was taken until Tuesday, Sep- 
tember 26, 1939, at 10: 30 a. m.) 



INVESTIGATION OF CONCENTEATION OF ECONOMIC POWER 



TUESDAY, SEPTEMBER 26, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington^ I). C. 

The committee met at 10:40 a. m., pursuant to adjournment on 
Monday, September 25, 1939, in the Caucus Room, Senate Office 
Building, Representative B. Carroll Reece presiding. 

Present: Representatives Reece (acting chairman) and Williams; 
Messrs. Berge; O'Connell; Henderson; Brackett; Lubin. 

Present also: Willard Thorp, Clarence Avildsen, and Robert Mc- 
Connell, representing Depiatment of Commerce; Willis Ballinger, 
representing Federal Trade Commission; Hugh B. Cox, special assist- 
ant to the Attorney General ; W. B. Watson Snyder, special assist- 
ant to the Attorney General ; Christopher Del Sesto, special assistant 
to the Attorney General; F. E. Berquist, special assistant to the 
Attorney General; Roy C. Cook and Leo' Finn, Department of 
Justice. 

Acting Chairman Reece. The committee will come to order, please. 

The first witness as announced by the chairman at yesterday's 
session is Mr. J. Howard Pew, president of the Sun Oil Co. Is 
INIr. Pew present? 

Acting Chairman Reece. Do. you solemnly swear that the testi- 
mony you shall give in this procedure shall be the truth, the whole 
truth, and nothing but the truth so help you, God ? 

Mr. Pew. Yes, sir. 

Acting Chairman Reece. Before giving your statement the com- 
mitte would appreciate your giving your name and address for the 
record, together with a statement of your background pnd expe- 
rience, after which you may proceed in presenting your statement 
as you see fit. 

TESTIMONY OP J. HOWAED PEW, PRESIDENT, SUN OIL CO., 
PHILADELPHIA, PA. 

Mr. Pew. Mr. Chairman, I am the president of the Sun Oil Co., 
which is one of the smaller of the so-called integrated companies. 
My early experience was in the refining and transportation business 
of our company which began about 38 years ago. I happen to 
have been the president of our company now since 1912. 

By arrangement between your committee and the American Petro- 
leum Institute, I was assigned the task of presenting to your com- 
mittee a broad general view of the oil industry. 

7163 



7164 CONCENTRATION OF ECONOMIC POWER 

The detailed consideration of the various activities of the industry 
was assigned to other witnesses who have also presented their 
statements to the committee. 

To Mr. DeGolyer was assigned production, Mr. Dow to speak and 
testify on transportation, Dr. Wilson on refining, Mr. S ^ensrud on 
marketing, and Mr. Anderson on employment; with Mr. W S. Parish, 
president of the Standard Oil Co. (New Jersey) to conclude the 
presentation with a general summary. 

I should like, Mr. Chairman, first of all, to present a brief state- 
ment setting forth those facts which the various witnesses represent- 
ing the American Petroleum Institute are prepared to substantiate. 

VIEWS or THE AMERICAN PETROLEUM INSTITUTE 

Mr. Pew. I am here as one of the spokesmen of the American 
Petroleum Institute, the largest and most inclusive trade association 
of the petroleum industry. On its behalf I wish to t'lank the T:m- 
porary National Economic Committee for the opportunity to tell 
our story here. Personally I have realized, from some considerable 
attention to your proceedings, that you were engaged in a compre- 
hensive and potentially fruitful investigation of the entire structure 
of our American economy. Carried on in the spirit you have mani- 
fested it should enlist the hearty cooperation of business, industry, 
and enterprise. 

The petroleum industry almost throughout its existence has been 
repeatedly subjected to searching inquiry. The spotlight of legis- 
lative and judicial investigation has time and again been flashed into 
every nook and corner of our activities. There has been much criti- 
cism, much loose talk of it as a monopoly. Most of the criticism has 
been found on analysis to be based on misinformation or prejudice. 
Largely it has been directed not at our industrial system, but at com-^ 
petitors and competitive practices; much of it is reminiscent of the 
old feeling against the ancient Standard Oil Trust, which ceased to 
be a part of our industry almost 30 years ago ; so we are appreciative 
of the assurance given by your committee that yours is to be an 
unprejudiced and objective inquiry and not one in which isolated 
instances of certain competitive practices are so set out and magnified 
as to dwarf the real issue. 

We believe the inquiry will be of real service because it should help 
dispel much of the clouds of mystery and doubt which have long 
hung over our industry. Commonly this industry has been broken 
down into four grand divisions — production, transportation, refin- 
ing, and marketing. Logically it might equally well have been 
broken down into a hundred divisions because there is no definite 
line of demarcation as between the various divisions. 

I first want to say that as you examine the operations of these 
activities and their relation one to another you will find certain out- 
standing facts; that there is a complete absence of monopoly; that 
natural economic laws are all at work; that no better illustration of 
our competitive system exists in American industry; that petroleum 
products are the cheapest commodities of general use ; that the aggre- 
gate tax paid on the industry's activities and products is the highest 
in the land; that the industry's average earnings have been and are 
reasonable; that the wages paid are among the highest and the 



CONCENTRATION OF ECONOMIC POWER 7165 

working conditions among the best in American industry; that no 
condition exists which requires further Federal regulation of the 
industry's activities; that the complaints you will hear will be di- 
rected not at monopolistic conditions, but at competitive practices 
which inhere in any economy where competitors exercise free will 
in the conduct of their business. 

In the field of petroleum production, you will find that within the 
' framework of the law there is free and unhampered opportunity for 
all. Conservation of a natural resource is the primary aim. 

In the realm of transportation, you will find that the industry 
has developed its own unique and complete system adapted to serve 
this industry alone, and providing the cheapest transportation in the 
world. 

(The vice chairman assumed the Chair.) 

Mr. Pew. You will find that the elements of this transportation 
system are in fact only plant facilities, that no other forms of trans- 
portation can compete, that their integration with the other activi- 
ties of the industry is essential to low-cost production and distribu- 
tion, and that rates and methods, already under strict regulation, 
would be less favorable rather than more favorable under any other 
scheme of operation. 

In the department of refining you will find that all units of the 
industry exercise complete independence of action in the manu- 
facture and sale of their products. 

Marketing operations are far-flung and turbulent. In- every phase 
of this activity there is the keenest competition. This branch of the 
industry fairly seethes with competitors, both large and small, all 
striving for a place and a share in the business. Such a widespread 
activity among so large and varied a number of independent enter- 
prisers inevitably will be marked by a good bit of complaint about 
competitive practices. This condition, however, is by no means 
peculiar to the oil industry. 

Throughout all these activities of the industry, the free play of 
economic law will be found imposing its conditions alike on both the 
efficient and the inefficient operator. But the facts will convince you 
that complete freedom of opportunity exists for any who wish to 
enter the business and risk their energy and capital in this competi- 
tive struggle. No investigation of an integrated industry like petro- 
leum can be complete unless and until the entire industrial operation 
and economy (beginning in the case of petroleum with the search for 
oil and continuing through to the final sale of the refined products) 
has been thoroughly scrutinized and understood. To this character 
of inquiry ,we willingly submit, confident that your conclusions will 
coincide with the best judgment of those whose lives and fortunes 
have been devoted to this industry. We are confident that your 
final judgment will be that no segment of American industry has 
better served the public or is more deserving of its confidence and 
good will. 

SERVICES OF THE INDUSTRY 

Mr. Pew. The birth of the petroleum indusj;ry, dating from the 
first recovery of oil from a drilled well, dates back little more than 
two generations. Today with over $8,000,000,000 invested, only agri- 
culture and rail transportation exceed it in investments of capital. 



7166 CONCENTRATION OF ECONOMIC POWER 

It was a vital factor in the machine a<Te, for it supplied the lubri- 
cants without which the machine era would have died a-borning. 
Kerosene gave the world light and when the internal-combustion 
engine was produced, gasoline breathed into it the breath of life. 
Chemists, inventors, technicians have found uses for hundreds of 
derivatives from this magic stream, all contributing to raise the 
standard and lower the cost of living. There could be no worse 
mistake than to attempt dealing with this industry as if it were 
concerned only with gasoline 

The Vice Chairman. May I interrupt you to inquire as to your 
pleasure with regard to interruption ? Would you like to make your 
statement and then have questions asked, or would you prefer to 
have questions asked as you proceed on points which are not clear? 
The committee wants some information. 

Mr. Pew. I want you to do just as you please, Mr. Sumners. 

The Vice Chairman. Perhaps it would be well, then, for me to ask 
you a question on the matter of sales. Yesterday a witness testified 
that in the selling end of the petroleum: business, there-was considerable 
loss to the major companies. They made money other places, but as I 
understood his testimony, they lost there. Now, that is the place at 
which you said there is the greatest competition. The question natur- 
ally arises in the minds of the members of the committee how it comes 
about that j^ou conduct that branch of your business at a loss, that 
branch in which the larger number of independent people are seeking 
to engage, if that be-true. It may be this witness was not advised. 

Mr. Pew. I think that is a matter that can only be ascertained from 
the study of the conditions obtaining in each individual corporation. 
In our company we have found the marketing department of our 
business to be probably the most profitable, if not the most profitable. 

Now, as regards procedure, this statement of mine is a broad general 
view, as I explained to the commitlee before you came in, of the indus- 
try and its activities and the way it functions. It isn't designed to be 
a detailed discussion. So I thought, if I might, it.might be well for me 
to present enough of it to get the background. I have treated 
many of these questions a little further on. As I explained before you 
came in 

The Vice Chairman (interposing) . You needn't bother with another 
explanation. Just go right ahead. 

Mr. Pew. Over half the barrel of crude is converted into other prod- 
ucts ; the kerosene and illuminating gas that light our homes, the fuel 
oil that heats them, hunker oil that runs our ships, lubricants that make 
it possible to operate the whole world's machinery. From petroleum 
we get asphalt for our streets and road oil for our rural highways. The 
doctor prescribes it as an "internal lubricant" for the human organism. 
The dietician usgs it in "reducing" dressing for salads, and the beauti- 
cian employs it as a constituent of milady's cosmetics. It turns up in 
your paints, in the coating of your stenographer's carbon sheets, in the 
ink with which you sign her letters, and in the chewing gum she mas- 
t'cates while you are doing it. Altogether, more than 200 different 
products come out of that barrel of crude; every year new uses are 
found for it, new products call for their share in it. 

And the industry has met every demand upon it. In war it floated 
us and our Allies to victory on a sea of oil; in peace, it has paid, 
through gasoline taxes, for our good roads — greatest public improve- 



CONCENTRATION OF ECONOMIC POWER 7^57 

ment ever created in so brief a time in any country. It has carried 
the comforts and satisfactions of urban life to the country, and given 
city dwellers the privilege of easy access to the country. Converting 
a continent into a neighborhood, it has opened an intimacy of con- 
tacts, acquaintance, and knowledge that guarantees against sectional 
misunderstandings and division. 

Finally, petroleum is our most characteristically American indus- 
try. It started here, and has continued here. Sixty-two percent 
of the world's oil industry is here. With every service dependent on 
it in this day of mechanized war, ours is the only country that is sure 
of instant supplies for every military emergency — army, fleet, sub- 
marines, flying forces, and service of supplies. With two ocean 
fronts to defend, we have oil on both. In a day of need, we would 
not exchange that guaranty for reinforcement by a fleet of battle- 
ships or a half hundred divisions of veterans in khaki. 

At a time when the world trembles on the brink of war, it may 
be worthwhile to recall American petroleum's part in the last war. 
From the first battle of the Marne, when the taxicabs of Paris hauled 
a fresh arniy out to the fighting line in the strategic play that prob- 
ably turned the tide of battle, to the last sweep of the Allies in 
1918, petroleum was of first importance. 

To control oil supplies was the object of much of the war's major 
strategy. As soon as the United States entered the war the Allies 
made urgent demands for petroleum. Immediately the National 
Petroleum War Service Committee was formed by' leaders of the 
industry. Through this committee the industryj with very little gov- 
ernmental interference, carried on its war activities. Every require- 
ment was met. 

In 1918, 2,600,000 tons of fuel oil were sent to Europe and more 
than a million tons of petroleum distillates. At the war's end the 
stores of oil in possession of the Allies were greater than' at any 
previous time. In their final winning drive, 80 percent of oil used 
was from America. 

I may close this phase of my discussion by quoting from an article 
by Victor Ross on Petroleiun in the World War. He said : 

It was recognized that the work of the National Petroleum War Service Com- 
mittee, though unostentatiously performed, was the most eflBcient and the most 
fruitful in results for the cause of Democracy of any industrial institution in 
the War. ♦ * * These results were achieved by the voluntary efforts of 
thousands of men serving in every phase of the industry — crude production, 
refining, and transportation. 

Under our system of iree enterprise the oil industry has estab- 
lished itself, has developed our oil reserves, and created transportation 
and refining systems adequate to meet any emergency. Under none 
other could it have been thus builded; under no other can it be per- 
petuated. The element of monopoly was driven out of it nearly three 
decades ago ; in part by the dissolution of the old Standard Oil Trust ; 
in part by the revolution within the industry when the automobile's 
demp,nd made gasoline the most important product. Since then the 
industry's whole character has been made over and its great growth 
has taken place. How rapid that growth has been I may suggest by 
recalling that A. C. Bedford, when chairman of the old Standard Oli 
Co., placed the entire investment in the industry in 1906 at $750^000,- 
000, of which about half was credited to the Standard Oil grotip. In 

124491— 40— pt. 14. sec. 1 6 



7168 CONCENTRATION OF ECONOMIC POWER 

1911, when the old Standard was dissolved, its interests were valued 
at about $650,000,000, other refining interests about $150,000,000, and 
producing properties at about $1,250,000,000. 

In this connection it should be remembered that the old Standard 
was predominantly a refining and transporting company, not a pro- 
ducing and retail marketing company. By any present definition 
it would not have rated as an integrated concern. It was not until 
after the dissolution of 1911 that the various Standard companies went 
much into production. Then the New Jersey Standard took over such 
producing companies as Carter Oil and Humble; Standard of New 
York took over Magnolia, and so on. At the same time these Standard 
companies went into retail marketing. They had to do these things 
in order to compete with the new fully integrated concerns that were 
starting into the field : Texas, Shell, Gulf, Pure, Sun, and many others. 
The truth is that integration, instead of being a weapon of monopoly, 
was the implement with which the new competition armed itself 
against the old monopoly. 

INTEGRATION HELD TO BE WEAPON AGAINST MONOPOLY 

Mr. Pew. On this point I cannot be too emphatic. I earnestly 
hope your committee will fully examine this aspect of the industry's 
development. If you will do so, I am convinced that your conclusions 
will agree with mine — that integration, instead of making for monop- 
oly, is our one sure guarantee against monopoly. 

The Vice Chairman. Why is that a cure against monopoly ? 

Mr. Pew. Because an integrated company, having its production, 
its pipe-line facilities, transportation, refining, and marketing, never 
can be controlled by any one group taking the control of one depart- 
ment or one phase or one activity within the industry. The old 
Standard Oil Trust was not, as I said, engaged in either production or 
marketing, but it dominated the industry through the control that 
it had in the transportation and refining branches of the industry. 

The Vice Chairman. How would it have come about ; by reason of 
that control of manufacturing, had they also engaged in retailing^? 
Would that have made them any less a monopoly ? 

Mr. Pew. I think if they had had control of the retailing they 
would probably have been able to effect the most complete control 
of the industry that could be obtained through the domination of any 
one branch. 

The Vice Chairman. Then how does it come about that integra- 
tion reduces the probabilities of monopoly? 

Mr. Pew. Because it prevents such control of any one activity. 

The Vice Chairman. I don't believe I follow your reasoning. 
The manufacturer controls the distribution of that which he manu- 
factures, by integration; he controls it. Now if he blocks competi- 
tion, either in manufacturing or distribution, he is a monopoly, and 
it doesn't seem to me that to double the possibilities of a monopoly 
would reduce the prob!ability of a monopoly. 

Mr. Pew. If you have a few well-integrated small concerns oper- 
ating throughout- all the divisions and all the activities of the in- 
dustry 

The Vice Chairman (interposing). Then they don't have to go 
through anybody else? 



CONCENTRATION OF ECONOMIC POWER 7169 

Mr. Pew. Yes ; they don't have to go through anybody* else. 

Mr. Berge. Mr. Chairman, may I ask a question? You conceive 
of effective competition in the oil industry, I take it, as bein^ a 
competition of numerous integrated companies. The competition 
will be promoted if each company is strong enough to have a source 
of supply and a marketing and a refining organization; therefore it 
can compete with other giants because it is strong enough to do so. 
If your theory of competition is the correct one — and I am not 
arguing now as to whether it is — what chance has an independent 
refiner or an independent marketer for effective competition against 
the great organizations ? 

Mr. Pew. I think the independent has a great many advantages. 
I think we use that word "independent" sometimes loosely because 
in our organization we consider that we are independents, although 
we are also integrated. I can recall that when we started in the 
gasoline business some 13 years ago that we had a great deal of 
advantage over the larger integrated companies, because we could 
go out and select the choice kinds of crude oil ; we could refine those 
in our refinery; we could ship those products out to the cream of 
the marketing territory; we went into just those areas, and we did 
just that thing. 

Mr. Berge. Why can't the large integrated companies do that too ? 

Mr. Pew. They can't pick and choose; they have to take a whole 
section. In the mass production they have to have a mass market. 

Mr. Berge. Now if the bulk of American oil is handled by the 
large integrated companies, what chance has an independent marketer 
to get a supply on satisfactory terms through the processes of com- 
•petition, if he himself is a competitor of the marketing branch of 
the companies from whom he must buy? I take it that the conse- 
quent growth of integrated companies and the multiplication of 
them numerically would mean more and more oil handled by them; 
and aren't you placing the independent refinery and also the inde- 
pendent marketer in a position, more and more, of dependence upon 
his larger competitors — and I am speaking of independent in a sense 
of companies that are organized to do business in respect to one 
branch of the marketing of oil, refining or marketing — I should say 
one branch of the total oil business — and who have no affiliations with 
integrated companies? I don't suppose that is a technical definition 
of independent company, but I am thinking of it as one of these 
organizations which only markets oil and is not affiliated with any 
of the commonly accepted big companies. Aren't they placed at 
distinct competitive disadvantage? 

Mr. Pew. I take it that your question refers first of all to the 
marketing activities of the industry. 

Mr. Berge. Perhaps there are different considerations in market- 
ing and refining. I know there is a large group known as inde- 
pendent refiners and also a large group known as independent mar- 
keters, and the associations of these independent gasoline stations 
are many of them very small-business men who in fact try to com- 
pete with the stations that are owned directly by the integrated com- 
panies. I am thinking about their being in the position of having 
to purchase supply from their competitors, which it seems to me 
they have to do. 



7170 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. Are you thinking of the marketers in the industry or 
the retailers? 

Mr. Berge. Well, I hadn't in my own mind defined the question 
that closely. You may answer it as to either or both groups. 

Mr. Pew. Well, my view is that there will always be the oppor- 
tunity for the small operator in this industry. My view is that he 
will always be able to operate in any one of the branches of the 
industry, because after all the personal element, management, the 
ability of the individual, will always obtain a certain amount of busi- 
ness as a result of his efforts. But, in addition to all that, I think 
there is a point beyond which the large integrated companies can- 
not go, because the independent operator can always pick and choose 
the cream of the business, and it ig always more profitable for him 
than it is for the integrated companies who have to take business, 
by and large, as they get it. 

Mr. Berge. I don't quite follow that. I don't see how you can say 
that the independent has an advantage in picking the cream of the 
business when he hasn^ the facilities for marketing or retailing that 
the integrated company has and where he is dependent to a large 
extent, it seems to me, on that for his source of supply. 

Mr. Pew. In the first place, he has the opportunity of buying from 
all of the large companies. There does exist, of course, the keenest 
kind of competition as between those larger companies. In the 
second place, he has the opportunity of buying from the so-called 
independents. 

Mr. Henderson. May I ask the witness a question ? I gather from 
what you said, one prong of your answer is that there is always a 
place for the small independent and that there is a place for high- 
grade management. I assume you would include in thati a certain 
amount of investment necessary, too, for an individual. He can't 
just start in the oil business in any one of its branches without a 
certain amount of investment. 

Mr. Pew. Or any other business. 

Mr. Henderson. But looking at the record that was presented 
yesterday by Dr. Ise, it seems that the percentage of business which 
is being done by the integrated companies is on the increase and 
therefore, as far as taking advantage of the opportunity, the indi- 
vidual of small means, regardless of expert capacity and managerial 
ability, is finding a smaller and smaller area available to him. Isn't 
that true? 

Mr. Pew. I wouldn't say so. I attempted to explain a moment ago 
our position a few years ago when we started in the gasoline busi- 
ness. We found that we had a tremendous advantage over the larger 
companies. We are able to go into the oil fields and choose the cream 
of the production. When we refined that oil we got our products of 
a high quality which was what we were looking for, and then we 
were able to take those products out and sell them in those markets 
which at the moment were the most advantageous. 

Mr. Henderson. But you had quite a substantial amount of capital, 
didn't you, for that undertaking ? 

Mr. Pew. I would say so, but I think it practically paid its way 
as we went along. I coiild get that information. My recollection 
is that we didn't go out and refinance. 



CONCENTRATION OF ECONOMIC POWER 7171 

Mr. Henderson. Oh, no ; but the Sun Ship ^ had resources which 
aren't available to the ordinary individual in terms of what you think 
of as competitive enterprise. ^ 

Mr. Pew. No ; but that wasn't the way-we started. We started in 
a very small way to make this gasoline, and then we selected one 
section of the country, one citj. We advertised our product in that 
city. It was inexpensive. Finally, after we covered that city we 
took another city and the business paid its way. 

Mr. Henderson. Getting back, though, to this impression which I 
got from the testimony yesterday, which was supported by a consider- 
able amount of fact finding, the area that is available eyen to a unit 
such as yours was when you started some years ago, is shrinking, 
isn't it, or is it your impression that it is a much larger area than 
it used to be? 

Mr. Pew. We have a much larger field in which to operate. I don't 
recall the number of automobiles that were on the roads in 1926 
and '27, but I suspect there has been a very large increase. 

Mr. Henderson. So that even though 20 companies have 90 per- 
cent of stocks of finished gasoline, your idea would be that the 
10 percent that is left is equivalent to a larger market for independent 
competitors than, say, 15 percent 12 years ago? 

Mr. Pew. I, first of all, am just wondering why you use the stocks 
of gasoline as the basis for distribution of the business. 

Mr. Henderson. It happened that I picked out one of the tables 
here.^ I will let you pick one: Domestic sales of gasoline, 18 com- 
panies have 80 percent; gasoline pipe-line mileage, 16 companies, have 
96 percent; stocks of lubricants, 80 of them have 93 percent; on the 
production of gasoline, 20 companies have 83.8 percent. I can go 
on down the line but it is immaterial to the question I am trying 
to get at, which is whether or not the area in which somebody wanting 
to go into one or all phases of the petroleum business can operate is 
shrinking or is larger than it used to be. 

Mr. Pew. I think that the larger the percentage of the business that 
is handled by the so-called major companies — a word which I think 
has been used in a most unfortunate way — the easier it is for the 
independents to get into the business. 

Mr. Henderson. That certainly runs contrary to testimony of 
independents in various branches in this business and also runs con- 
trary to the idea of free and equal opportunity in business, doesn't it? ^ 

Mr. Pew. No. 

Mr. Henderson. You mean if the large companies have a tre- 
mendously large percentage of the business, that there is a larger 
opportunity for the individual? 

Mr. Pew. I think there is a larger opportunity. 

Mr. Henderson. Why? 

Mr. Pew. Because he can choose the location in which to start his 
business, if it be a marketing business; he can choose his crude oil 
if he is interested in refining; the large integrated companies have 
to take everything that is produced along their pipe lines. Some of 
the crude suits their purposes, some of it doesn't. The independent, 



1 Mr. Pew is a director of Sun Shipbuilding & Drydock Co., Chester, Pa. 
' Referring to table introduced by Dr. Ise, appearing supra, p. 7103. 

8 For testimony on this subject see infra, pp. 7265-7291, 7306-7331, 7333-7387; also 
Hearings, Parts 15 and 16. 



7172 CONCENTRATION OF ECONOMIC POWER 

the small man, chooses the crude oil that best suits his particular 
purpose. 

Mr. Henderson. He can pick up these fragments that are left and 
build a successful thing? 

Mr. Pew. No ; he can go in and and take them away from the other 
man. 

Mr. Henderson. That is the point I was getting to, that since you 
started in the business evidently they have not been taking them away. 
This process of absorption of a larger and larger part of the market 
has been going on. The opportunity may be there, but with a tre- 
mendous amount of ability, brains, and money, it just hasn't happened. 

Mr. Pew. I don't understand that that is exactly the case. Mr, 
DeGolyer has some detailed figures on that which he proposes to 
present a little later, in which I think he will show that that trend 
has been in the opposite direction. 

The Vice Chairman. May I suggest, Mr. Pew, that that is the 
kind of thing we want, if I may make a suggestion. What has 
happened ? We know, for instance, that gasoline is a very important 
industry. Just what it is doing I don't know, but everybody going 
around over the country knows that, and everybody who buys gaso- 
line and every other kind of "lene" knows a heap of that stuff is 
made out of petroleum. We all know that, not in detail, but the 
thing that concerns us is what are we going to do about it, about the 
general situation. That is what we are here for. It is on these 
points such as you have been discussing that the committee deserves 
the greatest information. 

Mr. Pew. I have gone into a lot of these questions later on in my 
presentation. I think if you will permit me to give it that it might 
help in the later discussion. 

Mr. Berge. I don't want to pursue it unduly at this time, but I 
think it can be disposed of in a moment, but there was one question 
which was provoked by the figures Mr. Henderson gave. I notice 
that about 96 percent of the pipe-line business, which I understand 
to be the crude oil, the movement of the crude oil from the fields to 
the refineries, is controlled by 16 of the companies. As I understand 
it, you do favor the maintenance of independent, nonaffiliated compe- 
tion, I take it; you don't want to see the so-called independent 
refiners go out of business altogether. If 96 percent of pipe-lines are 
controlled by 16 companies, certainly it follows, doesn't it, that those 
companies have an advantage in competition in the refining end of 
their business over the independent refiners? The independent re- 
finer must be at a disadvantage in meeting the competition of the 
companies who own their pipe lines. Would you deny that? 

Mr. Pew. I think that is a matter that requires a good deal of 
exploration. I don't believe, first of all, that a general statement, 
such a broad statement as you have made, .can be answered broadly. 
It seems to me that we have got to take every individual situation 
and explore it with a view of determining just what the facts are in 
that particular case. 

I have, further on in my paper, dwelt at some length on just that 
situation. 

Mr.BERGE. Perhaps, then, I should defer further injuiry until you 
reach that part of your paper. I am interested in running that down 
a little. 



CONCENTRATION OF ECONOMIC POWER 7173 

Mr, Pew. I have here a list of 117 companies which the American 
Petroleum Institute classes as completely or partially integrated. 
They range all the way from the giants to the pygmies of the business. 
Forty of them are substantially integrated; but not over half of 
these 40 could possibly be rated as "majors." If anybody suspects 
that monopoly is likely to be established among these six score of 
fighting, independent and determined competitors, I should like to 
have him sit at my elbow during the working hours of a few business 
days. He would learn what competition really is. 

The discovery of integration as a bogieman of the industry is of 
quite recent years. When I first heard of it I had to ask what it 
meant, and was a little surprised to be told that my own company 
was guilty of being integrated. I presume it is; but if you should 
ask me when it became integrated I should first have to get your 
very detailed definition of the word, and then call our board of 
directors together and have our records examined from the beginning. 
With us, at least integration, like Topsy, "just growed." It was 
natural, it was inevitable, if there was to be any growth and any 
progress. 

The industry has been developed on the theory of big and expanding 
production at constantly lower prices. It is our most impressive 
monument to that unstinted competition that is always looking for 
better methods, improved processes, inventions, discoveries — that 
seizes upon every idea looking to lower costs, better products, wider 
markets — that always seeks to give the consumer better goods at lower 
prices. This competition has demanded millions every year for labora- 
tory and experimental work. It has demanded constant reorganiza- 
tion and modernization of plants and processes. The establishment 
that is today's last word in progress, and has cost millions, is likely to 
be outmoded by next year. Yet this seeming wastefulness is real 
industrial economy. The fraction of a cent of saving per gallon or 
the shade of improvement in quality multiplies into wider acceptance, 
expanding volume, and strengthened position. These are the things 
which keep us constantly on the keen edge of competition and which 
make competition a good thing. 

The test of an industry's success is that it provides adequate supplies 
of its products of good quality at fair prices, pays good wages, main- 
tains good working conditions, pays fair prices for the materials and 
supplies which it has to purchase, earns a sufficient return on capital 
in order that it may always command additional capital when it is^ 
needed for expansion or improvement, and most effectively conserves 
human and physical resources. By all these tests the petroleum in- 
dustry has deserved well of the public. It has justified our belief in 
the American system of free enterprise, unhampered initiative, private 
ownership, tind unrestricted competition. 

If the industry is tainted with monopoly, there must be some evi- 
dence. If our prices were excessive there would be innumerable com- 
plaints. Yet in all the many investigations the thing that has most 
impressed me is that our customers never allege that we are. over- 
charging them. More commonly they wonder that our products are 
so cheap. These prices scrape the bottom of the commodity price 
index. Thus in June 1938 they stood at 56.3 as against 78.3 for "all 
commodities." And they have in recent years shovm" the greatest 
shrinkage in consumer price. In 1920 the country's average service- 



7174 CONCENTRATION OF ECONOMIC POWER 

station price of gasoline, ex tax, was 29.74 cents ; in 1926 it was 20.97 
cents ; and on October 1, 1938, it was 13.76 cents — and the lower price 
paid for a much higher quality. The index shows petroleum products 
today are the cheapest commodities of general use. 

The estimated net book value of all the corporations comprising 
the oil industry is probably somewhat over $8,000,000,000. An esti- 
mate of earnings from 1921 to 1936 indicates, for the industry as a 
whole, a deficit in 1 year and profits in 15. The highest yearly re- 
turn on net worth was approximately 10 percent; average yearly 
earnings were just under 6 percent. It would be a mighty inefficient 
monopoly that could do no better than that. 

But even if prices are low and profits are modest, is there some 
phase subject to criticism? Is it our attitude toward labor? A 
favorite diversion of monopoly is supposed to be grinding the face 
of labor. So let us inquire how this industry has been treating its 
workers. 

Department of Labor statistics show that in 1938 pay rolls of oil 
refining exceeded 1929 by about $16,000,000. The average hourly 
refinery pay in 1938 was 98 cents, which was more than 40 percent 
above 1929, and the highest rate paid in any manu^facturing industrj'. 
Weekly working hours averaged 49 in 1929 and 36 in 1938; but the 
average weekly wage in 1938 — just under $35 — was higher than in 
1929 and over $12 above the average for all industrial workers. Re- 
fining showed one of the lowest labor turn-overs, and there were 7^ 
percent, more employees in 1936 than in 1927. If all business had 
kept that pace there would never have been an unemployment prob- 
lem. The oil industry, employing a million workers, has been lifting 
the face of labor, and not grinding it. 

The experience of my own company may be illuminating in tji© 
search for a monopoly factor. Sun Oil is one of the smaller inte- 
grated companies. Control and management have always been held 
within a single family. It is only about 13 years since we produced 
and marketed gasoline. At that time the industry had grown to full 
adult stature, and we were left no room to doubt that it was thor- 
oughly competitive. Nevertheless, our company was able to make a 
place for itself. We found no monopoly to freeze us out, and no 
excesses of competition to starve us out. We have never assumed a 
divine right to a place and a share in the industry. If somebody 
else could serve the public better in quality or price, he was entitled 
to the business. That is still our attitude, and the attitude of the 
industry. Everybody has recognized that his right to continue in 
business .depends oft his ability to give the public what it wants at 
prices it is botK able and willing to pay. To live up to that formula 
has kept all of us scratching. It has been a case of "root hog or die" 
and my agricultural friends tell me that the most vigorous rooter is 
usually the healthiest hog. 

I have outlined the accomplishments of the industry to show 
that it is serving the public well. If I am right, there is no need 
for drastic changes in. governmental policies respecting it. The in- 
dustry has become what it is under a regime bf free enterprise and 
wide-open competition, with little governmental interference. I am 
convinced that it will give Taest service in future under a continuance 
of just such conditions. I believe legislation such as has been urged 
in ^Hne quarters would be disastrous to both the industry and the 



CONCENTRATION OF ECONOMIC POWER 7175 

public welfare. I am confident especially that your investigations 
will lead to the conclusion that neither the industry's record nor the 
public's welfare justifies any of the punitive measures that prejudiced 
and ill-advised self-interests have urged on behalf of a srnall minority. 

I have noted that the consumer never seems to get- excited about his 
treatment, although his would be the first protest if he felt he was 
getting a bad deal. He only asserts himself when he considers the 
taxes on our products, which of course he has to pay. At that point 
the industry and its customers are in agreement. The excises on 
gasoline, averaging about 5 cents to the gallon, represent a rrianufac- 
turer's sales tax of right around 100 percent. No other industry 
makes a comparable contribution to public revenues; just about 
$1,000,000,000 yearly.^ 

Let us turn now to the technical advances that have been intro- 
duced by the oil industry. The first oil well, in 1859, was only 69 
feet deep. Today we go 2 miles deep. The early wells were all 
"wildcats"; nobody knew how to locate oil save by boring. Today 
geologists and geophysicists study terrains, test geologic structures, 
giving the driller invaluable help. We have learned about reservoir 
energy and how, by conserving it, to increase the yield of oil. 

THE industry's TRANSPORTATION SYSTEMS 

Mr. Pew., These advances have cost effort, time, patience, and mil- 
lions upon millions of dollars. The industry, starting from scratch, 
has had to devise all its own methods, apparatus, paraphernalia, and 
so forth, and it has always welcomed new ideas. Take transporta- 
tion. We deal in cheap and bulky materials, and have developed a 
complete and unique organizat^n to move them. Our pipe lines 
gridiron much of the continent. Small "gathering lines" bring, crude 
oil from wells to trunk lines, which in turn carry it to the seacoast, 
whence tank ships move it to refining centers thousands of miles 
away. The refined products, in turn, flow away by other pipe lines 
to the consuming areas, or move by rail in tank cars. The 125,000 
tank cars used by the industry are owned privately and not by the 
railroads. 

Every link in this transportation chain was devised by oil men to 
meet their special requirements. No part is adapted to serve any 
other industry. All movements are one-way movements. Something 
over a billion dollars represents the depreciated investment in this 
one department. So enormous is the freight of crude- oil and its 
refined products that well over one-half of all ocean-going freight 
tonnage transported under the American fla^ is handled by the tanker 
fleet of nearly 400 vessels. Incidentally, this fleet would be drafted 
as an auxiliary to the Navy in war; new tankers are built to meet 
naval requirements for power and speed.- The oil industry thus 
provides, and in peacetime maintains, one of the expensive elements 
of national defense. 

Dr. LuBiN. May I ask the witness a question at this point? I 
note that the industry takes credit in maintaining a reserve fleet for 

1 According to figures compiled by the Distilled Spirits Institute and the Alcohol Tax 
Unit of the U. S. Internal Revenue Dept., the distilled spirits industry paid in taxes for 
calendar year 1937, $1,021,135,100; for calendar year 1937, $917,277,086. According 
to spokesmen for both these organizations, taxes paid "by the industry will run well over 
a billion dollars for the 1939 calendar year." 



7176 CONCENTRATION OF ECONOMIC POWER 

naval requirements. Does the Federal Government subsidize you in 
building those ships at all ? 

Mr. Pew. I think there were 12 boats that were built in a special 
way to meet special Government requirements. 

Dr. LuBiN. In other words, the Government was responsible for 
this additional power and speed and paid for it? 

Mr. Pew. The Government put enough money into those vessels, 
as I remember it, to pay for that part of the cost which had to do 
with the special provisions necessary to make those vessels available 
for Navy work ; but I refer to all of these vessels, many of which were 
in addition to those 12, 

Hundreds of sea-going, river, lake and canal barges are included 
in the transport system; and finally, 100,000 tank trucks make the 
final distribution of gasoline to 300,000 filling stations. 

To this efficiency of transport is largely due the ability to serve 
products so cheaply. It is calculated that a third of the cost of the 
gallon of oil ready to go into the motorist's car represents transpor- 
tation. Had the industry been content to rely on conventional trans- 
port facilities, that gallon would have cost probably twice as much. 

This unique transport system is to the oil business what its assembly 
line is to an automobile factory. Anything which would interfere 
with the close correlation of producing and refining would be like 
requiring Mr. Ford's assembly line to be owned and operated by an 
independent or perhaps several independent and unrelated corpora- 
tions. The pipe lines have been common carriers for over 30 years, 
their service open to everybody at rates filed with the Interstate 
Commission and State commissions and subject to change by them. I 
am assured and believe that the overwhelming majority of inde- 
pendent oil producers would come here to protest against any change 
in this relationship. Let me tell you, from the current experience of 
my own company, why I believe this. 

In Starr County, Tex., we are developing a new producing area. 
Drilling has not yet gone far enough to define the field. We have 
10 wells producing, from which, under Texas regulations, we are 
permitted to take something like 520 barrels daily. That is not 
enough to warrant construction of a pipe line, but if we were dick- 
ering with a pipe-line company it is all the business we could 
guarantee. We, of course, hope production will ultimately be much 
larger; but if we told the pipe-line man of that "hope" he would 
likely say, "Well, if you get all that production, it'll b^ you that will 
make the profits out of it ; if you don't get it, my line will be a loss.- 
So I guess you had better take the chances." 

"But," we reply, "the law -doesn't allow us either to build a line 
or to furnish you the money to build it with." 

"Then I guess there will be no pipe line until the field is developed," 
retorts the pipe-line operator. 

And there we reach an impasse. Our company can't go ahead and 
develop the field unless it is assured a pipe line, and the builders 
can't afford to lay a pipe line until the field is developed. 

That is the picture where a new and speculative field is concerned. 
Now, consider a field like East Texas, that is highly developed and 
already has good pipe-line service, owned by the integrated, compa- 
nies. Suppose a ^roup of producers, dissatisfied with their rates, fail 
to get the commission to change them and decide to lay their own 



CONCENTRATION OF ECONOMIC POWER 7177 

line. For about 2i/2 million dollars a line can be put down to serve 
2,500 wells.. In that field the average well is worth probably $50,000. 
That is only 2 percent of the value of 2,500 wells, and with the 
guarantee of that business there should be no financing difficulty. 
The independent producers can have their own pipe line if they 
want it. 

Why then have not producers, if conditions are unfair, been laying 
their own lines? Remember, rates are subject to strict regulation 
by interstate and State authorities. Obviously, dissatisfied produc- 
ers would first appeal to public authorities for better rates. But in 
fact they have neither been building lines nor complaining about 
rates. I have known of only one case in which an independent line 
was laid, and I think it is still there, never having moved a barrel 
of oil. Likewise, my information is that in the thirty-odd years 
since pipe lines were made common carriers there have been only 
two cases before the Interstate Commerce Commission complaining 
of their rates; in one the decision sustained the rates, and in the 
other the complaint was withdrawn. On the record I submit that 
the long-established correlation of transportation with the other divi- 
sions of the industry has given practically universal satisfaction 
within the industry, and has been a leading factor in giving Ameri- 
can consumers the cheapest petroleum products in the world. 

Thus far I have discussed crude oil pipe lines. But pipe lines are 
used also to distribute gasoline from refineries to consuming areas. 
We were one of the first companies to put down a gasoline line. A 
word now about gasoline lines. My own company has some 850 
miles of tliem. When we laid them most people believed the idea 
pretty wild. We realized that such distribution would be imprac- 
ticable unless there was an assured market along the line's route. 
So, years before a pipe was put down, we had our marketing organi- 
zation develop business along the proposed route. This was expen- 
sive ; we lost a good deal of money building up a volume that would 
keep the line busy. And even then, before starting construction, we 
went to the railroads and offered to drop the project if they would 
give us the same rates we proposed to set up for the pipe line. They 
refused, the line was laid, and when it was ready we published the 
same rates we had asked them to make. Since then we have three 
times reduced those rates — and it is not unfair, I hope, to observe 
that these reductions were made in a period when the railroads were 
pressing the regulatory authorities for higher freight rates. 

The Vice Chairman. Wliat percentage of the business of the gas 
line is done by other than your own company, your own organiza- 
tion? 

Mr, Pew. I think the last figure I saw for the year 1938 indicated 
that we were moving about 87 percent of our own product. 

The Vice Chairman. How can you mix gasoline coming from 
different manufacturing plants, with different standards perhaps ? 

Mr. Pew. We have that worked out very nicely. Between the 
grades we put some special gasoline and we color that a special 
color, and then they telegraph along the line how that is proceeding, 
and at a given time they take out a sample and cut it off. 

In conclusion of this phase I wish to quote from the report of 
Walter M, W. Splawn, special caunsel to the House of Representa- 
tives' Committee on Interstate Commerce in 1933, Dr, Splawn, now 



7273 CONCENTRATION OF ECONOMIC POWER 

a member of the Interstate Commerce Commission, investigated, for 
the committee, the whole pipe line situation. The report, in two 
volumes, covers almost a thousand pages. I should like to read 
just a few lines from the conclusion. 

Oil pipe lines — 
he says — 

are found as a result of this investigation to be plant facilities in an integrated 
industry. They are very different from railroads, in that railroads carry all 
manner of freight v?hereas oil pipe lines are limited to one product ; petroleum 
carried in one direction, from a diminishing source of supply. Pipe lines have 
been built primarily by oil companies. It appears very difficult to apply the 
"commodities clause" to oil pipe lines. If the oil companies are forced to sell the 
pipe line companies, who would buy them and who would build to newly 
discovered oil fields? It appears that whatever regulation of oil pipe lines 
may be necessary, it may be provided in recognition of the character of pipe- 
line transportation and its relation to the oil business. 

The importance of the industry's specialized transportation system 
will be best illustrated by a comparison of transportation costs by 
different facilities. Our company employs all of them, and for 1937 
I have tabulated the ton-miles and the costs of carriage by each 
facility. The figures follow. 

Year 1937 



Type of transportation 



Ton-miles 



Percent 



Cost per 
ton-mile 



Water ... 

Railroad 

Pipe line (crude).-. 
Pipe line (gasoline) 
Trucks 

Total 



10, 378, 739, 263 

244, 358, 433 

744, 174, 990 

372, 992, 210 

64, 219, 988 



87.92 

'2.07 

6.30 

3.16 

.55 



$0.00063 
0. 01640 
0.00477 
0.00527 
0. 04873 



11,804,484,884 



100.00 



•0. 00162 



♦Weighted average. 

I think this is an interesting table. It is only of interest, however, 
to the extent that it represents our company's costs on these several 
transportation facilities. By ^ater we moved a little less than ten 
and a half billions of ton-miles of petroleum and petroleum products. 

The Vice Chairman. What sort of waters did you move those over? 

Mr. Pew. That includes all of our water transportation. 

The Vice Chairman. Ocean transportation as well as river? 

Mr. Pew. The ocean transportation mostly — that is. in bringing 
our crude oil from the Gulf of Mexico to our refinery at Philadelphia. 

The Vice Chairman. Have you broken that down to determine what 
is the cost of transportation other than ocean, or do you have such 
transportation ? Don't take the time to look it up. 

Mr. Pew. He tells me we have it.^ 

The Vice Chairman. Put it in the record later, if you don't mind.^ 

Mr. Pew. It is interesting to note that includes all the transporta- 
tion — barge movements, small barges, large barges, small boats, and 
so forth. 

Eighty-eight percent of the ton mileage was handled by water at 
a oost of six one-hundredths of a cent per ton mile. 



^ Refers to Mr. Robert Dunlop, economist, who .':at at the committee table with Mr. Pew. 
- Mr. Pew supplied the figures later in the day. See p. 7196, infra. 



CONCENTRATION OF ECONOMIC POWER 7179 

By railway we moved just under 250,000,000 ton miles, representing 
just over 2 percent of the total, at a cost of l^fioo cents per ton mile. 

Representative Reece. Mr. Pew, did you read the correct cost per 
ton mile ? You said six one-hundredths. 

Mr. Pew. That is right — six one-hundredths of a cent. You have 
the decimal point, and the second naught is the pennies, the third 
naught is the tenth of a cent, and the fourth naught, the fourth figure, 
is the hundredths of a cent — it is $0.0006 of a cent. 

Whereas by rail the cost was l^^ioo of a cent. 

Now, I have the pipe lines split down into two parts, that of move- 
ment by crude and by movement by gasoline. The two of them are 
a little under 10 percent and cost us just about a half a cent per ton 
mile. 

Mr. Berge. May I ask at this point if you made a similar break- 
down of the water transportation, how would it come out? What 
percentage of the water transportation would have been crude and 
what would have been gasoline, roughly ? 

Mr. P*Ew. I would say 80 or 90 percent would have been crude. 

Mr. Berge. How can that be reconciled with the I suppose known 
fact that most of the wells are a fairly good distance inla,nd? Do 
you mean that you take it to the coast in pipe lines and refine it, and 
then send it on ? 

Mr. Pew. We take it to the coast in Texas and then we load it into 
our tank steamers and move it 1,800 miles to our refinery at Phila- 
delphia, whereas much of this crude oil only moves about 300 miles, so 
that it all moves nine times as far by water as by pipe line. 

Mr. Berge. I see. Then it would be fair, however^ to say that a 
much larger proportion of the oil than is indicated by these figures 
does at some point in the transportation process move through pipe 
lines. Just looking at these figures without any explanation of them, 
one would assume that in 97 percent of the transportation of oil, 
the pipe line is not an important or necessary process. That is not 
so, as I understand you ; the bulk of this oil would go through pipe 
lines at some stage of the process, but the figures set up on a mileage 
basis would show a larger distance by water, and these figures' would 
be quite different if you were to set it up on the basis of that oil • 
which moves exclusively by water, wouldn't they ? 

Mr. Pew. Oh, yes. This statement was prepared merely to give 
you gentlemen a bird's-eye view of the costs as between these different 
methods of transport. 

Mr. Cox. While you are talking about that table, Mr. Pew, could 
you tell us whether or not most of that railroad movement you show 
there is over long or short hauls ? 

Mr. Pew. Oh, definitely, I think our railroad movement averaged 
150 miles. I may be wrong about that. 

Mr. Cox. It is comparatively short. 

Mr. Pew. Yes. 

Mr. Berge. I don't mean to press it too far, but doesn't this state- 
ment rather minimize unduly the importance of pipe lines, because if 
the independent had a pipe line, he could get to the ocean on the same 
basis as the major company. 

Mr. Pew. Minimize the importance of pipe lines ? 

Mr. Berge. So if you were 200 miles from the ocean and had no 
way to get it there, you can't use this cheaper ocean transportation. 



7180 CONCENTRATION OF ECONOMIC POWER 

Mr. Cox. You didn't mean this table to have any value so far as 
volume is concerned, is that right? 

Mr. Peav. I only developed that table to give you gentlemen a bird's- 
eye view of the relative costs of the various means of transport which 
we employ. 

Mr. Cox. Perhaps it would help if you would hazard an estimate 
as to how much of the oil moved at one point or another in its life 
through a pipe line. 

Mr. Pew. I should say very definitely all of it. 

To recapitulate, the per-ton mile truck-transportation cost is 3 
times that by rail. Eail transportation in turn costs more than 3 
times that by pipe lines; while it was over 26 times that by water. 
Recalling, therefore, how large a factor transportation is, it will be 
seen that it is vitally important to maintain this transportation system 
at full efficiency. We believe, as Dr. Splawn evidently did, that this 
can be accomplished by leaving transport in its present relationship 
to the industry, that oi a plant facility, an assembly line. 

And I think I ought to say at this point that this statement 
should not be accepted at its face value because it does give the rail- 
.roads the worst of the deal ; in other words, it takes into consideration 
the cost to us of railroading, whereas we put in this statement the 
cost to us of the pipe-line transportation. We don't use in the 
compilation of this statement the published pipe-line rates, whereas 
we do use the published railroad rates. 

Tank ships bear much the same relation as do the pipe lines. They 
are built especially for moving petroleum and its products; nearly 
all their service is in hauling for the company that owns them. Ex- 
ceptions occur when one company, to meet a' peak of business, 
charters a tanker from another company ; the vessel then becomes a 
contract carrier. There is practically no common-carrier transpor- 
tation by tanker.^ 

INTEGRATION 

Mr. Pew. Disintegration of the so-called "major" companies has 
been urged by a few special pleaders on the grounds that it would 
help one group or another of the so-called "independents"; yet my 
very definite information is that "independents" throughout the in- 
dustry almost unanimously believe there would be disastrous effects 
from destruction of the integrated companies. 

Industrial integration may be defined as vertical combination ; 
uniting in one corporate structure the various operations through 
which the raw material passes in its transformation into refined 
products ready for the market. A perfect example of integration 
may be seen in the milk supply of a small town. A farmer owns his 
own land, raises his own cows, feeds them on his own produce, milks 
them in his own barn, hauls the milk to town in his own wagon and 
distributes it to the consumers at their doors. I can remember when 
this service went so far that the milk man even attended to the refrig- 
eration. My grandmother kept her millc sweet by hanging it in a 

^ This subject is resumed on p. 72()3, infni. 



CONCENTRATION OF ECONOMIC POWER 71gl 

pail at a rope's end^ down the well. When the milk man came in 
the morning he poui^ed the daily allowance of milk into the pail and 
accommodatingly lowered it into the zone of coolness at the bottom 
of the well. 

Here is an instance of aii industry which, in the old and simple 
days, was integrated. . 

Mr. Berge. Are yon -through with pipelines at this part of your 
paper? ^ 

Mr. Pew. Yes, sir. 

Mr. Berge, Could I ask you just several questions on that before 
Ave leave it, that are bothering me? 

Mr. Berge. It seems to follow from what you said in answer to my 
last question that the pipe line, even though the distance of trans- 
portation may be in some instances relatively short, is a bottle neck, to 
use a word that we employ around here, through which this crude 
must all go, whether the distance be 200 or 500 or 1,000 miles. 

Now, it is true, is it not, that most of these fields are reached 
primarily, and in some cases exclusively, by the pipe lines owned 
and controlled bj^ a single integrated company ? 

Mr. Pew. I don't Relieve that I can give you the detail as to the 
number of pipe lines that run into each individual field. I can say, 
however, that most of the larger fields have a great many pipe lines, 
and I might also say that it so happens, for instance, in the East 
Texas field that there is a great deal more capacity than can possibly 
be used. And there is a lot of competition to get 

Mr. Berge (interposing). Competition between the integrated com- 
panies for that movement? 

Mr. Pew. That is right. 

Mr. Berge. Most of those fields or many of them are not reached by 
tank cars, and tank car transportation, of course, would be more expen- 
sive and couldn't be very effectively used in competing with the estab- 
lished pipe lines. Isn't that as a general proposition true ? 

Mr. Pew. I think that most of the fields are within reasonable pipe- 
line connection with a rail siding some place. . 

Mr. Berge. Would you have to truck the oil to the cars, or move it by 
pipe line to the cars and then load it in the tank cars ? 

Mr.' Pew. Quite. 

Mr. Berge. Either one would be more expensive, 

Mr, Pew. The customary way is to lay a short line. 

Mr. Berge. But either way would be more expensive than a through 
movement. As a general proposition, the pipe-line operation in com- 
parison with other branches of the business is a fairly profitable opera- 
tion; is it not? ' 

Mr, Pew, I think that is a fair statement, 

Mr. Berge. I am only asking these questions in general, because I 
have no statistical information that I am familiar with at all, I am 
merely trying to develop the general proposition. Then, is there any- 
thing to prevent the integrated companies in their financial operations 
between their subsidiaries, with each other, or on their books as a single 
company, from transferring losses from another department, I should 

* Refers to Mr. Pew's prepared statement, from which he was reading. 



7182 CONCENTRATION OF ECONOMIC POWER 

say from t)fFsetting losses from another department of the business 
against the profits from the pipe-line business, or from using the profits 
of the pipe-line operations to cover the losses, temporary perhaps, but 
nevertheless losses that they sustain in other branches of their business ? 

Mr. Pew. I don't think that in an integrated company one can accu- 
rately determine the profit in any one activity. As an illustration, 
about 33 percent of the money that is engaged in the conduct of the 
business of our company is devoted to those overhead activities, let us 
say, which are not distributable. I refer to the stocks of oil, the money 
that we have invested in accounts receivable, and other current assets, 
and cash in the bank. So that about a third of the money that we have 
in our business is not applicable to the conduct of any one activity, so 
that any distribution we make of the cost of that carrying charge to 
each particular department must of necessity be arbitrary. 

Mr. Berge. Then the accounting ramifications of a large integrated 
company are so complicated it is impossible to tell whether a particular 
department of business is making or losing money ? 

Mr. Pew. I don't think Henry Ford could tell you accurately what it 
costs him to drive bolt 203 in the body of his car. 

Mr. Berge. I don't suppose he could. On the other hand, it seems to 
me that that is a considerably more refined distinction than where the 
marketing of oil or the retailing of oil as an independent process could 
be determined on a cost-accounting basis. However, passing that, I 
suppose there can be no question that an indej)endent refiner who has 
no production or marketing or retailing activities, who only refines oil 
and buys his crude sources from another source and sells them to a mar- 
keter, certainly knows whether he is making or losing money on his 
refining operations because that is all he does. 

Mr. 'Pew. He has his own overhead, which is especially applicable 
to that particular activity in which he is interested. 

Mr. Cox. On this subject there is one question I Would like to ask> 
to clear up a doubt in my mind. I understood you earlier in the 
morning in answer to a question which the chairman asked, to say 
you felt confident that the marketing operations of your company, 
considered alone, as I understood it, were carried on on a profitable 
basis. I have a little difficulty in reconciling that with the statement 
you made just now about the difficulty with determining 

Mr. Pew (interposing). I thought I qualified that by saying "as 
near as we could figure." There are several ways that you can dis- 
tribute these funds which are not definitely earmarked as having to 
do with any particular one activity. Some people distribute those 
arbitrarily on the basis of the amount of business that is done. Some 
people distribute it on the amount of money that is paid out to labor. 
Others distribute it by devious methods, and still others by executive 
action. Now you can take your choice, but when I have been asked, 
as I have on many occasions, to tell the way in which we determine the 
cost of a gallon of gasoline, I have found that it was impossible to 
do so, and on investigation I have found that expert accountants have 
time after time attempted to make such a determination and have 
always failed. 

Mr. Cox. I just want to ask one more question about that. What- 
ever methods have been tried in your company, you feel sufficiently 
confident in their general validity that you are still prepared, in 



CONCENTRATION OF ECONOMIC POWER 7183 

answer to the chairman's question, to say that so fa;r as you can tell 
your marketing division, quite apart from your other operations, is a 
profitable enterprise? 

Mr, Pew. Well, it has been so satisfactory and profitable that by 
any one of these yardsticks it still shows a profit. 

Mr. Cox. Doesn't make any difference what method you use ? 

Mr. Pew. No. 

Mr. Ballinger. Mr. Pew, have you ever heard of any complaints 
from independents that they couldn't use pipe lines? I mean for 
instance, here is an independent oil producer; he has some oil he 
would like to get to the market ; he takes it around to a pipe line and 
asks them to carry it for him. He is turned down. Have you ever 
heard of complaints of that kind? 

Mr. Pew. I don't think that I can testify definitely to that. I think 
that there has been perhaps a time in a flush field when temporarily 
the pipe-line companies have difficulty in handling all the business 
that was offered to them, but my recollection, too, is that in every 
situation of that kind that was brought to my attention, the condition 
was straightened out just as rapidly as possible. 

Mr. Ballinger. Have you ever heard of a case where a pipe line 
suddenly, almost overnight, raised their rates so that an independent 
producer, shipping over those pipe lines, would find it impossible to 
sell to an independent refinery? 

Mr. Pew. Such a condition as that has never been brought to my 
attention. 

Mr. Ballinger. You are not aware that the Government has re- 
ceived complaints on that? You never heard of that? 

Mr. Pew. No. 

Mr. Berge. May I ask, Mr. Pew, if you care to express an opinion 
as to why there have been so many retirements from business in the 
last few years of independent refiners? No particular cases, of 
course, but whether there are some general factors at work in the 
industry that make for that? Is it their inefficiency? 

Mr. Pew. I don't suppose there is any activity in any industry 
that has been subjected to the technological advances that have 
occurred in the refining branch of the oil industry. A plant which 
a year ago was considered the best in the country may today be 
made obsolete as a result of some new development in a refining 
process. If I may enlarge upon that, I will tell you that our com- 
pany has just completed two plants at a cost of $12,000,000, which 
replace plants that we had in operation 2 years ago and which we 
thought were among. the best in the world. Today they are obsolete. 

Mr. Berge. Doesn't that necessitate your losing money? Again, 
you don't think you can allocate losses, but if the technological 
changes are occurring so fast in refining I suppose there must be 
some losses in that end of the business which yOu say integrated 
companies are able to bear, that the independent cannot bear. Other- 
wise, do those losses only hit him? It must be that the large inte- 
grated companies can sustain this burden, technological change, and 
larger investment in new refining properties, and so forth, because 
they are making handsome profits — drop the adjective — they are 
making profits in other branches of their business, perhaps the pipe 
line? 

124491— 40— pt. 14, sec. 1 7 



7184 CONCENTRATION OF ECONOMIC POWER 

Mr, Pew. i don't think that is just the way to look at it, if I may 
be permitted to express an opinion. These technological improve- 
ments have been so revolutionary that they pay out for their entire 
cost in the reduction in the costs of operation over the 2 or 3 subse- 
quent years after they are built. 

Mr. Berquist. Putting it anojther way, Mr. Berge, wouldn't it 
be indicated that they were using pipe-line profits to bring up the 
average, over-all average, of profits when you bear in mind the rates 
of profit for the industry as indicated yesterday — and has been noted 
from 5 to 7 or 8 percent — and yet the average of profits for all pipe 
lines in 1937 was 28.4 percent? 

Mr. Berge. That is what I am driving at, apart from technicalities 
or accounting practice, about which I know nothing, would you want 
to say that it is not the practice to make up those losses in the refin- 
ing end of the business, or other ends when you may sustain losses 
from the profits from pipe lines ? Would you want to deny that 
that is done. 

Mr. Pew. I don't think that feature ever enters the calculations 
of the executives of the so-called major companies. We are engaged 
in an operation which I would liken to Mr. Ford's assembly line. 
Our costs pile up all through that system, and when we get through 
we have a certain cost of gasoline — I don't mean that, sir, excuse me ; 
we have a certain cost of products. Now, if I may develop that pipe- 
line picture a little more, we have a gasoline pipe line which runs 
from. our refinery at Philadelphia to Cleveland. We put a large 
sum of money into that line — I think 7 years ago. Economically, it 
was justified ; its earnings have been large, perhaps larger than we 
could have justified strictly from a point of view of earnings, and 
we found a very ready market for our material out in that western 
section of the country. 

Last year they brought in a new field in Illinois. It completely 
upset the whole economic balance; and so we have to go out in that 
western territory and build ourselves a new refinery into which we put 
an investment well over $6,000,000 in order to make obsolete the 
$6,000,000 that we earlier put into the pipe line. Now, my great con- 
cern today about that gasoline pipe line is not whether we are going 
to earn too much in the future, but whether we are going to have any 
earning at all out of it. I just mention that because it is an element 
in this ^hole pipe-line situation. 

Mr., Berquist. But for the over-all pipe-line situation you are not 
fearful that the earnings will be meager or an/thing of that kind ? 

Mr. Pew. I think every pipe line has to be considered on its own 
•merits. 

Mr. Berquist. Well, taking all of them, then — taking all of them, 
not individually but in the aggregate — naturally they won't all re- 
turn the same rate, but when you get an average net earning of 281/4 
percent, which is not very far from that 25; some have been a little 
bit lower and some have been a little higher; I am quite sure that the 
earnings of 1938 were not the highest. 

Mr. Pew. May I develop that? In the first place, you have there 
an earning of 25 percent on the depreciated value of these pipe lines. 

Mr. Berquist. That is the way it should be, shouldn't it ? 

Mr. Pew. I am going to paint the picture for you and let you decide. 
If you have a pipe line running from Philadelphia to Washington, 



CONCENTRATION OF ECONOMIC POWER 7185 

built, we will say, 20 years ago, bringing gasoline here into Washing- 
ton to take care of the needs of the dealer, and as a result of the 
growth of the city there is a demand for another pipe line, what 
opportunity is there to get capital to bring in that new pipe line? 
Now, mind, the first line has been wholly depreciated and that gasoline 
is coming down here at almost no cost — a cent or two a barrel. Now, 
can we encourage a man to bring a new line down here if he is only 
going to have a cent or two a barrel? He will get no return on his 
capital. It seems to me, gentlemen, that these rates, whether it is right 
or wrong, must be established on the basis of the original investment. 

Now, the second point I want to bring up is this 

Mr. Berquist. May I raise a point there? That is on the suppo- 
sition that another pipe line would be needed. If it were needed, it 
would have to bear the costs, and so on ? 
Mr. Pew. Of the original investment. 

Mr, Berquist. Of the original investment; and it wouldn't be 
needed unless it would bear that cost? The need would have to be 
that great, wouldn't it ? 

Mr, Pew. Yes; but they would have to be assured of a rate to justify 
building that line, and that rate would have to include the original 
cost of the line. 

Dr, LuBiN. May I interrupt at that point? I am interested in 
the logic of the argument. Why wouldn't this line be built? Is it 
because the first company, which had the first line that had been 
depreciated so there- are no depreciation charges involved, would 
therefore be able to undersell the second company that would have 
to charge full cost? 

Mr, Pew. Well, I am assuming for the purpose of the discussion 
that that line is carrying oil for a group of different companies, 
and that they charge these companies a certain rate for transportation 
as though it had been shipped over the railroad. 

Dr. LuBiN. In other words, their cost delivered in Washington 
would be higher than the cost of the original company that built 
the line 20 years ago. 

Mr. Pew. He would have to charge a transportation rate several 
times as high as the other fellow, 

Dr, LuBiN, Grant that fact, why wouldn't the line still be built? 
Would company A that owned the line lower their selling price in 
Washington because of the fact that their transportation costs were 
lower ? 

Mr. Pew, I am assuming that rates are based on the depreciated 
value of the line. 

Dr. LuBiN. I grant that fact. \ 

Mr. Pew. And that the commission reduces those rates in accord- 
ance with the reduction in the investment. Now, if you were bring- 
ing oil down through that line, you might pay 2 cents a barrel ior 
transportation costs. If I had to build a new line I would have 
to charge 8 cents a barrel. How could I compete at 8 cents with 
the man who had a 2-cent price ? 

Mr. Ballinger. Mr. Pew, how can you completely depreciate your 
property ? You are constantly keeping it up intact as it was origin- 
ally built, so you can't completely depreciate a property. You have 
got to reinvest. 



7186 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. Well, the principle is there. You might have 10 percent 
left in the property, but 

Mr. Ballinger. What? 

Mr. Pew. You might have 10 percent left. 

Mr. Ballinger. If you had a pipe line costing $200,000, let us 
assume, and depreciation 20 years; at the end of 20 years you have 
$200,000 invested in that line. You haven't depreciated anything 
because your depreciation reserve takes that up and replaces the line 
intact. You have still got an investment in it. 

Mr. Pew. I am assuming that the line lasts for 20 years. 

Mr. Ballinger. It will last longer if you keep it up. 

Mr. Pew. No; a gasoline line properly built through this seql^ion 
of the country will last for 20 years without any replacements. 

Mr. Ballinger. But you make allowance for depreciation so it can 
go on as long as it is needed. That is what your depreciation reserve 
is for. 

Mr. Pew. But where is that money ? 

Mr. Ballinger. Keeping the line up to modern conditions, not al- 
lowing it to depreciate. That is what you have your depreciation 
reserve for ; it is constantly repairing it as you go along. 

Mr. Pew. All right; then why should we base the rates on the 
depreciated investment in these lines? 

Mr. Ballinger. You base it on the bare rate after you take out the 
depreciation reserve. 

'Mr. Pew. That isn't the way these have been figured. If you add 
the depreciation reserve to the amount of investment in these lines, 
then you and I are in agreement. 

Mr. Berqtjist. On that basis before depreciation the figure corre- 
sponding to the 28.4 would be something like 12 or 14 percent on the 
total invstment. 

Mr. Ballinger. Would that lead to another conclusion you have 
here? You quoted Dr. Splawn here, and since this whole subject 
of pipe lines, I think, is going to be before the committee here for a 
good deal of time, do you subscribe to this sentence of Dr. Splawn : 

If the oil companies were forced to sell the pipe-line companies, who would buy 
them? 

If they are that good an investment, do you think you would have 
any trouble selling them % -, 

Mr. Pew. I think that is a* fair question. I still think there would 
be a very serious question as to who would buy them. 

Mr. Ballinger. Well, everybody today in America is looking for a 
good investment. 

Mr. Pew. I know ; but in order to make a good investment out of 
those pipe lines you have got to have somebody feeding the oil into one 
end and taking the oil out of the other. 

Mr. Ballinger. I assume that. 

Mr. Pew. In the East Texas field I understand there are more than 
twice as many pipe lin'es as there is oil to feed them. 

Mr. Ballinger. But they make good returns. 

Mr. Pew. All right ; but suppose you and I bought one of these lines 
and the shippers on the one hand and the receivers on the other 
thought you and I weren't very attractive fellows and they woidd 
say to us, "We are going to ship our oil over the other line," so we 



CONCENTRATION OF ECONOMIC POWER 7187 

have got the line with nobody to put oil in at one end and nobody to 
take it out at the other ? 

Mr. Ballinger. If we are going to sell all the pipe lines in that field 
to independents — I mean independent people not connected with the 
oil business, just investors — isn't it a little stretch of the imagination 
to assume that just because of that transaction they jump from my 
pipe line to another pipe line ? They have to go somewhere. Some- 
body gets the benefit of it. 

Mr. Pew. Then what useful purpose would be served ? 

Mr. Ballinger. I am just challenging this statement here. I don't 
agree with the statement and I wanted to see if you agree with it. If 
the question comes to the front that perhaps we ought to divorce the 
pipe lines, I don't think the argument ought to be allowed to stand 
that you can't sell them, because I think there \\ ould be plenty of in- 
vestors who would buy them. Qf course, they wouldn'u make too 
much money, perhaps, under a real open system. 

Mr. Pew. Of course, you know these pipe lines are in the process of 
flux all the time, being taken out of certain fields and run into other 
fields. It is a very difficult thing, as I pointed out a few moments 
ago, to get capital to run these lines into new fields. 

Mr. Ballinger. You can always get capital from investment 
bankers ; at least that is my theory ; I don't know. Sometimes it is 
pretty hard, but that is the theory. If there is a need for some- 
thing, the investment banker is supposed to be on the job. 

Mr. Pew. Suppose a man has a prospective oil field such as our 
Starr County development, which we have great hopes for, do you 
suppose I could go to a 'bank and get them to loan me money to lay 
a line in the East Texas field unless I put my name on the note ? I 
don't think so. 

The Vice Chairman. Suppose we adjourn until 2 : 30 and figure 
that all out. 

(Whereupon, at 12 : 30 p. m., the committee recessed until 2 : 30 
p. m. of the same day.) 

AFTERNOON SESSION 

At 2 : 30 p. m. the committee reconvened, Representative Reece 
presiding. 

Acting Chairman Reece. I understand there were some appendixes 
offered yesterday for the record, the printing of which has not been 
ordered. These appendixes may be printed, and it is the desire of 
the committee that Nos. 1, 6, and 5 be printed in the order named 
and that the others be printed in consecutive order.^ 

Mr. Pew, you may conclude your statement, if you desire, after 
which, if it is the wish of the committee, Mr. Cox, of the Department 
of Justice, may propound any questions which he might desire, and 
then the members of the committee may follow up with questions. 

You may proceed, Mr, Pew, 

Mr. Pew, At the time we left off I was discussing the broad, gen- 
eral question of integration. 

Acting Chairman Reece. What page of your manuscript are you 
reading from? 

^ "Exhibit No. 1138," which is printed separately, with "Exhibit No. 1139," as Part 
14-A. 



7188 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. Page 11, the last paragraph. 

Here is an instance of an fndustry which in the old and simple 
days was integrated, later became disintegrated, and still later was 
reintegrated. Thus the village shoemaker made his shoes and sold 
them in his shop. Later, factory-made shoes were sold first to the 
wholesaler, by him to the retailer, and by him to the wearer. Still 
later many shoe factories established their own chains of retail stores, 
short-circuited the wholesaler, and took their product direct to the 
consumer; so you see Coward, Florsheim, Walkover, and any num- 
ber of other shoe stores handling particular lines exclusively, going 
back to first principles. Such illustrations roughly parallel the inte- 
gration that has grown into the petroleum industry, which we may 
now examine for a moment. 

In the beginning, one group of men devoted themselves to drilling 
wells and producing the oil. Another group, quite independent of 
these, took the oil in casks and hauled it in wagons to the refinery 
or to the nearest stream by which it could be floated to a refinery; 
and there still another group took it and refined it. Finally, the 
refiners in turn sold their products to the marketers, and these dis- 
tributed them at retail to consumers. 

The fiest step in integration, so far as I can discover, was taken when 
the pine line was invented to move oil from well to refinery. This was 
much cheaper than wagon hauling, and the wagoners protested it so 
violently that there were riots, in which some of the pipe lines Avere 
torn up. The wagon haulers seem to have been the earliest advocates 
of disintegration. 

The petroleum industry is necessarily an integrated one, whether 
through common ownership of all the activities or because of con- 
tractual relations between the several divisions of the industry. The 
producer of crude must have a market for it and must have a trans- 
porter 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 inde- 
pendently of each other, tl^eir 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. 

But 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 down 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 
Differed to him. In the completely integrated unit of the industry an 
executive authority — president, chairman, executive director, board of 
directors, or what you wiU — 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, 



CONCENTRATION OF ECONOMIC POWER 7189 

the consumer is the boss ; he makes or breaks the business ; somebody 
must keep him in mind all tlie time ; 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. It is the village n>ilkman, lowering 
the morning's milk to the bottom of the well. 

THE SEARCH FOR TECHNOLOGICAL IMPROVEMENTS 

Mr. Pew. Precisely because it is animated by this policy of consumer 
concern, integration sets the pace for efficiency. It sees the indus- 
trial picture as a whole, which no one of the units, operating inde- 
pendently and at several removes from the consumer, could do. Inte- 
gration makes possible the reconciliation of all the conflicting interests 
along the line from the search for oil to the operation of th6 gaso- 
line pumps at a thousand filling stations. It insures support for 
research, experiment, invention, improvement, in whatever depart- 
ment. A^^iere differing interests as between independent departments 
would frequently tend to discourage 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. 

As to this matter of improving methods and processes, I may be 
permitted a word about the experience of my own company. In its 
earlier years the company specialized in its own brands of greases 
and lubricants, some of which had established markets practically all 
over the world. That was before the day of the automobile,' when 
kerosene, lubricants, gas oil, and fuel oil were the chief products. 
The time came when we saw competition narrowing the market for 
our special lubricants, and when also we realized that gasoline was 
destined to be our most important product, with a neW type of lubri- 
cant, adapted to motorcars, taking second place. Sp we deter- 
mined — only about 13 years ago — to go in strong for gasoline. That 
meant that we must have cracking equipment in order to get the 
fullest recovery and best quality of gasoline from our crude. But 
cracking was covered by patents, which meant royalties. After a 
thorough investigation we decided that to license a cracking process 
would be too expensive and not otherwise entirely satisfactory. We 
believed we could develop a cracking process of our own, and by dint 
of heavy expenditures in time, effort, and money we succeeded. 

Turning next to automobile lubricants, experimentation convinced 
us that there was room for definite improvement in this line, and so 
we set afoot the long series of mechanical studies and technical inves- 
tigation from which was developed our "mercury process" for lubri- 
cants — a process that we regard as -the best in the business. 

Again, like everybody else in the industry, we had long realized 
the limitations imposed by the older refining methods. Nowadays a 
^reat number of products come out of a barrel of petrolfeum, and the 
industry needed a refining technique by which all these products could 
h& turned out in ^^he proportions in which tlie market was. demanding 



7190 CONCENTRATION OF ECONOMIC POWER 

them at any given time. Such a process is, of course, the ideal of 
any multiple-product industry. Refiners had long dreamed of it and 
-worked in their laboratories to develop it, but it remained for a French 
gentleman, M. Eugene Houdry, to hit upon the big idea. He devel- 
oped experimentally a catalytic process of cracking by which the crude 
could be turned into its various derivatives in substantially whatever 
proportions they were wanted: the entire barrel of crude turned 
into gasoline, if desired — a revolutionary advance incidentally in 
petroleum conservation. 

Unable to enlist European capital, M. Houdry came to this coun- 
try and interested the Standard Oil Co. of New York. Later the 
Sim Oil Co. became associated in the development of the process and 
of apparatus for its large-scale operation. Infinite patience and 
heavy costs have brought success to our endeavors. Plants employ- 
ing the process are now in. operation in this country and Europe 
and more are now being built. 

Among major advances in the industry, one other may be men- 
tioned. Our chief refinery is at Marcus Hook, at the head of Dela- 
ware Bay, to which we bring crude from the Texas coast by tank 
vessels. I have already spoken of the large part which trans- 
portation costs play in this industry. Our first tanker, the Paragnay, 
had a capacity of 20,000 barrels, made the round trip between the 
Gulf Coast and Delaware Bay in 24 days, at a cost of 36 cents per 
barrel. Today we operate a fleet of 14 tankers, the most modern 
of which carries 138,000 barrels of crude, makes the round trip in 
131/^ days, at a cost of around 11 cents per barrel. Incidentally, 
wages are now many times what they were in the days of the old 
Panfaguay. 

"Kealizing the importance of transportation, and the possibilities 
of . improvement in tanker design and construction, our ' company 
over 20 years ago established as a subsidiary the Sun Shipbuilding 
& Dry Dock Co., which builds tankers and other vessels for our own 
nwds and also 'for, such other companies as may contract for them. 

I have ^one into some detail regarding the practical advantages 
of integration in such an industry as ours with special reference to 
its part in lowering costs, raising quality of products, and serving 
the consumer. I have cited my own company's experience because, 
naturally, I know most about it. But I wish to add that 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. My own company is and always has been strictly in- 
dependent as to ownership, policies, and management. It has never 
engaged in any combination or conspiracy to restrict or control 
any phase of the business. 

Integration, of course, is the essence of mass production, in which 
American industry has led the world. Mass production reduces costs, 
makes lower consumer 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 



CONCENTRATION OF ECONOMIC POWER 7191 

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 customers' 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. ^.^^ 

OIL INDUSTRY SUPPORT OF CONSERVATION 

Mr. Pew. In view of my enumeration of advantages in integrated 
organization, you might well ask, "Why isn't your whole industry 
integrated?" For, after all, unintegrated and partially integrated 
units compete throughout the industry, and do it successfully. The 
truth is that success in any business depends a good deal more 
on men and management than on the formalities of organization. 
It is my information and belief that disintegration of the so-called 
major companies, instead of helping the so-called independents 
would harm them; because as a matter of fact a large share of the 
independents are fully integrated, and practically all of them are 
at least partially integrated. Those who would dissect the industry 
certainly advance some strange proposals. Thus, one of their 
leaders recently declared that "the majors have made handsome profits 
on their production of oil, due to legislation of the Federal Govern- 
ment and actions of the Department of the Interior holding produc- 
tion below market demand." As Federal measures thus serving the 
majors, he enumerated the Connally Act, forbidding interstate 
transportation of "hot oil"; the interstate oil compact, to help the 
States regulate production of crude; the tariff on petroleum prod- 
ucts; and the monthly forecasts of probable demand, prepared by 
the Bureau of Mines. These forecasts, he said, "provide a blueprint 
for the producers and the oil-producing States to follow." In short, 
this advocate of disintegration would have Congress undo about 
everything that has been accomplished in the last few years toward 
conservation and greater efficiency in the industry. It is the over- 
whelming testimony of disinterested observers that the "hot oil" 
law, the interstate compact and the Bureau of Mines estimates have 
been altogether useful and beneficial. They have promoted conserva- 
tion, have reduced the costs of producing oil, and have cheapened 
gasoline to the consumer. I should like briefly to review the accom- 
plishments in which they have been so helpful. 

The interstate compact to conserve oil and gas has been ratified by 
the legislatures of Colorado, Illinois, Kansas, Michigan, Oklahoma, 
New Mexico, and Texas. Each State binds itself to prevent operation 



7192 CONCENTRATION OF ECONOMIC POWER 

of oil wells with a wasteful oil-gas ratio, or otherwise under waste- 
ful conditions. The compact has no purpose to limit the production 
of oil and gas, to create monopoly, or to bring about regnnentation. 
Under it a Commission was set up to study measures looking to con- 
servation of oil and gas; to report recommendations to the member 
States ; and to assist in coordinating their police powers to promote 
maximum recovery. In operation the compact has broadened the 
interest and understanding of State officials, the oil industry and the 
public in true conservation. The oil-producmg States determine for 
themselves how much oil can currently be produced without waste 
and how it is to be divided among the fields and wells of each par- 
ticular State. In making its recommendations the Commission is 
aided by the advices of the Bureau of Mines ; but each State exercises 
its own judgment as to the amount that may be produced without 
waste. 

The Federal Government, through the Connally Act, has sought to 
bolster this State polic}^. That act provides that petroleum or its 
products, produced in violation of State law, may not be moved in 
interstate or foreign oommerce. The operation of these measures 
has emphatically demonstrated that State and Federal authorities 
can work together to conserve oil and gas resources. Without any 
additional cost to the consumer they have benefited producers, re- 
finers, and distributors. To undo these accomplishments would mean 
a set-back in conservation, and disaster alike to the public and to 
every branch of the industry. 

The whole subject of conservation should be viewed in the light 
of modern experience. Medieval philosophers commonly assumed 
that any policy or transaction which benefited one group must do so 
at the expense of some other group. If one party to a trade profited, 
they insisted that the other must lose. We know that is not true; 
we understand that under our free system of competitive enterprise 
all groups may benefit together; and it is in this light that we must 
recognize the benefits of conservation. Because of it, gasoline is 
cheaper to the consumer, and he uses more; the producer profits be- 
cause production costs are less and he sells more crude] transporter 
and refiner get more business ; and so everybody benefits. 

KEENNESS OF COIVIPETITION IN RETAIL MARKETING 

Mr. Pew\ With regard to retail gasoline marketing, in which in 
some areas intense competition has existed recently, a plain statement 
may clear up some misapprehension. In 1935 Iowa adopted a chain- 
store tax law under \fhich the tax per store was graduated upward 
as the number of stores in a chain increased. This law applied to 
company chains of filling stations, among the rest. Some other 
States adopted similar laws, and for a time there was a widespread 
demand for them. The threat of their general adoption has been 
charged with responsibility for the general retirement, of refiners 
from service-station operation; and unquestionably it was in large 
part responsible, but apparently there were other factors, one of 
which was a rash of price cutting by independent station operators 
which had broken out in various parts of the country long beforfe 
the Iowa Chain. Store Act was passed. 



CONCENTRATION OF ECONOMIC POWER 7193 

These regional price wars were acutely embarrassing to operators 
of chain filling stations. The reason is quite simple. Suppose a 
company had 20 stations scattered throughout ux city. Next door to 
one of them an independent operator sets up a pump and cuts the 
price — and the quality — of gasoline in that immediate neighborhood 
enough to compel the company station either to lose its business or 
meet the cut price. But to cut its price at one station would compel 
it to make the same cut at all of its 20 stations in the town. To 
do that would mean to do all its business at a loss; yet to fail in 
meeting the competition would be to invite the price war to spread 
to the entire town, cutting down the gallonage of all the company's 
stations and forcing the entire chain to operate at a loss. Precisely 
this experience was had in so many places that various companies 
ceased to operate their filling stations several years before the chain- 
store tax laws were passed. Then, when the legislative crusade 
against chain stores became general, most refining companies decided 
to retire from filling-station operation. The results have been 
disastrous; particularly disastrous to the independent filling station 
operators. So long as the company stations were operating, it was 
customary to publish as regular market news the prices at which 
gasoline was being sold by refiners to retailers, and also the price 
at which the retailers were selling to consumers. Between these was 
a differential, the retailer's margin, or spread. This margin varied 
with circumstances and regions, from about 2^2 to 41/2 cents, probably 
averaging for the entire countrj^ around 3.75 cents. When the re- 
finers quit retailing, their quotations of service-station prices could 
no longer be publislied because they were making no such quotations. 
The element of leadership and balance which they had afforded was 
withdrawn. Every filling-station operator was an independent 
fixing his ow^n selling price and therefore his margin; suspicious of 
his competitors, and inclined to fight to protect his gallonage. Thus, 
retail margins became uncertain, price wars common, and dealer 
margins reduced. 

That is, very briefly, the story of the general adoption of the 
Iowa plan of retail marketing. First was the impossibility of meet- 
ing price cuts through chains of stations; after that, the fact and the 
threat of chain-store laws. It has been charged that there was a 
third reason, namely, that the refining companies wanted to avoid 
social-security taxes for their filling-station employees. Personally, 
I do not believe this was a serious consideration. The oil industry 
has always been liberal to the point of generosity with its employees. 
Its wages have been high and it has been a leader in bringing about 
shorter working hours and better working conditions. On this point 
the best testimony is its immunity from labor disturbances. The 
cost of social-security taxes would not, alone, have been a compelling 
reason for retiring from retailing. The other reasons I have cited 
are really responsible. 

Personally, I strongly suspect that the refining companies got a 
bit panicky and made undue haste to dispose of their service ^tations, 
I am convinced that when operated on sound merchandising lines the 
company service station can take care of itself. But I have in mind 
a station that is a good deal more than merely a sign and a gasoline 
pump. I might call it the integrated station ; one prepared to pro- 



7194 CONCENTRATION OF ECONOMIC POWER 

vide the motorist a wide range of services. and supplies in addition to 
filling his tank with gasoline. Motorists buy tires and tubes and 
spark plugs and an endless lot of accessories and incidentals. Their 
cars have to be washed and lubricated. The integrated station would 
supply these needs and render these services all at substantial profit, 
and not be entirely dependent on gasoline sales. I believe the 
occupation of this broad field would have enabled the companies to 
continue operating their stations at a reasonable profit, to meet cut 
prices on gasoline, and in the end provide such leadership and bal- 
ance as would put the business on a normal earning basis. 

As to the charge that there has been an undue multiplication of 
filling stations, I think you will find wide differences of judgment. 
There are few more severe tests of patience than suddenly to find 
one's gasoline tank empty and no filling station in sight. But if 
there has been in some regions a disposition unduly to multiply sta- 
tions, the example of the company chains could only have been salu- 
tary. My own company, for example, before we discontinued retail- 
ing always made a thorough study of conditions before locating a new 
service station. The traffic was surveyed and counted, the number 
and location of competing stations was noted, and no location was 
approved unless it had an apparent chance to do a fair business. 
Today, all this is changed. The retail dealer, lacking experience and 
expert knowledge, locates wherever his fancy — or the availability of 
a vacant lot — may direct. Lacking adequate knowledge of the cost 
of doing business he is easily tempted to cut his prices in the hope of 
increasing volume; and in no business does price cutting become 
epidemic more readily than in this. 

This retailing problem has been the more acute because in a time 
of mass unemployment many have been attracted to gasoline retail- 
ing. The experience has demonstrated that the company-operated 
stations, though they were only a small proportion of the total num- 
ber of outlets, served a useful purpose. But despite this experience, 
one faction of the reformers would require that petroleum products 
be sold at the refinery, and from that moment the refinery should 
have nothing more to do with them. This would mean taking away 
from the companies all their marketing facilities — tank cars, tank 
trucks, tank ships and barges, gasoline pipe lines, and storage plants. 
The effect, of course, would be further to confound the confusion 
brought about by the influences I have noted. 

