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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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i- .. — _ — 


^®^" JRE THE 





Public Resolution No. 113 
(Seventy-fifth Congress) 


PART 17-18 


OCTOBER 17, 18, 19, 20, 23, 24, AND 25, 1939 

i'rinted for tlie use of the Temporary National Economic Committee 

124491 WASHINGTON : 1940 


TEMPORARY NATIONAL'S. 113, 75th Cong.) 
(Created pursuant ta Public ^ 

Wyoming, Chairman 

JOSEPH C. O'MAHONEY. Senator from>kJti^Chaliman 

HATTON W. SUMNERS, Representative from Texas,*^. 

WILLIAM H. KING. Senator from Utah 

WILLIAM E. BORAH, Senator from Idaho 

CLYDE WILLIAMS. Representative from Missouri 

B. CARROLL REECE, Representative from Tennessee 

THTIRMAN W. ARNOLD. Assistant Attorney General 

♦WENDELL BERGE. Special Assistant to the Attorney General 

Representing the Department of Justice 

JEROME N. FRANK, Chairman 

♦LEON HENDERSON, Commissioner 

Representing the Securities and Exchange Commission 

GARLAND S. FERGUSON, Commissioner 

♦EWIN 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 


Representing the Department of Commerce 
JAMES R. BRACKETT, Executive Secretary 






Testliiiony — ^ ^ , . ** 

Cattell, Roscoe E., chief engineer, Petroleum and Natural Gas Divi- 
sion of the Technologic Branch, United States Bureau of 
Mines 9510-9580 

Del Sesto, Christopher, special assistant to the Attorney General, 

Departmviit of Justice 9606-9648 

Farish, William S., pres'dent. Standard Oil Co. (New Jersey), 
New York City 9651-9816 

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

Qq]q , 9376-9406 

La Fleiche, Pierre, Casper, Wyo 9406-9427 

Loos, Mrs. Mary C, office manager. National Association of Petroleum 

Retailers, Milwaukee, Wis — 9437-9438 

McLaughlin, Glenn E., assistant professor of economics. Hunter Col- 
lege, New York City 9510-0580 

Schuh, Wilmer R., chairman, board of directors, National Association 
of Petroleum Retailers, Milwaukee, Wis 9429-9507 

Soyster, Hale B., Chief of the Oil and Gas Leasing Division of the 
Conservation Branch, United States Geological Survey 9510-9580 

Stabler, Herman, Chief of the Conservation Branch, United States 
Geological Survey 9510-9582 

Watkins, Ralph J., economic adviser, National Resources Planning 

Board, Washington, D. C 9510-9583, 9603-9601 

White, Alfred G., chief economist. Petroleum Economics Division, 

Bureau of Mines, Washington, D. C 958^-9603 

Statement of — 

Henderson, Leon, commissioner. Securities and Exchange Commission, 
Washington, D. C 9605, 9762-9763 

McConnell. Robert, special adviser to the Secretary, Department of 
Commerce, Washington, D. C 9580-9581 

Conditions peculiar to the industry ir the Rocky Mountain States-— 9376 

Importance of Wyoming as an oil producing and reflniug State 9377 

Transportation methods used in exportation of petroleum products from 

Wyoming 9381 

Refining and marketing in Wyoming 9383 

Question of competition or price leadership in marketing in Rocky Moun- 
tain area ^_ 940C 

Wyoming gasoline prices 9404 

The petroleum industry In Wyoming 9406 

Production 9407 

Transporta^t^c n 9416 

Reflnlng-J 9420 

Marketing of Wyoming petroleum products 9420 

Aims and activities of the National Association of Petroleum Retailers— 9430 

Income of the association 0435 

Activities of officers of National Petroleum Retailers Association 9440 

Conservation of oil and gas pools 9512 

Engineering aspects of conservation 9515 

Conservation of reservoir energy w_ 9516 

Fluid-energy relations 9517 

The need for technical knowledge 9.T20 

Unit operation .. ^ , 9522 

Economic aspects of conservation and waste in oil production : . 9529 

Steps taken by Department of Interior toward conservation 9558 

Naval oil reserves 9559 

Passing of Gert^ral Leasing Law II__I i_ 9564 




Operating regulations under the General Leasing L.iw -. »^^ 

Biireauof Mine77stimaTe7of national demand and methods used in c^l- ^^^ 
culation — -— --'_- --y - g^^-^ 

Investment and earnings of the industry—- - - - 

Objectives and contributions of the industry - -^^ 

Preservation of free and open competition advocated-^ - -- — - ^ood 

Costs, profits, ultimate prices - ^^^4 

Benefits to the public claimed by the industry - - »ooy 

Question of concentration of control—— ^«9U 

Ability and integrity of corporate management ^^w 

Possible effects of integration . - — yo°4 

Opportunities for the independent in producing ... ._— - - awT 

Oil reserves - - ^^- 

Opportunities for the independent in refining :•_- - Jo95 

Ck)St of building refinery -- ■ -, 9697 

Transportation ^^^ 

Complaints of the retailer 9720 

Filling station leases — 9723 

Profits and losses in marketing by Standard Oil Co. . . : 9726 

Pipelines .9731,9753 

Opportunities for the independent in marketing 9737 

Retailing ^ __-_— 9738,9744 

The Iowa Plan 9739 

Patented processes for refining : — __ 9742 

Integration -.-j 9748 

Crude oil, posted prices, conservation : 9765 

Question of Goyernment intervention and regulation of conservation 9784 

Optimum production : — ^^- ^ 9796 

The future supply of oil ^^ ...l , 9797 

Relation of optimum production to price - 9798 

Meeting the industry's problems 9809 

Schedule and summary of exhibits ._ v 

Tuesday, October 17, 1939 ___ 9375 

Wednesday, October 18, 1939 9429 

Th\irsday, October 19, 1939 9509 

Friday, October 20, 1939 2 9557 

Monday, October 23, 1939 •_ 9649 

Tuesday, October 24, 1939 9707 

Wednesday, October 25, 1939 9765 

Appendix 9817 

Supplemental data '_ 9956 

Index-^ T 


Number and summary of exhibits 

1296. Memorandum for Senator O'Mahoney on Wyoming gaso- 

line prices, prepared by W. B. Watson Snyder, Special 
Assistant to the Attorney General, Department of Jus- 
tice, from answers to the Committee questionnaire for oil 

1297. Schedule of Wyoming crude oil prices for 1924 "to 1938- .. 

1298. Chart: Schedule, comparative, Midcontinent and Wyoming 

light oil. 
Chart: Schedule, comparative, Midcontinent and Wyoming 
black oil 

1299. Transcript of a hearing held before the attorney general of 

the State of Wyoming relative to gasoline prices in that 

1300. Letter, dated March 22, 1939, from E. K. Burlew, First 

Assistant Secretary and Budget Officer, Department of 
the Interior, to Senator Joseph C. O'Mahoney furnishing 
statements of accretions to the Reclamation Fund, by 
States a? of June 30, 1938, and by annual transactions of 
the Fund, actual for 1936, 1937 and 1938, and estimated 
for 1 938 and 1 940 

1301. Letter, dated November 16, 1936, from C. E. Arnott, vice 

president, Socony- Vacuum Oil Co., to Wilmer R. Schuh, 
chairman of the board of directors, National Association 
of Petroleum Retailers, enclosing a copy of "The Pump 
Handle" and calling attention to unfavorable publicity 
of the Iowa Plan 

1302. Letter, dated February 17, 1937, from E. Chat Shanks, 

executive vice president, to Wilmer R. Schuh, chairman 
of the board, National Association of Petroleum Retailers, 
relative to signs posted by Sinclair Oil Co. soliciting 
truck business 

1303. Letter, dated September 26, 1939, from Carl G. Hodges, 

executive vice president. National Association of Petro- 
leum Retailers, to J. R. Connery, Houston, Texas, ad- 
vising him that the Association has sold approximately 
25i000 service station manuals to oil companies 

1304. Letter, dated Jane 10, 1936, from E. Chat Shanks, executive 

secretary, to Wilmer R. Schuh, president, National Asso- 
ciation of Petroleum Retailers, relative to a proposed 
meeting to be attended by directors of the Association, 
whose travelling expenses Mr. C. E. Arnott, vice presi- 
dent, Socony- Vacuum Oil Co., "would be able to see 
. . . was paid" r 

1305. Letter, dated August 20, 1936, from E. Chat Shanks, execu- 

tive secretary, National Association of Petroleum Re- 
tailers, to Harry J. Kennedy, vice president. Continental 
Oil Co., thanking Mr. Kennedy for his cooperation in 
connection with "association work." 
Letter, August 13, 1936, from Harry J. Kennedy, vice presi- 
dent. Continental Oil Co., to E. Chat Shanks, executive 
secretary. National Association of Petroleum Retailers, 
enclosing a copy of a memorandum, dated August 13, 
1936, sent to division managers of the company, praising 
the work of the Association and stating the company's 
desire to cooperate with it. j 






on page 







' On fik with the C&maiiltec. 



Number and summary of exhibits 

at page 

on page 








Letter, dated August 11, 1936, from Harry J. Kennedy, vice 
president, Continental Oil Co., to E. Chat Shanks, execu- 
tive secretary, National Association of Petroleum Re- 
tailers, stating the company's willingness to be of assist- 
ance in organizing dealer units in "region five" 

Tabulation, prepared from records of the National Associa- 
tion of Petroleum Retailers, of the number of service 
station manuals published by the Association and sold to 
major oil companies 

Letter, dated March 25, 1937, from R. T. Haslam, Stand- 
ard Oil Co. of New Jersey, to Wilmer R. Schuh, president, 
National Association of Petroleum Retailers, relative to 
the market situation in the New York area 

Letter, dated March 2, 1937, from Wilmer R. Schuh, presi- 
dent. National Association of Petroleum Retailers, to 
Walter Teagle, Standard Oil Co. of New Jersey, relative 
to complaints of dealers about conditions in the New York 


. Appears in Hearings, Part 16, appendix, p. 9368. 

"Engineering Aspects of Waste and Conservation in the 
Petroleum Indut - y", by R. A. Cattell, chief engineer, 
Petroleum and Natural Gas Division, Bureau of Mines.. 

Abstract from Federal laws on unit operation 

^Printed separately as Hearings, Part 17- A. 

Chart: Comparison of total assets of major oil companies 
in 1929 and 1938 

Letter, dated October 20, 1939, from Ralph J. Watkins, 
economic adviser, National Resources Planning Board, 
to Senator Joseph C. O'Mahoney enclosing a statement 
summing up the testimony given before the Committee 

by Mr. Watkins and his associates 

Appears in Hearings, Part 14. 

Photostatic copies of the replies of the following oil com- 
panies to the Committee questionnaire on the subject of 
exchange of gasoline: 
Atlantic Refining Co. 
Cities Service Co. 
Consolidated Oil Corp. 
Continental Oil Co. 
Gulf Oil Corp. 
Ohio Oil Co. 
Phillips Petroleum Co. 
Pure Oil Co. 
Shell Union Oil Corp. 
Skelly Oil Co. 
Socony- Vacuum Oil Co. 
Standard Oil Co. of California 
Standard Oil Co. (Indiana) 
Standard Oil Co. of Ohio 
Standard Oil Co. of New Jersey 
The Texas Co. 

Tide Water Associated Oil Co. 
Union Oil Co. of California.. . 


















' The statement is printed as testimony on pp. 9603-0604 



Number and summary of exhibits 

OD page 

1322. Letter, dated October 19, 1939, from A. A. Stambaugh, vice 

president, Standard Oil Co. of Ohio, to Senator Joseph C. 
O'Mahoney in reply to testimony given before the Com- 
mittee on October 11, 1939 by George B. Ingram, presi- 
dent, New Deal Oil Co., Canton, Ohio 

1323. Prepared manuscript of William S. Parish, president. Stand- 

ard Oil Co. (New Jersey) 

1324. Chart: Posted prices of crude oil from 1919 — price of aver- 

age gravity of crude in districts. Humble Oil & Refining 
Co. postings . 

1325. Letter of President Calvin Coolidge to the Secretaries, of 

War, Navy, Interior and Commerce appointing them 
members of the Federal Oil Conservation Board 

1326. Table: Rate of return based on income, .1931-1938, for 

Ajax Pipeline Co .' 

1327. Table: Summary of pipe line investment and earning sta- 

tistics, 1923-1938, for Humble Pipeline Co 

1328. Transcript of opinion of Associate Justice Blair, Civil 

Court of Appeals of the State of Texas, in the case of 
Mrs. Nellie Pollard Dailey et al. v. Railroad Commission of 
Texas et al., granting Mrs. Pollard's application for a drill- 
ing permit 


Unnumbered. Letter, dated October 24, 1939, from Ralph J. 
Watkins, economic adviser. National Resources Planning 
Board, to Senator O'Mahoney enclosing a letter from A. C. 
Fieldner, chief of the Technologic Branch of the Bureau of 
Mines, as to the relative cost of gasoline made from petroleum, 
coal, or oil shale 

Unnumbered. Letter, dated May 6, 1940, from W. S. Parish, 
president, Standard Oil Co. (New Jersey), to James R. Brack- 
ett, executive secretary of the Committee, furnishing Mr. 
Parish's opinions as to possible clarifications of the Robinson- 
Patman Act 



















United States Senate, 
Temporary National Economic Committee, 

W ashing to7i, D. G. 

The committee met at 10:35 a. m., pursuant to adjournment on 
Monday, October 16, 1939, in the Caucus Room, Senate Office Build- 
ing, Senator Joseph C. O'Mahoney presiding. 

Present: Senators O'Mahoney (chairman), and King; Representa- 
tive Williams; Messrs. Berge, O'Connell, and Brackett. 

Present also: Representative Mapes (Michigan); Clarence Avild- 
sen, representing the Department of Commerce; Quinn Shaughnessy, 
representing the Securities and Exchange Commission; W. B. Wat- 
son Snyder, Hugh Cox, F. E. Berquist, Christopher Del Sesto, special 
assistants to the Attorney General; Leo Finn and Roy C. Cook, 
Department of Justice. 

The Chairman. The committee will please come to order. Mr. 
Ferguson, would you be good enough to be sworn? 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. Ferguson. I do. 

The Chairman. I may say as a preliminary, that the problem of 
petroleum in the public land States ajid in the Rocky Mountain region 
may be somewhat different from that in other parts of the country. 
The States as States, because so much of the petroleum resources are 
on public land, and because the Federal leasing law provides for a 
system of royalties to be paid to the Federal Government for use in 
development and reclamation, and for paj-ment to the States to be 
used for schools and it)ads, have the interest of a land owner in the 
development of oil. 

Then, of course, there is the interest which comes to any com- 
munity from the industrial processes involved in refining crude petro- 
leum. Finally, there is the interest which all the community has in 
the price which is paid for the finished product. The committee has 
invited Mr. Ferguson, who is the vice president of the Continental 
Oil Co., one of the principal operators in the petroleum industry in 
the West, to tell the story from his point of view. I understand that 
the Continental Oil Co. is interested in petroleum, in every phase of 
the entire industry from production to marketing. Is that correct? 

Mr. Ferguson. Tliat is correct. 

The Chairman. You are prepared to make your statement ? 

Mr. Ferguson. Yes. 

The Chairman. Would you please give your full name and position 
to the reporter? 




Mr. Ferguson. My name is W. H. Ferguson, I am now and for 

more than 15 years have been executive vice president of the Coii- 
tinental Oil Co. My office is in the Continental Oil Building at 
Denver, Colo., and I reside in Denver. While I devote varying 
amounts of time to the business and activities of the company in 
other parts of the United States, the greater part of my time is con- 
sumed in general supervision of the activities of the Continental Oil 
Co. in the Rocky Mountain States. I do not profess to be a technical 
expert in any branch of the business, but I am reasonably well in- 
formed with respect to the course of the oil industry in all of its 
branches during the last 20 years in the Rocky Mountain States. 

I was appointed and served as general chairman under the N. R. A. 
petroleum code for region No. 5, embracing the States of Utah, Idaho, 
Montana, Wyoming, and Colorado. 



Mr. Ferguson. Now, I should like if the committee will permit 
me, to make a br'.ef general preliminary statement outlining some of 
the conditions peculiar to the petroleum industry in the Rocky Moun- 
tain States. I believe such a statement will be helpful as a back- 
ground to such questions and answers as may follow, if I may be 
permitted to go on with the statement. 

The Chairman. That will be quite satisfactory, Mr. Ferguson. 

Mr. Ferguson. If the so-called Mountain or Rocky Mountain 
S'^ates be regarded as including the States of Idaho, Montana, Utah, 
Wyoming, Colorado, New Mexico, and Arizona, they cover an area 
almost exactly equivalent to one-fourth of the area of the continental 
United States. If the State of Arizona be excluded as tributary to 
the Pacific coast trade area, and if the eastern part of New Mexico 
be excluded as falling more naturally within the trade area of Texas, 
then there is left approximately 600,000 square miles, or about one- 
fifth the area of the continental United States. 