SAVINGS THROUGH MASS PRODUCTION 

Mr. Pew. Disintegration simply proposes to turn the clock back — to 
surrender all the benefits of mass production. Can you imagine what 
a motorcar, such as you buy for a few hundred dollars, would cost 
if it came from a blacksmith's shop instead of an assembly line? One 
of the great motor corporations owns iron mines, coal mines, steam- 
ships, rubber plantations, blast furnaces, assembly lines, and a mar- 
keting organization that reaches into every part of the world. Obvi- 
ously, if that company's cars were built in blacksmiths' shops it would 
greatly increase employment; but, just as obviously, they just would 
not be built. I don't believe anybody would seriously suggest dis- 
integrating the motor manufacturing companies; yet. the cases are 



CONCENTRATION OF ECON^MfC ^OWER 7195 

parallel. Or, consider the great steel corporations.^ Some of them 
own their coal and iron mines, railroad lines, shipping, mills, and 
marketing organization. It falls into exactly the same general divi- 
sions as the petroleum industry — production, transportation, refining, 
and marketing. But I don't believe anybody seriously doubts that 
the close correlation of these divisions has been largely responsible 
for the splendid achievements of the motor industry, just as it has 
been largely responsible for the fine accomplishments of the oil 
industry. 

DENIAL OF MONOPOLISTIC PRACTICES IN THE OIL INDUSTRY 

Mr. Pew. Now, a word, Mr. Chairman, in conclusion. In what I 
have said on behalf of the oil industry, I have had constantly in mind 
the realization of how important is the inquiry that is engaging your 
committee. I recognize that its findings may give direction to vitally 
important determinations of national policy award our industrial 
and economic system. 

I have sought to show you that this industry has served the public 
well, and that it stands today as an excellent example of results under 
the unhampered workings of our American system of free enterprise. 
Without taint of monopoly, it is characteristically an American 
industry. 

I have recalled its services in war, and I have pointed out its con- 
tributions in time of peace to the national wealth, the public revenues, 
and the satisfactions of living. 

I have shown that it has developed through adherence to the theory 
of large production at the lowest possible prices. 

I have shown that by integrating its activities all the way from 
the search for oil to the marketing of its multitude of products, it has 
developed the highest efficiency and passed on to the consuming public 
the full fruits of that efficiency. 

I have shown that it has ceaselessly encouraged invention, im- 
proved processes, inspired research, and stimulated technologic 
advances. 

I have told you of the leadership it has taken in the great movement 
for conservation of our natural resources, and of its continuing co- 
operation with every governmental policy for promotion of con- 
servation. 

Whatever this industry has accomplished has been achieved through 
the workings of the American system of free and competitive enter- 
prise. Believing that the results have been good, I appeal to you 
gentlemen who are conducting this especial inquiry into the workings 
of our national economy, to stand firm in defense of that American 
system. 

"This industry's annual expenditure of millions in research and 
technologic improvement, and its record of constantly passing on to 
the consumer in lower prices and better products the resulting benefits, 
should dissipate any suspicion that monopoly exists here. If the in- 
dustry's primary concern were big profits, and if these were insured 
because of arbitrary monopolistic control, then what possible reason 

' 1 Hearings on the "Iron and Steel Industry" are included in Hearings, Parts 18, 19, 20, 
26, and 27. 



7196 CONCENTRATION OF ECONOMIC POWER 

could there be for vast expenditures in behalf of lower and ever-lower- 
ing prices ? The answer is that the industry has been built upon, and 
rigorously adheres to, the sound doctrine of big volume and low prices. 

To me, personally, any conspiracy of monopolistic domination 
would be a reprehensible betrayal of the American system of free 
enterprise, good sportsmanship, and equal opportunity. I know that 
my own company has never been partner to any conspiracy or mo- 
nopoly. I have never discovered evidence that such a conspiracy 
existed ; and I do not believe that within the period of the industry's 
modern history it ever has existed. 

Acting Chairman Keece. At the opening of the afternoon's hearing 
it was suggested that unless some members of the committee felt other- 
wise, Mr. Cox would have opportunity at this point to ask any ques- 
tions which he might have in mind, and you may do so, Mr. Cox, but 
if you will permit me to ask the witness if he has prepared and is 
ready to submit the tabulation requested by Judge Sumners this 
morning, if so it may be admitted to the record.^ 

Mr. Pew. The figure requested was: By barges — 973,445 tons, 219,- 
780,902 ton-miles, and the cost per ton-mile was $0.00259, which is a 
little over two-tenths of a cent per gallon. 

THE SUN OIL CO. 

Mr, Cox. Mr. Pew, I think it might be interesting to tjie members 
of the committee if you could tell us a little more about your company 
than you have so far. It is, is it not, one of the smaller of the large 
integrated companies, if I may put it that way? 

Mr. Pew. Well, it is largely integrated and it is a small company. 

Mr. Cox. I have in mind the fact of a chart which is contained in 
exhibit No. 1139, which was put in yesterday — chart 23, as a matter 
of fact. That exhibit, which is a comparison of total assets of 20> 
major oil companies, shows that your company is about fourteenth in 
the list. That would be about right? 

Mr. Pew. Yes. 

Mr. Cox. Can you tell us what the total assets of your company are 
as of today ? 

Mr. Pew. About $139,000,000. 

Mr. Cox. Is that all invested in the oil industry, or does part of it 
represent investment in the shipbuilding? 

Mr. Pew. That includes the investment in the shipbuilding. 

Mr. Cox. Could you give us any idea of how much of that figure 
could properly be allocated to the oil industry ? 

Mr. Pew. $130,000,000. 

Mr. Cox. With about 9 million in the shipbuilding. Your com- 
pany differs also from some of the larger oil companies in that the 
stock is rather closely held, is it not? 

Mr. Pew. The majority of the stock is owned by my family. 

Mr. Cox. Can you tell us roughly what percentage of the out- 
standing stock is held by your family? 

Mr. Pew. I submitted a statement. 

Mr. Cox. If I may suggest to you, your statement shows about 80 
percent. Would you accept that ? 

1 See p. 7178, supra. 



CONCENTRATION OF ECONOMIC POWER 7197 

Mr. Pew. Yes; 64 percent is in our immediate family. 

Mr. Cox. Is there another block held elsewhere? 

Mr. Pew. There are distant relatives and employees and associates 
that bring it up perhaps to 80 percent, but for my family directly, 
I think, it is about 64 percent. 

Mr. Cox. You said this morning, I think, in your statement that 
it was about 13 years ago that your company started marketing 
gasoline, is that right? 

Mr. Pew. That is right. 

Mr. Cox. And can you tell the committee what the capital assets 
of your company were at that time? 

Mr. Pew. Fifty-eight millions of dollars, approximately. 

Mr. Cox. That was the capital you had available at that time? 

Mr. Pew. That was the total assets in the business. 

Mr. Cox. That would include, of course, the shipyard. 

Mr. Pew. The shipyard; yes. 

opportunities for independent contended in spite of competitive 
advantages held by larger integrated companies 

Mr. Cox. You spoke this morning about the competitive ad- 
vantages which in your opinion are possessed by the larger integrated 
companies. 

Mr. Pew. I think that the larger integrated companies possess a 
great many advantages. The very fact of that integration reduces 
their overhead, cuts down on all those multiplied organizations 
ordinarily necessary for the buying and selling of the product. 

Mr. Cox. Would you say^ totaling up the advantages on both 
sides of the picture, that the integrated companies generally have the 
balance of competitive advantage their way ? 

Mr. Pew.- No; I would not say that. 

Mr. Cox. You wouldn't go that far? 

Mr. Pew. I would rather be inclined to think that the inde- 
pendent, as long as there is a large percentage of the industry 
operating under integrated conditions, has a little of the advantage. 

Mr. Cox. You said this morning, I think, along the same line that 
the greater the share of the industry controlled by the larger 
integrated units, the' greater competitive advantage you thought in- 
hered in the position pf the small nonintegrated companies. 

Mr. Pew. I did. 

Mr. Cox. Would there be any point at which that wouldn't be 
true? Suppose it got to the place where the integrated companies 
had 99 percent? 

Mr. Pew. I would say definitely that would be the most prolific 
opportunity for an independent operator. 

Mr. Cox. In other Words, if they actually got 100 percent, then 
it would be even better for the small man. 

Mr. Pew. Quite. Of course that is a hypothetical question. 

Mr. Cox. Oh, I realize that, but you are definitely of the opinion 
that as that percent goes up the opportunities for the nOnintegrated 
operator become greater, that is a fair statement of your opinion? 

Mr. Pew. Quite. 

Mr. Cox. Would you like to elaborate more on that and. tell us 
why you think that is true? 



7198 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. I mentioned this morning that an independent operator 
can always choose his field of operation. If he be in the refining 
business, he is in a position to choose the qualities of crude that best 
suit his purposes. If he is in the marketing business, he can operate 
in those fields where the markets are highest, or where the operating 
conditions are best. 

Dr. LuBiN. May I interrupt at that point ? Could you clarify that 
idea for. me? I just can't get what you mean when you say he can 
operate in any market where conditions are best. He can't just go 
in and open stations overnight. He has to build up his market, has 
he not? 

Mr. Pew. He has tO' go into business the same as anybody else. 

Dr. LxjBiN. He is already in business. Here is a large independent 
marketing organization that covers an area, let's say of 500 miles, 
a radius of 100 miles, and he can't move all over the United States 
overnight. Just because the marketing situation in California hap- 
pens to improve and the price had gone up, there isn't any reason why 
he could move from Washington to California overnight, is there ? 

Mr. Pew. Now we are talking about a marketer. 

Dr. LuBiN. Retail market? 

Mr. Pew. A marketer who buys from the refiner and sells to the 
retailer ? 

Dr. LuBiN. No; I am talking about a retailer who buys from the 
jobber or oil refiner and sells direct to the public. 

Mr. Pew. You are talking about a man with a retail store? 

Dr. LuBiN. Yes. 

Mr. Pew. That is quite a different matter. We have, I assumed, 
been discussing this problem from the standpoint of the refiner and 
the marketer. I don't understand that we have yet touched on the 
position of the retailer. 

Mr. Cox. I was thinking 

Mr. Pew (interposing). Because the oil industry has never been 
in the retail business, excepting only to a very small extent. They 
never had more than 15 percent of that business, and they only used 
that as a kind of a guidance and to set up standards for the retail 
trade to follow. 

Mr. Cox. Let us go back to the refinery, which was the ont unit 
I had in mind, Mr. Pew. We have to deal for the moment with 
hypothetical cases. Let us assume there is a refinery located in an 
oil field, say in the midcontinent field, midcontinent territory some 
place. Doesn't the fact that that man does not have access to a 
pipe line — suppose that he refines his gasoline there and is then faced 
with the problem of getting that gasoline to market. Doesn't the 
fact he doesn't have access to a gasoline pipe line put him to a com- 
petitive disadvantage which the larger company does not have? 

Mr. Pew. There are very few gasoline pipe lines in the oil fields. 
Most of the pipe lines running from the oil fields are crude lines that 
carry the crude from the wells. 

Mr. Cox. I am putting a case of a man with a refinery some place 
near an oil field and faced with a problem of getting his gasoline 
to a market which is distant. 

Mr. Pew. I think there are too many hypothetical elements in that 
for me to give you a reply. 



CONCENTRATION OF ECONOMIC POWER 7199 

Mr. Cox. Well, you would agree that taking the elements as I 
have given them, the man is at a competitive disadvantage, wouldn't 
you? 

Mr. Pew. You would have to describe them again. I don't even 
know that I would admit that. 

Mr. Cox. To be sure of the question, we will ask that it be read. 
(The reporter reads the question beginning above on line 9.) 

Mr. Pew. I wouldn't know how to answer that question because 
I know of no case which would fit that specification. 

Mr. Cox. Well, let us go back to the statement you made a little 
while ago about a man, an independent, being in position to move 
from one area of the industry to another as it appears to be more 
profitable. Suppose a refiner in that position, with a refining plant 
near an oil field, decided that he would be better off if he had his 
refinery closer to the market, and wished to consider building a refin- 
ery, say in Chicago or some city of that kind, a market center. 
Wouldn't an independent, as distinguished from an integrated com- 
pany, be faced with the difficulty of obtaining as cheap a method of 
transportation as the larger competitors would have? 

Mr. Pew. He could tender that oil to the pipe lines and pay the 
going rates and if he don't like those rates he can go to the Commis- 
sion and demand that they be lowered. 

Mr. Cox. How can you explain, then, the fact that so little oil 
seems to be carried on the crude pipe lines, except for the account 
of the companies which own them? 

Mr. Pew. I think most all of the companies have arrangements for 
their own transportation facilities. A pipe line, after all, only repre- 
sents a very small percentage of the investment in the oil industry. 
I told you this morning that there was about $8,000,000,000 invested 
in this industry. The pipe-line investment amounts to about $500,000,^ 
000. So, generally speaking, it is possible for those who require 
transportation of their own to work out some kind of an arrange- 
ment to get it. 

Mr. Cox. It isn't always as cheap as the pipe-line transportation, 
is it? If they have to do it by rail it couldn't be as cheap? 

Mr. Pew. I am speaking about the creation of a pipe line to handle 
their business. 

Mr. Cox. You think, then, that as a matter of fact, as distinguished 
from these hypotheses we have been talking about, that the inde- 
pendent refiners have no complaint as far as access to the pipe lines 
is concerned? 

Mr. Pew. I think substantially that the refiners in question can 
either get their oil through the pipe line under satisfactory con- 
ditions, or they can usually arrange to build their own lines or buy 
an interest in a line if necessary. 

Mr. Cox. Of course, to build a line or buy a line may require a 
comparatively large amount of capital, may it not? 

Mr. Pew. No: I tried to point out that the amount of capital in- 
vested in pipe lines is rather small as compared to the rest. 

Mr. Cox. When you compare it with the total investment in > the 
industrv. but it is a comparatively largre 

Mr. Pew (interposing). After all, if you are going into business 
you have to provide some capital. 

124491—40 — pt. 14, sec. 1 8 



7200 CONCENTRATION OF ECONOMIC POWER 

Mr. Cox. Yes ; but the question is how much, Mr. Pew. I assume 
from what you have said that you think a fairly substantial amount 
of capital would be required under those circumstances? 

Mr. Pew. Well, I think that pipe-line transportation is wdlhin 
the reach of most people who desire to use it. 

Mr. Cox. It isn't the investment required that is so excessive as 
to place the small refiner or competitor at a disadvantage? 

Mr. Pew. I want to point out the investment is comparatively 
small. Of course every man can't build himself a store on Fifth 
Avenue. It takes some money to get into most any kind of a business. 

Mr. Cox. And you think, also, that as far as the actual carriage 
■of oil in pipe lines is concerned today, the independent refiners have 
no valid grounds for complaint, that they can get that oil carried 
in existing pipe lines if they want it? 

Mr. Pew. As far as I know, in every instance. 

Mr. Cox. Can you tell us by way of illustration how much oil is 
carried in your crude-oil pipe lines for the account of other com- 
panies? 

Mr. Pew. I think that substantially all of the oil carried by our 
lines is our own oil. Now in some cases we carry oil for other people, 
but our procedure has rather been that of buying the oil in the field 
and putting it through the line and selling it at the other end. 

Mr. Cox. You have title to it? 

Mr. Pew. We have title to it. That is just a question of procedure, 
but after taking that point into consideration — I will give you the 
figure here, 84 percent is our own oil. 

Mr. Cox. That is the crude oil or the gasoline ? 

Mr. Pew. Crude oil. 

Mr. Cox. What about the gasoline pipe lines? 

Mr. Pew. 91.2. 

Mr. Cox. 91.2 of gasoline. Can you tell us how much of the 
balance that is carried for the account of others is carried for the 
account of other integrated companies as large or larger than your 
own? How much for smaller nonintegrated companies? 

Mr. Pew. I think substantially all of it is carried by integrated 
companies, for integrated companies, which are substantially as large 
as our own. 

Mr. Cox. In other words, as far as your pipe lines of both kinds are 
concerned, of crude oil and gasoline, you don't carry any oil for the 
small independent? 

Mr. Pew. No, if our lines attract the other integrated companies, 
the services are available for any who want to make use of them, and 
under whatever conditions the Interstate Commerce Commission may 
see fit to impose.^ 

Mr. Cox. So the situation is. simply that these independents haven t 
tendered any oil to you? 

Mr. Pew. I think the discussion is more or less academic, if I may 
be permitted to say so, because that branch of our industry is already 
under the control of the Government. 

Mr. Cox. You mean the Interstate Commerce Commission? 

Mr. Pew. The Interstate Commerce Commission, and if our rates 
are too high it is within their province to reduce them. 

1 Pipe lines which travel in interstate commerce, being common carriers, come within 
the purview of the I. C. C. ' 



CONCENTRATION OF ECONOMIC POWER 7201 

Mr. Cox. I am not questioning the rates, you understand, Mr. Pew. 
I am just trying to find out first whether, or not any oil is tendered 
to you by independents; and second, if it isn't, I am mildly curious 
as to why it isn't. It may be there simply aren't any operating in 
the area through which your pipe lines run ? ^ 

Mr. Pew. I am not familiar with that detail, but, generally speak- 
ing, most of these independent, so-called independent, refiners are 
located in the fields. They refine the oil in the oil fields and they 
ship it out by rail to that general district. 

Mr. Cox. Do you have any idea as to why, as a historical matter, 
they have located, those people have located, near the field? 

Mr. Pew. Well, we havei one small refinery ourselves that is lo- 
cated in the field ; it was located in the field at a time when the field 
was flush and we could buy oil very cheap: We stuck this little plant 
in there to run the oil and make a lot of money while the making 
was good. Most of the small refiners, I would say, were located 
there for similar reasons. When the flush of the field disappegirs, 
why the advantage of an oil refinery in that location very largely 
disappears. 

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. 

Mr. Cox. If I should suggest to you that perhaps as a historical 
matter one reason why they have located there, rather than near 
market is because they haven't been able to get access to the market 
except by rail and other more expensive means of transportation, 
would you accept that suggestion? 

Mr. Pew, No ; I think I wouldn't accept that. I think the reasons 
that I have given are those that have actuated practically all of 
the refiners who have built plants. 

Mr. Cox. Sometimes they have gone there when the field was flush 
and stayed after it ceased to be flush, haven't they ? 

Mr. Pew. Quite. 

Mr. Cox. Why haven't they moved away to more advantageous 
locations when the time came? Is that because it hasn't occurred 
to them? 

Mr. Pew. I think there are a good many questions. We have a 
little refinery there. I don't think, economically, we ought to stay, 
but we have stayed and the refinery is still operating. 

Mr. Cox. Where are you taking the oil from that refinery? 

Mr. Pew. Oh, we ship it to any customers we can find. 

Mr. Cox. Physically, how does it go ; through pipe linet 

Mr. Pew. By tank car. 

PIPE LINES 

Mr, Cox. There was one thing I was going to ask you this morn-. 
ing, Mr. Pew, about that statement you read from Mr, Splawn.^ 

1 p. 7178. supra. 



7202 CONCENTRATION OF ECONOMIC POWER 

He says in there that a pipe line is a plant facility. Do you remember 
that? 

Mr. Pew. Quite. 
• Mr. Cox. And I think at one point you described it as a plant 
facility and an assembly line. 

On page 11 of the mimeographed copy of your statement: 

* s * * by leaving transport in its present relationship to the industry, that 
of a plant facility, an assembly line. 

One thing that occurs to me might be of interest to the committee. 
As the law now stands the pipe line is a common carrier. That ap- 
pears to be the situation with respect to the law. Doesn't it strike 
you as a little odd that a plant facility and assembly line should be a 
common carrier? 

Mr. Pew. No; I don't get jthat reaction. We make use of our pipe 
lines as a plant facility, but when we undertake to build that line 
we assume certain obligations, we have a Very definite responsibility, 
and that responsibility is to handle such oil for such people at such 
time as they may require it. 

Mr. Cox. You think, then, that it can be both a plant facility and 
figuratively an assembly line and have certain public characteristics 
of common carriers at the same time? 

Mr. Pew. With the additional responsibilities. 

Mr. Cox. You see no reason for recommending or suggesting to 
the committee that the law in that respect should be changed so that 
a pipe line wouldn't be a common carrier? 

Mr. Pew. Well, that is a hypothetical question, and I am afraid 
I would have to turn it over to my attorneys. 

Mr. Cox. It is not a hypothetical question in the sense that it deals 
with a remedy which we might adopt, Mr, Pew. Do you think it 
would be better if they weren't a common carrier ? 

Mr. Pew. I think it is far better for these pipe-line companies to 
be under some measure of Goy,ernment control. There are so many 
problems incident to their operation that it certainly does eliminate 
cniticism if the responsibility for some of these things can be put 
right up to the door of the Government. I don't know, for instance, 
whether some of these rates are too high o> too low, but I am quite 
satisfied to let the Interstate Commerce Commission decide what 
those rates ought to be. 

Mr. Cox. Do you file rules and regulations as to tenders with the 
Interstate Commerce Commission for those pipe lines ? 

Mr. Pew. I am sorry to have to 'admit that the details of this en- 
tire transportation matter are left in the hands of Mr. Dow ^ to ex- 
plain a very careful analysis of it, and I am sure he can give you a 
much clearer picture of it than I can. 

Mr. Cox. I will withdraw that, and ask this question which will de- 
velop the fact that I am trying to get. Suppose I wanted to ship 
oil over your pipe lines. How much oil would I have to tender to 
you ? 

Mr. Pew. Fifty thousand barrels. 

Mr. Cox. Fifty thousand barrels. Has that amount been 50,000 
barrels for a considerable period of time? 

Mr. Pew. I think it always was. 

* Fayette Dow. whose testimony appears in Hearings, Part 15. 



CONCENTRATION OF ECONOMIC POWER 7203 

Mr. Cox. Never larger? 

Mr. Pew. I don't think so. ■ Of course, you know the purpose of 
that 50,000 barrels. The success of a pipe line depends on the ability 
to keep it full. The profit on a pipe line only comes from the top 
amount that goes through. If you run a pipe line at 50 percent 
capacity you inevitably would have a loss. 

Mr. Cox. What is the breaking point ? 

Mr. Pew. I don't remember, but it is possibly around 70 percent. 
It will vary, but my guess is TO percent, and it is that additional 
quantity that produces a profit. 

Mr. Berquist. Mr, Pew, it was. brought out this morning or yester- 
day that the major oil companies produce about 52.5 percent of the 
crude, or did in 1937, and refined about 83 percent of the crude, and 
at the same time it was brought out that about 89 percent of the 
crude oil trunk lines were controlled by these major companies. From 
your figures that you cited this morning, you pointed out the advan- 
tage of pipe-line transportation over rail transportation, first water 
having advantage over pipe line and pipe line over rail, and you 
rather indicated the importance of relative transportation costs in 
this industry and made it clear that there was a tremendous advan- 
tage of pipe line over rail transportation. I am wondering if you 
would admit that it is not a reasonably economic conclusion that the 
preponderant control of pipe-line transportation primarily accounts 
for the greater concentration in refining than in production, or if 
the advantages of pipe-line transportation were available to all per- 
sons as they are to the major companies, whether or not the propor- 
tions in refining might not be expected to be very much the same as 
the proportions in production. 

Mr. Pew. Well, I think there are a number of 

M*. Berquist. May I just complete that? Would you agree chat 
through the means of the pipe line, control of pipe-line transportation 
and the significance of the pipe lines in transportation, as a result 
an increasing degree of concentration of the industry occurs at that 
point which follows that advantage? 

Mr. Pew. No ; on the contrary I think the exact opposite is true. 
I haven't examined those statistical figures. In fact, I am not a 
student of statistics, -but I can recall that at the time of the dissolu- 
tion of the old Standard Oil Co. they dominated the refining industry 
in this country. They had the refining and they had the marketing 
industry 

Mr. Berquist (interposing). And they also had peculiar trans- 
portation advantages at that time, didn't they ? ■ 

Mr. Pew. They had the control of the transportation facilities, 
the refining facilities, and to some extent perhaps the marketing. 
Now, they were almost not at all engaged in production. It is quite 
evident that the trend must have been in the opposite direction be- 
cause today that same group have a percentage interest in the refining 
and marketing whi6h must be way b$low 50 percent. 

Mr. Berquist. May I ask this question further. Was it a factor 
in the Standard Oil situation with respect to railroads in which they 
enjoyed rebates and all other advantages of transportation, and isn t 
that situation somewhat parallel today in that this advantage accrues 
to those who own the pipe lines, call them common carriers if you 
will ; and therefore as a Jesuit following the function of transporta- 



7204 CONCENTRATION OF ECONOMIC POWER 

tion, these companies dominate to a very high deg^-ee that segment of 
the industry known as refining; and also that that segment of the 
industry controlled by this group has been increasing in recent years, 
not startlingly from year to year, but, we will say, in the magnitude 
of 10 or 12 percent in the past 10 years — ^gradually increasing? 

Mr. Pew. In the first place, I am not sure that your statistics are 
right. 

Mr. Berquist. We will have available the basic facts from which 
I quote in pamphlet form. Unfortunately they are not available 
here. 

Mr. Pew. I think that Mr. Swensrud and Dr. Wilson ^ have some 
figures on that too, but as to your other question, I think there is an 
entirely different proposition from that which existed in the early 
days of the old Standard Oil Co. In the first place, you speak about 
20 companies. I have heard a lot of talk here today about 20 com- 
panies. It is far more than 20 companies who operate under this 
general plan. There is the keenest kind of competition between those 
companies. Now,- such a condition as you describe could not possibly 
exist unless those companies conspired together against the interests 
of these independents. 

Mr. Berquist. I am not suggesting that, Mr. Pew. But you spoke 
a while ago that it was perfectly feasible for an independent to go 
in one of the aspects of the industry and he had many advantages in 
going into one branch of the industry. What I am wondering is, 
whether or not if he is going into the refining business he is almost 
forced also to go into oil transportation and possibly into produc- 
tion as well, so that he cannot advantageously go into the refining 
branch by itself. 

Mr. Pew. I think Dr. Wilson has a lot of statistical information 
that he can develop in answering that question which, unfortunately, 
I did not prepare myself to answer. I still hold that the independent 
refiner can still go into the business and if he be an expect refiner, 
as anyone must be to do refining today, he has just as great an 
opportunity as have the integrated companies. 

Mr. Berquist. Of course, the refineries that have failed in recent 
years have been largely the independent refineries. I don't claim that 
they were all efficient or all wisely located, but certainly one of the 
factors against them was the matter of transportation of their prod- 
ucts to the market, wouldn't you say ? 

Mr. Pew. No; I think that the influences in refining have been 
quite of a different nature. I tried to point out this morning the 
tremendous technological advances that have taken place in refining, 
and when I surveyed the statistics here a few weeks ago and found 
that there were some 431 refineries operating in this country today 
out of some 560 that were registered, I was surprised that there 
hadn't been a much greater mortality. 

Mr. Cox. Talking about the technological development 

Mr. Pew. Yes. 

POSSIBLE ECONOMIC CONSEQUENCES OF PRORATION 

Mr. Cox. To speak again for a moment of the refiner, when he 
makes his product, gasoline, and sells it, I ask you to assume that he 

^ Testimeny of these gentlemen appears In Hearings, Part 15. 



CONCENTRATION OF ECONOMIC POWER 7205 

sells that gasoline on a competitive market which is free from any ar- 
tificial limits, restraints, or interferences — I suppose you would agree 
to indulge in that assumption for a moment. I ask you then to con- 
sider the market on which he buys. If he buys in an oil field which 
is subject to proration, would you saj^ that he was buying on a market 
which was free from artificial restraints? 

Mr. Pew. Now you open up an entirely different field, one having to 
do with proration and conservation.' I don't believe I could answer 
that question without a full discussion of the whole proration and 
conservation program. 

Mr. Cox. You don't even feel that you are in a position to advance an 
opinion as to whether or not, quite apart from the merits of proration, 
the effect of proration is to interject an artificial element into the crude- 
oil market ? I am not saying it is a bad thing, Mr. Pew ; I am asking 
you if in a market where there is proration, you don't have something 
that isn't provided for by the ordinary working of the forces of supply 
and demand. 

Mr. Pew. You mean by that that the man hasn't the opportunity of 
going in and dickering with a certain producer to get a somewhat lower 
price than that which the other producer is receiving for the orders ? 

Mr. Cox. I mean, too, that the supply is curtailed by governmental 
interference. 

Mr. Pew. That again all depends on your viewpoint. I would like 
to see the industry operate on the basis, absolutely on the basis of supply 
and demand, but I would also like to see the industry operate in accord- 
ance with the best conservation practices ; but that presupposes that the 
reserves in this country are sufficiently large to permit of the applica- 
tion of those best conservation principles and at the same time to pro- 
duce sufficient oil to meet the country's needs. 

Mr. Cox. I don't want you to misunderstand me, Mr. Pew. I am not 
attacking the idea of conservation nor am I attacking the proration 
laws, but I am simply suggesting to you that an independent refiner 
who buys oil in the market subject to proration and sells oil from his 
refinery in a competitive market, is buying in a regulated market and 
selling in a competitive market, and that that fact may place him at a 
disadvantage as opposed to a man who operates in both markets and 
doesn't have to buy his crude oil. 

Mr. Pew. I don't admit that the market for crude oil is reflated. 
I do admit that the practices of the various State commissions m their 
proration activities do to a certain extent influence the determination of 
the market, but I don't believe that it controls it. 

Mr. Cox. Well, whether it controls it or not, at least it has some 
effect upon it, does it not ? 

Mr. Pew. Well, if that' same man were buying wheat in the wheat 
pit, he would pay the same price for it as every other buyer. 

Mr. Cox. I don't question that at all. 

Mr. Pew. I don't quite get the point. 

Mr. Cox. I am coming to the next point, and perhaps it will be clear 
then. If you were an integrated operator and not under the necessity 
of buying any crude oil from anyone except insofar as your production 
isn't adequate to meet the needs of your refinery, you are not buying 
on this market which is affected by governmental regulation, whether 
controlled or not we will pass by for the time being. The small inde-: 



7206 CONCENTRATION OF ECONOMIC POWER 

pendent refiner, however, is buying on that market and selling on a 
competitive market, I suggest to you that that puts him at a disad- 
vantage. 

Mr. Pev7. Well, you presuppose that there is a profit in the producing 
of oil. 

Mr, Cox. Well, isn't there a profit in the producing of oil ? A great 
many people are going to be disillusioned, I am afraid, if there isn't. 

Mr. Pew. Well, I hate to admit it, but we have been in the red a 
great many years. 

Mr. Cox. That is one branch of your integrated operation that isn't 
profitable ; is that right, Mr. Pew ? 

Mr. Pew, Subject to my qualifications. 

Mr. Cox. Well, we will take it all, subject to your qualifications. 

Quite apart from whether it is profitable or not, isn't it true that a 
man who has his own source of supply, as distinguished from the man 
who has to buy, has an advantage if the man who buys has to buy in a 
controlled or artificially affected market and sell in a competitive 
market? 

Mr. Pew. I think not. There is nothing that would give me so 
much satisfaction as to be able to buy all the crude oil that our com- 
pany refines. 

Mr. Cox. Would you be willing to buy all of it even though 

Mr. Pew (interposing). Every gallon of it. 

Mr. Cox. Your competitors weren't buying it ? 

Mr. Pew. Yes. 

Mr. Cox. And even though you had to buy that on a controlled and 
regulated market? 

Mr. Pew. Even though I have to buy it on the market conducted 
under such conditions as those which now obtain. 

Mr. Cox. You wouldn't care — or I suppose you would care — how 
high the price of crude oil went under those circumstances ? 

Mr. Pew. Yes ; I am very keen on getting the costs of crude oil down 
just as low as possibld^ 
) Mr. Cox. That is perhaps why you think there isn't any profit in it. 

Mr. Pew. So I can get it through our plant, get our gasoline as 
cheaply as possible, so that we can sell it to the public and sell more of 
it. That has been the aim of our organization from the beginning. 
, Mr. Cox. Mr, Pew, have you ever heard it suggested that large units 
In the industry sometimes arrange what is known as a "squeeze" in 
order to affect the competitive conditions of the small refiner ? 

Mr. Pew. No. 

Mr, C(5x. That they put up the price of crude oil and depress the 
price of gasoline at the refinery door, cut down the margin on which 
those men can operate? 

Mr. Pew. No ; I can tell you that there isn't any truth in that, or 
at least I have never been in on such a squeeze 

Mr. Cox (interposing) . I am not asking you that. 

Mr. Pew. And I don't believe such a squeeze could be perpetrated 
unless I was in on it. [Laughter.] 

Mr. Cox. You think you would be bound to be in on it ? 

Mr. Pew. Quite. 

Mr. Cox. You have heard that claim made?« 

Mr, Pew. No; I haven't even heard it made. 



CONCENTRATION OF ECONOMIC POWER 7207 

Mr. Cox. You haven't even heard that suggestion made that that 
sort of thing is done? 

Mr. Pew. No. 

Mr. Cox. Have you ever heard that the price of crude oil is kept 
high in certain fields in order to impair the competitive position of 
the independent refiners? 

Mr. T*i^\v. No. I don't know whether I have ever heard that or not, 
but I don't know of the existence of such a condition. 

Mr. Cox. Would you have been in on that, too, if it had been done ? 

Mr. Pew. Well, I might have been. 

CONTKACTUAL RELATIONSHIP BETWEEN INTEGRATED COMPANIES AND 
RETAIL MARKETERS 

Mr. Cox. Let's leave refining for a moment now and consider the 
relations that exist between the refiner on the marketing side and the 
retail outlets. What kind of contractual relations do you have with 
retail outlets? I understood from what you said a moment ago that 
you no longer own any stations; is that true? 

Mr. Pew. No; we no longer operate any stations. 

Mr. Cox. I see; you own the station itself but you provide for its 
operation under some kind of contractual relatipnship ? 

Mr. Pew. Right. 

Mr. Cox. What is the nature of that contractual relationship ? 

Mr. Pew. It is just an ordinary lease. 

Mr. Cox. And do you customarily as a part of that lease provide 
that the lessee shall not handle any products except yours? 

Mr. Pew. Not in connection with the lease; no. We have another 
agreement that we make with all of our dealers. 

Mr. Cox. What is the nature of that agreement, Mr, Pew? Can 
you tell us about that? 

Mr. Pew. We just make a sales contract. We have a sales contract 
with all of our dealers, the same kind of contract as that which 
obtains with those dealers who have a lease on our property. 

Mr. Cox. And what is the nature of that contract so far as it 
relates to the handlin.qr of goods besides your own? 

Mr. Pew. Well, I have a copy of it. 

Mr. Cox, Can you just tell us generally? Do you provide- 

Mr. Pew (interposing) . No ; I don't think I can. If I had known 
you wanted me to go into this, I wouid have been happy to have read 
up on it. What feature of this would you like ? 

Mr. Cox. The thing I am interested in are the provisions, if any, 
by which the lessee or your agents or dealers, as the case may be, agree 
to sell only your products and no products produced by any other 
company. 

Mr. Pew. There is no such provision. 

Mr. Cox. There is no such provision. So that all of your lessees 
and all of your agents. are free to sell gasoline of your competitors; 
is that correct? 

Mr. Pew. That is correct. 

Mr. Cox. And thej^ are also free to sell other products, such as oil ? 

Mr. Pew. Yes. 

Mr. Cox. And they are also free to sell any kind of automobile 
accessories of any kind that they would like to sell ? 



7208 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. Quite true. 

Mr. Cox. Have you ever received any complaints from people in 
the industry that the representatives of your company have attempted 
to persuade, or in some cases have ordered, the operators of filling 
stations to discontinue the goods of competitors ? 

Mr. Pew. Yes ; I have heard complaints of that kind. I never was 
quite able to understand just what their viewpoint was. It always 
seemed to me as if Mr. Chrysler were to ^pear before this com- 
mittee and object to the fact that the Ford dealers wouldn't put his 
cars in their exhibition rooms and charge that there was something 
wrong with the Ford dealers. At the same time, we do not restrict 
our dealers from the selling of products of other manufacturers of 
oil. 

Mr. Cox. I make no suggestion at this point that there is aAything 
improper in such practices or anything of the sort, but the reason I 
raise the question is because it has come to my attention that com- 
plaints of that kind have been made. Now whether they have been 
made to you or not, I don't know, but they have been made to differ- 
ent Government agencies. I am not assumiiig at this moment that 
the activities which are complained of are carried on under the direc- 
tion or with the approval of the responsible officers of the company, 
but I wanted to find out what your policy was with respect to that 
sort of thing. 

Mr. Pew. Our polic}' is that these dealers may sell without any 
duress on our part, such other lubricating oils as they may see fit to 
sell, manufactured by other companies. 

Mr. Cox. And such gasoline? 

Mr. Pew. Well, I don't think the problem has ever come up, but 
it would also apply to gasoline. 

Mr. Cox. Do you have any idea how many of your lessees or agents 
in fact sell gasoline produced by other companies ? 

Mr. Pew. I should think very few. 

Mr. Cox. Do you have any idea how many of them sell lubricating 
oil that is produced by other manufacturers? 

. Mr. Pew. If they sold other qualities of gasoline, then they would 
no longer be 100 percent dealers and they would be charged a half- 
cent more for that gasoline. 

Mr. Cox. You have that half -cent margin to encourage the dealer 
to sell only your products? 

Mr. Pew. We have it to cover our additional expenses. 

Mr. Cox. I am not sure that I understand that. Will you ex- 
plain what additional expenses you mean? 

Mr. Pew. When we do business with what we call a split dealerj a 
dealer who handles one or more qualities of gasoline, our deliveries 
are much less, naturally, because the other fellow takes a part of his 
business, and because of the reduced amount of business that he does 
with us, our costs go up. We have to send a truck around whether 
he takes 200 or 500 gallons, and a very careful compilation of all of 
our costs have indicated that the split dealer costs^ us to handle 
somewhere in the neighborhood of six-tenths of 1 cent a gallon more. 

Mr. Cox. That is an average. I suppose there might be split 
dealers who would take as much as a 100-percent dealer, depending 
upon location and general volume of his sales. You figured on an 



CONCENTRATION OF ECONOMIC POWER 7209 

average it costs you a half a cent more to do that, is there a similar 
margin so far as lubricating oil is concerned ? 

Mr. Pew. No; they are quite free to buy lubricating oil and I 
suppose 70 percent of them do buy outside lubricating oils. 

Mr. Snyder. Do they display that lubricating oil for sale to the 
public ? 

Mr. Pew. Yes; they do. 

Mr. Snydek. They don't keep it in hiding so the public can't see it ? 

Mr. Pew. No; it is there; just as Mr. Chrysler might display his 
Chrysler car in a Ford showroom.^ 

Mr. Snyder. But it is controlled by the franchise arrangement 
Mr. Ford has with his dealer? 

Mr. Pew. I don't know about that. 

Mr. Snyder. Do you have a franchise arrangement with your 
lessee ? 

Mr. Pew. I don't suppose so; no. 

Mr. Cox. Could you tell us, while we are reviewing that point, 
the terms on which your leases may be terminated, Mr. Pew? 

Mr. Pew (reading from Sun Oil Co. lease) : 

If the Lessee shall abandon the premises, become bankrupt ot insolvent, or 
if any receivership or assignment for the benefit of creditors be made, then this 
Lease shall immediately terminate. If Lessee shall fail to perform or violate 
any covenant or condition herein contained, or if an attachment, execution, or 
like process shall be made or issued against Lessee, then this Lease shall abso- 
lutely determine at the option of Company. 

If this Lease shall be cancelled or terminated prior to the end of the term 
hereof, or if Lessee shall fail to vacate the demised premises at the end of the 
term thereof, any attorney may immediately appear for the Lessee in an ami- 
cable action of ejectment, to be brought by the Company in any competent court 
for the recovery of the demised premises and damages for the detention thereof, 
and therein confess judgment against the Lessee, for which this agreement (or 
a true copy thereof) shall be a sufficient warrant; and the Company may issue 
thereon all necessary writs or process for recovering possession of said premises. 

Mr. Cox. That is enough for that. I wanted to find out whether 
or not you had any general right of termination apart from the gen- 
eral conditions just stated in there. 

Mr. Pew. Usually for a year. 

Mr. Cox. Usually for a year. There is no general right of can- 
celation on a certain number of days' notice ? 

Mr. Pew. No. 

Mr. Cox. Have you ever used a lease of that kind at all, with a 
general clause giving you the right to cancel the lease on a certain 
number of days' notice? 

Mr. Pew. I suspect we did in the early days, but I can't be too sure 
about it. - ■ 

Mr. Cox. You haven't, you think, used such a lease recently. 

Mr. Pew. No. 

Mr. Snyder. How long ago since you adopted this lease? 

Mr. Pew. I don't know. 

Mr. Snyder. Have you had leases that had exclusive selling clauses 
in them? 

Mr. Pew. I don't know. I am told that prior to 1933, not in the 
form of the lease but in the sales agreement, we had an exclusive 
provision. 



^ See testimony on this subject on October 7, 1939, Hearings, Part 15 ; and on October 
10, 1939, Hearings, Part 16. 



7210 CONCENTRATION OF ECONOMIC POWER 

Dr. LuBiN. In that same connection, Mr. Pew, what is meant in 
your contracts by an undivided retailer price posted at your plant ? 

Mr. PEfw. The undivided account is an account which buys all 
of its gasoline from us. 

Dr. LuBiN. What is the undivided price at the present moment at 
market? 

Mr. Pew. I don't know. 

Dr. LuBiN. Do you know what the divided price is? 

Mr. Pew. The divided is half a cent higher than the undivided. 

Dr. LuBiN. In other words the dealer who sells your products only 
pays half a cent less per gallon to you than the dealer who sells your 
products plus something else? 

Mr. Pew. Right. I was trying to explain, sir, that the cost of our 
handling the divided accounts more than made up that half cent 
differential. 

Dr. LuBiN. I can't understand. Why is that? 

Mr. Pew. Because of the lesser amounts involved. We have to 
make so many more deliveries with our truck. 

Dr. LuBiN. Let's assume that the maii has your gas, has Sunoco 
and he has X gasoline. It doesn't necessarily follow that he is selling 
less Sunoco because he also sells X, does it ? 

Mr. Pew. No ; but the statistics will convince you to the contrary. 
They do sell less. Our deliveries are very much less, and when we 
add up all the deliveries and figure up all our costs we arrive at a 
little in excess of a half cent in the cost of doing that kind of business. 

Mr. Cox. This is subject to the usual qualifications about cost? 

Mr. Pew. No. Those are definite. Now, when we put the qualifi- 
cation on top of that, it would raise it. 

Mr. Berge. That difference in cost of handling accounts that you 
speak of seems to be really in the nature of a quantity discount. 
Don't you experience the same differences in cost between handling 
the small accounts and the large accounts of your exclusive dealers? 
Isn't that a difference really due to quantity rather than to the way 
in which they do business? 

Mr. Pew. Possibly largely due to quantity. 

Mr. Berge. Then do you make a difference in price to your small 
exclusive dealer and your large exclusive dealer of a half cent? 

Mr. Pew. No ; we put in general classes. 

Mr. Berge. Then isn't the real explanation of the difference the 
fact that one is an exclusive dealer and the other is not, and that 
there is a policy to favor the exclusive dealer ? 

Mr. Pew. The reason is that the general cost of doing business 
with the nonexclusive dealer is something over a half a cent a gallon, 
generally. 

Mr. Berge. You have given no explanation of that difference, other 
than the fact that the nonexclusive dealer may sell less of your gas. 

Mr. Pew. Quite right, but we have to have some basis for — some 
groupings. We have to decide on something. Now, the industry 
has based it — they have differentiated there as between the 100-per- 
cent account and the split account. 

Mr. Cox. Why don't you do it on a flat quantity basis, just give 
everyone who takes so much the discount. 

Mr. Pew. That would be just another way of handling that; that 
would be equally as satisfactory to me, but there are certain trade 



CONCENTRATION OF ECONOMIC POWER 7211 

practices that have grown up over the years and that is one of those 
practices which obtain in our industry. 

Mr. Cox. Just a matter of habit? 

Mr. Pew. Yes; and I think the Federal Trade Commission are 
looking into this and similar groupings, and I think you will find 
that they have held that such a grouping is about as good a way as 
a matter of this kind can be worked out. 

Mr. Cox. Don't you feel, Mr. Pew, it is an advantage to you, quite 
apart from this difference in cost, to have the dealer handling only 
your gasoline? 

Mr. Pew. Very definitely. 

Mr. Cox. And isn't that advantage one of the reasons, really, why 
you give him a discount in addition to the difference in cost? 

Mr. Pew. No; I think not. If we worked that out and gave con- 
sideration to that feature we would have to raise that half-cent and 
make it a larger figure. 

Mr. Cox. I am not sure I followed you on that. You mean that 
if you are going to do it for the purpose of getting exclusive arrange- 
ments you would have to increase the margin ? 

Mr. Pew. No ; what I mean is that if we were going to give con- 
sideration to the value of having a dealer handling our business ex- 
clusively, and we will say" we calculate tha£ difference as being worth 
a tenth of a cent a gallon to us, then we would have to add that 
tenth of a cent to the ofelier five- or six-tenths and establish a new 
differential. 

Mr. Cox. You wouldn't have to do that unless you had to do it 
to get exclusive dealers, would you? 

Mr. Pew. Well, we don't propose to do it. Our costs are sub- 
stantially taken care of under the present conditions. We couldn't 
give a half -cent a gallon — we couldn't have all split accounts and 
give up that half -cent a gallon; the entire profit of all of the in- 
dicated operations in our business over a period of years has not 
exceeded a half a cent a gallon. Now, when a large percentage of 
our business comes along and costs us a half a cent a gallon more to 
do it, we just naturally either have to take that half-cent off of those 
fellows, or quit selling them, or go out of business. 

Dr. LuBiN. The thing that I just can't understand is, I understood 
you to say a few minutes ago that the number of split accounts is 
relatively small. 

Mr. Pew. I don't recall saying that: 

Dr. LuBiN. I may have misunderstood you, I just understood 
you to say that, in terms of actual number of "accounts, the split 
accounts are not as important as the accounts that carry your 
product only. • 

Mr. Pew. No ; I beg your pardon : I didn't mean to say that. 
My recollection is that the number oi our split accounts are about 
40 percent and that the volume that we do is about 20 percent. 

Dr. LuBiN. Despite the fact that a split account may do more 
gallonage than an account that carries only your own product, they 
still must pay more for it, half-cent more per gallon ? 

Mr. Pew. That is the grouping. 

Dr. LuBiN. So that it is cheaper in some of those instances to 
make deliveries to the split account than it is to the account that 
carried your product only, and yet you charge them piore for it? 



7212 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. That is right. 

Mr. Snyder. Approximately how many service stations does the 
company own and lease out? 

Mr. Pew. We own 680 stations. 

Mr. Snyder. And how many are leased out ? 

Mr. Pew. Substantially all of them. 

Mr. Snyder. And in all of those stations are your products sold 
exclusively, or just gasoline? 

Mr. Pew. I would say that in all cases our gasoline was sold 
by those stations exclusively. 

Mr. Snyder. On lubricating oils there may be more than your 
brand? 

Mr. Pew. I think our brand is sold in all of them, but other brands 
are sold in most of them. 

Mr. Snyder. At those 680 filling stations is any other brand of 
gasoline sold? 

Mr. Pew. I don't think so. 

Mr. Snyder. Is there an arrangement which says all dealers shall 
not go to a competitor ? 

Mr. Pew. No ; I don't think so. 

Mr. Snyder. What controls that situation ? 

Mr. Pew. Controls? I don't get your point. 

Mr. Snyder. How are you able to keep all of these lessee dealers 
selling your gasoline ? Are they all satisfied ? 

Mr. Pew. As far as I know. 

Mr. Snyder. Do you have 

'Mr. Pew (interposing). They wouldn't have made an agreement 
with us to lease the station if they weren't satisfied. 

Mr. Snyder. Do you have any arrangements with them in regard 
to the resale price which they sell at ? 

Mr. Pew. No. 

Mr. Snyder. How do they get the information of what price 
to charge? 

Mr. Pew. They don't get it from us. 

Mr. Snyder. How familiar are you with the marketing end of your 
business ? 

Mr. Pew. Well, after all, I am only the president of the company. 
I don't know very much about the details of all of these departments. 

Mr. Snyder. Does your official in charge of marketing discuss 
these matters with you frequently? 

Mr. Pew. Quite. 

Mr. Snyder. Have you heard of a situation where your dealers 
were complaining to your company that your salesmen were dictating 
the price, and that price was below the prevailing price, and they 
would go out of business if they were not permitted to sell at a 
higher price? 

Mr. Pew. No. 

Mr. Snyder. Have you ever ,heard of the situation at Baltimore 
last summer ? I suppose Mr. Eckert^ would have all that information. 

Mr. Pew. Certainly. . 

Mr. Snyder. You would rely on him for that information? 

Mr. Pew. Yes. 



3. Eckert, vice president. Sun Oil Co 



CONCENTRATION OF ECONOMIC POWER 7213 

Mr. Cox. Is it the policy of your company to have any voice at 
all in determining the retail price at which the gasoline should be 
sold? 

Mr. Pew. None whatever. 

Mr. Cox. Does Mr. Eckert understand that? 

Mr. Pew. Quite. 

Mr. Cox. And as far as you know those instructions have been 
given to Mr. Eckert? 

Mr. Pew. I am perfectly sure those instructions Have gone out to 
everybody. 

Mr. Cox. Anyone who disregards that in your organization is acting 
in disregard of express orders to the contrary ? 

Mr. Pew. And I am sure that nobody did disregard them. 

Mr. Cox. if they did 

Mr. Snyder (interposing). When you lease out a station, Mr. Pew, 
do you assign a certain gallonage for that particular station? 

Mr. Pew. In the sales contract there is a gallonage agreed to. 

Mr. Snyder. When the operators' gallonage falls down, what steps 
do you take to raise it ? 

Mr. Pew. Well, I ean't tell you that. I don't suppose that we 
take — it is suggested we make an attempt to ascertain what the con- 
ditions are. If the operator has been doing a good job, nothing is 
done about it. 

Mr. Cox. Do you cancel the lease if the gallonage falls below 
that? 

Mr. Pew. The lease is quite distinct from the sales agreement. We 
can cancel the sales agreement if they fall down. 

Mr. Cox. Well, now, I would like to be clear as to what the situ- 
ation is then. You cancel the sales agreement. Does that mean a 
man ceases to be able to buy your products? 

Mr. Pew. Quite. 

Mr. Cox. But the lease obtains so that- he has the filling station, 
but pie has to get gasoline and the other things he sells from some- 
one else? 

(Mr. Pew nodding head "Yes.") 

D^. LuBiN. What is the usual length of one of those leases? 

Mr. Pew. A year. 

Dr. LuBiN. So at the end of a year he is out of business, as far as 
that spot is concerned? 

Mr. Pew. Quite. 

Dr. LuBiN. You mentioned a minute ago that you had 680 stations 
that you have leased out. Has there been any time in the history 
of the company when it operated its own stations? 

Mr. Pew. Oh, yes. 

Dr. LuBiN. Did you operate all 680? 

Mr. Pew. Whatever we had at that time. 

Dr. LuBiN. Have you any idea what the pay roll of yout stations was 
dt that time ? 

Mr. Pew. No. I would be glad to get that information and file it 
with the committee.^ 



^ Mr. Pew supplied the information during his testimony the following day. The data 
were marked "Exhibit No. 1173" and are included in the appendix on p. 7512. 



7214 CONCENTRATION OF ECONOMIC POWER 

Dr. LuBiN. I would be very much interested in having it, particularly 
in view of the statement as to the relationship between the leasing pro- 
cedure and the Social Security Act. It has appeared to some people 
in the industry that 5 percent on the distribution of pay roll was a 
terribly high burden to bear, and that in terms of the profits of the 
retail market if that 5 percent could be shifted from the shoulders of 
the company or eliminated, it would have a different bearing on the 
profit situation of the retailer as a whole. 

The fact is that when the law first went into effect there was 1 percent 
in most States for unemployment compensation and 1 percent I think 
for old age, with a planned increase so that eventually it would get to 
4 or 5 percent, I think by 1942, according to the rate. 

Mr. Pew. That 5 percent was a very small item as compared with 
the other costs. I can assure you that so far as our company was con- 
cerned, it received very little consideration. 

Dr. LuBiN. I should think 5 percent of a pay roll for 680 stations 
might have been a rather significant amount of money. 

Mr. Pew. Yes ; but we are speaking now in relative terms. The cost 
per station of that 5 percent or a fraction of a cent per gallon was very 
small. 

Dr. LuBiN. I will agree to that, but still if one had a $5,000,000 pay 
roll, $250,000 is a lot of money if you add that amount to that pay roll. 
, Mr. Pew. I think you will find that most corporations think about 
these things in relative terms. I can assure you that it was not a factor 
in our determinations as to the policy we should follow in disposing 
of our stations. 

Dr. LuBiN. Do you know whether it was true of other companies? 

Mr. Pew. No ; I can't vouch for other companies. 

Mr. Cox. I gather from what you said just now to Dr. Lubin, and 
what you said this morning, Mr. Pew, that it was the competitive situ- 
ation which existed in the retail field rather than the Social Security 
taxes and chain-store taxes that in your opinion was the decisive factor 
in causing many of the large refining companies to get out of that 
field, at least so far as active operation was concerned? 

Mr. Pew. That seems to be the consensus of opinion. Of course, that 
really wasn't the case with our company. 

Mr. Cox. Why did your company do it? 

Mr. Pew. Well, our company found its filling-station operations to 
be quite profitable. Back in 1933 our earnings, subject to qualifica- 
tions, ran from 10 to 15 percent, but you remember the N. R. A. 
went into effect in 1933, and under the N. R. A. there was a certain 
price control of filling stations. The dealer of the so-called major 
companies couldn't give away his margin. His prices had to be 
posted. Then there developed a certain number of dealers who 
found they could violate the provisions of the N. R. A., and they 
did, and they took a lot of business away from the dealers who 
were living up to the law. The result was that it took so much 
business away from the honest dealer that it robbed the honest 
dealer of his margin of profit, because his gallonage was reduced. 
That seems to be the real reason for the demoralization that took 
place in the marketing in the retail department of the industry in 
the section where we do business. While in 1934 our margin of 
profit went down almost to nothing, in '35 and '36 we suffered lieavy 



CONCENTRATION OF ECONOMIC POWER 7215 

losses. I think it was in '36 that we finally disposed of our stations. 

Mr, Cox. Of course, N. R. A. wasn't in effect after the 25th of 
May 1935, so that that situation must have been continued by some 
other factor. 

Mr. Pew. Yes ; well, it caught them — this trick' of what they call 
"under canopy cutting." They had learned that by cutting their 
price they could greatly increase their business. That is just my 
opinion. 

Mr. Cox. But it brings me back to a suggestion that I was about 
to make to you to see whether you cared to express an opinion on it. 
That appears to have ^been a case, does it not, where the larger 
integrated operation was a little too rigid to compete successfully 
with smaller units in the retail market? 

Mr. Pew, I would say yesj but I would like to qualify that by 
saying that the integrated units at that time as well as many of the 
other units found themselves in the difficulty that they were in 
largely because of the fact that their filling stations were not them- 
selves integrated^ — integrated as regards the handling of supplies 
other than gasoline. 

Mr. Cox. Would you say that was a substantial factor in the 
situation ? 

Mr. Peav, I think in the later days it was, yes; and today I think 
it is definitely the controlling factor. 

Mr. Cox. Even controlling despite all considerations of the price 
a^t which gasoline may be sold ? 

Mr. Pew. Well, an integrated station, if I may call it such, let's 
call it a horizontal integrated station, will produce under present 
conditions on business outside of that of their gasoline, a profit 
equal to 5.2 cents a gallon on the gasoline sold, which is almost twice 
as much profit as they can get out of the sale of the gasoline itself. 
So that in such an integrated station the concern of the operator is 
not so much with how much profit he can get out of his gasoline 
but how many cars he can bring into his plant and how much of this 
other business he can get. He can use the gasoline 

Mr. Cox (interposing). As a loss leader. 

Mr. Pew, As a loss leader. Now I have here a chart which you 
might be interested in, a chart that we have distributed to our dealers. 
It shows that per gallon of gasoline sold if they get their share of 
this other business it will bring them in a profit of 5.2 cents a gallon 
on the gasoline sold. 

Mr, Cox, Do you furnish them with these other accessories? 

Mr. Pew. No. 

Mr. Cox, They buy those themselves ? You don't furnish anything 
of that sort? 

Mr. Pew, We are greatly concerned that our dealers should be 
happy. The only way they can be happy and contented is when 
they make a profit. They are our front. We have to keep those 
dealers in business. There is nothing that gives me so much concern 
as when these dealers aren't making a fair profit. 

Mr. Cox. That brings me to another question that I want to ask 
you again about the small independent refiner. We have talked 
about his position with respect to various phases in the industry. Is 
it your considered judgment that in the struggle, if I may use that 

124491— 40— pt. 14, sec. 1 9 



7216 CONCENTRATION OF ECONOMIC POWER 

word, for dealer outlets, he stands on the same footing as the larger 
integrated company? 

Mr. Pew. Yes. 

Mr. Cox. You think he suffers under no competitive disadvanta'^ ? 

Mr. Pew. No. 

Mr. Cox. You never heard any small manufacturer of petroleum 
products, for example, people who manufacture lubricating oil, 
complain of their outlets slowly being taken away from them by the 
larger integrated company? 

Mr. Pew. I have heard some complaints on the part of companies 
from time to time who were in the sole business of supplying lubri- 
cating oil, but it is my very definite belief, though I haven't got the 
facts, that those cbmpanies have increased their business in the last 
few years. The trend has been in exactly the opposite direction. 

Mr. Cox. Those complaints in your opinion are unfounded? 

Mr. Pew. That is my opinion. 

Mr. Cox. That their outlets, far from decreasing, have been 
increasing ? 

Mr. Pew. I« would say so. 

Mr. Cox. Have any of those complaints been made to you per- 
sonally, Mr. Pew? 

Mr. Pew. I have heard very little about it. I have never had any 
complaint personally made to me; no. 

Acting Chairman Reece. May I inquire, Mr. Cox, how much time 
you think you may need to finish with the witness? 

Mr. Cox. It is a little hard for me. to tell. I still have a substan- 
tial number of questions, and there may be some by the committee. 

Acting Chairman Reece. You can be here tomorrow without great 
inconvenience ? 

Mr. Pew. Certainly. 

Acting Chairman Reece. It is now 4 : 30. If we are not able to 
finish this evening it would be my judgment that we might recess 
very soon. The committee will stand in recess until 10 : 30 tomorrow 
morning. 

(Whereupon at 4 : 30 p. m. the committee recessed until 10 : 30 a. m., 
Wednesday,, September 27, 1939. r 



INVESTIGATION OF CONGENTEATION OF ECONOMIC POWEE 



WEDNESDAY, SEPTEMBER, 27, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. G. 
The committee met at 10:45 a. m., pursuant to adjournment on 
Tuesday, September 26, 1939, in the Caucus Room, Senate Office 
Building, Representative B. Carroll Reece presiding. 

Present: Representatives Reece (acting chairman) and Williams; 
Messrs. Berge, Lubin, O'Connell, and Brackett. 

Present also: Clarence Avildsen, representing Department, of 
Commerce; Willis Ballinger, representing Federal Trade Commis- 
sion; Quinn Shaughnessy, representing Securities and Exchange 
Commission; Hugh Cox, W. B. Watson Snyder, F. E. Berquist, and 
Christopher Del Sesto, Special Assistants to the Attorney General; 
Roy C. Cook and Leo Finn, Department of Justice. 

TESTIMONY OF J. HOWARD PEW, PRESIDENT, SUN OIL CO., 
PHILADELPHIA, PA.— Resumed 

Acting Chairman Reece. The committee will please come to 
order. You may resume, Mr. Pew, if you will, please. Are you 
ready to proceed, Mr. Cox? 

cracking process patents 

Mr. Cox. Yes, Mr. Pew ; I think yesterday you testified that at one 
point in your company's development you found that in connection 
with cracking processes it would be too expensive for you to operate 
under the patents which were then outstanding, covering certain 
processes. I should like to develop that a little bit. Can you tell 
us exactly why that was more expensive? 

Mr. Pew. I think my reference to that particular development at 
that time was not to be taken as a criticism of the patent situation; 
we simply felt that we could develop our own process; we felt that 
we could develop a better process; and if we did, we would pay no 
royalties. That was the course we followed. 

Mr. Cox. When you did make the reference yesterday^ to the addi- 
tional expense involved in using these patents, was that expense the 
royalty payment? 

Mr. Pew. The royalty payments. 

Mr. Cox. Who owned those patents? Will you tell us that? 

Mr. Pew.. I don't think that I am equipped with the information 
as to the various companies that were licensing the rights to use their 
particular cracking processes. There were a number. 

7217 - 



7218 CONCENTRATION OF ECONOMIC POWER 

Mr, Cox. Well, if I suggest to you that the patents were owned 
and controlled by major integrated companies, would you accept that 
suggestion ? 

Mr. Pew. I know that the major integrated companies were in- 
terested in many of the patents. Dr. Wilson is intimately familiar 
with the whole patent structure of this industry,' and he is prepared 
ot give you ai>y information on that point which you may desire. 

Mr. Cox. You don't feel that you are in a position now even to 
comment on the suggestion I made that those patents were owned 
and controlled by the major companies? 

Mr. Pew. I don't know. I know at the time that we were in 
negotiation with at least one or perhaps two different inventors who 
had nothing whatever to do with the major companies. 

Mr. Cox. Well, I am referring now to these patents under which 
you would have had to pay royalities to operators. 

Mr. Pew. We had to pay royalties under many. 

Mr. Cox. Were any of the patents under which you had to pay 
royalties owned by the major companies?- Do you remember? 

Mr. Pew. I think they owne.d a great many of them ; yes. 

Mr. Cox. And of course if you had had to pay royalties on those 
patents you would have been paying royalties to your competitors, 
would you not? 

Mr. Pew. Certainly. 

Mr. Cox. Now can you tell us in a general way how much money 
it was necessary for you to spend to develop your own cracking 
process, Mr. Pew? 

Mr. Pew. Well, during the years we have spent a great many 
millions of dollars in the development of cracking processes. 

Mr. Cox. Then, would it be accurate to say that a small independent 
refiner wished to take advantage of the processes which we have been 
discussing he would be faced with the alternative of paying royalties 
to his larger competitors or of spending millions of dollars to develop 
his own cracking process ? 

Mr. Pew. I think that is quite probably true, but in connection 
with that I think 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 that you 
gentlemen might look into.^ I don't know, but I think that is proba- 
bly true. 

Mr. Cox. Assuming that that is true, as it may well be, that means 
it is very difficult for anyone to carry on the research and experi- 
mentation that is necessary to develop these processes unless that 
person has substantial financial resources to use for that purpose. 
Is that correct ? 

Mr. Pew. I don't think that is necessarily true. It was true in our 
case. We didn't realize at the time we made our decision. If we 
had known how much it was going to cost us we probably would have 
made arrangement wit)i one of these other companies. 

Mr. Cox. Taken the license and paid royalties ? 

Mr. Pew. Yes. 



^ For hearings held by this committee on the subject of patents see Hearings. Part II, 
Patents — Automobile Industry, Glass Container Industry ; and Hearings, Part III. 
Patents — Proposals for Changes in Law and Procedure. 



CONCENTRATION OF ECONOMIC POWER 7219 

Mr. Cox. But, generally speaking, those are the two alternatives 
which a man faces. 
Mr. Pew. Yes, sir. 
Mr. Cox. So much for patents. 

METHODS OF DISTRIBUTION 

Mr. Cox. I would like to ask you a question, Mr. Pew, about the 
methods of distribution which your company uses. Do you sell rnost of 
your products direct to the retailers or do you deal with any kind of 
middleman ? 

Mr. Pew. IVIost of our products are sold direct to the retailer. 

Mr. Cox. Are there instances in which you deal with a middleman 
of some kind, a jobber or wholesaler? 

Mr. Pew. We have a certain small percentage of our business which 
goes to our distributors. 

Mr. Cox. Are those distributors men who sell only your products? 

Mr. Pew. In some cases, but in many cases they are not. 

Mr. Cox. Do they sell the product under your house name? 

Mr. Pew. In every case. 

Mr. Cox. In every case? You sell no gasoline, unbranded gasoline, 
to middlemen for distribution under other names ? 

Mr. Pew. No. 

Mr. Cox. Do you have any opinionas to whether, generally speaking, 
those middlemen perform useful functions in the industry ? 

Mr. Pew. I think they do, very definitely. 

Mr. Cox. In terms of volume, how much of your gasoline passes 
through their hands — can you tell us ? 

Mr. Pew. 8.5 percent. 

Mr. Cox. Just what is useful economic function that in your opinion 
they perform as to that part of your volume ? 

Mr. Pew. In the sparsely populated areas of the country where an 
organization handling a great many different commodities can operate, 
and operate efficiently, very often a similar organization handling only 
one commodity will not transact sufficient business to justify their 
existence. . 

Mr. Cox. In localities or regions where you deal with these jobbers 
or distributors, do you also sell direct to retailers ? 

Mr. Pew. No ; never. 

Mr. Cox. So that if you sell direct to retailers in a particular market- 
ing area, you have iio distributors in that area? 

Mr. Pew. None whatever. 

Mr. Cox. And the converse is true, if you have distributors you do 
not sell direct to retailers; 

Mr. Pew. That is correct. 

Dr. LuBiN. Mr. Pew, do these jobbers handle anybody else's product 
other than your own ? 

Mr. Pew. They handle a great mdiny products. 

Dr. LuBiN. Do they handle other brands of gasoline other than 
Sunoco ? 

Mr. Pew. I don't know. I don't suppose in most cases that 
they do. . s 

Mr. Cox. Do your contracts with these jobbers in any case require 
them to handle only your product? 



7220 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. I don't know. 

Mr. Cox. Do you think you have that information with you ? 

Mr. Pew. I am told that in the main they are largely exclusive 
contracts. 

Mr. Cox. They are bound by the contracts to deal only in your 
products. That is as far as gasoline is concerned but not as far as 
lubricating oil and things of that kind are concerned. 

Mr. Pew, Petroleum products. 

Mr. Cox. But nothing else. Do they get anything else from you 
except petroleum products ? 

Mr. Pew. ^o. 

Mr. Cox. Mr. Snyder calls my attention to the fact that under 
these contracts you apparently agree not to go into the territory 
where the jobber operates, for — I quote now from the contract: 

for purposes of competition in any way that would tend to lessen the profits 
of the agent as contemplated under this agreement. 

That I take it is the usual stipulation in these jobber contracts'? 

Mr. Pew. I presume so, I don't know. 

Mr. Cox. If I suggest to you that this form of contract was given 
to us in response to the questionnaire we addressed to you, then I sup- 
pose you would accept the suggestions that it is a regular stipulation. 

In dealing with these jobbers, on what terms is the price fixed at 
which they are to receive gasoline, can you tell us, generally? It is 
in the contract. Perhaps you would like to look at paragraph 6 in 
the contract. I point out, Mr. Pew, that — 

the agents shall sell company's products at company's regular marketing prices 
as the same shall be announced from time to time by the company. 

Stopping there for a moment, you do announce marketing prices 
from time to time, I take it, which are the prices that are operative 
under this contract ? 

Mr. Pew. To these distributors. 

Mr. Cox. These distributors. How are those prices arrived at on 
your part ? 

Mr. Pew. The price is determined by the dealer price in that 
locality, and he receives an additional allowance of 1^ or 2 or 2% 
cents, depending upon the nature of the business as pertaining to that 
particular area. 

Mr. Cox. And by the dealer price, you mean the price at which 
other companies sell^ to retail dealers ? 

Mr. Pew. Quite. 

Mr. Cox. So no matter what that price is, you give your jobber 
this margin which you have been speaking of ? 

Mr. Pew. Quite. 

Mr. Cox. And as that price goes down or up, your price to the 
distributor goes down or up ? 

Mr. Pew. Quite. 

Mr. Sntder. By the dealer price, Mr. Pew, you mean the tank- 
weight price? 

Mr. Pew. The tank-wagon price. 

Dr. LuBiN. In the event that price goes down is there any guar- 
antee to the jobber that such stocks as he has on hand wjll be taken 
care of on that adjusted basis, or does he handle that risk himself? 
-^ Mr. Pew. The stocks are consigned to this distributor. 



CONCENTRATION OF ECONOMIC POWER " 7221 

^' 
Mr. Snyder. With reference to paragraph 13 in that contract, 
Mr. Pew, are the commissions on gasoline, motor oils, and other prod- 
ucts uniform with all of your commission agents or jobbers? 

Mr. Pew. The commission varies somewhat due to the character of 
the territory in which the product is sold. In the very sparsely devel- 
oped communities where the cost of doing business is greater, these 
commission men get a larger commiss.ion. 

THE SUN OIL CO. AGENCY AGREEMENT 

Mr. Cox. Is there any margin or any difference between those who 
sell only your products and those who don't, if you do sell to any at all 
who sell any other persons' products as well as your own ? Is there any 
margin like your margin in the retail end of the thing between your 
exclusive agents and those who aren't exclusive? 

Mr. Pew. I don't think we have any agreements with distributors 
who are not exclusive. 

Mr. Cox. I understand you testified that way, but I also got the 
impression a few moments ago, which may be erroneous, that you did 
on some occasion sell to jobbers or distributors who didn't handle only 
your products but not under the same kind of contractual arrangement. 

Mr. Pew. I don't know of any instance. 

Mr. Cox. In other words, all of these men deal with you on an exclu- 
sive basis. 

Mr. Pew. As far as I know. There may be some exceptions but I am 
not familiar with them if there are. 

Mr. Snyde?. Mr. Pew, this contract makes the distributor an agent 
of the Sun Oil Co. Is that correct ? 

Mr. Pew. That is a legal question that I am not prepared to answer. 

Mr. Snyder'. On the face of the contract, is he not an agent of the 
Sun Oil Co.? 

Mr. Pew. I w-ouldn't be able to answer that. 

Mr, Cox. You'll agree, won't you, that the contract says he is an 
agent? 

Mr. Pew. If it says so. . 

Mr. Snyder (reading from the Sun Oil Co. agency contract) : 

This agbeement, made this day of , by and between, the 

Sun Oil Company * * * and — , party of the second part, herein- 
after called agent. 

Mr. Pew. That seems quite clear. 

Mr. Snyder. What general instructions do you give this agent in 
regard to selling your products ? 

Mr. Pew. I can't tell you. 

Mr. Snyder. Do you supervise his activities from day to day ? 

Mr. Pew. I am afraid I will have to refer that to our sales depart- 
ment. 

Mr. Snyder. Does this agent make. reports to you from time to time 
as to how he conducts his business, to the company ? 

Mr. Pew. He makes reports and we keep in close contact with him. 

Mr. Snyder. The agent hires his employees ? 

Mr. Pew, Yes. 

Mr. Snyder. Does he conduct the station at his own expense ? 
Does he pay taxes ? 



7222 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. I think we have different arrangements. Usually he 
conducts the station at his own expense, pays all his taxes, and our 
only relationship with him is that which is set forth in the agree- 
ment. 

Mr. Snyder. I am speaking of the distributor at the bulk plant 
rather than the station. 

Mr. Pew. The distributor, yes. 

Mr. Snyder. Does he pay the social-security taxes for his em- 
ployees ? 

Mr. Pew. Yes. 

Mr. Snyder. Is he liable for damage, accident, at the bulk plant? 

Mr. Pew. I would say so ; yes. 

Mr. Snyder. In regard to credit arrangements, paragraph 11 of 
the contract reads : 

The agent shall be governed in granting credit to Company's customers by 
the credit policy of Company, and shaU make all biUs to customers in the name 
of the Company, and shall collect daily all accounts receivable due Company for 
goods sold to Company's customers and make daily deposits of the money col- 
lected for Company's account in a depository designated by Company, the 
account of said depository to be carried in Company's name and subject to 
vs^ithdraw^al by Company only. 

Does the company have a complete credit policy by which certain 
customers are granted credit? 

Mr. Pew. They have. 

Mr. Snyder. Does this agent :^rom time to time add customers for 
credit to that list? 

Mr. Pew. I don't know. 

Mr. Snyder. In other words, after reading this contract, does the 
agent distributor conduct his entire business out of the funds which 
he receives from you as commission? 

Mr. Pew. I would presume so. 

Mr. Snyder. Are these bulk plants which you turn over to him 
your property? 

Mr. Pew. I think we have in some cases turned over bulk plants to 
him and in other cases he has provided his own bulk plant ; and in 
the commission which he receives consider,ation is given to the ques- 
tion as to who has furnished the capital for the bulk plant. 

Mr. Snyder. In paragraph 24 of the same contract — 

Agent shall be specifically prohibited from incurring any indebtedness or 
assuming any liability in the name of the company or for its account without 
first having received the written consent of company to incur such indebtedness 
or liability. 

The agent hereby agrees to indemnify and save harmless company in and 
from all suits, losses, claims, liabilities, or damages which may arise out of any 
injuries to persons or property — 

and so forth. Do you consider this agent as an employee of the 
company ? 

Mr. P^w. No. That is not my advice from those who are conversant 
with the details. Personally, I have no knowledge as to why certain 
nomenclature has been used in these contracts, but I shall be very 
happy, indeed, to have our attorney, who has prepared the agree- 
ments in question, come before you gentlemen and explain any of 
these details you may desire to have elucidated. 

Dr. LuBiN. Would yoa consider ohe of these bulk-plant operators 
an independent distributor? 



CONCENTRATION OF ECONOMIC POWER 7223 

Mr. Pew. Well, I consider that he is just what he represents to be 
here, a distributor of our products. 

Dr. LuBiN. Well, in view of our discussion yesterday as to the func- 
tion of the independent and his freedom, and so forth, would you put 
him in the category of these independents you were talking about yes- 
terday ? 

Mr. Pew. Yes. 

iDr. LuBiN, Despite the fact that everything he can do is determined 
by this contract ? 

Mr. Pew. I can't agree on that. He has complete freedom of oppor- 
tunity. There is no restriction as to his gallonage, no restrictions as 
to how he shall conduct his business excepting insofar as it affects losses 
that might otherwise fall on our company. 

Mr. Cox. During the life of the contract he can't handle anyone else's 
product ? 

Mr. Pew. During the life of the contract he cannot handle other 
products. 

Mr. Cox. To that extent the freedom which you spoke of yesterday 
to pick and choose between areas of activity and other products is lim- 
ited by the contract, is it not ? 

Mr. Pew. In the case of this particular distributor. But here he has 
chosen his ground. 

Mr. Cox. Chosen to make the contract with you ? 

Mr. Pew. Yes. 

Mr. Cox. It has been suggested to me, Mr. Pew, that this contract 
might be regarded as having the effect of getting the maximum of serv- 
ice from the distributor and at the same time assuming the minimum 
of liability for his actions. Would you accept that characterization ? 

Mr. Pew. No; I wouldn't. I think all these questions relate one to 
the other, the question as to what his compensation is for the doing 
of the business, the question as to the gallonage involved, his liabilities, 
our liabilities, all of those things are interrelated. 

Mr. Cox. Well, I am not sure it would be right to regard that charac- 
terization as invidious at all, merely as a matter of business policy you 
would like to get the most service from the distributor you could, 
wouldn't you ? Wouldn't that the good business ? 

Mr. Pew. Yes; I think it would be equally good business on his 
part to do everything for the interests of our company that he could. 

Mr. Cox. And it would be equally good business on your part to 
limit your responsibility for his actions so far as you could? 

Mr. Pew. Quite, and it would be equally wise on our part to pro- 
vide conditions which would enable him to make his activity as 
profitable to him as is possible. 

SUN OIL CO.'S ACQUISITION AND PRODUCTION OF CRUDE OIL 

Mr. Cox. Now, I would like to ask you a few questions ahout your 
acquisitions of crude oil. You produce some of your own crude oil 
from your own wells, do you not ? 

Mr. Pew. Quite. 

Mr. Cox. Do you produce enough crude oil in a year that way to 
satisfy the requirements of your refineries ? 

Mr. Pew. By no means. 

Mr, Cox. So that you have to buy some crude oil from others ? 



7224 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. Yes. 

Mr. Cox. Can you tell us offhand where that crude oil is bought and 
used ? 

Mr. Pew. Most of our crude oil that we refine at our refinery in 
Philadelphia is produced in the State of Texas, something less than 
half of which comes from wells that we have drilled, and the balance 
is that which we purchase. The largest single source of our supply 
comes from the East Texas field. 

Mr. Cox. And taking that field as an example, do you own wells 
in that field also ? 

Mr. Pew. Yes. 

Mr. Cox. So that you are producing oil from your own wells and 
at the same time buying oil in the field from others '( Is that true of 
other fields in Texas as well ? 

Mr. Pew. That is true in most all of the fields. 

Mr. Cox. How do you- determine what price you are going to pay 
for crude oil which you purchase from others ? 

Mr. Pew- That is very largely a question as to our view of the 
general competitive situation. If there is more crude oil being pro- 
duced than there is a ready market for, and if as a result of that 
excess production the price of refined products becomes so low that 
it is no longer possible to operate the business without suffering heavy 
losses, we would reduce the price of crude. 

On the other hand, if the production were not excessive, if there 
was a great demand for crude oil, and if the markets as a result had 
stiffened greatly, there was an evident need for encouraging drilling, 
we would increase the price of crude oil. 

Mr. Cox. In looking at that situation do you take into account 
at all the price that is being offered for crude oil in the same field 
by other companies ? 

Mr. Pew. That has a very important bearing. 

Mr. Cox. Is there any system of price leadership so far as the 
price of crude oil is concerned ? 

Mr. Pew. I would think that that question might be answered in 
some such way as this : The company that has the largest interest in 
the field, and that is most affected by competitive conditions, is very 
apt to be the leader in any price change. 

Mr. Cox. When you say he has the largest interest, will you tell 
us just precisely what you mean by that? 

Mr. Pew. Who is running the largest amount of oil out of any 
particular area. 

But, if that particular interest failed to change a price at the time 
I thought it ought to be changed, then I would take the initiative. 

Mr. Cox. Well, suppose that interest had a price that was lower 
than you thought the price ought to be, would you change your price 
upward even though their posted price had not been changed ? 

Mr. Pew. Our company has done just that thing on several ocpa- 
sions. 

Mr. Cox. Can you give us an example of two or three occasions 
when that occurred? 

Mr. Pew. I haven't the exact dates in ray mind, but I will be glad 
to get them and furnish them to this committee.^ 

1 Mr. Pew subsequently supplied the information in a letter, dated November 22, 1939, 
which is included in the appendix on p. 7695. 



CONCENTRATION OF ECONOMIC POWER 7225 

Mr. Cox. And I suppose that certainly the converse is true, if their 
posted price is too high, there have been occasions when you have 
reduced your price below that price. 

Mr. Pew. I can't recall any such instances, but I think there have 
been, 

Mr. Cox. Were there ever circumstances in the East Texas field 
or other fields in Texas where you have posted a price but haven't 
been willing to buy any crude oil at that price or at any other price ? 

Mr. Pew, There have been two or three cases. Of course, we can't 
run all the oil in the East Texas field. 

Mr. Cox. I realize that. 

Mr. Pew. And there have been cases down there when it was diffi- 
cult for certain producers to get connections, and I know we have on 
several occasions helped out and made a lot of connections and run 
oil which we didn't require in our refining operations, and which 
we put into our tanks. 

Mr. Cox, Then there have been situations there where these prices 
have been posted, not only by your company but by other companies, 
when in fact the crude oil couldn't be sold at those prices; is that 
correct ? 

Mr, Pew. We posted the price which was paid to all of the pro- 
ducers who were connected to our lines, and from whom we were 
buying the crude. There have been one or two instances when there 
were a few new wells brought in, when it was difficult for those new 
wells to get connections ; but I think that in every case of that kind, 
within a comparatively short period, connections were made to those 
wells and their oil was run. But there have been times, two or three 
times to my knowledge, when it was difficult for certain producers 
to get connections because of the large quantities of oil that were 
coming out of the field at that moment. 

Mr. Cox. Has that been true at any time since the field has been 
subjected to proration regulation? 

Mr. Pew. My recollection is that there was a little difficulty exist- 
ing at one time last year, in '38. I would like just to make one re- 
mark on that point. One of the witnesses who is prepared to ap- 
pear before you gentlemen, Mr. DeGolyer, is intimately familiar 
with the producing conditions in that area. He is prepared tO' give 
you all of this data, 

Mr, Cox, I realize a great many of these questions relate to what 
will be covered in further testimony; and yet, because you are the 
president of an operating oil company, I think it may be interesting 
for the committee to hear what you have to say, at least in a general 
way, on a great many of these things that will be covered in more 
detail later. That is the purpose of these questions. 

Tell me this, Mr. Pew. I assume from something you said yes- 
terday that you have at least a general idea, subject to certain im- 
portant qualifications, as to the cost of producing crude oil from your 
own wells. Is that correct? 

Mr. Pew. Yes, sir. 

Mr. Cox. What is the relation between that cost and the price you 
have to pay for the crude oil you buy from others ? 

Mr. Pew. Last year we produced 13 million and some hundred 
thousand of barrels of crude at a loss. 



7226 CONCENTRATION OF ECONOMIC POWER 

Mr, Cox. Well, would it be proper for me to assume from that 
that it is cheaper for you to produce your own crude than it is to 
buy it from others, or is the converse true ? 

Mr. Pew. Some years we have had losses and some years we have 
had profits, but on the whole, as I said yesterday, if I were assured 
of a constant supply of the kind of crude I wanted over a long period 
of years, so as to keep the other activities of our organization func- 
tioning, I would prefer to buy. 

Mr. Cox. Then is it your judgment that a man who' operates a 
refinery must own his own wells if he wishes to be assured of a 
supply of crude oil? 

Mr. Pew. No; I think it largely depends on the size of his opera- 
tion. 

Mr. Cox. Well, suppose it is an integrated company, not a large 
company but a company slightly smaller than your own. 

Mr. Pew. We have .always been able to buy all of the oil that we 
required. There has always been a fear in the minds of certain 
members of our board that we might sometime run into a situation 
when we couldn't get the qualities and quantities we wanted. 

Mr. Cox. Then your policy in owning and operating wells, is, in 
a sense poased on a hypothetical fear, isn't it? 

Mr. Pew. Quite. 

Mr. Cox. But there has never been a time when you couldn't buy 
all th( crude oil you needed, is that correct? 

Mr Pew. That is certainly true of recent years ; yes. 

Mr. Cox. So you owned the wells simply to guard against the 
contingency that the supply might be curtailed for some reason; is 
that correct? 

Mr. Pew. The hope that perhaps we might improve our opera- 
tions so as to make some money out of it. 

Mr. Cox. But, by and large, the ownership and operation of these 
wells has not been a profitable part of your business. 

Mr. Pew No. 

Mr. Cox. So you think as far as the financial aspect of the situa- 
tion is concerned, you might be better off if you didn't own any wells ? 

Mr. Pew. That is my judgment. 

Mr. Cox. But nevertheless your company has owned them, and is 
it doing any additional exploration with a view to acquiring more 
oil-producing properties? 

Mr. Pew. It is. 

Mr. Cox. So that you not only own wells now, but you are spending 
money in the hope that you may acquire some more wells. 

Mr. Pew. Quite. 

Mr. Cox. And probably after you acquire them you will continue to 
lose money on those wells. 

Mr. Pew. We hope not. 