The present population of this vast area may be estimated on the 
basis of the 1930 census as between 3,500,000 and 4,000,000 people, or, 
rouglily, the equivalent of the city of Chicago. 

If Arizona and New Mexico be e_xcluded, the population of the 
remaining five States of Utah, Idaho, Montana, Wyoming, and 
Colorado, is substantially less than the population of the city of 

From a trade standpohit the entire area may be roughly divided 
into that portion west of the Rocky Mountains, which is more or less 
subject to Pacific coast trade influences, and that part east of the 
Rocky Mountains whicli is more or less subject to the trade influences 
of the central United States. 

Under the official census of 1930 there were only three cities in the 
entire aroa having a population of more than 50!000; Denver. Colo., 
287,261 : Salt Lake City, Utah, 140,267, and Pueblo, Colo., 50,096. 



Mr. Ferguson. The State of Wyoming is by far the most impor- 
tant oil producing and refining State in the entire area, although 
in recent years Montana has become increasingly important. Accord- 
ing to the census of 1930, Wyoming had a population of 225,565. It 
ranked e'ghth in area among the States of the Union and forty-eighth 
in population. The State of Nevada was forty-ninth. The District 
of Columbia was included as a State in these comparative figures. 
Wyoming had a population of 2.3 persons for each square mile of 
territory. Cheyenne is the capital and largest city in the State, with 
a population approximating 20,000. Casper is the second largest city 
in the State, with a somewhat smaller population. Aside from these 
two cities I do not believe there are any other cities in Wyoming with 
a population as great as 10,000 people. 

While these preliminary statistics are presented merely for the 
purpose of conveying some general idea of the nature of the moun- 
tain area, it must be quite apparent that in such a great expanse of 
territory so meagerly populated, the transportation facilities and 
transportation costs play a vital role in all business activities, includ- 
ing that of the petroleum industry. 

Although a commercial oil well was drilled near Florence, Colo., 
in 1861, only 2 years after the Drake well in Pennsylvania, and al- 
though the early explorers in Wyoming encountered evidences of 
petroleum as early as 1832, and sales of oil were made from mountain 
seeps in Wvoming in 1863 by the Seminole Indians to emigrants 
going over the trail to California, the production of crude oil in any 
important commercial sense commenced with the discovery of oil in 
the Wall Creek horizon in the Salt Creek field in the year 1908, and 
the construction of a pipe line from the Salt Creek field to Casper in 
the year 1911. From the first discovery and development of oil and 
gas in Wyoming to July 1, 1938, the best available records show a 
total of about 8,000 wells drilled, of which number approximately 
one-half were drilled on public lands of the United States and the 
other half of State and patented lands. These drilling operations 
led to the discovery of i07 separate oil and gas fields; but all of them, 
except Salt Creek and the recent discoveries of deeper production at 
Lance Creek, were comparatively small and scattered over all parts 
of the State. Salt Creek has produced over 280.000,000 barrels of 
light oil and is still producing approximately 15,000 barrels per day. 
Its real development commenced with the construction of the pipe line 
to Casper in 1911 and proceeded very rapidly thereafter throughout 
the period of the Great War. 

In 1922 the field was estimated to have a daily potential of 280,000 
barrels. In 1919 the refinerv at Casper of the Standard Oil Co. of 
Indiana (then Midwest Refinins: Co.), was refining about 60,000 
barrels per day of crude oil and was one of the largest, if not the 
larirest, refinery at that time in the United States. The Salt Creek 
^eld, at that time, was also the largest liffht-oil field that had ever been 
discovered. In the earlv 1920's the Texas Co. erected a refinery at 
Casper, as did the White Eagle Oil Co. (now Socony-yacunm) . Con- 
tinentiil Oil Co. at the same time enlarged and modernized its re- 
finery at Glenrock, Wyo., about 25 miles from Casper. There was 
also constructed at that period, a modern refinery at Parco on the 


Union Pacific Railroad by the Producers and Refiners Corporation 
(now Sinclair Refining Co.), and Midwest Refining Co. (now Stand- 
ard of Indiana), also acquired and enlarged a refinery at Graybull in 
the northwestern part of the State. The Texas Co. a little later 
constructed a second Wyoming refinery at Cody. These are • the 
largest refineries now operating in Wyoming. Although there is a 
total of 52 refineries in the State, all producing and selling gasoline, 
most of them are skimming plants and dispose of their product in 
the local areas immediately surrounding the plants. However, even 
the largest refinery, which is that of the Standard Oil Co. of Indiana 
at Casper, now runs only 6,000 barrels of crude oil per day. The 
refinery of the Continental Oil Co. at Glenrock runs less than 3,000 
barrels of crude oil per day. 

The present total production of crude oil in the State of Wyoming 
is approximately 60,000 barrels per day. About half of the produc- 
tion is refined ^vithin the State and the balance is exported, either by 
pipe line or rail, or both, to other States, and refined there. 

In 1938 the total consumption of gasoline in the State of Wyoming 
was 63.376.600 gallons. There was manufactured in the State more 
than 300,000,000 gallons; 244,569,000 gallons were exported to other 
States as follows: 

Colorado .-_ 71,432,000 

If I may be permitted, I will put these statistics in round numbers 
rather than carrying them to their conclusion. 
The Chairman. That will be quite all right. 
Mr. Ferguson. 

Idaho 18,219,000 

Iowa 15, 708 

Kansas „ 856 

Senator King. Thousand? 
Mr. Ferguson. No ; just 856. 

Minnesota ^_ 20,700,000 

Montana 36,000,000 

North Dakota 24,000,000 

Nebraska 25,000,000 

South Dakota 44,000,000 

Utah _ 9,000,000 

or a total of 244,569,305 gallons exported from the State as against 
the consumption within the State of 63,000,000 gallons. 

The Chairman. Over what period ? 

Mr. Ferguson. 1938, 1 year. 

The Chairman. How does that compare with the trend over a num- 
ber of years prior to 1938? 

Mr. Ferguson. I should say the consumption in the State of Wvo- 
mmg has enjoyed normal increases over a period of vears. So far 
as the exports from the State are concerned, I should' say that they 
were very much larn-er in the earlier years when the refineries were 
operating at a very much higher rate'than they are now. 

The Chairman. That is the fact, is it not, that the total amount of 
gasoline exported from the State is considerably less now than it 
was a few years ago when the Casper refineries 'were operating at 
capacity, or near capacity? 

Mr. Ferguson. I think that is true. 


Senator King. Do your statements show the number of barrels of 
crude oil that were exported from the State? 

Mr. Ferguson. In round figures only. The total production of the 
State is a little over 60,000 barrels per day now, and about one-half 
of that, as nearly as I can ascertain, is refined in the State, and the 
other half is exported from the State. 

Senator King. Are the exports from the State of the crude oil 
increasing or diminishing? 

Mr. Ferguson. They are increasing. The reason for that I will 
try to develop as I go along. 

The refining of petroleum products is by far the leading manufac- 
turing industry of the State. According to the Census of Manufac- 
tures, United States Bureau of the Census, in 1937 the value of the 
products of all manufacturing industries in Wyoming was $49,128,00(3, 
of which the refined products of petroleum amounted to $29,993,000, 
or 61.05 percent of the total. 

Senator King. The greater part of that would be gasoline? 

Mr. Ferguson. Yes, sir. 

Although oil refining is the leading industry of California, it rep- 
resents only 12.28 percent of its manufacturing industry. In Louis- 
iana petroleum refining is also the leading industry but represents 
only 21 percent of its total manufactured goods. In Oklahoma oil 
refining is again the leading industi*y but represents only 39 percent 
of its total manufacturing. In Texas it is also the first industry but 
represents only 43 percent of the value of all manufactured products. 

These statistics are submitted merely for the purpose of showing 
the comparative importance to the State of Wyoming of its refineries 
and refining activities, and the necessity if the industry is to continue 
to operate at its present capacity of selling outside of the State ap- 
proximately 80 percent of its refined products. 

It will be observed from the tabulation showing the States into 
which Wyoming gasoline is exported that most of the products sold 
outside of the State must be sold in States to the east and south 
which also have available as a source of supply the entire Mid-Conti- 
nent area. 

Speaking generally in the other refining areas of the United States, 
such as the Mid-Continent, the Gulf Coast, Atlantic Seaboard, Cali- 
fornia, the refiner is able to add his transportation cost to market in 
arriving at his delivered price. 