Mr. Cox. But at least you are losing money on the ones you have, and 
that hasn't discouraged you in your attempts to find more. 

Mr. Pew. No. 

Mr. Snyder. Mr. Pew, I believe the company's records for 1938 
show that you produced 13,000,000 barrels of crude oil, that you pur- 
chased 24,000,000 barrels of crude oil, and sold 11,700,000 barrels of 



CONCENTRATION OF ECONOMIC POWER 7227 

crude oil. I suppose those three operations are carried on by your 
crude-oil department — production, purchases, and sales. In the year 
1938 was your crude-oil department conducted at a profit or a loss? 

Mr. Pew. I have just testified that it was conducted at a loss. 

Mr. Snyder. You said your producing, your own producing, was 
conducted at a loss. Do you include purchases and sales of crude 
oil also? 

Mr. Pew. The crude oil wasn't sold. The crude oil was shipped to 
our refineries. 

Mr. Snyder. Your answer to the question here definitely shows 
11,000,000 sold.i 

Mr. Pew. We have production in certain areas where we don't have 
our own pipe lines, that we have to sell. That is what this 11,000,000 
barrels is. 

Mr. Snyder. When you sold ;^our 11,000,000 barrels, did you make a 
profit or a loss on that transaction ? 

Mjr. Pew. I don't think we have any figures to show. 

Dr. LuBiN. You mean to say, Mr. Pew,. you don't know whether 
you are selling something at a loss or at a profit ? 

Mr. Pew. I don't think we have very definite figures to show, be- 
cause the costs in that operation, many of them, are common to the 
costs of the other operations in our field. A large portion of all of 
our expenses are common to all of the field. Now, when we take oil 
from a certain field and sell it, we don't know what portion of that 
particular expense goes to that particular oil. We do know, or think 
we know, something as to the total expenses of the production of all 
of our oil. 

(The vice chairman assumed the Chair.) 

Dr. LuBiN. So you might be consistently losing money on the oil 
you sold and you wouldn't Imow you were doing it. 

Mr. Pew. Well, we would have a pretty good idea. We have all 
kinds of subsidiary studies on this. I haven't any such studies with 
me. I will be very happy to have such a study produced and put in 
evidence. 

Mr. Snyder. Mr. Pew, when you purchased 24,000,000 barrels of 
oil in 1938, did you purchase that at a price above or below your 
cost of production ? 

Mr. Pew. In 1938, if we lost money on the oil that we produced, 
naturally what we would purchase would be purchaseid below our 
cost of production. 

Mr. Snyder. Is that absolutely true? Then it probably was an 
average loss over the whole department. 

Mr. Pew. I think that is a fair statement. 

Mr. Cox. Would you have any opinion as to whether that would 
be true as to all the larger companies which own their own production 
as well as operate refineries? 

Mr. Pew. I must confess that my information is to the effect that 
the other companies are better operators than we are and made more 
money out of their production than we have been able to show. 



^The "question" referred to was in the Committee questionnaire sent to oil companies 
before the hearing. It appears, as "Exhibit No. 1137," in the appendix on p. 7426. 



7228 CONCENTRATION OF ECONOMIC POWER 

EFFORTS OF NONINTEGRATED INDEPENDENT TO COMPETE WITH LARGE 
INTEGRATED COMPANY 

Mr. Cox. Would it be a fair assumption in the case of those com- 
panies that the oil which they buy is acquired at a cost greater than the 
cost of production of the oil which comes from their own property ? 

Mr. Pew. I think that it is a fair assumption. 

Mr. Cox, And of course, as between a company in that position 
and a small independent refiner who has to buy all of his oil, the 
larger company has a substantial competitive advantage, hasn't it? 

Mr. Pew. No; I don't think so. It all depends on the price. If 
the price is a fair price, determined by fair methods, I would say 
not. 

Mr. Cox. But isn't it just a matter of arithmetic, Mr. Pew? If 
the larger company gets 60 percent of its oil below the posted price 
in the fiel^ and the independent has to buy all of his oil at that 
higher price, isn't it necessarily true that his cost of raw material 
must be substantially in excess of that of the larger company? 

Mr. Pew. It is true that his cost is in excess of that of the other 
company, but it isn't true that he is at a competitive disadvantage. 
And in the case of the man who has no investment in connection 
with the production of the oil, and who doesn't have any costs in 
connection with that investment, it doesn't follow that he is at a 
competitive disadvantage. 

Mr. Cox. Well, but I assume from what you said that even taking 
into account the costs of exploration and of ownership and of opera- 
tion of the wells, that nevertheless the oil that came out of those 
wells was acquired at a cost less than the posted price in the same 
field; and if that is true, your explanation which you have just 
given doesn't quite explain away the disadvantages of the smaller 
independent operator. 

Mr. Pew. I still don't agree. Assume that a small independent 
has $100,000 invested in his plant while a more integrated company 
has $100,000 invested in plant and an additional $500,000 invested in 
production. The man with the investment in both plant and pro- 
duction mi^ht be at a distinct disadvantage, even though he pro- 
duced his oil at a lower cost than the other man could buy it for; 
because if both of them are entitled to earn 6 percent on their invest- 
ment, the man who produced his oil would have to earn $30,000 
from his production in order to put himself on an equality with the 
man who had no investment in production. The man with the 
smaller investment might pay somewhat more for the oil he bought 
and still have an advantage. 

Mr. Cox. Well, but if that interest on his investment is included 
in the cost of producing crude oil from his own wells, and even with 
that included, he produced that oil at a cost less than the posted 
price, theiv, taking into account the investment, he has a competitive 
advantage, has he not? 

Mr. Pew. I think that is a highly hypothetical question. The 
same condition obtains in every business and in all conditions of trade 
the world oyer. 

Mr. Cox. I think it probably does, but I wonder if that condition 
that you say exists anywhere doesn't somewhat qualify your answer 
that you gave yesterday that the small independent refiner does not 



CONCENTRATION OF ECONOMIC POWER 7229 

suffer under any competitive disadvantage as opposed to the large 
integrated operator. I simply raised the question as to whether or 
not, by reason of size and wealth alone, the larger operator does not 
have a substantial competitive advantage. 

Mr. Pew. I shall have to reiterate my statement of yesterday to 
the effect that a small operator has many advantages over the larger 
integrated operator, for the ver^ simple reason that he can choose 
his spheres of operation; he can buy the kind of crude oil which is 
best suited to his purposes ; he can distribute those products in such 
areas as may be the most profitable for him. 

Mr. Berquist. Right there, Mr. Pew, is not the major company, 
like yourself, in position to adjust its purchases in accord with the 
advantages that you attribute to the independent refiner ? I note here 
also that in 1938— in which you said your purchased crude must have 
cost less than your produced crude — ^in that year you bought 1,800,- 
000 barrels less than you did in the year before, and if the advantage 
was on the side of purchased crude, wouldn't it have been advisable 
to cut down the quantity that you produced at a loss and increase 
the proportion that you purchased? 

Mr. Pew. The problem isn't so simple as that. This production 
comes from a great many different areaSj widely scattered. In cer- 
tain of those areas we have no transportation facilities ; certain of the 
crude can be more advantageously handled by other companies, and 
that we sell. 

Mr. Berquist. By that you mean in some areas where you produce 
you do not have transportation 2 

Mr. Pew. Yes. 

Mr. Berquist. You have to rely on other people for transportation. 

Mr. Pew. Quite right. 

Mr. Berquist. And for that reason you are at a disadvantage when 
you rely upon other people for transportation ? 

Mr. Pew. We sell that oil in the field in the customary way. 

Mr. Cox. Why do you do that? 

Mr. Pew. Well, we sell it in the field because very often we prefer 
not to run that particular oil ; that oil we would have to take deliv- 
eries on at terminals which are not convenient for us to take delivery. 
Our ships go into our own terminals, pick up this oil and carry it to 
our own refinery. These *other terminals are quite a distance away, 
and most of these quantities are very small, amount to only a few 
thousand barrels a month, so the convenient tning for us to do is just 
to sell it to the pipe-line companies located in those areas. We have 
in a few instances — in several instances — arranged with the other 
companies in such cases where large volumes, were involved to move 
the oil into their territory and we have sent our ships around to 
pick it up. 

Mr. Cox. Do you ever move any oil through pipe lines belonging 
to other companies? 

Mr. Pew. Oh, yes; quite a bit. 

Mr. Berquist. But in the instances you cited, where you do not 
have your own pipe-line facilities, you find it advantageous to sell 
rather than to ship through pipe lines owned by others? 

Mr. ^Pew. I said we did that in a great many cases because there 
were small quantities of oil involved. 



7230 CONCENTRATION OF ECONOMIC POWER 

Mr. Ballinger. How long has your company, Mr, Pew, been an 
integrated company? 

Mr. Pew. I tried to point out to you gentlemen yesterday that that 
was something that we just discovered a few years ago when some- 
body accused us of the fact. 

Mr. Ballinger. Well, wasn't there a period in the history of your 
company when — ^I want to ask you whether you personally were 
not, or whether officials of the company were not rather critical of 
the majors, the so-called integrated companies? 

Mr. Pew. Oh, I can remember back in 1911 when we were very 
critical. That was before the dissolution of the old Standard Oil 
Co. trust. 

Mr. Ballinger. Well, that represented the height of integration, 
didn't it? • 

Mr. Pew. No. That didn't represent integration at all; because 
that company was engaged almost exclusively in the transportation 
and refining of petroleum. They were almost not at all engaged in 
either production or in marketing. 

Mr. Ballinger. But since the dissolution you have never been 
critical of the so-called integrated companies? 

Mr. Pew. I think that I have never been critical of the so-called 
integrated companies after the dissolution of the Standard Oil Co. 
and the setting up of the independent organizations. 

The Vice Chairman. Mr. Pew, how does it come about if it is 
more profitable to operate as an independent concern, a small busi- 
ness, that integration progresses? It seems a good businessman 
wouldn't go in the direction of smaller profits. 

Mr. Pew. Before you close 

The Vice Chairman (interposing). I withdraw the question if 
you have discussed it. 

Mr. Pew. Before you close your mind on that I want you to get 
a little information on that point which will be submitted by others. 
It is a statistical question ; the boys ^ have the statistics. I don't 
have them in front of me. In fact, I understand the trend is in 
exactly the opposite direction. 

The Vice Chairman. I don't know about oil, but I used to be a 
pretty good horse trader; and I never traded a horse for one that 
wasn't better. Why should an independent go into the integration 
when that brings him less profit relatively? I can't figure it out. 

Mr. Pew. Well, the independent starts in business in a small way. 
In a small way he can be an opportunist. He can take advantage 
of certain special conditions, which he does, and he finds it profitable. 

The Vice Chairman. But why does a person who is trying to make 
money out of his business change his form of business from one 
that is of higher profit to integration, where he gets less? That is 
just a concrete proposition you can lay right on the table. Why does 
he do it? *. . 

Mr. Pew. There are only limited opportunities for that kind of 
thing, A man goes into the oil industry and he takes advantage of 
certain special conditions which he finds to be profitable. His busi- 
ness grows. Then he finds that he no longer can engage in these 
small undertakings. Sis business has gotten too large tor it. He 

* Refers to economists for American Petroleum Institute. 



CONCENTRATION OF ECONOMIC POWER 7231 

has to develop something permanent. The first thing he knows he 
has started into integration himself. That is the way all these 
corporations have grown. 

The Vice Chairman. I understand that answer. Then why is it 
that the big concerns are not destroyed by the combined attack of 
small people who are making more money, relatively, out of their 
business ? 

Mr. Pew. There is a business balance arrived at. There is only 
an opportunity for a certain number of these activities. A man can 
be an opportunist only when certain opportunities are available. 
There comes a time when the cream is all gone; after that he has 
to integrate. 

The Vice Chairman. You mean the little company can make it, 
but there aren't so many places for the little man ? 

Mr. Pew. I mean that there is a limit beyond which the opportu- 
nist can't go. He has to get into integriition eventually. I think if 
you will go back and take the history of the development of most of 
the large companies today, they started in a small way. 

The Vice Chairman. Then integrated, but they are going in the 
direction of smaller profits, and that is what I don't understand. I 
wouldn't do it as a horse trader ; you might do it as an oil man. 

Mr. Pew. Well, I think perhaps I haven't made myself clear. 
There are certain opportunities for the small independent operator; 
he can go into a certain oil field and he can buy certain small quanti- 
ties of oil that are being produced there that are more useful to him 
in his particular line of work. He can go out and sell those products 
under most advantageous conditions because he can choose his 
territory. 

Now there is a limit to the kind of thing that he can do in that 
direction. If he wants to continue to be an l)pportunist he is very 
apt to go along and continue to make very large profits, but usually 
he determines after a few years that he doesn't want to be an op- 
portunist; he wants to have something substantial and he wants 

to be 

■V The Vice Chairman (interposing). May I interrupt you?. Why 
isn't his business substantial if he is making more money than he is 
making in integration ? 

Mr. Pew. Because he is not quite sure whether he can continue 
doing those things. 

The Vice Chairman. Why can't he continue if he is making a, lot 
of money? 

Mr. Pew. Well, he may not be able to do the same trick next year, 
or he may have to go out into some other direction, so the natural 
thing for him to do with his money is to develop along integrated 
lines. 

The Vice Chairman. Does he continue to make more money in 
that small operation until he goes broke, and then he has to quit? 
Is that the idea? 

Mr. Pew. Well, if I may develop that a little further. I very defi- 
nitely believe that there is in every corporation the seeds of destruc- 
tion, and that inevitably when a corporation gets too large it is 
going to go broke. I don't believe it is possible for a company to 
continue growing indefinitely. 

124491—40 — pt. 14, sec. 1 10 



7232 CONCENTRATION OF ECONOMIC POWER 

The Vice Chairman. It seems to me — if I may be pardoned— 
that the little man does have his opportunities as long as there are 
fields that he can select that represent what you call the cream of 
the business; it seems inevitable of course that there must be bigger 
activities that he can engage in, but is this little man in practice 
disturbed by an attack by the big concerns ? We hear much of that. 
Suppose he goes out and tries to get some cream. We hear the com- 
plaint that as soon as it is discovered that there is cream there, 
there are other people, bigger people, who are cream hungry and 
they come in and choke him off from his cream. I mean, we are 
just discussing now about what we have to find out about it. 

Mr. Pew. Well, I think, Congressman, that there are certain fac- 
tors of human nature that enter into this picture. I have never 
known a man who failed in any activity that didn't blame some 
other thing or some other person for his troubles. That applies 
to indivfduals who have entered into a business of their own; it 
applies to individuals who are employees of corporations. I have 
yet to find a man who is willing to admit 

The Vice Chairman (interposing). We agree with that proposi- 
tion. 

Mr. Pew. Now, you can get thousands of those men to come before 
you and testify against this industry ; you can get' thousands of such 
men to testify against any industry. 

economic problems to be solved 

The Vice Chairman. We agree with the general proposition. The 
fellow that goes broke wants to blame somebody else for it ; that is 
natural. We don't need to put much in the record about it; we 
agree with that. What we really are charged with here,' as I see it, 
is to find out, first, whether or not monopolistic conditions, obtain 
in the oil industry ; what chance the independent has, and if monopo- 
listic conditions do obtain in the oil industry, what practices have 
brought that condition about; what can be done about it. And then 
I think probably in the American mind, at least in some quarters, 
the question is whether monopoly is good or not; a controlled 
monopoly that is involved in this study, as I see it. It is very diffi- 
cult for people situated as we are to understand the details and 
sometimes it is difficult to be able to follow the testimony of people 
who know so much more about it than we do that we get all con- 
fused in a maze of big words, and technical terms, you know. 

I mean, we are limited. We can't follow all this business, and if 
we just get this proposition out on the top of the table ; and if you 
help us who are less fortunate in opportunities to understand it, I 
believe it would be helpful to us. We appreciate any contribution 
you gentlemen make in helping us to get digestible information for 
ourselves. You see this record gets so big that nobody will read it 
unless he is some professor, and he will use more words to explain it 
than there were in the original record. 

Mr. Pew. Then, Mr. Chairman, Inay I make a suggestion which I 
think would be most helpful. I think if this committee would under- 
take a study over the past several years in order to determine the 
number of independent operators who have gone into the oil industry, 
the number who have succeeded and the number who have largely 



CONCENTRATION OF ECONOMIC POWER 7233 

developed their business in the last few years, it seems to me that 
would be the proof as to whether or not there was an opportunity for 
the small independent. 

The Vice Chairman. That is at least one very good test. I think 
everybody could make that. 

Mr. Ballinger. Mr. Pew, going back to the old Standard Oil 
trust, wasn't that trust in the business of producing crude oil ? 

Mr. Pew. No ; only perhaps in a very minor way. 

Mr. Ballinger. When the petition of the U. S. Government in the 
lower court alleged they produced 30 percent of the crude oil in the 
United States? 

Mr. Pew. That wasn't my understanding. 

Mr. Ballinger. Wasn't it in the business of refining oil ? 

Mr. Pew. Refining and transporting. 

Mr. Ballinger. Transporting and also in the business of selling? 

Mr. Pew. Not in a substantial way. 

Mr. Ballinger. Well, the petition alleged they were very substan- 
tially in the business of selling. Now if the facts which the Govern- 
ment submitted, and which apparently impressed the court, are true, 
how do you say that company isn't integrated ? 

What is the difference between that company and your company? 

Mr. Pew. Well, I must confess that the statement they were pro- 
ducing 30 percent of the crude oil in this country was not my under- 
standing. 

Mr. Ballinger. Well, if that were true, then, that company did 
represent the height of integration; it was integrated power that 
really caused you a lot of trouble and caused a lot of oil interests a 
lot of trouble? 

PIPE LINE transportation, RATES OF RETURN ANH THE ECONOMIC RESULTS 

Mr. Pew. I don't think it was their integration that caused us 
trouble, no; I think it was their control over transportation. Not 
only the transportation by pipe line but the transportation by rail- 
road. I don't think it is well understood 

Th^ Vice Chairman (interposing). You think they are supposed 
to have gotten rebates? 

Mr. Pew. They not only got rebates on the material that they 
shipped, but they got drawbacks on the material that we shipped, so 
there was no competition — it just couldn't develop. 

Mr. Ballinger. Then the present condition is that you own the 
pipe line but when somebody ships over the pipe line they are really 
paying you to fight them at thp other end, aren't they ? They are 
contributing to your war funds. 

Mr. Pew. No. That all depends on whether the rates of the pipe 
line are reasonable. 

Mr. Ballinger. Well, assuming that they are reasonable, they are 
still subsidizing you, aren't they? 

Mr. Pew. No ; I wouldn't say so. 

Mr. Ballinger. Why not ? If I am a. shipper here and I am an 
independent and you own the pipe line and you have got the profits 
from the pipe line which you can transfer to the refining front or the 
selling front, every time I ship over your line I am contributing busi- 
ness to you to fight me. 



7234 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. You forget, sir; that we have a big investment in that 
pipe line. , 

Mr. BAiiLiNGER. Granted. I grant that. I still say that, if I am an 
independent, I am at a handicap. 

Mr. Pew. I don't think so, not after giving consideration to tliat 
investment. No more are you handicapped than if I had that money 
invested in some entirely unrelated business, I would still have that 
money to fight a certain competitor, if you choose to characterize it 
in that way. 

Mr. Ballinger. Not if you didn't own the pipe line, you wouldn't 
have that money. 

Mr. Pew. If I had that money invested in some other activity 1 
certainly would have the income from it to do what I pleased with. 

Mr. Ballinger. . Well, that enters a whole problem in another field, 
the funds from that being used on one competitive front. 

Mr. Pew. It seems to me, if I may so submit, that the whole 
problem here is one having to do with the reasonableness of the 
rates. 

Mr. Ballinger. The rates haven't been reasonable? 

Mr. Pew. I think that that whole question has got to be studied 
in each particular case. There are many pipe lines that are losing 
money, some that are entirely shut down. Generally speaking, how- 
ever, proration has lengthened out the life of oil properties. There- 
fore, pipe lines can be used for a longer period of time. That has 
had the effect of reducing the cost of moving oil by pipe line. As a 
result of that condition there have been in the last few years very 
substantial reductions in those rates. Now, I agree with you that 
the pipe-line rates must be reasonable. The responsibility in that con- 
nection rests with the Interstate Commerce Commission. As far as 
my own company is concerned, I think it is perfectly absurd to estab- 
lish an unreasonable pipe-line rate because it is the total costs of all 
of our operations which have to do with our profits and our sales 
policies. Why should we set up a fictitious profit on our pipe-line 
operations? My own feeling is that we must keep the pipe-line 
rates reasonable and we must look to the Interstate Commerce Com- 
mission to see that those rates are reasonable. 

Mr. Ballinger, Well, you have raised a theory of competition here 
which I would like to get before the committee. I just want to put 
the illustration because it is analogous to this situation we are de- 
scribing. If you are in the grocery business and you also own an 
undertaking establishment and a theater and a fleet of ships and 
you take the profits from those other businesses and route them on 
the grocery front, you may win the battle but it isn't because of your 
efficiency as a grocer; it is because you are calling in other allies and 
other sourc6s, so that your efficiency there on the grocery front is 
not determined, as I say, by your efficiency as a groceryman. In 
this integrated movement you are calling on profits from other busi- 
nesses, you have got them available to route on the competitive front 
where you sell the gas and oil, and it looks to me like the independent 
hasn't got much chance when you call in three or four other guys 
to help you. 

Mr. Pew. You may be thinking way ahead of me, sir, but I con- 
fess I can't see the difference. If I own a pipe line and I charge a 
reasonable rate for the use of that line and obtain a reasonable earn- 



CONCENTRATION OF ECONOMIC POWER 7235 

ing as a result of obtaining that rate, there accrues to me a certain 
profit. Let's say that accrues in dollars, and I can see no difference 
as between the obtaining of an earning in that manner as compared 
with having invested that money in some entirely unrelated business 
and obtaining the same return on the investment. I can use that 
money in either case for any purpose I wish. You are an economist, 
I am a layman. I just can't see that. 

Dr. LuBiN. Isn't the difficulty really in the definition of the words 
"fair and reasonable"? If the rate fixed by the Interstate Commerce 
Commission were fair and reasonable, it would cost you just as much 
to ship your oil over that line as it would me as an independent. 
That is really the crux of the matter. A fair and reasonable rate 
is one that would cost you just as much as anybody else. 

Mr. Pew. I am sorry, but I just don't get your question. 

Dr. LuBiN. In other words, a fair and reasonable rate for a com- 
mon carrier is a rate which means that the actual cost of transport- 
ing a thousand barrels for a given mileage would be the same for 
everybody ; namely, I would pay it in traffic rates to you as an owner, 
but if you were shipping your oAvn oil the actual cost to you of 
shipping, the overhead and other things, depreciation, and so forth, 
would be just about what it would have cost me as an independent 
to ship over your line. 

Mr. Pew. If you were both independents. 

Dr. LuBiN. If you were the owner, the rate that you would be 
permitted to charge and the net cost to you would be about identical 
after you took into consideration depreciation, investment, return on 
your investment, and what the Interstate Commerce Commission set 
as a reasonable return on your investment. 

Mr. Pew. Oh, yes ; if you add to the cost a reasonable return on the 
investment, very definitely the cost to both of us would be the same. 

Dr. LuBiN. It should be the samei if the rate was reasonable. 

Mr. Pew. Yes. 

Dr. LuBiN. That is really the crux of the problem. 

Mr. Pew. What is a reasonable rate. 

Dr. LuBiN. Exactly. 

Mr. Pew. If you and I can agree on what a reasonable rate is — 
you are tlie shipper and I am the owner of the line — then our problem 
is solved. 

Dr. LuBiN. That is true. I am perfectly willing to admit that the 
rates must be reasonable. 

Mr. Berge. Isn't a larger question posed here than merely the ques- 
tion of whether the rate that the shipper pays is in itself fair ? I think 
we can assume that it is if it is regulated, but isn't the question rather 
whether a set-up is fair which requires that a shipper pay even a 
reasonable rate to his competitor? Isn't there a broad question of 
whether that advantage is not so great as to be unfair and give him 
an advantage over the man from whom he must collect ? Wasn't the 
commodities clause in regard to railroads based on the theory that a 
manufacturer of commodities ought not to have the advantages of 
ownership of transportation facilities and be able to collect, from 
others for whom he may haul, a profit ? It seems to me that we con- 
cede that for these purposes everything you may be doing may be 
legal, and as the law now stands the rates you collect may be fair, but 



7236 CONCENTRATION OF ECONOMIC POWER 

that you are enjoying an advantage which the commodities clause 
denied to railroads under that act. 

Mr. Pew. No; I think the two cases are not comparable. In the 
first place, the Interstate Commerce Commission was created for the 
purpose of correcting an abuse which had been practiced by the rail- 
roads. They were abusing a privilege which they had formerly en- 
joyed. No one has claimed, or at least I have never heard anybody 
express the view that the pipe-line companies in this country have 
abused their privilege. 

Mr. Berge. Do you base that upon the fact that the rates of the 
pipe-line are regulated ? I mean you constantly refer to the fact that 
the rates must be fair because they are fixed by the Interstate Com- 
merce Commission and we can assume that those are fair rates and if 
you observe them they are not in themselves unreasonable, but I don't 
see that your argument extends beyond that. 

Mr. Pew. The fact that there have been only two complaints filed 
with the Interstate Commerce Commission on the rate structure seems 
to have some bearing on that situation. 

Mr. Berge. It may have bearing as to whether the rates are reason- 
able and I am conceding for this purpose that the rates are reasonable, 
but you surely are aware that there are numerous complaints from 
substantial groups throughout the country that come to various Gov- 
ernment agencies and surely must have reached the oil companies that 
the whole system of having pipe-lines owned by integrated companies 
is unfair to the independents. Now, it seems to me that the theory 
you enunciate is squarely contrary to what the Supreme Court stated 
to be the purpose of the commodity clause, and I am suggesting here 
that the law does not treat railroads and oil pipe-lines the same in 
this respect. In regard to the commodities clause, I am just going 
to read one paragraph here from Mr. Justice Lamar's opinion in the 
Delaware and, Lacka/wammxi case, 238 U. S., in which he said that — 

The commodity clause of the Hepburn Act was intended to prevent railroads 
occupying the dual and inconsisteat positions of public carrier and private ship- 
per, in order to separate the business of transportation from the business of 
selling. That statute made it unlawful for railroads to transport in interstate 
commerce any coal in which the company had any interest direct or indirect. 

I must confess that I don't see the distinction. 

Mr. Pew. Well, there is a very real distinction, and that distinction 
has been held by the Supreme Court. I shouldn't comment on some- 
thing with which I am not very conversant, but as I recall it, there 
was a case handed down by the Supreme Court in connection with 
the United States Steel- Co. in which they held that an industry 
owning its own transportation facilities was quite a different proposi- 
tion from that of a transportation agency owning its own industries. 
And in the case of the United States Steel Co., they held that it was 
entirely right and proper for the United States Steel Co. to own their 
own railroad.^ 

Mr. Berquist. Mr. Berge, your inquiry was directed along the 
economic lines, was it not; and its economic implications? 

Mr. Beege. L am not questioning that there are distinctions in the 
law which make it applicable in some situations and not in others. 
The fact that the commodity clause may not have covered one situa- 



1 Testimony on the "Iron and Steel Industry" appears in Hearings, Parts IS, 19, 20, 26, 
and 27. 



CONCENTRATION OF ECONOMIC POWER 7237 

tion where it did cover the other doesn't seem to cover the question. 
In this case which I read, they state the purpose of the act as being 
to prevent the raih-oad from occupying the position of public carrier 
and private shipper. From the economic standpoint I can't see the 
distinction, aUhough of course the commodity clause is very restricted 
in application and we are not pretending it has adequately solved 
the situation, even in the railroad field. 

Mr. Pew. Of course, I pointed out yesterday, too, that the actual 
cost of these pipe lines is a very small element in the entire picture 
of the oil industry. I pointed out that out of a total investment of 
some $8,000,000,000 in the industry, only 500 millions of that had to 
do with pipe lines. 

Now I may also say that in a great many instances, perhaps the 
majority of instances, any shipper desiring to use a pipe line can ar- 
range to buy a proportionate interest in that line. I know that that 
condition obtains in a great many areas. 

The prime purpose of pipe lines is that they be used as a plant 
facility, a part of our assembly line in a mass-production industry. 

Mr. Berquist. May I call the committee's attention to Table O and 
Chart XIV of "Exhibit No. 1139,"^ which throw light upon the 
investment and earnings and rate of return of pipe-line companies. 
I think Mr. Berge's point was that with high earnings in the pipe- 
line field, that they could be utilized in other branches. 

Now, referring to that tabulation which is made from the figures 
of the I. C. C, and verifiable, we find that on a depreciated basis the 
earnings were 28.4 percent; on the nondepreciated basis the figure is 
something like 14 percent, which is considerably higher than that for 
the industry as a whole, so obviously it is contributing to the average 
of the income by pulling it upward. 

Also, may I point out further that the operating income of 15 major 
companies, their net operating income for 1938 was $82,000,000. Of 
other major companies not included in that 15, it was $10,000,000 — the 
sum total of those two about $93,000,000. 

Now, contrasting that with the income derived by the nonmajof 
gi'oup, we find that the nonmajor group income was but ^2,000,000, 
and that of the aggregate income the percentages are : For the 15 major 
companies, 86, 4 percent of the total net income; of the o£her major 
companies not included in that list, 11 percent; and for the nonmajor 
companies the income derived for them was but 2.3 percent. 

So obviously if the earnings in that department were much higher 
than was shown by Mr. Gill for the industry as a whole, the income 
from the pipe-line industry has contributed millions of dollars to their 
net income and at a rate higher than for the industry as a whole, 
whereas for the independents in the industry, their income derived 
from pipe-line operations is but 2.3 percent. So they can have a very 
little bit of contribution from this most highly profitable branch of the 
industry. 

Mr. Pew. Now, Mr. Berquist, I assume that you have made that 
statement for the purpose of indicating to the committee that these 
earnings were unreasonable. 

Mr. Berquist. No; I haven't said that at all. I have said merely 
that tlie major companies have the lion's share of the pipe-line branch 

^ Th« table and chart appear in Part 14-A, pp. 7730 and 7?2'5, respectively. 



7238 CONCENTRATION OF ECONOMIC POWER 

of the business, and that that branch of the industry is by far the most 
profitable branch of the industry, and, as the result of that, they are in 
a strategic position on all competitive fronts because of the additional 
earnings which they derive from pipe lines. 

Mr. Pew. Isn't that the same thing, then, as saying 

Mr. Berquist (interposing). That there is a lot of advantage in 
having pipe lines. 

Mr, Pew. Isn't that the same thing as saying their earnings are 
unreasonable ? 

Mr. Berquist. I haven't said that. 

The Vice Chairman. Gentlemen, this notion presents itself to my 
mind, and I hesitate to ask for information or suggestion because it is 
impossible for me to be present all the time, but if some light has not 
already been thrown into the record, it seems to me that now perhaps, 
or soon, would be a good time to develop this notion and see what we 
think of it. 

In the first place, it seems to me that there is a substantial dif- 
ference between a railroad and a pipe line insofar as attracting 
individual capital where you build the railroad expecting to get 
freight. A railroad is generally put into a country where there i« 
a dependable source of traffic — and it is supposed to be rather profit- 
able — and then it can haul a lot of different commodities. 

I don^ know whether there have been any pipe lines built into terri- 
tories by anybody except somebody who is producing oil; I don't 
know whether or not anyone else will build them. If nobody will 
build a pipe line except somebody who is producing oilj unless the 
Government is going to do it, you have to attract capital to that 
construction, and you have got a limited terirtory to which to 
appeal, and that would seem to be the producers of oil. 

This is merely for development. I appreciate that it is an im- 
portant thing in considering the divorcing of pipe-line ownership 
from oil-producing ownership, or oil-refining ownership, to think 
who is going to build the pipe lines. Maybe there is an answer to 
that. If there isn't an answer to it, I don't see any route to ^o 
except to get these producers to do it, or the Government to do it. 
I haven't thought the thing through, but it seems to me some light 
ought to be thrown on that aspect of the matter if it hasn't already 
been done. 

Mr. Cox. Another witness who is going to testify is going to 
cover some aspects of that, particularly as to the possibility of 
attracting capital. 

The Vice Chairman. What I am anxious to do is to have this 
investigation proceed on lines — this is not said in the spirit of 
criticism — that will give some practical assistance to those respon- 
sible, as. distinguished from academic discussion of these important 
questions. In other words, we want usable information. I don't 
know whether my colleagues will agree with me or not, but I believe 
they will ; and we would like to see what can be developed. 

Representative Reece. I was about to make inquiry as to whether 
any pip^ lines had been built by other than producers ? 

Mr. Pew. I only know of one line that was built for the purpose 
of attracting business from people other than those who invested 
their money in the line, and as far as I can find out, there never 
was a barrel of oil put through that line. 



CONCENTKATION OF ECONOMIC POWER 7239 

The Vice Chairman. Was that because the territory was occu- 
pied by integrated companies? Were there any considerable num- 
ber of independents operating in that territory who do have access 
to that line? 

Mr. Pew. It was done a good many years ago and I ju^t never 
have been able to get the full detailed story of it. It was run, 1 
think, from a point in Louisiana out to the Mississippi River, and I 
think after they tried for a number of years to get somebody to put 
the oil through it, they used it for gas, but my information is very 
incomplete. But I think, sir, that very definitely the thing that 
makes a line possible is that the builder has an assured supply at 
one end and a definite outlet at the other. Now these profits that 
we talk about are possible only when your line is full, or almost 
full. When that line gets reduced in capacity to a point where 
it is only pumping 70 or 80 percent of the oil for which it was 
designed, profits just disappear. And so the first requirement it 
seems to me that should be in the mind of any man who builds a 
pipe line is that he is going to have an assured supply of oil and an 
assured outlet for it. Naturally, the large refining companies and the 
large producing companies are the ones who can best assure the 
continued use of the line. 

Mr. Balltnger. Let's approach it from perhaps a little different 
angle. Let's consider the possibilities of leaving pipe lines in the 
hands of the oil companies. If that were done, would you be willing 
to do the following things? First, would you be willing to have 
a Government agency make those pipe lines available to independ- 
ent producers or oil on equal terms with the other companies or 
with the other majors ? If they want to ship oil over it and they have 
the facilities to ship it, do they have the right to ship it ? 

Mr. Pew. Very definitely: They already have that right. 

Mr. Baulinger. Now we come down to the other problem, namely, 
that when they ship over the line they do, in effect, subsidize you. 
That is one of the underlying motives of the Hepburn Act. If that is 
true, let's say the profit made from the pipe lines shall not be used 
in the refining end of the business, and shall not be used in the market- 
ing-jend of the business! You make those profits and declare them as 
dividends and wipe them out ; you couldn't route them to another end 
of the business. 

Mr, Pew. I can't answer that question intelligently because I can't 
agree on your premise, 

Mr. Ballinger. Well, the situation in respect to the coal companies 
seems to me almost identical with the little producer of oil. What 
chance does the little independent producer of coal in Pennsylvania 
have against a railroad that owns coal mines and can carry their coal 
for nothing, or charge him excessive prices for carrying it which 
constitutes a differential in the competitive struggle that he just 
couldn't overcome. It is the same situation in oil, with certain varia- 
tions which the vice chairman indicated. 

Mr. Pew, The Interstate Commerce Commission never would have 
been created for the purpose of regulating the railroads if they hadn't 
been guilty of abuse of a privilege. Now, the Interstate Commerce 
Commission already is in existence and has jurisdiction over the rates 
and the activities of these pipe lines, and it seems to me, sir, that this 
discussion is very academic, if I may take that privilege, because after 



7240 CONCENTRATION OF ECONOMIC POWER 

all, the sole responsibility of adjusting this whole question lies at the 
door of the Interstate Commerce Commission. 

Mr. Ballingee. To settle the problem I am talking about, we need 
more legislation. I mean, with the present set-up in the Interstate 
Commerce Commission we can't reach the things I am talking about. 
They have no way of prohibiting the oil companies from putting the 
profits from the pipe lines over into the marketing end of the business. 
And with due respect to the Interstate Commerce Commission, for 
which I have great regard, I don't think they have ever had enough 
money to really go into this thing, to really vigorously regulate pipe 
lines. 

Mr. Pew. They are making a very comprehensive study now which 
I understand will be completed shortly. I am very much interested, 
though, in your psychology as to the taking of the money from one 
activity of the business and putting it into another activity. In an 
integrated company, sir, it is very difficult to determine accurately 
what your profits are in any particular activity. It is the sum total 
of those activities which produce your cost figure, and from that the 
earnings are computed by taking the total amount of money received 
from the sale of all your products and deducting the total cost. 

Now, you seem to have the feeling that because a man owns a pipe 
line, and perhaps makes a fair return on that pipe line, that he takes 
that money and uses it to destroy somebody else in some other depart- 
ment of the business. 

Now, I say to you that if that man had that same money invested in 
some other activity, the income from that would be equally available, 
if he chose to use it for destroying somebody else.' But I haven't found 
in this oil industry, during the last 25 years certainly, any evidence 
on the part of any of these so-called integrated companies to the effect 
that they were out to destroy anyone. 

Mr. Ballingee. Well, of course, I wouldn't agree with your prepiise 
that a corporation engaged in one business should he permitted to 
promiscuously go around and invest anywhere it wants to ; I think it 
ought to stay in that business, and as it makes its money it ought to 
declare its dividends. I am against this extension of control from 
one business to another and this promiscuity of investment that has 
been raised in the Borah-O'Mahoney bill ; it is a problem that has to 
be gone into, but it would constitute a form of discrimination, I think, 
when we analyze it to the very bottom. 

Mr. Pew. Which would? 

Mr. Ballinger. Investing around — getting dividends from other 
business; why not stick to the business you are in and as you make 
your money in that declare dividends ? 

Mr. Pew. Now, you just made the remark you thought perhaps 
there ought to be a disintegration of the pipe lines.-"^ Tliat would be 
throwing us out of the very business that we have spent our lives in 
developing. 

Mr. Ballinger. Now, I haven't got the final opinion on what to do 
with this thing; I am certainly not advancing any, but I am saying 
we are trying to get at the evils of this thing. Now, if you want to 
keep those pipe lines, something ought to be done about it, from my 
standpoint. I don't think you ought to use the profits — you say you 
can't compute them, but I am sure &ey are there, and they are avail- 



CONCENTRATION OF ECONOMIC POWER 7241 

able to you. They may be a lump sum or a pot you are putting it 
into, but it constitutes sinews of war in the last analysis. 

Mr. Pew. On the contrary, it is my opinion that we never got those 
profits. 

Mr. Ballinger. Who gets them ? 

Mr. Pew. I think they very largely disappear. 

Mr. Ballinger. With these earnings? 

Mr. Pew. Quite. 

Mr. Ballinger. That is something new; I can't understand how 
you can do that, if you make the money. 

Mr. Pew. Suppose we double the rates on our pipe linesl In order 
to increase our profits by an amount equal to the increased earnings 
that would obtain from the operation of the line, we would have to 
add a price to the sale of our products of oil equal to that figure. 
Now, you have to assume that the markets throughout the country 
would go up by an amount equal to the increase in the amount of 
money obtained from the increase in those pipe-line rates. I say. to 
you that if the pipe-line rates went up tomorrow until they were 
doubled that the price of gasoline wouldn't go up a tenth of a cent. 

Mr. Ballinger. Why? 

Mr. Pew. Because the competitive forces throughout this country 
would never sustain such a condition. 

Mr. Cox. You do save money, though, on each gallonTof your 
product that you sell by reason of your Jnighly developed transporta- 
tion system, don't you? Your company itself? 

Mr. Pew. Very definitely; yes. 

Mr. Cox. I was under the impression that sometime in the fall 
of last year you made a public statement to the effect that you saved 
approximately 10 cents a gallon on every gallon of gasoline you sold 
by reason of the ownership of your transportation. 

Mr. Pew. I don't remember whether that was the figure but I 
have frequently made statements of that character that as a result of 
the correlation of all of the transportation facilities which the oil 
industry uses, and which they have themselves developed, we have 
effected a saving in costs, all of which has been passed over to the 
consumer by way of lower prices of, I have forgotten whether the 
figure was 7 or 10 cents a gallon. 

gasoline prices 

Representative Reece. We now seem to be touching upon the ques- 
tion of price, which is a phase of this study which probably holds the 
greatest interest to the large group of consumers. At sometime I 
would be interested in having you tell us how you arrive at prices. 

Mr. Pew. You refer to how we arrive, for instance, at the cost of 
a gallon of gasoline? 

Representative Reece. Yes, sir. 

Mr. Pew. Well, that is a difficult question, but I will attempt to 
answer it. 

Representative Reece. Well, I have in mind rather how you arrive 
in a general way at the price at which gasoline is sold to the dis- 
tributors. 

Mr. Pew. Well, gasoMne prices are determined by consumer de- 
mand and prodiicers' competition. There are a great many com- 



7242 CONCENTRATION OF ECONOMIC POWER 

petitive forces which have to do with the determination of price. 
If, as a result of unusual competition in a given area, we feel that 
the price should be reduced, we bring about such a reduction. 

Representative Reece. How? 

Mr. Pew. By publishing a lower price; we simply publish a lower 
price on our tank wagon of gasoline, or gasoline. If, on the other 
hand, the demand seems to be increasing over the supply, we will 
perhaps try out an increase. 

But all prices are largely a question of trial and error. We some- 
times put our price up, but if the other sellers don't put their prices 
up, then we have to retire as quickly as possible and bring our price 
down. If, on the contrary, we reduce our price, it compels all of 
the other marketing companies to reduce their price. 

Mr. Berge. What factors cause you to reduce your prices? 

Mr. Pew. If we find that there is a lot of cutting of prices in the 
community, that we are losing business because other people are 
surreptitiously cutting their prices, we will make a reduction in our 
price. 

Mr. Beege. Would you ever cut prices first? 

Mr. Pew. In the area in which we do business I think we have 
made the largest number of price cuts of any of the companies. 

Mr. Berge. I was wondering what factors other than the price 
cutting of the other fellows caused you to cut them, so I was interested 
in whether you led off. 

Mr. Pew. We have led off a great many times. 

Mr. Berge. What factors caused you to lead off? 

Mr. Pew. The instability of market conditions, the loss of business 
to others who were undercutting ours. 

Dr. LuBiN. Then the other fellow did cut first. 

Mr. Berge. That is not answering the question. I wanted to know 
what factors caused you to take the lead in price cuts. If price cuts 
are always dependent on the other fellow, then we have to get him in 
and find out why he did it, but I thought if you ever led off in the price 
cut you could tell us what caused you to do it. 

Mr. Pew. We have led off in price cuts where we were perhaps under 
all other sellers in the market simply because we felt that the best 
interests of the market would be served by a lower price. Our profits 
were perhaps larger than we thought they should be and we felt that 
a lower price would stimulate more business and we simply reduced 
the price. 

Mr. Berge. How could you tell whether your profits were larger? 
There must be some ultimate standard of judgment that you apply. 
Let's forget about the price cutting of the other fellow and find out 
what mental process leads you to cut when he doesn't cut. You men- 
tioned instability of market conditions, which, to my mind, simply 
suggested again some price cutting from the other side. Let's forget 
about price cutting. You say you think your profits in some instances 
might be too big. How can you determine that if you don't know what 
your costs are? 

Mr. Pew. We do know what our total costs are. We know what the 
total costs of all of the operations of our business are. We know 
what we are receiving for every penny. We take the return, the total 
amount of money which we receive for all of our products, and deduct 
that from the total operating costs of our business, including that of 



CONCENTRATION OF ECONOMIC POWER 7243 

crude oil, transportation, and so forth, and the result, of course, is 
our profit or loss. From that we determine what our price structure 
should be in the event we want to make a cut. 

Mr. Berge. Now, then, what you are doing is, in a rough, nontech- 
nical way, deciding whether you are earning a fair return on your 
investment as a whole, something comparable to what is done in public 
utilities. Well, then, if you decide that you are earning more than a 
fair return on your total business, if you decide to make a cut, would 
you make that cut Nation-wide ? If you did not make it on all of 
your business, what basis would there be for determining where you 
would make it? 

Mr. Pew. Well, the conditions in each particular territory would 
have to be very carefully studied and understood. 

Mr. Berge. Does that mean anything more than what the other 
fellow is doing? 

Mr, Pew. I wouldn't think so. 

Mr. Berge. Then it finally comes down to thisj doesn't it : That you 
only make price cuts where somebody else is making them ? 

Mr. Pew. I don'J get your point. I told you that we have made 
price cuts before any other cutting was done. 

Mr. Cox. You make the price cuts sometimes, don't you, Mr. Pew, to 
increase your gallonage ? 

Mr. Pew. Oh, yes. 

Mr. Cox. For example, there have been times in the middle twenties 
when you went into the State of Florida and cut prices there in order 
to build up your gallonage. 

Mr. Pew. It is possible. 

Mr. Cox. I understand that that was a fact. That was a situation 
where you did cut prices irrespective of the price which was being 
maintained by the other people in the market. 

Mr. Pew. We very rarely cut prices for that purpose. It has always 
been our intention, our a>m, to build up our business as the result of 
service and quality of product. 

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 where you have resorted to price 
competition 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 don't think we ever tried — I don't think we ever broke 
into a new territory and in order to get business reduced our price 
below the market. I don't think that was an actuating motive in con- 
nection with the development of our business. 

Mr. Cox. There is no reason why you should be ashamed of doing 
something like that, is there, Mr. T*ew ? 

Mr. Pew. No ; I think it is a legitimate thing to do. 

Mr. Cox. That is the ordinary course of competition ? 

Mr. Pew. I think it has been frequently done, but you asked me 
whether we had done it or not. 

Mr. Cox. I just wanted to find out. 

Mr. Pew. I don't recall that was ever our policy. 

Mr. Cox. But you don't feel it is improper ? 



7244 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. Certainly not. 

Dr. LuBiN. I can't quite understand how, if that is not your pol- 
icy, you say that you freq^uently lead in price cuts. If you don't 
cut prices to get more business, why do you take the lead in price 
cuts? 

Mr. Pew. We cut prices not — we are talking about two entirely 
different things. The question that I just replied to was one in 
which a company breaks into a new area, builds stations, and in 
order to attract people to that station cuts the price way below every- 
body else. After they have built up a business and have a comparable 
position, they raise their price and sell under the same conditions 
that the other companies sell. That is something which I say our 
company has not done, at least to my knowledge. I also have said 
that I don't see any reason why we shouldn't do it if we want to. 
In this competitive system I think the people should do, within the 
framework of the law, pretty much what they please. If they want 
to cut their prices, I think they should be permitted to do so. 

The question that you asked has an entirely different meaning, as 
I get it. Why do we cut prices in a market that is already estab- 
lished, where all of the companies are established in their business? 
I would say that we cut the prices there for the purpose largely of 
increasing business throughout the whole territory. We will get 
more business; when we cut the price we know that our competitors 
are going to cut the price, too, and they couldn't compete if they 
didn t, and as a result of the lowering of the price more people 
purchase our goods. 

Mr. Berge. May I ask this: You said that in instances where you 
lead off in the price cutting, one of the factors you take into account 
in determining where you would make it effective is the condition of 
the market. I take it that one of those, factors would be the amount 
of independent competition; that is, if you have decided that yodr 
profits have been so satisfactory that you can reduce your prices in 
some areas, ariiong other things, in determining where you wduld 
reduce them wouldn't you take into account the amoun^t of independ- 
ent competition? I don't mean that you would be governed by inde- 
pendent price cuts necessarily, but just the presence of that independ- 
ent competition. You might cut prices in a certain city because there 
is a substantial number of independents doing business there, might 
you not? 

Mr. Pew. Right. Not because there are a substantial number of 
independents, but we might cut prices because the amount of business 
that those independents were taking away from us would necessitate 
our taking such action in order to hold the business we had. That 
might be one of the factors. Now, there are a great many factors. 

Mr. Berge, You wouldn't want to say that it was ever done for the 
purpose of eliminating independent competitors? 

Mr. Pew. No ; certainly not. 

The Vice Chairman. Gentlemen, I have been holding off on account 
of the continuity of the questions on the same point, but it is now a 
•quarter of 1. I think we had better recess until 2 : 30. 

(Whereupon, at 12 : 45, the committee stood in recess until 2 : 30 p. m. 
of the same day.) 



CONCENTRATION OF ECONOMIC POWER 7245 

AFTERNOON SESSION 

(The committee resumed at 2:30 p. m., on the expiration of the 
recess.) 

Acting Chairman Reece. The committee will come to order, please. 
Before we proceed with the witness, I have received some data for 
entry in the record in connection with the study made on distilled 
spirits, and it may be admitted. 

(The data referred to were marked "Exhibit No. 1172" and are in- 
cluded in Hearings, Part 6, appendix, p. 2748.) 

Acting Chairman Reece. Likewise; some data which Dr. Lubin re- 
quested yesterday has been submitted by the present witness and will 
be admitted.^ 

(The data referred to were marked "Exhibit No. 1173" and are 
included in the appendix facing p. 7512.) 

Acting Chairman Reece. Are you ready to proceed ? 

Mr. Cox. I have a few more records, while we are putting material 
in the records. I wonder, Mr. Pew, if you will be kind enough to 
furnish the committee with the list of 117 companies which you re- 
ferred to in your statement as being wholly or partially integrated? 
It is not necessary to read it; just put it in the record. And at this 
time I should also like to offer for the record a chart which is based 
entirely on the material which was contained in the statement sub- 
mitted by Dr. Ise on the first day of the hearing. This chart is 
merely a representation of statistics with respect to concentration 
which were contained in a table of Dr. Ise's statement. We have 
simply .taken the table and placpJ it in chart form. It purports to 
show the degree of concentration existing in various branches of the 
industry at various times between the years 1936 and 1938. It does 
not cover all of that period, but because of the difficulty of obtaining 
comparable statistics some of the compilations were made as of one 
year and some of another. The table to which I refer appears in 
the record for September 25, and this is the chart which I should now 
like to introduce. 

Acting Chairman Reece. It may be admitted. 

(The chart referred to was marked "Exhibit No. 1174" and is in- 
cluded in the appendix facing p. 7512.) 

Mr. Cox. Mr. Pew, so that we may have it for the purpose of 
considering this pipe-line question, can you tell us whether in the 
case of your own company the pipe-line rates which you charge are 
higher or lower than the rail rates for the same haul? 

Mr. Pew. Of gasoline? 

Mr. Cox. Yes ; let's start with gasoline. 

Mr. Pew. It is very much lower, 

Mr. Cox. Is that true also of crude oil ? 

Mr. Pew. Very much lower. 

Mr. Cox. Is it your opinion that that is true generally throughout 
the industry, that the rates which are charged by the pipe lines are 
lower than the rail rates ? 

Mr. Pew. Generally speaking, yes. 



^P, 7213, supra. 



7246 CONCENTRATION OF ECONOMIC POWER 

Mr. Cox. It is true? 

Mr. PeW. It is true. 

Mr. Cox. You understand that I am speaking of rates now, not 
cost? 

Mr. Pew. Quite. 

Mr. Cox. Mr. Pew, you have spoken about the decline which has 
taken place in the retail price of gasoline. You mentioned that in 
the statement which you read. Do you have any opinion as to the 
factors which are primarily responsible for that decline? 

Mr. Pew. I think you have put the question very well. It is a 
question of- opinion. I think I expressed yesterday that I thought 
that perhaps one of the most important factors, particularly in the 
territory in which we operate, was brought about by the conditions 
obtaining during the N. R. A. I think that was the start of the 
decline in the earnings of the filling stations. 

Mr. Cox. That certainly was the beginning, in your opinion, of 
the soft condition in the marketing end of the business; is that' 
correct? 

Mr, Pew. Yes. Our filling stations had, as near as we could deter- 
mine, shown a very satisfactory earning prior to the advent of the 
N. R. A. and during the first year of the N. R. A. In 1934 whoji 
some of the dealers violated the provisions of the N. R. A. and took 
away our business by what they called under-canopy cutting, the 
profits in the whole filling station structure went down. 

Mr. Cox. You are inclined, then, to view the decline in the retail 
price of gasoline which has taken place over, say, the period between 
1928 and the present time as being caused largely by competition in 
the retail distribution ; is that true ? 

Mr. Pew. The price decline that has taken place as the result of the 
reduction in the dealer's margin, or the difference between what tl^e 
dealer paid for his gasoline and that which he sold it for to the public, 
has resulted in a reduction in the price of gasoline. But, of course, 
that is not by any means accountable for the entire reduction in the 
price of gasoline to the public. 

Mr. Cox. Wliat are the other factors ? 

Mr. Pew. For instance, if I may continue, sometime ago I made a 
careful study of just this situation in the territory in which we do 
business, and I found that, as between 1929 and 1938, the volume of 
gasoline sales had increased 42 percent, and the total amount of money 
that the industry received for that increased business was just 0.64 
percent less in dollars. 

A part of that, it is true, occurred as the result of somewhat lower 
differences obtaining as between the price which the dealer paid for 
his gasoline and the price at which he sold it, but most of that differ- 
ence was due to technological improvements which occurred within 
the industry and which were passed on to the public by way of lower 
prices. 

Mr. Cox. In what branch of the industry precisely do those techno- 
logical changes occur ? Are you thinking primarily of refining? 

Mr. Pew. No; I am thinking of a great many things. If I may 
start back with the crude, today we have crude which is selling around 
a dollar a barrel. In the 10-year period prit)r to 1915 the average price 



CONCENTRATION OF ECONOMIC POWER 7247 

of crude oil was 72 cents a barrel. During that intervening period 
wages increased by or over 180 percent, so that today the wages 
being paid are almost three times what they were in the earlier period. 
Tremendous increases have taken place in all of the material that goes 
into the drilling of a well. As a result of conservation policies, crude 
oil is being produced at a tremendously reduced cost as compared with 
the earlier period. That improvement has resulted from technological 
improvements within that activity of the industry. Great improve- 
ments have been made in methods of operation of the pipe lines. It 
used to be that a pipe line was laid and at certain pomts along the 
road tanks were installed and the oil was pumped from one tank at 
one point to another tank maybe a hundred miles along the road and 
then another pump took it out of that tank and pushed it along and it 
went into another tank. Today we have centrifugal pumps which keep 
that oil moving continuously, with no interruption. That and other 
technological improvements in the pipe-line operation have resulted 
in a great saving. Now, we come to the transportation by boat. I 
think I pointed out yesterday that during my connection with our com- 
pany I have seen transportation costs by boat come d.own from a high 
of 36 cents a barrel to a present cost of 11 cents. Those reductions 
have been made as a result of technological improvements in the build- 
ing of ships. I could take the time of this committee describing what 
those improvements have been. Part of them have come through better 
design in the hull of the ship ; much of it has come from improvement 
in economy of engine design. Some of it is due to the fact that the 
ships are larger, but all of it is due to the technological improvements 
which the industry has developed. 

As to refining, perhaps the greatest advance has been made in 
technology. The plant which last year was efficient and economic, 
which we all thought was the last word in ar plant, may this year 
become obsolete. In our own company, we have just completed two 
plants. They cost us well over $12,000,000. "We just didn't have 
$12,000,000 to put into those plants, but we felt the need for them 
was so keen that we went to the bank and borrowed the money to 
build them. In fact, we have spent in our company about $14,000,000 
each year for the last 3 years in making technological improvements 
within various activities of the business, all designed to reduce the 
cost of our refined products, particularly so as to enable us to put 
the gasoline into the cars of the consumers at the lowest possible 
price. Now, we haven't done that all because we were altruistic. 
We have done it because we hoped to get our money back by way 
of increased business, but my studies of the industry, the technologic 
improvement that has obtained throughout the industry, have shown 
that every improvement has been passed on to the public by way of 
lower prices. 

Mr. Cox. Would it be fair to say that one reason that you have 
made these attempts to increase your own efficiency has been because 
the competition which exists in the industry has been a continuous 
incentive to you? 

Mr. Pew. -Without question. 

Mr. Cox. To make those changes? 

Mr. Pew. I think the urge of competition is a great factor in 
developing the technique of any industry. 

124491— 40— pt. 14, sec. 1 11 



7248 CONCENTRATION O/^ ECONOMIC POWER 

Mr. Cox. In your opinion did the increase in the supply of crude 
oil, beginning in 1930 and 1931, have any effect upon tne retail price 
of gasoline? 

Mr. Pbw. I would say very definitely that if we hadn't developed 
conservation policies and applied that technique to the development 
of the oil industry the price of gasoline would have been much 
higher, on the average — there would have been low points and there 
would have been high points, but on the average unquestionably the 
price of gasoline is very much lower than it would have been under 
the old techniques. 

Mr. Cox. I am afraid that answer isn't quite responsive to my 
question. (The question was read.) 

Mr. Pew. I don't think I understand the question. 

Mr. Cox, Well, I will put it in another way. Did you hear Mr. 
Gill's testimony on Monday? 

Mr. Pew. Yes. 

Mr. Cox. Do you recall that he had a chart — I think it was No. 6 ^ — 
which compared the wholesale commodity prices with the wholesale 
refinery prices for petroleum products, and Mr. O'Connell asked him 
some questions about that chart, and I am going to read to you a 
portion of that testimony to see if you agree with the statements 
which were then made. Mr. O'Connell said : 

Would it be fair to say, then, that the substantial decrease in the total 
price, or in the average price of petroleum products from 1926 to 1938 is ex- 
plainable by the greatly increased supply of crude oil? 

Mr. Gill replied : 

I think, Mr. O'Connell, that was an important factor but by no means the 
sole factor. 

Now, all I want to find out from you now, Mr. Pew, is whether you 
agree with Mr. Gill that that was an important factor. 

Mr. Pew. I would say so, yes; although I want to qualify that by 
saying that I am not sufficiently familiar with those charts and the 
exact dates at which these changes were made to discuss it intelli- 
gently. 

Mr. Cox. I will be glad to show you the charts. This chart, I 
think, is the one they were talking about. 

I think the question that Mr. O'Connell asked was about that drop 
in 1931. 

Mr. Pew. The price of gasoline depends very largely on the price 
of the crude oil. But the price of gasoline or other petroleum prod- 
ucts is not determined entirely by the price of crude in a particular 
area. The consumer demand and producer competition have a very 
important bearing, on price. So I would only say to you that over 
a long period of time it is fair to assume that there is a relationship 
between the price of crude oil and the petroleum product prices, and 
over a long period of time it may be assumed thr.t the. average prod- 
uct prices would approximate the total of the crude prices plus the 
costs of operation, plus reasonable profit. 

Mr. Cox. May I assume from that answer, then, that your opinion 
is that over a long range the price of the products to the consumer 
would tend to go down as the supply of crude increases, assuming 

1 "Exhibit No. 1146," appendix, p. 7494. 



CONCENTRATION OF ECONOMIC POWER 7249 

that the increase in the supply of crude means decrease in the price ? 

Mr. Pew. I would say over a long period of time; yes. 

Mr. Cox. And would you also agree that any decrease in or limi- 
tation on the supply of crude which resulted in an increase in the 
price of crude, tended over a long period of time to increase the pric6 
to the consumer? 

Mr. Pew. I would. 

Mr. Cox. Mr. Pew, in your experience and observation, has there 
been any uniformity of policy among the major integrated oil com- 
panies ? 

Mr. Pew. There are a great many — it seems to me that question 
covers a pretty broad field. Can't we reduce that? 

Mr. Cox. I will reframe it and see if it makes the answer easier. 
We have been talking here in the time in which you have been testi- 
fying about a number of economic problems. Has it been your ob- 
servation that with respect to their attitude toward those problems 
there has been any uniformity of policy on the part of the major oil 
companies? 

Mr. Pew. That would be a matter of opinion; I just don't know. 

TRANSPORTATION POLICIES OF INTEGRATED COMPANIES 

Mr. Cox. Well, let's consider some particular matters. This morn- 
ing there were some questions asked about the desirability of divorc- 
ing the pipe lines. Would you say that all of the major integrated 
companies took the same point ,(if view about the wisdom of that 
proposal? ' ^"" -^ 

Mr. Pew. I would definitely say so. 

Mr. Cox. Would you say that all- of the small nonintegrated inde- 
pendent refineries took the same attitude with respect to that question 
that the major companies do? 

Mr. Pew. I would say the great majority of them take the same atti- 
tude that the majors do — so-called majors. 

Mr. Co±. But in your opinion there is a minority of them sufficiently 
misguided to take a different view? I am just trying to find out if 
there is unanimity. You think there isn't among the smaller pro- 
ducers ? 

Mr. Pew. I think there is a very small minority. 

Mr. Cox. And take the question as to the desirability of enacting a 
commodities clause with respect to the pipe lines ; you understand what 
I mean by that? I take it that the major integrated companies take 
the same point of view about that ? 

Mr. Pew. Essentially so because they look upon their pipe lines as a 
plant facility. 

Mr. Cox. And is. there some group among the smaller independent 
refineries that takes a different view of that ? 

Mr. Pew. I can't testify definitely on that. I understand there have 
been a few that take a different viewpoint on it, but that the great 
majority are hopeful some day of having their own pipe lines, and 
they take the same view that I would take. A great majority of them. 

Mr. Cox. Now, take also the matter of railroad rates. I think you 
testified yesterday that for the most part you used the railroads only 



7250 CONCENTRATION OF ECONOMIC /POWER 

for short hauls. That is also true of most of the larger integrated 
companies, is it not? 

Mr. Pew. No ; I wouldn't say that is true. I think some ,of the 
major integrated companies ship much further than we do. 

Mr. Cox. I have no doubt of that, but if I should suggest that taken 
generally, the hauls are shorter than the hauls of the smaller noninte- 
grated units in the industry, would you agre^ with that ? 

Mr. Pew. No; most of the so-called major companies are not 
equipped with pipe lines to distribute their gasoline. 

Mr. Cox. Will you read the answer ? 

(The reporter read the answer.) 

Mr. Pew. If I may continue that, consequently that puts the so- 
called independent companies in exactly the same position as the major 
companies who do not own or have facilities for pipe-line distribution 
of their products. 

Mr. Cox. You think then as between the major companies and the 
^ independent companies there is no difference as to the length of their 
hauls, so far as railroad traffic is concerned ? 

Mr. Pew. In our case, having a gasoline pipe line, we would not 
ship as far as those companies which are not so equipped. As to the 
rest of the companies, whether they be the so-called majors or the so- 
called independents, I can see no difference. 

Mr. Cox. Well, to the extent that other companies than your own 
have gasoline pipe lines, for example, those gasoline pipe lines are 
owned and used by major companies, are they not? 

Mr. Pew. Yes. 

Mr. Cox. So that at least so far as those companies are concerned, 
they would not have the same occasion for long railroad hauls as 
the small independents would. 

Mr. Pew. Quite right. 

Mr. Cox. Isn't it a fact, Mr. Pew, that the policy of the major 
inte^ated companies, so far as railroad rates are concerned, has been 
consistently to object to any reduction in long-haul rates while at the 
same time consistently favoring reductions in short-haul rates ? 

Mr. Pew. I wouldin't say so.. On the contrary, it has always been 
my policy, the policy of our company, to bring about a reduction in 
rates irrespective of the distance, provided it would enable us to ob- 
tain a delivery of the product at a lower cost. 

Mr. Cox. Assuming that that has been the policy of your company, 
has it not been the policy of some of the larger integrated companies 
consistently to oppose reductions on long hauls, so far as petroleum 
products are concerned? 

Mr. Pew. I can't tell you what the policies of the larger companies 
are as a whole, but I do know that many of the larger companies are 
taking exactly the same attitude that I have, that we are not par- 
ticularly interested in the method of distribution, but we are very 
much interested in the cost of that distribution. If the railroads will 
carry oil for our company cheaper than we can move it by pipe lines, 
we will deliver all of our business over to the railroads. 

Mr. Cox. Of course, on the other hand, if you can use the pipe line 
while* someone else has to use a railroad at higher rates, that gives 
you an advantage, doesn't it? I am not speaking of your company 
but of the major companies generally. 



CONCENTRATION OF ECONOMIC POWER 7251 

Mr. Pew. They all have the use of our pipe line of they want to 
make use of it. 

Mr. Cox. We have a map here in the record of the gasoline pipe 
lines, which shows that one direction in which they run is from some 
of the midcontinent fields toward the marketing area in the Central 
States. The answers to the questionnaires also showed that those 
gasoline pipe lines are used almost entirely by the major integrated 
companies. To the extent then that any other company wishes to 
compete for that market and move gasoline into that market, it has 
to use more expensive means of transportation, does it not? 

Mr. Pew. That would seem to me to depend entirely on what the 
rates happen to be by the two methods. 

Mr. Cox. I think you testified a little while ago that generally 
speaking the pipe-line rates were less than the railroad rates. 

Mr. Pew. Yes, I did; but that was a very general statement. I 
didn't say that in all cases it was cheaper. 

Mr. Cox. Are you suggesting, then, that so far as the particular pipe- 
line oj)eration which I am speaking of — let's take a specific example. 
Suppose on this map, which is included in "Exhibit No. 1138," ^ gaso- 
line IS going to run in a pipe line from Tulsa up to St. Louis, which, I 
take it, would be possible on this map. Are you suggesting the pipe- 
line rate for that transportation is as high as the railroad rate ? 

Mr. Pew. I don't. know what it is. 

Mr. Cox. A little while ago you said generally you thought they 
were lower. 

Mr. Pew. They are generally lower. Now you are asking me a 
specified question. 

Mr. Cox. Do you have any doubt that, generally speaking, those 
gasoline pipe-line rates from the midcontinent field to points in the 
eastern marketing areas, are cheaper than the railroad rates? 

Mr. Pew. My recollection is that they are the same. 

Mr. Cox. That is very interesting, because if they are the same, and 
assuming that the cost of transportation is less by pipe line than it is 
by rail, that means that anyone who doesn't own the pipe line and is 
using it is not enjoying the advantages of the cheapness of that 
method of transportation, is he ? 

Mr. Pew. Would you read that question again? 

Mr. Cox. Perhaps it is a little involved. 

(The reporter read the question.) 

Mr. Cox. I am not very pleased about that question. We will strike 
that out and we will ask the question again. 

Assume that the pipe-line rates are the same as the rail rates and 
that the shipper we are speaking of pays those rates and is not the 
owner of the pipe line, doesn't that mean that he is not getting any 
advantage from the cheapness of that particular method of trans- 
portation ? 

Mr. Pew. Again it all depends on how much it is costing the owners 
of that line to put the gasoline through to St. Louis. If the rates 
established are reasonable rates, then I would say that the independent 
who used that line was not at a disadvantage, because he would be 
getting the, use of the other man's capital and not paying an exorbitant 

^ Appears in Hearings, Part 14-A, facing p. 7728. 



7252 CONCENTRATION OF ECONOMIC POWER 

price for the use of that capital. Now, if, on the other hand, those rates 
are unreasonable, then I would say dennitely that he is at a disad- 
vantage. 

Mr. Cox. I assume frojn your testimony yesterday that, even taking 
into account return on the investment, the cost of transporting gasoline 
by pipe lines was much cheaper than the cost of transporting it by rail. 

Mr. Pew. I made such a statement. 

Mr. Cox. And, of course, if you own the pipe line, you are trans- 
porting your gasoline at cost, including a return on your investment. 

Mr. Pew. But you remember in the development of that statement 
I explained that the costs that I exhibited were our own costs, and the 
costs I set up for the railroad were the established rates, which in- 
cluded their profit. 

Mr. Cox. Yes ; that goes to the point that interests me now, because 
we are imagining a situation in which an independent pays for pipe- 
line transportation the eqiuvalent of those railroad rates, although 
the cost of the pipe-line transportation, including a reasonable return 
on investment, is much less. 

Mr. Pew. I think it is entirely a question of fact. If the railroad 
rates have been reduced to a point below the railroad's cost, it might 
conceivably be that the pipe lines did have a reasonable rate. I don'' 
know what the facts are. All I can say is if that pipe-line rate- 
I don't know, because I have never explored the situation — if th 
pipe-line rate from Tulsa to St. Louis is an unreasonable rate, then ;" 
independent shipper over that pipe line is at a disadvantage. 

Mr. Cox. But you think he is not at a disadvantage if the rate 
reasonable but as high as the railroad rate ? 

Mr. Pew. If it is a reasonable rate and as high as the railroad rat 
then he is not at a disadvantage. 

Mr. Cox. Even though the actual cost of the pipe-line transporta- 
tion, including a reasonable return on investment, may be much less 
than the railroad rate ? 

Mr. Pew. Now you are bringing up another point. 

Mr. Cox. That is the point that interests me. I would like to get 
an expression of opinion on it. 

Mr. Pew. If the established pipe-line rate from Tulsa to St. Louis 
is a reasonable rate, then the independent can ship his gasoline through 
that line and pay that rate and not be at a disadvantage with those 
who own a pipe line. 

Mr. Cox. Well, if he does so, he gets the gasoline at the end of the 
pipe line at a cost which is considerably in excess of the cost incurred 
by the owner of the pipe line moving his gasoline through? 

Mr. Pew. Only by the amount of a fair return on our capital ; and 
when you can use the other man's capital without paying for it more 
than a reasonable return you are in just as good a position as the 
other man. 

Mr. Cox. You are assuming, and I am assuming, too, when you talk 
about a reasonable rate, a rate which returns just a reasonable income 
on the investment committed to that sort of enterprise ? 

Mr. Pew. A jate which returns a reasonable return on the invest- 
ment and which is high enough to attract new investments into that 
particular Jine of activity when they are required. 



CONCENTRATION OF ECONOMIC POWER 7253 

Mr, Cox. Would you care to express an opinion in the case of pip 
lines as to what kind of rate of return that should be, Mr. Pew? 

Mr. Pew. Well, I think I would be stepping on the toes of th 
Interstate Commerce Commission. Frankly,- we have a very interest 
mg problem. We built a pipe line out to Cleveland; did it for th( 
purpose of getting our gasoline into that territory. As a result oi 
the development of the Illinois field, the whole economic picture is 
changed, and we have now built a plant to handle that western busi- 
ness. No longer will it be possible economically for us to use that 
line for that western business. We are going to be faced with a 
probable or possible loss in connection with that line. I am going to 
ask the Interstate Commerce Commission to review that situation and 
determine a rate. I don't know what it ought to be, and I don't know 
what our future policy will be, and so I am very happy to lay it right 
at the doorstep of the properly constituted Government authority, 
which is the Interstate Commerce Commission. 

Mr. Cox. You don't feel like expressing even any opinion whatso- 
ever generally as to the rate of return, apart from that specific case? 
Mr. Pew. I think the best evidence that the rates were too high is 
that a year ago action was taken looking toward the reduction of 
those rates, and I think, too, that there have been a number of 
reductions that you gentlemen haven't got the data on. 

Mr. Cox. We understand there have been progressive reductions 
of rates on pipe lines. 

Mr. Pew. For instance, I have been told here since yesterday that 
the sur^^ey in Texas will show that the average return of the pipe 
lines, based on the appraisal by the Interstate Commerce Commis- 
sion, will show a. return on investment of about 9 percent. 

Mr. Cox. You think that is a reasonable return, that kind of busi- 
ness ? 

Mr. Pew. I don't want to criticize the Interstate Commerce Com- 
mission. I don't think you ought to ask me to. 

Mr. Cox. I am not asking you to criticize ; I don't think you would 
be. They might very well be interested in your opinion. 

Mr. Pew. If the Interstate Commerce Commission wants me to 
express an opinion, I will be very glad to do so. 

Mr. Cox. But you don't feel that you want to express an opinion 
now? 
Mr. Pew. 1 don't think you ought to ask me to. 
Mr. Cox. Would you express an opinion as to whether that rate 
was too high ? 
Mr. Pew. No. I hope you won't ask for that. 

Mr. Cox. Well, if you feel that way about it, I won't ask you. I 
have asked you these questions about policy in an attempt to find out 
whether or not, in your opinion, on general matters of policy the 
industry is divided into two camps, one of which you find has largely 
integrated companies, and in the other you find the smaller noninte- 
grated companies. Is it your opinion that that condition exists? 

Mr. Pew. I would say that jt does not exist. That the large ma- 
jority of the smaller companies feel toward this general question just 
as do a majority of the larger integrated companies'. 

Mr. Cox. There may be a dissenting minority, but you think that 
isn't large ? 



7254 CONCENTRATION OF ECONOMIC POWER 

Mr. Pew. I think you can always find in any group that the one 
who has failed in business, whether that be an independent business 
of his own or whether it be iji connection with the services in some 
other person's employ, invariably he blames his troubles on somebody 
else or on some other thing. 

Mr. Cox. Do you think that all of the complaints about the practices 
in the petroleum industry come from people who have failed in 
business? 

Mr. Pew. Well, I would say that a large majority of them certainly 
c6me from such sources. 

Mr. Cox. And that is true through all the branches of the industry, 
beginning with production and gomg through ? 

Mr. Pew. I am giving you my opinion. 

Mr. Cox. That is all that you can give us. I understand that. Do 
you think there is anything that the industry itself could do to 
protect the existence of the small integrated companies? 

Mr. Pew. The small integrated companies ? 

Mr. Cox. The small nonintegrated companies. 

Mr. Pew. I made the suggestion this morning, which I hope your 
committee will seriously consider, and that was to conduct a study with 
a view of determining just how many small operators who have come 
into the business during the last few years have tremendously in- 
creased their business. It seems to me that is the only real yardstick 
with which to arrive at the point which seems to be of great interest 
to you. 

Mr. Cox. Suppose that study should show that in fact there has 
been an increase in the number of small units operating in the indus- 
try, in your opinion are there any steps that might be taken to en- 
courage that trend, either by the industry itself 

Mr. Pew (interposing). I think that our competitive conditions 
must control ; it seems to me that a man must necessarily have some 
ability ; he must show some engineering knowledge ; he must be keen 
and alive to all the problems of the industry. I wouldn't say that 
we ought to subsidize anybody who wants to come into the industry, 
irrespective of his capacity. 

Mr. Cox. I wasn't suggesting a subsidy; I was just wondering if 
there were any other things you had in mind. I take it you think 
ihe most important thing is to maintain free competitive markets in 
all branches of the industry ? 

Mr. Pew. I do. 

Mr. Cox. You wouldn't agree, then, with the people who think 
that the antitrust law should be amended in some way so as to per- 
mit agreements in the industry for the purpose of regulating market- 
ing practices ? 

Mr. Pew. I think the surest way to destroy the petroleum indus- 
try is to adopt a cartel system.^ 

Mr. Cox. That you would, I take it, then, believe that the anti- 
trust law shoul^ be left unimpaired and should be enforced if we 
are to preserve 

Mr. Pew (interposing). Very definitely. I think there is the 
machinery in the "antitrust laws to accomplish every proper purpose. 

* Testimony on "Cartels" appears in Hearings, Part 25. 



CONCENTRATION OP ECONOMIC POWER 7255 

On the other hand, I think that the Government should set up ma- 
chinery in order to enforce those laws. 

Mr. Cox. And you feel that if those laws are enforced intelli- 
gently and vigorously that free competitive markets will exist in 
which small enterprise can succeed? 

Mr. Pew. I do. 

Mr. Ballingeb. Mr. Pew, when you suggested that the committee 
make a 'study to see how many new competitors have come into the 
business, do you mean to make a study on the refining end of the 
business to see how many new refiners have come in? 

Mr. Pew. Yes, sir. 

Mr. Ballinger. You think that' would show that any new re- 
finers have come in ? 

Mr. Pew. I haven't the figures. 

Mr. Ballinger. You say you have ? 

Mr. Pew. I have not the figures. 

Mr. Ballinger. As a matter of fact, hasn't there been a steady de- 
cline in the number of refiners in the last 15 years ? 

Mr. Pew. I haven't those figures. 

Mr. Ballinger. Well, if it were shown, if we made a study of that 
and found that a lot of new competitors had come into business for 
producing oil that wouldn't be very significant if there had been a 
number of new discoveries of oil, would it, and after all as I under- 
stand it, only about 3 percent of the total land in the United States 
suspected of having oil has been under active utilization. Still a lot 
of opportunity to find a well, but after you get it sometimes it is a 
little difficult to do something with it. 

Mr. Pew. I think it would very definitely show there was an op- 
portunity there. If a large number of new independent operators 
had come into the industry. 

Mr. Ballinger. Now, I want to go back just one more question, 
Mr. Pew, when did your company acquire pipe lines? 

Mr. Pew. 1904. 

Mr. Ballinger. Well, this morning I understood you to say that 
your criticism of the old Standard Oil trust was mainly because of 
the preference shown the trust by the railroads, was that it? 

Mr. Pew. Yes. 

Mr. Ballinger. Well, I thought that had ceased pretty much in 
the oil business by 1900. Wasn't the law which outlawed rebates 
and drawbacks passed about 1903? 

Mr. Pew. I can't tell you; I don't know. 

Mr. Ballinger. I thought it had ceased pretty much with the dis- 
solution of the old South Improvement Co. of the Standard Oil trust, 
•way back in 1872 or 1875. 

Mr. Pew. No. 

Mr. Ballinger. It hadn't? 

Mr. Pew. No. No, very definitely. 

Mr. Ballinger. The contract was abandoned by the Standard 
Oil Co.? 

Mr. Pew. My father was tremendously interested in the south 
Texas oil field, which was brought in at Spindletop. He saw an 
opportunity there to go into the oil business in a larger way and 
be free of railroad domination. That was the inspiration for our 



7256 CONCENTRATION OF ECONOMIC POWER 

company goin^ into the Texas field. Not only that, but he was so 
anxious to avoid the use of our railroads that he went into the south 
Texas oil field and bought some oil production and arranged for 
pipe lines to pick it right up there in the Spindletop field, which 
was within a few miles of water transportation. He built a refinery 
at Philadelphia and then he went to Europe to get his distribution, 
all for the f)urpose of avoiding the railroad. 

Mr. Ballinger. What year was this? 

Mr. Pew. This was in the early years of 1900. 

Mr. Ballinger. Well, I thought in those early 

Mr. Pew (interposing). The first decade of this century. 

Mr. Ballinger. I thought the question of rebates and drawbacks 
had been pretty well ironed out. I will look up the subject more 
thoroughly, but that was my impression of it. 

Mr. Pew. I think in a few years after that it was perhaps ironed 
out, but the conception of going into that business had its inspira- 
tion in that of avoiding the use of the railroads. 

Mr. Ballinger. "But after that was ironed out there was still a 
period of years in which the Standard Oil trust was still going on ; 
you were still critical of it even after that was ironed out? 

Mr. Pew. My memory doesn't — I was in overalls down at the 
plant in those days; I just can't tell you. 

Mr. Ballinger. Well, I mean weren't you really opposed to the 
Standard Oil trust because of its control of pipe lines, one of the 
basic reasons you were opposed to it, or your company? 

Mr. Pew. Well, at that time we had our own lines and our own 
connections with the Spindletop field. We weren't particularly con- 
cerned about the other fellow's pipe line. But very definitely the 
control of the transportation. Now, that included the railroads. I 
think that our feeling and my father's feeling particularly had to 
do with the shipment by rail. You see every barrel that he shipped 
by rail, a part of that money was taken out of the pot and turned 
over to the Standard Oil Co. 

Mr. Ballinger. When you got your pipe lines you didn't have any 
criticism? 

Mr. Pew. That wasn't a very pleasant way for him to think over 
his business at night when he got home and started to contemplate on 
the day's work, was it ? 

Mr. Berquist. Isn't that exactly the way some of the independents 
feel when they ship over pipe lines ? 

Mr. Pew. That is exactly the way he feels if he is paying an ex- 
orbitant rate for it, but if he is getting his oil shipped at a reasonable 
rate, a rate based on the investment of that line, and somebody else 
is putting up the capital for him, why, he ought to be just tickled 
to death because he is enabled thereby to do more business on less 
capital than would be the case if he had to put in his own line, 

Mr. Berquist. Let's consider, then, what he might think. An inde- 
pendent refiner or independent refiners generally are located usually 
in the field or near the source of supply of crude. Let us contemplate 
what he would think when he considers that, if he wants to get into a 
market and sell gasoline, and having produced it near the field, and 
wants to get it, say, into Chicago markets or at Minneapolis or some 
other point where, say, two important gasoline pipe lines — the Phillips 



CONCENTRATION OF ECONOMIC POWER 7257 

and the Great Lakes — ^happen to run ; and he finds that their rates are 
about the same as the railroad rates, so it wouldn't make much differ- 
ence which way he shipped, but he notices that the Great Lakes pipe 
line could make a net return of 31 percent and the Phillips pipe line 
could make a net return of 42 percent. Mind you, those are both lines 
that were built and completed in 1931, so they can't be fully depre- 
ciated yet, the base can't be so small ; and he must have a great deal 
of food for thought in that situation. / 

Mr. Pew. If I were in his position and I made up my mind that was 
too high a rate, I would feel rather bitter about it ; but, on the other 
hand, we must not forget that that man has located his refinery 
there to take care of a certain sphere which isn't touched by these 
other pipe-line companies. He has got a great range of country to 
which he can distribute his products without going into the Chicago 
market; and he never intended, when he built that plant down there, 
to go into the Chicago market. Now, I would like to say just one 
other thing. I understand that any of these independents can pur- 
chase a pro rata share in that line at a fair value. In other words, 
he can buy a pro rata interest in that line which would put him on 
exactly the same basis as the other shipper. 

Mr. Cox. You mean the Great Lakes pipe line ? 

Mr. Pew. I should like you to research that point a little bit. I 
shouldn't comment too strongly on it because I am not familiar with 
the facts. 

SIMILARITY IN FINISHED GASOLINE 

Mr. Berge. Mr. Pew, I would like to ask whether it is the practice 
in the business of the major integrated companies to exchange with 
each other processed gasoline, finished gasoline, gasoline that is ready 
to be put on the retail market ? 

Mr. Pew. Well, I am unable to go into that matter with you because 
our company has never made a practice of it. 

Mr. Berge. Sometimes when one company has a temporary surplus 
and others have a shortage, could it be done ? 

Mr. Pew, We have never done it. 

Mr. Berge. You have never purchased any gas from a refinery 
that another company has processed? 

Mr. Pew. Oh, yes; we have bought gasoline from other companies 
and brought it into our refinery and we have mixed it with our other 
gasoline or we have reprocessed it ourselves to bring it up to our 
quality. We have never exchanged our gasoline and shipped out 
the gasolines which would have been received from such exchange. 

Mr. Berge. When you have bought gasoline from other companies, 
then, do you mean that you have always subjected it to some further 
processing ? 

Mr. Pew. In every case. 

Mr. Berge. Or merely tested it to see whether it is up to your 
specifications? If you buy high-grade gasoline and it has been prop- 
erly refined out of good crude oil and been done in the plant of an 
equally reputable company, why should it need further processing? 

Mr. Pew. It so happens that we have never bought any gasoline 
that exactly met our specifications. We have always had to process 
it or blend it to make it meet our quality. 



7258 CONCENTRATION OF ECONOMIC POWER 

Mr. Berge. Are you prepared to say that there is a chemical or 
physical difference between the gasoline which you may sell and that 
which your competitors may sell? I am not calling for an expres- 
sion of opinion as to the merits of respective gasolines, but rather as 
to differences. Are the gasolines that are retailed by the major 
companies chemically and physically different, or isnt there a sub- 
stantial similarity between many of the brands ? 

Mr, Pew. I think that you have given me a rather hard under- 
taking to describe. In the first place, all of the specifications for 
petroleum products are of value largely as an indication of their qual- 
ity. You can't definitely determine by any known specification the 
exact quality of a gasoline. If, however, we produce gasoline from 
exactly the same crude oils month after month and they all meet 
exactly the same specification, in all probability those gasolines will 
be substantially the same and will give exactly the same performance. 

Mr. Berge. You mean the gasoline you produce and that some- 
body else produces ?_ 

Mr. Pew. The gasoline that we produce in our own plant, run from 
the same crude oils, tested by the same methods, will give substan- 
tially the same performance when used in a car. 