The Chairman. Before you enter that phase, may I ask you if you 
can state v^iat refineries do the exporting of gasoline from the State ? 

Mr. Ferguson. The refineries which do the exporting from the 
State are naturally the larger refineries which are operated by the 
major companies. The smaller refineries usually limit their capacity 
to the market available within a very narrow transportation radius. 

The Chairman. Well, if I were to name them as the Continental, 
the Standard of Indiana, the Texas, and the Sinclair, would I name 
the companies which export practically all of the gasoline? 

Mr, Ferguson, You would if you add the Socony-Vacuum Co. 

The Chairman, The Socony-Vacuum Co, also? 

Mr, Ferguson, Yes, 

The Chairman, Where does the Socony-Vacuum operOite? 


Mr. Ferguson. They have a refinery at Casper. It was originally 
built by the White Eagle Oil Co. and taken over by the Socony- 

The Chairman. Do you know the capacity of that? 

Mr. Ferguson. I don't know the exact capacity of any of the refin- 
eries other than our own. 

The Chairman. So that we have approximately six major com- 
panies which manufacture and export practically the entire amount 
of gasoline which is shipped out of the State of Wyoming? 

Mr. Ferguson. I think that is a correct statement, if you say prac- 
tically the entire amount. There are small refineries that export 
from the State. For example, there is a refinery at Cody which 
belongs to the Husky Refining Co. I think it exports gasoline into 
Montana, and there are other refineries on the borderline of the State 
that export possibly into the Dakotas and into Nebraska. But I 
think your statement is substantially correct when you say that prac- 
tically all of the gasoline exported is exported by the major 

Tlie Chairman. The exportation of these small refineries is in- 
significant in the total picture? 

Mr. Ferguson. I think that is correct. 

The Chairman. Now then, with respect to the exportation of crude 
oil for refining, what companies do that? 

Mr. Ferguson. V^ell, of course the producers of crude oil are 
both major comparies and independents, and so far as crude oil is 
concerned in export, it would be difficult to segregate the crude oil of 
an independent producer or a major producer, or any other kind of 
producer. He sells his crude wherever he has a market, and sells it in 
the field, so it is immaterial to him where the purchaser may take it. 
I might say that the principal purchasers of crude for exportation, 
outside of the State, are the Standard Oil Co. of Indiana, wh"ch 
moves crude to Sugar Creek and Whiting; the Continental Oil Co. 
which moves crude to Denver; the Bay Petroleum Co. at Denver, 
which also purchases crude in Wyoming and moves it to Denver, and 
there are two other local refineries in Denver who buy Wyoming 
crude and move it into Denver. 

The Chairman. Wliat is the Bay Petroleum Co.? 

Mr. Ferguson. It is a refining company. 

The Chairman. Major or minor? 

Mr. Ferguson. Well, I should say it would be classed as a minor. 

Tlie Chairman. It is an independent? 

Mr. Ferguson. It is an independent. 

Tlie Chairman. It is not affiliated with any of the integrated 

Mr. Ferguson. No. 

The Chairman. And the other two, what are the names of those? 

Mr. Ferguson. One is the Perry Refining Co., which is a small 
independent refinery in Denver. The other is the Oriental Refinery, 
which is a small independent refinery in Denver. 

The Chairman. So that 

Mr. Ferguson (interposing). I might finish. In addition to that 
there has been exported within recent months oil to Pocatello, Idaho, 
by the Idaho Refining Co., which is also a small independent refinery 
there. I do not think of any others, although tliere may be some. 


The Chairman. So that without considering now the ownership 
of the oil when produced, practically all of the exportation of crude 
oil, like practically all the exportation of refined gasoline, is done by 
the majors? 

Mr, Ferguson. I should say the greater part of the exportation is 
by the major companies, except that the amount exported by the 
Bay Petroleum Co. should not be underestimated. They bring more 
oil into Denver to their refinery in Denver than the Continental Oil 
Co. brings into its refinery in Denver. 

The Chairman. Where does the Bay purchase its oil ? 

Mr. Ferguson. It buys its oil from independent producers in the 
Lance Creek field. 

The Chairman. Does it have any production of its own? 

Mr. Ferguson. No. 

transportation methods used in exportation of petroleum products 

from wyoming 

Representative Williams. In that connection, what is the method 
of transportation? 

Mr. Ferguson. The method of transportation now? 

Senator King (to Representative Williams). Of crude oil or 

Representative Williams. Both the crude and gasoline. 

Mr. Ferguson. The method of transportation for the crude oil 
exported from the State is now largely pipe-line transportation. 
There is a pipe line from the State running back to Freeman, Mo., 
which makes available Wyoming crude for a refinery near Kansas 
City and also for the refineries in Chicago. There is a pipe line con- 
structed last year from a Wyoming field' to Denver, Colo.- Most of 
the oil exported is now moving by pipe line. Formerly it moved to 
a considerable extent by rail. It still moves to a considerable extent 
by rail from fields along the Union Pacific Railroad to the refinery of 
the Utah Oil Refining Co. in Salt Lajce City, but the Utah Oil Refin- 
ing Co. is now engaged in the construction of a pipe line from the 
Wyoming fields to its Salt Lake refinery. 

Representative Williams. Who own these pipe lines? 

Mr. Ferguson. The pipe line running east to Freeman, Mo., is 
owned by the Stanolind Pipeline Co., a subsidiary of the Standard Oil 
Co. of Indiana. The pipe line running to Denver is a ioint enterprise 
owned by Continental Oil Co. and C. U. Bay of the Bay Petroleum 
Co., and interests related tO' the Minelousa Oil Co. from whom Bay 
buys his crude in the Lance Creek field. 

Representative Williams. Does anyone else use those pipe lines 
except the owners ? 

Mr. Ferguson. The line east to Freeman, Mo., I believe is not used 
by anybody except the Standard Oil Co. of Indiana. The line to 
Denver is used not only by the owners but also, by any independent 
refiner who desires to transport oil through it. For example, at the 
present time the Perry Petroleum Co. in Denver is transporting oil 
through it; the Oriental Refining Co. in Denver is transporting oil 
through that line. In addition to that the Idaho Refining Co. of 
Pocatello transports oil through the line to Cheyenne, and there loads 
it out by rail. 


Representative Williams. Now, going to the gasoline transporta- 
tion, is that done through pipe lines, too? 

Mr. Ferguson. There is no gasoline pipe line at all that I know of 
in the Rocky Mountain area. 

Representative Williams. How is that transported? 

Mr. Ferguson. It is transported either by rail or by truck. 

Representative Williams. Do you know what part of it is by 
truck, about, what relationship or percentage? 

Mr. Ferguson. I can't answer that. 

I should say, however, that the greater part of it is still transported 
by rail from Wyoming. 

Representative Williams. Is there any limit to the distance in 
which those trucks operate? 

Mr. Ferguson. Well, probably some sort of an economic limit that 
they are called upon to operate over, bnt I suppose a truck would 
go from the Atlantic to the Pacific coast if it had to. 

Representative Wiixjams. What is the practice, if you know, in 
that area? 

Mr. Ferguson. With respect to trucking? 

Representative Williams. Yes; with reference to the area, the 
limitations, within a limit of 50, 100, 150, 200 miles? 

Mr. Ferguson. I should say that truckers in that territory fre- 
quently truck gasoline four or five hundred miles. For example, the 
entire eastern part of Colorado is subject to competition from the 
Mid-Continent area. That competition has grown to be mainly the 
competition of Mid-Continent gasoline being trucked into Denver 
and the eastern Colorado area from refineries in Kansas and Okla- 
homa, that everage 450 miles distant. 

Representative Williams. Are those by contract or common car- 
riers, or how ? I mean who owns the trucks ? 

Mr. Ferguson. So far as I know, none of that trucking is done in 
trucks owned by the major oil companies. There may be some of it, 
but I have no recollection of any now and the volume would be 
inconsiderable, but trucking is done by two types of independent 
truckers : First, the public carrier type who charges a certain rate for 
the transportation, and, secondly, by jobbers who send their own 
trucks to the Kansas and Oklahoma refineries, buy the gasoline at the 
refinery, and truck it themselves in their own trucks to their own 
bulk plants and stations. You have the public carrier type of truck- 
ing, and you have the jobber trucking for himself. 

Representative Wili.iams. None of the companies, so far as you 
know, own their own trucking facilities or any subsidiary company 
of them operating a fleet of trucks for the transportation of gasoline? 