Mr. Berge. You mean that your gasoline will from month to month 
give substantially the same performance, is that what you mean? 

Mr. Pew. If obtained from the same fields and subjected to the 
same technological refining processes. 

Mr. Berge. I am assuming, which I suppose we have the right 
to assume, that there are a number of companies who earnestly try 
to meet high specifications and to the best of their abilities apply 
rigid tests to get gasoline of good quality^ good crude, and apply 
high-grade processes to it and turn out a high-grade product. And 
I was trying to find out whether there is any substantial difference 
between the gasoline that companies of the type I have described 
would put out. I am not trying to rate them or grade them relatively 
at all, but are there differences? 

Mr. Pew. Oh, very definitely there are many differences. After 
all, the only way that you can make a correct analysis of any petro- 
lemn product is that of determining every hydrocarbon that is con- 
tained in that product. Now there are hundreds of different hydro- 
carbons contained in every drop of oil. It takes years to isolate four 
or five of them. These Hydrocarbons that are contained in a finished 
product, when manufactured from the same crude in the same re- 
finery, and which meets the same specification, turn out probably 
a product which will give the same performance in use. 

But if, on the other hand, we make this product up out of entirely 
different crudes, subject them to an entirely different refining process, 
then you have an entirely different set of hydrocarbons in your fin- 
ished product and they will not react the same way when subjected 
to the tests which we know as specifications. 

Mr. Berge. Can't we assume that at least some of the major com- 
panies, and perhaps many of them, use crudes from the same fields, 
or fields where the crude is substantially similar and refined by sub- 
stantially the same processes? After all, there are a lot of compa- 
nies in this game and to a layman, it wouldn't seem tjiat^ there would 
be a necessary variance between the process of every company. Now 



CONCENTRATION OF ECONOMIC POWER 7259 

I can see that you might draw very highly defined technical dis- 
tinctions, but from the standpoint of practical service and worth of 
the product there must be substantial similarity between the leading 
brands of gasoline. They may have differences, but is the motorcar 
so refined in its reactions and responses that there would be differ- 
ence in performance from each of the several dozen different leading 
brands of gasoline ? 

Mr. Pew. May I answer that this way : We obtain our crude from 
30 or 40 different oil fields. We try to run substantially the same 
percentage of all those crudes each month. We subject our products 
to the most careful analyses. We 'have hundreds of men in our 
laboratory making these tests, keeping control of it every few min- 
utes, 24 hours a day. And yet, when we get all through, we put that 
gasoline in a big tank and we have a number of cars, the same kind 
of cars that you and I run on our highways, and we put that gasoline 
in the pars and take it out and make a test before we finally say that 
the consumer may use it. 

Mr. Berge. Now without meaning any disrespect to your company, 
wouldn't the processes of many other Companies be substantially the 
same? 

Mr. Pew. Well, I don't know. 

Mr. Berge. Again speaking without reference to any particular 

Mr. Pew (interposing). I beg your pardon^ I didn't quite under- 
stand your question. I understand it now. You say, Wouldn't the 
processes be the same. 

Mr. Berge. Substantially the same. 

Mr. Pew. My answer to that is "No." The qualities of gasoline 
largely are obtained as the result' of some one or other cracking 
process. 

Mr. Berge. Those processes are freely licensed back and forth. 

Mr. Pew. Those processes are used by most of the companies. But 
there is a wide variety in the type X)f process that these companies 
use. Now for instance, the cracking process that we use ran our 
pressure in some cases up to 2,300 pounds, and we put the oil through 
at a temperature of 920°. Some of the other companies run it 
through at 450 pounds. That produces an entirely different series 
of hydrocarbons. And so my answer to that is that there is a wide 
variety in the processes which these various oil companies employ. 

Mr. Berge. Is it your belief that each of the commonly advertised 
brands — and I am confining my question to brands that are com- 
monly believed to be good brands — each have unique qualities that 
none of the others possess? 

Mr. Pew. That subject has been very carefully researched by Mr. 
Swehsrud.^ He has st.udied the whole probleni from every angle. 
I am not really prepared to discuss it. In fact, I have never read tlie 
advertisements that are put out by these other companies. [Laugh- 
ter.] 

Mr. Berge. I would like to ask you then whether it is your opinion 
that in the coinpetitive struggle, the purchasers t6 whom you appeal 
buy your gasoline rather than somebody else's because of the unique 
qualities they think your particular gasoline pogsesses, or for some 
other reason. Now since the price is substantially the same at most- 

1 Mr. Swensrud's testimony appears in Hearings, Part 15. 



7260 CONCENTRATION OF ECONOMIC POWER 

times — as you said this morning, when one company reduces the 
others reduce, and if one company goes up, unless the others soon 
follow, it goes back again— the retail purchaser of gasoline doesn't 
have much of a choice in a particular community as to price, and I 
was just wondering then what you thought did lure him to your 
product. 

Mr. Pew. Well, price is one factor, of course. 

Mr. Berge. Let's assume that the price is the same. 

Mr. Pew. But the other factors are the service that is rendered. 

Mr. Berge. You mean the service incidental to the sale of gasoline ? 

Mr. Pew. Yes ; the courtesy of the filling-station attendant. 

Mr. Berge. I was just wondering if maybe that wasn't about all 
there was to it, if the motorist didn't in some instances regard the 
leading brands as the same, or in those cases where he thought one 
was peculiarly a favorite, it wasn't because of the advertising rather 
than because of any innate difference. 

Mr. Pew. In all due modesty, I may tell you it is my opinion that 
our gasoline is the best on the market. [Laughter.] 

Mr. Berge. I would expect you to think so, and I am not trying 
to get you to express any other opinion than that. That is not my 
thought at all. But I am trying to find out whether the business 
hasn't been so highly developed by so many different companies em- 
ploying sound processes that there really wasn't very much left to 
competition except the services that they might render incidental to 
the sale of gasoline at the service station, or the conflicting myths 
that are built up in people's minds around the advertising. 

Mr. Pew. I think you have got an erroneous conception of that 
picture, if I may say so. 

Mr. Berge. I would like to get that straightened out. 

Mr. Pew. In the first place, I think that the measure of merit of 
an industry — and after all we are talking about the petroleum indus- 
try — can best be determined by the yardstick of progress over the 
years, progress by way of improved service, progress by way of im- 
proved quality, progress by way of reduction in the prices of its 
products, and progress, too, in the treatment of its employees. 

Now by all of these yardsticks I feel that the oil industry stands 
at the head of the list. 

Now I am coming to that. You take this question of advertising. 
Lots of people think we spend too much money for advertising, but 
it is the very fact of the advertising programs of the various com- 
panies that has stimulated technological progress designed to improve 
the qualities of their respective products. Ten years ago the gasoline 
was of such a quality that it just wouldn't run in your car today 
for a block. It would just tear the engine all to pieces. I attribute 
the most of that development to the advertising policies of the 
various companies. 

You can't have a mass-production industry unless that industry 
has a mass market, and I think that if you would study this problem 
you would find that that mass market was largely developed as the 
result of the advertising policies of those companies whom you regu- 
larly see using our newspapers and periodicals in their advertising. 

Mr. Berge. Don't misunderstand me. I wasn't implying any criti- 
cism of the advertising policies of the companies. I would be willing 



CONCENTRATION OF ECONOMIC POWER 7261 

to see the necessity for advertising. What I was simply trying to find 
out was whether there were in chemical and physical facts sufficient 
intrinsic differences in gasolines. to warrant the belief that is built 
up among motorists that there is really a difference in perforaaance 
between the major brands. It seemed to me that most of the major 
companies were putting out a product that rendered a substantially 
good service, and I thought if that was so, that this advantage that 
you said yesterday that the independent service stations had over 
the bigger companies, in that they could choose their brand, was 
really not so important, because there wasn't any substantial dif- 
ference between the major brands. ' I don't know whether I make 
my question clear there or not, but as I understood you yesterday 
the principal advantage that the independent service-station opera- 
tor jias in your judgment is that he can pick and select what brand 
of gasoline- he can sell. However, I don't care to press it further, 
because I see that you maintain that there is a substantial difference, 
so I guess we will have to let it rest at that. 

MAJOR INTEGRATED COMPANY'S COMPETITIVE ADVANTAGE THROUGH 
TRANSPORTATION 

Mr. Ballinger (to Mr. Pew). You and your father were against 
rebates in railroads and thought it was a vicious system. Suppose the 
oil companies had owned the railroads, would that have been all right ? 

Mr. Pew. It may have been wrong if they had practiced the same 
schemes of rebating and draw-backs. 

Mr. Ballinger. If they had turned their profits over to the oil 
companies yoii would have gotten your rebates in the form of profits. 
Under the system where they didn't own the railroad you would have 
got your rebate paid out to you at once, but it would have dome in 
under either system, wouldn't it ? 

Mr. Pew. I think itrevolves around the point of the reasonableness 
of the pipe-line rates. 

Mr. Ballinger. Eeasonable or unreasonable, I want to put an il- 
lustration up to you. Here is an independent pipe line. You are a 
competitor with this gentleman over here. The pipe line is giving 
him rebates and, sa_y, draw-backs, if you want. You complained 'bit-- 
terly against that system. But if you could own the pipe line and get 
your rebates in the form of profits, you would say it was all right. 

Mr. Pew. I think that we must visualize these pipe lines as entirely 
different from the old railroad systems that owned their coal com- 
panies. Our pipe lines are a part of our assembly line, just as 
much a plant facility as the assembly line of Mr. Ford when he 
runs his cars through and puts the various parts together on 
them. The problem, then, becomes one of utilizing our lines not 
only as a plant facility, but, on the side,' to take care of those 
other people who want to make use of our lines. I say that because 
we are a common carrier ; we are under obligations to carry the goods 
for the independent at a reasonable rate, a rate that he would be happy 
to pay us because it saves him the necessity of putting his money 
into a like facility. In fact, I think he is advantaged by it, because 
he couldn't build a line for his less.-r quantity to carry the oil at 
anything like the price that he can get for "it under these other 
conditions. 



7262 CONCENTRATION OF ECONOMIC POWER 

Mr. Ballinger. Yes; but if he were shipping over a pipe line that 
didn't belong to you, he wouldn't be contributing ; as I have said over 
and over and over again, this thing comes down to that ; he* is giving 
you something to fight him with. If he could ship over the railroads 
at equal rates with the pipe lines he then wouldn't be subsidizing 
you. 

Mr. Pew. Then I would have that money to invest in some other 
industry, I would get a return on it, and I could use the return just 
the same as I could the return that I got on the pipe line. 

Mr. Ballinger. But you think there is essentially a difference be- 
tween profits from a pipe line and rebates on railroads. 

Mr. Pew. Very definitely — reasonable earnings, reasonable profits 
on a pipe line. 

Mr. Ballinger. Why not say "reasonable rebates" ? 

Mr. Pew. No; there is no such thing as a reasonable rebate. 

Mr. Ballinger. Well, you keep it down on the side of extortion, 
completely putting the other guy out of it ; you let him linger on. 

Mr. Pew. No ; the rebate was an entirely different "breed of cats." 

Mr. Ballinger. To sum it up, I see it something like this : A prize 
fighter got into the ring and said, "I am ready to fight this inde- 
pendent refiner, but I want to introduce you to my two assistants 
who are going to participate in the struggle." This is your concep- 
tion of fair competition. You are calling in pipe-line profits and 
profits from the other end of the business and going after the little 
refiner who is in nothing but the business of refining. It does con- 
stitute a differential against him. I don't see how you can get away 
from it. 

Mr. Pew. I don't think it makes a bit of difference — excuse me for 
differing with you — whether that money is invested in a pipe line 
or whether it is invested in XYZ business. He still h3,s the money, 
and he can still use it where he pleases. 

Mr. Ballinger. The XYZ business, I say, is entirely another 
matter. Most of the troubles we have with corporations today is this 
interminable urge or the part of corporations to get into another 
business, to find some way to wangle in on it, get favoritism, special 
privileges, pull wires in six or seven different direction. I 'think it 
would be good if the oil people stayed in the oil business, railroad 
people stayed in the railroad business, and steel people in the steel 
business. 

Mr. Pew. I quite agree with you. Now you are talking about 
divorciAg the pipe lines and making us take our money out of the 
business ? 

Mr. Ballinger. Maybe there is an alternate proposal. Perhaps 
you can go on using the pipe lines, but we can prevent the differential 
lam speaking about from operating to the disadvantage of the inde- 
pendents — this differential of profits, from pipe lines. 

Mr. Pew. Then you want a reasonable rate. 

Mr. Ballinger. You still allow the differential. Suppose we have 
a reasonable rate, and 50 percent of the business is from independents 
and 50 percent your own company, and th£it 50 percent of profits 
is contributed by the fellows who hope to compete with you at the 
other end. 

Mr. Pew. You want to subsidize the other fellow. 



CONCENTRATION OF ECONOMIC POWER 7263 

Mr. Ballinger. You wouldn't subsidize him in the slightest. I 
would like to see to it that your profits from the pipe-line business 
are not used on the refining front or on the marketing front. How- 
ever, I am afraid I have taken up too much time now, Mr. Pew. We 
could argue about this all night. 

SHIPPING PRACTICES IN THE INDUSTRY 

Mr. O'CoNNELL. I should like to ask one or two questions. Do I 
understand that your company owns a fleet of tankers — oil tankers? 

Mr. Pew. They do. 

Mr. O'CoNNELL. Do you operate them under the Sun Oil Co. or 
through a subsidiary company? 

Mr. Pew. We operate about half ot our fleet through the Sun Oil 
Co. and the other half through an organization known as the Motor 
Tankship Corporation. 

Mr. O'CoNNELL. Do all of your ships operate under the American 
flag? 

Mr. Pew. They all do. 

Mr. O'CoNNELL. Are you familiar with the practice indulged in 
by at least one of the major companies of operating its tankers 
through a subsidiary corporation created under the laws of other 
countries and operated under a flag other than the American flag.^ 

Mr. Pew. I am not familiar with it. I know that it is done. 

Mr. O'CoNNELL. You know that it is done ? 

Mr. Pew. Yes. 

Mr O'CoNNELL. You don't know why it is done, do you ? 

Mr. Pew. Well, years ago we owned two or three British ships. 
We used those ships for carrying our products to Europe. It is 
impossible under normal conditions to ship oil in American bottoms 
to Europe in competition with the lower costs of the foreign-built 
ships. 

Mr. O'CoNNELL. Possibly I have something else in mind. I am 
informed that at least one of the major oil companies operates a 
substantial fleet of tankers through a subsidiary corporation under 
the Panamanian flag and that those ships are officered and manned 
by other than Americans, and I was interested to know whether you 
thought that was entirely in accord with the position I understood 
you to take, that the industry's attitude toward labor was one that was 
let me say, unparalleled. Are you familiar with that particular 
situation ? 

Mr. Pew. I am not familiar with it; but just to bring out one 
point, the cost of American shipbuilding and operating ships under 
the American flag is so much greater than it is under any of the 
other countries — most other countries — that on business as between 
A.merican ports and a foreign port the American boats just can't 
compete. 

Mr. O'CoNNELL. Well, would an oil company operating its own 
tankers and carrying its own oil be really in a position of competi- 
tion with foreign boats? 

Mr. Pew. Not in foreign trade; they can't be. 

^ These hearings were held prior to the practice of certain U. S. shippers in transferring ' 
registration of their ships to Panamanian. 

124491 — 40— pt. 14, $ec. 1 12 



7264 CONCENTRATION OF ECONOMIC POWER 

Mr. O'GoNNELL. Then I take it that the incentive to a company to 
operate under another flag would be, or partially at least, to avoid 
the requirements of, let me say, the Maritime Labor Act and^ other 
laws of this country that would require certain wage standards? 

Mr. Pew, I don't think you have to look that far for a reason. 
An American company either can't do that job at all — they have got 
to farm it out to foreigners — or they have got to operate their ships 
under a foreign flag. 

Mr. O'CoNNELL. That hasn't been the experience of your company? 

Mr. Pew. Well, we don't do any business today with other coun- 
tries in our own boats. We simply charter them. If we want to ship 
a cargo of oil abroad we charter a boat. 

Mr. O'CoNNELL. You are not familiar with the fact, as I under- 
stand it, that this company, at least this one company, made a prac- 
tice of having a substantial part of its tank fleet operated under a 
subsidiary corporation under the Panamanian flag, even though there 
was no foreign trade involved ; but as I understood it, I could think of 
no good reason other than to avoid these things. 

Mr. Pew. Under the law you can't move goods between two 
American coastal ports in any except an American-flag ship. 

Mr. O'CoNNELii. Yes; but you could move between South Ameri- 
can ports, I take it. 

Mr. Pew. Yes ; but all that business is handled by foreign bottoms. 

Mr. O'CoNNELX. By a "foreign bottom" you mean owned by an 
American company possibly but operated by another flag. 

Mr. Pew. It may be an English company, a Panamanian com- 
pany, or what not, but it just isn't economically possible to do busi- 
ness between two foreign countries or between one foreign country 
and the United States with a ship that is built in the United States. 

Mr. O'CoNNELL. I wasn't particularly thinking of built. 

Mr. Pew. I feel rather strongly about that, because I happen to be 
a shipbuilder/ and we can build ships with a less expenditure of 
labor than they can build them in any other country in the world. 
There are fewer man-hours spent in the building of our ships in 
America than is the case in Europe, and yet our costs are so 
excessive that we can't compete. 

Mr. O'CoNNELL. Incidentally, has your shipbuilding comptiny 
built any ships recently, tankers for your own company or other- 
wise? 

Mr. Pew. We built a ship a few months ago for ourselves. 

Mr. O'CoNNELL. In those operations, does your shipbuilding com- 
pany or the person for whom you are building the ship receive a 
subsidy from the Maritime Commission, a construction subsidy to 
equalize the cost ? 

Mr. Pew. Not in the case of the ship that was built for us. 

Mr. O'Connei^. Have you ever built any under that subsidy 
arrangement ? 

Mr. Pew. No. It'is, I think, a little misleading to call it a subsidy, 
because the amount of money which our Government contributes 
to the building of that ship adds nothing to the value of the ship in 
the hands of the operator. 



^ See footnote 1, supra.p. 7171. 



CONCENTRATION OF ECONOMIC POWER 7265 

Mr. O'CoNNELL. I understand that. 

Mr. Pew. It is only money that is spent for the purposes of the 
Government in the event of an emergency when the Government 
takes over the boat. It is a direct liability, I think, rather than 
otherwise, as far as the operator is concerned. 

Mr. O'CoNNELL. You are thinking of the Government subsidy or 
the Government payment which is made to give tankers additional 
speed and additional facilities to make them available in time of 
emergency; but I was thinking of the fact — I understood it to be a 
fact — that there is a regular construction subsidy which is granted to 
equalize the cost of construction of ships in this country and abroad. 

Mr. Pew. That is in export business. 

Mr: 0'Co;s^NELL. But that is quite apart from the war purpose. 

Mr. Pew. Yes. 

Mr. O'Connell. There is a distinction, I think, between the two 
of them. They both involve expenditure of Government funds. In 
one case there is a clear Government purpose to make the tankers 
available in time of war, and in the other case, I take it, it is part of a 
buy -American plan, so to speak. 

Mr. Pew. We built a number of ships, for instance, for the McCor- 
mick Line, operated under just such a subsidy as you mention. I don't 
think we have ever built any tankers to operate undeT* those conditions. 

Acting Chairman Reecb. Are there any other questions? The 
commitee appreciates very much your presentation and thanks you 
kindly for giving us this time. 

Mr. Pew. Thank you very much, gentlemen. I want to express my 
appreciation for your courtesy and your patience. 

(The witness, Mr. Pew, was excused.) 

Acting Chairman Reece. The next witness scheduled is Mr. Marion 
M. Travjs. Is Mr. Travis present? 

Do you solemnly swear that the testimony you shall ^ive in-j^is 
procedute shall be the truth, the whole truth, arid nothing but the 
truth, so help you God ? 

Mr. Travis: I do. 

TESTIMONY OF MARION M. TRAVIS, SOUTHPORT PETROLEUM CO., 

HOUSTON, TEX. 

Acting Chairman Reece. Before you begin your statement, will 
you please give us your name and background of your experience? 

Mr. Travis. My name is Marion M. Travis. I was formerly con- 
nected with the Southport Petroleum Co., of Houston Tex. I was 
its general manager in charge of all sales and purchases — all purchases 
of crude and sales of refined products. I have been in the oil business 
for in excess of 30 years. I am past 50 years of age. I have worked 
in the oil fields from the time I was 16 or 17 ; I have woi:ked under the 
drilling derrick; I have produced oil; I have refined oUf I have 
worked in the laboratory; and I have worked in executive positions 
with this and other companies that I was associated with and I believe 
that I am fully acquainted with practically every phase of the 
industry. 

I want to correct an impression in the statement I was not president 
of the Southport Petroleum Co. As I stated, I was its general man- 



7266 CONCENTRATION OF ECONOMIC POWER 

ager. I controlled 50 percent of the stock of that company and its 
subsidiary companies. 

Acting Chairman Eeece. Do you have a statement which you would 
like to make to the committee before we ask you questions? *If so, 
you may proceed, or, if you have a statement which you would like 
to summarize and have the full statement go into the record as your 
statement, that can also be arranged. 

Mr. Travis. I am at a loss. I do not want' to burden the committee 
with the job of listening to the reading of a statement. On the other 
hand, I believe by reading it I can make the statement clearer than I 
can by summarizing. 

Acting Chairman Reece. We will be glad to have you do that. 

MAJOR COMPANY DOMINATION OF THE INDUSTRY 

Mr. Travis. Many theories and explanations have been advanced 
in an effort to explain the situation that now exists in the oil industry. 

This, incidentally, was written early this year. 

The business depression, the administration, the new oil fields in 
Illinois, the more liberal licensing policy adopted by the Ethyl Cor- 
.poration, and too much crude oil being produced are among the ex- 
planations offered as the cause of the present situation. The fact is 
that none of these things are, or have been, responsible. The search 
for the real truth will lead you in the final analysis to the considera- 
tion of the methods employed and adopted by major oil companies in 
the marketing of their refined products. It is only after we thoroughly 
comprehend tliese methods that we may understand how they relate 
back to the production and control of crude oil. 

Major oil companies sell approximately 85 to 95 percent of their 
gasoline and kerosene on what is known as the tank-wagon market, 
and the remainder of their products on what is known as the spot 
market. The tank-wagon market is a market that is definitely con- 
trolled by each major, oil company and is usually the identical market 
of the other major oil companies. This market is set and fixed by 
major oil companies and over a large area of territory does not fluctu- 
ate on an average of more than once or twice a year. It is on this 
tank-wagon market that the major oil companies sell their house- 
branded gasoline. That is, the trade-marked gasoline. The spot mar- 
ket that the major oil companies sell their surplus of gasoline and 
kerosene usually constitutes the 100-percent market of the independent 
refiner. Tlie spot market is reflected by several trade journals who 
have no stake or investment in the industry, who are unsupervised as 
to their methods of representing the market, who maintain no tech- 
nical staff, and are not acquainted with production costs or relative 
values of refined products. The contribution that these trade journals 
make is their idea of the going market for the various refined products 
which they list. Set up as these trade journals are, it is not a difficult 
thing for a broker to, manipulate the refined market. This manipula- 
tion may be the difference between profit and loss to the independent 
refiner, since the great majority of independent refiners are completely 
dependent upon these trade journals for their market realization. 

Varying seasonal demand, or unfavorable statistical position, be- 
come vital factors affecting the market structure. At such times the 



CONCENTRATION OF ECONOMIC POWER 7267 

market is very susceptible to manipulation and it is a comparatively 
simple matter to depress it to lower levels. It takes but little imag- 
ination to realize that under this market set-up major oil companies 
can tilt this market downward by the simpfe expedient of dumping 
products into commerce on the spot market and thus reduce the 
spot-market quotation to a level that will destroy any possibility 
of profits resulting to the independent refiner. Keeping these 
thoughts firmly in mind, let us examine events and developments 
from before the conclusion of the Madison trial a year ago. The oil 
industry was completing tlie most successful year in it.s history. In 
September the industry was approaching the heating-oil and fuel-oil 
season with normal stock of heating oil and fuel oil on hand to meet 
the seasonal demand, and with no substantial increase in demand 
in sight, due to the fact that the 1937 depression had definitely set 
in and had unmistakably manifested itself in reduced fuel-oil con- 
sumption, yet the industry proceeded to increase its runs to stills 
instead of tapering off, having run at peak to produce the summer 
requirements. An examination of the A. P. I.^ figures dealing with 
crude oil runs to stills for the last 4 months of 1937 and the first 
three months of 1938, discloses approximately 49,000,000 barrels more 
crude oil was charged to stills than for the corresponding period of 
1936 and 1937; and that during this same period gasoline, gas, and 
fuel-oil stocks increased approximately 33,000,000 barrels. In other 
words, 33,000,000 barrels more crude oil was charged to stills than 
was necessary. In view of the fact that major oil companies all 
receive weekly statistics showing the crude runs to stills and the with- 
drawals from crude storage, and the increase in inventory stocks, 
it cannot possibly be imagined that major oil companies were unac- 
quainted with what was happening. It is much more reasonable to 
assume that not only did they know at all times what was happening, 
but that they definitely wanted to happen that which did, otherwise 
they would have taken positive steps to prohibit this increase of 
inventory. 

From this point let us proceed to review events in relationship to 
this bad inventory statistical position. Foreign buyers of crude oil 
and refined products purchased a daily average of 197,390 barrels 
of crude oil as computed for the first 10 months of 1938, and a daily 
average of 287,400 barrels of refined products for the same period; 
or a total of 484,790 barrels of crude and refined products equivalent 
to approximately 15 percent of the total crude oil produced in the 
United States for this period. The crude and refined products both 
are exported on what is known as the spot-export market. Foreign 
buyers were not slow in converting the bad statistical position of our 
refined inventory of their advantage. The foreign crude purchaser 
who often belongs to the same combination who purchases our refined 
products, advised his current American supplier that he contemplated 
sharply curtailing or discontinuing his present purchase of crude oil 
altogether, because he was being offered refined products cheaper 
than he could produce refined products from crude oil. 

The supplier was then confronted with the proposition of losing his 
sales or making price concessions. He promptly elected to do the 
latter, and this was the beginning of the crude-oil price concessions to 

Apieriean Petioleum Institute. 



7268 CONCENTRATION OF ECONOMIC POWER 

the export buyer. These foreign buyers next proceeded to advise their 
refined-oil suppliers that in view of crude-oil price concessions which 
they had received from cruderoil suppliers, that they could now j)ro- 
duce refined products cheaper than they could buy them, and by with- 
holding their purchases of refined products, they were able to force 
the refined-oil suppliers to lower their spot-market quotations, for 
refined products, so as to compete with the lowered crude-oil prices, 
at which time the crude-oil purchaser immediately went back to his 
crude-oil supplier demanding additional concessions, which were not 
difficult to secure, and then back again to his refined-oil supplier. 

So, back and forth they wended their way, never to return without 
further concessions. While all of this was taking place in the ex- 
port market between the supplier of crude oil and refined products 
on the Gulf and the buyer thereof in Europe, the following is what 
took place in the domestic market of the United States. Gulf Coast 
refiners, seeking to escape this ruinous competition, proceeded to force 
their refined products on the Atlantic seaboard and on the Pacific 
coast, and very promptly broke down these markets to the level of 
the Gulf Coast market after allowing for ocean transportation. Gulf 
Coast gasoline is said to have found its way from the Gulf to Boise, 
Idaho, via Seattle, Wash. 

At the same time this was going on refiners located in northern 
Texas, in central Texas, in east Texas, in the Shreveport, La., area, 
and in the El Dorado, Ark., areas, who had been refining and ship- 
ping about 50 percent of their gasoline, kerosene, and heating oil 
to the Gulf Coast, found themselves deprived of an outlet for half 
of their products, since they could not afford to ship gasoline, kero- 
sene, and heating oils as they formerly had done for export or coast- 
wise, and in an effort to escape the ruinous export spot market, they 
proceeded to ship their refined products northwest, north, northeast, 
east, and into every nook and cranny that would offer a better reali- 
zation than Gulf Coast export or coastwise markets would, and soon 
these refiners succeeded in breaking down the domestic markets from 
the Rocky Mountain States to the Atlantic seaboard, and thus was 
the refined market sfructure broken down from one end of the United 
States to the other, all because concessions had been originally made 
by crude-oil suppliers to export buyers from their former prices, 
which included the posted prices and the full cost of gathering, trans- 
portation, and loading. 

These results are inevitable once concessions on crude-oil prices 
are made. The crux of the entire proposition is this: So long as 
the industry is geared to produce or refeie 15 percent more than we 
can consume, this 15-percent surplus, which is exported, will, in the 
end, set the market for the 85 percent that is sold in the domestic 
market. During the interim, the majors have enjoyed a profitable 
tank-wagon realization. 

No amount of crude-oil price cuts, no improvement in the refined 
statistical inventory position, and no reduction in the crude-oil 
stocks can restore a healthy refined price structure so long as there 
are any concessions made to export buyers of crude oil. Ten cents 
a barrel on a crude-oil price concession is equivalent to one-half a 



CONCENTRATION OF ECONOMIC POWER 7269 

cent a gallon of refined-oil-price recession, not only oi^ the^ Gulf coast, 
but throughout the whole United States. 

Summarizing these events for the purpose of analysis, making a 
careful study of causes and their effects -drom the vantage point 
gained of 30 years of experience in the oil business, I am forced to 
make the following conclusions that major oil companies have evolved 
a formula that definitely limits the growth and the very existence 
not only of the independent refiner but of the independent producer 
as well. 

The components of this formula considered by themselves appear 
to be so innocent and inocuous that it is difficult to recognize them as 
parts of a definite and sinister formula. Some of these components 
have even escaped the shrewdest minds of the Government who have 
sought to delve into the mystery of major oil company set-ups. 

I do not flatter myself that I have discovered every element or 
ingredient of this formula, but I do believe that I can reveal the 
most important ones, their relationship to one another, and how they 
work. I have listed below some of the more important ingredients 
or elements that comprise this formula, I have arranged them not 
in the order of their importance, but rather in a manner as will make 
it easier to understand them. 

Mr. Travis. Ingredient No. 1 is diffused distribution. By virtue 
of diffused distribution, the independent refiner is rendered almost 
helpless in his efforts to escape the spot-market realization for his 
refined products. The tremendous investment that would be neces- 
sary to build sufficient filling-station outlets and advertise his prod- 
ucts in order to trade-mark and house-brand them would be many 
times greater than his total investment, large though it is, in his 
refining operation. Diffused distribution makes it possible for ma- 
jor oil companies to defy the entire trend of modern merchandising, 
Lhe modem trend being toward the elimination of the inefficient, 
wasteful, and expensive middleman. This trend has restored at least 
25 cents to every dollar in the way of additional purchasing power 
in connection with most of the commodities and products that we 
normally buy. The Atlantic & Pacific Tea Co., Sears, Roebuck & 
Co., Montgomery Ward & Co., J. C. Penney, E. H. Macy, Woolworth, 
Kress, and the various nationally known food-distributing compa- 
nies, among others, are distributing their products and merchandise 
on a cost-plus-25-percent (or less) basis, exclusive of the cost of 
transportation. Major oil companies distribute their^ regular trade 
gasoline, which constitutes about 80 percent of all the gasoline they 
sell, on a basis of approximately 140 percent above the cost of such 
gasoline, if purchased on the refined spot market, exclusive of taxes 
and ti"ansportation costs. 

In other words, the consuming public pays to the major oil company 
$2.40 for $r worth of gasoline, plus the tax and transportation on same. 
Motor oil and greases are distributed at even a greater cost basis to 
the public. From my computations it is apparent that the consuming 
public spends approximately 8 percent of the national income at the 
filling station. At least one-fourth of this amount, which wouTd be 
equivalent to one billion and a quarter dollars per annum might be 
saved and restored to the consumers if gasoline, motor oil, and greases 



7270 CONCENTRATION OF ECONOMIC POWER 

were distributed on a basis comparable to that on which merchandise 
is distributed in other lines of industry. If this economy were effected, 
the consumption of gasoline, motor oils, and greases would unquestion- 
ably increase at least 15 percent, and a 15-percent increase in consump- 
tive demand of refined products would mean a 15-percent increase in 
the production of automobiles, trucks, and so forth. For comparative 
purposes, this one billion and a quarter tribute that is paid to major 
oil companies because of their diffused distribution, is sufficient to 
cover our annual national relief bill. 

Mr. Travis. Ingredient No. 2. In this formula is the major oil com- 
pany tank-wagon quotation. This quotetion permits them to sell 
their trade-marked brand of gasoline on their own market structure. 
This market cannot be affected because someone deliberately, or other- 
wise, dumps a few cars of gasoline to someone at a lesser price. No 
one can rig the tank-wagon market and no broker can manipulate it 
to his advantage. This market fluctuates only when the major oil 
companies get good and ready for it to fluctuate — usually when their 
business starts falling off after the spot market has been in a pro- 
tracted decline and independents have been able to make some inroads 
on the major oil company jobber accounts. 

Mr. Travis. Ingredient No. 3. This is the spot market, and is some 
ingredient, as you will see. It is a completely unsupervised, sensitive, 
chaotic, and especially susceptible to rumor and bearish influences, 
an altogether harum-scarum, daffy-dilly sort of an affair. (You will 
pardon me for being a little facetious ; I was feeling a little differently 
at the time I wrote this.) If there is anyone connected with the staff 
of the principal trade journals who knows anything whatever about 
the technical phases of refined products, the manner or cost of produc- 
tion, I have yet to meet him. Their sources of information are prin- 
cipally the major oil companies or brokers. Yet this market is the 
one that the independent refiner is forced to sell almost all of his 
products and yet hardly ever is he consulted by the trade journals as 
to what he might know about the spot market. The independent re- 
finer is as helpless as the patient who is being operated upon and the 
comparison does not end there. It is everybody's party, but he pays 
the bill. 

Major oil companies make it their business to sell certain small 
quantities of their refined products on this spot market. They con- 
stantly trade in this market, not because they need it as an outlet, but 
because by trading in this market they cannot only influence it but 
dominate it. I have observed time and again that major oil companies 
have sold refined products on the spot domestic market, or on the 
spot export market at a lower price than the prevailing market quota- 
tion, and then turn around and cover their sales by purchasing from 
independents desperate for outlet at a still lower price. Very often 
the lower prices resulting from these transactions would be immedi- 
ately reflected in the trade journals' spot-market quotations. It is a 
notorious fact that major oil companies buy almost as much refined 



CONCENTRATION OF ECONOMIC POWER 7271 

products from indepfendents as they sell on the domestic and export 
spot markets. It is important to know and realize that most of the 
refined products majors buy in the export spot market are sold by 
them through their own controlled outlets in Europe and elsewhere 
on their own European tank-wagon markets. 

The spot market thus becomes a sort of thermostat by which the 
number of independent refiners and their state of health is definitely 
regulated. Major oil companies do not want to destroy all of the 
independent refiners. That would give entirely too much color and 
currency to the charges of monopoly and would, in the end, destroy 
them. Not daring to destroy the independent refiner completely, 
they aim to keep him barely alive on starvation rations and use him 
as a means of regulating the independent producer. 

To illustrate, when the spot market has been manipulated to re- 
flect a very bad refined market condition for a considerable period 
of time, then crude-oil prices may be lowered. Shut-downs and 
shut-ins, reduced takings, or no pipe-line connections at all, become 
the order of the day, and the independent refiner is blamed for it all 
because the indej^endent refiners' lowered spot market was responsible 
for the crude price cut and for the reduced takings^ the shut-downs 
and shut-ins, and so forth. It is a remarkable coincidence that after 
every protracted period of shut-downs and shut-ins, reduced takings, 
and no pipe-line connections, and reduced crude-oil prices, that major 
oil companies acquire a great many new properties from independent 
producers. 

Mr. Travis. Ingredient No. 4. This is pipe-line transportation, 
both crude and refined, and the passing on of all or part of the trans- 
portation economies effected to the purchaser of the commodity trans- 
ported in order to destroy competition. This subject has received so 
much attention that I will not add to it here, other than that in the 
writer's opinion pipe-line divorcement is not the cure for this evil — 
but that confiscatory taxes above a very reasonable return based on 
the valuation is — that and Interstate Commerce regulation, regulat- 
ing pipe lines that will make them common carrier in more than 
name only. 

Mr. Travis. Ingredient No. 5. This is the export spot market for 
crude oil. This is a ramification and a buttressing of the export 
refined spot market. We have witnessed and seen that concessions 
from the crude-oil prices that represent the posted and the full gath- 
ering, transporting, and loading tariff, are quickly followed by equiv- 
alent recessions in the spot market refined price structure. The 
export spot market crude price structure becomes the thermostat 
equivalent which regulates the size and the existence of the inde- 
pendent pipe-line companies who had the temerity to enter into this 
almost exclusive major oil company field. We have recently had per- 
fect examples of the workings of this ingredient of the formula in 
the sale of crude oil loaded aboardship on the Gulf at prices that 
represented actually less than the posted price paid for crude oil in 
the field in which it was gathered. In other words, the total gather- 
ing, transporting, and loading tariff was passed on to the purchaser. 



7272 CONCENTRATION OF ECONOMIC POWER 

Crude oil is at present bein^ sold by numerous companies consider- 
ably below the posted and the full transportation and loading tariff. 
The usual major oil companies' excuse for selling below the full price 
is that it was necessary to meet independent competition. 

Mr.- Travis. Ingredient No. 6, tetraethyl lead, has recently lost some 
of its importance by the reason of the adoption of a more liberal licens- 
ing policy on the part of the Ethyl Corporation. This ingredient of 
the formula up to recently was a powerral economic club that enabled 
major oil companies to produce antiknock gasoline at a greatly re- 
duced cost compared to the independent refiner who had to achieve 
antiknock quality by expensive cracking-unit installations. It is to be 
noted that this more liberal licensing policy coincides with the United 
States Government's suit against the Ethyl Corporation. 

Mr. Travis. Ingredient No. 7 is the Ainerican Petroleum Institute, 
under the auspices of which statistical information concerning every 
phase of the industry is or may be compiled. This institute is domi- 
nated and controlled by major oil companies. Its meetings afford the 
fullest opportunity for collaboration by major oil-company repre- 
sentatives for constructive policies to them or destructive policies to 
the independent, as the case may be. Such meetings without the bless- 
ing of the A. P. I. would be very awkward. Adroit presentation of 
statistical information may definitely further the purposes of monop- 
oly. Presentation of some of the statistical information in the manner 
it has been presented had a definitely bearish effect on the entire market 
structure of refined products and on crude oil, , It is well to note that 
this institute makes no effort to compile the very important informa- 
tion dealing with the production and exports of crude and refined 
products produced by these major oil companies in Venezuela, Colom- 
bia, Peru, Ecuador, Bolivia, and other important South American oil 
fields. The crude and refined products from these fields constitute the 
most important competition to our American products. There is defi- 
nite reason to believe that were this information available it would 
greatly influence our American policies, especially that of proration. 

Mr. Travis. Ingredient No. 8 is political pull, power, and influence. 
This subject is so vast, so far-reaching, so ramified, and so private as 
to make it very difficult to evolve a pattern sufficiently representative to 
do it justice, but from what I have glimpsed and from what I have 
sensed it is truly an awesome thing. I have not had occasion to become 
acquainted with this influence in the Nation's Capital. Suffice it to 
say, however, that there is not a State in this Union which has not felt 
this subversive influence in some way or another. It may be in con- 
nection with specifications under which refined products may be sold, 
which specifications contrive to make it almost impossible for an inde- 
pendent refiner to successfully compete for important business from 
the State, counties, or municipalities. It may be tax bonds, usually 
out of all proportion in size to those furnished by the major oil com- 
panies in comparison to their respective volumes of business, which 
make it extremely difficult for independent refiners and distributors 
to comply with them in many States. Tax bonds are very difficult to 
procure. 

I wish to state that there is a portion of this ingredient that at 
this time I would wish to withdraw. I think it befogs the issue and 



CONCENTRATION OF ECONOMIC POWER 7273 

serves no purpose, and it is not my intention here to create any heat, 
rather to shed light, and I will skip and start there where it starts. 

Nothing better illustrates the faith that the major oil companies 
feel in their political powers than the security with which they are 
still investing hundreds of millions of dollars in the building of new 
filling-station outlets. They say ,that concentrating distribution 
would throw thousands of people out of employment. They know 
full well that the substantial lowering of retail prices would result 
in an increased demand for gasoline and motor oil which would be 
followed by an increased demand for automobiles and trucks, and 
that the manpower necessary to produce the additional refined and 
automotive products would fully offset the manpower that might 
find itself temporarily out of employment. It is also to be remem- 
bered that in spite of the approximate 140-percent cost of distribu- 
tion, filling-station attendants as a class are among the lowest-paid 
workers in the United States. The transition from difi'used to con- 
centrated distribution could not be accomplished in less than 1 or 2 
years, during the process of which the increased demand for refined 
and automotive products would have manifested itself, and the labor 
problem would then be that of balancing the unemployed from a 
poorly paid field against increased employment in the highest paid 
field. The temporary charges for transition could be borne by gov- 
ernment, if need be. This problem of reemployment should not 
deter the junking of the diffused distribution any more than the 
throwing away of crutches on which one has hobbled along until he 
has gotten well and no longer needs. 

Acting Chairman Reece. Do you have some questions, Mr. Cox ? 

Mr. Cox. Mr. Snyder is going to examine the witness. 

LOSSES SUSTAINED BT INDEPENDENT COMPANY IN COMPETITION WITH 

MAJORS 

Mr. Snyder. Mr. Travis, for how many years were you connected 
with the Southport Petroleum Co.? 
., , Mr. Travis. From its inception. 

Mr. Snyder. About what date was that? 

Mr. Travis. I think in 1930 or '31. 

Mr. Snyder. Did you have a considerable investment in that com- 
pany? 

Mr. Xravis. I did. 

Mr. Snyder. Roughly, what was the company valued at? 

Mr. Travis. I think something like $4,000,000 net. 

Mr. Snyder. Was it a complete refining unit ? 

Mr. Travis. It was a complete refining unit, operating two refin- 
eries. 

Mr. Snyder. Where were those refineries located ? 

Mr. Travis. One at Kilgore, Tex., and one at Texas City, Tex. 

Mr. Snyder. Did the company have any crude-oil reserves? 

Mr. Travis. Very little. They had some, but very little. 

Mr. Snyder. Were they located in the State of Texas ? 

Mr. Travis. They were. 

Mr. Snyder. Did you own crude-oil-gathering systems? 



7274 CONCENTRATION OF' ECONOMIC POWER 

Mr. Travis. We did. 

Mr. Snyder. Did you have trunk crude pipelines ? 

Mr. Travis. We did not. 

Mr. Snyder. Were the gathering systems directly connected with 
your refineries? 

Mr. Travis. They were. 

Mr. Snyder. How recently did you dispose of your interest in the 
Southport Petroleum Co.? 

Mr. Travis. As of July 1. 

Mr. Snyder. Did you dispose of it because you thought it was a 
bad investment and you wanted to get out of it ? 

Mr. Travis. I have disposed of it because we had consistently been 
losing money over a period of time, in spite of the fact that we were 
doing what I call a first-rate job of refining and selling and dis- 
tributing 

Mr. Snyder. Did you have a modern plant? 

Mr. Travis. Ultra-modern. 

Mr. Snyder. Yoii had the most up-to-date cracking processes for 
the refining of crude oil ? 

Mr. Travis. We thought that they were. 

Mr. Snyder. Which branch of the industry contributed mostly to 
your losses? 

Mr. Travis. Will you explain that question ? 

Mr. Snyder. Did you have your losses in the. production branch 
of the industry ? 

Mr. Travis. Our losses occurred in the distributing end of the 
business. 

Mr. Snyder. In other words, the marketing branch is where you 
lost your money. 

Mr. Travis. The marketing branch. May I explain that? 

Mr. Snyder. Surely, we would be glad to have you. 

Mr. Travis. We attempted to escape the spot-market realization. 
There is only one way that that is possible and that is to house- 
brand your products, to advertise them and to create a demand for 
them. That permits you to do what major oil companies do, that is, 
sell your product on the tank wagon price which is considerably^ 
above that which you receive for the spot market. We surveyed 
various areas and we finally settled on the idea that we could achieve 
an economy through barge transportation or ocean transportation to 
New Orleans, and we found that there was an area in Southeastern 
United States, the States of Florida, Georgia, Alabama, Mississippi, 
South Carolina, Tennessee, Louisiana, and Eastern Texas in which 
we could achieve economies, especially from New Orleans east. 

We formed the Southport Transit Co., which acquired barges. We 
leased tugs, and we transported gasoline and refined products to one 
terminal at New Orleans, and later on to a terminal that we con- 
structed at Port Birmingham. We acquired a fleet of new trucks to 
transport over considerable distances in an effort to achieve an economy 
over freight. Prior to acquiring these facilities which would permit 
us to enter in on a competitive basis with other companies in the 
southeastern part of the United States, we went to the railroads and 
'asked for a reduction of freight rates from New Orleans — that is, 



CONCENTRATION OF ECONOMIC POWER 7275 

from Avondale, where our terminal is located, across the river from 
New Orleans — to various consuming centers in southeastern United 
States, but found that we could get nowhere in securing freight-rate 
reductions that would make it possible for use to compete on a com- 
petitive basis. 

Mr. Snyder. Did you appeal to the Interstate Commerce Commis- 
sion for those reductions ? 

Mr. Travis. That isn't hardly the way you go about these things. 
We interviewed executive heads of railroads, and we know from ex- 
perience that if they are unwilling to cooperate with you toward 
securing lowered rates that the protracted procedure of appealing to 
the Interstate Commerce Commission is just a waste of time and would 
be profitless or futile. 

Strange to say, after we had completed our transportation facilities, 
our terminals had acquired filling-station outlets, had engaged in 
advertising campaigns, and had started to create a demand for our 
products on a house-brand basis, the railroads did see fit to reduce 
freight rates from New Orleans; from Baton Rouge; from Mobile, 
. Ala. — all of which are refining centers ; and the way it worked out all 
of our economies that we, achieved were vitiated or negated, and we 
found ourselves back again to where we started. 

Mr. Snyder. For what reason? What destroyed those economies? 

Mr. Travis. Well, there are certain economies that major oil com- 
panies have. They have terminals located on the Atlantic seaboard; 
in Florida; Savannah, Ga.; Charleston, S. C. ; and all along where 
they could, with the lowered freight rates that were put into effect 
not only from New Orleans but from the Atlantic seaboard west into 
this territory compete again to advantage. 

Mr. Snyder. Are you conveying the idea that when you asked for 
lower freight rates the railroads ref used'them ; and then, after you 
went into business, the railroads granted fbwer freight rates at the 
request of your competitors ? 

Mr. Travis. Yes, sir. 

Mr. Snyder. Now, in your refining operations, what quality gaso- 
line did you manufacture ? 

Mr. Travis. We manufacture all qualities of gasoline that are being 
sold practically by every major oil company. We produced gaso- 
line according to the specifications of most, of the major oil com- 
panies on the Atlantic and Gulf coasts. 

Mr. Snyder. Was 100 percent of your gasoline production dis- 
tributed through these facilities which you gradually acquired ? 

Mr. Travis. No; only a small part. This, as I explained before, 
was an attempt to escape spot market realization and to get on the 
tank-wagon market. 

Mr. Snyder. Before you embarked on this venture of your own 
distribution, to whom did you sell your gasoline ? 

Mr. Travis. We sold on spot market to all and sundry. 

Mr. Snyder. To jobbers? 

Mr. Travis. To jobbers, to major oil companies, to independent 
distributors. We did succeed in marketing — the Southport Petroleum 
Co. is doing an excellent job of marketing house-branded products 
in the Houston area. 



7276 CONCENTRATION OF ECONOMIC POWER 

Mr. Snyder. After you began your marketing operations of your 
own, did you continue to sell to the major oil companies? 

Mr. Travis. Yes, sir. I might add that the reason for this suc- 
cessful operation in house-branding in the Houston area is due 
primarily to the fact that we can move gasoline as cheaply as any- 
body can from the Houston area to the points of distribution, and 
there are no transportation advantages available to anybody more 
than what we can enjoy ourselves. 

Mr. Snyder. That was using water transportation? 

Mr. Travis. No. It is very inexpensive to transport. We trans- 
port it from Texas City to the Greater Houston area as cheaply as 
the major oil companies, and for that reason we were definitely in 
position to compete with major oil companies in house-branding in 
that area. 

Mr. Snyder. Was a gasoline pipe line involved in your distribu- 
tion? 

Mr. Travis. No, sir. 

Mr. Snyder. Did you ever have need to use the gasoline pipe lines 
as carrier? 

Mr. Travis. I did not. 

Mr. Snyder. When you began marketing in the southeastern area 
of the United States, did your sales to the major oil companies 
increase? 

Mr. Travis. No ; it did not particularly affect them. 

Mr. Snyder. Did you sell your gasoline to several of the companies, 
or many of them? 

Mr. Travis. I have sold to many of the companies. We made the 
gasoline according to the specifications that they desired to buy. 
The Southport Petroleum Co. is still selling to major oil companies. 

Mr. Snytjer. You mean that certain of the major companies handed 
you specifications and you made the gasoline according to tho^ 
specifications ? 

Mr. Travis. It isn't quite that way. The major companies who do 
not produce all the gasoline that they need buy it through brokers 
whom they designate — gasoline such as they require according to 
their specifications. We receive the inquiries, and if we can Ineet the 
price we secure the business. 

Mr. Snyder. Then you mean in your normal operations you were 
producing gasoline of those specifications. 

Mr. Travis. Yes, sir. 

Mr. Snyder. Do you care to name the names of the co'^ipanies to 
whom you sold gasoline ? 

Mr. Travis. Yes ; we sold to Standard Oil Co. of New York, Stand- 
ard of New Jersey, the Asiatic Petroleum Co., at times to the Shell, 
we sold to the Gulf, and we have sold to the Sun Oil Co. 

Mr. Snyder. Well, now, do you know or not whether this gasoline 
that was sold them was resold by them under their brand names? 

Mr. Travis. I would have no way of knowing, but I would assume 
it was. . 

Mr. Snyder. Do you know whether the Sun Oil Co. reprocessed it 
or not before it sold it under its trade name ? 

Mr. Travis. I wouldn't imagine they reprocessed the gasoline they 
bought from us, because it was very high octane and they were very 



CONCENTRATION OF ECONOMIC POWER 7277 

particular about the specifications. If you are going to reprocess 
gasoline, you are not very particular about the specifications in the 
first instance. 

Mr. Snyder. Do you have a tetraethyl-lead license ? 

Mr. Travis. We secured one finally about a year ago. 

Mr. Snyder. Then practically all this gasoline you were selling to 
the major companies was unleaded. 

Mr. Travis. At times the gasoline, for instance, that we sold to 
Sun was unleaded. We sold some of the gasolines kaded ; most of it 
we sold was unleaded until this last year. 

Mr. Snyder. Were you able to attain a high octane without tetra- 
ethyllead? 

Mr. Travis. We were. 

Mr. Snyder. Was there any particular process that you used that 
you would care to name ? 

Mr. Travis. We used the Donnelly process, and we were licensed' 
under the Donnelly Process Corporation and the Gasoline Products 
Corporation. 

Acting Chairman Reece. What do you think about going on to- 
night ? If it is going to take considerable amount of time, my disposi- 
tion would be to recess until tomorrow. . The committee will stand in 
recess until 10 : 30 tomorrow morning. 

(Whereupon, at 4 : 53 p. m., the committee recessed until 10 : 30 a. m. 
Thursday, September 28, 1939.) 



INVESTIGATION OF CONCENTKATION OF ECONOMIC POWER 



THURSDAY, SEPTEMBER 28, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. G. 
The committee met at 10:40 a. m., pursuant to adjournment on 
Wednesday, September 27, 1939, in the Caucus Room, Senate Office 
Building, Representative B. Carroll Reece presiding. 

Present : Representative Reece, Messrs. O'Connell, Henderson, and 
Brackett. 

Present also : Hon. Edward Noble, Acting Secretary of Commerce ; 
Jdlarence Avildsen and Robert McConnell, representing the Depart- 
' ment of Commerce ; Willis Ballinger, representing the Federal Trade 
Commission ; Quinn Shaughnessy, representing the ■ Securities and 
Exchange Commission; Hugh Cox, W. B. Watson Snyder, 
Christopher Del Sesto, and F. E. Berquist, special assistants to the 
Attorney General; Roy C. Cook and Leo Finn, Department of 
Justice. 

Acting Chairman Reece. The committee will come to order, 
please. Are you ready to proceed, Mr. Snyder.? 

TESTIMONY OF MARION M. TRAVIS, HOUSTON, TEX.— Resumed 

Mr. Snyder. Mr. Travis, just before adjournment yesterday, we 
were discussing certain frieight-rate changes in the Southeastern 
area, I believe you testified that at the time you entered the area 
you had requested the railroads to reduce the rates and the railroads 
refused. Then I asked you the question if you appealed to the Inter- 
state Commerce Commission and I believe you said that you .did 
not. Then I asked you the question whether the rates were reduced 
at a later date after you had entered and begun business there. 
Do you know whether the railroads reduced those rates on their 
own motion or whether the oil companies went to the Interstate 
Commerce Commission and requested a reduction? 

Mr. Travis. I do not know. 

POSTED PRICES AND COMPETITIVE PRICE REDUCTION 

Mr. Snyder. When you began marketing in States along the Gulf 
coast and the Southeastern States, were you faced with any unusual 
competitive conditions? 

Mr. Travis. We ran into unusual competitive conditions in prac- 
tically every State that we entered into. 

7279 

124491 — 40 — pt. 14, sec. 1 13 



7280 CONCENTRATION OF ECONOMIC POWER 

Mr. Sntder. Is there any particular situation that you believe is 
outstanding ? 

Mr. Travis. Well, they were a repetition of the same thing. When 
we entered New Orleans, shortly after we entered, there were" price 
i-eductions in the spot market of a cent a gallon. We certainly had 
not made any inroads on competitive accounts to justify, in our 
opinion, such a price cut as took place. 

Mr. Snyder. In order to obtain a gallonage in New Orleans did 
you cut the price? 

Mr. Travis. I do not think so. I think our policy has been to 
sell quality rather than price. 

Mr. Snyder. Were you selling third-grade or branded gasoline in 
New Orleans at that time? 

Mr. Travis. We were selling .all grades of gasoline and endeavor- 
ing to brand our quality gasoline. 

Mr. Snyder. You conducted newspaper advertising? 

Mr. Travis. We did, radio and newspaper advertising. 

Mr. Snyder. What was your brand name? 

Mr. Travis. Hiotane. 

Mr. Snyder. Suggested by high octane? 

Mr. Travis. It is a patented word, a combination of the two. 

Mr. Snyder. How long had these so-called price wars continued 
after you went in there? 

Mr. Travis. They are periodic. The periodic-price wars in the New 
Orleans area have been over the last several years — there have been 
more price-war periods than there have been periods when there 
were no price wars. 

Mr. Snyder. During these price wars on gasoline, about how many 
cents per gallon below the prevailing price existed ? 

Mr. Travis. Do you mean in the spot market or in the filling 
station ? 

Mr. Snyder. At the filling station. 

Mr." Travis. Several cents. 

Mr. Snyder. Several cents per gallon? 

Mr. Travis. Per gallon. 

Mr. Snyder. Did the tank-wagon price fluctuate the same way? 

Mr. Travis. I have no way of knowing what the major oil com- 
pany tank-wagon prices are; that is between them and their jobbers, 
or dealers. 

Mr. Snyder. Are not those tank-wagon prices published in the 
trade journals of New Orleans? 

Mr. Travis. Well, I don't think so ; I don't think they are published 
in any local trade journals. 

Mr. Snyder. Are they published in the National Petroleum News ? 

Mr. Travis. I think that they are published in the National Petro- 
leum News, but the tank-wagon price structure is a thing that is 
between the major companies and their own particular jobbers, and 
we don't i-eally know, what they really are. 

Mr. Snyder. In other words, you don't believe that gasoline is 
being sold at the tank-wagon prices by the majors; you believe they 
are lower prices ? 

Mr. Travis^ That depends entirely, I imagine, on the particular 
njajor policy. 



CONCENTRATION OF ECONOMIC POWER 7281 

Mr. Snyder. Now, in regard to the export market, do you find 
the competition from all the major companies about on the same 
level, just as keen from one as another? 

Mr. Travis. Just what do you mean by that? 

Mr. Snyder. Do you find that major company X reduces price* 
just about the time major company Y reduces it? 

Mr. Travis. Yes, 

Mr. Snyder. Take products, let's take gas oil. 

Mr. Travis. As I said before, major companies buy more in the 
spot market than they sell, and what they sell we do not know; we 
only know of what they buy and what their policy is toward the 
aarkets in connection with their buying. 

Mr. Snyder. Sales from what class of refiners constitute the spot 
market ? 

Mr. Travis. Sales from independent refiners constitute the spot 
market. 

Mr. Snyder. You were an independent refiner, were you not? 

Mr. Travis. I was associated with an independent refiner at the 
time. 

Mr. Snyder. Did the trade journals check with your company to 
get your sales prices? 

Mr. Travis. Only to this extent, perhaps once in 7 months I would 
be called up; one particular individual of Piatt's Oil Gram, and 
asked what the situation looked like. They would ask particularly 
as to what we were selling. 

Mr. Snyder. For instance, did they ask you if you had sold a 
•argo of gas oil and at what price you sold it ? 

Mr. Travis. No. 

Mr. Snyder. If they had asked you, would you have reported it 
to them ? 

Mr. Travis. I would. In fact, I reported many sales to them and 
in connection with that it is well to bring out that the spot export 
market is reported by one trade journal only, the Petroleum News, 
and Piatt's Oil Gram, which is the same company more or less. 
They have an exclusive trade journal; they have no representative 
in the Gulf coast market. Their markets are made in New York; 
the opinion that they reflect is the buyer's opinion and not the 
seller's opinion. 

Mr. Snyder. Would you say, when you say "buyer's opinion," would 
you consider that to be the major oil companies' opinion ? 

Mr. Travis. No; it is the opinion of the buyer, whether he is a 
foreign company or a foreign purchaser. It is his idea, or he reports 
the prices for which he bought or paid for certain commodities. 

Mr. Snyder. Now, most of the major companies do post prices at 
which they sell their various commodities to different classes of cus- 
tomers. On the whole, do you find that those companies adhere to 
those prices in actually making sales ? 

Mr. Travis. In reference to that 

Mr. Snyder (interposing). Any refined products; take crude oil 
and refined products. 

Mr. Travis. It is difficult for me to say what they do or what they 
don't do. It is an opinion, and we can only express an opinion as 



7282 CONCENTRATION OF ECONOMIC POWER 

we see things happen in re-sults and conclude from these things that 
have happened. 

Mr. Snyder. Do you have the opinion that in buying and selling, 
some major oil companies are more ethical than others? 

Mr. Travis. Unquestionably. 

Mr. Henderson. May I ask the cross-examiner what he means by 
"ethical" ? Is that a proper question, Mr. Qhairman ? 

Acting Chairman Reece. I think so, if he is able to answer it. 

Mr. Henderson. He has a question and an answer and I still don't 
know what he means. 

Mr. Snyder. I am relating to the former question as to whether 
the companies were selling at the prices which they posted. Do you 
think it unethical for a major company to post a sales price and 
then not to sell at that price? 

Mr. Travis. I would think so ; yes. 

Mr. Snyder. Is there any particular company that you have in 
mind that always follows the practice of posting a price and not 
selling at that price ? Or put it the other way : Is there any company 
you have in mind that always sells at their posted price? 

Mr. Travis. I can perhaps best answer that question in connection 
with purchases of crude oil that we have made. 

Mr. Snyder. Your purchases of crude oil from major companies? 

Mr. Travis. Yes. 

Mr. Snyder. For instance, with what company did you deal gen- 
erally in making your purchases? 

Mr. Traatcs. We have bought crude from the Texas Co., we have 
bought crude from the Humble, we have bought crude from the Sun 
and one or two other companies that don't come to mind. 

Mr. Snyder. You bought crude from them on the posted price for 
crude, that was the basis of the purchase? 

Mr. Travis. At posted price for crude. 

Mr. Snyder. Were you able to get concessions from these com- 
panies at the time you made the purchases ? 

Mr. Travis. On some companies, yes. 

Mr. Snyder. In giving you those concessions, do you think the com- 
panies were unethical ? 

Mr. Travis. I think if posted price for crude oil is followed, that 
any recession from that price to anybody is unethical, and it is pleas- 
ant for me to say that in my dealings with the Humble Oil Co. 
that that company has never offered any crude at less than the posted, 
the gathering, the transporting, and the loading tariff, plus usually 
1 cent or 2 cents a barrel for brokerage. All of those were included 
in the price. 

Mr. Snyder. In contrast with the Humble Co. , are there any com- 
panies that you have in mind that are unethical, using that as the 
measure of ethics? 

Mr. Travis. I would rather not state at this moment. 

Mr. Snyder. I won't press the question if you would rather not 
answer it. 

Mr. Travis. I would rather not answer it. 

Mr. Henderson. Mr, Chairman, if counsel doesn't want to press 
it, maybe we ought to knoAV 5^hether from the witness's response we 
are to take it that he prefers not to name companies that have been 
guilty of what he calls unethical practices, but would rather leave 



CONCENTRATION OF ECONOMIC POWER 7283 

the impression that there are some that are guilty. Can we have 
dome understanding that way ? I don't like to see a question of such 
importance passed over. Do I gatl>er, Mr. Travis, from your re- 
sponse that there are companies that do not adhere? 

Mr. Travis. Most certainly there are. 

Mir. Henderson. May I ask, while I am on the subject, if it is 
unethical for the seller to sell at a different than posted price, is it 
unethical for the buyer to take it? You were very clear as to the 
lack of ethics in the case of the seller. Do you have any ideas on 
that? 

Mr. Travis. Mr. Henderson, business is competitive. 

Mr. Henderson. That is what a seller would say. 

Mr. Travis. If you have to have crude, you usually buy, especially 
if you buy the crude, you buy it at the best price obtainable; but the 
practice of making concessions from the posted and the full tariff for 
transporting, gathering, and loading leads to a break-down of the 
entire structure, as I pointed out yesterday. 

Mr. Henderson. The entire structure of what? You mean the 
price structure? 

Mr. Travis. The price structure for refined and crude. 

Mr. Henderson. When you say "a break-down," do you mean a 
lowering of the price ? 

Mr. Travis. I do. 

Mr. Henderson. Well, of course, in some sense of the word, the 
way a real structure of prices is made by rigging the market, 
and the competition as between the buyer and seller with different 
conditions of supply and demand. 

Mr. Travis. I expressed this opinion. The whole theory of prora- 
tion is based on the idea of balancing supply against demand. 

Mr. Henderson. W^hose theory of proration? 

Mr. Travis. The Commission of Texas maintain that crude oil 
produced in excess of market demand constitutes waste. I think that 
that is the accepted theory of proration. I think it is for that 
reason that crude-oil purchasers infer that they have the right to 
post fixed prices for crude oil, because there is so much demand and 
so much supply. 

Now, if they undertake to fix posted prices for crude oil, I think 
it is incumbent upon those crude- oil-purchasing companies to main- 
lain the price structure in relationship to their posting; in. other 
words, that if they are to sell crude oil, that it would be unethical 
for them to make concessions in their transportation and sell the 
crude oil at which every independent refiner has to meet the posting, 
and to sell that crude oil into the market at a lesser price than repre- 
sents the posted, the transportation, loading, and gathering tariff. 

Mr. Henderson. Let's get back to the buyer. What is his theory 
about proration and posted prices? Could I get an answer to the 
question I posed whether it is unethical for a buyer to buy below the 
posted price? You started explaining it in terms of competition, but 
I want to get back to this ethical concept. What do you think of a 
buyer who buys for less than the posted price ? 

Mr. Travis. I think that he is helpless. He either has to buy it at 
the best price obtainable, because in relationship to his price it is 
going to relate back to what he receives for his finished products, and. 



7284 CONCENTRATION OF ECONOMIC POWER 

if he doesn't buy it as cheaply as he can, he will lose just that 
much more. 

Mr. -Henderson. So it shifts over from an ethical concept to a 
profit-and-loss concept, then, as far as the buyer is concerned? 

Mr. Tkavis. I think, Mr. Henderson, that there is this difference, 
that the buyer who buys from crude-oil-purchasing companies has 
not undertaken the moral obligation to maintain a price structure. 

Mr. Henderson. In other words, he hasn't posted a buying price.^ 
Mr. Travis. He has not posted a buying price. The crude-oil- 
purchasing company that posts a buying price has undertaken, to my 
mind, the moral obligations of maintaining that position. 

Mr. Henderson. Let me ask you this in that connection. Which 
did you find the "most profitable period of your operations, when 
crude was low or when it was high? 

Mr. Travis. It is more profitable when crude is high. 

Mr. Henderson. That is your considered experience? 

Mr. Travis. That is my own experience. When crude is low there 
is no bottom to the market, and the market is chaotic. We find 
that foreign buying is at its low ebb during a period of price 
recession. 

Mr. Henderson. I am not talking about breaking the market or re- 
ceding the market. I am talking about the level of price now. Over 
the period of your operations, have you made more money when crude 
has been low or when it has been high ? 

Mr. Travis. We made more money when crude was high. 

Mr. Cox. Wlien the posted price was high ? 

Mr. Travis. When the posted price was higher and when the refined 
price was maintained in relationship to the posted price. 

Acting Chairman Keece. When some companies were selling below 
the posted price and you were able to buy below the posted price and 
did buy in that way, why did you part of the time buy from the com- 
panies who maintained the posted price ? 

Mr. Travis. We bought crude that was specifically suited to our 
purpose, to our contracts, and to our marketing poliey^, and that in the 
final analysis dictated as to whom we bought the crude from. In other 
words, the wrong kind of crude we couldn't use even at price "Conces- 
sions. By the "wrong kind" I mean the kind that doesn't fit in with 
our refining operation. 

Mr. Snyder. Of course, you buy crude at the posted price and you 
sell your products on the market price. 

Mr. Tra\t[S. On the spot market. 

Mr. Snyder. The spot-market prices. Your margin of profit, then, 
gross profit, is measured by the difference between the two prices, 

Mr. Travis. Right. 

Mr. Snyder. Your theory is that the higher crude-oil prices 
strengthen the spot-market price ? 

Mr. Travis. They do. 

Mr. Snyder. Now, while you are in the refining business down tliere 
most of the time, do you find that that relationship actually exists be- 
tween those two prices? Do you enjoy that profitable relationship? 

Mr. Travis. We do. When crude oil becomes scarce and temporarily 
when there are no crude-price concessions being made to export buyers, 
the refined-market structure strengthens very qui 'My and stays firm 
until crude-price concessions are made again. 



CONCENTRATION OF ECONOIillC POWER 7285 

Mr. Snyder. Does that situation apply to practically all refined 
products which you sold? 

Mr. Travis. Practically to all of them. 

Mr. Snyder. Do you have any difficulty in making a profit on gas 
oil, Diesel oil, furnace oil? 

Mr. Travis. Well, the gas-oil, Diesel-oil, furnace-oil phase of the 
independent refining operation is what might be termed as the bottle 
r.eck to their operation. 

Mr. Snyder. What percentage of your refining operation is repre- 
sented by gas-oil production? 

Mr. Travis. On some crudes 40 percent, on some crudes 50 percent. 

Mr. Snyder. So gas oil was an important product so far as your dis- 
tribution was concerned? 

Mr. Travis. It was a very important product. 

Mr. Snyder. Do 3'ou find that trade journals correctly reflect gas-oil 
and Diesel-oil prices? 

Mr. Travis. The objection that we find to the trade journals' reflec- 
tion is simply this : There are not very many sales made during a week 
on the Gulf coast excepting in cargo lots, and it is different than it 
is in the interior where there are hundreds of carloads of products 
sold daily, and the practice of interpreting the market on cargo lots 
where there are only three- or four- or five-cargo spot-market sales 
made a week, on an average, is a bad one, for this reason : They should, 
in my opinion, reflect the actual sale for the actual commodity. , If 
Piatt's say they interpret the market to be that gasoline is 5 to 5^4, the 
thing that happens is this: That is an interpretation; if a cargo of 
gasline is sold at 4% it immediately goes down, if it is sold at 514 the 
low does not rise. 

Mr. Snyder. The low fluctuates ? 

Mr. Travis. The low fluctuates. 

Mr. Snyder. The high remains permanent for a period? 

Mr. Travis. The low fluctuates downward but remains practically 
stationary upward because you have got to make a sale at a price 
above the high quotation before they will reflect it. We have 
had that up with Piatt's time and again. They insist that the realiza- 
tion must be greater than their high because they say, "Well, we do 
quote it 5 to 5i/4 and. if you have gotten 5i^ that is the market quota- 
tion." A quarter of a cent a gallon on a cargo of gasoline or a cargo 
of anything amounts to $8,000 or $10,000-^10 cents a barrel. 

DIESEL and heating OILS PURCHASES AND SALES 

Mr. Snyder. Do you find that any of the major companies purchas- 
ing products from you take advantage of the difference between high 
and low prices on various similar products? Now, for instance, 
Diesel oil and heating oils ? 

Mr. Travis. I would prefer to answer the first part of that ques- 
tion first and the last part of it second. There is a distinct difference 
in the policies of certain majv-^r oil companies, I have sold millions 
of dollars worth of products to the Standard Oil Co. of New Jersey 
and I have never been requested to sell them products at lower than 
the going price. More often than not I have received their idea of 
j)rice that was somewhat higher than the going price. In contra- 



7286 CONCENTRATION OF ECONOMIC POWER 

distinction to that, the Asiatic Petroleum Co. policy is diametrically 
opposite. 

Mr! Snyder. I wish you would give some explanation of their action. 
If you have any example in mind. 

Mr. Travis. Yes. The Asiatic Petroleum Co. is the largest buyer 
of Diesel oil and other refined products probably in the United States, 
for the export market. This company, as I understand, does not pro- 
duce or does not refine; they are domiciled in this country and buy 
for their foreign associations. They are the largest buyers of Diesel 
oil. Now, we have contracted sales — or I have contracted for the com- 
pany as an associate in the past, for sales of Diesel oil. In every 
mstance they insisted that the contract be based in relationship to 
the spot-market quotation for heating oil as published in Piatt's. 

Mr. Snyder. What is the difference between the Diesel-oil quotation 
and the heating-oil quotation in cents ? 

Mr. Travis. That varies with the season. The usual difference is 
around a half a cent a gallon — heating oil being on an average one- 
half cent lower. 

Mr. Snyder. In winter? 

Mr. Travis. I mean for the over-all period. Now, the mischief of 
this type of contract — and yet they are the largest buyers, and if we 
couldn't sell gas oil, we were almost dependent upon them — was this : 
The independent refiner, as I pointed out before, refines 40 or 50 per- 
cent of his crude oil into gas oil or Diesel oil and the same oil might 
be used or utilized as heating oil. The independent refiner has neither 
the financial or the physical facilities to store gas oil during the period 
of low seasonal demand as heating oil, and he has to sell it. The 
Asiatic insist upon buying high Diesel, or whatever Diesel index gas 
oil they want, in relationship to the heating-oil season. The heating- 
oil season has a period of about 4 months a year when it is firm and 
the rest of the year it is weak, and susceptible to fluctuation, and is 
very sensitive. 

Mr. Henderson. First of all, do you know what countries the 
Asiatic buys for ? 

Mr. Travis. The most, or a great deal, of the gas oil that I have sold 
them in the past was shipped to England. I think they are associated 
with the Royal Dutch Shell, one of that group. 

Mr. Henderson. When you talk about the independent and his diffi- 
culties as to storage, and therefore his susceptibility to the market, 
I have two questions on that. In these 4 months when demand is firm 
for heating oil, did you say independents ever have any difficulty in 
getting a supply of crude ? 

Mr. Travis. We contract the bulk of our crude requirements from 
year to year. 

Mr. Henderson. Have you ever had any trouble in getting all that 
you wanted? 

Mr. Travis. No. 

Mr. Henderson. Now, on the next part of the question, in the 8 
months when you say the market is not firm, do I gather that the 
buyers know very well the .independents' position, that they have 
to sell and they traffic in it pretty extensively ? 

Mr. Travis. That is correct. 

Mr. Henderson. So you get a condition which you would call an 
unstabilized or chaotic market about 8 months of the year ? 



CONCENTRATION OF ECONOMIC POWER 7287 

Mr. Travis. In relationship to gas oil — yet, mind you, the Diesel- 
oil season is coincident with the gasoline season. It so happens that 
Europe has gone to Diesels to a much greater extent than we have in 
this country and for that reason the demand is abroad rather than at 
home. 

Mr. Henderson. Well, I gather from your testimony that you 
thought the Asiatic did take advantage of that? Did they or any 
large buyers ever drive the price down below your costs ? 

Mr. Travis. Yes, sir. 

Mr. Henderson. Is that frequent? 

Tr. Travis. During the last 2 years up to recently it has been 
almost constant or at least for the best part of a year and a half. 

Mr. Henderson. That would mean, from the gravity of your tes- 
timony, that foreign buyers are getting our natural resources at less 
than cost? 

Mr. Travis. Unquestionably. 

Mr. Henderson. And they were able to do that on account of the 
relative power and size of the buying as against the relative weakness 
of the selling instrumentality? 

Mr. Travis. That, added to a bad inventory position that occurs 
periodically during the last 2 years within our own industry. 

Mr. Snyder. Is it necessary to sell to the Asiatic Petroleum Co.? 
Are there any other purchasers? 

Mr. Travis. The other purchasers have during the last 2 years been 
materially reduced, greatly reduced. The political condition in Eu- 
rope is such that the totalitarian States buy on a trade-and-barter 
basis, in Rumania and other places, and the independent distributors, 
many of them who formerly were large buyers, have ceased to exist 
and gone out of business. 

And during the last year and a half the Asiatic Petroleum Co. has 
been the largest buyer of gasoline and gas oil, 

Mr. Snyder. Are they purchasers of gas oil in such quantities that 
they set the gas-oil export spot market ? 

Mr. Travis. You have an anomaly there. Piatt's post a Diesel 
price and also post a heating-oil price, a furnace-oil price. 

(The vice chairman assumed the Chair.) 

Mr. Snyder. The way you have explained it, I don't see that 
Asiatic's purchases affect either of these prices, do they ? 

Mr. Travis. The Diesel-oil price remains more or less stationary 
and the heating-oil price fluctuates for about 8 months of the year 
downward and then is constant. 

Mr. Snyder. They are buying on a heating-oil market and as far 
as you know selling on a Diesel-oil market. 

Mr. Travis. That is right. 

Mr. Snyder. Now in regard to the statistical reporting, what you 
call ingredient No. 7,^ did you ever make any attempt to have the 
American Petroleum Institute change their system of reporting? 

Mr. Travis. I did, 

Mr. Snyder. How did you go about bringing it to their attention ? 

Mr. Travis. I wrote a letter of October 20, 1938, to Mr. Axtel J. 
Byles, president of the American Petroleum Institute, and made some 
criticism and some suggestions, and a cOpy of this letter and the en- 

1 Supra, p. 7272. 



7288 CONCENTRATION OF ECONOMIC POWER 

closure I herewith hand you. In this letter I also requested the op- 
portunity of addressing the American Petroleum Institute in connec- 
tion with some of these things, and others, and Mr. Byles was kind 
enough to extend an invitation, which I accepted, and had the oppor- 
tunity of reading this particular paper in November last at Chicago 
at the A. P. I. meeting. I offer that. 

Mr. Snyder. Mr. Travis, in your letter to Mr. Byles you made 
some suggestions for eliminating what you believed were the evils 
of the reporting system ? 

Mr. Travis. I -did. 

Mr. Snyder. Would you mind putting these in the committee's 
record, the letter and the speech ? 

Mr. Travis. No ; I offer them for this record. 

Mr. Snyder. Mr. Chairman, Mr. Travis offers his letter to the 
American Petroleum Institute and his speech before their board of 
directors as exhibits to supplement his testimony. 

The Vice Chairman. Are they submitted for the committee? I 
am not familiar with the practice of the committee. 

Mr. Henderson. I suggest, Mr. Chairman, that they are proper for 
admission. 

Mr. Snyder. It saves the time of reading them. 

The Vice Chairman. They may be admitted. 

(The letter and manuscript referred to were marked "Exhibits 
Nos. 1175 and 1176," respectively, and are included in the appendix 
on pp. 7512 and 7515. 

excessive marketing costs in distribution of gasoline and oil 

Mr. Snyder. In your statement you discussed the subject of dif- 
fused distribution. What is diffused distribution? 

Mr. Travis. Well, it is just the opposite of concentrated distribu- 
tion. What I mean by that is this : If a commodity is distributed in 
myriads of places to where the volume is small, the cost of distribu- 
tion becomes excessive. 

Mr. Snyder. For instance, do you mean selling gasoline at a small 
service station at the rate of 250 gallons a day, for instance, as con- 
trasted with selling 5,000 gallons at another service station? 

Mr. Travis. Selling gasoline in amounts of two or three hundred 
gallons a day to my estimation is the result of too many stations, 
and the cost — it is obvious, most any station, as an example, needs 
two or three employees. When you consider even the low prices paid 
for help in the filling station business, you have costs of $10 or $12 
a day resulting. If you divide 250 gallons a day by $10 a day as the 
cost, the overhead cost, you have a cost resulting of 4 cents a gallon 
for merely taking the gasoline out of the pump and putting it into 
the automobile. That is almost as much as the refiner gets, which 
represents the producer and the transportation and the refining of 
the gasoline. 

Mr. Snyder. How would you go about eliminating this situation? 

Mr. Travis. Merely by the creation of master filling stations. I 
would first of all suggest that the Government once and for all set 
up specifications as to what constitute the various grades of gaso- 
line.^ Now it might be argued that the changes in the automotive 

^ On the subject of standards and specifications of commodities generally, see Hearings, 
Part 8. 



CONCENTRATION OF ECONOMIC POWER 7289 

industry are such that these specifications would not be possible and 
so I would say, anticipating that criticism, that the evolution of the 
gasoline motor has leveled off. They have reached the top of high 
compression and some of the companies have even backed away from 
it. To divert just a moment, the automobile engine has been in- 
creased in capacity of horsepower. 

The Vice Chairman. Mr. Snyder, may I inquire of you and your 
staff, what is the point of this testimony? 

Mr. Sntdee, Mr. Travis in his statement thinks he has a solution 
for saving many millions of dollars to the public, which is the over- 
head of gasoline filling station operation, and which the public pays 
for by having the various stations selling small quantities with a labor 
bill of many cents above the price which the gasoline leaves the re- 
finery, and he thinks he has a solution for this problem. He believes 
it will reduce the price of gasoline to the public. 

The Vice Chairman. Don't you think you are going pretty far 
afield so far as this investigation is concerned ? 

Mr. Snyder. I think that is up to the committee to decide whether 
they are interested. 

The Vice Chairman. Personally I don't have a very definite opinion 
myself, but I shouldn't say improvements in automobiles had ari^'thing 
to do with this inquiry we are trying to conduct, 

Mr. Snyder. Are there any other matters you wish to tkring before 
the committee ? 

Mr. Travis. In corroboration of the statement of the cost of distri- 
bution being some 140 percent, I would offer the National Petroleum 
News issue of January 11, 1939, which shows a graph of comparative 
figures for 5 years and of the direct intention of the period of 1938, 
the weighted average tank car price on the spot market for 12 markets 
as against the average station price for gasoline exclusive of tax in 50 
cities throughout the United StateSv. This differential reprea!en;ts 
some 8 cents a gallon. 

Mr. Snyder. This 8 cents is a differential between 

Mr. Travis (interposing). The spot market tank price as an aver- 
age price — we usually can't get the average price, we have to sell on 
the low — and the service station filling price exclusive of tax. 

Mr. Snyder. And that includes the freight from the refinery to 
distributing point? 

Mr. Travis. That is right. 

Mr. Snyder. And includes the retailer's margin. 

Mr. Travis. And the jobber's margin. 

Mr. Snyder. The jobber's margin. 

Mr. Travis. That is right. There is a spread of 8 cents which on 
6-cent gasoline will be the equivalent of 133 percent. 

Mr. Cox. The witness has offered this chart. We have Jio objections 
to its being entered in the record if the committee desires. 

The Vice Chairman. The commrt^,ee will consider it. My colleague 
makes inquiry as-to the source of this information. You mean this 
whole book? 

Mr. Travis. Just that particular page. 

The Vice Chairman. The committee will consider it. 

Representative Williams. What is the source of the information 
upon which that graph is made. 

Mr. Travis. The National Petroleum News is a trade publication 
and this is their, gathering and interpretation of the markets through- 



7290 CONCENTRATION OF ECONOMIC POWER 

out the United States, tank wagon spot market and the filling station 
market, and they say down below the graph, covering 50 cities through- 
out the United States. 

The Vice Chairman. Just this one page ? 

Mr. Travis. Yes, sir. 

(The chart referred to was marked "Exhibit No. 1177" and is 
included in the appendix on. p. 7520.) 

The Vice-chairman. Are there any other questions? 

Mr. O'CoNNELL. Mr. Travis, I understood you to say that it was 
the generally accepted theory of proration that its purpose is to 
bring the supply of crude in equilibrium with the demand for gaso- 
line and other petroleum products. Is that correct? 

Mr. Travis. That is right. 

Mr. O'CoNNELL. Had you heard it suggested that there was at least 
large justification given for the policy of proration on the grounds 
of conservation? 

Mr. Travis. Well, the interpretation, of conservation as made by 
the Railroad Commission of Texas is that crude oil produced in 
excess of market demand constitutes waste, and therefore would be 
conservation to maintain apparently between supply and demand. 

Mr. O'CoNNELL. Were you here the other day when Dr. Pogue 
was explaining proration ? ^ 

Mr. Travis. I was not. 

Mr. O'CoNNELL. As I understood his testimony, it was to the effect 
that conservation involved operating oil wells at a rate which would 
produce the optimum of crude oil over the life of the well. 

Mr. Travis. Well, unquestionably proration as it is practiced now 
has gone far beyond that state. When you have a condition with 
wells capable of producing in excess of a thousand barrels a day and 
are permitted to produce only 20 barrels or 21 or 22 barrels, it is 
obvious that they have gone beyond that stage of conservation. 

Mr. O'CoNNELii. Would it be fair to say that in your opinion pro- 
ration as it is practiced is primarily for the purpose of controlling 
supply rather than for achieving a broad policy of conservation? 

Mr. Travis. That is right. 

Mr. Shaughnesst. Mr. Travis, I would like to follow up Mr, 
O'Connell's question as to proration being partially a function of 
price. You stated that your company makes more money when the 
price of crude is high. Would that apply if the price of crude were 
not fixed ? 

Mr. Travis. Yes, I think so, for this reason. If the price of crude 
were not fixed you would have chaos altogether. 

Mr. Shaughnesst. By "chaos" do you mean fluctuating prices ? 

Mr. Travis. It is more than that. You would not be able to plan ; 
you wouldn't be able to refine; you would buy something, and you 
wouldn't know what you could hope to get, and it would be chaotic; 
that is just the only word that I can think of. 

Mr. Shaughnessy. It might be competition, though, mightn't it? 

Mr. Travis. It might be competition, but I don't think that it is 
the purpose or that it is desirable to have an industry to becon^e so 
competitive that bedlam ensues, because that will in the end destroy 
the mdustry. 

^ Supra, p. 7113 et seq. 



CONCENTRATION OF ECONOMIC POWER 7291 

Mr. Shaughnessy. But, assuming that that is true, didn't you start 
your refinery originally on very little capital ? 