Mr. Ferguson. Not in the Rocky Mountain, area. There may be 
some exceptions to that which do not occur to me now, but if there 

The Chairman (interposing). Does the Continental do any truck- 

Mr. Ferguson. The Continental does no trucking. If there are 
exceptions, they would be minor. 

I would like to repeat, Mr. Chairman, the first part of this para- 
graph m order to tie it up with the last paragi-aph. 



Mr. Ferguson. It will be observed from the tabulation showing 
States into which Wyoming gasoline is exported, that most of the 
products sold outside of the State must be sold in States to the east 
and south, which also have available as a source of supply the entire 
Mid-Continent area. Speaking generally in the other refining areas 
of the United States, such as the Mid-Continent, the Gulf Coast, 
Atlantic seaboard, and California, the refiner is able to add his trans- 
portation costs to, market in arriving at the delivered price. The con- 
trary is largely true in Wyoming. The farther Wyoming gasoline 
moves to the east or south into Colorado, the lower the price at which 
it must be sold in order to meet the competitive supplies from other 
sources. The State of Wyoming as a matter of long-continued State 
policy running through a number of State administrations when dif- 
ferent political parties were in office has insisted upon the refining 
within the State of Wyoming of the crude oil produced in the State 
of Wyoming. There is a provision in all of the State oil and gas 
leases that tne oil produced from the State lane' nust l^e refined in 
Wyoming. A single refinery with modem cracking equipment run- 
ning from 6,500 to 7,000 barrels per day will supply the entire con- 
sumption of the State of Wyoming. The maintenance of the refining 
industry, therefore, at its present level obviously compels the refin- 
eries to operate on average net-backs or to obtain at the refineries an 
average realization which they hope may exceed their costs. Wliile 
each refinery in Wyoming has a different radius of distribution, both 
within and without the State, I should say that the average realiza- 
tion for 70-72 octane gasoline, at the larger refineries, would fall some 
place between 5 and 6 cents per gallon. 

The cost of producing gasoline in Wyoming is higher than it is 
elsewhere in the United States, for a number of reasons, among which 
may be mentioned the large number of skimming plants, the higher 
wage scales, the small capflcity of the refineries and the higher cost 
of raw materials largely because of transportation rates. 

The business also is more seasonal than that of any other State 
of the Union, In 1937 gasoline consumption in Wyoming in the 
month of January was 3,278,000 gallons and in thg month of August 
of the same year it was 8,400,000 gallons. 

I might add by way of explanation here that the reason business 
is more seasonal in Wyoming than in any other State in the Union 
is not due solely to the weather, but a great part of Wyoming's gaso- 
line business comes from tourists going through the State, to Yellow- 
stone Park in the summer, which consequently raises the consumption 
in the summer to a very high seasonal level. 

The Chairman. But the consumption within the State is only a 
small proportion of the production within the State, and the bulk of 
our gasoline is exported. Now what can you say about the swings 
in the market for that exported gasoline, which is more- important m 
its effect upon refining ? 

Mr. Ferguson. I had charts made up to show the seasonal varia- 
tions of the entire territory in which we operate. I didn't want to 
lengthen the memorandum which I am reading by adding to the 
charts, but from those charts it would appear that in the territory 
ta which Wyoming's gasoline 'is exported, seasonal variations are 

12M91 — rfO--pt 17 sec 


much higher than the average of the United States. I refer to the 
States of North Dakota, Minnesota, Colorado, and other States where 
climatic conditions are not materially different from conditions in the 
State of Wyoming. 

By way of illustration of seasonal variations. Continental Oil Co. 
has a service station at Cody, Wyo., one of the entrances to Yellow- 
stone Park, which does a business durhig the winter months of about 
2,500 gallons per month, and during the three summer months a busi- 
ness of about 25,000 gallons per month. These wide seasonal varia- 
tions make it necessary for the refineries, if they are to operate 
evenly throughout the year so as not to disturb unduly continuous 
employment, to store during the winter months substantial excess 
quantities of gasoline in preparation for the high demand the fol- 
lowing summer. 

The carrying of such stocks involving tankage, shrinkage, insur- 
ance, taxes, and so forth, is an added element of cost to the manu- 
facturer. The refinery employees in the larger refineries of the State 
work 36 hours per week and their average annual income in Wyoming 
is $1,811.40, which is higher than any other State in the Union with 
the single exception of the State of New Jersey where the average 
annual wage of refinery workers is $1,870.95. All other labor em- 
ployed in Wyoming by manufacturing industries averages an annual 
wage income of $1,375 against the average for refinery workers of 

T^^e cost of producing crude oil is considerably higher in the State 
of Wyoming than in many of the other oil-producing States with 
the possible exception of Montana. Casing and other heavy ma- 
terials have to be transported longer distances at relatively high 
freight rates. The winters are frequently long and hard, interrupt- 
ing and increasing the cost of operation. Most of the fields are 
isolated and remote from any town or railroad so that dwellings 
have to be erected for workmen, special school and hosp tal facilities 
furnished, as well as light, heat, and water. Royalties paid the 
United States are much higher than are customarily paid to land- 

The ordinary costs of marketing petroleum products are also higher 
in the State of Wyoming than in any other State with the possible ex- 
ception of Montana, Utah, and Idaho, where conditions are some- 
what similar. 

The Continental Oil Co. has 55 bulk plants in the State of Wyo- 
ming through which it distributes petroleum products over an area 
of 97,000 square miles. It is the largest single marketer in the State, 
although its total gallonage is less than 13 000,000 gallons per year, 
or approximately its sales in the city of Denver alone. The dealers 
in Wyoming are now very generally taking a margin which averages 
about 5 cents per gallon. Their business is very seasonal. There are 
approximately 1,300 licensed retail dealers in "the State. They are 
largely dependent for their living upon the business of the three or 
four summer months. Consumption of gasoline in the State per reg- 
istered motor vehicle is also relatively high. Because of the large 
number of bulk plants necessary to serve the State, the gallonage at 
each point is small. In order that the commission agent operating the 

» See testimony and footnote 1, p. 9396, Infra. 


bulk plant may make a living, the rate of commission paid him must 
necessarily be h'gher to compensate for the small volume. The jobber 
operating in Wyoming usually receives a margin of 2.5 cents per 

The Chairman. How does that compare with thr margin paid in 
Montana ? 

Mr. Ferguson. I think the margin in Montana today is about 3 
cents, but I am not sure of it. 

The Chairman. How about Colorado? 

Mr. Ferguson. I am coming to some comparisons. And unless he 
has only one bulk plant which he operates hi'nself, he must pay out 
of his 2.5-cent margin a commission approximating on the average 2 
cents per gallon to the commission agent operating the bulk plant and 
making deliveries to dealers, farmers, and other consumers. 

The other one-half cent or three-quarters of a cent, depending on 
the commission agent's commission, must cover a return on his invest- 
ment in the bulk plant, delivery equipment, inventory losses, credit 
risks, advertising, sales effort, insurance, and other items of expense. 
Compared to more populous areas in the East, the high jobber and 
dealer margins alone necessitate a higher consumer price of some 1.5 
to 2 cents per gallon, depending on the points with which the compari- 
son is made. In the State of Nebraska, for example, into which con- 
siderable Wyoming-made gasoline is shipped, the average dealer's 
margin is about 3.5 cents and the average jobber's margin is about 2 
cents, which aggregate 2 cents less than the corresponding margins in 
the State of Wyoming. 

I do not believe that anybody could successfully prove that any 
Wyoming jobber is making an excessive amount of money on his 
2.5-cent margin or that any Wyoming dealer is getting rich, even if 
he takes a 5-cent margin. 
The Wyoming State tax is 4 cents, and the Federal tax is 1 cent. 
The State tax is higher than in some other States, but it is also lower 
than a number of States. Frequently, however, comparisons are made 
between gasoline prices in Wyoming and some other State where the 
State tax is lower without due allowance being made for that differ- 
ence in cost. 

The Continental Oil Co. operates only one refinery in the State of 
Wyoming, which is located at Glenrock, Wyo., about 25 miles from 
the city of Casper. All of the refined products which we manufacture 
at Glenrock are shipped out of the refinery by rail. The average 
freight rate on gasoline to all of our bulk plants in the State of Wyo- 
ming is slightly less than 2.5 cents per gall(5n. About 70 percent of 
the output of the refinery is .shipped into surrounding States where 
the freight rate to market is higher than 2.5 cents per gallon. Most 
of the small independent refiners make deliveries from their refineries 
by truck, and in many instances directly from the refinery to the 
dealer, short-circuiting the bulk plant which the larger competitors 
must maintain in order to maintain a State-wide service and to handle 
lubricating oils and greases, wax, and other petroleum products. 

Truck transportation in the State of Wyoming is much cheaper 
than the prevailing scale of railroad rates. A considerable part of 
this transportation saving is passed by local competitors to the public 
in lower prices. The railroad rates on petroleum products into the 
Rocky Mountain area, both from the Mid-Continent, and California, 


are now receiving serious consideration by the railroads, who con- 
template putting into effect drastic reductions to meet trucker com- 
petition, as they have already done in other parts of the United 
States. Similarly, intrastate rail rates from the Wyoming refineries 
must be reduced to meet trucker cost or it is inevitable that all the 
refineries in the State will be compelled to resort to deliveries by 
truck from their refineries. Such reductions, when made, should in- 
volve a material saving in transportation, which will undoubtedly be 
passed on immediately to the consumer because of the competitive 
forces at play. 

There is a statute in Wyoming, as in many other States, which 
compels every refiner in the State to establish a base price at his 
refinery and to add the transportation cost as he moves out from the 
refinery to his price. The statute, however, specifically permits the 
refiner to sell at a lower price in any locality if necessary to meet 
competition either within or without the State. 

I might say that there is some confusion in the Wyoming statutes 
pertaining to this matter, but I think without attempting to analyze 
and discuss it at length, the net effect of the statute is either to speci- 
fically permit the meeting of competition either within or without the 
State or to impliedly permit it by making the offense the selling at 
lower prices with the intent of destroying competition. 

The Continental Oil Co. establishes a base price at its refinery at 
Glenrock, but is compelled to sell its products at many points in the 
State at" prices substantially lower than its Glenrock price plus 
freight in order to meet local competition. 

As above stated, there are 52 refineries in the State. Each has a 
transportation advantage within a local radius of distribution. As 
against this, the cost of manufacture of the skimming plants is rela- 
tively higher than the costs of those few refineries having modern 
cracking units. 

The Chairman. What is the base price at Glenrock? 

Mr. Ferguson. We have a base tank-wagon price at Glenrock of 
17.5 cents. 

The Chairman. Well, the tank-wagon price is not what you ordi- 
narily call base price, is it? 

Mr; Ferguson. We sell to jobbers in Wyoming because there is 
no spot market of any kind there, at a margin under our tank-wagon 
price, so all of our quotations at wholesale to jobbers are on the 
basis of 2.5 cents under our tank-wagon price at point of delivery. 

The Chairman. Yes; but you make up that tank-wagon price by 
taking in certain factors, one of which is this base price of which you 

Mr. Ferguson. Yes. 

The Chairman. So that is what I was trying to determine. What 
is the base price at Glenrock? 

Mr. Ferguson. If you take the 2y2-cent jobber margins from the 
I7y2-cent price, you have a 15-cent price. If you then deduct the 
5 cents for the State and Federal taxes you have a 10-cent base price 
at Glenrock. 

The Chairman. In making response to the questionnaire, the Con- 
tinental Oil Co. submitted certain typical methods of determining 
what the tank-wagon price is.^ For example, you gave this method 

1 See Hearings, Part 14-A, p. 8128. 


at Thermopolis, Casper basing price 9 cents, freight 1.35, State and 
Federal taxes 5, margin to cover marketing cost 3, making a total of 
18.35 which resolved into a tank-wagon price of 181/2 cents. So that 
at Thermopolis you took the Casper basing price of 9 cents.* Now 
what is the comparable basing price at Glenrock ? 

Mr. Ferguson. The basing price at Glenrock today would be 10 
cents on a comparable basis. 

The Chairman. Why would it be 10 cents at Glenrock and 9 cents 
at Casper, only about 50 miles away, both of them on the railroad? 

Mr. Ferguson. I think since that questionnaire was answered there 
has been a half-cent increase in prices in Wyoming that followed the 
increase generally by the Sinclair Co. all over the United States, so 
that would leave a half-cent to be accounted for. 

The Chairman. Disregarding that increase, perhaps you could give 
the basing point or explain the difference between the two as of that 

Mr. Ferguson. The comparable basing point price to the answers 
to that question at Glenrock would be 9i/^ cents, and the reason we 
must base our prices on Casper when we go west and north of Casper 
is because the competitive basing point prices at Casper involve a 
freight rate differential against Glenrock of 0.36 percent, which we 
translate into the nearest one-half cent. In other words, we cannot 
sell west or north of Glenrock at a price higher than the Casper 
price, plus freight, because that is our competition; that is part of 
our competition, 

I believe, Mr. Chairman, that there are a number of things of that 
sort which you will want to develop, and that it might be well to let 
me finish the statement I have, which is very brief. 

The Chairman. Very well ; that will be quite satisfactory. 

Mr. Ferguson. Because some of them are anticipated in this state- 

The volume and intensity of competition in the marketing of petro- 
leum products in the State of Wyoming, both between the major 
company and the independents, and among the major companies and 
the independents, is not different in character or degree from that 
prevailing generally in other parts of the United States. If any- 
thing, the struggle for gallonage is more intense because of the large 
number of local refineries in proportion to the small total of available 
gallonage. There has been talk, at times, that the price of gasoline 
in Wyoming was based upon Mid-Continent, plus freight, and that 
the people of the State were therefore not receiving any benefit from 
their local crude supplies and refineries. I had occasion quite recently 
to make a comparison between what the prices would be at our 55 
bulk plants in the State of Wyoming if based upon Mid-Continent, 
plus freight, and what they actually are. The study indicated that 
prices, at all the points in Wyoming where we operate, for Conoco 
Bronz-z-z gasoline (70-72 octane) averaged 2.24 cents per gallon 
lower than Mid-Continent, plus freight, and that our prices for our 
demand or lower octane gasoline averaged 2.48 cents per gallon lower 
than what is commonly referred to in Wyoming as the Oklahoma- 
plus basis. 

It is a somewhat singular thing, but in conformity with the gen- 
erally high standard of living in Wyoming, 80 percent of the gasoline 
which we sell in the State is either Conoco Bronz-z-z (70-72 octane). 


or ethyl gasoline, whereas in Colorado, an adjoining State, only 73 
percent of our total volume is Bronz-z-z and ethyl gasoline. It 
would seem that the people of the State, although afforded an op- 
portunity to buy a somewhat lower octane gasoline at 2 cents per 
gallon cheaper, prefer to pay more and buy the premium products. 

In July 1922 the retail price or gasoline to the consumer at Casper 
was 211/^ cents. The date is July 1922. Today it is 22 cents for 
70-72 octane gasoline and 20 cents for a lower octane gasoline which 
is, nevertheless, much superi ^ to the only grade of gasoline available 
to the consumer in 1922, The dealer's margin in 1922 was 2 cents. 
Today the dealers in Casper are taking a margin of 414 cents. In 
1922 there were no State or Federal gasoline taxes in Wyoming. 
Today 5 cents must be added to the consumer price for State and 
Federal taxes. In spite of the increase of 5 cents in State and Fed- 
eral gasoline taxes, and a 2I/2 cents in dealer's margin, gasoline 
of a comparable grade is sold at Casper today for II/2 cents a gallon 
less than in July 1922. In other words, in spite of an enormous im- 
provement in the quality of the product, there has been a real decline 
over that period of 9 cents per gallon in price. This accomplish- 
ment, however, is wholly obscured so far as the public is concerned, 
by the increase in taxes and the dealer's margin. 

The Chaieman, Does the Continental in operating its own retail 
stations take the same dealer's margin that is taken by the inde- 

Mr. Ferguson. Continental does not operate any retail stations. 
I think it was .about 1935 that we concluded to go out of the retail 
end of the business entirely. We had leased many of our stations 
in tlie smaller towns before that time, but at that time we completed 
our retirement from the retail end of the business. We no longer 
have any control over the dealer's margin at our stations or at our 
dealers' stations. 

The Chairman. You have no company- operated stations in the 
Rocky Mountain region at all? 

Mr. Ferguson. We have no company-operated stations anywhere 
in the Rocky Mountain region. 

The Chairman. You do have leased stations, do you? 

Mr. Ferguson. The stations which we formerly owned we have 
leased and they are operated independently by the lessees. 

The Chairman. Do you own more or fewer stations than formerly 
when you were operating? 

Mr. Ferguson. In the Rocky Mountain States I do not believe we 
have built a service station for 6 or 7 years. 

The Chairman. Have you purchased any? 