Mr. Travis. We acquired production; we started the refinery on 
modest capital. 

Mr. Shaughnessy. And didn't your refinery grow very rapidly 
prior to 1934? 

Mr. Travis. No. We made more headway after 1934,— '34, '35, '36— 
at Texas City than we' did back in the small plant that we had at 
Kilgore. 

Mr. Shaughnessy. But you did make a substantial investment at 
Kilgore on the basis of your earlier profits, didn't you? 

Mr. Travis. We made a substantial investment. We felt that even- 
tually as we made money producing — we were fortunate there ; we 
invested it in refining facilities — and we felt that eventually the thing 
would steady down; and in that connection I wish to say that we 
did not make much money when you had a chaotic price condition 
in the east Texas field. 

Mr. Shaughnessy. You did make enough to build the refinery at 
.Texas City. 

Mr. Travis. Tha^ was money that we made in the producing 
business rather than in the refining business, and that was a matter 
of chance. If you buy leases and they become proven and become 
valuable; as a matter of fact, to build our plant at Texas City we 
sold off quite a number of wells that we had in the east Texas field. 

Mr. Shaughnessy. In other words, the governing basis of the build- 
ing of your refinery system was the profit that you made from 
crude oil? 

Mr. Travis. More than it was from the refining, in the early str.ges, 
and then when we built our plant at Texas City we were able to make 
money at ^ Texas City, and the conditions had become quite well 
stabilized. 

Mr. Shaughnessy. And then you were able to make money despite 
the existence of the spot market ? 

Mr. Travis. In spite, of it. 

Mr. Shaughnessy. Until you got the export last year ? 

Mr. Travis. Until the excess inventory piled up in 1938, and until 
crude-oil price concessions became the order of the day to export 
buyers of crude oil. 

The Vice Chairman. Any further questions? 

Mr. Travis. I wish to thank you, gentlemen, for yqur courtesy. 

(The witness, Mr. Travis, was excused.) 

The Vice Chairman. Mr. Dailey. 

Do you solemnly swear that the testimony which .you are about to 
give will be the truth, the whole truth, and nothing but the truth, 
so help you God ? 

Mr. Dailey. I do. 

TESTIMONY OF JOHN B. DAILEY, HOUSTON, TEX. 

The Vice Chairman. Mr. Dailey, I am advised that you have a 
statement prepared to be offered for the record. 
Mr. Dailey. Yes, sir. 

The Vice Chairman. Will you proceed, please? 
Mr. Dailey. I do not have that statement in my possession. 



7292 CONCENTRATION OF ECONOMIC POWER 

The Vice Chairman. I understand that you will summarize this 
statement, and then you want to offer the statement in the record, as I 
understand it. It may be received as an exhibit. 

(Mr. Dailey's prepared statement was marked "Exhibit No. 1178" 
and is included in the appendix on p., 7520.) 

The Vice Chairman. Tell us who you are and give the committee 
some explanation that will identify you and your interests and the 
reason for your presence. 

Mr. Dailey. Mr. Chairman and members of the committee, my name 
is John B. Dailey, of Houston, Tex., and I am not an oilman. My 
business experience has been related to other fields except for a brief 
experience after the war as a roughneck on the drilling rig. That is 
the work on the derrick floor, tip until 2 years ago, when I went 
down to Houston, I was faced with the problem such as any layman 
might be, having a lease of land in an oil field. That is my connec- 
tion with the oil industry, and I will say more or less that my state- 
ment which I have filed is more testimony of just what happened 
rather than as an oilman qualified to give any technical opinion. 

Mr. Cox. You may proceed. 

The Vice Chairman. The counsel has some familiarity with the 
testimony that is supposed to be developed from this witness? 

Mr. Cox. I haven't seen all of the statement. 

The Vice Chairman. I don't know what the practice is, but I 
assume counsel will proceed to develop the testimony as though this 
witness had been called by some member. 

Mr. Cox. The procedure heretofore followed has been that the wit- 
ness gives a short summary of the statement. I think Mr. Dailey 
will give a summary of his statement. 

PROBLEMS OF AN INDIVTDTJAL IN OBTAINING DRILLING PERMIT IN TEXAS 

OIL FIELD 

Mr. Dailet. In a short paragraph of a few lines I can condense 
here reference to the substance of my statement filed with the com- 
mittee. In one of the great oil fields of the Texas Gulf States there 
is a 20-acre tract of land owned in fee by my family for 20 years. 
It is owned by my mother and uncle, who acquired it by inheritance 
from their father. Oil wells have surrounded this property for 2 
years, draining their oil and gas and confiscating their positioij in 
this field, while for 17 months they have failed to obtain a drilling 
])ermit from the Kailroad Commission of Texas, wjiich would enable 
them to have their property drilled. Both being between 65 and 70 
years of age, with the* time drawing short that they may enjoy the 
material benefits from the oil land which they have owned, they 
are forced to watch the dominant oil interests in this field confiscate 
their property by the arbitrary denial of a drilling permit by this 
Texas oil-regulatory body. 

This is An old-fashioned oil squeeze play in the new oil-conserva; 
tion system. With this situation in mind I have listened with great 
interest to the urbane comments of some of the witnesses of the 
American Petroleum Institute, especially on the wonderful equity 
of conservation principles called unitization in an oil field. I saw a 
cross section of a 7-inch steel casing pulled out of a suitcase.^ I sa-w 

1 The mechanical device exhibited by Dr. Pogue. See p. 7114, supra. 



CONCENTRAnON OF ECONOMIC POWER 7293 

exhibited a cross section of an eighth of an inch choke. That is 
the choke that has strangled independent refiners and marketers out 
of business; that is the choke that strangles small independent pro- 
ducers; that is the choke by which major oil interests devise to drive 
lease and royalty values down ; that is the choke which squeezes almost 
the last drop of the oil owners' or landowners' oil from them. Maybe 
that is the choke that my relatives' drilling permit could not pass 
through. 

As I have made a detailed statement, I will here summarize only 
briefly my testimony referring to this oil-field situation, and also 
comment a little on production control by States. This situation 
concerns the Old Ocean oil field in Brazoria County, Tex., which is 
one of the great oil and gas reser\e» on the Gulf coast of Texas in 
the early stages of its development. Up to the fall of 1937 the then 
sole operators in the field were the holders of over 13,000 acres. This 
development was then owned by four men through their personal 
companies, J. C. Karcher, E. DeGolyer, and D. J. Harrison, and J. S. 
Abercrombie. The latter two men, through their personal compa- 
.nies, the Harrison pil Co. and the J. S. Abercrombie Co., were in 
charge of the operations. 

In the late fall of 1937 the DeGolyer and Karcher holding was dis- 
posed of to the Harrison-Abercrombie interests. Up to September 
1937 there were only five wells completed in this field on the holdings 
of the above operators. However, there was this 20-acre tract in the 
center of the field owned in fee by my family for 20 years, which was 
not then and has not now been leased to these operators. In my 
statement the period covered from the first part of September 1937 
to June 1938 refers to various tactics of oil interests to prevent any 
drilling being done on this property as an independent unit by 
anyone. 

The period in the statement from June 1938 to June 1939 covers 
testimony relating to the inability of the fee ownei-s of 20 years to 
obtain a drilling permit from the Railroad Commission of Texas and 
the lower courts of Texas, while the oil interests in this field drilled 
wells as rapidly as possible with the operation of several drilling rigs, 
until there are now about 40 completed wells, some surrounding our 
property on the east, west, and north. Some of these wells adjacent 
to our property are draining some of our own oil and gas, according 
to good technical opinion, and our valuable subsurface rights are 
thereby being confiscated daily. We appear to be fenced out of our 
own property. They grow rich while I grow weeds. 

On May 2, 1939, the Railroad Commission of Texas granted a 
permit to drill on a leasehold of 1 acre in the Old Ocean field. 

It is an almost unbelievable situation, without parallel, I under- 
stand, in the history of the administration of this oil regulatory bpdy 
in Texas, where for over 1 year they have refused to give a permit 
oh a 20-acre tract owned in fee, and are now opposing it in the 
courts ; yet they have just recently granted a permit on a l-acre tract 
which is a leasehold only recently acquired. 

This recent decision of the Railroad Commission of Texas to grant 
a permit to drill on a l-acre' leasehold is quite in accordance with 
Jaw and precedent. However, the effect of this arbitrary and con- 
fiscatory ruling denying us a permit to drill a well on our own 20 
acres of oil land was to place us in the position whereby we must 



7294 CONCENTRATION OF ECONOMIC POWER 

trade with these oil operators on their own terms in order to get any 
oil income, for if a drilling permit could not be obtained, we could 
not trade with anyone else on any terms whatever. Hitler in Ger- 
many or Poland could not confiscate property any more completely 
than this. 

Here are these oil operators taking out for several years approxi- 
mately $200,000 worth of oil annually from each of their wells, under 
restricted allowables, and some of their wells draining from several 
separate sands under our land, while for 2 years since our property 
has been in the class of proven or near proven oil land and we have 
been prevented from getting anything but weeds while they took 
the oil. 

rhis situation points to sGiifb of the bad characteristics of the 
so-called "unitized operation" in oil fields, which in fact means 
"monopolized operation" under a unified operating interest whereby 
everybody but the monopolizers get crucified. 

It also indicates the grave abuses which occur under this so-called 
conservation program, in name administered by States under the 
theory of State rights, but in fact administered by the invisible gov- 
ernment of the great oil interests themselves. It illustrates the dan- 
gers of these so-called quasi-judicial oil boards under maladministra- 
tion and shows why all of these boards, both National and State, set 
up by Congress or State legislatures, need to be constantly supervised 
by the legislative bodies which delegated great but vague powers to 
them. 

We are having increasing government in this country by quasi- 
judicial boards. If in the various Federal boards there ever occur 
the conditions which have been and are the order of the day in some 
of these various State oil regulatory bodies controlled by the ^reat 
oil interests, then the liberties of the peoples under constitutional 
government will disappear. The story of Louisiana is beginning tb 
come out, but Louisiana is not the only State which has oil. 

I have no quarrel with the principle of conservation of national 
resources or with the principle of orderly production of oil or any 
other commodity, but under this proration of oil production by 
States, under the control of the major oil interests, serious abuses 
have arisen. Some States really produce without restriction and 
some States do not. Due to glaring injustices on one hand and 
gross favoritism on another as to one State against another, and as 
to one field against another within States, the whole structure is on 
the point of tottering because of the growing dissatisfaction with it. 

The concentration of oil reserves in a few hands today is a menace 
to future generations of tomorrow, and the State of Texas, where 
are located over one-half of the now proven reserves of the country, 
is the strategic position under this oil-proration program. In con- 
nection with State oil proration I should like to quote from an opin- 
ion in a decision by a chief justice of the Supreme Court of Okla- 
homa as follows: 

In my opinion, proration of oil was borne of monopoly, sired by arbitrary 
power, and its progeny (such as these orders) is the deformed child whose 
playmates are graft, theft, bribery, and corruption. 

In the study of this proration program, which is primarily the 
allocation of markets for the convenience of the great oil interests, 



CONCENTRATION OF ECONOMIC POWER 7295 

allowing for manipulation of markets and prices and ruthless monopo- 
listic practices, the quotation above may will be pondered. Irrespec- 
tive of how proration of oil was born, today general opinion seems 
to be that an uncontrolled oil flow would cause chaotic demoralization. 
At the same time, under the present loose set-up of State regulation, 
vicious evils exist in the so-called oil-conservation system which can 
only be eliminated by the Federal Government taking a dominating 
part in the oil-proration program. 

That was a great statement by the chief justice of the Supreme 
Court of Oklahoma, and I wonder how he would have characterized 
this order of the oil-regulatory body of Texas on September 27, 1938, 
denying my family a permit to drill a well on their own land after 
delaying action for almost 4 months after the date of the permit 
hearing on June 8, 1938, and after the date of the filing of the permit — 
about the middle of May 1938. 

The Vice Chairman. Are you going to state before you conclude 
the grounds upon which the commission declined to give you the 
permit ? 

Mr. Dailey. I haven't stated that, but I thought I would answer 
that question or I would state it. 

The Vice Chairman. I will ask the question now then. 

Mr. Dailey. The copy of that order ju^t said there wasn't suflScient 
reason for granting a permit. 

Mr. Cox. Well, Mr. Dailey, there is a 40-acre spacing rule, isn't 
there ? 

Mr. Dailey. Oh, yes. I forget that you people are not familiar 
with this. In this conservation program the State authorities set up 
spacing rules. Now, in this particular field their spacing order says 
that wells shall be not closer than 1,320 feet to each other and they 
must be 660 feet from adjacent property lines. . Now, of course, that 
order doesn't say you have to have 40 acres to drill a well. That 
is a spacing program, but it is equivalent in meaning that if you have 
one of these drilling plots that has to be an exact square composed of 
40 acres. 

Well, of course, that would confiscate propefty and that is covered 
in the law of Texas under what they call rule 37, whereby you go 
through a certain procedure and you get what they call an exception 
to the spacing rule. Now, for example, in the East Texas field, which 
is composed of about 130 acres, they have 27,000 wells. Now, if East 
Texas were drilled on a 10-acre spacing basis, there would be 13,000 
wells, so that means that probably three-fourths of the permits in 
the East Texas field were granted as exceptions to this particular 
spacing rule. 

Now, in this Old Ocean field, for instance, Harrison- Abercrombie, 
the principal operators, all of their drilling tracts are not exact squares 
composed of 40 acres. They are lop-sided and rectangular and they 
come closer to property lines than the rule of one well to 40 acres, and 
they get exceptions, but I haven't been able to get an exception. In 
other words, the railroad commission has granted 

The Vice Chairman. You have got just half of 40 acres. 

Mr. Dailey. . I have 20. 

The Vice Chairman. That is half of 40, so you couldn't get a well 
until you could, get somebody else to contribute 20 acres to the effort. 
Is that the ruling? 

124491 — 40 — pt. 14, sec. 1 14 



7296 CONCENTRATION OF ECONOMIC POWER 

Mr. Dailey. No; that isn't the rule; that is compulsory pooling; 
the laws of some States have that, but they do not have that in the 
State of Texas. 

The Vice Chairman. I didn't want to go too far afield about* that. 
I think we won't pursue ^at particular phase of the matter further, 
if you please. 

Mr. Dailey. That was a great statement by the chief justice of the 
Supreme Court of Oklahoma, and I wonder how he would have 
characterized this order of the oil-regulatory body of Texas on Sep- 
tember 27, 1938, denying my family a permit to drill a well on their 
own land, after delaying action for almost 4 months after the date of 
the permit hearing on June 8, 1938, a v^ry unusual situation in itself, 
for normally such permits are granted as a matter of course and 
promptly. This arbitrary order was in effect the bare-faced confisca- 
tion of our property. The Railroad Commission of Texas obeyed the 
commands of these powerful oil interests, who demanded that unless 
we surrendered over our property to them on their dictated confisca- 
tory terms, that we should not be allowed to get a single barrel of oil 
from our land. 

Mr. Henderson. Mr. Chairman, could I interrupt there? I think 
that is quite an important statement the witness has made. In other 
words, in effect, if I gather what you have said, Mr. Dailey, the 
order was dictated by the major oil companies ? 

Mr. Dailey. I don't know that I would put it that way. 

Mr. Henderson. Will you go back and read the sentence, then ? 

Mr. Dailey. Yes, sir. The Railroad Commission of Texas obeyed 
the command of these powerful t)il interests, who demanded that 
unless we surrendered our property over to them on thfeir dictated 
confiscatory terms, that we should not be allowed to get a single barrel 
of oil from our land. 

Mr. Henderson. What is the basis for-— I don't see the distinction 
you made between what I said 

Mr. Dailey. May I quote briefly from the hearing, which is a part 
of the official record and which you have? On June 8, 1938, in this 
permit hearing, the operators intervened against the granting of a 
permit on this 20-acre tract which was located in the center of it. 
Without going into their objections, they concluded by stating — and I 
can't remember the exact words; they are a matter of record — they 
would ask the commission to deny a permit on this property unless we 
would agree to pool the property with them, sharing half the expense, 
and that if we would not agree to do that, then they asked that the 
railroad commission deny a permit to drill on the property. 

Mr. Henderson. I understand that, and I have been over that, but I 
am getting to what is the import of your testimony as to whom the 
commission obeyed. 

Mr. Dailey. I will say this 

Mr. Henderson (interposing). There was a. formal hearing? 

Mr. Dailey. There; was a formal hearing, and they said they would 
ask — of course, if I had this record here, I would read it. It is in the 
file.i 

Mr. Henderson. I have been through it, but I am getting at this 
particular language. 

1 "Exhibit No. 1178,'' appendix, p. 7520. 



CONCENTRATION OF ECONOMIC POWER 7297 

Mr. Dailet. In other words, they stated the terms which they would 
pool 20 acres of their leases with our 20-acre field. 

Mr. Henderson. Do I take it that in any proceeding where there 
are two parties, if the judiciary grants to one party what it begs, 
it is obeying the dictation of that group ? 

Mr. Dailet. Now, I might not have stated that properly, Mr. 
Henderson. 

Mr. Henderson. What I am getting at is whether there is anything 
other than this record on which you base your idea that the Railroad 
Commission of Texas actually was under any undue influence of these 
intervening parties. 

Mr. Dailet. I haven't said that. I said that these operators, 
whether you call it "ask" or "demand," that is verbiage 

Mr. Henderson. Usually "beg," but go ahead. 

Mr. Dailet, They said if these people will once agree to pool 20 
acres with us and go into partnership with us, then we ask that the 
Commission deny this permit. That was the substance of it. We 
refused to do that, on the basis that it could confiscate our property. 
I will explain later why. 

The Vice Chairman. You had better do it now. 

Mr. Dailet. In the first place, in a pooling agreement these oper- 
ators were owners of leaseholds. They did not own the royalty of 
the acreage around this tract of ours. Now to make a pooling unit, 
you not only have to get the permission of the leaseholder of the 
surrounding acreage, but you have to get the permission of the roy- 
alty owners. 

In this particular tract, we are in the center of a 400-acre field. 
That royalty has been bought, it is split up. As it has been explained 
to me in Texas, the owner of a little fraction of that royalty could 
hold up a pooling agreement. We had no evidence, in the first place, 
that they could do what they said they would do. As a practical 
matter, of course, my mother and uncle simply didn't have the means 
to put up fifty or sixty thousand — two individuals between 65 and 
70— and go into partnership with two oil corporations on a working- 
interest basis. 

The history of working-interest agreements is bad. In addition 
to that, they proposed to drill one well. Now, in this particular 
field there are several productive sands. In several wells surround- 
ing our property, from the evidence I have, they are drilling from 
several different sands. If we pooled the tract with them, that 
would mean that they would equally own with us half of each sand, 
but they would only drill a well to one sand, so we would only get 
oil out from under our property in one sand; whereas they, having 
wells around us, draining from several sands, would get oil from 
each sand that is under us. 

Mr. Henderson. And jou would have no participation in that? 

Mr. Dailet. None. I don't know whether I have expiaiued that 
or not. 

The Vice Chairman. You have made a very clear explanation. I 
think the committee understand what you are trying to convey. 
Right on that point, though, before you proceed, is there any arrange- 
ment, custom, or law under which, if you had entered into this 



7298 CONCENTRATION OF ECONOMIC POWER 

agreement, they would have been req^nired to have gone through 
each sand from which they were draining in the neighborhood? 

Mr. Dailet. I think so ; yes, sir. I think there is a law in Texas — 
it has been explained to me and I am just quoting other people's 
opinion, because I don'lt know — but the laws of Texas are that when 
you drain from a producing horizon or oil sand, you are draining 
from a common reservoir; and if, for example, we can drill this 
and operate it as a separate 20-acre unit, then if they had a well off- 
setting us on, say, sand No. 1 on the east, and on sand No. 2 on the 
west, we could make the leaseholder, for example, of this property 
either drill a well to both sands or forfeit his lease. Now, that 
comes under the laws of Texas relative to offset. I may be wrong 
about that; that is the way it has been explained. 

From newspaper reports, the president of the American Petroleum 
Institute recently stated in Houston, Tex., that one trouble was 
that the industry had not tried to sell itself to the public. I should 
like to ask him how the revelation of the real truth about the so-called 
oil-conservation system, as now administered, is ever going to sell 
the oil industry to the public. The history of the oil business is 
what it is because when monetary stakes are large, as they are in oil 
fields, human nature is what it is. 

As stated above, the sole operators of the Old Ocean oil field up 
to recently were the Harrison -Abercrombie interests, holding over 
13,000 acres. In February 1939 the Sun Oil Co. completed their 
first well on their 600 acres of leases and have since been completing 
additional wells. The Midcontinent Petroleum Corporation has also 
completed two wells on their 90-acre leasehold this summer. These 
are the three operating positions in the Old Ocean oil field who take 
the oil, while my operJiting position of 20 acres can only take its 
weeds . 

On June 9 1938, the petroleum engineer of Harrison-Abercrombie 
testified under oath during cross-examination that the producing 
section of the Old Ocean field was composed of about 2,000 feet of 
oil and gas sand. To illustrate the magnitude of this reservoir, 
many fair oil fields have only 10 feet of sand, and the great East 
Texas field, so I have been informed, will probably not average more 
tha^ 30 feet of sand. If the statement of the operators' engineer 
is correct, the Old Ocean field has the greatest sand body ever found 
in this country, and the forecasts of some may be correct that it is 
the greatest oil and gas reservoir in the world and will produce for 
more than 100 years. 

Rich, ruthless, and rapacious as many factors of the oil business 
have often been, and while the mixture of oil and politics has some- 
times produced a slimy substance, has it gotten to the stage in this 
Nation, under so-called oil conservation, that a small landowner has 
constitutional rights when his property is farm land but has no such 
rights when it is oil land? What do the civil-liberties statutes mop-n 
i*f oil interests can deprive him of his constitutional rights and 
privileges when his swampland becomes oil lapd? 

Since my family and I have this valuable tract of land 6wned in 
fee for 20 years, which is now in the center of one of the greatest oil 
fields in the United States, and have not cleverly taken it away from 
someone who lived in a swamp after oil was discovered, and yet we 



CONCENTRATION OF ECONOMIC POWER 7299 

are unable to get even a permit to drill a well on our own property, 
I should like to ask this committee: Does the Constitution of the 
United States and the State of Texas function any longer in Texafe, 
and am I living in a free democratic country, or am I not? 

The Vice Chairman. Any quetsions? I assume that this state- 
ment, Mr. Dailey, is submitted by the committee or you or somebody 
for the record. 

Mr. Dailet. Yes, sir. 

The Vice Chairman. It seems to have been carefully prepared. 

Mr. Henderson. Mr. Chairman, the procedure, I think, was estab- 
lished while we were, unfortunately, without your participation in 
the committee's deliberations. This is a different type of presentation 
from that we originally had, when individual members from admin- 
istrative agencies came in and made a presentation. This is a full 
committee's authorization, and the oil industry was asked to partici- 
pate, with the understanding also that we would ask various technical 
experts in the Government to be of assistance to the full committee, 
and that when presentations were made we would draw on them for 
pointing up the testimony. That is the reason why counsel and ex- 
perts from the Department of Justice are assisting in this work. 

The Vice Chairman. Thank you, sir. 

Please proceed, Mr. Cox. 

Mr. Cox. Mr. Dailey, I want to be sure that the record is clear 
on this procedure that you went through before the Railroad Com- 
mission. You applied for a permit which permits you to drill on 
your20-acre property, is that right? 

Mr. Dailey. Yes, sir. 

Mr. Cox. And that was denied? 

Mr. Dailey. Yes, sir. 

Mr. Cox. Did you appear at that hearing through counsel and 
present evidence ? 

Mr. Dailey. I appeared with counsel. 

Mr. Cox. And presented evidence to the Commission in support of 
your application ? 

Mr Dailey. I didn't. I was just present, but my attorney did, and 
petroleum engineer. 

Mr. Cox. Did you apply for a rehearing after the denial? 

Mr. Dailey. We did. 

Mr. Cox. And was the rehearing denied.? 

Mr. Dailey. That was denied 5 yes, sir. 

Mr. Cox. Is there any provision in the law of Texas for judicial 
review of administrative orders of that kind ? 

Mr. Dailey. Yes, sir. 

Mr. Cox. Did you take advantage of the judicial procedure that 
was provided by the law ? 

Mr. Dailey. Yes, sir; I appealed to the lower courts of Texas, 
and that was heard, I think it was March 13, 1939, and they upheld 
the Commission, and I have appealed .to the court of civil appeals 
in Austin, where it is being heard, I think, sometime in October. 

Mr. Cox. Mr. Dailey, is it your opinion that this situation of yours 
is typical in any way of landowners in oil fields, or is it an extraor- 
dinary and rather bizarre incident? 

Mr. Dailey. You mean experience about the permit ? 



7300 CONCENTRATION OF ECONOMIC POWER 

Mr. Cox. Yes. 

Mr. Daiuey. I have only been in Texas for 2 years, Mr. Cox, and 
what I can say about that is only partly what I have heard and the 
evidence about the granting of these permits as exceptions under 
rule 37. I have been told that never in the history of the oil-regula- 
tion body in. Texas has there been such a strong case for an exception 
under rule 37, because it is one of the rare types when the landowner 
has sort of been made an oil company by having his oil land proved 
up, and he owns it in fee and has a strong position. And further- 
more, 20 acres in a field of this kind, for an individual, is a very 
nice holding, and I believe that Old Ocean is the only field on the 
Gulf Coast of Texas that has a 40-acre spacing rule. In the Hastings 
field, in the same county, there is a 10-acre spacing rule. They have 
two wells on 10-acre plots because they are two sands. And in 
Fairbanks field, in adjoining Harris County, they have a 10-acre 
spacing law. In the West Columbia field, in the same county, which 
is a different kind of dome, they don't have spacing rules there, and 
so anybody drills as many wells and as close together as they want. 

The Vice Chairman. May I ask a question ? In this tract that you 
speak of in the big oil field, are there many small tracts ? 

Mr. Dailey. You mean the original land ownership ? 

The Vice Chairman. Yes. 

Mr. Dailey. Yes, sir. I have broken that land ownership down in 
my statement. There are fewer small tracts than there usually are. 

The Vice Chairman. Was any effort made by these companies to 
lease vour land prior to the time you began to make efforts to get 
wells? 

Mr. Dailey, We jt-^p them any number of opportunities to drill it. 
They reiused to drill it unless we would pool it. 

The Vice Chairman. I know; but I asked you if they made any 
effort to lease this land. 

Mr. Dailey. Oh, yes, sir ; they first had this lease in the summer of 
'34. They found a discovery well in the fall of '34. 

The Vice Chairman. I don't want to go too far afield, but they did 
make an effort to lease your property when they were leasing up the 
country generally? 

Mr. Dailey. Yes; but we wouldn't lease it under a pooling agree- 
ment. 

The Vice Chairman. Were there any of your neighbors owning 
small tracts who also refused, that you know of? 

Mr. Dailey. I have heard some did for awhile, but as far as I know 
they have all pooled. 

The Vice Chairman. Yours is the only tract insofar as you know in 
the big acreage mentioned by you sometime ago that isn't covered by 
lease? 

Mr. Dailey. That is right ; correct ; yes, sir. 

Mr. Cox. Wouldn't it be fair, then, to say, Mr. Dailey, that harsh 
and unjust as this situation may be with respect to you and your prop- 
erty, it isn't a typical situation which can be regarded as posing some 
general problem as to the administration of proration laws ? 

Mr. Dailey. I should say from what I know about it in Texas that 
this is not a typical situation, because Texas has no compulsory pooling 
law. It has been said to me that this is the first effort of the oil 



CONCENTRATION OF ECONOMIC POWER 7301 

interests to get a court decision which practically enforces compulsion, 
but there is nothing in the law of Texas which would enforce it, and 
heretofore I don't know of any instance that they have turned down, 
any exception. Why, they've got wells on -a tenth of an acre in the 
east Texas field. The Railroad Commission has given a permit on a 
1-acre lease. 

Mr. Balunger. Isn't your case also a little peculiar? As I under- 
stand it, having read some of this before I came here, isn't it your 
contention that your 20 acres are at the top of the dome? I mean, in 
other words, if you would start drilling on that property" now you 
would tap a good deal of the whole field, wouldn't you ? 

Mr. Dailet. Well, I don't know about that, Mr. Ballinger. I am 
not at all satisfied with the information that I have got about the Old 
Ocean field, and 1 spent 2 years trying to get it. Now, exactly where 
we are on this structure as with reference to the top of the dome I 
couldn't say, because there hasn't been the drilling in the south section 
of the field to finally tell where is the top. 

Mr. Ballinger, Have you any reason to believe from things you 
have heard that you are somewhere near the center of that dome ? 

Mr. Dailey. I will put it this way : The people that have talked to 
me have said that we were situated in probably the most favorable part 
of the field. 

Mr. Ballinger. Now, if you were situated in the center of that 
dome, that might explain die extraordinary activity to prevent you 
from drilling, wouldn't it ? 

Mr. Dailey. I don't think that that would be the reason; no, sir. 
Of course, I don't know what the reason is. I can give you some 
reasons which are opinions — opinions of others. They may not be 
correct. 

Mr. Ballinger. With respect to these other people who leased their 
property, how do you explain that? If you thought that the leasing 
terms offered you were bad, why is it that these people sort of folded 
up and went right along? 

Mr. Dailey. vVell, Mr. Ballinger, we leased them this property in 
the summer of '34 for about the same terms that other little tracts had, 
I imagine — I have never seen it; but we put a drilling provision in 
there, and after the discovery well came in, for some reason or other 
they didn't drill, and naturally when you've got a piece of acreage that 
is within the possible productive area of a new well, you should have 
better terms, and, of course, when it is proven you should have still 
better terms. Now, that is just like an oil company, if they have got, 
suppose, a tract of proven land in a field, they are not going to turn 
it over to another oil company on the same terms as originally when 
it was so-called wildcat territory. 

Mr. Ballinger. When this property was leased, why didn't they 
drill ? 

Mr. Dailey. Well, of course, I don't know why they didn't drill it. 
I could give you a lot of reasons which I thinJr, but I don't know 
why. 

Mr. Ballinger. It seems odd to me; I mean I just can't get it. 
They had the lease, they could take the oil out, the terms were all 
drawn up; if there was any oil under there, why didn't they go to it? 

Mr. Dailey. As one of my friends in Houston, said, this was one 



7302 CONCENTRATION OF ECONOMIC POWER 

of the rarest things that had ever happened where an oil company 
breaks up their own block of acreage by letting a leasing after a dis- 
covery well has come in. I don't know why. Maybe it was just a 
mistake. 

The Vice Chaieman. The committee will stand adjourned until 
2 :30. 

(Whereupon, at 12 : 25 p. m., the committee recessed until 2 : 30 p. m. 
of the same day.) 

AFTERNOON SESSION 

The committee resumed at 2 : 35 p. m. on the expiration of the recess. 

Acting Chairman K-eece. The committee will come to order. I 
believe you were questioning the witness, Mr, Cox. 

Mr. Cox. Yes. 

Mr. Dailey, did you observe any other experiences of small pro- 
ducers in Texas under the proration laws which would enable you to 
express an opinion as to whether, generally speaking, those laws create 
certain diflficulties for small producers which didn't exist before the 
laws? 

Mr. Dailey. Well, of course, I personally haven't had any other 
experience, and what I would say would be hearsay evidence. I have 
heard many complaints. Of course, that situation in the oil business 
is old where everyone producing oil says, "You should produce regu- 
larly, but not me." There is no general feeling as a matter of human 
nature, and when you go to one of these State proration meetings in 
Austin you don't hear much talk about the optimum production. You 
hear talk that they are getting the optimum hard deal and the other 
fellow is getting the optimum good deal. But as a matter of fact, of 
course, in any business like the oil business there are no holds barred 
and the fellow that can't take care of himself is going to get in a 
squeeze play. 

Now, as a matter of fact, if by tactics one way or another, big 
operating interests in the field with large capital can delay a small 
operator until the allowable is cut, he places the small operator at a 
terrible disadvantage. Now, this is the case here. For instance, the 
operators in the Old Ocean oil field were taking out for several years 
from 350 to 400 barrels a day. Now this allowable has been cut. The 
last act I saw — I have been away from Texas since April — it was cut 
to 200 barrels a day. That means these operators in this field would 
have a great advantage over me. They finance the cost of their well 
with a very big allowance. Now, they have delayed me, and li I am 
going to take the same allowable when I drill, it is going to take me 
longer to pay out my well. I think in the small operating interest, 
if there are any ways that they can harass him, they do it. It is by 
one ineans or another, if it is possible to do it. 

This happens to be the tactics employed in this particular field, and, 
<y£ course, you go to these State-wire proration meetings, you hear 
people get up and grumble openly in the meeting; they talk to you 
privately. What is the 'basis for that I am not sure, but as a general 
impression and as an opinion I would say that this change that has 
come in the oil business from a basis of capture to an investment basis, 
of course, is difficult for a lot of operators to understand; but when 
you don't take out oil rapidly it places the small operator at a distinct 



CONCENTRATION OF ECONOMIC POWER 7303 

disadvantage with the bigger one, because the small operator, while his 
small property is intrinsically just as valuable, he hasn't access to 
financing that the big operator has, and the basis for him financing his 
well to the best advantage is in the early stages of the development of 
the field, when the allowable ifi bigger than it is later. I don't know 
whether that answers your question. That is one angle. If on an 
investment basis, for example, I make a deal, we will say, for the financ- 
ing of the development of this property of my family and myself, the 
question of the rate of return on the drilling cost is a factor. Per- 
sonally if they would say, "Take out $200,000 a year," well, I wouldn't 
know what to do with $200,000 a year. Frankly, I would live in a 
style I am quite unaccustomed to, but that has been one of the points 
that has been raised by people that I have talked to. They say, "By 
the time you ever get that permit they are going to have that allowable 
squeezed down so low, how long is it going to take to get our money 
back?" Of course, drilling on proved land is about the finest invest- 
ment there is, I don't care how small you squeeze the allowable down. 

I don't know anything like it, but, of course, the small operator is 
always talking to you, "I want to get my money back." That is one 
factor. Now, of coursCj another method is they will tie a man up 
through legal technicalities to cloud his title and harass him, and most 
of the time he doesn't own it in fee; he has a lease; then, for instance, 
they will go and tap lease him. That is supposed to be very bad in 
oil companies, big companies. Oh, that is terrible. But they do it. 

Then the man as a leaseholder has lost his. property. That is a 
squeeze play. Or they may bring out one of the vacancy rackets, so 
prevalent in Texas, which is one of the most outrageous things on the 
statute books of any State. You might have a vacancy. Shall I 
explain what a vacancy is? 

Mr. Cox. I think you had better explain what a vacancy is. 

Mr. Dailey. They passed a law — I haA^en't read this law and I may 
be in detail incorrect, but the substance of it is this : When Texas came 
into the Union Texas owned a great deal of land which they have sold 
to people who may have had it for 100 years as a good-faith purchaser, 
and when oil is discovered some one of these vacancy hunters goes 
around with a surveying crew and locates a vacancy and brings a suit. 
Well, of course, it is supposed they are getting back for the State land 
that the man didn't own in good faith. 

As a matter of fact what the State gets out of it isn't a drop 
in the bucket; the vacancy fellow — and it is a racket, and it is a 
disgrace to have that sort of thing. Now, that is another thing, 
even if he wins. And they tried to change that law. It was up for 
discussion when I left Texas. I haven't been there since April. 
Whether they changed it or not — the newspapers were full of it. Of 
course the big interests of these oil companies control- the source of 
supply of capital. No good operator ever sells a piece of oil-pro- 
ducing property, if it isn't for reasons that make it necessary for 
him to sell it, because the history of it has been that on an invest- 
ment basis anybody usually makes a mistake if he ever turns loose 
of a piece of oil-producing property, but the small operators have 
to do it; they get overextended, and they are just as good a credit 
risk, but that is a very difficult thing and a small operator, to protect 
his equity, has to act fast because his lease will run out. 



7304 CONCENTRATION OF ECONOMIC POWER 

Mr, Berquist. Mr. Dailey, has the title to your property ever 
been attacked^ Has that subject been up? 

Mr. Dailey. In this permit hearing on the 9th of June these 
operators introduced some evidence which they claimed threw a cloud 
on the title. They admitted it was an undivided interest. They 
said that in 1874 there was some evidence that we really didn't own 
the property. Well, my attorney told me that it was just applesauce, 
because they must have thought it was pretty good or they wouldn't 
have offered to go in partnership with me. 

And as a matter of fact, this big 4,000- acre lumber company called 
the Bernard River Land & Development Co. — we bought it from 
them; my grandfather for some reason or other bought it from 
them 20 years ago, and that big holding constitutes a big part of the 
proven area of the Old Ocean oil field, and the Sun Co.'s holdings ; I 
haven't heard that title questioned. They said there was something 
doubtful about the south half of the Breen survey. 

Well, there are ^00 leases in the Breen survey, but I don't think — 
my legal advice is our title is airtight. That was just to cast the 
usual browbeating tactics that would scare some poor fellow to death 
and if he was a small operator and leaseholder, just to make him do 
business on their terms or they take everything he had away from 
him, if possible. 

Mr. Cox. Have you considered selling your 20-acre tract? 

Mr. Dailey. Yes; for 2 years — ^you know this is the only piece of 
oil land I guess I am ever going to have and I haven't thought about 
much of anything else but to try to get something out of it. I con- 
sidered, of course, first, that we could make a deal with these people 
to drill it, and I didn't care much for their proposition and I began 
going around and trying to develop other things. 

Mr. Cox. What people were those ? 

Mr. Dailey. I saw Harrison-Abercrombie. For example, before I 
went down to Houston we had this property. It wasn't leased and 
we had a letter from one of the operators that when it was properly 
proven they would like to have it. I said, "All right. On what 
terms?" He said it appeared to have at least four sands; that is, 
at least four oil fields to it. So then they came back and made this 
proposition and I was in Canada and I thought, "Well, it has got 
four fields; I thought they were going to say they were going to 
drill about eight wells on it." They came back and said if we would 
pool it they were going to give me a royalty on half of the oil. Well, 
there is where your pocrl comes in. That meant they were going to 
give us a sixteenth royalty. Well, we had 16/16 of it and they were 
going to give me ^V out of, we will say, one of these sands. Now, 
it is known, of course, there are more than four producers in this 
field now. You might say they would offer to give me 1/80 of my 
own oil and plus $50 an acre in cash and an oil payment of $75 
an acre out of my own. They were going to do that. It would 
mean that outside of the oil in that horizon they could put wells at 
different depths around and get oil from under the tract in all but 
one sand. Now, that started the thing off and I went through this 
situation in Houston. Of course everybody that I talked to admitted 
that it was proven — ^yes ; it was fine. Then something would happen 
the next time we would begin to talk about it. Somebody said, "Oh, 



CONCENTRATION OF ECONOMIC POWER 7305 

they are just working the old run-around, the old squeeze play." 
I couldn't even get a bid. This was long before I applied for this 
permit. I wasn't always going to see some ghost come up and 
want to drill it and I thought I would drill it myself. 

I had some funny experience when I went up to New York to 
talk to some of my friends. Then we got tied up. in this drilling 
of the property. Of course these people put up this — I don't mind 
if we can't get together on terms with them; that is quite all right. 
They certainly don't have to buy me out. To drill it is good enough 
for me, but I would be perfectly willing to deal with them on the 
general basis that similar deals have been worked out, and practically 
submit it to arbitration. I would sell it, of course. Now, of course, 
there are any number of different formulas, it just depends. I will 
give you an instance. The Hastings field that is operated by the 
Stanolind and the Humble Co. in the same county, that is one of 
the great oil fields of the Gulf coast. It has a great sand body of 
a thousand feet in some places. Of course that would vary in differ- . 
ent parts of the field. There was one tract — a 10-acre lease— that 
some small operator got hold of, and the story as I have it is that 
they paid a million dollars cash. Federal taxes paid. When you 
stop to think about it, he estimated that there was about 400,000 
barrels under his 10 acres, and it wasn't too much of a price, but 
there was another tract in the Hastings field, an operator got a 10- 
acre lease and for some reason or other he didn't come to terms with 
the Humble and Stanolind, He said there were two sands and he 
would rather have the oil than sell it, so he drilled two wells on that 
10-acre tract. It was a very valuable holding. Then they drilled 
twin wells all over the field. According to the testimony of the 
operators there isn't 1,000 feet of sand, there is 2,000 feet. I never 
heard of a big sand body like that before in Texas, but that is their 
testimony, and from the wells and the testimony of this letter there 
are at least four. That means at least four wells. 

Now, it is very difficult to sell to advantage a piece of property like 
that, because the income, capitalized, means a very nice capital asset. 
It is difficult to sell it. I am practically forced to reduce it. 

Mr, Shaughnessy. Mr. Dailey, may I ask one question ? If you did 
get a drilling permit for this property, wouldn't it increase the value 
of your land if you wanted to sell it ? 

Mr. Dailey. Oh, tremendously. It would increase the value of it 
in my making a deal, either with an operator or making financial ar- 
rangements, because one of the big bugaboos has been all this, "Oh, 
they are going to tie you up on the drilling permit forever." Well, 
they tied me up for a long time. I haven't been in Texas but this was 
a letter written to me by one of my relatives. They sent an emissary 
around to him and in talking to him about this pooling business they 
said, "I guess they dismissed the possibility of my getting a permit in 
the court of appeals," ^ They didn't mention it, and they said, "If 
you get a permit, we will tie you up in injunction proceedings." 

Acting Chairman Reece. Do you have further questions? 

Mr. Cox. No, 



1 See Mr. Cox's statement on October 23, 1939, relative to the issuance of Mr. Dailey's 
drilling permit. A copy of the decision of the Texas court of appeals, in issuing a manda- 
tory injunction to the Texas Railroad Commission, was introduced October 25, 1939, 
marked "Exhibit No. 1328" and is included in Hearings, Part 17. 



7306 CONCENTRATION OF ECONOMIC POWER 

Acting Chairman Reece. Mr. Noble, the Under Secretary of the De- 
partment of Commerce, is with us today. If you have any questions 
that you would like to ask, we would be very glad to have you do so. 

Mr. Noble. I have no questions. 

Acting Chairman Reece. Any other committee members have ques- 
tions ? We thank you very kindly for coming before us and making 
your very interesting statement. 

(The witness, Mr. Dailey, was excused.) 

Acting Chairman Reece. The next witness scheduled is Mr. Harold 
B. Fell, but I understand due to illness in his family he is unable to 
be present today and that the general counsel of the Independent 
Petroleum Association of America will appear in his stead, Mr. 
Russell Brown. 

Mr. Brown, do you solemnly swear the testimony you shall give in 
this proceeding shall be the truth, the whole truth, and nothing but 
the truth, so help you God ? 

Mr. Brown. I do. 

TESTIMONY OF RUSSELL BROWN, GENERAL COUNSEL, INDEPEND- 
ENT PETROLEUM ASSOCIATION OF AMERICA, WASHINGTON, D. C, 
APPEARING ON BEHALF OF HAROLD B. FELL, ARDMORE, OKLA. 

Mr. Brown. Mr. Chairman, in explanation, Mr. Fell has prepared a 
statement to be made at this time. Mr. Fell is a producer, and also 
a vice president of the Independent Petroleum Association of America, 
which is a group of producers. He was here in attendance on the 
committee on Monday, but he was called away on account of the illness 
of his wife, and had to go to Rochester, Minn., and asked that I present 
the statement for him. 

The statement is printed and is in your hands, and is somewhat 
lengthy. I don't think it would be necessary for me to read the 
entire statement. I think perhaps I can briefly smnmarize the sub- 
stance of it. 

Acting Chairman Reece. We will be very glad to have you follow 
whatever procedure you think might be best. 

(Mr. Harold B. Fell's printed statement was marked "Exhibit 
No. 1179" and is included in the appendix on p. 7552.) 

PROBLEMS AND StlGGESTIONS OF SMALLER, NONINTEGRATED PRODUCERS 

Mr. Brown. This statement, as I say, is presented by a group. It 
differs somewhat from, some of the other statements because this repre- 
sents one association's point of view, the collective point of view of 
a bunch of the smaller producers in the industry, a group that has 
been working on the various problems of the producer, and this state- 
ment attempts to bring to the committee the experience of that group 
over a period of years in meeting the problems of production, and 
deals entirely with production. Practically all of the members are 
exclusively producers, and for that reason the problems presented in 
this statement are the experiences of the producers, not only in the 
production of petroleum but in their efforts to meet the various prob- 
lems that confronted them from time to time, not only in the com- 
petitive situation, but also in their efforts to find a legal means of 



CONCENTRATION OF ECONOMIC POWER 7307 

continuing the production business in the face of the various prob- 
lems that are pecuhar to production. 

The migratory character of petroleum was one of the first problems 
that confronted them, which developed what is known in law as the 
rule of capture,' which simply means that you have got to reduce the 
oil to possession before it is yours. That has necessitated an unusual 
situation, and a very different situation to that which applies to 
other minerals, such as coal or iron, and so forth. That developed 
what later on in the production end of the industry was known as 
offset requirements; that is, if a man gets a lease on your property 
and your property joins another man's and another person has a well 
on that, he is required to drill a well there to protect your interest, 
because the oil might move backward and forward. That brought 
on in later days, when we found more oil, the problem of getting 
more flush production than there was any requirement for. 

Not only that, but to modify that law required a lot of laws that 
later became what are now embodied in the conservation laws. The 
proration laws were not a part of these conservation laws. There 
£eems to be some cyanfusion in putting proration as a conservation 
law. The proration laws are simply the outgrowth (;>i the conser- 
vation laws that have for their purpose assuring to each of the pro- 
ducers in the territory their right to explore and obtain their part 
of the oil. So as this has developed in the /arious producing States, 
the producers have taken the lead in advocating the various forms of 
conservation laws. These laws — most of them — are imperfect today. 
They are a gradual development of thinking as our information de- 
velops on production. So what yesterday seemed to have been a 
very satisfactory law, we find after a process of development we get 
new information which has occasioned the changing of many of 
these laws. They are confronted constantly with the problem of not 
only getting the information on which they base what they think are 
the best laws, but then selling the idea to the various producers who 
are likewise engaged. Then they are confronted with the problem of 
getting <^he State bodies that are not altogether oil-minded to under- 
stand the necessity of this type of law, and finally getting it passed. 
That has been a gradual process of development through the various 
oil-producing States. 

Later on, after most of the States had adopted some form of con- 
servation law, we found that their ability to enforce these laws was 
spmewhat interfered with, because under our interstate-commerce 
laws the transportation systems are required to take commodities 
presented to them, and a man might drill into a field in the State of 
Texas, for example, and produce more than the State allowed. The 
State laws would probably not permit that to move into intrastate 
commerce, but there was no power to stop it from moving in inter- 
state commerce. So in order to meet that situation this group that 
presents this proposed what is now known as the Connally "hot oil" 
law which is simply a law offered in aid of the States that have 
conservation laws and applies only in those States where they do 
have conservation laws. It provides that commodities produced in 
violation of those laws shall not enter into interstate commerce. 
That was an outgrowth of the development of the necessity as the 
producers saw it from time to time. 



7308 CONCENTRATION OF ECONOMIC POWER 

Following that there seemed one of the principal problems was a 
matter of understanding between the States. We first had difficulty 
between the pools in a State as to their relative rights in a total 
amount of production that might be had from that State, and then 
there was misunderstanding between States. This group didn't de- 
velop it but there was developed a law which is commonly known as 
the interstate compact in oil-producing States, which is simply a 
compact between the oil-producing States, approved by Congress, 
authorizing them to study and discuss the laws pertaining to the con- 
servation of the natural resources of petroleum. That has been in 
effect for some time and it is now jomed in by some six States, I 
believe. 

• Part of that compact is that the States themselves shall pass such 
conservation laws as will enable their regulatory bodies to properly 
enforce and interpret the conservation laws of the States. That is 
a brief history of the regulatory laws that have been passed by the 
various States as contained in this statement. 

A number of problems grew out of the production activities. One 
of the first was that pipe lines that were the principal outlet for the 
production came in and were not common carriers in many of the 
States. Now in practically all of the States the pipe lines are com- 
mon carriers required by law, which meant if they came in they 
should take out everyone's oil, if they take any they should take the 
oil tendered to them. Later an additional trouble grew out of that 
in that since the pipe-line people were ordinarily the purchasers of 
oil, we found that they often purchased oil that was desirable maybe 
from their own leases or maybe from some leases with which they 
happened to have a favorable relation, so in order to meet that prob- 
lem there was passed in practically all of the States the common- 
purchaser law, which is a law requiring them to purchase equitably 
from the various p6ols leased within the State, which is an effort tc 
improve and insure to the individual producers the same rights. 
Most of these independent producers have no market except through 
the pipe-line purchasers, who purchase their oil at the field. You 
will understand from that the necessity of having these differe^t types 
of laws passed. 

There are still imperfections that we have no answer for yet. It 
is the thought of most of the producers that the problems if possible 
should be met within the industry. Where they can't get the rights 
that they feel they should have, either because the other companies 
are larger or because they are unwilling to recognize them, they have 
felt willing to go to the State legislatures to get such corrective 
measures as might serve their purpose. 

One of the problems that confronted the domestic producer was the 
feeling with many of them that the larger companies also had prop- 
erties in foreign countries that we felt and later determined could be 
produced and brought into our market more cheaply, and, since they 
were our principal purchasers in this country, that whenever they 
wanted to change theij price here they could raise the amount of im- 
ports that they would bring in and so flood our market as to reduce the 
price. In order to avoid that, they came to Congress in an effort to 
get a restriction on imports, and they have to some degree restricted 
that until today the import problem is not so serious. 



CONCENTRATION OF ECONOMIC POWER 7309 

Other problems confront us ; one which has been mentioned is the 
feeling among some that probably the earnings from one branch were 
used to give them an advantage against those who were engaged ex- 
clusively in some other branch. We have tried to meet that. So far we 
haven't a satisfactory solution, but we bring these things to you so you 
can see how far we have gone. This has been studied by committees 
from our group for a great length of time, committees who, are actively 
in the production and familiar with the various problems. They do 
not feel at this time that divorcement of the pipe lines from the other 
divisions is the answer. That is based largely on the fact that we don't 
transport ourselves ; we sell at the field. 

We are dependent on that for our market. We are not sure where 
we would go for our market under divorced conditions. We rather 
have suggested that each division of the industry should be required 
by some means — standing on its own feet, production should be — the 
receipts from production should go back to production and not be 
used in other divisions. One or two of the remedies we have suggested 
in trying out on that would be an actual separate income-tax return 
that would in fact — I don't know how effective the present one is, and 
we don't ourselves — Would in fact require separate return and a separate 
tax on the divisions, marketing, transportation, production, and so 
forth. We have also suggested to the Securities and Exchange Com- 
mission the advisability of requiring in their reports that companies 
reporting to them should separately report their income and profit- 
and-loss situation as to each division of the industry, so that that would 
be readily ascertainable and might have the effect of discouraging any 
temptation to use profits in one as against losses in another, which 
might give them an unfair competitive situation. 

We present those as problems and suggestions. We have one other 
suggestion that we would like your consideration of, and that is we 
feel there are many of the problems in our industry that could be met 
if there were some agency of government that could approve agree- 
ments worked out between those within the industry, could check those 
agreements for the purpose of ascertaining whether or not there was 
anything in them that might violate the antitrust law, and, if there 
we're not, then permit operation under those agreements. 

So that we feel we might set out here some of the things we feel 
might be improved by that. 

No. 1. Effective utilization of natural-reservoir energy in all new 
fields. 

No. 2. Prevention of uneconomic above-ground stocks of petroleum 
and products. 

No. 3. Assurance of permanent, effective balance of supply with 
demand. 

No. 4. Establishment and maintenance of equitable proration, 
within and between oil pools. 

No. 5. Elimination of unneqessary and unprofitable drilling. 

No. 6. Protection of the "stripper" wells. 

No. 7. Establishment of a proper basis for determining, price. 

No. 8. Elimination of the subsidizing of losses in one branch of an 
integrated company with the profits from another. 

No. 9. Establishment of rules making possible sound and ethical 
practices in the marketing division of the industry. 



731 CONCENTRATION OF ECONOMIC POWER 

No. 10. Assurance to small refiner of access to supply of raw mate- 
rial as well as access to market. 

I think, Mr. Chairman, that summarizes what we have attempted 
to set out in more detail in this statement, and I think from our 
point of view we recognize this as an -effort to better understand the 
problems confronting business, and we thought it was our duty to 
bring you something of the history of our problems as we have met 
them. 

Acting Chairman Reese. The committee is very glad to have you 
give it this summary of Mr. Fell's statement, and I authorize it to 
go into the record, and in doing so I assume, Mr. Cox, that you had 
looked it over and that it is agreeable with you ? ^ 

Mr. Cox. Well, perhaps I had better say this off the record. (Dis- 
cussion off the record.) 

Acting Chairman Reece. I understand the Department of Justice 
takes no responsibility for the statements of the witnesses appearing 
before the committee in the study, but I understand that in the 
nature of this study, being as it is, that these statements were to be 
submitted to the Department so that it might have opportunity to go 
over them, and the only purpose I had in propounding the sugges- 
tion was to see if you were advised and had expected Mr. Fell to make 
this statement had he been here in person. 

Mr. Cox. That is quite right, and I have seen the statement. We 
have all seen the statement. 

Acting Chairman Reece. And it is the statement Mr. Fell expected 
to make had he appeared here in person ? 

Mr. Cox. So I understand. 

Acting Chairman Reece. If that is sOj then I should think the 
statement should go into the record as indicated, and we will be very 
glad to have it so printed. 

Now, Mr. Cox, do you wish to ask Mr. Brown some questions ? 

Mr. Cox. I think when I do you will see why I wouldn't approve 
of all the things Mr. Brown said. 

Mr. Brown, you are familiar with this statement, aren't you 8 

Mr. Brown. Yes. 

PROPOSAL FOR INDUSTRY AGREEMENTS NOW OUTLAWED UNDER PRESENT 
INTERPRETATION OF ANTITRUST LAWS 

Mr. Cox. I would like to call your attention to a statement on page 
11 which reads as follows: 

The current interpretation of the antitrust laws is now handicapping the 
independent -group in their efforts to protect themselves from the large inte- 
grated companies. 

Will you just amplify that a little bit for the benefit of the 
committee ? 

Mr. Brown. I would.be glad to. To begin with, Mr. Cox, we are 
in full sympathy with the antitrust laws. As a matter of fact, we 
think that is what enabled us to get into the business and we rely 
on that to enable us to stay in the business. We are in full sympathy 
with any effort to enforce that. It has come to our understanding 

^ Introduced supra, p. 7306. 



CONCENTRATION OF ECONOMIC POWER 7311 

that interpretations have been made that the antitrust laws forbade 
any agreement, whether good or bad, within any interindustry agree- 
ment, and we can't agree with that. 

That has so permeated the industry that there is a hesitancy and 
a fear among a lot of our fellows* to get together and do what we 
'think — and I think you will think, if you could see it — as being a 
constructive thing for the industry and for the country as a whole. 
In other words, we have a feeling that the interpretation that some 
are placing on it prevents the lambs from organizing against the 
wolves, if you see what I mean. Maybe that clarifies it. 

Mr. Cox. I think I begin to see what you mean. May I ask this 
question : Do you propose to interpret the antitrust laws so that the 
independents can agree among themselves and combine to protect 
themselves, although larger companies cannot? 

Mr. Brown. No ; I don't ask that in here, if you read the statement. 
The statement says that if we could make an agreement, if we had 
some group — this is based, as you understand, on my plea for agree- 
ments within the industry — if we had some group that we could 
submit; for instance, if we could come to you and say, "We want to 
protect ourselves — the refiners are running too much gasoline. It 
is breaking down the entire petroleum structure, economic structure. 
We feel that puts the small refiner out of business and second, this 
reacts back to the small producer." Now they wouldn't do that. ^ If 
we should go to them and prepare a normal agreement of operation 
that would be satisfactory, they couldn't face the public and refuse 
to sign that agreement and go along with it, but we want an agree- 
ment that would be in conformity with the antitrust law. 

I am not asking for the independent anything that the others 
wouldn't have. 

Mr. Cox. Then, as I understand it, your proposal is that machinery 
be worked out to permit industry agreements, not simply combina- 
tions on the part of the independents, but agreements between inde- 
pendents and the majors, if necessary ? 

Mr. Brown. Whatever it may be, on things where it would not 
conflict. That is purely a matter of giving confidence and removing 
fear. 

Mr. Cox. And it is your suggestion that those agreements should 
be subject to some supervision by a public agency? 

Mr. Brown. I so state in there. 

Mr. Cox. That was the way I understood you. 

Mr. Brown. Thgit would be highly desirable. Of course, it 
wouldn't be effective-'unless it were; we couldn't have any confidence 
in it if we went out and made agreements among ourselves. 

Mr. Cox. Is it your idea, then, assuming just for the purposes of 
this discussion, without anything more, that it is now illegal for peo- 
ple in an industry to agree upon what you call a proper basis for 
determining price ? You think the antitrust laws should 1)e jnodified 
so as to permit that kind of an agreement, subject to review by some 
public authority? 

Mr. Brown. I have never asked for the antitrust laws to be mod- 
ified ; I don't in this. 

Mr. Cox. I am suggesting to you that you assume for the moment 
that legally the antitrust laws, as they now stand, do not allow in- 

124491 — 40— pt. 14, sec. 1 15 



7312 CONCENTRATION OF ECONOMIC POWER 

dustry to agree upon a basis for a price. Suppose that is true ; then 
would you want the law changed ? 

Mr. Brown. No ; I wouldn't want the laws changed. 

Mr. Cox. Perhaps I am not making myself clear. I will try* it in 
this way. You suggest that agreements — some machinery should be 
provided for making agreements which will establish a proper basis 
for determining price. Will you tell me and the committee what is 
the difference between a price-fixing agreement and an agreement 
that determines the proper basis for determining prices ? 

Mr. Brown. I think I can do that, to my mind ; maybe I have the 
wrong theory. We have a feeling that the price for crude petro- 
leum — we have no idea just how it is determined; as far as I can tell, 
there is none in our group can tell you to save their life how the price 
that should be paid for crude is determined. We have a feeling that 
a lot of those who purchase our crude use this sort of process. They 
go into a competitive market and maybe wastefully spend a lot of 
money on marketing conditions, that we think are not justified in 
many instances. They enter into price wars. They don't care what 
they get for a gallon of gasoline. There are a lot of our people that 
feel that way. Now, they may be wrong, but I am telling you that 
is the feeling that prompted this. 

We have a feeling that many of them don't care what they get for 
a gallon of gasoline, because what they do is take off the cost of mar- 
keting, the cost of transportation, the cost of refining, and they give 
us for production whatever is left. 

Now, we think that is the wrong basis. We think the price of 
crude ought to be determined, beginning and taking into considera- 
tion a reasonable cost basis for the production of crude, and then add 
your various costs to that until it reaches the gasoline sold in the 
station. That is purely a matter of base, and not a matter of price- 
fixing. That is what we are talking about. 

Mr. Cox. Would you want a formula agreed upon of some kind 
to prevent the price of crude going below certain limits? Is that 
an accurate statement? 

Mr. Brown. No; that wouldn't be quite accurate. I think the 
price of crude will always fluctuate somewhat, but we don't want 
someone to be able to overnight strike it down. If you understand 
our position, one of the greatest fears in the' producer is the uncer- 
tainty; until we have eliminated a lot of that uncertainty through 
these past years, through these various efforts we have made, we are 
continuing that same effort. 

For years the fellow who produced crude, when he found a field, 
had no means of determining what the barrel of oil was worth. 
There was no basis for it. All he knew was that it could only be 
worth to him what he could sell it for, and that night, when he 
brought the field in, it might be worth $1 a barrel ; the next morning 
when he went to his lease he would probably find a notice saying he 
would get 10 cents for a barrel. Now that prevents him from going 
to the banker ; the banker won't give him a reasonable consideration 
on a loan, because he has no basis of telling what a barrel of crude 
is worth. Now we want to eliminate the possibility of a few people 
saying that crude yesterday was worth $1, but today it is only worth 
40 cents, and completely wiping us out of business. We want to be 
able to protect ourselves against that. 



CONCENTRATION OF ECONOMIC POWER 7313 

Mr. Cox. I think I see the problem. I wonder if you could be a 
little" more specific and indicate to the committee just how an agree- 
iment of that kind would operate. 

Mr. Brown. That would be a matter of suggestion. It is a prob- 
lem on which we would like to work and it would take a long time 
to work that out. I haven't any detail worked out for it. It is only 
one of the things we would like to try to work out. 

Mr. Cox. You think if an agreement of that kind were possible it 
would result in an agreement as to the basis of purchasing, which 
would prevent the violent fluctuations in price, although you said a 
moment ago it wouldn't prevent all fluctuations? 

Mr. Brown. I think there could be something worked out. 
Frankly, I don't know any detail as yet. 

Mr. Cox. "Would it be fair to say that the effect of that agreement 
over a long period of time would be to establish a kind of minimum 
price ? 

Mr. Brown. I don't think so because conditions vary. I would say 
this, the effect of it would be for over a long period of time they 
couldn't maintain a price below the cost of production. It might have 
that effect. That would certainly be one of the purposes of it ; yes, 
if that is what you mean. 

Mr. Cox. Now considering paragraph 2, the prevention of uneco- 
nomic above-grouiid stocks of petroleum and products. That really 
would have to be an agreement for a limitation of production, 
wouldn't it, applied to manufactured goods ? _ 

Mr. Brown. Of manufacturing, yes. I think it would. I think it 
would involve a restriction on excessive refinery operations. 

Mr. Cox. Well, that is a more pleasant way of saying it. 

Mr. Brown. It is my way of saying it. 

Mr. Cox. It is a restriction of production and, you think assuming, 
again, that if that sort of thing is illegal now, the law should be 
changed to prevent an agreement? 

Mr. Brown. I haven't so stated. 

Mr. Cox. You haven't suggested the law be changed but if that 
kind of thing is illegal now, I am just asking you for the sake of 
the discussion to make that assumption, then you think it might be 
desirable to change the law ? 

Mr. Brown. I don't think so. I don't think the change in the 
law — the object sought would be worth changing the law. 

Mr. Cox. You would give that up if it is illegal now? 

Mr. Brown. Maybe a lot of these things we would find when we 
had this group that we couldn't do, but then we would quit. 

Mr. Cox. Would it be fair to say to you, then, so far as any one 
of these 10 things you have listed here on this last page, is at the 
present time inconsistent with the proper interpretation of the anti- 
trust laws, as that interpretation is made by the courts, your organi- 
zation doesn't wish to press for any changes in the law which would 
permit it ? 

Mr. Brown. Not where the courts have so said; no. There are a 
lot of things that I think are proper, and I think you think are 
proper, and I think the entire Department thinks are proper; but 
our folks are afraid to discuss them because they don't laiow, they 
have no means of knowing, whether they are proper or whether you 



7314 CONCENTRATION OF ECONOMIC POWER 

think they are proper. If you could say, if we had some means so the 
Department could say, "Well, that is a matter we think is proper," 
then we could go ahead with freedom and with confidence and lack 
of fear. That is what we want. 

Mr. Cox. How many of your problems are intrastate in character 
so that they are matters that don't really concern the Federal 
Government ? 

Mr. Brown. Quite a few of them. There again it is a question of 
just where the line is between intrastate and interstate. I don't think 
we know it yet. I know I don't. 

Mr. Cox. I take it from your testimony, then, that you do not 
think, quite apart from any legal questions, that price fixing or 
agreements to restrict or curtail demand are economically desirable. 

Mr. Brown. I don't think price fixing is desirable, 

Mr. Cox. But you do think perhaps agreements to restrict pro- 
duction are desirable? 

Mr. Brown. Yes; I think, in many instances where we have no 
agreement on that, we waste an awful lot of oil, and by proper 
agreements we can avoid that waste. 

Mr. Cox. When you speak of waste, do you include in that state- 
ment the refining operations? Do you think there is waste involved 
there by excessive production ? 

Mr. Brown. I think the excessive operation of the refinery often 
results in wastes ; yes. 

Mr. Cox. In what sense does that waste take place ? 

Mr. Brown. In two or three senses. One is that excess stocks on 
hand are always subject to some waste. That is the primary thing. 
The second is, excess stocks bring about a temptation to dispose of 
them. An abundance creates a desire to sell for something. When 
they start selling they begin to cut until they sell it for whatever they 
can get. Then that comes back in a reduction in the price of crude 
until it reaches the point where it affects a large part of our wells, 
which, as you understand, are small wells, with very small production ; 
and when the price they get for the crude gets so low, they have to 
abandon those wells, and we lose that part of the oil. That is where 
the second waste comes in. 

Mr. Cox. Would you say one diflficulty so far as you people are con- 
cerned today is the fact that the market for the purchase of crude is 
excessively competitive ? 

Mr. Brown. No; I don't think it is excessively competitive. I 
wouldn't understand it that way. 

Mr. Cox. Well, would you agree it is a competitive market ? 

Mr. Brown. We don't know. It is handed to us. We have to take 
what we can get, and we think it is competitive. It has all the appear- 
ances of being, and I know of no one who would say it is not. What 
I mean by that is, we don't enter into the determination of the price 
of our own product. 

Mr. Cox. That is posted by the purchaser in the field, and your 
"people pay it? 

Mr. Brown. We take it. 

Mr. Cox. And you feel there is no real bargain involved in that 
sense ? 

Mr. Brown. No. We think, as these laws develop and as conditions 



CONCENTRATION OF ECONOMIC POWER 7315 

develop, it probably should become more of a matter of bargaining 
and an understanding between us, because we think the man who pro- 
duces a product ought to have some right to sit down with the man he 
is going to sell it to and say : "What is thisTworth, and on what basis 
can I sell it to you, so I will know whether to develop any more or not?" 

Mr. Cox. You said in your testimony, as I understood it, that you 
thought it mi^ht be a good idea to prevent the integrated company 
from subsidizmg one branch of their activity with profits from 
another; is that correct? 

Mr. Brown. Yes ; if I had a remedy for that I would like to sug- 
gest it. I have suggested a few of the things we are thinking of, but 
I don't know how it ought to be done. 

Mr. Cox. Are you convinced that sort of thing is done? 

Mr. Brown. I think it is; yes. I am pretty well convinced that 
it is. 

Mr. Cox. And that, in turn, affects the price which you people 
receive for your product. 

Mr. Brown. I think it affects the whole industry when it is done. 
It creates an incorrect picture of the welfare of one branch. 

Mr. Cox. What branch particularly do you think profits are taken 
from ? 

Mr. Brown. I think it is primarily from the pipe-line branch. 

Mr. Cox. The transportation branch of the industry? 

Mr. Brown. That is right. 

Mr. Cox. Mr. Berquist calls my attention to paragraph 10, on the 
last page of your statement: "Assurance to sm^U refiner of access to 
supply of raw material as well as access to market." Are we to 
take it from that statement that it is your opinion now that the 
small refiner does not have access to a supply of raw materials? 

Mr. Brown. I don't know of a place where he doesn't have free 
access to it, but I think he ought to know that he is always going 
to have it. 

Mr. Cox. It is a question of certainty, then. 

Mr. Brown. I think that is it. 

Mr. Cox. What about the access to the market? 

Mr. Brown. That is a matter that I am somewhat in doubt about 
and don't know enough about to be of much value to you. 

Mr. Cox. Do you have any idea as to specific steps that might be 
taken to assure him of access to supply and market? 

Mr. Brown. Yes; as an illustration I think probably something 
along the line which was finally worked out in the last days of the 
code could be worked out and still be legal. Under those operations, 
every refiner — and I don't think we froze any operations under that — 
was assured, he had the confidence that he could get a supply of raw 
material and that his markets were not cut off. Now that was very 
helpful, and I think probably one of the most effective things the 
Government has ever done in the oil industry, and it was in the 
last part of the final working out of o.ur refinery situation. I think 
something along that line could be accomplished yet if we had some- 
one we could sit down with and be sure we were doing it legally 
and not endangering our future. 

Mr. Cox. Would it be unfair to suggest to you that this scheme for 
agreements appears on its face to be very much. like the N. K. A.? 
Is that the sort of thing you have in mind ? 



7316 CONCENTRATION OF ECONOMIC POWER 

Mr. Brown. No; I don't think I have quite that in mind. I think 
I have the specific things from time to time, whatever they may be, 
while the N. R. A. was an over-all organization. This wouldn't in- 
volve administrative activity on the part of the Government, it 
wouldn't necessitate it, because the minute you saw when the contract 
was presented to you and it had on its face elements of illegality, then 
the thing is abandoned and no further effort made to pursue it. But 
if a group of folks found a means of operation — for instance, a lot of 
small refineries have been built, we will say, near a source of supply, 
but probably not near a. retail market sufficient to take care of it — 
for a long period of time many of the larger companies that didn't 
have a refinery in that area could take part of that off their hands in 
a perfectly economic manner. They wouldn't do it today, because 
they say they are afraid of the interpretation of the antitrust laws. 
We don't know whether that is true ; we don't know whether the big 
companies are hiding behind that as a bug-a-boo and doing that just 
to keep from doing what we think is a constructive thing, or whether 
they would in fact be violating the law. If we had this sort of thing, 
we could come to you and you could say, "Why this is perfectly legal" ; 
and when they say to us, "We can't do that because it is illegal," we 
could show them it is not. 

Mr. Cox. Would you be willing to have the execution of such agree- 
ments carefully supervised by public officers to make sure that the 
administration of the agreements conformed to the agreements as they 
appeared on paper ? 

Mr. Brown. Frankly, the detail hasn't been completed in my mind, 
but I think that there would necessarily be some body that approved 
it to whom we could go and again present to them some activity that 
was being pursued allegedly under that agreement and see if that was 
a violation ; and then if so, of course the antitrust laws would become 
operative and stop it. 

Mr. Cox. Could that body come to you and say, "We would like to 
see what you are doing under this paper agreement that we saw 3 
months ago"? 

Mr. Brown. Well, I think you always have that right. They could 
do that just as you do now. 

Mr. Cox. We only get what yOu want to give us. 

Mr. Brown. I don't think you have ever had any trouble getting it. 

Mr. Cox. One other question I want to ask you. You said some- 
thing in your statement which led me to believe that it was your 
opinion that from time to time the major companies accumulate stocks 
of manufactured products with a view to the effect that that accumu- 
lation may have upon the market. Is that correct? 

Mr. Brown, I said that was the opinion in many of the fellows' 
minds, and if we had some means of avoiding that, then that would 
remove that fear from their minds and they could go ahead. 

Mr. Cox. Do you have any opinion personally as to whether that is 
done? 

Mr. Brown. Well, I am in this position on that: They know they 
are running a lot of excess products, and anybody can tell their excess, 
they don't have to ask it, I mean anyone that is at all familiar with 
the industry. WTiy they are rimning them is purely a ground for 
sj)eculation. It is perfectly natural if you are in a business that you 



CONCENTRATION OF ECONOMIC POWER 7317 

would be afraid — it is like a small country wonders why a bigger 
country is moving a big army in against their line. It arouses specu- 
lation from that standpoint. 
Mr. Cox. I think that is all I have. 

DIFFERENCE BETWEEN VIEWPOINTS OF LARGE, INTEGRATED COMPANIES AND 
SMALLER INDEPENDENTS AS TO AMOUNT OF GOVERNMENT INTERVENTION 
NECESSARY IN BUSINESS 

Mr. Henderson. Mr. Brown, did you follow Mr. Pew's testimony ? ^ 

Mr. Brown. Somewhat, yes; practically all of it. 

Mr. Henderson. The thing that strikes me to develop a little further 
along the line of questioning Mr. Cox has taken is that Mr. Pew was 
very strong in his statements that there is no condition in the 
industry which require any further intervention of government. I 
presume from that that he was representing the point of view of what 
you would call the large producers, the majors. Here is your group, 
presumably of much smaller stature as individual businesses, which 
in its 10 propositions very definitely drives toward a much further 
penetration on the part of government as an umpire, referee, or 
intervener of some kmd. What I would like to know is whether that 
represents a personal difference, you might say, between Mr. Pew 
and Mr. Fell or whether it is pretty generally the cleavage that runs 
between the larger producers and the people in your organization. 

Mr. Brown. I would say that is probably the unconscious reaction 
from difference of position. In other words, size gives you an element 
of confidence that you can take care of yourself and therefore you 
don't need or require any intervention, but if placed in the same pen 
with a group of large folks and some smaller ones, even though they 
don't believe the larger ones intend to step on them or intend to lay 
down on them, they realize that thing might happen unless there is 
some plan of insuring protection. I think that is probably the dif- 
ference, a matter of size largely. 

Mr. Henderson. The tenor of Mr. Pew's testimony was that there 
are no conditions that really require it so far as the entire industry 
is concerned, In this listing which Mr. Fell has prepared and you 
have so ably presented for him, there is more than a suggestion that 
there are a number of conditions which militate against the inde- 
pendent and the individual. Am I right in that feeling? 

Mr. Brown. I think you are right in this, Mr. Henderson, that our 
group feel very intensely that eternal vigilance is all that keeps them 
in existence and this is one of the elements of doing it. 

Mr. Henderson. Do you feel that there are times in which the small 
refinery is denied access to- raw material and also access to markets ? 

Mr. Brown. I wouldn't be in position to honestly tell you there 
are times he has been deprived of raw material, because I don't recall 
it, but I can see where that might happen very easily, and I could 
understand why he might fear that;, but as to access to markets, 
yes; I see that quite often. I think that actually exists and has 
existed for, oh, 2 years at least. 

Mr. Henderson. You think, then, there also is unsound and un- 
ethical practice in the marketing end of the business ? 

1 Supra, p. 7163 et seq. 



7318 CONCENTRATION OF ECONOMIC POWER 

Mr. Brown. Unquestionably. 

Mr. Henderson. And you think also that some of the integrated 
companies subsidize some of their losses with profits derived from 
pipe-line ownership ? 

Mr. Brown. Yes ; I don't think there is any question about it. 

Mr. Henderson. And then you think, too, as I gather, the smaller 
man wants protection against this mysterious force that fixes the 
price which he has to pay. Do you think — let me ask you frankly, 
because it is highly important — that there is conscious collective 
fixing of price for crude? 

Mr. Brown. Do you mean for the crude product? 

Mr. Henderson. Yes. 

Mr. Brown. I doubt very much if there is. I don't think it is 
necessary. I think the set-up 

Mr. Henderson (interposing). I mean for the crude. 

Mr. Brown. I doubt if there is because I doubt if the necessity 
exists for it. 

Mr. Henderson. Why? 

Mr, Brown. The position which they have where there are rela- 
tively few who are able to buy a great amount of crude fixes it 
so that no small purchaser of crude can raise the price of crude; 
he can lower it, but he couldn't raise it. 

Mr. Henderson. You know, Mr. Brown, you are in the position 
of the fellow who after a long period of time found that he had 
been talking prose all his life. Wliat you are now discussing is 
oligopolistic competition. You are saying that the small man is not in 
position to affect the price and therefore the larger groups un- 
doubtedly do. They have an awareness, is that it, of what would 
happen if they cut each other's prices? 

Mr. Brown. Well, I don't know. As I have stated in here frankly, 
I don't know how they arrive at this price of crude. 

Mr. Henderson. When yourSay "they" do you mean a group? 

Mr. Brown. I mean the feliQw that buys one man's crude. 

Mr. Henderson. Isn't it pret£y generally about the same price? 

Mr, Brown. I think so. 

Mr. Henderson. In a field? 

Mr. Brown. Competitive conditions would force that, I can easily 
see that, because if one man has your connections and he is giving 
you a dollar for oil and he suddenly cuts to 70 cents and another 
man is willing to take it at a dollar, then you just take your connec- 
tions off and give it to the other man^ so competitive conditions would 
force a rather leveling of that price; I could understand that very 
easily. 

Mr. Henderson. I can see where that would work advantageously 
at times but how does the low price or a change in price get fixed in 
your opinion? 

Mr. Brown. I don't know, 

Mr. Henderson. You don't know. Is it price leadership, do you 
think ? 

Mr. Brown. -I would like to have that information; I am searching 
for it, 

Mr, Henderson. What I am trying to get at is, there has always 
been a great mystery as to how that particular chalk mark was 
made which represents a posted price, and you people are dealing 



CONCENTRATION OF ECONOMIC POWER 7319 

constantly with people who make those chalk marks. I think the 
committee would be interested in your best explanation of how prices 
are made. 

Mr. Cox. Do you feel there is a large purchaser who purchases 
more than anyone else who acts as a kind of price leader? 

Mr. Brown. Normally, but that is not necessarily true. Often 
approximately the same amount will be purchased by some four 
or five different people. 

Mr. Cox. Take the trade journals' prices. Frequently in a field 
they will only report the crude price posted by one or more of the 
larger companies, won't they? 

Mr. Brown. That is true as a rule. Sometimes there will be four 
or five. 

Mr. Cox. But frequently there are only one or two. 

Mr. Brown. Yes; and sometimes there are only one or two pur- 
chases. 

Mr. Cox. And that price is taken as the price of that field? 

Mr. Brown. Yes. I will be perfectly frank with you, Mr. Hender- 
son, if that confuses you as an economist you must understand how it 
confuses the fellow who sells it, because when he goes to the bank 
he ought to be able to tell the bank, "Now, I have so many thousand 
dollars' worth of oil or gas on which I would like to borrow so 
many dollars," but he caiVt do it unless he has some basis for that 
price. 

Mr, Henderson. This confusion you speak of sometimes undertakes 
to find resolution about the same way that you have described. You 
say, "We don't know how this price is fixed. By gum, we want some- 
thing to prevent them" — using your own language — "from fixing this 
price to our disadvantage." 

Mr. Brown. That is right. 

Mr. Hjenderson. That is confusion worse confounded in my opin- 
ion. 

Mr. Brown. We know whom we sell to and we know what they 
pay us after they pay us and what they pay us today. We don't 
know whether that is what they are going to pay us tomorrow or 
not. We had a recent illustration of that when things looked on 
the face of it, so far as statistics are concerned, and I concern myself 
somewhat with statistics because of the industry, everything looked 
fine and I thought that the production of petroleum was going along ; 
I knew there were spots that were bad out I thought things were 
going along pretty well and I woke up one morning and found on 
my desk a notice that crude had been cut 20 cents a barrel. 

Mr. Henderson, A notice from whom? 

Mr. Brown, Well, it was in the papers, in the trade journals, 

Mr. Henderson. Who cut it? 

Mr. Brown, Some of the purchasers. 

Mr. Henderson. Some of them or one qf them ? 

Mr. Brown. One day it was one, the next day it was another, and 
so on. 

Mr. Henderson. Was that for different fields ? 

Mr. Brown. Yes. 

Mr. Henderson. Only one in each field? 

Mr, Brown, Oh, no, no. Where they were both purchasing in the 
same field the cuts came. 



7320 CONCENTRATION OF ECONOMIC POWER 

Mr. Henderson. Was it always the same amount? 
Mr. Brown. Not exactly ; no. It varied some. There is a different 
basis for that— one uses a gravity base and one runs higher than 
another, . . 

Mr. Henderson. Mr. Chairman, I am still confused but suspicious. 
I assume the witness is also. 

Representative Williams. Does that fluctuation in the price and the 
market price occur frequently? 

Mr. Brown. It doesnt occur so often as it used to. Formerly the 
fluctuation up and down was very disturbing. Since 1933 we have 
had very little of that type of fluctuation and it has been very helpful 
to us. I think the fear of fluctuation is probably one of the greatest 
tilings that the producer has to bother him. I will say frankly that 
it has improved considerably. 

Representative Williams. When you found that the price had been 
cut, for instance, 40 cents a barrel overnight, what reason was there 
for that ? What reason was given for it ? What explanation is there 
for that? 

Mr. Brown. On this particular occasion where there was a 20-cent 
cut that I referred to, there were two companies, one of the companies 
gave as a reason that they had tried to get the price of refined products 
up and were unable to do so, and at the time they tried to raise the 
refined-products price they stated that the price of refined had to go 
up or the price of crude down, and that was the reason they gave. 
The other that affected a very large part of our production gave no 
reason at all until about 6 or 7 days later, at which time they an- 
nounced a set of reasons which were overproduction and other people 
selling their crude below the price that they were posting — those were 
the main reasons ; there were other reasons set up. 

Mr. Henderson. May I return just a moment to the questioning? 
During the code days, was it generally understood that there would be 
a uniform basis for fixing the price for crude ? 

Mr. Brown. There was quite a group in the industry that went so 
far even as to try to get the price fixed rather than to have the uncer- 
tainties experienced in the past, but that group lost out and were not 
successful. 

Mr. Henderson. I am not talking about the actual price fixing, but 
as I recall during the code the question of "hot oil" was up, and it was 
pretty generally understood that the major companies had a uniform 
basis to try to fix a uniform price for crude. Didn't you understand 
it that way ? 

Mr. Brown. I don't think it went quite that far. There was a lot 
of discussion. At that time, you see, we would bring the marketers, 
the purchasers of crude, and the producers, and they would all sit 
down and talk it over together in the presence of tlie Secretary of 
the Interior, who was the administrator of the code. At that time 
the question of realization on a barrel of crude was discussed a lot; 
and, based on the realization that they were getting, they figured that 
the price of crude ought to be up so much. 

Mr. Henderson. How did it get up ? It got up, of course. 
Mr. Brown. I don't know how, except that probably the people 
that were selling gasoline and buying crude became conscious of the 
fact that there ought to be some harmony between the price of crude 
and the price of gasoline. 



CONCENTRATION OF ECONOMIC POWER 7321 

Mr. Henderson. Harmony between themselves? 

Mr. Brown. I don't know about between themselves. 

Mr. Shaughnessy. Wasn't there a fixed ratio in the code ? ^ 

Mr. Brown. There was a fixed ratio of status, but it was never 
operative. It was discussed and I think adopted, but it never operated. 

Mr. Henderson. The prices did get up? 

Mr. Brown. Oh, j^es. 

Mr. Henderson. And they didn't follow a natural law of supply 
and demand in that connection, did they? 

Mr. Brown. I don't think you could quite say that, because they 
were down not in response to a natural law, and they simply came back 
to more of a level than the natural law. 

Mr. Henderson. That sounds to me like a one-way pocket for a 
natural law of supply and demand. 

interpretation or existing antitrust laws 

Mr. O'Connell. I am rather interested in the discussion you had 
with Mr. Cox about the possibility of having agreements between 
competitors in the industry. I don't know that we can develop it 
much more, butj frankly, I am a little bit confused. Do I understand 
it to be your view as a lawyer that agreement between competitors 
in the producing or refining or some other area of the oil industry, 
or all of them, which would have for its purpose, as you put it, the 
"prevention of uneconomic above-ground stocks of petroleum and 
products," which I would assume means some type of controlled pro- 
duction, and would also include the establishment of a proper basis 
for determining price — is it my understanding that you believe as 
a lawyer that that type of agreement between competitors could be 
entered into in the oil industry within the framework of our present 
antitrust laws ? 

Mr. Brown. Yes; I think that certain phases of it could. I don't 
think you could make an agreement to go so far as to inter e with 
the normal flow of commerce. 

Mr. O'Connell. Frankly, those are just words to me, "to interfere 
with the normal flow of commerce." Suppose you tell me how far 
specifically you could go to prevent the "uneconomic above-ground 
stocks of petroleum." 

Mr. Brown. I think any agreement that you would enter into to 
prevent waste of an irreplaceable natural resource has foundation in 
reason 

Mr. O'Connell (interposing). But let's talk about the Sherman 
Act, the antitrust laws. 

Mr. Brown. And unless it violates specifically the terms of the 
Sherman antitrust laws it ought to be done. If it violates that the 
agreement couldn't be made so we would be safe. 

Mr. O'Connell. That is rather begging the question, isn't it? You 
want the Department of Justice to tell you that a given course of 
conduct is not in their opinion in violation of the principles of the 
Sherman Act. 