Mr. Ferguson. I would hesitate to say that we had not purchased 
a single station during that period, but our policy has been so strongly 
against doing so that I would doubt if we had purchased more than 
one or two. 

The Chairman. Could you say whether or not you have more or 
less leased outlets than you had operated outlets when you were oper- 
atipg the stations vourself ? 

Mr Ferguson. We have less leased outlets, because we have aban- 
doned a number of service stations due to changes in highways or other 
conditions of that sort. 


The Chairman. Then the Continental is leasing fewer stations 
today than it operated formerly before the leasing plan was adopted ? 

Mr. Ferguson. In Wyoming. 

The Chairman. In Wyoming? 

Mr. Ferguson. I think that is correct. 

The Chairman. And what is the fact with respect to Colorado? 

Mr. Ferguson. I think that would be the fact in Colorado. 

The Chairman. And Utah? 

Mr. Fekguson. I think it would be the fact in Utah. In all of the 
Rocky Mountain States. I think we have constructed during that 
period a number of stations in other areas where we are marketing, 
tributary to the Great Lakes pipe line and areas in Virginia and the 
East, to furnish an outlet for our Baltimore refinery. 

The Chairman. In answer to my question a moment ago you said 
that the basing price at Glenrock was, at the time this questionnaire 
was answered, 9% cents. What goes into the determination of the 
basing price? 

Mr. Ferguson. In arriving at a basing price for our refinery at 
Glenrock we take into consideration the net back at the refinery on 
all the gasoline we sell, and we figure, so far as we are concerned, we 
must have a basing price of that amount in order to give us an 
adequate average netback on all of our business. 

The Chairman. Now, by netback you mean the price which the 
refiner receives at the refinery? 

Mr. Ferguson. That is correct. 

The Chairman. What relation does that have to the cost? 

Mr. Ferguson. Tlie average netback, of course, has a very im- 
portant relation to the cost, because if the average netback is less 
than the cost, you will lose money at the refinery. 

The Chairman. Naturally. 

Mr. Ferguson. The Glenrock basing price is one factor contrib- 
uting to the average netback, and to that extent is related to our cost 
and our hope for profits. 

The Chairman. Now, I hope you have more than a hope in operat- 
ing the refinery. 

Mr. Ferguson. Sometimes we have more than a hope, and some- 
times we have less than a hope.- 

The Chairman. Well, the questionnaire which was submitted to 
the committee indicated that the cost per gallon at Glenrock was 4.87, 
something less than 5. 

Mr. Ferguson. That is for Conoco bronze gasoline? 

The Chairman. Wo]], I didn't examine this questionnaire myself. 
Do yon remember, Mr. Snyder, what that indicated ? 

Mr. Snyder. They didn"'t indicate the brand. They said it was the 
cost of a gallon of gasoline at the refinery gate, exclusive of any 
selling expenses. 

The Chairman. And what was the question? 

Mr. Snyder. Summary cost statement of each domestic refinery 
operated bv reporting company or by its subsidiaries or affiliates for 
the year 1938. showing tlie principnl elements of cost determining the 
cost of a ga]lon of gasoline and fuel oi] separately at the refinery 
gate, exclusive of any selling expenses. They showed 4.87 cents ; .then 
if you add taxes and depreciation on a unit basis, that is adding 


22 cents, makes a total of 5.09 cents, just slightly over 5 cents, includ- 
ing depreciation and taxes. 

Mr. Ferguson. With respect to that answer which I have probably 
seen but have no recollection of at this moment, I might express my 
personal opinion that all figures of costs in making gasoline of that 
land are misleading and worth very little. For example, at Glen- 
rock, we move our own Lance Creek crude through our own pipe line 
to the refinery. Due to the isolation of the Lance Creek field the 
price of crude oil in the Lance Creek field on the gravity basis is 
33 cents a barrel less than it is in the Salt Creek field. It requires 
the lower price to equalize competitive crude prices. Now, if we 
charge our Glenrock refinery with Lance Creek at the crude field 
price of 33 cents a barrel less than the Salt Creek crude price, we are 
simply penalizing our producing department for the benefit of the 
refinery and so far as our producmg department is concerned, we have 
yet in the Lance Creek field more than $1,000,000 that we have failed 
to recover from our production there. I say that all statements of 
earnings of departments of an integrated company such as ours can 
be made anythmg you want to make it. We can determine what we 
transfer the gasoline to our marketing 

The Chairman (interposing). That is what the consumer some- 
times thinks. 

Mr. Ferguson. Not as between departments. I am speaking as to 
the relative earnings as between departments. We could justifiably 
charge the Glenrock refinery with the Salt Creek price for its crude, 
in which event you would add to that figure I don t know how much, 
because I would attach little importance to that figure. 

The Chairman. Well, then do you think that the committee should 
attach little importance to the figures given by the other companies 
operating in that area in response to the same question? 

Mr. Ferguson. I do, because I think the method of bookkeeping 
of every company answering that questionnaire with respect to the 
cost of making gasoline would be different from every other company. 
For example, what method do they employ in arriving at the cost? 

The Chairman. The Continental gave three different answers for 
three different refineries. The Continental Oil Company at Glenrock 
reported the cost of 4.87 ; at Denver, 5.97 ; at Lewistown, Mont., 7.08. 
Now, there was some difference that went into the computation of 
those figures. Can you explain what the difference was? 

Mr. Ferguson. The difference at Denver is largely the transporta- 
tion cost of bringing the crude into Denver. The difference at Lewis- 
town would be due largely to the fact that it is a skimming plant with- 
out any cracking unit. But I could discuss for a longer period than 
I think you would want to listen to me, the misleading character of 
departmental figures of that sort. 

The Chairman. What is the price of gasoline, or what was the 
price of gasoline at. Glenrock at the time this questionnaire was 
.answered, approximately? 

Mr. Ferguson. You mean the retail price? 

The Chairman.' The retail price. 

Mr. Ferguson. 22 cents. 

The Chairman. And what was the retail price of gasoline at 
Denver at that time? 

Mr. Ferguson. I think it was about 20 cents. 


The Chairman. So that the consumers in Denver, with the cost as 
reported by the Continental, 1.10 higher than the cost at Glenrock, 
were paying 2 cents less a gallon than the consumers at Glenrock. 

Mr. Ferguson. Well, without 

The Chairman (interposing). Now, that is one of the curious facts 
which develop in any survey of the oil industry which causes all the 
uncertainty in the public mind with respect to the price structure. 

Mr. Ferguson. I appreciate that ""thoroughly and have been called 
upon a number of times to explain our method of operation, which 
produces that result. 

The Chairman. Well, how about the method of accounting? 

Mr. Ferguson. Well, as far as our total accounts are concerned, we 
know whether we are making something or losing something, but 
as to the division in the departments of those results, I say they.^-e 
misleading; but to answer more directly your question, I appreciate 
the difficulty in explaining to the public that gasoline made at Glen- 
rock should sell for a higher price than gasoline made at Glenrock sells 
for in Nebraska. 

The Chairman. You may be interested to know, Mr. Ferguson, that 
half of the members of this committee who have at one time or 
another been tourists in Wyoming have been asking me that same 
question, and I have found it very difficult to explain. 

Mr. Ferguson. Now, my explanation of it — it is the real explana- 
tion — is that the natural resources of the State of Wyoming are out 
of all proportion to the home market. Its refining industry, process- 
ing more than 30,000 barrels per day, is very much larger than the 
home market can possibly consume. The reason for that is, to a 
considerable extent, historical. Wlien the Great Salt Creek field 
was opened up and when the refinery of the Mid-West Refining Co. 
was running 60,000 barrels per day of crude oil, we were in thfi 
midst of the Great War. There was an insatiable demand for petro- 
leum products from every quarter. They were shipping gasoline 
from Casper to California; the Los Angeles basin fields had not yet 
come in. 

They were shipping a trainload every day to Baton Rouge to be 
exported to England, and they were needing the product from Casper 
to meet the demands in Iowa, Illinois, and Indiana. Under those 
conditions Wyoming developed a refining industry out of all pro- 
portion to wliat the economics of the home market would have 
required. By way of illustration, the State of New Mexico has 
developed a large production along its eastern border. It never 
thought of refining all of that oil in the State of New Mexico, which 
is a large State thinly populated. 