Mr. Brown. I would like to have a better understanding as to their 
interpretation of it. 

* National Industrial Recovery Administration Code. 



7322 CONCENTRATION OF ECONOMIC POWER 

Mr. O'CoNNELL. And you feel that for the competitors in the in- 
dustry to sit down and establish a proper basis for determining price 
could also be done within the framework of the present antitrust 
laws? 

Mr. Brown, I think certain phases of that could be done. 

Mr. O'CoNNELL. What do you mean by certain phases? These 
provisions here are not so qualified. The principle of establishment 
of a proper basis for determining price seems to me to be partly 
price fixing. 

Mr. Brown. That is what I attempted to explain. I don't think 
there is any price fixing in that. 

Mr. O'CoNNELL. You would fix only certain elements that go to 
make up petroleum price. 

Mr. Brown. Determining on what base a price should be, what 
base you use, in determining price you pay for crude. 

Mr. O'CoNNELL. How many factors of the total price would you 
have to determine, before you would get into price fixing? I don't 
know that I follow you exactly. 

Mr. Brown. I think only one. That is whether you begin with 
realization or begin with cost. I think that is all you would need to 
determine. 

Mr. O'CoNNELL. All you need to determine in order to what? 

Mr. Brown. To let the flow of price come in a natural way. 

Mr. O'CoNNELL. Oh, I wanted to know how many factors you 
would have to determine in order to be in violation of the Sherman 
Act. 

Mr. Brown. I don't know, 

Mr. O'CoNNELL. But you have no hesitancy in saying that the 
establishment of a proper basis for determining price would be all 
right. 

Mr. Brown. No; I say that that is one of the things we seek to 
do, to find a means of doing by agreement. 

Mr. O'CoNNELL. Between so-called competitors in the industry. 

Mr. Brown. That is right. I would feel perfectly free in doing 
that, because the agency created would have the responsibility of 
saying, "Well, this can't be done," and then it would stop. 

Mr. O'CoNNELL. That would sound to me as though you would 
like to have an agency created or an existing one authorized to grant 
exemptions from the provisions of the existing antitrust laws, 

Mr. Brown. That certainly isn't the intention. It is certainly not 
the intention of those that authorized this. 

Mr. O'CoNNELL. There is one other question I would like to ask. 
In discussing the difficulties that arose because of the ownership of 
pipe lines by the producing companies or refining companies, you 
suggested that some types of State law had been enacted which I 
understood you to say had to some extent eliminated the difficulties 
caused by that situation. Would you repeat what they were? 

Mr. Brown. Ownership of pipe lines? 

Mr. O'CoNNELL. I understood you to say that there were certain 
State laws having to do with compulsory purchasing or something 
of that sort. 

Mr. Brown. Oh, that is State laws making pipe lines common car- 
riers first, and then they have the coinmon purchaser; that is that 



CONCENTRATION OF ECONOMIC POWER 7323 

you can't come in and purchase from your lease or your friend's 
lease in a field to the exclusion of everyone else around; in other 
words, you have the only pipe-line connection in there and you must 
take equitably from those that are allowed to produce in that field, 
el%e a pipe-line company could drive every fellow out of that business 
iniihat field. 

Mr. O'CoNNELL. How does that particular legislation solve the 
problem of the individual or independent producer? Do you mean 
it enables him to sell? 

Mr. Brown. It insures him a part of that market. He won't be 
cut off. 

Mr. O'CoNNELL. But it also limits his market to that end of the 
pipe line and to the owner of the pipe line as a purchaser. Is that 
correct ? 

Mr. Brown. Oh, no ; anybody else can come in. 

Mr. O'CoNNELL. Whose pipe line would they use ? 

Mr. Brown. I don't know. They could probably haul it out by 
rail or probably make an arrangement with this pipe line so part of 
it would go out ovef the same pipe line. That is and could be done. 

Mr. O'CoNNELL. Can the independent producers make arrange- 
ments to use the pipeline in that situation? 

Mr. Brown. I imagine they could. They don't do it often because 
they always sell at the field. 

Mr. O'CoNNELL. I understand they always sell. I wondered 
whether they always sold because of the situation that arose by 
virtue of the ownership of the pipe lines. 

Mr. Brown. I rather think that the reason they do it probably 
is because they have always done it. 

Mr. O'CoNNELL. But I understood it was your group that was to 
some extent responsible for legislation, State le^slation, after pipe 
lines were made common carriers, which made it necessary for the 
pipe-line owners or whoever is purchasing in the field to use this com- 
mon carrier, so I take it there was a problem to you people. 

Mr. Brown. Yes, indeed. 

Mr. O'CoNNELL. So would it not follow that the sale of the crude 
by independent producers at the well, so to speak, is the result of 
the situation created by the ownership of the pipe lines ? 

Mr. Brown. I am not quite sure that I understand that. 

Mr. O'CoNNELL. Maybe I am making it a little too complicated. 
As I understood it, you testified that a difficult situation for the 
independent producer was created bv virtue of the fact that pipe 
lines were owned by producers, right? 

Mr. Brown. Owned by 

Mr. O'CoNNELL. by producers or by integrated companies. 

Mr. Brown. I don't know that I said quite that. 

Mr. O'CoNNELL. You might restate it the way you stated the 
problem. 

Mr. Brown. I said one of the problems that confronted us was 
that the pipe lines were the purchasers, the owners of the pipe lines 
were also the purchasers of our crude in a. very large part of the 
fields. 

Mr. O'CoNNELL. Eight there, what problem was created by that 
situation ? 



7324 CONCENTRATION OF ECONOMIC POWER 

Mr. Brown. The problem then that I stated was, since they were 
the purchasers, they could select from whom they would buy, and 
since they were the only outlet through the field, and probably the 
only purchasers in the field, if they could buy only from John Jojies, 
John Jones could continue to run his oil and we couldn't ours, so 
he would draw the oil out from under our lease. 

Mr. O'CoNNELL. Then I understood you to say the next step was 
that pipe lines were declared to be or made to be common carriers. 
Did that improve your situation ? 

Mr. Brown. It made it more amenable to the State regulatory 
laws; yes. 

Mr. O'CoNNELL. I don't understand you. 

Mr. Brown. It made the pipe lines available to anyone who wanted 
to use them, theoretically at least, and in fact, in many instances. 

Mr. O'CoNNELL. Then following the making of the pipe-line com- 
panies common carriers, it was still necessary to do something to solve 
the problem which you have of selling. 

Mr. Brown. That is right. 

Mr. O'CoNNELL. And that was solved in part by requiring the 
owner of the pipe line to buy on a pro rata basis from all people in 
the field. 

Mr. Brown. That is right. 

Mr. O'CoNNELL. Does that solve your problem? 

Mr. Brown. It helped it very materially. 

Mr. O'CoNNELL. Have you still a problem? 

Mr. Brown. Oh, yes; we have problems. 

Mr. O'CoNNELL. I mean in connection with that. 

Mr. Brown. Not so much. There has been some during the past 
year, but most of it has been corrected. There would be times, for 
instance, where they would go in, and they do yet in some of the 
fields, and probably they have some reason, I don't know ; but any-^ 
way they will elect to buy oil from this man and leave this man over 
here unconnected. Then he has no market outlet and this njan is 
producing all the time and the other feels that he is being prejudiced. 
Therefore, it creates a lot of trouble, and he is prejudiced in his own 
rights. 

Mr. O'CoNNELL. Do you happen to know whether pipe lines under 
the laws under which they operate are required to take whatever oil 
is offered them for shipment ? 

Mr. Brown. There is a general law to 'that effect, but there are 
limitations on it, the provisions of which I am not familiar with. 
You have to make certain tenders in amounts, and so on, but the 
detail of that I wouldn't want to quote. 

Mr. O'CoNNELL. You think as a practical matter it is still possible 
for a pipe line to accept the oil from some producers and refuse to 
accept it from others ; or not accept it from others? 

Mr. Brown. Well, to a limited extent it has been practiced in the 
past few years in some States. 

Mr. O'CoNNELL. Do you think that practice is indulged in in part 
because of the fact that the owners of the pipe lines are in many 
cases producers and the purchasers of oil, of crude oil ? 

Mr. Brown. I don't think that enters into it so much as probably 
that rather than move over another connection into another lease or 
another district, they would rather take what they have from this one 



CONCENTRATION OF ECONOMIC POWER 7325 

where they are already connected. The matter of convenience I think 
probably enters into it as much as any other thing. 

Mr. O'CoNNEix. You don't think the ownership of oil wells or be- 
ing in the market as purchaser would have any effect on the attitude 
of the pipe-line company in regard to that? 

Br. Brown, I wouldn't say it wouldn't have any effect, 

Mr. O'CoNNELL, But you don't know how much effect? 

Mr, Brown, No; I don't know how much effect. Naturally, it 
would have some effect. 

Mr. AvLLDSEN. Mr. Brown, you were telling us about your asso- 
ciation. I don't believe you told us approximately how many mem- 
bers you have or where they are located, in what States. 

Mr. Brown. We have membership in all of the oil-producing 
States. The exact number I don't know, it runs into several thou- 
sand, I should say. 

Mr, AviLDSEN, Are there a number of independent associations or 
are most <5f the independent producers in your association ? 

Mr. Brown. There are a number of associations. In fact, there 
^re a number of associations in territories where we don't attempt to 
have members because the problems that they have are problems we 
can handle for the association and we don't attempt to have mem- 
bers there. The effect of it is that we represent their membership 
on matters national. 

SPONSORSHIP OF THE CONNALLY HOT OIL ACT 

Mr. AviLDSEN. Yours is the principal national association of inde- 
pendent producers? 

Mr. Brown. I think so; yes. 

Mr. AviLDSEN. What percentage of the independent producers are 
in your association, would you say? 

Mr. Brown. I would say maybe 20 to 30; I wouldn't want to tell 
you unless I knew better but that is a rough guess, 

Mr. AviLDSEN. You think there might be 70 percent who don't 
belong to any association, any national association ? 

Mr. Brown. No; I wouldn't want to say that. There are a lot 
of independent producers, for instance, that belong to the American 
Petroleum Institute, and a lot of independent producers that belong 
to various separate groups, and some don't belong to any, except 
some State group ; they don't belong to any national association. But 
I would say when you take into consideration those that we repre- 
sent through State associations, where they don't have direct mem- 
bership, in ours, it would run much higher than 20 or 30 percent. 

Mr. AviLDSEN. I see. Now, you said that your association spon- 
sored the Connally Hot Oil Act? 
. Mr, Brown. Yes, 

Mr. Avildsen: And were primarily responsible for that enactment, 
you felt, 

Mr, Brown, At least we were the first advocates of it, 

Mr. AviLDSEN. Did any of the major producers oppose that law? 
Was any other association opposing that law ? 

. Mr. Brown, At first we tried to get them — we submitted it to them 
before we ever submitted it to Congress, hoping they would go along 
with us on it. At that time they wouldn't do it. 



7326 CONCENTRATION OF ECONOMIC POWER 

Mr. AviLDSEN, Why did tliey say they wouldn't go along? 

Mr. Brown. I don't know; I didn't ask them the reason. 

Mr. AviLDSEN. Did they give you any reason ? 

Mr. Brown. They just said the group didn't approve it. Later 
on they did approve. 

Mr. AviLDSEN. But there was no real concerted opposition on the 
part of the major companies to that law ? 

Mr. Brown. Not in concert. There probably was individually but 
not in concert. 

Mr. AviLDSEN. Why would they individually? 

Mr. Brown. I don't know. 

Mr. AviLDSEN. You have no suspicion of why they might have 
opposed it? I couldn't see myself why they would. 

Mr. Brown. I don't know of any. There was no concerted oppo- 
sition, as I say. 

Mr. AviLDSEN. I should think they would benefit from it as much 
as the independents. 

Mr. Brown. They should. We thought they would. As a matter 
of fact, we thought they ought to be more interested and I think they 
now recognize that they would, that the whole industry is benefited 
by it. 

Mr. AviLDSEN. Mr. Brown, have you any idea as to how much of 
the independent producer's product is sold to an independent refiner 
as compared to the percentage that is sold to the major company? 

Mr. Brown. Oh, it is a very small percentage that goes to the inde- 
pendents. 

Mr. AviLDSEN. The independent producer doesn't try to do business 
with an independent refiner ? There is no great amount of coopera- 
tion between the little fellow in the producing with the little fellow 
in the refining field? 

Mr. Brown. In many instances the independent refinery was built 
because of troubles in marketing of the crude that he produced, and 
that has later resulted in integration of a lot of independents that 
would not otherwise have taken place, and there is often cooperation 
to that extent. Maybe two or three or four or five producers will be 
interested in one of the producers who has bought a refinery. 

Mr. AviLDSEN. But generally there is no cooperation there. 

Mr. Brown. No ; I don't think there is. As a matter of fact, they 
usually sell 

Mr. AviLDSEN (interposing) . I notice your association seemed to be 
interested in the welfare of the small refiner and that is what made me 
ask about it. 

Mr. Brown. That is right. We have a feeling the best thing for the 
oil industry and the besj: way to prevent monopoly is a strong competi- 
tive situation with a large number of independents in both production 
and refining. We would like to see as many healthy independent 
refiners as possible, just like we want to continue as many independent 
producers as possible. 

Mr. O'CoNNELL. Mr. Brown, I also understood you to say that the 
independent producers in major part dealt with the major companies, 
insofar as the refining end was concerned. 

Mr. Brown. You mean selling their crude — I think that is true. 

Mr. O'CoNNELL. You hope the, independent producers will stay in 
business and sell to the major companies ? 



CONCENTRATION OF ECONOMIC POWER 7327 

Mr. Brown. No; I mean there is so much more of the major demand 
than of the independent. 

Mr. Cox. Has that percentage been going up in recent years, Mr. 
Brown, with more and more of the oil of the independent producers 
being sold to the major companies, or less and less ? 

Mr. Brown. I would say probably in the last 2 or 3 years it has 
been more. In other words, there have been a lot of independent 
refiners going out of business in t^e last few years. 

Mr. AviLDSEN. I suppose very frequently the independent producer 
sells to one of the major companies' pipe lines and that pipe line in 
turn sells to independent refiners. 

Mr. Brown. I think that often happens ; yes ; because probably the 
independent refiner has no transportation system to that field. It is 
a natural operation. 

Mr. AviLDSEN. Now, Mr. Brown, you talked about the situation 
that you would like to see where, say, the Department of Justice 
could tell you that it would be all right for the members of your 
association or independent producers to agree on a formula for 
fixing the cost of the crude oil, provided that that formula limited 
itself pretty much to the matter of not selling below their actual cost ; 
is that right? 

Mr. Brown. Yes. 

Mr. AvTLDSEN. You felt if they merely agreed not to sell below 
cost that would not be harmful to the independent producers? 

Mr. Brown. I don't think that was quite what I meant. What I 
was trying to say -was that we feel that crude ought to be marketed 
on some known basis. We don't think it is fair to the public or to 
the producer to have such an unknown situation as often exists, and 
we think there dftght to be a known base and we think that base 
ought to begin with the cost of production and, work from there up. 

Mr. AviLDSEN. That is what I mean. 

Mr. Brown. Whether we could work that out in agreement or not, 
that is what we would like to try to do. 

Mr. AviLDSEN. But I mean you think the Department of Justice 
ought to say to you, "There is nothing wrong in agreeing that you 
will not sell below cost, agreeing that your price will be at liBast 
cost"? • 

Mr. Brown. I don't think that was involved. I think the point 
involved was. What do you base your price of crude on? Do you 
base it on what is left over after you have sold your gasoline, or 
taken out your cost, or do you base it on a reasonable cost basis? 
That doesn't mean that you would always pay cost, but it would mean 
that that is the foundation. Sometimes it goes below and sometimes 
above it. 

Mr. AviLDSEN. Now you are talking about how the buyer bases his 
price ? 

Mr. Brown. That is right, what he will pay for crude. 

Mr. AviLDSEN. I should think the agreement would more naturally 
take the form of the seller's, the law providing that the sellers would 
agree. 

Mr. Brown. Not to sell? 

Mr. AviLDSEN. Not to sell below cost. That is the way most pools 
were under the N. R. A. 

124491^0— pt. 14, sec. 1 16 



7328 CONCENTRATION OF ECONOMIC POWER 

- Mr. Brown. I don't know whether that could be worked out or 
not. Frankly, I don't know. 

Mr. AviLDSEN. Because in your business, the price is posted by 
these pipe-line companies which are in turn producers. 

Mr. Brown. Often producers also. 

Mr. AviLDSEN. Has anybody in your industry ever worked out — 
did you have under the N. R. A. workable formula on not selling 
below cost or a reasonable cost? 

Mr. Brown. We had a formula that seemed to some to be ivi\ 
I don't know enough of the details of the marketing to know whether 
it was or not. 

Mr. AviLDSEN. Wouldn't it involve aru immense amount of checking 
up on the part of a Government agency? Wouldn't there be innu- 
merable arguments as to what is cost ? 

Mr. Brown. Yes. If you tried 

Mr. AviLDSEN (interposing). I mean is the thing practicable, that 
is what I want to know. ^ 

Mr. Brown. I don't think it would be practicable to say in all 
instances you must have cost. That is not my idea at all. 

Mr. AviLDSEN. Is any kind of formula practical? 

Mr. Brown. I don't know. It would be difficult; I would say that. 

Mr. AviLDSEN. In other words, you are asking for something here 
which you admit is not possible to work out ? 
, Mr. Brown. No; I don't admit 

Mr. AviLDSEN (interposing). Then explain what you mean there. 
, Mr. Brown. I said I knew of no formula, but it is an ideal we are 
working to, to find a means of basing 

Mr. A«EDSEN. But so far you haven't found such a formvda? 
_ Mrv Brown. We have not. As a matter of fact, I can find one no 
place, anywhere I go. I can't find where they base the price they 
pay for a barrel of crude. 

Mr. AviLDSEN. And your association has not worked out what you 
think would be a workable formula for the industry ? 

Mr. Brown. No; we have not. But we think if we had a law we 
might approach it. 

Acting Chairman Reece. Mr. McConnell, have you any questions? 

Mr. McCoNNELL. No questions. 

Mr. Cox. I have a few more I would like to ask. Mr. Brown, did 
your association appoint a committee some time ago to study the whole 
question of pipe lines? 

Mr. Brown. Yes. 

Mr. Cox, Did that committee make a report of any kind? 

Mr. Brown. Yes. 

Mr. Cox. Would you like to furnish the committee a copy of that 
report ? 

Mr. Brown. Yes; I will be glad to. I have a limited number 
here. 

Mr. Cox. Just one Avill be enough. 

Mr. Brown. There were more questions involved than just pipe 
line, but that was in it. 

Mr. Cox. I think it might be interesting to offer this for* the 
record and perhaps reserve the decision as to whether or not it should 
be printed. 



CONCENTRATION OF ECONOMIC POWER 7329 

Acting Chairman Reece. It may be accepted with the understand- 
ing the decision as to whether it may be printed may be announced 
later. 

(The report referred to was marked "Exhibit No. 1180" and is 
inckided in the appendix on p. 7563.) 

Mr. Cox. Just to clear up one matter which was left somewhat 
in doubt in my mind as the result of your answers to the questions 
of the committee. Is it your opinion that an independent refiner 
who uses railroad transportation can compete with refiners who use 
pipe-line transportation, either for crude oil or for gasoline? 

Mr. Brown. You are getting into a subject on which an opinion 
from me wouldn't be worth much. 

Mr. Cox. You would rather not express an opinion ? 

Mr. Brown. No; I don't know enough about it. 

Mr. Cox. You say that your association sometimes receives com- 
plaints from independent refiners about the difficulties that they 
have in business ? 

Mr. Brown. Oh, yes. It is a perfectly natural intercourse. 

Mr. Cox. And do not complaints ever relate to their inability to 
compete with the larger companies who use cheaper methods of trans- 
portation ? 

Mr. Brown. I think I have heard that raised, yes ; by a number of 
them. But I never checked into the data. I have had them discuss 
it with me. Many of the problems of the refiner are discussed with 
me. When I say with me I mean with our association, and that is 
one of them. 

Mr. Cox. Is it your opinion that those pipe lines, both crude lines 
and gasoline lines, are now in fact operated as common carriers? 

Mr. Brown. Well, I don't — that is not the way they are operated. 
I don't know whether they could be operated that way or not. I 
don't think there is very much use of them as common carries. I 
will put it that way. 

Mr. Cox. Now, one more question, Mr. Brown. Is there really 
very much doubt in your mind as to the present legality of an agree- 
ment on the part of the industry to limit the production of manu- 
factured products? 

Mr. Brown. No. 

Mr. Cox. You think it is legal? 

Mr. Brown. I think it is legal. 

Mr. O'Connell. I would like to have you give us some author- 
ity for that proposition, if you have any at hand. 

Mr. Brown. I haven't any with me. 

Mr. O'Connell. It is a very novel view, as far as I know. 

Mr. Brown. As I stated to you a while ago, I base that on cer- 
tain—I don't think you can go into a full agreement as to your pro- 
duction, but I think you can agree that certain operations con- 
stitute waste, and beyond that it should not be indulged in. 

Mr. O'Connell. Is that what you mean by the prevention of un- 
economic above-ground stocks of petroleum ? 

Mr. Brown. That is what I mean. 

Mr. O'Connell. And you believe that an agreement between all 
of the producers of crude oil in this country to reduce the amount 
of production would be legal under the Sherman Act? 



7330 CONCENTRATION OF ECONOMIC POWER 

" Mr. Brown. I don't think you would want to, necessarily, have 
that between all of the producers ; no. I think that 

Mr. O'CoNNELL (interposing). Let's say between 90 percent of 
them. 

Mr. Brown. I think you would have specitic cases; I don't have 
in mind an over-all agreement; I have in mind specific operations 
that could be covered by that. 

Mr. O'CoNNELL. When you are referring to agreements within 
the industry, aren't you speaking of the whole industry? I mean 
as far as producers are concerned, all the producers. 

Mr. Brown. I don't mean an over-all agreement ; I mean the right 
to make it any place within the industry where it is necessary to 
effect a saving. 

Mr. O'CoNNELL. Well, then you wouldn't quarrel with me that it 
would contemplate possibly an agreement between all units in the 
industry ? 

Mr. Brown. That might be possible. I don't see how it could be 
operative and I don't see — I could easily see how it could be illegal. 

Mr. O'CoNNELL. Could you tell me how to prevent the stocks of 
petroleum products above-ground without the agreement to produce ? 

Mr. Brown. I think the States have absolute control. 

Mr. OK^ONNELL. Let us discuss the Sherman Act; we are talking 
about what can be done under the antitrust laws. 

Mr. Brown. You are asking me how we could effect this condi- 
tion, and I was beginning with the States. I think the States can 
take notice of the fact that excess production constitutes waste. 
Therefore, they may reduce their operations to prevent that. Then. 
I think excess imports brought in here would contribute to that, and 
that should be prevented. There is probably no way of preventing 
that except by a national act of Congress. So I think you can effect 
that part in that way, without agreements, but now under the agree- 
ments I am talking about it is very often in pools ajid in groups — 
I mean in areas, group of pools. We can work out agreements to 
effect a production program there that might or might not be inter- 

greted as violations of the antitrust law, but I don't think they would 
e ; but I think if they were made and it was known that they were 
not, we would have no diflficulty then in proceeding with them. 

Mr. O'CoNNELL. I take it there would be no problem unless the 
agreement was, for the purpose of to some extent curtailing produc- 
tion in a given area, or in all areas. Is that correct? 

Mr. Brown. Well, I wish I could feel that way. My feeling, and 
many of our folks feel 

Mr. O'CoNNELL (interposing). Obviously, it wouldn't be to stimu- 
late production? 

Mr. Brown. Many of our folks feel just as I have said, that it 
might be interpreted that any agreement they make between the 
operators either fo r go od or for ill, is a violation of the antitrust law. 

Mr. O'CoNi^ELL. T^ell, let's not characterize them for good or ill; 
what I was trying to do is to limit our discussion to whether or not 
an agreement between the competitors in the oil industry to restrict 
production could be done under the Sherman Act, and you ventured 
the view, as I understand it, that it can be ? 



CONCENTRATION OF ECONOMIC POWER 733 1 

Mr, Brown. I don't think I went quite that far. I said agreements 
between producers and operators of refineries ; the small and the large 
is the way that is woi'ded in there; between the small and the large. 
That isn't an agreement between competitors. 

Mr, O'CoNNELL. "Where is that language? 

Mr, Brown. I think in the preliminary. 

Mr. O'CoNNELL. I am confining myself to the specific recommenda- 
tions. 

Mr. Brown. That is abbreviated there as much as we can, but re- 
ferring of course to the general problem. I think if you will turn 
back to pages 

Mr, O'CoNNELL (interposing). I don't think there is any point in 
continuing this. I think we are probably pretty far apart on what 
the Sherman Act means, and I don't think we will get anywhere by 
continuing the discussion. 

Acting Chairman Keece. Any further questions? The committee 
appreciates your appearance. Likewise, it appreciates the statement 
which Mr. Fell prepared, and regrets the nature of the circumstances 
which made it impracticable for him to be here. 

The committee will stand in recess until tomorrow morning at 
10:30. 

(Whereupon at 4 : 20 o'clock the committee stood in recess until 
10:30 a. m., Friday, September 29, 1939.) 



INVESTIGATION OF CONCENTRATION OF ECONOMIC POWER 



FRIDAY, SEPTEMBEB 29, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. C. 

The committee met at 10:40 a. m., pursuant to adjournment on 
Thursday, September 28, 1939, in the Caucus Room, Senate Office 
Building, Representative B. Carroll Reece presiding. 

Present: Representatives Reece (acting chairman), and Williams; 
Messrs. Henderson, O'Connell, Davis, and Brackett. 

Present also: Clarence Avildsen and Robert McConnell, repre- 
senting Department of Commerce; Quin Shaughnessy, representing 
the Securities and Exchange Commission; Representatives Disney 
(Oklahoma) and Mapes (Michigan) ; Hugh Cox, W. B. Watson 
Snyder, F. E. Berquist, Christopher Del Sesto, special assistants 
to the Attorney General, Leo Finn and Roy C. Cook, De'partment of 
Justice. 

Acting Chairman Reece. The committee will come to order, please. 

The next witness scheduled is Mr. Louis J. Walsh. Is Mr. Walsh 
present ? 

TESTIMONY OF LOUIS J. WALSH, VICE PRESIDENT, EASTERN 
STATES PETROLEUM CO., INC., NEW YORK CITY 

Acting Chairman Reece. Do you solemnly swear that the testi- 
mony you shall give in this procedure shall be the truth, the whole 
truth, and nothing but the truth, so help you God ? 

Mr. Walsh. I do. 

Acting Chairman ReeCe. As I understand you have a statement 
which you wish to present to the committee and then make a sum- 
marjjr yourself at this time. 

Mr. Walsh. That is correct. 

Acting Chairman Reece. You may proceed in that order, the state- 
ment being admitted and made a part of the record. 

(Mr. Walsh's prepared statement was marked "Exhibit No. 1181" 
and is included in the appendix on p. 7573.) 

Acting Chairman Reece. After that, Mr. Cox and Mr. Snyder will 
ask some questions. 

Mr. Walsh. The "Eastern States Petroleum Co. is an independent 
refining 

Acting Chairman Reece. The committee would appreciate your 
giving for the record your position, address, and backglfound of 
experience. 

7333 



7334 CONCENTRATION OF ECONOMIC POWER 

Mr. Walsh. I am a graduate mechanical engineer. My first oil 
experience was with the Prudential Oil Co, in Baltimore in 1915. 
I became associated with the Beacon Oil Co. in Boston, Mass., in 
1919, becoming executive vice president of that company in 1925 
and continuing in that position until 1931. 

FORMATION AND HISTORY OF EASTERN STATES PETROLEUM CO. 

In 1932 I assisted in the formation of the Eastern States Petroleum 
Co. and became a vice president of that company at that time and 
have been a vice president since that time. 

The Eastern States Petroleum Co. was organized early in 1932 by 
myself and three associates. Mr. Kahle, the president of the com- 
pany, has had a long and varied experience in the oil business and 
was with the Standard Oil of New Jersey for a number of years. 
In 1923 he became president of the Louisiana Oil Corporation and 
in 1926 he became president of the Beacon Oil Co. He continued 
in that position until about 1931 and came back w^ith the Standard 
of New Jersey. 

Then in '32 he joined us in the formation of the Eastern States 
Petroleum Co. The other two associates of the company, Mr. Mc- 
Carthy and Mr. Armstrong, have had similar long and varied ex- 
perience in the oil business, not only with major companies but with 
independent companies. 

We formed this company, each of the four associates having an 
equal share of the capital stock of the company, and it has continued 
that way until this time. It was entirely a personal enterprise. 

Mr. AviLDSEN. What size was the company, the capital? 

Mr. Walsh. The original capitalization was $75,000 and has not 
been changed. 

Mr. AviLDSEN. What is the net worth today, approximately? 

Mr. Walsh. I would say approximately a half million dollars. 

In 1928 to 1930* all the independent refineries on the east coast had 
been purchased by major interests. For example, the Beacon Oil 
Co. that Mr. Kahle and I were associated with was purchased by the 
Standard Oil Co. of New Jersey. The Massachusetts Oil Eefining 
Co. was purchased by the Cities Service Co. The New England Oil 
Eefining Co., at Fall River, Mass., was purchased by the Shell inter- 
ests. The Prudential Oil Corporation of Baltimore was purchased 
by the Continental Oil Corporation. The Warner-Quinlan Co. of 
New York was purchased by the Cities Service Co. At that time 
there were no independent refiners left on the east coast or the Gulf 
coast east of New Orleans. In 1932 there was a large surplus of 
gasoline and other petroleum products in the East Texas field. There 
was a surplus of tank steamers. There was a larger number of inde- 
pendent marketers along the Atlantic seaboard who had no inde- 
pendent refinery source of supply. It was our plan in forming the 
company to take East Texas as our source of supply and ship the 
products by rail to Houston or any Gulf port, and ship by tank 
steamer from Houston to the Atlantic seaboard and market the prod- 
ucts to independent refiners in this area. This program was suc- 
cessful, and we did very well. 

In 1933 the major oil companies organized what is commonly known 
as the tank-steamer pool. The purposes of the pool was for each 



CONCENTRATION OF ECONOMIC POWER 7335 

member of the pool to put in a certain percentage of their ships. 
They were to reserve 84 percent of the ships required to carry their 
own material, the balance of 16 percent to be put into the pool. 
These ships had been operating along at cost and charter rates of 14 
to 18 cents per barrel. Under the pool plan, the major companies 
reserving 84 percent of their own ships at the 14- to 18-cent rate, 
would practically go along on the same basis as they had been going, 
by putting 16 percent of the tonnage into the pool. An independent 
operator wanting tonnage would have to go to the pool and charter 
ships from them. The charter rate proposed was 42, cents per bar- 
rel. This high rate was to pay the members of the pool for ships 
that from time to time they had to lay up. 

The net result of the whole thing was that an independent requir- 
ing ships could go to the pool and, by paying 42 cents per barrel, 
could have products moved from the Gulf coast to the Atlantic sea- 
board. The major company moving products from the same point 
to the Atlantic seaboard, on 84 percent of his business his cost would 
be 14 to 18 cents. On the remaining 16 percent his cost would he 42 
cents, so that his average cost would be about 21 cents, as compared 
with 42 cents to the company that was not a member of the pool. 

We, of course, protested, and a number of other people protested. 
Thanks to the Department of Justice, that pool was never put into 
effect. It didn't die there, however. It was revived sometime later 
and under the N. R. A. it very nearly became a law. However, it 
isn't. We, of course, continued our marketing business on the east 
coast. 

The N. R. A. came along. Among other things the Petroleum 
iministration Board decreed that aJl commercial consumer con- 
acts should be canceled. At that time we had a number of hiFge 
commercial consumer contracts, particularly in the New York City- 
area. For example, we supplied Third Avenue Railway, one of the 
biggest buyers of gasoline in the city. We at times supplied the 
B. M. T., who of course operated a very large bus fleet in New York 
and Brooklyn. The Petroleum Administration Board by decree can- 
celed all these contracts. 

In about 3 months as the result of the operations of the Petroleum 
Administration Board under the N. R. A. we lost about 50 percent of 
our business. Decrees came out so thick and fast to the Board that 
it was impossible to keep up with the decrees and the interpreta- 
tions. A decree would come out one day and 2 days later it would 
be canceled or amended or changed. 

That went along all during 1934. About the middle of 1934, the 
Petroleum Administration Board organized what was known as the 
East Texas Buying Pool. The theory of that was for about 29 
major companies to buy not less than 3 percent of their requirements 
in East Texas, at prices above the then going price. They did this, 
and in a period of about 2 weeks the price of gasoline in East Texas 
went from 3^/2 cents a gallon to 4^ cents a gallon. 

With this raise in the price of East Texas, there was no corre- 
sponding change in prices along the Atlantic seaboard. They stayed 
exactly the same as they were. This condition continued for quite 
some time. The buying pool, the original buying pool was succeeded 
by I believe three others, two of which actually went i^ito effect and 
were operated, and two never did come up. The last buying pool 



7336 CONCENTRATION OF ECONOMIC POWER 

was formed in '35, after the N. R. A. was declared invalid. The 
jury at Madison so found and so convicted a number of the members 
of this so-called buying pool. 

The buying pool, so far as we were concerned, only had one effect. 
It put us out of business. We were confronted with a fixed selling 
price in New York City and the eastern seaboard, no change there 
whatever. On the other hand, at our source of supply prices had been 
substantially increased through the operation of these different 
buying pools. 

It was necessary for us to change our whole plan of operation, 
which we did. We were forced into so-called partial integration. 
We decided that we had to go ahead and manufacture our own prod- 
ucts. 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 re- 
maining five being topping capacity. 

The price of East Texas crude which is the barometer of the entire 
industry on account of the size of the field had been posted at $1 
since sometime in 1933. With East Texas crude at $1, and pipe-line 
transportation which we bought from other companies, from major 
companies, we could with a modern plant refine the crude oil at 
Houston, ship the products to the east coast, or export them, and 
compete with the major companies and make a reasonable profit. 
This situation continued during '35, '36, and through part of '37. 

AVlien we built our plant, proration was in effect in Texas and to 
some extent in Oklahoma and California. Proration from that time 
on became more and more stringent. The allowables in different fields 
were reduced. The allowables on wells in those fields were reduced 
time after time. Then the Sunday shut-down came, then the Satur- 
day and Sunday shut-down, and here a short time back the complete 
15-day shut-down. 

The effect as far as we were concerned of proration over those 
years was a reducing of the supply while at the same time the demand 
was increasing. We had no particular objection to that. 

During this period, the price of crude started going up. In late 
'36 it went from $1 to $1.10. and then in '37 it went from $1.10 to 
$1.27, and later it advanced to $1.35. 

While crude was advancing, the prices on the Atlantic seaboard 
stayed substantially the same. Export prices were the same. 

The chart that I have made here I believe shows that situation quite 
clearly.^ 

Mr. Henderson. This does not show the Atlantic coast price of 
irasoline ? 



1 Appendix, p. 7578. 



CONCENTRATION OF ECONOMIC POWER 7337 

Mr. Walsh. It shows the Gulf coast price and you simply add 
the freight to New York, which is rouglily a lialf a cent a gallon. 
These are intended to be world prices. 

Mr. Snyder. Which line is the Gulf coast price on that chart? 

Mr. Walsh. The top line. 

Mr. Snyder. Which line is the crude oil price East Texas, second 
from the bottom? 

Mr. Walsh. Second from the bottom. 

Mr. Henderson. What was your point? The point was that East 
Texas crude went up and the price of gasoline on the east coast re- 
mained the same, was that it? 

Mr. Walsh. That was the point. 

Mr. Henderson. That doesn't follow the chart. 

Mr. ^alsh. You notice in '36 the difference between the second 
line from the bottom and the top line. You notice that same differ- 
ence, say, at the end of '37, in October or November of '37. 

Mr. Henderson. What it seemed to me to show was that East Texas 
crude went up and there was a slight elevation in the gasoline price, 
and then around October of '37 the price of gasoline went down while 
crude stayed up. 

Mr. Walsh. That is correct. 

Mr. Henderson. The price of gasoline on the east coast remained 
the same. As a matter of fact it went down. 

Mr. Walsh. I was talking average figures and didn't want to over- 
state it. 

Mr. Henderson. What you mean is that you had a fixed price for 
crude and the gasoline price went down. 

Mr. Walsh. Rather put it the other way, the gasoline price stayed 
the same and the crude price went up. 

Mr. Cox. You were buying on a regulated and controlled market 
and selling on a competitive market. 

Mr. Walsh. We were buying on a definitely controlled market, 
controlled through proration, and selling on a definitely competitive 
market. Our position as an independent refiner in the Gulf coast 
is this : We own no pipe lines, we have no production. We are con- 
nected 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 ? 

PIPE LINE PROFITS AND RATES OF RETURN 

Mr. Walsh. None whatever. We have available crude froui prac- 
tically all the fields in Texas, New Mexico, and some fields in 
Louisiana. However, to get this crude to our refinery we must use 
transportation through one of these three major companies. We 
must, of course, pay the full tariff rates. These tariff rates, including 
the gathering, vary from 171/2 cents a barrel from East Texas to 
Houston to 30 cents a barrel from New Mexico to Houston. These 
tariff rates are about twice the actual cost of operating these lines. 



7338 CONCENTRATION OF ECONOMIC POWER 

In other words, if we pay 20 cents a barrel in pipe-line tariffs to get 
crude to our refinery, 10 cents of that represents profit to the pipe- 
line company carrying the crude. 

Mr. Henderson. How do you calculate that? We had a witness 
here sometime ago who couldn't separate tKat out and properly 
ascribe it. How do you compute that? 

Mr. Walsh. I have studied figures that have been put into the 
Interstate Commerce Commission. 

Mr. Henderson. On costs, you mean? 

Mr. Walsh. On costs. 

Mr. Henderson. Does that mean that you, as an independent, are 
dealing with a major and he has an overriding 10-cents-a-barrel 
differential? 

Mr. Walsh. That is the point I am trying to make. To a Gulf 
Coast refinery a 10-cents-per-barrel profit would be a reasonable 
profit, so that the pipe-line differential represents a reasonable profit 
to the refiner, to the independent refiner without a pipe line source 
of supply. 

Mr. Henderson. You mean, then, it is analogous to the old Stand- 
ard Oil situation with the railroads when they got a kickback on 
every barrel of oil that was shipped by a competitior? Is that the 
point you are trying to make? 

Mr. Walsh. Yes ; I w^ould say it was analogous to that. 

Representative Williams. Who fixed these rates? 

Mr. Walsh. The companies that own the pipe lines fixed them 
originally, but they were all approved by the Interstate Commerce 
Commission. 

Representative Williams. Do you think that is an excessive charge? 

Mr. Walsh. I do. 

Representative Williams. Have you ever made any complaint to 
the merstate Commerce Commission? 

Mr. Walsh. I have not. 

Representative Williams. Don't you think you might get some 
relief by doing that ? 

Mr. Walsh. Eventually I think we could. 

Mr. AviLDSEN. Why haven't you filed a complaint? 

Mr. Walsh. The time element. 

Mr. AviLDSEN.. What do you mean ? 

Mr. Walsh. For example, I know that a number of independent 
refiners in the Mid-Continent are'a have been trying for 3 years to 
have rail rates put more in line with pipe-line rates in the areas 
that they serve and they have carried that fight on very well, they 
have spent a lot of money on it, and after 3 years they are just 
about in the same status. 

Mr. AviLDSEN. Still you have not filed a complaint. It wouldn't 
cost you very much to file a complaint. 

Mr. Walsh. I disagree with you as to cost. It would cost plenty. 

Mr. AviLDSEN. How much ? 

Mr. Walsh. I don't know, but I can easily imagine spending 
$20,000 or $30,000. 

Mr. AviLDSEN. What do you base that on ? 

Mr. Walsh. To get your information and have it plotted and 
charted, get your experts, and testify. 



CONCENTRATION OF ECONOMIC POWER 7339 

Mr. AviLDSEN. When you say that the pipe-litie company makes 10 
cents a gallon profit, that their cost is 10 cents, they charge you 20 
cents ? 

Mr. Henderson. A barrel. 

Mr, AviLDSEN. I mean a barrel. Are you figuring any return on 
their investment? 

Mr. Walsh. Naturally. 

Mr. AviLDSEN. How much are you allowing for return on their 
investment ? 

Mr.. Walsh. Maybe 6 percent or something like that. 

Mr. AviLDSEN. How much depreciation are you figuring? 

Mr. Walsh. Whatever is allowed by the Government. 

Mr. AviLDSEN. Do you figure that after allowing the Government 
rate of depreciation and 6 percent on their investment they are still 
making a profit of 50 percent of the charge that they make, is that 
it, a profit of 10 cents on a charge of 20 cents ? 

Mr. Walsh. That is substantially correct, yes; after allowing for 
all fixed charges and operating charges. 

. Mr. AviLDSEN. Tl}at doesn't seem to coincide with the figures sub- 
mitted to this committee by the committee's advisory staff, I don't 
believe. 

Mr. Walsh. I think those figures were 26 to 42 percent. 

Mr. AviLDSEN. That is net profit on the investment. You are talk- 
ing about the percentage of profit on the gross revenue. I assume 
a pipe-line company turns over its investment several times in a year. 

Mr. Walsh. Very, very rapidly. 

Mr. AviLDSEN.' At that rate they would make, if they turned over 
their investment three times, at your rate of profit, 150 percent on 
their invested capital. 

Mr. Walsh. It is a question of accounting. I think the profit 
returns of 26 to 42 percent are indicative. I thing those figures are 
low. You certainly wouldn't expect them to be on the high side. 

Mr. AviLDSEN. Would it be your guess if a pipe-line company cost 
$5,000,000, the gross revenue that line would take in a year if it were 
oppi^ting at 90 percent capacity, say, how much gross revenue would 
th«y have ? 

Mr. Walsh. Well, that would probably be a 50,000-barrel-a-day 
line, multiplied by 365, I think — I get tangled up in figures — $150,- 
000,000 a year, is that about right? That means that line would 
handle about 18,000,000 barrels a year. 

Mr. AviLDSEN. What would you think the gross revenue would be? 

Mr. Walsh. I would say a $5,000,000 line, a 300-mile line, say the 
tariff was 20 cents, that would give them a gross revenue of $3,650,000. 

Mr. AviLDSEN. You figure then that they don't turn their invest- 
ment over once a year. 

Mr. Walsh. Oh, no; not their total investment. 

Mr. AviLDSEN. Is that common in your opinion for a pipe line ? 

Mr. W^LSH. Yes ; I think those are typical. 

Mr. AviLDSEN. Their gross volume is less than their investment. 

Mr. Walsh. I would think so. 

Acting Chairman Reece. The committee has present this morn- 
ing two Members of the House who are very much interested in this 
problem — Representative Disney of Oklahoma, and' Representative 



7340 CONCENTRATION OF ECONOMIC POWER 

Mapes of Michigan. We are very glad to have them and will be 
pleased to have these Members of Congress sit with the committee 
and when the witness is through propound any questions which might 
occur to them. 

Mr. Henderson. I suggest to the chairman that we could find out 
roughly what the profit per barrel is from the figures which are 
available to the staff. If Mr. Avildsen is interested we could do that. 

Mr. Avildsen. They always talk about the percentage of profit on 
the investment, the pipe-line companies make so much on the invest- 
ment but they don't say how much they make on the gross revenue. 
If they turn over their capital many times a year the percentage on 
the gross revenue would be small; if they turn it over only once 
every 2 3'ears then the percentage on the gross revenue would be 
normal. It is very important to know what the gross revenue is as 
well as the invested capital. One figure without the other doesn't 
tell us anything. 

Mr. Henderson. We can make that computation of what it is on 
a barrel. 

Acting Chairman Reece. And that can be put in the record.^ 

Mr. Henderson. On the basis of the eixample you gave, the wit- 
ness's statement is approximately correct; I must say that from the 
calculations I made. 

Mr. Walsh. This situation of high-grade crude prices and low- 
products prices got serious about the middle of '37. We continued 
for about a year losing money every month and at the end of the 
year we lost a substantial amount of money. We decided ' some- 
thing had to be done about it. It was this stringent domestic situ- 
ation which led to our negotiations for Mexican crude. We began 
our operation on Mexican crude in August of '38, after months of 
search for American crude oils on which our thoroughly modem 
refinery could be run at a profit, after months of operation at a loss' 
during, which we saw a great deal of our surplus disappear. 

In other words, we had a refinery located in the very heart of the 
greatest producing and refining center of the world and were forced 
to go outside of the country to get crude. 

We believe our plant has a lower capital cost per barrel processed 
than our competitors, and our operating costs are lower and we are 
as efficient at least as our competitors in that area. 

Acting Chairman Reece. Mr. Snyder, do you wish to ask some 
questions ? 

Mr. Sntder. In the spring and summer of 1935 when the gasoline 
price was 4i/4 cents in New York City and the East Texas price 
was 61/^ cents, that was the tank-car price, 6^4 cents, or Gulf coast 
price? 

Mr. Walsh. The 614-cent price was New York City price. 

Mr. Snyder. And 414 in East Texas? 

Mr. Walsh. Yes ; 4i/4 in East Texas. 

Mr. Snyder. Then the situtition reversed and. the New York City 
price didn't rise and the East Texas price did ? 

1 See "Exhibit No. 1327", "Humble Pipeline Co.^ — Summary of pipe line investment and 
earning statistics. 1923-1938", a table prepared by the T. N. E. C. staff of the Depart- 
ment of Justice for the petroleum study, based on I. C. C. Published Reports ; the table 
appears in Hearings, Part 17. See also "Statistics of Oil Pipeline Companies", published 
annually by the Interstate Commerce Commission. 



CONCENTRATION OF ECONOMIC POWER 7341 

]\Ir. Walsh. That is correct. 

Mr. Snyder. In those calculations you did not take into account 
the cost of transportation, did you, to New York City? For instance, 
on your chart ^ you said it was a half cent more to transport it by 
tanker from the Gul'f to New York. 

Mr. Walsh. That is correct, but after getting the gasoline at 
New York, you had your other costs, such as terminal cost, barge 
transportation and marketing costs, insurance, handling losses and 
things of that sort. 

Mr. Snyder. Now when your gasoline would go into distribution, 
what would be your cost of that East Texas gasoline in New York, 
approximately ? 

.Mr. Walsh. The cost of gasoline as compared to the East Texas 
price should show a differential of about 3 cents per gallon. 

Mr. Snyder. In other words, you would need a 3-cent margin in 
oi-der to meet the competition in New York? 

Mr. Walsh. That is correct. 

Mr. Snyder. Including any profit whatever? 

Mr. Walsh. Including a reasonable profit. 

Mr. Snyder. Per gallon, what would you consider a reasonable 
profit? 

Mr. Walsh. A quarter to half a cent. 

Mr. Snyder. That is net profit? 

Mr. Walsh. Net profit after costs. 

Mr. Snyder. When you went into the refining branch of the in- 
dustry, you believed that you would be able to meet this situation 
by low-priced crude and manufacture your own products and not 
be dependent upon the East Texas gasoline supply, is that correct? 

Mr. Walsh. That is correct. We believed that and were able to 
do it for a period of about 3 years. 

Mr. Snyder. It was the increase of the price of crude from $1 to 
$1.35 that dealt you the final blow ? 

Mr. Walsh. That is correct. 

Mr. Snyder. This refinery that you have at Houston, is it modern 
in every respect? 

Mr. Walsh. Yes; we believe it to be thoroughly modern. 

Mr. Snyder. Are the gasoline and other products , produced there 
comparable in qift,lity to the brands marketed on the eastern sea- 
board ? 

Mr. Walsh. Yes; they are. During that period there were a 
number of sales to the major companies, and these sales were of gaso- 
line to meet specifications of the regular products. 

Mr. Snyder. Were the specifications these buying companies gave 
you special specifications for those purchases or the regular branded 
specifications ? 

Mr, Walsh. They were their regular branded specifications. 

Mr. Snyder. Would you care to name the companies to whom you 
sold your gasoline? 

Mr. Walsh. Standard of New York, New Jersey, Shell, Sinclair. 
We probably sold most of the major companies during that time. 

Mr. Snyder. Doing business in .the New York harbor area? 
. Mr. Walsh. That is correct. 



^Appendix, p. 7578. 



7342 CONCENTRATION OF ECONOMIC POWER 

Mr. Snyder. Did the raise in crude-oil prices in East Texas over 
the period January 1935 to May 1937 affect the major oil companies 
to the same extent as it affected your company ? 

Mr. Walsh. It did not. The major companies in each case pro- 
duced a substantial amount of the crude oil that they run through 
their refineries, so that a company buying half their oil and producing 
half their oil would of course be in the same position as we were so. 
far as the half that they purchased was concerned, but they would 
make the additional profit on the 50 percent that they produced them- 
selves, so the net result would be that their position would be substan- 
tially the same. 

Mr. Henderson. I don't quite see where you mean they would make 
the additional profit. Where would their realization come? 

Mr. Walsh. I am talking strictly 

Mr. Henderson (interposing). Of an integrated company? 

Mr. Walsh. Yes; a completely integrated company. 

Mr. Henderson. That) is, assuming that the price of gasoline was 
raised, too. 

Mr. Walsh. Oh, yes ; assuming that gasoline went up with it, then 
they would benefit by it. 

Mr. Henderson. If the price of gasoline stayed the same, it wouldn't 
make any difference whether you made it $5 a barrel, an integrated 
company wouldn't make any more money, would it? 

Mr. Walsh. The point I am making is they were penalized only 
half the amount we were penalized. 

Mr. Henderson. Assuming the gasoline price was the same? 

Mr. Walsh. Assuming the price was the same and the price of 
crude went up. 

Mr. Henderson. You didn't put it on a penalty basis. 

Mr. Walsh. I intended to put it that way. 

Mr. Snyder. Of course, your statement^ asumes that the cost of 
production of the major companies is much lower thaji the posted 
price they pay for crude in the East Texas field. 

Mr. Walsh. I believe that is true, and has been for 3 or 4 years. 

Mr. Snyder. I believe the other day Mr. Pew testified that an 
independent refiner is always at liberty to build a pipe line 'for his 
operations, or might well buy an interest in an existing pipe line and 
share in the pipe-line profits which the major companies allegedly 
enjoy. Could you do anything like that and solve your problems? 

Mr. Walsh. We of course are at liberty to go ahead and build pipe 
lines wherever we please. With a 15,000-barrel refinery, we wouldn't 
be warranted in investing two or three million dollars which would 
be necessary to reach areas tributary to our refinery. 

So far as buying a partial interest in an existing line is con- 
cerned, I don't believe that is possible. If it were possible, it prob- 
ably could only be done on the basis — bought at a price which would 
certainly not net the 28- to 42-percent return that the present owners 
enjoy. 

Mr. Snyder. In other woi-ds, you believe they would sell the inter- 
est to you at the present value of their investment rather than at the 
original value of the investment ? 

Mr. Walsh. Exactly, I am sure of that. 

1 "Exhibit No. 1181," appendix, p. 7573. 



CONCENTRATION OF ECONOMIC POWER 7343 

Mr. Snyder. Did I understand you to say it would cost two or 
three million dollars for you to build a pipe line to the East Texas 
oil field from Houston? 

Mr. Walsh. That is correct, 

Mr. Snyder. How many miles is that? 

Mr. Walsh. It is a little over 200 mile:^. 

Mr. Snyder. About $10,000 a mile then is what it would cost? 

Mr. Walsh. That is about right. 

Mr. Snyder. What size line would that be? 

Mr. Walsh. Eight-inch. 

Mr. Snyder. Would your refinery at 15,000-barrels-a-day capacity 
be able to keep that line running? 

Mr. Walsh. No; an 8-inch line woula handle about four or five 
thousand barrels a day. 

Mr. Snyder. So it would be operating only about one-third of 
capacity. 

Mr. Walsh. Yes. 

Mr. Snyder. Would there be enough independent-refiner demand 
in your area to take up the other two-thirds of capacity at Houston ? 

Mr. Walsh. No ; there would not. 

Mr. Snyder. Would you say that an independent company ex- 
panding by integration and going into the pipe-line business, needs 
partners in the refining business to go along with him and help 
finance the venture ? 

Mr. Walsh. Will you please repeat the question? 

Mr. Snyder. I will rephrase the question. Suppose an inde- 
pendent refiner decides to integrate and have a pipe line, build a 
new one, do you think it is necessary for him to join with other 
independent refiners or other major refiners in order to build the 
pipe line and make a successful, operation of it? 

Mr. Walsh. Yes; I do. 

Mr. Snyder. Do you think there are many independent refiners 
who can spend two or three million dollars for pipe line expansion? 

Mr. Walsh. No ; there are none that I know of. 

conservation differentiated from proration 

Mr. Snyder. Do you consider the objectives of conservation and 
proration as being the same? 

Mr. Walsh. No; I do not. 

Mr. Snyder. I wish you would explain your answer. 

Mr. Walsh. I believe that conservation is strictly an engineering 
matter. I am entirely in favor, of it. Conservation through engi- 
neering has certainly improved the operations of oil producing 
properties. It unquestionably reduced operating costs and over a 
period will imdoubfedly increase the recoverable oil from whatever 
field it happens to be in. Conservation is good for the individual 
well owner, it is good for the industry, and it is good for the country 
as a whole. 

I do believe, however, when you try to tie conservation into price 
fixing, and then call the combination of the two proration, that it is 
not a good thing. I think that proration as it has been 'admin- 
istered has not been a good .thin^ for the industry. I think that 
conservation rs certainly a good thmg for the industry. 

124491 — 40 — pt. 14, sec. 1 17 



7344 CONCENTRATION OF ECONOMIC POWER 

Mr. Snyder. Do you bfelieve that some of the practices used in 
proration are carried to extremes in attempting to achieve the con-' 
servation principle? 

Mr. Walsh. Yes; I do. The best example of that, of course, is 
the biggest field in the world, the East Texas field. I think that 
the allowables under proration as compared* with the potentials for 
that field are ridiculous, if you try to tie them in with engineering. 

Mr. Snyder. What do you think about the use of chokes in the 
flow line of tlie well? Do you think that is good engineering? 

Mr. Walsh. I am thoroughly in favor of that. I think it is good 
engineering. 

Mr. Snyder. Do you have any idea a^ to the size choke that may 
be used ? Do you think there is a limit on the size used ? 

Mr. Walsh. Oh, yes; there certainly is. I believe each field, each 
Avell as a matter of fact, under best engineering practice, should be 
produced using a certain choke and producing a certain amount per 
day. I don't believe that you can arbitrarily set up an allowable per 
day and then work backward to the choke necessary to restrict 
production to that amount. 

Mr. Snyder. You think conservation should be carried on with 
practices pertaining to each particular well rather than to the whole 
field or area on a uniform basis? Is that possible? 

Mr. Walsh. Yes ; I believe that can be done. 

Mr. Snyder. What adverse effect, if any, has "extreme proration 
had upon the independent refiner? 

Mr. Walsh. Will you repeat the question, please? 

(The reporter read "the questii^n.) 

Mr. Walsh. It has restricted his source of supply. 

Mr. Snyder. In other words, his supply is totally less or in the 
hands of companies with which he is not connected? 

Mr. Walsh. No; the total supply isn't less. 

Mr. Snyder: You think that proration turns this oil into eliannels 
which make it not available to you? 

Mr. Walsh. That is correct. 

Mr. Snyder. I wish you would explain that situation, just exactly 
what you mean by it. • • 

Mr. Walsh. Taking East Texas again, for example, there are 
several independent refiners there today tlmt are shut down. They 
are unable to get a crude supply. The only way they could get it 
woidd be to go out and pay premiums to well owners in order to get 
sufficient crude to run their plants. 

Mr. Snyder. Do some of those refiners have gathering systems of 
their own? 

Mr. Walsh. Complete gathering systems in the East Texas field. 

Mr. Avildsen. Why would they have to pay premiums? I don't 
understand. 

Mr. Walsh. You and I would own a well;. we are selling to, for 
example, a major company. There is no reason in the world why 
we should disconnect from the major company 'and sell to an inde- 
pendent producer. He must offer .something. 

Mr. Avildsen. What is the difference between that and the situa- 
tion which prevailed when the independent built the refinery? 

Mr. Walsh. At that time, the well owners were having difficulty 
getting connections. 



CONCENTRATION OF ECONOMIC POWER 7345 

Mr. AviLDSEN. There wa.s an oversupply? 

Mr. Walsh. There was an oversupply. 

Mr. Snyder. Has proration affected your company in the way in 
which you have been describing? 

Mr, Walsh. Yes ; exactly that way. 

Mr. Henderson. You don't mean that you have had to shut down. 
Didn't you say in response to my question you had no diflBculty in 
getting crude? 

Mr. Walsh. That is right. We had no difficulty in getting crude 
but at the price we had to })ay we shoW'ed an operating loss. 

Mr. Henderson. Do you have to pay a premium? 

Mr. Walsh. No ; we paid the regular price plus the tariffs. 

Mr. Henderson. You said, as I understood, in response to Mr. 
Snyder's question, exactly the sapie way, and you have been affected 
in a different way. 

Mr. Walsh. Not to the same extent. We didn'fjiave to shut down. 
We would have had to shut down if we had continued the way we 
were going. 

Mr. Snyder. When this situation came about, you switched to an- 
other source of supply ? 

Mr. Walsh. Exactly. 

Mr. Snyder. It is true you switched at that time to the Mexican 
source of supply? 

Mr. Walsh. Yes. 

Mr. Snyder. Mr. Walsh, would you care to venture any opinion as 
to how proration affected the independent producer? 

Mr. Walsh. Well, I am sure it has had a very harmful effect on 
the independent producer in Texas. To my own knowledge a number 
of the best producers there had stopped -putting money m new ven- 
tures in Texas. Any new investments they have been making have 
been in Louisiana, Arkansas, Illinois, New Mexico, and other States 
where the proration laws are not so stringent. 

There is no incentive today in Texas for a producer to develop new 
properties. The return on his investment on account of these low 
allowables is so low that his investment might not pay out, probably 
wouldn't pay out for 7, 8, 10 yeiars. And that return is not attractive 
enough to offset the hazards of wildcatting and new development. 
I believe that eventually it will be harmful to the State of Texas. 

Mr. Snyder. In what period of years do you think his investment 
ought to pay out? 

Mr. Walsh. In the development of new properties and wildcatting, 
it should pay out in certainly not over 2 or 3 years. 

Mr. Snyder. I suppose the extension of the length of time to pay 
out also affects his credit at the bank when he wants to borrow 
money ? 

Mr. Walsh. Yes ; it affects his whole financial picture. 

Mr. Snyder. Could the present proration regulations be^ adjusted 
to liberalize the credit situation for the independent producer? 

Mr. Walsh. I believe they could. I think that basically there arc 
only four reasons for protraction. One was the East Texas field, an- 
ot]\er was the Conroe field, both in Texas ; Oklahoma City field, in 
Oklahoma; and Kettleman Hills, in California. All four of those 
came in at the same time, four of the biggest fields in the world, 



7346 CONCENTRATION OF ECONOMIC POWER 

and it just swamped the industry temporarily, and proration was 
used as a means of controlling the thing until they had gone past- 
that flush production. 

I think the need for proration today is certainly questionable; 

Formerly, when large amounts of flush production occurred, it was 
taken care of through storage, and I think it could have been done 
in this case if enough storage had been made available. 

Mr. Berquist. Do you suggest the abandonment of conservation 
when you say that? 

Mr. Walsh. Absolutely not. 

Mr. Berquist. You differentiated between conservation and pro- 
ration. 

Mr. Walsh. Yes ; I did. 

Mr. Berquist. In what way? 

Mr. Walsh. Conservation, I said, is strictly an engineering matter, 
and conservation principles should be applied to every well in the 
country to determine exactly the rate of production, or the optimum 
rate of production, for that particular well. 

Mr. Berquist. How do you define "optimum rate" ? ■ " 

Mr. Walsh. The amount that will produce the greatest amount 
tlirough its flowing life and the greatest total amount from the sands 
that that well is producing in. 

Mr. Sntder. I believe you stated that in 1935 you beca,me partially 
integrated by building this refinery at Houston. Referring to page 
514 of the record of September 26, Mr.. Pew testified as follows: 

An independent operator can always choose his field of operation. If he 
be in the refining business, lie is in a position to choose the qualities of crude 
that best suit his purposes. If he is in the marketing business he can operate 
in those fields where the markets are highest or where the operating conditions 
are best. 

Would you care to comment on Mr. Pew's observations in those 
regards ? 

Mr. Walsh. So far as the refinery is concerned, he can choose the 
location of it, and in Gulf Coast plants, of course, he has crude avail- 
able through pipe lines from almost any of the, fields in that territory. 
However, he is under this same 'handicap that I mentioned before of 
paying toll to the pipe-line company serving his plant. 

Mr. Snyder. Tliat is all the questions I have. 

Acting Chairman Reece. Congressman Williams? 

Representative Willias. To what do you attribute the cause of that 
rather unusual rise in the price of crude back in '37? ^ 

Mr. Walsh. I think it was due to proration. 

Representative Williams. You mean by that, by means of prora- 
tion the supply was restricted ? 

Mr. Walsh. Yes. 

Representative Williams. In reference to the demand? 

Mr. Walsh. That is correct. 

Representative Williams. What was it that took place at that tinae ? 
Was there any particular restriction? Wasn't the proration continu- 
ing as it had been; there hadn't been any real restriction in the 
output, had there ? 

* See chart in appendix, p. 7578. 



CONCENTRATION OF ECONOMIC POWER 7347 

Mr. Walsh. There had been a gradual restriction. For example, if 
(lie allowable in '36, some particular well, had 100 barrels a day, in 
'37 it might be 80 barrels a day, and in '38 it might be 70 barrels a 
day. There was a gradual reducing of allowables. 

Representative Williams. Who did that? What was the cause of 
that? 

Mr. Walsh. The railroad commission in Texas, for example, and 
the other governing bodies in the other States would get figures from 
the Bureau of Mines and try to set it. 

Representative AVilliams. And it was the conscious deliberate action 
of some governmental body tliat did that. 

Mr. Walsh. That is correct. 

Representative Williams. Has that continued? 

Mr. Walsh. Yes; it is continuing right today. 

Representative Williams. Has the price of crude continued to go 
up? 

Mr. Walsh. No; I misunderstood your question. As a matter of 
fact, crude is now back to $1.10 a barrel. 

Representative Williams. Why has it gone back down ? 

Mr. Walsh; The law of supply and demand, I would say. 

Representative Williams. There has been a continued restriction 
of the supply, as I understood you, by reason of the governmental 
body. 

Mr. Walsh. Tliat is correct. 

Representative Williams. And still the price has gone down? 

Mr. Walsh. Yes. I would say the reduction in price was due to 
the reduction in prices of products. 

Representative Williams. You say that is due to a decrease in 
demand? 

Mr. Walsh. No. Competition, probably. 

LOWER MEXICAN CRUDE PRICES AND TRANSPORTATION COSTS 

Representative Williams. You were forced to go on to the Mexican 
market, as I understood you, for your crude. 

Acting Chairman Reece. We are very much gratified to have our 
chairman with us this morning. 

(Senator O'Mahoney assumed the Chair.) 

Repi-esentative Williams. What was the result of that ? What was 
tlie difference in the price you bought youjr oil at? 

Mr. Walsh. The price we were able to get crude oil for was low 
i-nough so we could operate on a profit. 

Representative Williams. You are still continuing that policy? 

Mr. Walsh. Yes ; we have been running on Mexican oil for a little 
over a year. 

Representative Williams. How do you get it from Mexico, your 
means of transportation? 

Mr. Walsh. Tanlj steamer. 

Representative Williams. Is the rate of transportation lower than 
it is through the pipe-lines ? 

Mr. Walsh. Well, there are no pipe-lines. 

Representative Williams. I mean the local pipe-lines. Is your 
transportation charge less — is Avhat I am trying to ask you — than it 
was through the pipe-lines ? 



7348 CONCENTRATION OF ECONOMIC POWER 

Mr, Walsh. Yes ; on a mileage basis it is less. 

Representative Williams. Well, are your transportation charges 
less? 

Mr. Walsh. Yes ; specifically our cost from Tampico to Houston is 
about 10 cents a barrel, and our costs by pipe-line from Texas points 
would vary from 17i/^ to 25. 

Representative Williams. Then it is because of the differential in 
the transportation charge that enables you to operate on Mexican 
rather than East Texas oil. 

Mr. Walsh. Partly, and crude itself is lower. 

Mr. AviLDSEN. There is no tariff on that oil ? 

Mr. Walsh. We operate under a bonded-warehouse arrangement. 

Mr. AviLDSEN. You reexport it? 

Mr. Walsh. We bring the oil in in bond, and there is a representa- 
tive of the Treasury Department there 24 hours a day, and 'we ex- 
port everything; we sell nothing in this country. 

Mr. O'CoNNELL. Do you operate entirely on Mexican crude? 

Mr. Walsh. Entirely. 

Mr. Henderson. As I understand, you turned to Mexico as a source 
of supply on account of the unavailability except at a premium of 
East Texas oil. Is that it? 

Mr. Walsh. That isn't quite correct. There was plenty of oil 
available without a premium, but the selling price of the products 
was such that we couldn't operate at a profit. 

Mr. Henderson. You said the price fixed for crude was too high. 

Mr. Walsh. That is correct. 

Mr. Henderson. I went over your printed statement.^ You say 
when you went in to buy Mexican oil, the Shell interests warned 
you not to buy from the wells which supposedly they had owned — 
at least, there was a conflict of opinion with the Mexican Govern- 
ment — or any others. Is that true? 

Mr. Walsh. Yes; that is absolutely true. 

Mr. Henderson. In other words, they told you to keep out of 
Mexicor " 

Mr. Walsh. That is right. 

Mr. Henderson. What did they tell you they would do to you if 
you didn't? 

Mr. Walsh. Run us out of business. 

Mr. Henderson. When you went in, what happened ? 

Mr. Walsh. Well, we had considerable difficulty with our bank 
ing connections and our sales. 

Mr. Henderson. Did you attribute that definitely to Shell? 

Mr. Walsh. It happened at the same time. 

Mr. Henderson. It hadn't happened before? 

Mr. Walsh. It never happened before. 

Mr. Henderson. Did any of your banking interests tell you it was 
due to that? 

Mr. Walsh. No. 

Mr. Henderson. They did bring up the question that there was 
possibility of' legal difficulties in connection with the products, that 
the crude oil or products might be attached, or something of the 
sort? 



■ "Exhibit No. 1181," appendix, p. 7.' 



CONCENTIIATION OF ECONOIVIIC POWER 7349 

Mr. Walsh. Yes. 

Mr.. Henderson. But they haven't been able to stopi you? 

Mr. Walsh. Oh, no. 

Mr, Henderson. I want to be quite sure about this. Did some- 
body representing Shell actually tell you to keep out of Mexico? 

Mr. Walsh. Yes. That is in my printed statement. 

Mr. Henderson. You say "warned by the head of the Shell in- 
terests." Would you mind stating who that was? 

Mr. Walsh. Mr. Wilkinson. 

Mr. Henderson. Mr. Wilkinson? 

Mr. Walsh. Yes. 

Mr. Cox. On one occasion in New York you had to resort to legal 
proceedings to pievent the Shell people from restraining the export 
of some oil, didn't you? 

Mr. Walsh. Yes. We applied to the Federal district court in 
New York for an injunction enjoining Shell from interfering with 
our business. It was granted, and later another judge reversed it. 

Mr. Henderson. Reversed the injunction so they are at liberty 
to interfere with your business. Is that it? 

Mr. Walsh. Well, yes. 

Mr. Henderson. Or at liberty to do things which harass you. 

Mr. Walsh. Theoretically the injunction was granted and then 
reversed. 

Mr. Cox. That was an interlocutory order, you obtained in the first 
instance, and that interlocutory order was set aside, but there Was 
no decision handed down. 

Mr. Walsh. That is correct. The case has never been tried. 

Mr. Henderson. How about the other American interests in 
Mexico? Did you have any threats from them? 

Mr. Walsh. No. 

Mr. Henderson. Wliy do you suppose that was? 

Mr. Walsh. Shell is the biggest ; I mean they own about 80 per- 
cent of the properties in Mexico; that is the reason for that, I 
suppose. 

Mr. Henderson. Do you think it meant the American interest's 
were so minor tliat they were indifferent to your taking it out? 

Mr. Walsh. I wouldn't say "indifferent," but 

Mr. Henderson (interposing). You had difficulty with the major 
interests before when you were marketing in New York, didn't you? 

Mr, Walsh. Yes; but that was just ordinary, straight, out-and-out 
competition; you expect that. 

Mr. Henderson. You haven't had any in this particular case? It 
all lies with Shell? 

Mr. Walsh. Yes. 

Mr. Henderson. As far as intimidation is concerned. 

Mr. Walsh. Yes. 

Mr. Snyder. Wasn't that due to some extent to the fact that the 
products which yoH. were exporting from your I'efinery were sold 
in the foreign markets of the Shell Oil Co. ? 

Mr. Walsh. I believe that had a great deal to do with it. We 
were shipping mainly to England and France. 

Mr. Snyder. Is it a fact that none of the products refined from 
Mexican crude are distributed in the United States ? 



7350 CONCENTRATION OF ECONOMIC POWER 

Mr. Walsh. They are all exported; none of them are distributed 
in this country. 

Mr. AviLDSEN. Has the war affected the market for your oil? 
Have there been greater demands since September 1? 

Mr. Walsh. Yes ; there has been a definite strengthening of prices. 

Mr. AviLDSEN. How much has the price gone up? 

Mr. Walsh. I would say certainly more than a cent a gallon, 
which would be 15 to 20 percent. 

Mr. AviLDSEN. That means that your company is operating at a 
satisfactory profit now, would you say? 

Mr. Walsh. We have been since we started. 

Mr. AviLDSEN. What do you call a satisfactory profit, what return 
on your net worth? 

Mr. Walsh. Well, that is what you have got left after deducting 
liabilities from assets. 

Mr. AviLDSEN. Your capital and surplus, is that it ? 

Mr. Walsh. That is true. 

Mr. AviLDSEN. How much do you think you ought to make on 
your net worth? 

Mr. Walsh. Well, I gave you a figure here a short time ago. I 
said : To an independent refiner 10 cents a barrel would represent a 
reasonable profit. 

Mr. AviLDSEN. Wliat would that be in percentage on your net 
worth ? 

Mr. Walsh. I never figured our net worth reduced substantially 
to that. 

Mr. AviLDSEN. Suppose your net worth is a half million dollars. 
You stated, I think, that your net worth is about that. 

Mr. Walsh. Yes. 

Mr. AviLDSEN. What net profit after taxes 

Mr. Walsh (interposing). I wouldn't attempt to figure it on that 
basis. I would figure it on barrels throughout. 

Mr. AviLDSEN. I kno\^, but what do you think — suppose your net 
profit at the end of the year is $50,000. Would you consider that 
a satisfactory return on your net worth ? 

Mr. Walsh. No : I wouldn't. 

Mr. AviLDSEN. Suppose it were $100,000. Would you consider 
that a fair return? 

Mr. Walsh. No ; I am still, trying to get back to this old figure of 
10 cents a barrel. We have an investment of about $2,000,000 in 
our plant. 

Mr. AviLDSEN. Wasn't there a big bond issue against it? 

Mr. Walsh. No; there* are rio bonds outstanding whatever. 

Mr. AviLDSEN. Why isn't that part of your net worth? You said, 
your net worth was $500,000. 

Mr. Walsh. Yes; I say the plant is worth substantially that, but 
we owe money and have liabilities. 

Mr. AviLDSEN. How much are your liabilities, roughly? 

Mr. Walsh. Oh, I don't know, maybe a million or a million and 
a quarter. 

Mr. AviLDSEN. The plant has been pretty well depreciated, has it ? 

Mr. Walsh. The normal rates. 

Mr. AviLDSEN. I should think you would have a large indebted- 
ness if you had a net worth of a half million dollars. 



CONCENTRATION OF ECONOMIC POWER 735 1 

Representative Reece (to the witness). It occurred to me this might 
be information you would prefer not to give. 

Mr. AviLDSEN (to the witness). Is that so? If not, please say so. 
You see, Mr. Chairman, the statement has been made here that an 
independent refiner is an opportunist, he is a fellow who comes into 
the field and makes a large profit, and that has been stated by some 
of the witnesses here, I am trying to find out whether that is true; 
I mean I am trying to find out wliat an independent refiner invests, 
how much he expects to make, and so forth, to see if he is an oppor- 
tuuist. That is the reason for my question. If Mr. Walsh prefers 
not to tell that, that is all right. 

Mr. Walsh. I see your point. Speaking of the independent refiner 
as an opportunist, I think that may be so if an independent goes 
into some particular flush field with the expectation that he will be 
there some 2 or 3 years. That certainly is not our case. We definitely 
nre in the business to be there 'a long period ; we weren't opportunists 
when we entered it. 

Mr. AviLDSEN. You stated that you started in 1932 with $75,000. 

Mr. Walsh. That is right. 

INIr. AviLDSEN. And in 1935 I believe you built a refinery for 
^900,000. 

Mr. Walsh. That is right. 

Mr. AviLDSEN. Did youl)orow a lot of money to do that? 

Mr. Walsh. Yes; we did. 

Mr. AviLDSEN. Did you borrow more than half of it? 

Mr. Walsh. I would say substantially half of it. 

Mr. AviLDSEN. Then the other half must have been profits that 
you made in those 3 years. 

Mr. Walsh. Yes. 

Mr. AviLDSEN. So you did make very substantial profits in those 
3 years prior to building the refinery. 

Mr. Walsh. Yes. 

Mr. AviLDSEN. On your $75,000 capital. 

Mr. Walsh. Yes. 

Mr. Henderson. How did you make that money? Did you make 
it by underselling the market or aggressively securing your product 
in East Texas, or to what do you ascribe it? 

Mr. Walsh. I don't believe we undersold the market any more 
than any of our competitors. Each competitor accuses all the others 
of doing that. I think in a small organization every officer of the 
company was working for the company. We had a well-organized 
organization. 

Mr. Henderson. How were your prices in the New York-New 
Jersey district compared with the prices of the major companies in 
that period? 

Mr. Walsh. We think they were substantially the same. 

Mr. Henderson. Substantially the same? 

Mr. Walsh. Yes. 

Mr. Henderson. I would like to get at this question of the crude 
price. I had some discussion yesterday with Mr. Brown as to how 
that posted price gets fixed. Have you any ideas you would like to 



7352 CONCENTRATION OF ECONOMIC POWER 

give the committee as to how that price gets fixed or who fixes it? 

Mr. Walsh. In most fields there is usually one predominant buyer 

and he sets the price. We naturally are subject to go along with it. 

OBJECTIONS TO EXISTING METHOD OF PRORATION AND RECOMMENDATION 
FOR CONSERVATION ON PURELY ENGINEERINGS BASIS 

Mr. Henderson. What do you suppose are the factors responsible 
for an increase or a decrease in crude price ? 

Mr. Walsh.' I think it is purely a question of supply and demand. 
I don't think there is any artificial fixing of that price. 

Mr. Henderson. Then you think the price of crude is too high on 
account of the interference not at the price-fixing line but at the pro- 
ration line. Is that it? 

Mr, Walsh. Yes. That is, the proration affects or restricts our 
buying of crude, but yet on the other hand we are absolutely competi- 
tive so far as selling our products is concerned. 

Mr. O'CoNNELL. According to that theory and according to your 
chart/ the proration must have broken down in 1939. Is that correct ? 

I notice the price of crude is substantially decreased in '39. 

Mr. Walsh. Well, I wouldn't say that proration broke it down, 
but simply the price of products had gone down. Crude was prob- 
ably selling a little too high back there when it was $1.35. 

Mr. O'CoNNELL. You speak of the price of products. Do you mean 
gasoline products? 

Mr. Walsh. I am taking gasoline. That represents 60 percent of 
the value of the crude, 60 or TO percent. 

Mr. O'CoNNELL. The break in the price of crude at 39 cents is 
very much sharper and more substantial, apparently, than the break 
in the price of gasoline. 

Mr. Walsh. That is right. It is generally admitted in the industry 
that that price of $1.35 was too high and they were a little bit slow 
in reducing it. 

Mr. Henderson. Your idea is that over a period of time the law of 
supply and demand did force it down ? 

Mr. Walsh. Oh, sure. 

Mr. Henderson. Wliat forced it up to $1.35? 

Mr. Walsh. The same reason. 

Mr. Henderson. Was there a scarcity? 

Mr. Walsh. I wouldn't say scarcity, but there was a good healthy 
demand for crude. 

Mr. IlENDEnsoN. The amount of crude that could be produced under 
proration ? 

Mr. Walsh. That is right. 

Mr. Henderson. If you took away proration, you wouldn't have 
that? 

Mr. Walsh. The supply would be increased so much. 

Mr. Henderson. What, do you suppose would happen to the price 
of crude if you took away all the proration ? 

Mr. Walsh. Outside of Texas, I don't believe. you would have any 
effect. In California they had proration laws, but they never 

II mounted to anything. It wasn't necessary to make them very 

* Appendix, p. 7578. 



CONCENTRATION OF ECONOMIC POWER 7353 

Stringent. The same is true in Oklahoma and most of the other 
States. I think if you built enough storage, ;y^ou could just set your 
allowables according to your engineering principles and not try to 
fix it according to market demand or anything of that sort, just 
produce at the optimum rate. ^ 

Mr. Henderson. You mean leave that to each individual producer? 

Mr. Walsh. It might be regulated by some State body or some- 
thing of that kind, but 

Mr. Henderson (interposing). But he would have to have some 
terms of reference by which he decided it, would he not ? 

Mr. Walsh. He probably would hire an engineer. That would be 
the best thing. 

Mr. Henderson. You would have it run in terms of engineering 
optimums rather than market optimums. 

Mr. Walsh. Engineering optimums entirely. 

Mr. Henderson, And let the market find itself. 

Mr. Walsh. That is right. 

Mr. Henderson. So that you would have it on a conservation basis 
rather than on a market basis. 

Mr. Walsh. Strictly a conservation basis. 

Mr. O'CoNNELL. Were that to happen, I take it there would be a 
substantial increase in the supply of crude at least in the Texas area. 

Mr. Walsh. There might be, temporarily, yes; there would be, 
temporarily. 

Mr. O'CoNNELL. Wouldn't there be more than temporarily? 

Mr. Walsh. There might be; yes. 

Mr. O'CoNNELL. Wouldn't that have the effect in all probability of 
reducing the price of crude? 

Mr. Walsh. Yes. 

Mr. O'CoKNELL. Over a period of time. 

Mr. Walsh. Yes. 

Mr. AvirjjsEN. Would you say that the production in the Texas 
field had been reduced steadily since '35, '36, '37, right through '38? 
Has production gone down right along? 

Mr. Walsh. I would say, in relation to demand, yes. Maybe the 
total over-all production has been substantitally the same. I think 
it is 1,300,000 a day or something like that. 

Mr. AwLDSEN. There has been no change ? 

Mr. Walsh. I don't happen to remember the figures, but I would 
say tlint they might have gone along at about the same, whereas de- 
mand had gone up. 

Mr. AviLDSEN. But I understand, then, that the crude price went 
up without any change in production, proration? 

Mr. Walsh. Yes ; except that for a few years prior there had been 
a gradual decrease. 

Mr. AvixDSEN. I am talking now about '35, '36, '37 and '38, those 4 
years. In '36 and '37 there was a substantial rise in crude. 

Mr, Walsh. That is right, 

Mr. AviLDSEN. And at the time of the rise there was no change in 
production in Texas? 

■ Mr. Walsh. I don't think so. I think it was probably substan- 
tially the same. 

Mr. AvHiDSEN. And later when tb^e was a decline in the price of 
crude there was no change in production. Is that right? 



7354 CONCENTRATION OP ECONOMIC POWER 

Mr. Walsh. Substantially the same ; yes. 

Mr. AviLDSEN. Why do you say that the production affects the 
price? It doesn't seem to indicate there is any relationship there. 
The production is the same if the price s^oes up or down. I am just 
trying to get some information. It didn't seem to coincide with this 
chart. I think Mr. Williams was trying to get the same point. 

Mr. AviLDSEN. All I am trying to say is that your price depends 
entirely on the supply and demand. There must have been a re- 
stricted supply and a greater demand or the crude price wouldn't 
have gone from $1 to $1.35, and the reduction a year or so later 
must have been for the same reason. 

Mr. Berquist. Actually the demand has been increasing for crude 
year by year. 

Mr. Walsh. Oh, yes; it does every year. Gasoline sales are in- 
creasing every year. 

Mr. Berquist. So the market has taken more off crude each year 
and production has mounted along with that. 

Mr. Walsh. That is correct, sir. 

Mr. Henderson. To get back to that line of questioning as to how 
you made your money, I think I ought to be a little franker than I 
was. In the old days one used to hear that ^-our corporation was a 
price-cutter in that area, and there was a considerable volume of com- 
plaint that came in at times about your company. Did you have an 
aggressive policy? You said that you charged about the same price 
as the majors. In the New York district of course it is well known, 
as you have pointed out in your testimony here, that for some of the 
gasoline sold at wholesale, the price was considerably less than it was 
in some of the other territories. Did the majors meet you on the 
nose or what did happen? 

Mr. Walsh. We were aggressive, of course we were, and probably 
at times we did quote prices under our competitors, but I don't believe 
we did that — I mean I don't believe that we cut prices any more 
than our major competitors in that same area. 

Mr. Henderson. Am I right that the general feeling was that 
those prices were lower than in some of the other sections on account 
of the aggressiveness there? 

Mr. Walsh. No ; I don't think so. 

Mr. Henderson. You don't think they were any lower? 

Mr. Walsh. No. 

Mr. Berquist. Isn't it probably true that the New York market 
is one of the most competitive markets for gasoline in the country? 

Mr. Walsh. Yes. Greater New York represents about 35 per- 
cent of the total volume of gasoline used in the country. I believe 
it is the most competitive market in the country. 

Mr. AviLDSEN. Thirty-five percent of the totJ^l? 

Mr. Walsh. I think that is the total. By Greater New York 
I mean within a radius of 75 miles, including northern New Jersey 
and part of Connecticut. 

The Chairman. I am sorry that I haven't had the opportunity 
of listening to your testimony this morning. I have just been 
glancing hurriedly over your statement.^ I observe that you testi- 



1 "Exhibit No. 1181," appendix, p. 7573. 



CONCENTRATION OP ECONOMIC POWER 7355 

fied with respect to the purchase of the expropriated oil in Mexico 
that you adopted this policy reluctantly because you realized that 
if 5'ou did adopt it you could not sell to the major companies who 
had been your large customers. 

Mr. Walsh. That is right. 

The Chairman. In other words, prior to the contract for the ex- 
propriated 6)il you had been selling to the major companies. 

Mr. Walsh. The contract for the unexpropriated oil. 

The Chairman. After the expropriation. Is that correct? 

Mr. Walsh. That is right. 

The Chairman, Had you been selling also to the Shell? 

Mr. Walsh. Yes; we had been selling to all the major companies 
up until that time. 

The Chairman. Are we to undei-stand, then, that your difficulties 
began after the Mexican expropriation? 

Mr. Walsh. So far as selling — let me bring out this point. Ex- 
propriation occurred in March of '38, the expropriated properties 
belonging to certain companies that wouldn't agree to the labor laws 
that the Mexican Goyernment established. Companies that did agree 
to them didn't have their properties touched. In addition, the Mex- 
ican Government had considerable land of their own that didn't 
belong to any company, from which, before expropriation, they had 
been producing oil, so there were really two kinds of oil in Mexico 
even after expropriation. 

The Chairman. Yes; I understand that; but I gather from your 
statement that until the difficulty arose in Mexico you were selling 
your products to the major companies, to the Shell Co., and to any 
other purchaser who cared to come along. 

Mr. Walsh. Our products manufactured from American crude. 

The Chairman. Yes. 

M^. Walsh. That is right. 

The Chairman. You were having no difficulty, then, up to that 
time? 

Mr. Walsh. None whatever. 

The Chairman. Your difficulties began after the trouble in Mexico. 

Mr. Wai.sh. Well, after we had started running Mexican crude. 

The Chairman. That is right ; and I gather that you were selling 
the products of this Mexican crude in the market which up to that 
time had been dominated, let us say, by the Shell Co. 

Mr. Walsh. Yes; to England and France. 

The Chairman. And you were having no trouble from the major 
coinpanies. 

Mr. Walsh.. That is correct, from the other major companies. 

The Chairman. Then prior to this time, what was the situation 
with respect to monopolistic practices on the part of the American 
oil industry? 

Mr. Walsh. I don't quite get that question. 

The Chairman. Well, of course now, I may not have absorbed all 
of your statement, but as I have just said, I gather that your difficul- 
tiiBS arose after the Mexican trouble 

Mr. Walsh. No; we had trouble before that. 

The Chairman. All right -what was that? 

Mr. Walsh, We were losing money. 



7356 CONCENTRATION OF ECONOMIC POWER 

The Chairman. Why ? i •, i 

Mr. Walsh. Because of an increase in the price of crude oiJ, witn 
no corresponding increase in the price of products. 

The Chairman. And that increase in the ])rice of crude oil you 
ascribe to two things, the proration laws and the control of pipe lines 
by the refining companies? 

Mr. Walsh. The completely integrated companies, yes; those are 
the two points that I tried to make. 

The Chairman. So that aside from the Mexican situation, your 
complaint is directed against these two factors in the oil industry, is 
that right ? 

Mr. Walsh. That is correct, proration 

The Chairman. Anything else? 

Mr. Walsh. No; that is all. 

The Chairman. Now, I noticed your conclusion. [Keading:] 

I believe there is a definite monopolistic control of the oil industry, partly 
by design — mostly as the result of ill-considered emergency federal legislation. 

Now that statement would seem to place most of the responsibility 
on Congress. 

Mr. Walsh. Yes; but the only point there is the Connally Act. 

The Chairman. The Connally Act ? 

Mr. Walsh. The Connally Act, which of course is based on the 
foundation of the different State laws. If there were no State laws, 
there would be no object of the Connally Act. The Connally Act 
fathers the whole thing. 

The Chairman. You don't like the Connally Act ? 

Mr. Walsh. Well, I think that the foundation of the Connally 
Act is proration laws which I think are not sound. 

The Chairman. In other words, you believe that the States should 
not adopt the policy of proration at all ? ^ 

Mr. Walsh. Not if they combine proration with price fixing, which 
is the way that it is working today. 

The Chairman. Well, I notice that the second of your recom- ' 
mendations is "the extension of Federal control and price fixing to 
include control of refineries and marketing." Now, do you mean 
that you want Congress to pass more extensive control legislation 
than the Connally Act ? 

Mr. Walsh. Yes ; make it a complete utility from well to consumer. 

The Chairman. In other words, you would have the Government 
take complete control of the industry? 

Mr. Walsh. Yes; I would rather have them do that than go along, 
on the present basis. 

Mr. Cox. This paragraph 2 is put in the alternative, isn't it? 

Mr. Walsh. What page is that? 

Mr. Cox. That is page 25.^ 

Mr. Walsh. Yes: that is as an alternative, of course. 

The Chairman. Then what is your suggestion, your definite sug- 
gestion, your primary suggestion as to what should be done? 

Mr. Walsh. First put proration on entirely an engineering basis, 
conservation basis, divorce it entirely from price fixing. There aTe 
two factors today in proration. One is conservation, which I think 



^ Appendix, p. 7588. 



CONCENTRATION OF ECONOMIC POWER 7357 

represents about 10 percent, and the other factor is price fixing which 
represents about 90 percent. 

The Chau^man. Who pulls the strings on the price fixing ? 

Mr. Walsh. The Bureau of Mines here in Washington say that 
the country needs 3,000,000 barrels of oil a day during October. 
That is in some way split up among the different States and sent 
down to Texas. 

The Chairman-. "In some way." In what way ? 

Mr. Walsh. Through the oil compact, I suppose, which is an 
agreement between a number of States. 

The ChairmXn. Can't you make it definite as to that? 

Mr. Walsh. I really don't know how those Bureau of Mines' 
figures are actually split, to tell the truth. 

The Chairman. Who splits them ? 

Mr. Walsh. I can't definitely answer that. I think it is decided 
between the commissions in the different States. 

The Chairman. It all stands on this basis of estimate of con- 
sumption by the Bureau of Mines ; is that right ? 
^ Mr. Walsh. That is right. 

" Mr. Henderson. Isn't it true that the Bureau of Mines makes a 
State estimate also ? 

Mr. Walsh. Well, I am not certain on that point, whether they 
split it or somebody else splits it. 

Mr. Henderson. I think the staff could answer that question for us. 

The Chairman. I am trying to get the story. 

Congressman Williams. What was the answer? I think that is 
an important thing. 

Mr. StNDER. The Bureau of Mines, as I understand it, reports an 
estimated demand for crude oil for a certain month; then the Bureau 
of Mines breaks down that demand by the particular crude oil- 
producing States. 

The Chairman. Of course, that may be the fact. I am trying to 
determine what the witness knows about the control of prices to 
which he has been testifying. Now you begin with this estimate by 
the Bureau of Mines. 

Mr. Walsh. Let's say the Bureau of Mines splits that up and 
allocates a certain part of it to each oil-producing State, 1,300,000 
barrels a day for Texas. Then the Railroad Commission of Texas 
tries to set the allowable in the State so that approximately that 
amount is produced. It may run over, but I believe they try to 
keep it as close as they can. 

The Chairman.. You believe that shofPld not be done? 
■ Mr. Walsh. I don't believe that should be done; no. 

The Chairman. You don't believe the Bureau of Mines should 
make this estimate ? 

Mr. Walsh. No ; I don't. 

The Chairman. Do you know whether that is done in compliance 
with any requirement of law? 

Mr, Walsh. I" don't believe it is; in fact I am pretty sure it isn't. 

The Chairman. Now, if tiiat were not done, what would be the 
effect on the price situation ? , 

Mr. Walsh. You would go back to exactly the way the business 
Has operated for years p"rior to proration. Supply and demand would 
take care of it. 



735}^ CUNCENTKATION OF lOCONOMIC I'OWER 

The Chairman. What would the effect be on conservation? 

Mr. "Walsh. No effect whatever. 

The Chairman. What is your opinion with respect to the testi- 
mony that before proration there was a great waste of oil and a 
substantial decrease of the amount of recoverable oil in fields which 
vv ere drilled under the old method, with every owner trying to get out 
as much as he could, as soon as he could. 

Mr. Walsh. To my mind, there has never been any petroleum 
wasted. I think it is impossible to waste a barrel of oil. 

Tlie Chairman. You don't think that any is left in the ground 
when a great many wells are drilled? Now understand, Mr. Walsh, 
liere we have the Department of the Interior supervising the devel- 
opment of many oil fields on the public domain. The Department 
of the Interior has recommended to Congress, and Congress in 
response to that reconnnendation has passed legislation authorizing 
(he unit plan of development on oil fields on the public domain. 
Now the unit plan of development was justified upon the ground 
that it would save oil, it would conserve oil, it would increase the 
amount of recoverable oil in the pool to which it was applied, and 
that if it were not followed, it would be impossible to get out as 
much oil as under the unit plan of development. 

Now, do you say to the committee that in your opinion those 
suggestions in support of these conservation policies are incorrect? 

Mr. Walsh. No; I agree with that thoroughly They are merely 
applying the , best known engineering to those particular Govern- 
ment reserves, and those same engineering principles slioiild be 
applied to all oil properties. Whether the result of that is to produce 
1,000,000 barrels a day or 10,000,000 barrels a day, I don't think 
there is any tie-up betw^een the two. 

Mr. Berquist. Do you believe that if best engineering principles 
vvere applied so that optimum production would result — I mean by 
that the best use of gas pressures would be made — that, the quantity 
of petroleum produced would be greatly in excess of what is being 
produced now ? 

Mr. Walsh. I think it would be temporarily; yes. 

Mr. Berquist. In other words, the amount that is produced is 
less than that which would give an optimum result in production 
in the long run? 

Mr. WAiiSH. That is true right today ; yes. 

Mr. Berquist. What would you say would be the degree of in- 
crease if optimum operation were generally applied over that which 
is now being produced ? 

Mr. Walsh. Oh, perhaps 25, 30 percent. 

Mr. Henderson, As I gather, Mr. Walsh, what you are saying 
is that the Bureau of Mines estimates are madB on a basis which 
is not related to the most efficient production of oil in the United 
StateSy but is related to market conditions. 

Mr. Walsh. That is it exactly. In setting that figure, they take 
no account of engineering production. 

Mr. Hendejrson. Let me put it another way. When they put out 
their monthly estimates, they do not say that the oil wells in the oil- 
producing States, producing on the most. efficient engineering basis, 
will produce only this number of gallons? 

Mr. Wai.sh. They- certainly do not say that. 



CONCENTRATION OF ECONOMIC POWER 7359 

Tl»e Chairman. Does it all hinge upon the action of the Bureau of 
Mines, or does some other factor enter here in fixing the price 1 
Suppose that the Bureau of Mines did not make this monthly esti- 
mate so that the various State commissions would have no figures, no 
central figures, to prorate among themselves, what would be the 
result? 

Mr. Walsh. I think the different States acting under their State 
laws would try to arrive at some figure that would be probably simi- 
lar to the Bureau of Mines figure. I think the Bureau of Mines 
figure is just an incident. 

The Chairmak. You think that is just an incident? 

Mr. Walsh. Yes. 

The Chairman. Does all of this depend, therefore, upon the action 
of public authorities, or does some of this price fixing flow from the 
action of private persons or agents? 

Mr. Walsh. No; it all flows from your commissions who admin- 
ister the State laws. 

The Chairman. Then what do you mean by the monopolistic 
practices to which you refer? 

Mr. Walsh. That these State laws tend to create monopol}^. 

The Chairman. And "by that I suppose you mean price fixing? 

Mr. Walsh. Well, they tend to create monopoly in that they throw 
the business to these larger companies. 

The Chairman. In x)ther words, your conclusion is that if we 
didn't have these State laws that we would have greater opportunity 
for independents. 
, Mr. Walsh. That is it exactly. 

The Chairman. That the proration laws are the fundamental 
means of making it difficult for independents to compete with the 
larger company. 

Mr. Walsh. That is it exactly, and the other point is the owner- 
ship of pipe lines by the major companies. 

The Chairman. And on either of these two factors do you have 
any other suggestion? 

Mr. Walsh. None whatever. If you don't change , those, make 
the whole thing a utility ; that is the alternative suggestion. 

The Chairman. In other words, then, your recommendation to the 
committee is that the control of pipe lines should be divor<»d from 
the large producing companies, the proration laws should be aban- 
doned 

Mr. Walsh (interposing). Except for engineering conservation. 

The Chairman. Well, how would that engineering conservation 
be caiTied on under your plan? 

Mr. Walsh. These State bodies woukt be given opportunities to 
check up on how these different properties are being operated, and 
if they are being operated not in a good, efficient manner, they might 
have some authority to correct it. Of course that is pretty far reach- 
ing. 

The Chairman. Isn't that exactly what you are complaining about, 
that they do have that authority now? 

Mr. Walsh. They do as far as volume is concerned. 

The Chairman. Your complaint is that this authority is exercised 
by public authority, by public bodies upon the basis o:^ price fixing 
rather than upon the basis of the largest amount of oil to be pro- 
duced. 

1:iH!>l --lO— )il. H. .see. I —IS 



7360 CONC.'ENTRATH^N OF E(jONOMI(J I'OWEll 

Mr. Walsh. Tliut is correct. I would tibolish the price-fixing end 
of it but would lea\'e the other stay. 

The Chairman. Then beyond thai you wouldn't need any public 
authority governing the oil business^ 

Mr. Walsh. None Avhatever, 

The Chairman. Are tliere any other monopolistic practices? 

Mr. Walsh. No; those are the only two. 

The CnAHisiAN. Those aie the only two tliat you care to comment 
upon to this committee? 

Mr. Walsh. Tluit is correct. 

The Chairman. Are there any other qm stions ? 

Mr. Berquist. Take the demand forecast for September, which is 
based upon July and August; of course, they were based upon the 
demand that arose in those months at the Current prices, were they 
not? 

Mr. Walsh. That is correct. 

Mr. Berquist. Then in the forecast of demand there is no allow- 
ance made for changes in price and the result of changes in price in 
the inci"ease or decrease of demand that might flow from those 
changes in price ? 

Mr. Walsh. They don't give any consideration to price whatever, 
as far as demand is concerned. Of course, as the price comes down* 
as a rule demand goes up considerably more than it would normally. 

Mr. Berquist. Do you boiieve if the price went down that there 
would be increased demand for petroleum products? 

Mr. Walsh. Yes; I am sure there would be, particularly in fuel 
oil where you have a commodity that is in direct competition with 
'coal. As the price of coal goes up and. oil goes down, then naturally 
th'ey use considerably more fuel oil. 

Mr. Berquist. And tfiero has been a considerable transfer, has 
there not, over the years in the use of fuel oil in place of coal? 

Mr. Walsh. Oh, yes; a great d6al. Particularly here in the East, 
,a number of plants are equipped to burn coal or oil, depending on 
which is the lower in price. 

Mr. Berquist. So there is some, you think, considerable degree in 
the flexibility of demand, depending upon the price level? 

Mr. Walsh. Yes; there is a substantial degree of flexibility. 

The Chairikan'. Are there any other questions? 

Mr. Hendetrson. I have just one more question on that, since the 
element of price was introduced into that demand forecast. Is there 
much of a relation between pleasure-car transportation and the price 
of gasoline in your opinion? You testified as to fuel oil. 

Mr. Walsh. I would say that the lower the price of gasoline, the 
greater tlie consulnption and demand. There are 25,000,000 auto- 
mobiles in the country and I think maybe 10,000,000 of them have 
only a certain amount of money to spend every week on gasoline. 

Mr. Hknderson. Do you think if the gasoline price were lower, 
they would use more g:\s. or would they u.-e the money for something 
else? 

Mr. Walsh. Tt would probably go both ways. 

Ml". Hindi RSON. IjCt me ask you this: what has b^'en your obser- 
vation over these years is to what happens to the consumption of 
gasoline with a change in jirice downward? 



CONCENTRATION OF ECONOMIC POWER 7361 

Mr. Walsh. I think it has increased noticeably. 

The Chairman. Are there any other questions? If not, the com- 
mittee will stand in recess until 2 : 30 this afternoon. The next wit- 
ness will be Mr. Karl A. Crowley, of Texas. 

(Whereupon, at 12 : 30 p. m., a recess was taken until 2 : 30 p. m. of 
the same day.) 

AFTERNOON SESSION 

The committee resumed at 2 : 35 p. m. on the expiration of recess. 

The Chairman. The committee will please come to order. 

Mr. Crowley, please come forward. Do you solemnly swear that 
the testimony you are about to give in this proceeding shall be the 
truth, the whole truth, and nothing but the truth, so help you God? 

Mr. Crowley. I do. 

The Chairman. You may be seated, Mr. Crowley. 

TESTIMONY OF KARL A. CROWLEY, ATTORNEY, FORT WORTH, 

TEX. 

The Chairman. Will you give your name^ please ? 

Mr. Crowley, Karl A. Crowley. 

The Chairman. Will you state the experience and the leason for 
your presence ? 

Mr. Crowley. I am a lawyer, practicing at Fort Worth, Tex. J 
have been engaged in practice there for about 20 years. 

The Chairman. Is your practice extended to the oil business ? 

Mr. Crowley. It has. That has been my principal practice for 
the past 20 years. 

Representative Reece. May I ask him where he lived before he 
went to Fort Worth, Tex. ? 

Mr. Crowley. I have the honor of having been born in your State, 
Congressman. 

The Chairman. I think that is propaganda and should be stricken 
from the record. 

Representative Reece. .Yes; leave that out. 

The Chairman. You may let it stand as long as he wants it out. 
[Laughter.] 

Mr. Crowley. During the past 20 years, Mr. Chairman, my princi- 
pal clients have been engaged in the oil business. They have with- 
out exception been independents. During this time I have now and 
then had a very small interest^in some of the business. I do not pose 
as an expert, but I would like to make the statement on behalf of 
the independent producers of'Tny State that with the hope that this 
committee will find some solution to this perplexing problem of mo- 
nopoly that has so long engaged the attention of government every- 
where, I have filed a lengthy statement. It is entirely too long to 
read. If I may, I would like to have it considered as read and just 
speak mqre or less extemporaneously during the short time that is 
allotted to me. 

I will speak principally about conditions in Texas because my 
familiarity with the oil fields there is greater than it is anywhere 
else. 



7362 CONCENTRATION OF ECONOMIC POWER 

The Chairman. Mr. Crowley, if there is no objection upon the part 
of any member of the committee, your printed statement will be 
made a part of the record and you may proceed as you have indicated. 

(Mr. Crowley's printed statem.ent was marked "Exhibit No. 1182" 
and is included in the appendix on p. 7591.) 

Mr. Crowley. Yes, indeed; and I will be glad to undertake to 
answer any questions any time. I don't mind being interrupted at all. 

MONOPOI.TSl TO PrA(;TlCES TENDING TO "sQUEEZE" OUT SMALLER 
INDEPENDENTS 

Mr. Crowley. Gentlemen of the committee, this question of the 
oil monopoly has been before us since the early days of the Standard 
Oil Trust. In those days the monopoly was based upon an agree- 
ment of the Standard of New Jersey with subsidiary companies 
whereby they controlled production, transportation, refining and 
marketing. Today we have the same conditions, exactly, as led to the 
difcsolution of the trust, finally in 1911. The only difference is that 
we now- have a gigantic cartel owned by approximately 20 integrated 
major companies. The Congress of the United States has investi- 
gated the monopoly repeatedly. Recommendations of different kinds 
have been made for legislation. The Hepburn Act relating to the 
divorcement of the railroads and the coal mines grew out of the 
investigation by the Commissioner of Corporations, which was 
succeeded by the Federal Trade Commission. In 1906, I believe, 
they made their 4'eports recommending the divorcement then of pipe 
lines as early as that time. The Standard Oil Co. was finally dis- 
solved by the Supreme Court of the United States in 1911 because 
of monopolistic practices engaged in by that company which are 
now being engaged in bj^ these 20 major integrated companies. I 
will not limit it to those 20, but incliide those that are integrated. 

The oil monopoly has varied its activities only slfghtly since those 
earlier days. They now resort to fake conservation laws called pro- 
ration laws ; they hide behind the technicalities -of rate making on 
their pipe lines and resort to those things in addition to the old 
practices of squeezing out the independent wherever he undertakes 
to operate. The East Texas oil field is an example, where the 
independent has been so ruthlessly mistreated as to the independent 
refining. There Ave have the greatest oil field that the world has 
ever seen, with a supply of oil, if those wells could be produced, that 
would perhaps furnish the world with crude oil for 2 years or more. 
There were built around in East Texas approximately 100 inde- 
pendent refineries to get the benefit of a plentiful supply of crude 
oil. No sooner had these plants been built than there was forced 
upon the pi oducers and the refiners as well the drastic proration 
laws that we now have in Texas. I do not want to be understood 
as advocating the abolishment of proration. The producers every- 
where have been fed the dope of high prices; they can't be taken off 
that dope — that is all it can be called. Tlie law of supply and 
demand will naturally come into play and into existence at some 
future time, but it can't be done now. I agree thoroughly with the 
witness, Mr. Walsh, this morning, in his statement here that prora- 
tion has iievftr been used except as a means of fixing prices; that is, in 



CONCENTRATION OF ECONOMIC POWER 7363 

recent years. Proration was forced upon the producers of East 
Texas; proration has been forced upon practically every State that 
has adopted it, as a means of controlling production. The objective 
of the integrated companies today is not "for further regulation by 
Government or to lessen regulation of Government, but to get enacted 
into law their unitization plan. 

They must control production; they must keep the supply of oil 
within their control and as far back as 1928 — I think this might be a 
good time to refer to a report made by the Federal Oil Conservation 
Board by Mr. Pew, who testified here. Mr. Parish and a number of 
others 

The Chairman. Let me interrupt you, Mr. Crowley. It has been 
suggested that it might be well to announce that the committee plans 
to hold a meeting tomorrow morning. I make this announcement 
in the belief that those present may not know of the plan, and som^ 
who want to be present at all of the sections might otherwise not be 
here if the announcement were not made. You will pardon the 
interruption. 

Mr. Crowley. The Federal Oil Conservation Board on January 28, 
1928, made a report. It was a committee of that board, and sug- 
gested that there be cooperative development by the unitization plan 
of producing oil, and expressed fear at that time that their agreement 
to curtail production by unitization might be in violation of the 
antitrust laws. 

The committee recommended, and I quote the recommendation : 

First, Federal legislation which shall unequivocally declare that agreements 
1'(ir the cooperative development and operation of single pools are not in viola- 
tion of the Federal antitrust laws. 

Secondly, permit under suitable safeguards the making, in times of over- 
pro<luction, of agreements between all producers for the curtailment of produc- 
tion, and similar legislation in various other States. 

That is the present objective of the integrated companies. Here- 
tofore the hardy individual has gone out and risked his capital, dis- 
covering new oil pools, finding new sources of supply. At every time 
when the country has been threatened with a shortage of oil we find 
this independent out exploring other lands; he developed Oklahoma; 
he developed Texas, the Seminole field, the Oklahoma City field, west 
Texas, where the experts of the majors said there could be no oil ; he 
found it. They went to east Texas, when that section had been 
condemned by the experts of the majors.. He found the oil there and 
developed the greatest oil pool that the world has ever seen. Thie 
supply of crude oil has been tlie threat to the monopolistic control 
of the major companies. Now this unitization plan, along witii 
proration, that they have, in mind, and the Federal regulatioMS as 
proposed by a bill introduced up here by Conoressman Cole, wiU 
ultimately, if their plans succeed, give them complete and f idl control 
of the oil business; and the little fellow may as well get ready to 
surrender and get C5)mpletely out. 

The proposed bill of Congressman Cole may be discussed here, but 
I want to say at this time that I am opposed to it and I don't believe 
there is an independent oil producer in the State of Texas or in the 
United States that is in favor of it. -It would allow the unitization 
of oil fields ; it wo»i1d allow a Federal board to have complete con- 
trol of the oil busoess.' Control would eventually become so strict 



7364 CONCENTRATION OF ECONOMIC POWER 

than an operator would have to come up here and get a certificate of 
convenience and necessity to drill a wildcat well or build a filling 
station down in Ottumwa, Iowa. It is a bad thing. 

i would like to tell this committee how proration was accomplislied 
in the Texas field at the end of 1931, which was the first full year 
of development in East Texas. There were 3,612 wells producing 
from 92,000 acres of land. The field began to produce far in excess of 
the requirements of the major oil companies and then the independent 
refiners began to go into East Texas. The major oil companies saw 
the threat to their monopolistic control by this great East Texas oil 
field, which now has an estimated capacity of 15,000,000 barrels an 
hour, if the wells could be permitted to flow that much. 

Its flow would supply the United States with oil for 5 days. The 
majors saw this threat coming and the independent refiners began 
moving in and building refineries. They began to plan foi the cur- 
tailment of production by urging that the legislature meet and pas? 
proration laws. The Governor of the State declared martial law. 

The Chairman. Who urged that? 

Mr. Crowlet. Governor Ross Sterling, the former president of the 
Humble Oil & Refining Co. 

The Chairman. You said they urged that the legislature act. 
Who? 

Mr. Crowley. The major oil companies. 

The Chairman. Who were the spokesmen? 

Mr. Crowley. One spokesman was — I will give you his stat^aent — 
Mr. Seubert of the Texas Co., I believe. 

The Chairman. On page 12 of your paper I see a note there.^ 

Me. Crowley. I understand Mr. Seubert is with the Standard of 
Indiana. He says this: 

We are probably at the point where the industry will have to speak its 
piece with prices, until the State authorities particularly in Texas devise some 
more efficient means of control than they have brought forward to date. 

The oil industry cannot live without fair profits. It cannot earn profits so 
long as a few nonconformists are able to wreck any kind of a price schedule 
that is set up. 

The first posted price for crude oil in East Texas, gentlemen 
of the committee, was 68 cents a barrel, which ran from August lo 
November 1, 1931. 

About the time that Mr. Seubert made this statement they put 
their threat of price reduction into effect. Oil declined to 10 cents 
a barrel, and it remained at 10 cents a barrel and sold at prices rang- 
ing from 10 to 50 cents a barrel for quite awhile. It was not until 
September 1933 that oil again reached the price of $1 a barrel. The 
Legislature of Texas had been called into special session. They 
passed a proration law. At that time they were not so opposed by 
many of the producers because we had an allowable, I^think, of 
225 barrels of oil per day for each well. That of course steadily 
declined and declined and declined until today the allowable is 20 
barrels per day with 2 days' shut-down making an average of about 
14 barrels of >oil out of the East Texas field. That is the only field, 
incid^itally, where the Connally law is enforced anywhere in the 
United States. 



^ App«udU, p. 7597. 



CONCKNTRATION OF ECONOMIC FOWEIl 7365 

Ml-. Henderson. Do you mean that there is no other State that 
has a proration law from which there is "hot oil" being shipped? 

Mr. Crowley. No, sir; I do not mean that. I mean that that is 
the only State where the Federal Tender Board operates, the only 
I)lace where the Federal Tender Board operates is in East Texas. 
There is worlds of "hot oil" being shipped out of Louisiana, 
thousands upon thousands of barrels of "hot oil" being shipped our 
of Louisiana. 

Mr. Henderson. Do you think that is true of the other producing 
States? 

Mr. Ckowley, That is undoubtedly true according to Dr. Pogue 
who testiiied' here a few days ago, even as to the East Texas field. 
Notwithstanding the Hot Oil Act, there were about 104,000,000 bar- 
rels of "hot oil" shipped out of East Texas. Incidentally, I want to 
say that the little independent down there is accused of being a "hot- 
oil" runner. The records show that there have been 5,000,000 barrels 
of that 104,000,000 barrels of "hot oil" confiscated. It is a mystery 
to everybody concerned what became of the other 99,000,000. It is 
most difficult for anybody to believe that the big companies, with 
their pipe lines, didn't have some part in the dis^xtsition of the other 
99,000.000 barrels of "hot oil" known to have been run out of the 
East Texas field. 

Mr. Henderson. How about the 5,000,000 that was confiscated? 
Was that from the independents? 

Mr. Crowley. I haven't any record before me of that. I haven^t 
got a list of the defendants in the cases that were involved, but I have 
no doubt but that it was confiscated from independents. I don't 
want to be considered as condoning^ "hot oil" running, but I do say 
that the proration laws have been inequitably enforced. There has 
been discrimination. The independents have been closely checked 
up on and the majors have been the "gentlemen" of the inclustry and 
allowed to do as they pleased. 

Our oil supply is based upon so-caH«d market demand. You 
heard that explained this morning, how that market demand was 
fixed. The market demand is fixed by the nominations of tlie major 
oil companies. The majors merely .indicate how much oil they 
would like to have and that oil is supplied to them. The independent 
may seek to get a supply of oil for himself, but his nominations are 
not controlling as they are with the majors. 

The Chairman. To whom are these nominations made? 

Mr. Crowley. To the Railroad Commission of Texas, for Texas 
oil. The wells of Texas now produce on an average of about 14 
barrels a day throughout the State. Ten years ago they were 
producing about "40 barrel-s per day, Oklahoma produces today just 
about her full capacity, an average of about 8 barrels per day, and 
that is the total potential. The wells of California produce jJbout 
50 barrels per day, against 14 barrels of Texas. The wells of New 
Mexico about 42. When I say 14 barrels in Texas, I mean 14 barrels 
in East Texas. We have in Texas different allowables for different 
fields. We have different allowables for wells in the same' field. 
There are wells in west Texas that have been allowed to produce 
several hundred barrels from one way in the same field where thf 
average was about ^2 barrels. Mr. Thompson is here. I am sure 
if you want to follow that up yo\\ can inijuire into the reason for 



7366 CONCENTRATION OF ECONOMIC POWER 

that, but as administered today the proration laws are inequitable, 
discriminatory against the independent oil man of the State of 
Texas. 

The Chairman. Is this discrimination a matter of law or a matter 
of administration ? 

Mr. Crowley. A matter of administration. Proration of course is 
based upon price fixing and the proration laws are administered in 
Texas for the purpose of fixing the price of crude oil. I don't sup- 
|)Ose there is anybody who will dispute that. Conservation plays 
little part in it, I don't mean to sav that we don't have conservation 
in Texas because I think we do. I do not think there is any oil being 
wasted in Texas, but so far as the production itself is concerned 
I hat production is based upon the question of price purely and simply. 
We had a meeting before the Railroad Commission where the 
major companies had been threatening price cuts for several weeks; 
the commission invited the major heads to come down; they came, 
and an agreement was practically reached in the open session of the 
Railroad Commission that the Commission would limit production for 
a period of 3 months to such and such a figure in consideration of 
which the majors would keep the price of crude oil up. That is 
reflected on the minutes of the meeting, and I have extracts of them 
right here before me where that agreement was actually made. That 
agreement ran for 3 months and still conditions didn't improve 
in the oil business, and we faced and had another cut — we had a 
cut in October and then we had another cut in August of this year. 
There was not the slightest justification in the world for this last cut. 
The story of that was printed in advertisements in the daily news- 
papers, fairly familiar to people in the oil business, and there was a 
little difference of opinion between the Standard of New Jersey and 
the Sinclair. 

Sinclair advertised that he couldn't make any money out of gaso- 
line at the price that he had to sell it for. He proposed to raise 
the price, published advertisements stating the reason for it; it was 
generally understood that Sinclair at that time was a good deal in 
me same position that the independent is always, suffering from a 
lack of crude oil at competitive prices. The Standard of New 
Jersey refused to go along on the raise in the price of gasoline. 
Sinclair said, "My only remedy is to>educe the price of crude oil," 
and the price of crude oil was reduced 20 cents a barrel. That 
ruinous price ^t would have bankrupted every independent in the 
business. He had already been squeezed and squeezed and squeezed 
as t<> his volume of production and he simply couldn't take a price 
cut of 20 percent of his gross revenue. What happened at that time 
was simply this : Colonel Thompson, the head of the Compact Com- 
mission of the six States, got the Railroad Commission of Texas 
together; they ordered a 30-day shut-down. Five other States fol- 
lowed the example of Texas to shut down their oil fields until the 
price of oil increosed. We had the spectacle of six oil-producing 
States saying to the rest of the United States, "You can't ha,ve 
gasolhie, you* can't "have oil until you are willing to pay the 'price 
that we think is fair." And I think they did exactly right. I 
think that whatever Colonel Thompson has ever done, that this will 
stand out as one courageous piece of work on his part and the oil 
producers of Texas are lor it. We are opposed to things of that 



CONCENTRAtlON OF ECONOMIC POWER 7357 

kind in principle, but who is to be the most powerful over the dil 
producers of the country, the Standard and Sinclair or Government 
authorities? There ought to be a remedy for such conditions as this 
so that there cannot be any ruthless price cutting, ruthless destruc- 
tion of the little producer. "The little producer cnoosing his field," 
was mentioned by one of the great oil men of the country the other 
day. How is he going to choose his field under conditions like 
that? Of course, he can't choose his field! This spectacle of the 
closing down of these oil fields might not be what you would be in 
sympathy with if you lived in some other section of the country 
that didn't depend on oil like Texas does. Maybe you don't favor 
anything of that kind. We might oppose Kansas and Nebraska 
deciding not to let us have any wheat, but if they were the victims 
there of monopoly in the handling of wheat, the milling, the distri- 
bution, the warehousing of it, you might find the same sort of 
rebellion. Congress can find a solution to this thing. 

I heard the little man referred to in contemptuous terms in sub- 
stance that he wasn't needed in the oil business. Well, he has been 
a vital factor in the oil business heretofore. Twenty-three out of 
twenty-five oil wells of the United States have been discovered by 
this independent. He has invented the processes of refining. The 
old Tidewater, shut off from the coast and from its markets by the 
railroads and the Standard Oil Co. combination, invented the 
use of the pipe line. The independent producer has always gone 
out and found these oil fields. This statement ^ that I have filed 
with your committee gives somewhat of a detailed statement of the 
pioneering of the independent oil man; it shows, in brief form, how 
the oil business has been developed, and it is the little fellow that 
has built the oil business, just like it is the little man that has built 
America, and the little man only asks in the oil businees,. like he 
asks in any other business, just a fair opportunity to exist, and he 
can't do it with this monopolistic control of the oil business that we 
have upon this country today. 

The refineries I mentioned awhile ago in East Texas I have heard 
referred to as coffee-pot refineries. Why, if it please the committee, 
half of the refiners of this country are coffee-pot refiners if they are 
coffee-pot refiners over there. There have been independents who 
have gone into East Texas thinking they would have an opportunity 
to get a supply of oil, provided they had leases of their own, that 
have built some of the finest smaller units of refineries in the whole 
country, cracking plants, all kinds of appliances — of course, they 
had to pay th« tribute to the patent pool lor the use of these things, 
but they built them nevertheless. They were built, nearly a hundred 
of them, and as the production was curtailed in East Texas their 
output began to be reduced. They squeezed the independent refiner 
out in East Texas by two methods — I mean the major oil companies 
squeezed the independent refiner out — first curtailing his supply of 
crude oil, and in the second place keeping the price of crude oii up 
above similar grades of crude in other sections of the country where 
they had a full, complete monopolization of the field. 

It must be borne in mind that these integrated ct)mpanics are tbe 
only purchasers of crude oil except that rare independ«nt refiUftsr 

'"Eihibit No. 1182," appendix, p. 7.^.91. 



7368 CONCENTRATION OF KGONOMKJ POWER 

who tries to c^erate; they are the only buyers of the product; they 
fix the price of oil; the price of the major company determines the 
market price of the oil, and that is all there is to it. 

I would like to give you. on that particular point, the differential — •' 
I don't think anybody has touched upon it here — as to how the 
squeeze worked upon the independents. It is easy to understand 
Jiow they reduced his volume, but here is how the price squeeze 
worked. 

I have prepared a table in my prepared statement on page 85 of 
that report.^ Reduced to a common gravity, it shows that the dif- 
ferential against a refiner operating in East Texas and elsewhere in 
that area of the country, ranges from 4 cents a barrel to 39 cents 
a barrel. You heard this independent refiner testify this morning 
that if he could make a profit of 10 cents a barrel on his operations 
he thought he was doing fine. This thing itself shows you that he 
couldn't make it in East Texas. 

The Chairman. Do you mean by this table that tljie price in the 
East Texas field is less by the amount of the figure carried in the 
column labeled "Differential," or more? 

Mr. Crowley. I mean that it is more. 

The Chairman. In other words, the price foi' crude oil in East 
Texas is greater by the amount indicated in the last column on this 
page than the price in the second column ? 

Mr. Crowley. Yes, sir. 

The Chairman. Which is the price for that gravity of oil in the 
fields mentioned? 

Mr. Crowley. That is riarht. 

The Chairman. I understand you to say that is greater. 

Mr. Crowley. It is greater. . 

The Chairman. Now, is that pleasing or dissatisfying to the pro- 
ducer of crude oil in East Texas? 

Mr. Crowley. Well, of course, I am just presenting facts, I am 
not talking about what pleases him. Naturally the producer of crude 
oil is pleased at the price, but to offset that, Senator, his vokime of 
output is 14 barrels a day over there and if he happens to be oper- 
ating elsewhere where the majors desire to take a good deal of oil, 
he gets considerably more oil out of the ground. So they keep the 
volume low in East Texas, and therefore they can afford to sustain 
some of the losses occasioned by higher prices. 

Now the sj'stem is just the same as it has been for a long time, but 
only slightly different.; They use a different method. In 1921 — that 
is 18 years ago — I was receiver of an oil concern with a capital of 
$15,000,000 engaged in the producing and refining business, and they 
had very little production. They bought most of their oil. Oil at 
that time was $3.50 a barrel. The independents were building re- 
fineries all over West Texas, operating on ranging crew, one of two 
big plants started in Fort Worth and $3.50 a barrel is what they were 
having to pay for crude. Oil connections were scarce, they were 
hard to get; it was hard to buy oil, so they began to pay a premium, 
10, 15, 25, or 50 cents. This particular concern was paying about 
85 cents,, or $3.85 for its oil and making plenty of money. 

But suddenly overnight, without any apparent rhyme or reason or 
cSfBse whatever, the price^of gasoline went down, went way below the 

1 AfitpMUlix, p. 7636. 



CONCENTRATION OF ECONOMIC POWER 7369 

cost of buying the crude oil, so buckle and tongue wouldn't meet. 
This particular concern could not pay this high price for crude oil 
because they could not realize that much out of the refined product 
and they folded up, they went broke, and the wrecks of those plants 
remain alongside the T. & P. Railroad from El Paso to Texarkana, 
just like they are doing in Longview today. 

The Chairman. Now you are talking about refiners. 

Mr. Crowley. That is what I am talking about. 

The Chairman. When I interrupted you with a question, you 
were about to tell us hov/ some of the independents were squeezed out 
in the East Texas field, and I wasn't clear whether you were referring 
to independent producers or refiners. 

Mr. Crowley. I meant independent refiners. Pardon me for just 
discussing this thing so generally and without any particular se- 
quence, but I am trying to do it extemporaneously and save as much 
time as I can and tell you these points as they happen to occur to me. 

But the squeeze of 1921 is the squeeze of 1938 and '39. Every 
plant in East Texas practically is shut down, except two or three 
plants over there that have been able to buy some of this confiscated 
crude oil that has been confiscated by the State of Texas and they 
might as well be junked. I have in mind one concern that built 
one of the finest little plants in Texas; cost them about a million 
dollars for the plant and pipe line. They operated that, being in the 
squeeze, losing money every day, until they lost about $400,000. Thej' 
finally gave it up as a bad job. 

The Chairman. Now what you mean is that these independent 
refiners in the Texas field, in the East Texas field, were squeezed 
out by reason of an increase in the price of the crude; is that right? 

Mr. Crowley. They were. 

The Chairman. Now how was that increase in the price of crude 
brought about? I think that is the gist of the squeeze, isn't it? 

Mr. Crowley. Well, that was just brought about by one of the 
companies posting notice on its door that effective on such and such a 
date they would pay $1.35 a barrel for crude oil. 

The Chairman. Do you think that was done by agreement among 
the majors in order to close out the independent refiners? 

Mr. Crowlf.y. Well, I don't know what it takes to make an agree- 
ment. Senator. 

The Chairman. Well, of course that is always the problem in an 
antitrust suit and in this study. 

Mr. Crowley. Here is the situation. These gentlemen don't need 
a written agreement. They have adopted the same policies, the same 
procedure. When one posts a price cut they all come to that. When 
one posts a price raise, they come to that; whether it is crude oil or 
Nvhether it is gasoHne. They have adopted the same policies, the 
same practices, the same procedure, and those policies, practices, and 
procedure, by mutual consent we will say, are exactly those adopted 
by the Standard of New Jersey, by written agreements. Certainly 
they violated the antitrust laws. 

The Chairman. What I wa,s driving at with my original question 
a moment ago was that an increase in the price of crude which would 
be highly pleasing to an independent producer, if he could sell, 
would be equally displeasing to an independent refiner who was 
Vii^t)le to purchase? 



7370 CONCENTRATION OF ECONOMIC POWER 

Mr. Crowley. That is ri^ht. 
. The Chairman. Would it not? 

Mr. Crowlet. That is right. 

The Chairman. So that one and the same actj assuming that it was 
an act brought about by agreement or by price leadership, would 
be hostile to the interests of one group of independents, but favorable 
to the interests of another group of independents. Hostile to the 
interests of the refiner but favorable to the interests of the producer, 
assuming that the independent producer could sell. 

Mr. Crowley. That is right. 

The Chairman. What I am driving at is whether or not in your 
opinion the difficulty in which the independent finds himself is due 
to the fact that for the most part he operates in only a single small 
field of the whole industry, where he is competing with a major 
company which operates in all fields of the industry and which, 
therefore, can balance its gains and its losses in the various depart- 
ments. 

Mr. Crowley. Well, of course thit is the effect of it and if it were 
the ordinary usual course of business, nobody would have a right 
to complain, but it is not done in the usual course of business. There 
has been related here by other witnesses and proved from this paper 
that I have filed here of deliberate price wars. You will very much 
have that in marketing. We will take the question of crude oil pric^. 
Now, here is East Texas, 37 gravity, 37.9 gravity, balanced against 
Van, Tex., about 40 miles away. Van has gravity of 34 to 34.9. The 
price of East Texas at the time this was written was $1.10 a barrel. 
The price of Van crude was 93 cents. That 93 cents crude is all 
owned by practically one concern, the Pure Oil Co. You see, when 
the major companies get full and comi)lete control of the production 
in a field, they have no fear of an independent refiner setting up 
alongside of them, and competing because he can't get any crude 
to operate on, so the best thing for them to do is to make it tough on 
him, like they have in Longview. We can't operate in Longview. 
They have closed down 100 refineries. 

The Chairman. Just how did they make it tough in Longview ? 

Mr. Crowley. Well, they made it tough by hammering, hammer- 
ing, and hammering until they got the out])ut of oil reduced first 
to 225 barrels, down, down, and doAvn to 20 barrels a Jay. 

The Chairi^ian. That, is by the operation of the proration law ^ 

Mr. Crowley. That is by the operation of the proration. 

The Chairman. So'.that in order to accomplish that hammering 
it was necessary to have the cooperation of the officials who admin- 
istered that law ? 

Mr. Crowley. That is right. That is right, and they threateaed 
them with lobbjang for an independent establishment to be set up to 
govern the oil business, if they didn't knuckle down and do what 
they wanted them to. I suppose that the railroad commission of 
Texas is about the worst badgered Government body in existence. 

The Chairman. You mean they are threatened with a legislative 
campaign to do away with their jobs and set up a new commission? 

' Mr. Crowley. Absolutely ; yes, sir. 
- The Chairman. Do those Texans submit to that sort of intimida- 
tion. 



CX)i!JCENTRATrON OP ECONOMIC POWHR 737 1 

Mr. Crowley. Why, Senator, we have very little to say about our 
affairs in Texas. We have to go up to 26 Broadway to get most 
of our instructions. 

The Chairman. I once remember hearing a gentleman from Texas ; 
he was a member of the faculty, I think, of the University of Texas, 
say down here to a group of Members of Congress that Texas was 
the richest foreign possession of the city of New York. 

Mr. Crowley. I don't think there is any doubt about it. 

Mr. Henderson. Mr. Chairman, may I ask the witness a question ? 

The Chairman. Certainly. 

Mr. HENDiKsoN. I want to get at two things, if I can. In the 
first place when a major posts a higher price in East Texas, for ex- 
ample, for its crude, does it benefit by sales to independents of any 
substantial amount on that increased price? 

Mr. Crowley. I don't quite understand the questioii. 

Mr. Henderson. Well, to put it this way, what part of the produc- 
tion in East Texas do tne major oil companies cont«"ol ? 

Mr. Crowley. Well, what pait of it do they own ? 

Mr. Henderson. Yes. 

Mr. Crowley. In feast Texas they own about, I think, 46 percent. 

Mr. Henderson. Well, do they use all of that for th^r own refin- 
eries and for their own marketing? Do they sell also to the inde- 
pendents ? 

Mr. Crowley. I can't answer you about that; I don^ know. 

Mr. Henderson. You don't know whether the miijor oil coihpanies 
sell some of their production to independent refiners or not? 

Mr. Crowley. I don't know. I don't think they sell very much, 
except they may do some exchanging. At some places they do ex- 
change oil. But I am not familiar enough with that to answer your 
question. 

Mr. Henderson. On this lucid question of the fixii^ of the price 
of $1.35 for crude mentioned several times, for instance, who posted 
that first, do you know? 

Mr. Crowley. I don't know who posted it first, but the others aU 
fell into line right away within the next day or so. 

Mr. Henderson. But has any evidence ever been adduced of any 
reliability that before the price leader posted a price' he had conferred 
with or colluded with the others? 

Mr. Crowley. Well. I have no evidence of it: 

Mr. Henderson. What I am trying to get at — 1 thidk it is in all 
fairness, Mr. Chairman — we ought to try every time a question 
is brought up to see whether the witness means. that he believes 
there is collusion, whether there is evidence of collusion, or whether 
there exists, as there does in many industries, a price leadership just 
by reason of th^ outstanding percentage of the business that accrues 
to a large unit. Now, which of those do you meaft ? 

Mr. Crowley.. I think I have got the answer tcr your question right 
here. 

Mr. Henderson. I noticed in Mr. Seubert's article he talks about 
the price'schedule that- is set up. 

Mr. Crowley. I am looking for the reference to the meeting of 
the Railroad Commission of Texas to which the major companies 
were invited a»d the agreement that apparently was reached there 
between the StAte authorities and the major companiea 



7372 CONCENTRATION OF ECONOMIC POWER 

Mr. Henderson. I can understand that, Mr. Crowley, because that 
is what was done in some cases, but that is an entirely different thing 
from what is done without benefit of State commissions. I can 
understand how that would come about through the compulsions of 
a strong State body. I am talking about the time when the pressure 
is not being exerted. 

Mr. Crowley, Well, I don't know what they base it on. I heard 
one ojfr-the major witnesses testify the other day that there was noth- 
ing to this market-demand business; that he had worked out a 
market-demand figure several times and it was just a question of get- 
ting previous figures and calculating and making a guess as to about 
what the market demand would be, and at best it was a guess. But 
here is a case, Mr. Henderson, where they actually met and made 
an agreement about what would be done, if you would like me 
to read it to you. 

Mr. Henderson. I think it is pertinent. 

Mr. Crowley. The majors and independents all met an ith the 
railroad commission in December. The suggestions were made by 
the majors as to what they wanted done. This is page 23 of this 
statement.^ The majors "intimated" what they would like to have 
done in order to keep up the price of crude. The commission fol- 
lowed the recommendations of the majors and no sooner had the 
recommendations' of the majors been followed by the commission issu- 
ing its orders suspending hearings and ordering a continuation of 
the present plan of allowables, and a 2-day shut-down, than the 
majors themselves began to overload their refiners. Now thfe sug- 

festions and recommendations of this group of majors are quoted 
ere. 

(1) That production of crude oil be held — 
That is on page 22 — 

ttzlthin the Bureau of Mines' recommendations, with a shut-down of two day 
pet week. 

(?) That the Railroad Commission of Texas announce its proration policj 
for a lor^er time than month by month, indicating that at least 90 days woulc 
be a desirable period for the Commission to use. 

Assuming that the foregoing recommendations would be heeded, 
the majors susrgested as the desired position of the industry on 
March 31, IP ^ 

(1) Let crude stocks remain aw>roximately at the level that then existed 
hat that with the commencement of -the period of heavy consumption these 
stocks be gradually reduced. 

(2) To place the refining operations upon a basis that would result in having 
ftb<Mit 82 millions of barrels of gasoline in storage on March 21. 

•' Now at the last commission hearing of August 29, 1939, it was 
dhowri by the Humble Oil Co', the producing branch of the Stand- 
ard's business — it is a subsidiary of the Standard of New Jersey — 
that they had an oil supply of about 12 days when the normal re- 
quirements of the business would be that, that they have a supp' ' 
of 56 days and notwithstanding that they reduced the price of crude 
oil ^ cents a barrel, so suppfy and demand haai't had a thing in 
the world to do with the increase or dectea^ of the price of crude oil. 

» At)|pendix, p. 7603. 



CONi^KNTItATION iW K(U)\()MI(' POWER 7373 

Mr. Henderson. I want to get back, Mr. Chairman, to the point 
I have been pursuing. During the days of this hearing the wit- 
nesses have been, to put it midly, in juxtaposition to the majors, 
constantly intimating that there is collusion in ordinary times, or 
that there is a monopolistic practice of a very active sort directed 
toward independents and toward accomplishing some agreed-upon 
purpose. 

This particular witness has shown that in a situation reported to 
be chaos, under State auspices certain recommendations were made 
which, as anybody knows, would affect supply and demand, and 
itndertake to bring about a desired result. That was done under the 
code, as far as oil is concerned. It was done under several of the 
N. R. A. codes in order to affect the supply and demand, and it had, 
as I say, some benefit of clergy in the doing. Now, that may be a 
monopolistic practice under Government aegis, but where the com- 
plaint lies is as to this persistence of monopolistic practice on the 
part of the majors against the independents. I think it is important 
that you try to fix that. Otherwise the charge should not lie. 
, The Chairman. I think you are quite rip;ht. 

Mr. Henderson. Now, Mr. Crowley, without being critical, you 
made some remark which has been made as long as I can remember 
ivs to who made this determination. You said, "Well, you have to 
go (;o 26 Broadway." Now, maybe you do. I want to be utterly 
frank; I would say there are times when I have suspected 26 
Broadway of making determinations that were followed by the 
industry, but I think the committee is interested in this undertakinff 
to find out what evidence does exist of that kind of an exercise oi 
domination by the majors as against the rest of the field. 

Mr. Crowley. Well, we do have something like 100 independent 
refineries, having been built in East Texas; we do have a price differ- 
ential, being fix^ by the major companies over there against the inde- 
pendent buyers of crude oil there ; we do have tliese 100 plants, closed 
down and junked. We do have — those plants were built by men 
who were in the oil business, who had been in the oil business for 
generations, who wanted to stay in the oil business, and were driven 
out of the oil business by ihere force of that coincidence of the 
squeeze. It is recognized as a squeeze by such independents as 
Charlie Roser; it is recognized as a squeeze. It does have the effect 
of a squeeze. It doesn't make , any difference who puts the pinchers 
on. The effect is just the same. They go into bankruptcy. 

Mr. Henderson. Well, you could have the squeeze which comes 
out of a set of conditions over which nobody had any control, of a 
set of conditions which were highly competitive, or a set of condi- 
tions which were definitely controlled. As I gather from your re- 
sponses, you and others who have had considerable experience believe 
there is a deliberate policy ? 

Mr. Crowley. I don't think there is any doubt about it. 

The Chairman. Now, what do you base that conclusion on ? That 
is what Commissioner Henderson is trying to get at, and it is the 
thing in which the committee is interested. 

Mr. Crowley. I base, that conclusion on the fact that the majqr 
companies are the only -buyers of crude oil; they are the only trans- 
porters of crude oil. That is, they fix the price of crude oil, beiiig 



7374 CONCENTRATION OF ECONOMIC POWER 

the only buyers. They own the pipe lines, and naturally they fix the 
prices. I don't say that they meet around the table and agree 
beforehand what they are going to do. They have the American 
Petroleum Institute; they have their society or engineers and geolo- 
gists; they can attend conventions and finalty agree that this and 
that and the other thing is the best policy to pursue. 

The Chairman. Now, if a representative of one of the majors 
should come h€Sr6 and should say, "The prices of crude oil are not 
fixed by agreement, nor are they fixed collusively • they are fixed by 
natural conditions, such as the isolation of the neld from market; 
the expense of transporting the oil ; the facilities which are a^^ailable 
and so forth." What answer could I make to such a person? 

Mr. Cbowley. I don't know, Senator. It would depend on the 
particular • case but they were exactly the same alibis that wei:© 
furnished to the Supreme Court of the United States in the case of 
the United States against the Standard Oil Co. of N«w Jersey in 
1911. 

The Chairman. Of course, the contention is always made that the 
results are the outcome of natural conditions, but nevertheless when 
this committee comes to study the evidence that has been presented 
here» it caJOnot rely upon belief . It must have fiome fact. Now a 
moment ago you were talking about the price of crude oil at Van and 
the price at East Texas. If I remember correctly, you said that at 
Van the price was much lower than it was in the, East Texas fields 
is that correct? 

Mr. Crowley. Yes ; based on gravity, that is right. 

The Chairman. Now, when you say based on gravity, you mean 
that tliere was a different kind of crude pr6duced in the two fields! 

Mr. Crowley. Yes; it was 34 gravity, in East Texas, 37. The 
price in East Texas was $1.10 and the price of Van was 93 cenlSj, 
but reducing them to the common gravity, the price of Van would 
be 99 centfe against $1.10 for Van. 

The Chairman. $1.10 for East Texas? 

Mr. Crowley. $1.10 for East Texas, making a differential of 11 
cents dgainst the buyer of East Texas crude. The buyer of East 
Texas crude couldn't get Van crude because there was none fdr sale. 

The Chairman. Why was none for sale? 

Mr. Crowley. It was all owned by the Pure Oil Co. 

The Chairman. And was the. Pure Oil Co. a purchaser in the East 
Texas field, too? 

Mr. Crowlet. Along with some others, yes. 

The Chairman. Was the Pure Oil Co. a producer in the V-^rt field ? 

Mr. Crowley. Yes, sir. 

The Chairman. Was it ah exclusive producer? 

Mr. CROWiiEY. I think it owned practically the whole field. 

The Chairman. Were there any independent producers there ? 

Mr. Crowley. No independents operated there. 

The ChaikAian. So there was no possibility of an independent 
refiner at East Texas , getting the Van crude unless the Pure Oil 
would be willing to sell it to them ? 

Mr. Crowley. That is right. 

Tlie Chairman. But there was a difference in the gravity of the 
two oils? 



CONCENTRATION OF ECONOMIC POWER 7375 

Mr. Crowley. Yes ; some difference. 

The Chairman. And was that difference of gravity such -^s to 
justify the differential which you have figured out? 

Mr. Crowley. Of course not. . Tlie difference in price was 93 
cents for Van crude, and $1.10 for East Texas, but to be fair about 
this thing, I reduced it to the common gravity and it would be figured 
at 99 cents for Van crude and $1.10 for East Texas. 

The Chairman. How far distant were these fields? 

Mr. Crowley. About 40 miles— 40 or 50 miles. 

The Chairman. So that within an area of 40 miles, oil which dif- 
fered in gravity only about three degrees was selling at a differeutial 
of 11 cents a barrel? 

Mr. Crowley. Seventeen cents. 

The Chairman, I am taking the 11 cents which you had on this 
page. 

Mr. Crowley. Eleven cents is after it is reduced to the common 
gravity. The actual difference was 17 cents. 

The Chairman. Without the compensatory figure, the difference 
was 17 cents? 

Mr. Crowley. Yes, sir. 

The Chairman. Was the Van field any easier of access to the 
market than the East Texas field? 

Mr. Crowley. Not at all. 

The Chairman. Was there any circumstance at all, to your knowl- 
edge, that would justify this very much lower price for Van than 
for East Texas? 

Mr. Crowley. Not at all: 

The Chairman. Is it on that difference that you base your con- 
tention that the price of crude oil in the East Texas field was un- 
necessarily high? 

Mr. Crowley. Well, partly; yes, sir. 

The Chairman. On what other consideration? 

Mr. Crowley. I think it is very evident from the difference in the 
allowable per well and the existence of independent refiners over 
there and that the majors didn't want that independent competition. 

The Chairman. Was any argument of this kind made to the Texas 
commission? 

Mr. Crowley. Repeatedly. 

The Chairman. Could the Texas commission have made available 
crude oil in the. East Texas field to the refiners 

Mr. Crowley (interposing). No, sir. In the East Texas field? 

The Chairman. Yes. 

Mr. Crowley. It could have made an allowable for the whole field, 
but you see the majors had so much of it tied up that if you would 
iiave increased the allowable in order to furnish we will say the East 
Texas Refining Co. with 5,000 barrels a da j% that might have made 
the allowable from its own wells — that would have made tlie allow- 
able from the entire field so high that it would have destroyed the 
price structure and it might have created physical waste so far as that 
goes. 

The Chairman. So the Texas Railroad Commission was confronted 
with the problem as to whether or not it Would endanger the price 
structure or close out the independents. 

124491— 10— pt. 14, sec. 1 19 



7376 CONCENTRATION OF ECONOMIC POWER 

Mr. Crowley. Yes; it amounted to tliat, I suppose. The Railroad 
commission has always been confronted with price structure and they 
have considered little else. I have filed with the committee here ex- 
cerpts from the Commission's hearings, held month by month, show- 
ing, "What we can do to keep the price up," and the suggestions 
made that "If there is too much oil allowed from this or that or the 
other field, we will be compelled to withdraw some of our connections, 
and we can't take your oil and we will have to reduce the price." 

The Chairman. Now, Mr. Crowley, there are, it seems, at least 
four primary interests- in the peti'oleum industry. There is the inter^ 
est of the producer, No. 1; the interest of the refiner, No. 2; the 
interest of the distributor, No. 3; and finally. No. 4, the interests of 
the consumer. So that these four interests must be balanced one 
against the other and it is quite obvious that any set of circumstances 
that tends to increase price for the producer or the reij; er tends also 
to increase price for the consumer and maybe to decrease profit for 
the distributor. 

Now, if there is control in the industry — and of course since you 
have the proration laws and your State commissions, there is a cer- 
tain amount of Government control, at least in the production; the 
State commissions, together with the oil compacts among the States, 
and finally the Connally Act — do you take the position that there is 
some other system than that which is now in vogue which will operate 
more equitably and justly to these four interests than the one now in 
operation ? 

Mr. Crowley. Yes, sir; I do. 

The Chairman. What is your suggestion along that line ? 

Mr. Crowley. Do you mind before I answer that, if I touch on the 
question of pipe lines first? 

The Chairman, Certainly; go ahead. 

Mr. Crowley. One of the worst things about the whole business is 
the control of the transportation facilities by the major companies. 
They can and do use these profits which are inordinately if not un- 
conscionably high to cushion or make up the losses they make in other 
branches of the industry. I make that statement, and the records 
bear me out in that. 

r have some figures quoted in this report here which show some of 
the profits made by these companies that I took from the Interstate 
Commerce Commission's own reports. With 16 pipe-line companies 
belonging to the integrated companies, profits from their operations 
over a period of 7 to 9 years averaged about 45 percent, I think, I 
wouldn't want you to depend on these figures entirely because Mr. 
Cox has them accurately in some of the exhibits that have been filed. 
I did this myself so I am not certain about the exact proportions. 
But they have made extremely high profits on their pipe lines. We 
will take the Shell Oil Co., the Shell Pipeline Co., as an example. 
This is not only a European corporation that is a part of this same 
monopoly, but it is enjoying the s le benefits here that a full-fledged 
American institution would. Six nillion six hundred and forty-nine 
thousand dollars was the capital stock in 1936. This pipe-line com- 
pany made a profit during 9 years of $100,050,000, a profit of 166 per- 
cent per annum average throughout this entire period. These profits 
range here from various percentages to as high as 16,000 percent in 



CONCENTRATION OF ECONOMIC POWER 7377 

I year. We have the Great Lakes Pipeline Co. with a capital stock 
of 4% million dollars. Of course they borrowed money to aid in 
building this pipe line. It paid total dividends of $13,360,000. You 
say, "How does this affect the producer, how does it affect the re- 
finer?" It affects him a great deal., There was an exhibit filed with 
the testimony of Mr. Walsh this morning. It was not called atten- 
tion to, I suppose, because he is not particularly trying to operate 
in sending his products to the North and the East by rail, but I have 
a copy of that, and it is a simple illustration of another squeeze that 
is put on the independent, wherever he is, who does not have access 
to pipe lines. 

In shipping oil and gasoline from north Texas points to Kansas 
City, there is a differential there in favor of the pipe line company 
over the independent producer of 70 cents for each 42-gallon barrel. 
The independent shipping his gasoline up to those points uses train. 
If the gasoline is carried by these pipe-line companies, there is a differ- 
ential there of 70 cents a barrel. This goes as high as $1 or more. 
But if it averages 2 cents a gallon, then you can see why the owner 
of the pipe line has such advantages over the shipper who has to use 
the railroads. 

This practice has been outlawed by the Hepburn Act in principle 
although from a technical standpoint maybe it does not outlaw the 
rebating engaged in by the pipe-line companies by paying out divi- 
dends to their parent company. I have an article here in Fortune 
Magazine about the Continental Oil Co., one of the Morgan com- 
panies and showing that, their losses in other branches of the industry 
have been more than offset by their profits paid by the pipe-line com- 
panies. They could lose money on production, refining, and market- 
ing, these branches of the industry in which they have competition, 
and still pay their dividends here with profits out of the pipe-line 
companies where they have no competition. 

Mr; Henderson. Do you mind, Mr. Crowley, developing the Hep- 
burn Act a little bit? I don't believe that all of the committee are 
familiar with what the Hepburn Act was intended to outlaw and 
might not catch the analogy you are making. 

Mr. Crowley. That was to prevent rebates from the shipper- 
owners. 

The Chairman. The railroads? 

Mr. Crowley. Yes; the railroads. To give an illustration of how 
this thing might work, here is the Shell Co. with its ^profits of 
$100,000,000 in 9 years; that is, $11,000,000 a year. They come out 
here and this year, July 1, announce they are borrowing $85,000,000 
of American money through J. P. Morgan & Co. ; at 21/2 percent, on 
15-year debentures. Their profits on their pipe lines will amortize 
this debt, assuming that they will keep on at the same rate they are 
going. But the independent not only can't get these advantages of 
the pipe line ownership and profits, but he can't borrow any money for 
15 years. He has got to depend upon hand-to-mouth existence, short- 
term loans, high rates of interest, and be very careful about how 
he operates at that. The pipe-line control enables the major com- 
panies unquestionably to have an advantage that they ought not to 
enjoy. Pipe-line divorcement was recommended by the Federal 
Trade Commission many years ago ; it was recommended by inference 



7378 CONCENTRATION OF ECONOMIC POWER 

by the Interstate Commerce Commission in 1906, I think. I will not 
take time to refer to that. It was recommended again by President 
Koosevelt in his message to Congress in 1933. It has been recom- 
mended by every governmental agency and economist that has fever 
made a report upon the subject, with one exception, and that was Dr. 
Splawn.^ Dr. Splawn published the pipe-line report, and the major 
companies have hidden behind that report ever since the day it: was 
published. They say that Dr. Splawn says this and Dr. Splawn says 
that. He thought that they ought not to be divorced. Dr. Splawn 
made a speech in Abilene, Tex., a few months ago, talking about 
building of local industries and factories to consume the raw mate- 
rials of the country there, how it would build communities, and so 
forth, and develop the country. I wrote' to him and asked him if he 
didn't think a refinery was a manufacturing industry that ought to be 
encouraged to locate closest to the source of raw materials and dis- 
tribution and the customers. I have great respect for Dr. Splawn, 
and we are friends, and I told him frankly : "Every time I hear an 
alibi of a major company they are (luoting Dr. Splawn, who says the 
pipe lines are a plant facility, and it is this sort of plant facility that 
you wrote this report about tliat has kept cities around the oil 
fields from growing, becoming much more prosperous. Their oil is 
piped away instead of being refined at Longview, for instance, and 
thousands of men thrown out on the street." 

I don't suppose Dr. Splawn would mind my quoting a couple of 
sentences out of this letter, because I think he has seen the light. 
This is May 29, 1939 [reading] : 

Of course, the report to which you refer speaks for itself. I have never 
thought it supported some of the arguroents which have been put forward by 
representatives of various groups. This, though, is a free country in which 
views are published whether they be logical or illogical, well or ill founded. 
You and I would not have it otherwise. The whole question of private trans- 
ponatiou by corporations manufacturing goods to be transported is shaping up 
as most perplexing 

and it is true ; it is shaping up as most perplexing. 

The Chairman. Returning to the question which I propounded a 
few moments ago, what I am curious to know is what your opinion 
is with respect to the cause of the conditions which you have been 
describing and which are described by others. Do you attribute the 
difficulties which the independent has' to struggle against to active, 
collusive planning by the majors, or do you attribute it to the fact 
that the majors are integrated companies which have not only great 
producing interests and groat refining interests, but also these very 
successful transportation interests which you have just described? 
In other words, is the condition which causes so much complaint a 
result of a policy by private interests which is actively antisocial 
or is it a result of the fact that the integration of these great com- 
panies in all of the fields, or all of the departments of the industry, 
has been permitted ? 

Mr. Crowley. Well,'it may be more the system than national plan- 
ning, although I dont think there is a doubt but that common under- 
standings are arrived at by the companies in their various operations. 



^ Dr. W. M. W. Splawn, Interstate Commerce Commissioner. 



CONCENTRATION OF ECONOMIC POWER 7379 

The CHAinMAN. You see, the word "monopoly" is used in so many 
different senses, we are constantly struggling with that. There are 
monopolies which are perfectly legal and there are monopolies which 
are natural, that can't be avoided, monopolies which are set up by 
operation of law; but the monopoly against which public sentiment 
rises is the monopoly which is the result of active combination among 
interests that if they didn't make this combination would not possess 
the advantageous position of control which they do possess by reason 
of the combination. 

When you speak of monopoly in the petroleum industry, just what 
do you mean ? 

Mr. Crowley. I mean that the power is possessed by the integrated 
companies to control prices of the raw material, the manufacture of 
it, and the distribution to the public. 

The Chairman. Is that, in your opinion, an inevitable result of 
their size and of the great power they possess because they are inte- 
grated, or is it a result of active arrangement, agreement among 
them? 

Mr. Crowley. I think it is possibly both — possibly both. 

The Chairman. Now the committee would be delighted to have 
specific instances to substantiate that opinion. 

Mr. Crowley. They do not have detailed agreements covering all 
their undertakings, but they have identical and common practices that 
have all the force and effect of written agreements and are just as 
destructive to the small competitor. When the price is posted by 
one, the others immediately follow. WTien a practice of one kind 
or another is engaged in, the majors all engage in it. They right 
now plan for the unitization of oil fields, for the development of 
an oil field as a unit ; compulsory pooling arrangements that you 
were inquiring about tliis morning. That is the next step, so that if 
it happens that you own a piece of land within that pool, there will 
be some governing authority under their political dominion ar^l 
control to tell you whether you can drill your well on it or whether 
you can't. The so-called equitable withdrawal from a so-called com- 
mon pool, that is their unquestioned objective right now. 

They have such a law in Arkansas; they have such a law in 
New Mexico, and in Michigan, to provide for compulsory pooling. 
They are trying to pass laws giving commissions power to guess at 
the approximate amount of oil that rnjay be under your land and 
determine then how much you will be permitted to withdraw from 
that land. 

The Chairman. Do you criticize or do you support public control 
of production ? Let's confine ourselves to that field. 

Mr. Crowley, t certainly do not. 

The Chairman. You do not believe that the proration laws should 
be permitted to stand 1 

Mr. Crowley. Oh, yes. I am for the proration laws, but I think 
that they have gradually got to be worked back to where they are 
administered on the basis of engineering principles to prevent physi- 
cal waste, and only physical waste, and not administered to fix prices. 

The Chairman. How would you do that, Mr. Crowley ? 

Mr. Crowley. I don't know how you would do that. I think 
v;e have no physical waste of oil in Texas today. • I think it would be 



7380 CONCENTRATION OF ECONOMIC TOWER 

disastrous to withdraw the protection of prices right at this time by 
the fibandonment of proration laws. I think it would be hard to do, 
but I think we oilglit to come back to this question of fair competi- 
tion. I think the pipe lines ought to be divorced. I don't think you 
can make oil a public utility. It can't be done at all. I don't think 
that we ought to permit combinations of an integrated industry to 
operate so that one may be allow^ed to make great prifits to bolster 
up losses in another field where they have competition, as is being 
done with reference to the pipe lines, 

I think that there can be disintegi tion of the companies without 
harmful effects, but, on the other hand, with tremendous and great 
beaiefits to the people of the country and to the oil business itself. 
* Tlie Chairman. Now, it is perfectly obvious with respect to prora- 
tion that it works inequitably upon the small owner of oil land. 
A farmer, for example, who has, let us say for the purposes of 
the question, 10 or 12 or 14 acres of land in a big field, under a 
proration system, would frequently be permitted to bring out so small 
a quantity of oil that he would not begin to derive the profit from his 
land which he might have derived when there was no proration. 
Isn't that right? 

Mr. Crowley. That is right. That is where utilization of the field 
Avould apply also. 

The Chairman. And unitization would have the same effect upon 
the small man. 

Mr. Crowley. That is right. 

The Chairman. And the producer who either by ow'nership or by 
lease, or otherwise, had acquired a larger area could more easily 
stand the proration than the little fellow, isn't that right ? 

Mr. Crowley. That is right. The larger company has lots of 
reserves ; they can draw on other areas. 

The Chairman. And the independent refiner, likewise, is at a dis- 
advantage when he has no sources of crude under his own control on 
which he can depend, but must obtain that crude from other sources. 
Is that correct? 

Mr. Crowxey. That is correct. 

The Chairman: Now is there any way by which the independent 
I'efiner could be protected in receiving a supply from the independent 
producer ? 

Mr. Crowley. Well, if you have free competition the chances are 
that he will get a supply of crude oil from the independent producer, 
but whei^e his transportation means are cut off, or where there is con- 
trol of an oil field by this unitization plan, where there are such 
restrictions as retard the free flow of oil in commerce, then the 
independent refiner can't get it. 

The Chairman. As a matter of fact, the pipe line stands between 
the independent producer and the independent refiner, does it not? 

!Mr. Crowxey. It does ; indeed it does. 

The Chairman. Because it is difficult if not impossible for the in- 
dependent producer or refiner to obtain access to the pipe line. 

Mr. Crowley. That is correct. 

The Chairman. Do you have any suggestion in that regard? I 
suppose your suggestion of divorcement would tend to cover that? 

Mr. Crowley. I think if the pipe line is divorced you will have 
many more small refineries operating in the oil sections competing 



CONCENTRATION OF ECONOMIC POWEIl 7381 

with the majors, and they will be buying oil from the independent 
producers, and it will tend to boost the price of crude oil. 

The Chairman. What would be the effect upon the price of gaso- 
line to the consumer? 

Mr. Crowley. It ought to be a good deal less. I have shown you 
where they have a differential right here today. These figures I 
read about these gasoline pipe-line cases from North Texas to 
Minneapolis, St. Paul, St. Louis, Kansas City, and so forth, show 
exactly a 2-cent charge against the independents, or a 2-cent differ- 
ential in favor of the major that is never passed on to the consumer. 
The independent refiner having a small unit to operate where he can 
devote personal attention .to it can operate more efficiently than the 
big company. He hasn't got the overhead; and he is doing it in 
Texas — where he can survive at all, he is selling gasoline, and good 
gasoline, much cheaper than the major companies sell it. 

The CHAiRMAisr. Do you have anything else, Mr. Crowley? 

Mr. Crowley. No. 

Mr. Ballinger. Mr. Crowley, you said you were in favor of prora- 
tion ; you are not in f avor-of the way it is" administered, but you are 
in favor of the theory of proration. Did you say that? 

Mr. Crowley. Well, I think that we have got to tolerate proratioia 
whether we are in favor of it or not, because if you do away with 
proration and allow the w^ells even to flow as much as they can 
produce without waste, you nevertheless would create such a great 
supply of oil — there woiild be such a great supply of oil on hand-- 
that prices would be depressed too low. 

Mr. Ballinger. Well, do you think that there is any way that an 
equitable system of proration could possibly be worked out? 

Mr. Crowley. I haven't any definite ideas on the thing. Of. 
course, I think that the law of supply and demand will right the 
situation if we can have the law of supply and demand actually 
put into effect. 

Mr, Ballinger. The theory of overproduction in oil is true of 
many other industries. Do you want them all to have proration 
schemes ? 

Mr. Crowley. No, sir; I don't. I am against price control, price 
fixing, regimentation, or anything of tlie kind. I am for the good 
old American system that T. Jefferson once talked about. 

Representative Williams, I was just wondering, Mr, Crowley — 
you mentioned an equitable withdrawal of oil from the pool by the 
various landowners. What have you in mind with reference to 
that? 

Mr. Crowley. I think that is a fallacious idea, I think it is a 
plan of monopoly, I don't think it is sound, I don't think there is 
anything good about it. I think it is guesswork from beginning 
to end. You can find an oil well here in one spot and an offset 
will give you a dry hole. There are very, very few oil pools that 
are in truth and in-^fact common pools. East Texas might be called 
one because of the peculiar sand conditions, but for the most part you 
will find w^ells in the same field producing from different sands 
offsetting each other, I don't think there is a man living who can 
estimate with any degree of accuracy the amount of oil "under the 
ground under any given tract of land, and nothing but the drill and 
actual test will determine the presence and amount of oil. 



7382 CONCENTRATION OF ECONOMIC POWER 

The CHAiKMAisr. That has frequently been demonstrated by ex- 
ploration, has it not, field after field having been brought in after it 
liad been condemned by the best experts in the business? 

Mr. Crowley. Yes, indeed; that is right. Now the evil effect of 
such a thing as that, that is the one thmg that ought to be fought 
off, is that if a large company has, in an area supposed to be an 
oil field, a large tract of land it could insist upon withdrawing, say, 
a thousand barrels, where if the little fellow had 10 acres of land 
tliey might give him 10 barrels, so that he could not afford to drill 
a well and compete with the producer of the thousand barrels 
from the larger tract of land. 

The Chairman. Has it ever been suggested or practiced in any of 
tliese proration policies that the small owner should have a larger 
proportion of his oil than the large owner? 

Mr. Crowley. No. 

The Chairman. Is it always based upon acreage, solely? 

Mr. Crowley. No; it isn't based on acreage; it shouldn't be based 
on acreage. There is no fair way to determine basing it upon 
acreage. ^ 

The Chairman. What factors are used in Texas? 

Mr. Crowley. Well, the ancient rule of capture has always de- 
;termined 

The Chairman (interposing). I mean in forcing proration. 

Mr. Crowley. They base it on the well, per well basis. They allow 
so much per well; except, I think, in the Yates pool, where there is 
an agreed unit of operation out there. I think the Yates pool ib 
a unit. 

Representative Wiixiams. We had an example of a case here yes- 
terday, as I understood Mr. Dailey, where they wouldn't give him 
a permit to drill a well on his land. 

Mr. Crowley. Yes; I heard some of that testimony. I don't know 
a thing about the facts except what was developed here, but there is 
Avhere it would be put into effect. A man has 20 acres of land that 
he owns in fee ; if the governing authorities were persuaded to make 
40\ acres the unit he couldn't drill a well without joining somebody 
else; or if it made 100 acres the unit, he would have to put his tract 
in with somebody and get a fifth of the production. 

Representative Williams. Did I understand you to say that 
Arkansas had passed an equitable-withdrawal law of some kind? 

Mr. Crowley. They have got a law that is just like the New Mex- 
ico law, providing for compulsory pooling, compulsory unitization, 
and I discussed that matter in the statement that I have filed here 
with the committee. 

Representative Williams. Do you favor that kind of law? 

Mr. Croavley. I certainly do not. I think it would put the inde- 
pendent producer absolutely at the mercy of the big company. 

Mr. Cox. Are those Arkansas and New Mexico laws you have been 
speaking of at all similar to the regulation that was involved in the 
case of Thompson against the Consolidated Gas Co. ? 

Mr. Croweey. No; they are different. The Thompson against 
Consolidated Gas Co. was a ratable taking of gas from each well in 
that area. Compulsory unitization is the control of the land. 

Mr. Ballinger. Mr. Crowley, I want to try to get a little bit more 
of this proration idea. Your theory of proration is that it is all 



CONCENTUATION OF ECONOMIC TOWEIl 7383 

right if it will insure a living to all existing oil producers. Is that 
it? You want to work it out equitably so everybody will stay in 
the picture. Is that it? 

Mr. Crowley. Well, I am not a very strong proponent of proration, 
but I think that we have got it and we have got to keep it until the 
supply of oil begins to diminish, and it doesn't look like that is any 
time soon. 

Mr. Ballinger. Your kick against the present system is that it 
squeezes out the little fellow, so the inference is your kick would 
cease if it didn't squeeze out the little fellow\ 

Mr. Crowley. That is probably right. We cannot say tliat pro- 
ration except to prevent physical waste is fundamentally right unless 
we are going to believe in regimentation and pricc-tixing and cori- 
trol of an industry by Government. I think if you will let Ihe little 
fellow run his business and protect him against monopoly, the old law 
of supply and demand will take care of the regulation of Inisiness — 
I mean of prices. 

Mr. Ballinger. But on proration you don't have that good old law 
of supply and demand. 

Mr. Crowley. That is so, but we have been taking "dope" in the 
oil business. We have had to have price fixing. 

Mr. Ballinger. If you have to have them at the producing end, 
why shouldn't the refiner say: "We want a proration scheme; we 
want something that will guarantee our existence?" And why 
shouldn't the filling-station operators say they want something? 

Mr. Crowley. I am not talking about guaranteeing anybody any- 
thing; but I say if you withdraw proration, the price will go down, 
because everybody will want to produce all the oil they can. There 
is Illinois today — for some strange reason the monopoly has not 
been able to convince the people there they ought to be managed 
and regulated, and they are producing the oil and selling it and 
doing fine ; and the Texas producers, incidentally, are going up there 
in droves and drilling oil wells. 

Mr. Ballinger. Didn't it happen in California when they repealed 
the Petroleum, Code, everybody predicted the direst things would 
happen in the California oil business and everybody would be ruined, 
and no such thing happened? 

Mr, Crowley. That is right; it didn't happen. It might not 
happen if we did away with proration. 

Mr. Ballinger. But you can't have your cake and eat it. 

Mr. Crowley. I am not arguing for proration, because I was 
against it when it was fastened onto us, and I have seen it used to 
manage and juggle us around just as they wanted to do to us, and 
I am not trying to uphold the price-fixing thing at all. I don't think 
it works. I don't think it is right. 

Mr. Ballinger. You would want proration, then, to conserve the 
oil. 

Mr. Crowley. Proration should only be administered to conserve 
the oil. 

Mr. Ballinger. And of course, we don't know how much oil we 
have. I mean, every time we are running out,- we always get more. 

Mr. Crowley. Well, of course the experts now concede unlimited 
supplies of oil. I was just reading the report of a major company 
economist or geologist or engineer the other day, Mr. Delbridge, of 



7384 CONCENTiiATlON OF ]*:(X)NOMIC POWER 

the Atlantic Petroleum Company, estimating the supply of oil. He 
made a very interesting speech in which he estimates the oil supply 
Avill last 150 years. We don't know how much oil we have. We have 
plenty. 

Mr. O'CoNNELL. Mr. Crowley, in answer to a question by the chair- 
man, I understood you to suggest that the conditions in the oil in- 
dustry of which you complain may be caused in part by agreement 
between the major companies and in part by the development of 
the integrated company assets without agreement. That would sug- 
gest to me that it is your belief that problems of concentration and 
control or monoj)oly might be of interest to the Government whether 
they result from agreement between competitors or whether they are 
a result of just a natural evolutionary process. Would that be a fair 
statement of what you believe? 

Mr. Crowley. Yes, sir. 

Mr. O'CoNNELL. Would it follow from that that it is your belief 
that the existing concept of the antitrust laws, which is primarily 
based upon agreement between competitors, is inadequate to deal 
with the situation in the oil industry ? 

Mr. Crowley. Well, I wont say that. I think the antitrust laws 
ought to be enforced. 

Mr. O'CoNNELL. I agree. 

Mr. Crowley. And I think there is a case against the major com- 
panies now for violation of the antitrust laws, and I think the suit 
ought to be brought, but I think, in addition to that, that Congress 
ought to enact legislation that would prevent a recurrence of the 
present conditions. It takes so much time and it takes a tremendous 
amount of- money to prepare an antitrust case ; we know that without 
being on the inside. There ought to be some rules laid down that 
would prevent this thing being and recurring. We have had a 
solution of the meat monopoly problem in the packing-house cases, 
where there was divorcement of the retail outlets by the packers; 
and we have had it in the divorcement of the coal business from the 
railroads, and calamity didn't fall upon us. There is no particular 
reason why we can't have protective laws for future guidance in the 
oil business by divorcement of the pipe lines. 

Mr. O'CoNNELL. I had no thought of questioning the propriety 
of the antitrust laws, but it seemed to me from what you said about 
the condition arising in part possibly because agreement in part is 
the result of so-called natural forces, it might be that you thought 
the antitrust laws were inadequate in and of themselves to deal with 
the existing situation. I take it you would believe that antitrust 
prosecutions plus something else would be needed to rectify the situa- 
tion in the oil industry. 

Mr. Crowley. I think we ought to avoid this thing coming up con- 
stantly. Every few years, every 10 or 15 years, or oftener, the oil 
business, the oil monopoly, is investigated by somebody in the Gov- 
ernment, and it keeps coming up. The question of rebates in the 
riirilroads was before Congress all the time until they settled it, until 
they did- something about it tliat defiuitely cured it, and I think that 
can be done in the oil business.. There is not any reason why mining, 
transportation, manufacturing, and merchandising — that is what 
their integrated, system means — are necessary to each other, and it 



con(;kntkatu)N of economic tower 7385 

certainly does indicate, by reason of their very existence, a monop- 
olistic control, whether reached by agreement or just because of the 
way the business is operated, 

Mr. Cox. Mr. Crowley, you said a moment ago you thouglit that 
there was a basis now for a suit under the antitrust laws against 
the major oil companies. Do you mean a suit which proceeds on 
the theory that they have been buying and conspired to fix prices, 
or a suit that aims as divorcing some of their properties f^om thern ? 

Mr. CROWL^r. Well, I think on the order of the picture-show suit. 
I believe you did have contracts in that, but I have in mind a suit 
for the divorcement of these branches of the industry that 
resulted in the monopoly. 

Mr. Cox. I take it, it is clear from what you say, that you believe 
in divorcement of pipe lines. As I read the Transportation Act 
of 1920, the pipe lines are noAv common carriers. Is that your in- 
terpretation of that statute? 

Mr. Crowley. I didn't understand that. 

Mr. Cox. Will you read the question. 

(The reporter read the question.) 

Mr. Crowley. Yes, sir. 

Mr. Cox. And as such common carriers their rates are subject 
to regulation by the Interstate Commerce Commission and they are 
required to take oil regularly from all persons who offer to them, 
as I understand the law. That being so, the suggestion has been 
made to the committee here that those circumstances make it un- 
necessary to divorce the pipe lines. Have you anything to say 
about that ? 

Mr. Crowley. Well, the way it works out — I am not a rate expert, 
but we know that the rates are first published by the pipe-line com- 
panies and that if they are not challenged within a certain length 
of time they go into effect, and it means a long drawn-out, bitter con- 
troversy and an expensive contest and many small shippers can't 
contest an unfair rate for a lot of reasons. One is money — the 
expense ; and the other is that he doesn't dare get into a controversy 
with the major company because there is not one independent that 
can't be squeezed and thrown out of business somewhere if they 
get down on him. 

A proceeding before the Interstate Commercef^Comniission is not 
an effective remedy. There isn't any reason for having an unfair 
rate to be established that oughtn't to have been llowed in the first 
place to go into effect until challenged by some weak little defense- 
less individual or little corporation before this Commission. These 
things that are wrong to start with ought to be forbidden by 
Congress. 

Mr. Cox. Was it your opinion, then, that whatever they may be 
called in the statute, pipe lines in fact are not common carriers as 
they are operated today? 

Mr. Crowley. The facts show that. I think I can prove it to you 
with one illustration. If the pipe lines were truly common carriers, 
then why do all the major integrated companies jointly own the 
Great Lakes gasoline pipe line? That answers the question itself. 
If it was a common-carrier line, they would all use it and pay the 
usual tariffs. It is not a common carrier, so they all use it and 



7386 CONCENTRATION OF ECONOMIC POWER 

receive their rebates in the form of dividends. And the inde- 
pendent who tries to ship through the line, of course — well, he just 
doesn't do it because he cannot. 

Mr. Cox. It has also been suggested here if you divorce the pipe 
line and prohibit tlie major integrated companies from owning the 
pipe lines, it would be difficult to find anyone who will be willing 
to invest capital to build pipe lines into new oil fields. Have you 
any comments to make on that ? 

Mr. Crowley. I don't think there is a thing in the world to that. 
I think the same rule that applies to the railroads would apply to 
the pipe lines. It always has in the past. I remember when the 
lirst fields wei"e opened up around 1919 and '20 in Texas, tremendous 
amounts of oil were carried by little gathering lines to the railroad 
and shipped by railroad, and there will be a transportation means 
found if oil is there to be carried. That just comes as a matter of 
course. It is elementary, I think. "Wherever there is a need for that 
oil there will be a way found to get it to the market; and there is a 
cheaper form of transportation by rail, according to Commissioner 
Eastman, than the pipe lines. 

You might say, if the pipe lines were divorced, who would buy 
them? Well, the coal mines and the railroads were divorced, and 
somebody bought the railroads. The packing houses were divorced 
from their retail outlets, and the retail outlets are running, owned 
by somebody else. 

The Chairman. Mr. Crowley, ymi have studied the prices of crude 
oil in the whole State of Texas, have you not ? 

Mr. Crowley. Yes; I have. 

The Chairman. Have you made any effort to schedule these prices 
on the basis of fields which are controlled by the major companies 
and fields in which independent producers operate? 

Mr. Crowley. No, sir ; I haven't. The major companies have 
gotten control of most of the fields; the biggest part of the produc- 
tion in nearly all the fields outside of East Texas. 

The Chairman. Well, the charge is sometimes made that the price 
of oil, of crude oil, is low in those 'fields which are — I mean is rela- 
tively high in those fields in which the independent operators operate. 

Mr. Crowley. Independent refiners, you mean? 

The Chairman. Yes. 

Mr. Crowley. Well, that is undoubtedly true in East 'J'exas. 

The Chairman. And; low where they do not? 

Mr. Crowley. Yes; that is true. 

The Chairman. Now, "it has also been charged that quite the re- 
verse is true with respect to crude oil. That where the independents 
appear, the price tends to go down; but where there are no inde- 
pendents, then the price tends to be higher. Is there any basis for 
(hat? . 

Mr. Crowley. No; I don't think so. All the fields have a few in- 
dependents in them, and some of the fields are owned almost as a unit 
or controlled as a unit, such as the Yates pool and the Van pool in 
East Texas, but the prices undoubtedly are higher where there is in- 
dependent refinery competition than they are in those fields where 
the major companies, have complete monopoly and are the exclusive 
]:)urchasers of crude oil. 



CONCENTRATION OF ECONOMIC POWER 73^7 

The Chairman. Well, your suggestion to the committee 'is that 
there ought to be a pipe-line divorcement; that although you don't 
like proration, it is here and must be reckoned with. 

Mr. QiowLET. Yes ; I think we have to get away from it, get away 
from it gradually, and get back to quit trying to fix prices for every- 
tiiing in the country ; it just won't work ; might as well try to dam 
up the Mississippi River and tell it not to flow as to keep the natural 
laws of supply and demand from operating, unless you want to 
change the whole S5'^tem of government that we are operating under. 
But if it has to be done, if prices have to be made and have to be 
fixed by somebody, let it be the States or the United States of Amer- 
ica instead of the major companies, as they are at present. 

You can't make a public utility out of the oil business; when you 
do you stop the independent from going on and discovering the new 
fields, and when you put the oil business under Federal regulation, 
such as is proposed over in the House, you are going to find that the 
little fellow will quit the oil business because he can't afford to come 
t^ Washington to get his permits, to do business, and he can]t afford 
tp engage in the contest that he will have to engage in with his major 
competitors who can' maitnain representatives right here in the cit^y 
at all times. Just give us some fair and free competition. That is 
all that the little fellow in the oil business ought to want. It is all I 
think that he does want. 

The Chairman. Are there any other questions ? If not, Mr. Crow- 
ley, we are very much indebted to you. We thank you very much 
for your presentation. It is now 4:30; what is the desire of the 
committee? The next witness I understood was Mr. DeGolyer, was 
it not, and Colonel Thompson, both of whom I think desire to be 
heardthis week, do they not? What is the will of the committee? 

Representative Williams. We can't possibly hear them both this 
afternoon without staying here all night. 

The Chairman. What can we do about tomorrow ? 

(Conference off the record.) 

The Chairman. The committee will statid in recess until 10:30 
tomorrow morning. 

(Whereupon, at 4: 30 p. m., the committee recessed until 10: 30 the 
following morning.) 



INVESTIGATION OF CONCENTEATION OF ECONOMIC POWER 



SATURDAY, SEPTEMBER 30, 1939 

Unii'ed States Senate, 
Tempokarv National Economic Committee, 

Washington, I). C . 

The committee met at 10 : 40 a. m., pursuant to adjournment of 
Friday, September 29, 1939, in the Caucus Room, Senate Office Build- 
ing, Senator Joseph C. O'Mahoney, presiding. 

Present: Senator O'Mahoney (chairman), Representatives Reece 
and Williams, Messrs^ O'Connell and Brackett. 

Present also : Clarence Avildsen, representing the Department of 
Commerce ; Quinn Shaughpessy, representing the Securities and Ex- 
change Commission; Hugh Cox, W. B. Watson Snyder, F. E. Ber- 
quist, Christopher Del Sesto, special assistants to the Attorney Gen- 
eral ; Leo Finn and Roy C. Cook, Department of Justice. 

The Chairman. The committee will please come to order. Is Mr. 
DeGolyer present? 

Mr. DeGolter. Yes, sir. 

The Chairman. Do you solemnly swear that the testimony you are 
about to give in this proceedings shall be the truth, the whole truth, 
and nothing but the truth, so help you God ? 

Mr. DeGolter. I do. 

The Chairman. You may be seated. 

TESTIMONY OF E. DEGOLYER, DALLAS, TEX. 

The Chairman. Will you be be good enough to give your full name 
and your connections to the reporter, please ? 

Mr. DeGolter. My name is E. DeGolyer, of Dallas, Tex. I am an 
independent petroleum producer, geologist, and petroleum engineer. 
I was formerly a member of the United States Geological Surve}^, 
left here some 30 years ago to become a geologist for the Mexican 
Eagle. That was my entry into the oil business. I left the Mexican 
Eagle about 20 years ago and was one of the organizers and managers 
of the Amerada Corporation. 

The Chairman. What corporation was that? 

Mr. DeGolter. The Amerada Corporation, one of the small 
producing oil companies. 

The Chairman. In Texas? 

Mr. DeGolter. It operates in Oklahoma and Texas, generally in 
ISIidcontinent and California. 

I resigned from the Amerada about 7 years ago in order to go into 
the productioh of oil and consulting, work. 

" 7389 



7390 CONCENTRATION OF ECONOMIC POWER 

The Chairman. Do you mean individually, or through some cor- 
poration ? 

Mr. DeGolyer. Well, generally through corporations which I either 
own entirely myself or in which I have a very substantial interest. • 

I have been very much interested in the oil industry as a matter of 
study for a number of years. 

Representative Reece. Is your interest in the production of oil 
altogether ? 

Mr. DeGolyer. I am a past president of the Association of Petro- 
leum Geologists and also the American Institute of Mining and 
Metallurgical Engineers. I was technical adviser to the N. R. A. in 
the formation of the Petroleum Code, and have been since that time 
a member of the economic advisory committee of the Interstate Oil 
Compact. I appear before you at your invitation but also upon the 
nomination of the American Petroleum Institute of which I am also a 
director. 

The Chairman. Have you done geological work for other corpo- 
rations than those which you have mentioned? 

Mr. DeGolyer. Oh, very seldom, I have done a good deal of 
work in appraisal engineering for many corporations, but I don't 
think I have done a great deal of geological work outside of the 
companies by which I was employed or the companies in which I was 
interested. 

The Chairman. Would it be proper to characterize your experi- 
ence as that of an independent who has not been associated with the 
major companies, so-called? 

Mr. DeGolyer. I shouldn't say so. I think probably in my 30 
years I have had a pretty fair cross-section, since my earliest expe- 
rience was with the Mexican Eagle, which was a large integrated 
company operating entirely jn Mexico. The control passed about 
1920 in that company to the Dutch Shell group, and shortly after 
that I resigned from the company. The Amerad.a Corporation was 
organized and operated as an independent, started from the ground 
up — that is, built itself into a producing position — and it is strictly a 
producing company. The enterprises in which I have engaged for 
myself are strictly producing enterprises. 

The Chairman. And independent ? 

Mr. DeGolyer. Independent; yes. 

The Chairman. Very well, Mr. DeGolyer. 

Mr. DeGolyer. The statement Avhich 1 have prepared and which 
was submitted some time ago, has been in tlie hands of your com- 
mittee, and I assume in the interest of time it will be as agreeable 
to you if I try perhaps to accent those things which seem more 
important to me rather than to go through the entire statement. 
I will be glad to follow such procedure as you desire. 

The Chairman. I think perhaps it would be well to follow the pro- 
cedure we have followed. Your full statement will be placed in the 
record and you may emphasize such parts of it as you desire. 

(Mr. DeGolyer's printed statement was marked "Exhibit No. 1183" 
and is included in the appendix on ]). 76G2.) 

OIL I'RODUCTION 

Ml'. DEGor.YHR. In (he Hrst place, 1 desire to speak to some extent 
on the magnitude of the producing branch of the industry. 



CONCENTRATION OF ECONOMIC POWER 739I 

More than 3,000 separate pools of oil and gas have been discovered 
in the United States since the beginning of the industry, in 1859. 
They range in size from the mammoth East Texas pool, with an 
estimated ultimate production of approximately 3 1/2 Billion barrels 
of oil or 10 percent of the estimated total past production and proved 
reserves of the United States, to scores if not hundreds of 1-well 
pools which have produced only a few thousand barrels of oil. 

I might correct this at the moment by saying that the best engi- 
neering estimates for the size of the East Texas pool at the present 
time, and estimates which have become available to me since this 
statement was originally prepared, indicate an ultimate production 
of about 5 billion barrels rather than 3l^ billion barrels mentioned 
in the statement. 

In order to discover and develop these pools, almost a million, 
wells have been drilled. These wells range in depth from the shallow 
wells of less than 100 feet, drilled by manpower in the early days 
of the industry, to the world's deepest drilled hole, completed dur- 
ing the early part of the past year to a depth of 15,004 feet. More 
than one-fifth of these wells were dry holes and consequently fail- 
ures. About one-twentieth of the wells were gas wells. The re- 
maining three-quarters were producing wells. Approximately one- 
lialf of the producing wells have been exhausted and abandoned, 
leaving some 355,000 wells which are producing at the present time. 

T might have carried this description a little bit further. Of these 
355,000 wells which are producing at the present time, the best esti- 
mates indicate that something between 200 and 250 thousand of 
them are stripper wells, that is wells that are very close to the 
economic limit of their ability to produce, or more specifically, 
generally speaking, wells producing 5 barrels or less per day each. 

The Chairman. Do you mean that of 1,000,000 wells which have 
been drilled in the search for oil, 800,000 have been successful? 

Mr. DeGtolyee. Yes, sir ; that is about the figure. 

The Chairman. That includes all wildcatting and everything else? 

Mr. DeGolyer. Yes, sir. The reason, Senator, the ratio may ap- 
pear rather high to you is because of the fact that one successful wild- 
cat discovers one field and the development of that field may require 
hundreds, or in the case of some fields, even thousands of wells which 
are drilled without great risk. The ratio of 5 to 1 indicated is not 
the ratio of probability of finding oil in a wildcat well. 

Twenty-one billion barrels of oil have been produced and the Na- 
tion's proved reserves are variously estimated at 14 to 17 billion 
barrels. Those were the official estimates, or estimates regarded as 
reliable, which were available to it at the time my statement was pre- 
pared. I have heard estimates from good sources more recently 
as high as 20 or even 22 billion barrels. Current production, approx- 
imately in balance with consuinption, is I14 billion barrels annually 
or 3% million barrels daily. More than 1 gallon of oil per capita is 
consumed daily in the United States. 

This in brief is a description of the present situation of the pro- 
ducing branch of the industry. I should like to add to it, because I 
think it is something that interests this committee, that as nearly as 
we can estimate — and it is rather difficult to get an exact figure — 
there are about 10 to 11 thousand producing groups, units, either 
persons or corporations, ui the United States. In arriving at statis- 

11:4491— 40— pt. 14. sec. 1 1;0 



7392 CONCENTRATION OF ECONOMIC POWER 

tics of this sort, a great company "feiich as the Humble Oil & Refin- 
ing Co. is one unit, and John Jones who has a single well some place 
else is another unit. 

I should like to go from that description of the producing brfech 
of the industry and its magnitude to a more detailed consideration 
of the question of reserves. 

OIL RESERVES 

Mr. DeGolyer. There are almost no generally available estimates 
of reserves by company ownership which can be used for compara- 
tive purposes since it is seldom that two companies estimate their 
own reserves on the same basis and only a few companies publish es- 
timate of reserves. Some crude guesses can be made, however, and, 
upon such material, various groupings can be made which are prob- 
ably more exact than the guesses upon which they are based. 

Approximately 10 companies own half the gross proved oil reserves 
of the United States. Outstanding with regard to reserve position is 
the Standard of New Jersey group, including the Humble Oil Refin- 
ing Co. with almost 2l^ billion barrels of gross proved reserve. 
It is followed by 4 companies with gross proved oil reserves of 
the order of magnitude of a billion barrels each. Approximately 
3 companies are in the one-half to three-quarter billion barrel class; 
9 or 10 companies in the one-quarter to one-half billion barrel class ; 
6 to 8 conipanies in the 100 to 200 million barrel class, and probably 
a dozen companies in the 50 to 100 million barrel class. 

On a net basis approximately one-third of the Nation's reserves 
are owned by the so-called old Standard companies. 

The Chairman. How does that compare v/ith the amount of known 
reserves that were owned by the old Standard Oil Trust? 

Mr. DeGolter. I should think that the percentage is much higher. 
There are no statistics upon which to base any comparative estimate, 
but in my opinion the percentage at the present time is much higher. 

The Chairman. In other words, the Standard companies today own 
a much larger proportion of the oil reserves of the United States 
than the old Standard Oil Trust did. 

Mr. DeGolter. I should think that they do. It was somewhat 
before my time in the United States and I am not acquainted with 
conditions, though I do bear in mind that Mr. Pew testified the other 
day that the old Standard Company didn't do .a great deal in pro- 
duction, it was chiefly a purchaser, and it is largely on his statement 
that I base my belief that the percentages today must be' substantially 
higher than they were then. 

Mr. O'CoNNELL. Mr. DeGolyer, do the figures you gave as to the 
percentage of reserves held by the large companies and small com- 
panies—are those figures subject to pretty substantial margin of 
error ? For example, you suggested that the Standard Oil compa- 
nies, including the Hijfoble Oil owned about two and a half billion 
of barrels of the reserve, and a few moments ago you indicated that 
within the past fetv months the estimates of the amount of oil in 
the East Texas field have been raised from thre^ and a half to five 
billion, and that the estimates as to the total amount of reserve ranged 
from seventeen to twenty-two billion or more. 



CONCENTRATION OF EdONOMK" POWER 7393 

Mr. DeGolter. Yes; I should say they are subject to hirge error; 
they are subject to considerable change. 

Mr. O'CoxNELL. But the relationship in all probability would not 
change ? 

Mr. DeGolyer. I think the relationship is fairly sound. 

Mr, Cox. Wliere did you get those figures? 

Mr. DeGolyer. From various sources. A good many estimates 
were got from the companies themselves. I myself have estimated 
many of the companies' reserves, and there are various technical short- 
cuts tliat rather help you. 

For example, if you know the reserves of three companies oper- 
ating over more or less the same territory and know the ratio of 
their current production to their estimated reserve, which is very 
easily ascertainable, you have a very fair basis for estimating the 
reserve of the fourth company, if you can get its production. 

One-fourth by small companies or individuals, some of which have 
reserves of as much as 25,000,000 barrels — probably that limit is too 
low — one-fifth b}^ the 10 principal independents. Since I have sat 
through this hearing I suspect I had better define the word "inde- 
pendent." Since I have grouped the old Standard companies; here 
in this use of the word "independent" I include major companies who 
are not members of the old Standard group, such as Texas, Gulf, 
Pure, and so forth. 

And from one-sixth to one-eighth is royalty owned by landow^ners 
and royalty owners. I put that figure in here because I am in this 
particular case making my percentages on the net basis. This one- 
eighth which is owned by the landowners and royalty owners is 
generally subject to control or sold to the operating companies. 

Whether by force of circumstance or design, the big companies are 
able to market their reserves less rapidly than are .the small companies 
and individuals. The 10 largest companies, estimated to own one-half 
the gross approved reserve for the United States, had a gross produc- 
tion of 36.8 percent, or a net of 31.5 percent, of the production. The 
thousands of individuals and smaller companies owning the other one- 
half of the crude reserve had a gross production of 63.2 percent. The 
Jersey group reserves — this is not a recompilation of the old group 
again but is taking simply the Standard of New Jersey, the group as 
it now exists — are being produced at approximately 40 percent of 
the rate averaged for the rest of the Nation's production. 

The CHAreMAx. What were the circumstances that prompted you 
to say that the big companies were marketing their reserves less 
rapidly than the others, either by force of circumstance or by design ? 
What was the question mark that was in your mind when you fi'amed 
that? 

Mr. DeGolyer. I don't know what the question was, the question 
which was in my mind. I don't know exactly what it was, but there 
was a question mark in my mind as to why that had happened, 
whether it had happened through the desire of the big companies to 
maintain their reserves or whether it had happened through the more 
intensive operation of the small company and the greater pressure 
that it exerted to get its production onto the market. I don't know ; 
it may have been some combination of the two, but I thought that it 
was an interesting fact and was worth bringing out. 



7394 CONCKNTRATTON OF ECONOMIC POWER 

The Chairman. Well, do you mean that the big company, the major 
company, tends to develop and transport and distribute the refined 
pvoducts more slowly than the independent? 

Mr. DeGolykr. I don't know the extent to which that tendency "may 
lun through the other branches of the industi-y, but it is actually a fact 
that he gets to market with his reserves much more slowly than the 
independent does. When I say he gets to market, I am referring to 
the crude market now. 

Representative Reece. I am wondering, Mr. Chairman, and, of 
course, I can make the observation in the form of a question, if it 
might be accounted for in part by the fact that the large companies 
are probably in a better position to acquire extensive reserves, antici- 
pating re(iuiron'ents over a long period oi time, pnd in acquiring them 
doing so with the expectation, possibly, of not utilizing them for some 
time'. 

Mr. DeGolyer. I should think, since the bulk of the production is 
the production of the larrge companies and the amount of production 
of the independents is relatively small, and since the independent him- 
self — I should think in the high 90 percents of the independent pro- 
ducers are men wdio are only independent producers, they have no 
connection with the independent refiners, there are some few cases 
where the independent refiner is also an independent producer, but 
since the interest of the independent producer is merely in marketing 
his oil on the crude market, and since the large company has this 
whole string of investment behind it — pipe lines, refineries, mai-kets, 
and so forth — there is no I'oal- reason for the independent producer to 
have much of a feeling about maintaining reserves. 

The Chairman. Well, then, it is merely another way of saying 
that the big companies have the larger reserves. 

Mr. DeGolter. Oh, yes; I have stated that here. 

The Chairman. I say it is just another way of stating the same 
fact, probably. 

All right, ikr. DeGolyer. 

ritOSVECTING ANn CONSERVATION PARAMOUNT PROBLEMS IN PRODUCTION 

j\Ir. DeGolyer. I think the foregoing statements show generally 
enough the picture of the industry. There are two problems in pro- 
duction W'hich seem to me to be exceedingly important, whether to a 
large company or a small company. One is the problem of prospect- 
ing for new reserves, the other is the problem of proration and con- 
servation as it affects the amount which any producer, large or small, 
may be permitted to produce. 

Since I conclude from the questions that have been asked in the 
hearings thus far that you are probably much more interested in 
the proration phase than you are with that qf prospecting, I will try 
to be rather brief on the prospecting phase. The oil industry is 
different, I believe, from any other extractive industry in the extent 
to which the necessity 'for prospecting is a part of their regular daily 
business. There are many great inining companies who have in 
a single ore deposit reserves which will last them for decades. Very 
few oil companies are in that fortunate position, and especially, 
during the old open flow type of production that we had, the producer 
could hardly enjoy the flush period of a lease because he was faced 



CONCENTRATION OF ECONOMIC POWER 7395 

with the immediate necessity of findino- another new lease some- 
where else upon which to develop production if he intended to main- 
(ain a goin<j:, constant rate of ])rod)iction and remain as a ])i-oducer. 

I think the prospeciinii; Ikis been more highly developed by the 
oil industry as a result of this necessity aud of the great demands 
which have been placed on it by the consumer. I think it has 
developed its prospective techniques far in advance of any other 
mineral industry. 

From the very earliest days of the industry wells were drilled; 
well, they were drillexl almost on straight speculation. The earliest 
oil discoveries, and a great many oil discoveries since that time, 
were drilled because there was an escape or seepage of oil or gas 
which attracted the attention of the prospector. It was not until 
about 1912 or '13 that any rationalized technique, any development at 
l)rospecting in a technical manner, really occurred, and the earliest 
step in that direction was the introduction of geology as a guide. 
Gfeologists had speculated considerably almost from the very begin- 
ning of the industry, but very little geologic work had been done. 

The one point that I want to bring out here — I don't intend to 
go into a full description of prospecting, which is the risky and 
liazardous branch of the industry — the one point that J want to 
emphasize Avith regard to it before passing is simply this, that we 
have certain extremely wide areas in this Nation where oil or gas 
pools may be found. 

The art of prospecting consists of a series of techniques, any one 
of which becomes important upon its discovery, peaks rapidly, and 
llien fades out except for a slight residual value. 

If I may illustrate the point, the exploration of the Gulf Coast 
of tlie United States was a problem which, until the early twenties, 
liad no solution much other than hit and miss prospecting. The 
Lucas gushen was drilled at Spindletop. Spindletop is a slight 
topographic mound on the very flat j^trairies of the coast. There 
are a number of other similar mounds which were well known, and 
within a year or so they were all prospected for oil deposits. Then 
a long period passed by with almost no discovery of new prospects. 
In some of. the older prospects the period of prospecting was very 
long and they were not proved as oil fields within a few years of 
tlie Spindletop discovery, but they were discovered as prospects. 

In the early 1920's the geophysical rnethods wore introduced into 
the United States. The geophysical metliods are essentially the 
application of very precise measurements by the physicist to geo- 
logical problems. One of the most successful of the early methods in- 
troduced was the so-called seismic method. Tdie refraction method 
is the particular phase of it to which I wish to refer at the present 
time and it consists essentially in the explosion of a charge of dyna- 
mite at the surface of the ground, the recording of the time of 
the explosion with great precision down to a thousandth of a sec- 
ond, let us say, at the recording instruments placed generally 2 to 5 
miles away, and the recording at the same instrument of the time of 
arrival of the sound wave which travels through the earth. 

It so happens that most of the oil fields in the Gulf Coast are 
associated with salt domes, that is great plugs of rock salt thrust up 
into the country rock. The rate of sound travel- in the normal coun- 



7396 CONCENTIIATION OF ECONOMIC TOWRU 

try rock is about 5,000 or 6,000 feet per second; the rate of sound 
travel through the salt is about 15,000 to 18,000 feet a second. If 
the sound wave arrived at the normal time, that is at the rate of five 
or six thousand feet a second, the country was blank; if it arrived 
in some quicker time and the measurement of this time was less than a 
half second, it was a very good indication that you had found a 
salt dome, that a salt dome had been discovered. 

Now that particular technique came in in the early twenties. It 
peaked very rapidly into a very hectic campaign, and by the late 
twenties or early thirties it had practically exhausted its usefulness. 

I have gone into a detailed description of this particular technique 
because it is the best illustration we have of this coming in of a 
new method of prospecting, the peaking of that method, and its 
tapering off. No newly discovered method of prospecting becomes 
entirely exhausted, but practically there is little residual value left. 

Generally in prospecting in the United States, we jBrst had surface 
geology about 1913 or '14, and after 8 or 10 years, or some such time, 
most of the area of the United States which was amenable to examina- 
tion by surface geology had been worked and the method was no 
longer very useful. Next we had subsurface geology. Subsurface 
geology is the dne technique that continues because it is the one 
standard against which all the rest have to measure, since it is simply 
the interpretation of the results actually secured by the drill. 

In about '19 core drilling came in, that is the drilling of compara- 
tively shallow wells for the purpose of determining geology which 
is not otherwise revealed, and except for special areas it reached 
its maximum and tapered off. In the early twenties the geophysical 
methods were introduced and there have been three or four of them, 
first the torsion balance, almost parallel with the refraction seismo- 
graph to which I referred just now; afterward the reflection seis- 
mograph. 

The only point I want to make here is that as a prospecting prob- 
lem the entire United States is not amenable to solution by any of 
these special techniques which have yet been developed and that 
every time we get a new technique we usually have a new area opened 
up to us which is amenable to prospecting. For example, at the 
present time a great deal of work is being done on so-called soil 
analysis where samples of the soil are taken very close to the surface. 
These are analyzed chemically for the hydrocarbons, for very minute 
amounts of hydrocarbons, and it seems probable that we may have a 
new prospecting method. If this method does develop ultimately 
we will then open up some further areas which have not been subject- 
to technical exploration heretofore. For example, we might open up 
the Edwards Plateau region of southwest Texas which would be some- 
thing about the size of a reasonably large-sized State. Of course, as 
each new technique comes along it gives us another slice at the same 
general nonexpanding whole, and as we progress in the art there is 
less and less territory left to us for prospecting. 

I believe that independents are great prospectors. It is a type of 
business which they seem to like very much and, as I have said in 
my statement here, strictly on the basis of single pools I have re- 
viewed the number of new discoveries made in the last 2 or 3 years as 
reported in the oil journals, running up to several hundreds, and the 



CONCENTRATION OP ECONOMIC POWER 7397 

small operator or independent has been the discoverer in the ratio of 
perhaps 2 to 1 as against the big companies. The independent in 
his exploration generally has to confine himself to the simpler types 
of prospects, and I believe on a barrel or volume basis, on the basis 
of adding reserves, he might not break even with the big companies 
because they work on the more difficult problems and the more ex- 
pensive problems and generally speaking get the bigger reserves. 

The Chairman. Would it be proper to say that the independent 
prospector gets the wells but the big companies get the reservers? 

Mr. DeGolyer. Well, that might be correct. Senator, though oc- 
casionally independent exploration results in the discovery of tre- 
mendous reserves. I think perhaps the reason the independent is 
so prominent as a prospector is that it is the great venturesome^ 
part of the business and is the place where fortui;ies are made 
or presumed to be made quickly and I suppose where money is also 
lost quickly. 

Representative Reece. From your study do you think there is a 
probability that there may be undiscovered fields in parts of the 
United States which have not yet been gone into? 

Mr. DeGolyer. Yes, sir ; I think it is quite probable^ 

Representative Williams. While you are on the subject of the 
geology of the situation, I wonder if you could describe to this com- 
mittee a cross section of an oil field, we will saj^ a thousand feet under 
the surface. What would it look like if you could put it out on a 
map ? 

Mr. DeGolyer. Well, the simplest and most typical oil field would 
be the so-called anticlinal field, an anticline being simply an arch 
in the rocks, and a cross section of that field, a thousand feet under 
the surface, or at the producing sand 

Representative Williams (interposing). That is it, at the produc- 
ing place. 

Mr. DeGoyler. Would be, generally speaking, a .rainbow like arch. 
Now in all the textbooks you will usually find such arch divided by 
three lines. The top will be shown as gas and underneath the gas 
there will be the oil and underneath the oil on the flanks of the arch 
there will be water. Actually such types of fields do exist. They are 
not uncommon, but they are by no means typical. That particular 
type of field which has been ingrained in the textbooks is the field 
with a gas cap and fields with gas caps .are not particularly common. 
The gas generally occurs in solution in the oil, just like gas is in 
solution in carbonated water. A more correct cross section of the 
field would leave the gas cap off, simply the upper part of the arch 
filled with oil, the gas in solution in the oil and water on the flanks. 

Representative Williams. What I have in mind is, would you find 
there a great pool just the same as a lake of water, or would you find 
a number of separate pools, or would you find simply a number of 
veins running through the structure? 

Mr. DeGolyer. What you would fi.nd is a great pool-like mass of 
sand saturated with oil, the oil occurring in the pore space in the 
sand. That is the simplest type of field. Actually in many fields 
you may have more than one productive sand. You then have a 
multiple sand field. In many other fields the geology becomes much 
more complex, but this case that I have described to you is the typical 
and fair case for illustration purposes. 



7398 CONCENTRATION OF ECONOMIC TOWEll 

Representative Reece. Then what protects a small area within a 
field where the wells have been drilled around a smaller area, for 
instance such as Mr. Dailey was talking to us about when he was 
before the committee ? 

Mr. DeGolter. Nothing protects it except drilling on the lease 
itself. 

Representative Reece. But if his drills are not sunk in due time 
the oil will be dissipated under his area, under his land ? 

Mr. DeGolyer. If his tract is not drilled, in due time the oil will 
be produced from under his tract, in my opinion. 

The Chairman, That is the common understanding in the in- 
dustry, is it not? That is the reason requirements are made for the 
drilling of offset wells. 

Mr. DeGolyer. Yes, sir. 

The Chairman. Because of the fear that if a particular tract ot 
land in an oil pool is surrounded by wells the oil will be drained away 
from that tract unless it is itself drilled. 

/ Mr. DeGolyer. Yes. Of course in this particular case to which 
you i-efer and to which I should address myself since I was a partner 
in the development of the field, the Railroad Commission having 
established what was effectively a 40-acre spacing, Mr. Dailey actu- 
ally, and on his own testimony, was offered the right to combine his 
20 acres with another 20 acres so as not to violate the 40-acre spacing 
rule for the field. I think that he was offered ample protection then. 

Representative Williams. Is there any plan by which there can 
be an equitable adjustment or equitable withdrawal on the part of all 
the landowners over a lake pool? 

Mr. DeGolyer. I think so. 

Representative Williams. What is your plan; what is your sug- 
gestion along that line? 

Mr. DeGolyek. My suggestion is that the production of tlic vari- 
ous tracts be in proportion to the reserve of oil underlying such tract. 
Now it has been testified here, and since I am a specialist on the sub- 
ject I willingly admit that you can't with great precision estimate 
how much oil — you can^t make an absolute estimate of the amount of 
oil there is under any particular tract of land,, but in the develop- 
ment of a pool your problem is not that. Your problem is to estimate 
the relative amounts of oil. It wouldn't be necessary that it be 
expressed in barrels. It might be expressed in percentages, and if 
you wanted to go further with it, yovi might make the relative esti- 
mate adjustable from time to time so that as the development of the 
field proceeded and you got more information with which to work, 
you could come closer to the truth. 

Representative Williams. Can you mark the circumference -of that 
pool on the surface of the earth? 

Mr. DeGolyer. After the pool has been developed, you can. The 
pool will be marked by productive wells and dry holes, and the line 
between production and barren territory can be shown on a map 
with great ease. 

Representative Williams. Then you would distribute the amount 
that each landowner was entitled to in accordance to the number of 
acres lie luid witliin that area? 

Mr. DeGolyer. Acreage is im]|X)rtaiit, as probably the most prac- 
tical and easily available measure of reserves. It is not absolutely 



CONCENTRATION OF ECONOMIC TOWER 7399 

precise, but I think that we woiihl make a great step forward if we 
put it on an acreage basis. I tiiink we would remove. a lot from dis: 
pute that is now imder dispute. 

Representative Williams. What other claims are being made, what 
other plans or suggestions are made outside of the acreage? 

Mr. DeGolyer.^ I said I would try to do it on reserves. When 
you come to the question of reserves, the thickness of the sands 
underneath the land, and the porosity, permeability, and other fac- 
tors enter into it. Tavo men might have in the same pool the same 
acreage, but one man might have 10 feet of sand and the other might 
liave 20 feet of sand under his acreage. 

Representative Williams. How can that be determined ? 

Mr. DeGolyer. That will be determined by the drill in the course 
of the development of the field. 

The Chairman. But in fixing the percentage for the operation of 
a unit field, for example, it is impossible to know what those factors 
are unless the particular tract has been drilled. 

Mr. DeGolyek. That is true. 

The Chairman. So that if a unit plan were to be adopted for a 
new field which had just been discovered, let us say, by the drilling 
of one well at the apex of the field, a distribution of the rights in 
that one well upon the basis of the percentage of each owner's acreage 
to the total acreage would be altogether lacking in accuracy, in all 
probability, would it not? 

Mr. DeGolyer. It would be lacking in accuracy, but oil, especially 
the development of oil, is rather a gambling business and I think 
you probably wouldn't have more trouble in getting your plan 
accepted as a practical solution. 

The Chairman. That is probably true, but that wasn't the point 
I was developing. 

Mr. DeGolyer. I see your point. 

The Chairman. There is no uniformity in wells in a given pool? 

Mr. DeGolyer. Well, there is some general degree of uniformity, 
but there is no precise uniformity. I mean, there can be wide varia- 
tions, that is the point. 

The Chairman. That is what I mean, that there would be wide 
variations depending, as you said a moment ago, upon the depth of 
the sand, upon its porosity, and so forth. 

Mr. DeGolyer. Yes. 

Representative Williams. For my information, and perhaps for 
the record, what is the unit operation plan? The Senator seems to 
know that. What is that? 

Mr. DeGolyer. The Senator has addressee^ i-emarks to the unit 
operation plan several times and I judge he is thinking about unit 
operation on the public domain. 

The Chairman. Yes; I am. 

Mr. DeGolyer. As to which I am not very well informed. As a 
technical thing, as an operating plan, unit operation means simjoly 
the operation of a single pool as a single unit, I mean by one direc- 
tion. 

The Chairman. And instead of having wells drilled upon the land 
owned by individual persons, there would be a limited number of 
wells drilled and each owner in entire pool would have an interest 
in each well drilled regardless of on whose land it was drilled. 



7400 CONCENTRATION OF ECONOMIC POWER 

Representative Williams. Is that plan adopted and in practical 
operation in the producing field, or is that confined only to gov- 
ernmental operations on the public domain? 

Mr. DeGolyer. I think that it is used both ways. I will admit 
that just at the moment I don't seem to be able to find examples 
very readily. Of course, I could cite examples of unit operation 
which are quite accidental, where one company happened to control 
all of the land and had a unit operation. 

Representative Williams. That w^ould be perfectly simple if you 
had a common ownership. 

Mr. DeGolyek. I can also recall fields where there is a very divided 
ownership, and there they achieve practically unit operation by leav- 
ing the direction of the development of the field, in the best interests 
of tlie field and for the preservation of equity among the divided 
ownersliip, in the hands of an engineering committee, such as in the 
Yates Pool in Texas. 

Mr. Shaughnessy. Mr. DeGolyer, there seems to be some difficulty 
on this point, that although you may be able after a field has been 
drilled to determine how much oil should go to each producer, how 
can you do it in advance of the drill ? 

Mr. DeGolyer. You can't do it with a great degree of precision in 
advance of the drill, but you have the case, for example, of the 
Kettleman Hills which was one of the bigget unit operations ever at- 
tempted in the country and where provision was made for subse- 
quent adjustment of the lines, even as to the acreage to be included in 
the unit. A man might have gone into that unit with a certain per- 
centage ownership and after the pool was developed and the readjust- 
ments occurred, find himself with a much lower percentage of owner- 
ship. That is a practical way of meeting the question, Mr. Shaugh- 
nessy. 

Mr. Shaughnessy. That is due partially to the fact that different 
variations in the sand occur after the drilling has been done, is that 
correct, and pressure, porosity? 

Mr. DeGolyer. It is due to the fact that we- just don't know where 
the edge of the pool is, that is all. I mean, the pool has a boundary 
and we don't know where it is until we find it. We might guess 
within a half mile of where it would be. 

The Chairman. At best, all these plans are approximations and 
they are not accurate. 

Mr. DeGolyer. Thej^ are not precise, no sir. 

Mr. Shaughnessy. .Do you think they do substantial justice? 

Mr, DeGolyer. I think they do, yes. I don't think there is need 
for me to continue the discussion of prospecting. 

Representative Reece. Since Mr. Dailey testified concerning that 
matter of his,^ I am wondering if sometime during your appearance 
you expect to make a statement with reference to it. 

Mr. DeGolyer. I am quite at the disposition of the committee with 
regard to that. I would be pleased to be questioned with regard 
to it. 

Chairman Reece. I noticed in reading his prepared statement - that 
your name occurred in it several times and since the committee's time 

1 Supra, p. 7291 et'seq. 

2 "Exhibit No. 1178," appendix, p. 7520. 



CONCENTRATION OF ECONOMIC POWER 7401 

was taken up by Mr. Dailey's testimony, I thought it might be help- 
ful to have the matter developed. And I tliought possibly since 
your name was mentioned that you might also feel that way about it. 
Needless to say, I know nothing about it and have no interest in it 
myself except as a member of the committee. 

Mr. DeGolyer. I called on Mr. Cox after hearing Mr. Dailey's 
testimony and told him that I was quite at your disposition with re- 
gard to it, that I would be very glad to have it gone into. 

The Chairman. Mr. Cox, are you prepared at the proper time to 
make some inquiries about the matter to which Congressman Reece 
refers? You have* Mr. Dailey's testimony there. 

Mr. Cox. I think I have a copy of his statement here. The one 
aspect of the testimony which Mr. DeGolyer called to my attention 
was one which I planned to ask Mr. DeGolyer to make a statement 
about, so that his story of the transactions might appear on the 
record. I hadn't planned any very long examination about the de- 
tails of the transaction. 

The Chairman. Suppose we bring that up when Mr. DeGolyer has 
concluded his presentation. I was going to ask you, Mr. DeGolyer, 
with respect to prospecting, whether, as the years have gone by, the 
independent plays as large a proportion now in prospecting as he 
did — plays as large a part? 

Mr. DeGolyek. I don't think that he does. Prospecting has de- 
veloped at a tremendous rate during the past 20 years, and especially, 
from the time of the introduction of the core drill about 1919, some 
of the advanced methods of prospecting became quite expensive and 
generally speaking are beyond the reach of a good many independ- 
ents. As far as the effort to find oil is concerned he is still at it in 
large numbers. 

The Chairman. But the actual drilling, the actual search for oil 
under conditions as they now exist is largely a task for those who 
can bring large amoulits of capital to the job ? 

Mr. DeGolyer. That is quite true. 

The Chairman. And that, you say, has a tendency of eliminating 
the independent from the prospecting field? I say a tendency. 

Mr. DeGolyer. It may have a tendency. As an actual matter of 
fact, generally speaking, the independent keeps to those particular 
areas which are advantageous from his viewpoint in being low-cost 
areas. For example, southwest Texas has oeen quite a field of 
independent endeavor most of the time, as well as western Kansas. 

The Chairman. Now we hear it frequently stated, and I think i^ 
was stated here by one of the witnesses, that the geologists for the 
major companies have upon occasion, at least, if not frequently, con- 
demned certain areas as probably not being good prospects, but that 
thereafter some independent who was willing to risk his capital went 
in and proved those areas. Is that the fact? 

Mr. DeGolyer. I don't know that that is the fact. Geology, Sena- 
tor, I hate to admit, is probably the most inexact of the sciences. 

Mr. Cox. Worse than economics? [Laughter.] 

Mr. DeGolyer. Not so dismal. . 

The Chairman. But economics may not be a science. 

Mr. Cox. I would agree with that. 

Mr. DeGolyer. There is great division of opinion, and I don't think 
that you can classify the division of opinion among geolop-ists. We 



7402 CONCENTRATION OF ECONOMIC POWER 

have seen most things classified here on independent and major lines, 
but I doubt if that can be done with geologists. I have had experi- 
ence along that line myself, which I am glad enough to tell because ' 
I was the one who was right — and of course that is always pleasing. 

The Chairman. That is always satisfactory. 

Mr. DeGolter. I found a case by geophysical mctliods, prospect- 
ing south Texas, and offered it to one of my friends in one of the 
major companies after I had leased it up, and after he had looked 
into it, he called me up and said that this particular prospect as 
far as he was concerned was the acme of normalcy — whatever that 
means. This was a geophysical prospect. I afterward succeeded 
in getting it drilled and we did discover an oil field, but I cite this 
only as evidence that there arc many minds and man^^ views. In fact, 
I tiiink one of the important things about this industry is the fact 
that the prospecting is in the hands of so many men, and that they 
do have different views. I doubt whether any very catholic-minded 
oil geologist would have recommended the prospect which Mr. Joiner, 
an independent, subsequently drilled and discovered the greatest 
Texas oil field. It wasn't a thing of the type that we were looking 
for. 

The Chairman. You spoke of having leased up this area in which 
you had your own experience. By that I assume you mean before 
any prospecting was initiated, before you offered it to anybody to 
drill, you had acquired leases upon all the land which in your judg- 
ment was likely to be oil-bearing. 

Mr. DeGolter. That is true, all the land we could obtain that Avas 
likely to be oil-bearing. 

The Chairman. There was some hnid likely to be oil-bearing lliat 
you could not obtain? 

Mr. DeGolter. I think that is the case, yes. 

The Chairman. Is that usually the practice? 

Mr. DeGolyek. I tliink that generally is it. 

opportunities fur the independent producer DIIMINISIIINC; FOR LACK 

OF capital 

The Chairman. Do the independent prospectors find themselves 
able to acquire all of the acreage in particular j)ools that they v.ant 
to test? 

Mr. DeGolter. Well, their experience I should say generally is 
about the same as that of anybody else. Sometimes they do and 
sometimes they don't. In this particular instance I couldn't get all 
of the land that I thonght might possibly be productive because part 
of it happened to be under lease to someone else, and that I was 
unable to get. 

The Chairman. Do the independents still maintain their per- 
centage of discovei'ies, or is that decreasing as the expense of pros- 
pecting is increasing? 

Mr. DeGolter. I don't think it is decreasing. As an independent, 
I think that an independent has certain advantages o\'er a big com- 
pany. A big company has certain advantages over an independent, 
beyond any question, but by and large I think that the independent 
will be a wildcatter as long as there is any oiF industry left for him 
to wildcat in. 



CONCENTKATION OF ECONOMIC POWER 7403 

The Chairman. And you think there is still an opportunity for 
the independent? 

Mr. DeGolyer. I know there is an opportunity for the inde- 
pendent. 

The Chairman. And it has not been diminished, is that your 
testimony ? 

Mr. DeGolter. On the basis of percentages, I believe it has been 
diminished, because the advance of these new technics, most of which 
are very expensive, takes it out of the hands of the independent, 
not because he is an independent but because he hasn't got the capital 
to support him. 

The Chairman. So that the modern independent is likely to be a 
person who can command a good deal more capital than the old- 
fashioned independent could. 

Mr. DeGolyer. I suspect that he .is. Under proration the modern 
independent — let us assume that he has some production of his own — 
has something which is now collateral on which he can borrow money 
at the bank. He can command capital. In the old days that wasn't 
always the case. Ai^ oil property wasn't regarded as collateral. 

The Chairman. In the beginning, when as you stgited drilling took 
place where there were oil seeps, the discoveries were made at very 
shallow depths, so that it was possible to drill a well where there 
was an oil seep at very little expense and an individual could do it, 
but an individual can't do any prospecting today to amount to any- 
thing, can he? I mean one single person on his own. 

Mr. DeGolyer. I should think that he can. 

The Chairman. That is what I am trying to get at. 

Mr. DeGolyer. And more p.articularly he can take on bigger 
ventures. 

The Chairman. But he must be an individual who has a large 
amount of capital. 

Mr. DeGolyer. No ;" this is another condition that I am explaining. 
He can take on bigger ventures, and commonly does. It is a common 
practice among independents — four of us will go together. If we 
have a prospect which seems attractive and it is too big to be 
handled by one man within his resources, that is, he might be able 
to handle' it but he finds that the speculation is too great, the hazard 
is too gi'eat for him to risk that much of his capital, he takes a half 
of it and somebody else takes a half. You have a typical case in 
this field Mr. Darley testified about, the Old Ocean field, where four 
men joined together in a wildcatting venture which would have been 
an expensive one, even for a big company. 

The Chairman. That required the expenditure of a large amount 
of capital. 

Mr. DeGolyer. It did ; yes, sir. 

The Chairman.- Well then, isn't it a fair conclusion that as the 
difficulty of finding oil increases, the prospecting business is becom- 
ing more and more the business of large accumulations of capital? 

Mr. DeGolyer. I tliink that is true. 

Mr. AviLDSEN. I don't know anything about Illinois; perhaps you 
can tell whether that was an example of the larger companies' devel- 
opment. 

Mr. DeGolyer. In one way it was, in one way it wasn't. After 
the development of the geophysical methods, the older fields east of 



7404 CONCENTRATION OF ECONOMIC POWER 

the Mississippi River were generally neglected. The production 
there was very small and nobody seemed to be paying much attention 
to them. It apparently occurred to some of the companies that Illi- 
nois ought to be amenable to geophysical work too, so they went 
up there and leased lands and did geophysical work. I was interested 
in a company that, I think, brought in one of the very early fields in 
Illinois as a result of geophysical work. Fields being very shallow, 
it is rather a paradise for the independent and the independents 
flocked to Illinois in droves. 

We were coming out of a country where you might have to drill 
from 4,000 to 10,000 feet, and in Illinois they were developing pools 
that were 1,000 and 1,200 feet deep. 

Mr. AviLDSEN. The original prospecting was done by the larger 
companies, and then a drove of independents came in and, with small 
capital, found other wells? 

Mr. DeGoltee. I should say essentially the original prospecting 
was done by the larger companies, though there was no reason, in 
the particular case, why it had to be done by the larger companies, 
since I myself was a part of a very small independent company and 
was successful in finding our own pool in Illinois. 

on. RESERVES AND THE EFFECT OF CONSERVATION 

Mr. AviLDSEN. Now, getting back to the matter of reserves, could 
you tell us what the trend has been with regard to reserves? You 
state that the major companies now have about 50 percent of the 
reserves. What did they have 5 years ago ? 

Mr. DeGoeter. The major companies would have much more than 
50 percent of the reserves. I say about 10 companies own half of 
the reserves. 

Mr. AviLDSEN. Those 10 companies, did they have more than half 5 
years ago, or less than half? What has the trend been? 

Mr. DeGolyer. I can't tell you what the trend has been, because 
there are no statistics available as. of that time, I would guess, again 
without being able to support it statistically, that the proportion of 
the reserves owned by the larger companies, the majors or whatever 
you want to call them, is greater now than it was then. 

Mr. AviLDSEN. Has that increase come about through discovery on 
their part, or by purchasing from the independents ? 

Mr. DeGolter. By both. They are able prospectors. 

Mr. AviLDSEN. About evenly divided between purchasing and dis- 
covery, or what proportion would you think? 

Mr. DeGolter. I should hesitate to try to give it a proportion with- 
out looking into the matter further. 

Mr. A\iLDSEN. Roughly, have you any idea? Do they do a lot of 
purchasing of reserves, or is it mostly discovery? 

Mr. DeGolter. I should think that it is mostly discovery. 

Representative Williams. I understand from your figures, based 
on the present rate of consumption, that the reserves will be exhausted 
in some 10 or 15 years. 

Mr. DeGolter. No, sir; and as one of the previous witnesses said, 
I'm glad you brought that up. The reserves couldn't possibly be 
exhausted in 10 or 15 years. We would be on short rations before that 



CONCENTRATION OF ECONOMIC POWER 7405 

long. But I think, that since the first reserve estimate was ever made, 
the temptation to divide that reserve by the current rate of production 
to see how many years it would give has been almost irresistable. 

In the first •place, you couldn't get the oil out in 15 years. All that 
means, in terms of years, is that that is the ratio of the current con- 
sumption to the amount of developed or proved reserves. You have 
enough for 15 years, but you couldn't get it in 15 years, if 15 years 
should be the figure. 

Mr. AviLDSEN. How long would it take you to get it out, would 
you guess? 

Mr. DeGolyer. I don't know. You probably could get the bulk of 
it in 15 years. You would probably have some of it coming along 
20 or 30 years after. 

Representative Williams. Our supply would be very much cur- 
tailed in the latter part of the years, then. We couldn't maintain 
present production and consumption. 

Mr. DeGolter. If you didn't discover any more oil, you couldn't, 
that's right, and that is the one thing I have been trying to empha- 
size here, that this ijidustry is faced with the consequent necessity 
for discovery. 

Mr. Shaughnesst. I would like to bring out one point in that con- 
nection. Isn't it true that as the years go on the cost of producing 
such oil as is now part of your reserves will increase? 

Mr. DeGolyer. I think that that is likely to happen. 

A lot of these questions here that involve the future rather em- 
phasize, to rny mind, that we are in a transition period here with 
regard to our methods of production; I mean, if conservation and 
proration are to prevail, and if we are to go on to this desired opti- 
mum, costs will be one thing. If all these laws should be stricken 
down and we go back to the old open-flow method, costs would be 
another. 

I think that there is a possibility of continued reduction in the 
future of the cost of production if we are going to operate on this 
so-called optimum recovery and can get the wider spacing of wells 
which can easily go with it. 

Mr. Shaughnessy. By cost of production ^o you mean just cost 
of production, or cost of exploration and production ? 

Mr. DeGolyer. I mean the total cost of production and discovery. 

Mr. O'CoNNELL. Do you also mean the cost of crude oil ? 

Mr. DeGolyer. Yes, sir. 

Mr. Q'Connell. Do you mean the cost to a refiner, say, of crude 
oil, under proration ? 

Mr. DeGolyer. Yes, sir. 

Mr. O'CoNNELL. We have heard quite a bit to the general effect 
that one of the purposes, or at least one of the results, of proration 
is to reduce and restrict the amount of crude oil produced, and as a 
result of that to support the price. 

Mr. DeGolyer. That is one of the things that I want to go into a 
little bit further on, but the question of the degree to which real con- 
servation takes place — I am not concerned with price fixing rackets 
or attempts to manage; aS a matter of fact, I think, on the face of 
the record, so far as proration has done anything, and admitting that 
it is a restriction of output and, therefore, must have an effect on 



7406 CONCENTRATION OF ECONOMIC POWER 

price — I think so far as it has done anything it has tended to support 
what the men who administer it appear to regard as a minimum 
price bej'oncl which proration itself becomes damaged if you go, but 
I will develop that theme a little further. 

Now I think, in going into this question of conservation and pro- 
ration, I shan't go very deeply into my statement. It is there before 
you, but I shall be guided to some extent by the opinions that seem 
to have been formed by the examinations here before this committee 
up to the present time, and will try to see if I can forward our 
understanding of the problem. 

The old method of production, the old open-flow method, under the 
intense competition engendered by the law of capture, I think beyond 
any question — and I speak now technically — involved great under- 
ground wastes. As I have said in my report,^ these are things that 
are difficult to prove and they can only be matters of opinion. But 
take east Texas itself, Avhich is by no means a perfectly prorated pool, 
but one which certainly has had tremendous benefits from proration. 
By the time the pool was outlined, at which time we had data with 
regard to the thi^yiness of sand and the area that was covered, vari- 
ous estimates of the productivity of the pool, various considered esti- 
mates by the most competent men available at the time, ran as low 
as a billion and a half to two billion barrels as the total amount of 
oil recoverable. Later on, the best estimates as the field showed some- 
thing of its performance ability, ran up to three billion and three 
billion and a half, three billion and a half being the figure that I used 
in my statement. At the present time the estimate is 5,000,000,000 
barrels. 

Now, part of that estimate may be due to the fact that the earlier 
estimates were too low, but part of the revision of the estimates is 
undoubtedly forced by the fact that a greater amount of oil is being 
recovered. I should say that possibly proration in east Texas has 
saved as much as 2,000,000,000 barrels of oil on the basis of a 
.'),OOO,000,O0O-barrel estimate. 

Now, if you question me very closely on this, I will admit that 
if somebody comes along with data afterward and indicates it 
might only be a billion barrels, I wouldn't argue much about it, but 
my free thought at the moment is that probably 2,000,000,000 barrels 
has been saved, and I am supported in this belief not onl}^ by these 
increased estimates but by the fact that cores which have been taken 
in watered-out parts of the sand have shown an oil residue of 
about 80 barrels to the acre-foot. The original content was prob- 
ably six or seven hundred barrels per acre-foot. Eighty barrels per 
acre-foot of sand isn't much more than enough to varnish that much 
sand, and the recovery that we expected under any of the old open- 
flow methods for the fields where we have had experience would be 
something less than 50 percent, whereas here we appear to have got 
a recover}' of about six- or seven-eighths of the oil. 

This is simply a citation of the difference in recovery between old 
open flow and restriction of production. I think that restriction 
of production, strictly from a technical standpoint, from the stand- 
point of trying to increase the efficiency of a mining operation, no 
matter how little of it has been done or how badly it is done, has 

i"Exliibit No. lisn," appiendix, p. 7662. 



CONCENTRATION OF ECONOMIC POWER 7407 

been of value in conservation. I don't think there is any question 
about it. 

While we are on this subject of conservation, perhaps I can con- 
tribute to an understanding of it by a simple if somewhat theoretical 
consideration of this problem of most efficient recovery. We have 
had witnesses before this committee here who were violently opposed 
to conserv'ation proration as now practiced, but who said that they 
thought what ought to prevail would be best engineering standards, 
and one of them was even in favor of Dr. Pogue's optimum. 

The last preceding witness testified, if I remember correctly, that 
the idea of a pool as a common source is generally and with few 
exceptions fallacious. Technical evidence contrary to his conten- 
tion is overwhelming, but since he offered the example of multiple 
sand fields, it may be that we suffer only from confusion of terms. 

Let us take, then, a single sand pool which would be a common 
source of supply, and the simplest one with which we can deal. We 
would have a porous formation, let us say of sand, structurally some- 
what higher in the pool than in the barren areas adjacent to it. The 
sand would be sealed jis to the top by an impervious formation, clay 
or shale, and this would be the retaining formation as to the top 
and flanks of the pool. 

The oil would occupy the porous space of the highest part of the 
sand and be supported by bottom or edge water, salt water under 
hydrostatic head, which would occupy the barren part of the sand. 

The oil in this pool is subject to two pressures, the pressure of the 
dissolved gas contained within it, the so-called gas energy, and the 
pressure of the bottom and edge waters, the so-called water drive. 

The physical condition of the oil in places is also the result in 
part of the gas dissolved in it, the oil being much more fluid and 
less viscous than in the state in which we are accustomed to see it, 
the difference being as great as the difference Between kerosene or 
even gasoline and ordinary crude oils, according to the type of crude 
and the amount of gas in solution. 

I have sketched here a theoretical field. I believe that we can 
all agree that the most desirable method of producing the oil from 
such pool or from any pool is that method which yields the great- 
est recovery of oil subject to legal and economic limitations. The 
introduction of legal and economic limitations makes the problem a 
complex one, and in order that to get further with it I propose 
to dismiss them for the moment and, for the purpose of simpliB-ca- 
tion, just consider how much oil we could possibly recover from "this 
pool if there were no other factor that had any control, and we 
were being given a premium, let's say, for getting the greatest amount 
of oil out of the pool. ' 

This would give us an ideal optimum, too ideal, perhaps, to be" 
achieved in actual practice, but of value in any event as a goal to- 
ward which we should strive. 

I think no geologist or engineer who studies this problem can 
escape the conclusion that most oil will be recovered only if all the 
values of the gas in solution are used, both its energy value as an 
expulsive force and its viscosity reducing value, and that this desid- 
eratum can be achieved only by producing the oil so slowly thut we 
get a perfect follow-up of the- water drive. 

124491-^0— pt. 14, sec. 1 21 



7408 CONCENTRATION OF ECONOMIC POWER 

The ideal rate of production depends upon many things in this 
theoretical consideration — the type of oil, the amount of gas in solu- 
tion, hydrostatic head of water drive, size of pool, porosity and per- 
meability of the sand. These will vary widely for different sands. 
It might be that under the most unfavorable conditions it would re- 
quire a thousand years to get this optimum amount of oil out of the 
pool. It might be that under the most favorable conditions, such' as 
those that exist in the Golden Lane pools of southern Mexico, all of 
that oil could be just as efficiently produced if it was produced within 
24 hours. But both of those conclusions are theoretical and not prac- 
tical. The point is that this would be the method by which we would 
recover the most oil possible under any condition. 

Now you have two measures of the effectiveness of this recovery, 
one the so-called bottom-hole pressure, which is merely the pressure 
developed at the bottom of the well and recorded on a specially con- 
structed pressure gauge sent down for that purpose. That is one 
measure. The differences. in bottom-hole pressures from time to time, 
the fact of whether the whole tendency is down too rapidly or 
whether it is on a flat basis. 

The other measure is the gas ratio measure ; that is, whether you 
are producing more gas with a barrel of oil than is originally dis- 
solved in it. 

Having arrived at our theoretical and ideal optimum, let us con- 
sider it as a practical matter which involves the legal and economic 
limitations. The legal limitations involve chiefly the necessity of do- 
ing equity to a divided ownership and those arising out of the various 
proration laws. They may change from time to time, but they are 
definitely known factors. 

And then we come to the economic limitations. The economic limi. 
tations are the cost-price relationships. Part of them are determi- 
nable, part of them have got to be assumed. You can, even if you 
don't know, you can estimate to a close degree of accuracy the cost 
of development of a field and the actual operating cost of producing 
oil. 

But you haven't got enough yet to solve your economic factor. You 
haven't got enough yet to solve your economic problem. The last 
thing that is required is the question of price, the price that you are 
to realize from the oil sold, so that becomes part of the engineering 
problem. I don't think that there is any question about the solution ; 
it is something which has to be worked out for each field by itself. 
Fields are more individual than people. 

And you come to another phase of conservation. Before leaving, 
this first one, however, I should like to say that I doubt whether 
there are any fields, there are certainly not many fields in the United 
States today, with all of the proration restriction that we have got, 
that are being produced under what Dr. Pogue describes as his opti- 
mum, which I think is another way of saying "the best obtainable 
engineering practice." I don't think there are many fields in the 
United States being produced under those conditions, and I think 
further that if all of the fields in the United States were to be pro- 
duced under this optimum that you would have less available oil 
today than you have. In fact, you probably wouldn't have enough to 
meet your current demand. We are in the midst of a transition 



CONCENTRATION OP ECONOMIC POWER 7499 

period here, and if we really get to the optimum production we, in 
my opinion, will have to increase our proven reserves above the point 
where they are now in order to do it. 

Mr. O'CoNNELL. On what do you base your belief that if all the 
wells were producing according to Dr. Pogue's optimum you would 
have less oil being produced than is being produced today? 

Mr. DeGolter, I have made various estimates of my own from 
time to time during the past 2 or 3 years in trying to arrive at an 
answer to that question. While the data aren't entirely satisfactory, 
I have got far enough with it to think that I am correct in that 
opinion. Incidentally, I have checked it with other engineers who 
have been interested in the same problem and I find that those are 
the results that they have arrived at independently too. 

Mr. O'CoNNELL. I take it there is probably a wide variance be- 
tween particular pools, and some of them are producing oil at a rate 
which is in excess of the optimum and some of them are producing 
oil at a rate which under proration might be much less than the 
optimum. 

Mr. DfiGoLpiR. I should guess that all of them are producing 
above the optimum. 

Mr. O'CoNNELL. How much is East .Texas producing now, do you 
know, per well, under proration? 

Mr. DeGolter. I don't know what it is. Incidentally, the well 
as a unit doesn't come into the problem. It is a question of the rate 
of taking oil from the field, whether you have got 20,000 wells or 
one well to do it. 

Representative Williams. Right in that connection, what would 
be the difference between having one well, we will say, ^^f 8 inches, 
and having 16 wells with the choke confining their output to one-half 
inch? 

Mr. DeGolter. Crtie well with six inches, or Whatever the diam- 
eter may be — in most of our fields the difference isn't particularly 
important, unless you try to take the full capacity or some in- 
creased capacity. It is a question of the rate at which you take the 
oil, rather than the size of the opening that it comes through. 

Representative Williams. I am assuming that. I am taking in 
one case one. well that is, we will say, eight times as large as eight 
wells, the eight having the same output, the same flow, as the one. 

Mr. DeGolter. If the eight wells were, for theoretical purposes 
we will say, drilled very close together, I don't think that there 
is any particular difference, but it is in the spacing that you generally 
get from eight wells which gives you drainage over a much wider 
area. You see, the problem, the point where your phjjical waste 
begins, in my opinion, is when you take gas out from the bottom of a 
well faster than the oil follows up behind it. When you do so you 
leave space, in the sand and that space is filled by gas coining out 
of solution. The propulsive energy of the gas which comes out of 
solution is lost and the oil from which it comes becomes much more 
viscous and less liable to be produced. 

Representative Williams. It seems to me that if the same purpose 
could be attained by simply having one well, there is considerable 
economic loss in drilling these wells. 

Mr. DeGolter. There is, a very great loss in drilling the wells, 
and that is the reason that we are tending to wider and wider well 



7410 CONCENTRATION OP ECONOMIC POWER 

spacing. In the early days wells were drilled very close together. 
At the present time 20-and 40-acre spacing are not uncommon. It 
atfee^ helps solve an economic problem. In the Magnolia Arkansas 
field they are drilling on a 40-acr& Basis and giving the vs^ells, which 
are quite expensive, a daily allowable of 300 barrels. Old style, 
they would have drilled four wells to the 40 acres at a cost of, let 
ps say, around $75,000 a well, and given them an allowable of 75 
barrels each and the increase in cost would have been considerable. 

Representative Williams. Has there through Uie years been any 
very definite relation between the price of crude oil and the price of 
the finished product, gasoline, any definite relation between the two ? 

Mr. DeGolyer. That is a little bit o^t of my field but I think 
that there has been a general relationship and a definite relationship. 

Representative Williams. It seems we have had some testimony 
here in some cases where the price of crude has gone up and the price 
of the finished product has gone down over certain periods of time. 
I was just wondering what the explanation of that kind of pro- 
cedure was. 

Mr. DeGolyer. That is a little bit beyond my particular field. 

COST OF production 

Representative Williams. What is the average cost of the pro- 
duction of crude at the ground, to get it out of the ground? 

Mr. DeGolyer. I believe we were talking about today as to the 
average cost. There is a report on the cost of producing petroleum 
issued December, 1935, by the Petroleum Administrative Board. 
Their average weighted cost for the United States, for all groups, 
was within a fraction of 80 cents. 

I don't know whether I think that is right or not. In my opinion 
the average cost of producing oil is higher than that. I think that 
the average cost of producing oil east of the Rockies is something 
between 90 cents and $1. I think west of the Rockies it is probably 
10 or 20 cents cheaper, but I have read this report and looked over 
the tables, and like anything else it depends upon a lot of the assump- 
tions that you have to make. For example, in this report they include 
interest. I don't quite see why that should be. Personally, I proba- 
bly wouldn't include interest if I were estimating the cost. On the 
other hand, they have a figure for amortizing intangible drilling 
cost which looks ridiculously low to me, and so I decided to let 
them have the interest and probably that would make up for my lack 
of cost on the other hand. I think that probably 80 to 90 cents for 
Mid-Continent and 90 cents to $1 overall east of the Rockies and 
around 70 to 80 cents for California are about the average costs of 
producing. 

Mr. Shaughnessy. There i^ one thing I would like to bring out in 
that connection. The cost varies greatly from field to field, doesn't 
it? 

Mr. DeGoyler. Oh, it certainly does. 

Mr. Shaughnessy. But the price does occur without relation to 
cost. 

Mr. DeGolyer. The price, I take it, is Jhe buyer's bid, 

Mr. Shaughnessy. The buyer's bid. It is frequently without re- 
lation to the cost in the field. 



CONCEl&TRATION OF ECONOMIC POWER 741I 

Mr, DeGolter. Well, since we just agreed between us that the 
price varies widely from field to field and since the posted price is 
the thing that covers half the State or a section of the country, I 
would say that at any time an}' posted price anywhere would have 
no relation to cost in certain areas, 

Mr. AviLDSEN, Getting back to this matter of drilling, have you 
ever made an estimate of how many wells should have been drilled 
in East Texas pool to get the maximum amount of oil out of the 
pool with the minimum of wells? Have you any idea of how many 
unnecessary wells were drilled in that pool ? 

Mr, DeGolyer, No; I haven't, 

Mr, AviLDSEN. Haven't you any rough idea at all? 

Mr. DeGolyer, Well, I can give you some information upon which 
a rough idea could be based. About the same time there were three 
pools developed, the Hobbs' pool in New Mexico, the Oklahoma City 
pool, and the East Texas pooh All of them were great pools. Of 
course, the East Texas pool is the greatest pool in the world, not com- 
parable quite with anything else. The Oklahoma City pool is a 
nmch bigger pool than Hobbs, but Hobbs was decidedly a major 
pool, Hobbs was drilled on a 40-acre basis, Oklahoma City and 
East Texas were drilled on a much, much lower density. Personally, 
I think if you had no legal questions as to ownership, 40 acres would 
have been an ample close spacing for the development of any pool 
produced under good engineering practice, 

Mr. AviLDSEN. On that basis, then, how many excess wells would 
you guess were drilled in East Texas? 

Mr, DeGolyer, Well, there were 100,000 acres ; I think the density 
is about one well to 5 acres, so I would say about — < — 

Mr, AviLDSEN, Eight times too many, 

Mr. DeGolyeii. About eight times too many, 

Mr. AviLDSEN, How much was the average cost? 

Mr- DeGolyer, I don't know, I suppose around $15,000, 

Mr. AviLDSEN, How much money was wasted, would you say, in 
that field in drilling these wells? You are an engineer, you are 
supposed -to figure these things, 

Mr. DeGolyer. I can figure it ; I haven't, but you have got all the 
elements there. We can agree that it was a very substantial amount, 

Mr, AviLDSEN, It would be interesting to get that figure into the 
record. It may take a second to figure it out. How many excess 
wells? 

Mr, DeGolyer, There are 100,000 acres. 

Mr. AviLDSEN. How many wells are there in East Texas ? 

Mr. DeGolyer, Twenty-four thousand. 

May I ask. Is the 5-acre' spacing about the right density ? ^ 

Mr, Farish, Yes. 

Mr. DeGolyer. Twenty-four thousand wells. 

Mr, AviLDSEN, Twenty-one thousand excess, about? 

Mr, O'CoNNELL. Twenty thousand excess at $15,000, 

Mr, DeGolyer, I think on the premises we have deduced here 
and the information that I have secured from the audience, that if 

^ Conferring with Mr. W. S. Farisli, president, Standard Oil Co., New Yorli City, whose 
testimony before this Committee appears In Hearings, Part 17. , 



7412 CONCENTRATION OF ECONOMIC ^OWBR 

there are 100,000 acres and a 40-acre spacing, that would be S,500 
wells, and if there are 24,000 there today, presumably that would be 
21,000. 

Mr. AviLDSEN. That is right. 

Mr. DeGolyer. And 3,500 necessary wells. 

Mr. AviLDSEN. And that $15,000, whatever it comes to — it comes 
to over $300,000,000. Now, in addition to spending $300,000,000 more 
than was necessary for wells, do we get less oil out of that pool as the 
result of having so many excess wells? 

Mr. DeGolter. That I don't know. There is a school of thought 
which thinks that you do under anything like perfect proration. 

Mr. Berquist. May I ask this question : In your discussion on cost 
you stated that certain cost studies had been made with which you 
do not agree, and you rather make it appear that the question of 
cost is vague. I may also add that companies reporting to the T. N. 
E. C. said it was impossible to report on investment, costs, profits, and 
so forth, of the various branches of the industry, including the 
production branch. Would you consider that accurate, complete 
costs should be kept by producers to the end that the economics of 
production of crude might be better understood and placed upon a 
factual rather than a vague and hypothetical basis ? 

Mr. DeGolter. I think that you misunderstand the condition to 
some degree. Otherwise, I think the answer would be yes; that 
I think exact costs should be kept. The exact costs are kept, but 
all costing is based on certain assumptions and different companies 
make different assumptions. To cite a case, one company may write 
off all of its intangible drilling costs as it is permitted to do under 
the law. Another company may capitalize them and amortize them 
over a period of years. One company may amortize them on a barrel 
basis, another company may amortize them on a unit basis, and you 
get confusion. You will find that the producing costs, the so- 
called lifting cost, is generally a very exact cost and can be com- 
pared between different companies, but when you get past that 
point, take a company which is a producing company, one company 
may spend four times as much as another in its effort to find addi- 
tional oil. None of the costs that we have today are the exact costs. 
Our costs are the cost of producing present oil plus the cost of finding 
oil which we hope to produce sometime in the future. I mean, it has 
got to be that way from a business viewpoint. The exact cost would 
be the cost of producing the oil and the cost of finding the oil that 
you have produced. 

Mr. Berquist. We have received many answers, Mr. DeGolyer, to 
the effect that even though you calculated costs by the different 
branches of the industry and had figures on investment and profits, 
and costs, and so on, that they would be, well, meaningless; that it 
could be done but they would be meaningless ; or that it could not be 
done. After all, in making many decisions in the industry, isn't, it 
necessary to have some pretty good bench marks as to whether you 
proceed in operation, whether it be in production or refining or 
marketing or what not? 

Mr. DeGolyer. Yes, sir. 

Mr. Berquist. In other words, doesn't a lot of this we have heard 
about being able to determine the cost of production assume this kind 



CONCENTRATION OF ECONOMIC POWER 7413 

of significance : You ask a man how old he is and he can tell you the 
year and the month and day of his birth, but it isn't very pertinent 
to know what hour he was born on a particular day. It assumes 
that sort of significance, doesn't it? 

Mr. DeGolyer. I don't think it is quite as bad as that. I think 
.there is a wide variation in the method of costing among different 
oil companies and I think, rather than trying to be mysterious about 
it, each company when it is asked for these figures is rather con- 
scious of the fact that the figures that it has set up by its method 
of accounting may not be comparable with any other. I think 
for a broad purpose like this to get it down to the matter of 
what it costs to produce oil — and I think it is a figure that should be 
determined all right — that you have to have a real investigation made 
by accountants who can go clear into the question of why do you 
charge this and why do you charge that. I am not talking about 
little spools of thread and packets of needles, either. 

Mr. Berquist. There has been a lot of discussion about the cost of 
production here. From what you say, then, do they lack so much 
comparatibility, and so forth, that they have no validity for purposes 
of discussion? On the one hand, reference is made to the cost to 
produce; on the other hand, we get the answer that to determine 
costs within any branch of the industry is meaningless because you' 
can't properly prorate the different elements of cost, and so on. After 
all, those things can be done with a degree of accuracy great enough 
for purposes of making decisions, and also great enough so that you 
don't have differences such as you mentioned awhile ago of 10 or 
15 cents a barrel as being the cost of production. - 

Mr. DeGolter. I agree with you, and I think that this report on 
costs is a very fine job, and it is the best thing that is generally avail- 
able to us right now. And yet I told you that, in my own opinion, 
I thought their costs were too low, and I gave you some of the rea- 
sons why I thought that the cost was too low, and if you ask me 
what the cost of producing oil is, I make up a theoretical figure in 
my own mind which seems to me to be much more satisfactory than 
the costs that I have got from hundreds of companies, a number of 
which I have examined into. 

I am afraid I have only further confused a confusing problem, 
but I think the problem is a difficult problem because it does require" 
assumptions, and the assumptions in different companies differ rather 
widely and their figur&s aren't much good for a general compilation ; 
but I think if you can get, not the ultimate break-dOwn but just a 
littld break-down, down the road from them, that you can then set up 
figures for yourself which will be more nearly correct. 

Mr. Avildsen. Mr. DeGolyer, getting back to these 21,000 unneces- 
sary wells ifi East Texas, have you any rough idea as to how many 
of those were drilled by the major companies and how many by the 
independents? 

Mr. DeGolyer. No; I haven't an idea on that subject at' ^^1. I 
don't really think it makes much difference. Under the highly com- 
-|)etitive conditions you get a pattern where no man is his own mas- 
ter. It just goes on -and on. 

Mr. Cox. Can you tell us when those wells were' drilled ? 



7414 CONCENTRATION OF ECONOMIC POWER 

Mr. DeGolter. They were drilled from the discovery of the field, 
which as I remember it, was in late 1930. Probably most of them 
were drilled during '31, down to the present time. 

CONSEQUENCES OF PRORATION REGULATIONS 

Mr. Cox. And there have been proration regulations in that field 
during that time, have there not? 

Mr. DeGolter. There have been proration regulations in force in 
the field, though in justice to the proration people I think we must 
realize that was one of the earliest attempts to use the proration 
laws and people didn't just do things in the East Texas field because 
they were ordered to by the committee. It was a very imperfect 
control which became more perfect only as the result of a lot of 
court decisions, and so forth. 

Mr. O'Connell. Proration as you understand it, and as it is prac- 
ticed today — can that be used as a practical matter to prevent in gen- 
eral the uneconomic drilling of wells, or is it rather a device which 
lends itself better to controlling the amount produced by any given 
number of wells ? 

Mr. DeGolter. I think that the regulations of the States differ 
somewhat- on that, but I think that it can be used to prevent the 
drilling of uneconomic wells. 

Mr. Cox. But it didn't prevent it in the East Texas field. 

Mr. DeGolter. It did not; no, sir. When the development of that 
field started and when it was at its height, it was still a year or two 
from determination by the courts as to the validity of the various 
regulations. 

Mr. Cox. But I take it in any new development there must be a 
certain amount of drilling which may or may not be economic in order 
to determine the extent of the pool and in order to lay a basis for any 
system of proration, so isn't it a fact that proration as it is practiced 
cannot prevent some uneconomic drilling of wells ? 

Mr. DeGolter. It probably cannot prevent all uneconomic drilling, 
but I think that as a practical matter it would prevent uneconomic 
drilling. Of course, I must admit that I am rather advanced as a 
theorist on the well-spacing thing. While we are drilling wells now 
on 40-acre spacing and think that we are showing a great deal of 
restraint and being very advanced in our techniques, I think that the 
engineers of 15 or 20 years from now will laugh at us for drilling 
wells on 1 to 40 acres as much as we do the men back in the Spindletop 
days who drilled a well to an acre. 

Mr. Cox. Would it be fair, Mr. DeGolyer, to say if a proration 
system merely fixes an allowable for the well and doesn't have some 
kind of spacing rule of the kind you have been talking about, that it 
may have the effect of encouraging unnecessary drilling ? 

Mr. DeGolter. It did actually in the East Texas field. That is the 
reason that you have got the number of wells there that you have. 

Mr. Berquist. You mean proration tended to increase the number 
of wells ? 

Mr. DeGolter. Proration at that time was based on the well as the 
individual unit, and as the number of wells increased and as the 
amount allowable to each well went down the producer countered by 
drilling still more wells, and the thing just went on. 



CONCENTRATION OP ECONOMIC POWER 7415 

There doubtless will be many people who will think that this opin- 
ion I have expressed of a well to 40 acres for East Texas, on the 
theory that it would be operated in a most efficient manner, as a 
unit operation, let us say, would be ridiculously low, but I don't 
think there would be many people, even of the ones who objected 
to my viewpoint, but what would agree that the present density of 
a well to 5-acre spacing is ridiculously high, and, of course, that is 
an average over all. In a good many spots there are several wells 
to an acre. 

Mr, Cox. Mr. DeGolyer, the other day after the conclusion of Mr. 
Dailey's testimony you called my attention to a statement made on 
page 16 of the mimeographed copy of his statement ^ which you said 
you would like to have an opportunity to comment on. Do you 
recall that? 

Mr. DeGolyer. Yes. Mr. Dailey merely states here in this state- 
ment that it was reported to him that I had called on some law firm 
which was representing them and complained to them about their 
representing him. Mr. Dailey has just been misinformed because I 
have never called on any law firm nor discussed Mr. Dailey with any 
of his legal staff. 

Mr. Cox. Is there any other comment at this time that you wish 
to make on any of the statements Mr. Dailey has made? 

Mr. DeGolter. I think I should like to make some comment. As 
a matter of fact, it is just as well to take this particular field as any 
other, to discuss some of these general principles we are trying to 
arrive at. 

The field by determination of the railroad commission has been 
put on a 40-acre spacing basis. The 40-acre basis didn't fit the land 
lay-out. Not only was it a misfit so far as Mr. Dailey was con- 
cerned but it was a misfit in a number of other places there. 

Mr. Dailey was offered, as I understand from him, and as I under- 
stood at the time, an opportunity to combine 20 of his acres with 
20 acres of the partnership 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 units. 

Mr. Cox. Forgetting about Mr. Dailey for the moment, in any field 
in which a spacing rule is adopted, isn't one of the problems how 
to deal with the man who doesn't have the required acreage? 

Mr. DeGolyer. Yes, sir. 

Mr. Cox. Because isn't it also true that the spacing rule by itself 
may to a certain extent impair his' bargaining position if he at- 
tempts to ? 

Mr. DeGolyer. Yes; that is right. 

1 "Exhibit No. 1178," appendix, p. 7520. 



7416 CONCENTRATION OF ECONOMIC POWER 

Mr. Cox. Certainly as opposed to interests with larger financial 
resources he is at a disadvantage, as far as bargaining is concerned. 

Mr. DeGolyer. I would say so, ' 

Mr. Cox. Do you have any suggestions as, to how that situation 
might be avoided and at the same time have a spacing rule which 
would accomplish the conservation end which you described? 

Mr. DeGolyer. I am not too well informed on this. Certain 
States have permissible pooling agreements and I believe certain 
other States have forced pooling, but as to the specific question, I 
think that the equity can be preserved by permissive pooling. That 
may still leave him at some disadvantage. All landowners and all 
producers, or many producers, many landowners, are going to be at 
a disadvantage under any serious attempt at conservation, whether 
it involves proration or not, if the standard, the thing they think 
about, is the good old days when they were operating under open- 
flow conditions. 

Mr. Cox. Do you think that disadvantage is just one of the prices 
we have to pay for conservation ? 

Mr. DeGolyer. I think that it is. 

Mr. Cox. This morning in the opening part of your statement this 
sentence occurs: "Current production approximately in balance with 
consumption is li/4 billion barrels annually or 31^ million barrels 
daily." I am not sure what inference if any should be drawn from 
the phrase "approximately in balance with consumption." Do you 
mean that that is all the oil that could be consumed? 

Mr. DeGolyer.^ No ; I don't mean anything more than I say. That 
particular part was simply an attempt to make a factual presenta- 
tion of the oil industry as I saw it and there is nothing hidden in 
the phrases as far as I know. It is approximately in balance at that 
rate. It is merely an attempt to express the magnitude of the 
problem. 

Mr. Cox. You don't mean by that if one and one-half billion bar- 
rels annually were produced that they wouldn't be consumed. 

Mr. DeGolyer. I certainly do not. 

Mr. Cox. You simply mean that the one and one-fourth that are 
produced are consumed. 

Mr. DeGolyer. More or less; yes, sir. 

Mr. Cox. You have owned oil wells and sold crude oil, haven't you? 

Mr. DeGolyer. Yes, sir. 

Mr. Cox. Whom do you sell it to ? 

Mr. DeGolyer. Do'you mean at the present time? 

Mr. Cox. Yes. 

Mr. DeGolyer. Well, I don't know exactly who it is, but I think 
I sell it mostly to smaller independents. I am not sure but what one 
of them is this Southport that Mr. Travis was formerly with. 

Mr. Cox. You don't sell any crude oil to the large integrated com- 
panies? 

Mr. DeGolyer. No, I don't; not any operation which I direct my- 
self. 

Mr. Cox. Do any of the operations in which you have a substantial 
Interest sell to them? 

Mr. DeGolyer. I believe I still have some contingent interests in 
the Old Ocean field and I believe that some oil is sold by them to 



CONCENTRATION OF ECONOMIC POWER 7417 

the Pan-American. I can't be certain about that. I think that is 
the case. 

Mr. Cox. Mr. Brown testified here the other day ^ that in his opin- 
ion the economic position was such that there could be no real bar- 
gaining between the buyers of crude oil and the independent oper- 
ators who were selling it. Do you agree with that estimate of the 
situation ? 

Mr. DeGolyer. Well, to my great regret I was forced into bar- 
gaining to sell to the Southport. The bigger companies didn't need 
my oil, I mean they had a posted price, but they were also securing 
all of the oil that they required at that posted price, so there was 
no room for a connection for me and I had to go right straight to 
bargaining. 

Mr. Cox. You mean they posted a price but they wouldn't buy your 
oil at that price? Is that right? 

Mr. DeGolyer. Well, I take it that the posted price is the com- 
pany's bid for oil, and I presmne that there is a limitation 6n the 
amount. I have always found as a practical matter that there is a 
limitation on the amount which they are prepared to buy. 

PRICE POSTING AND QUESTION OF PRICE LEADERSHIP 

Mr. Cox. What has been your experience as to the way prices of 
crude oil behave? Is there a system of price leadership in the oil 
field? 

Mr. DeGolyer. Well, I really don't know exactly what you mean 
by price leadership. 

Mr. Cox. I will put it this way. Is there a tendency for all of 
the buyers to follow the prices posted by one or two of the leading 
or larger companies? 

Mr. DeGolyer. I think that there is. There is a tendency for all 
the price postings to go together, if that is what you mean; some- 
times there is one company that is the leader, sometimes it is another 
leader, if you mean making the initial change at the time of change. 

Mr. Cox. Take a period of 6 years in your observation. How many 
different leaders have there been in a single field in that period ? 

Mr. DeGolyer. Well, I can't really say, I should imagine it would 
be a matter of four or five or six companies. 

Mr. Cox. In your experience the leadership shifts from one to 
another at, say, the rate of about one a year? Is that right? 

Mr. DeGolyer. No ; I wouldn't say that. I mean after all 

Mr. Cox (interposing). I am taking it on an average. 

Mr. DeGolyer. That implies some degree of rotation. I don't 
remember that the matter has ever been put to me before, and while 
I am trying to follow you as well as I can, I am guessing that it is a 
half dozen different companies, I remember that it isn't always the 
same company that raises or lowers the price, I can't go far enough 
to say that it is some specific fixed rate or in a changing order. I 
don't know about that. 

Mr. Cox. You sell crude oil in the Old Ocean field, don't you? 

Mr. DeGolyer. No. I was a partner in the enterprise. The man- 
agement was Harrison-Abercrombie, and crude oil was sold for my 
account. 



* SuDra. o. 7306 ftt sea. 



7418 CONCENTRATION OF ECONOMIC POWER 

Mr. Cox. How long was that sale made? 

Mr. DeGolyer. Oh, up to the time that I traded out of my position 
in the Old Ocean field, I would say that it had been going on about 
5 years or so in varying amounts. 

Mr. Cox. Wlio were the price leaders in that field ? 

Mr. DeGolter. Well, there weren't any. We sold that oil by 
negotiation. 

Mr. Cox. Was that all sold to independent refiners? 

Mr. DeGolyer. Until quite recently I believe practically all of it 
vas sold for export or to independent refiners or in some fashion of 
I he sort. 

Mr. Cox. Going back to the question I started with, th'-^n, I take it 
that you don't accept Mr. Brown's statement with respect to the 
bargaining power in the sale of oil. You think you have some bar- 
gaining power. Is that right? 

Mr. DeGolyer. Well, I have answered that to my great regret I 
have been compelled to exercise bargaining power. 

Mr. Cox. Have you ever sold any crude oil above the posted price? 

Mr. DeGolyer. Companies of which I have had the management 
have. 

Mr. Cox. You mean companies in which you have had an interest ? 

Mr. DeGolyer. Yes; compan