The pipe lines were immediately extended from West Texas into 
the area and took the production to the Gulf where it was available 
for the consumption of the Atlantic seaboard. Now starting with the 
over-built structure of the refining industry at the time of the war, 
the trade area for Wyoming refineries has gradually contracted as 
the production of the Salt Creek field declined, but still the people of 
the State, having enjoyed the activity and prosperity and employment 
of a large refining industry, are extremely reluctant to see it dwindle 
down to the point that would be justified by basic economic condi- 
tions. They still want a large refinery or refining industry — it is 
the largest industry in the State today, and they can only have a large 


refining industry by permitting those refineries to operate on average 

When they take gasoline into Colorado it isn't what they should 
get for it, it is what the price is in Colorado and they have to sell it 
at that price, and that is determined by the Kansas and Oklahoma 
prices, plus trucker transportation, and they take it into Nebraska 
where it isn't a question of trying to get a higher price; they have 
to take the competitive price in Nebraska. And when they get all 
through they try to take some advantage of their location. They put 
together all the competitive forces and they hope in the local market 
and in the foreign market to get for their gasoline an average netback 
at the refinery which will exceed their costs of production. 

Now by way of illustration, take other industries in the area. You 
have the great beet-sugar industry. Beet sugar is sold in Wyoming 
•for much higher prices than it is on the Mississippi River where it 
encounters competition from Cuba. The steel industry at Pueblo, 
Colorado, and I presume in Utah, sells its steel in Pueblo or Denver 
for higher prices than it does in California. 

The Chairman. But the refining of beet sugar is increasing in 
Wyoming and in other western States, rather than decreasing? 

Mr. Ferguson. They can increase the refining of sugar in Wyo- 
ming so long as their cost of refining that sugar does not exceed the 
price they are able to obtain in an extended market. In other words, 
if the production of sutrar in Wyoming today can all be marketed 
west of the Mississippi River, that is one thing. If they enlarge that 
industry and have to go east of the Mississippi River with their sugar, 
then one of two things must happen, they must either- cut their costs 
of production and manufacture or they must pay the farmer less for 
his beets, and the same thing is true of the oil industry. In Wyo- 
ming if the oil fcdustry is to expand and refine more crude oil in 
Wyoming, they will have to cut the cost of the crude to the producer, 
on the one hand, or they will have to devise methods of lowering 
their production costs to dispose of the additional product. 

Take the canning industry in that western country. The can- 
neries in Colorado sell their canned goods in Colorado for more than 
they do on the Pacific coast. Now the farmers want them to operate 
at as great a capacity as possible and if they operate at that capacity 
thev have to go ont of the home market to" get rid of their product. 
In Wyoming if rpfining capacity was cut from 30,000 barrels to six 
or seven thousand barrels, what would become of the crude? 

The crude oil would have to be exported from the State through 
pipe lines in an increasing quantity or else the production of the State 
would have to be so curtailed that the employment of labor and capital 
would be seriously impaired. 

The Chairman. Now do I understand you to say that the Conti- 
nental does not segregate in its accounting the activities of the various 
departments of the industry? 

Mr. Ferguson. Oh, yes; we segregate them solely to convey some 
idea to the executives as to what each department is doing. 

The Chairman. In other words, your executives know what your 
producing department is doing, what your transporting department 
is doing, what your refining department is doing, and what your 
marketing department is doing? 


Mr- Ferguson. If you know enough about the business to interpret 
those accounts; yes. But if you don't, those accounts mean nothing. 
May I give you an illustration? 

The Chairman. Well, I assume that the executives know enough 
about the business to interpret the accounts and also to explain the 
accounts to lay persons. 

Mr. Ferguson. Well, I know enough about some accounts to interpret 
them properly, but there may be -others with which I am not so 
familiar and which mislead me. 

The Chairman. I will gamble on your ability to interpret them. 

Mr. FeivGUson. For example, just by way of illustration, we have 
maintained the price at our refinery at Denver of Mid-Continent plus 
railroad freight. 

The Chairman. From where? 

Mr. Ferguson. From any point in the Mid-Continent, any point 
in group 3. That was our tank-car price until the trucker competition 
became so great. 

The Chairman. Then do I understand this correctly, that in Den- 
ver you maintain the Mid-Continent price plus freight, the group 3 
price,, plus freight to Denver? That was the Denver price? 

Mr. Ferguson. That is right because a large part of the gallonage 
consumed in Colorado must come from Kansas and Oklahoma. There 
is no gasoline that I know of moving into the Rocky Mountain area 
at Mid-Continent plus freight, or California plus freight over in 
the Idaho territory, except in areas where they have to go to Cali- 
fornia or Oklahoma or Kansas to get part of their supply. But I 
was illustrating, if I may, this question of accounting. We credit 
our Denver refinery as against the marketing department with a price 
of Mid-Continent plus 3.37, the railroad rate. Our marketing depart- 
ment can't get the Mid-Continent price plus 3.37 a gallon; it must 
meet the trucker competition, so it drops its price 75 hundredths 
of a cent to try to hold some of the jobber business we have. That 
isn't low enough but we try to hold what we have. 

The refiner}^ there gets full credit for the Mid-Continent price 
plus freight and the marketing department is running at a huge loss. 
Now, we will change that eventually, but in the meantime it is 
only a departmental account anyway — what difference does it make? 
We say that to ourselves, and if the railroads are going to reduce 
their rates to the trucker level in that territory, why not wait before 
adjusting the departmental accounts until that permanent change 
takes place? I only mention that by way of illustration. 

The Chairman. Now, as I mentioned the price of crude a moment 
ago, and it occurred to me as I listened to you that the Continental 
Oil Co., as an integrated company, was actually in much the same po- 
sition as the State of Wyoming as a community, because you are in- 
terested in the price of crude, you are interested in the profits of re- 
fining, and you are interested in the profits of marketing. The peo- 
ple of the State of Wyoming are interested in the price of crude, 
because of the landowners; their schools receive a definite and sub- 
stantial income from the royalties that are paid for the development 
of the public land. Now, does the Continental attempt to make any 
balance or does any operating company of an integrated character 
attempt to make any balance among these various departments? You 
are interested, for example, in maintaining the price at which you 


sell your finished product. Are you interested equally in maintain- 
ing the price of the crude oil or would you like to see the price of 
crude oil drop? 

Mr. Ferguson. We would like to see the price of crude oil go up 
because we are producers of crude oil in Wyoming on balance. 

The Chaieman. That is right. 

Mr. Ferguson. In other words, we produce a great deal more crude 
oil in Wyoming than we refine. So far as our marketing prices are 
concerned, they are largely out of our hands ; they are controlled by 
competition. We have to sell in the various towns in Wyoming for 
the competitive price and if we should attempt to raise the price In 
order to make more money we couldn't do it. Now our interest 
is a little different, Mr. Chairman, from the interests of the State 
of Wyoming alone in this respect. If we reach a stage in the State 
of Wyoming where we can't make money, we can always curtail that 
losing operation in Wyoming and supply Wyoming from some other 
source, a thing that might well happen to the refining industry in 
Wyoming if it couldn't make money operating at the present levels. 

It could curtail its refining activities so as to supply the State 
only or the State and some nearby territory, and then supply the 
other territory, which is now being supplied from Wyoming from 
some other source of supply. But aside from that distinction, be- 
cause we are both in and out of Wyoming, I should say our interests 
are not very different from the interests of the State. 

The Chairman. Well, now what is the trend of the price of crude 
in this Eocky Mountain area? 

Mr. Ferguson. So long as the refining industry is .maintained at 
what might be said to be unecoriomically high levels, the tendency 
will be for the price of crude to go down in order to absorb excess 

The Chairman. Now what do you call uneconomically high levels? 

Mr. Ferguson. Well, I should say that Wyoming today i^ refining 
more crude oil than under normal conditions would be refined with 
such a small local market. 

The Chairman. Well, what is the tendency generally in the oil 
industry toward refining at the point of production ? 

Mr. Ferguson. I think the history not only of the oil industry but 
of nearly all manufacturing businesses will indicate that manufactur- 
ing establishments are better located in the center of great markets. 
In the oil business you can move crude whether by pipe line or rail, 
more cheaply than you can move refined products. If you move your 
raw materials to the center of a great market you don't have as much 
to pay by way of transportation in the distribution of your product. 
Now if you attempt to locate refineries for example in Wyoming at 
the source of the raw material in the Lance Creek field and the Salt 
Creek field, you couldn't employ a gasoline pipe line to take the gaso- 
line to the various markets now served because you would have in 
addition to the gasoline at least 50 percent of the barrel of crude left 
in fuel-oil distillates, kerosene, asphalt, road oil, and other materials 
that could not be moved by pipe line, or the same pipe line. 

The Chairman. Well, was that circumstance understoor^ by those 
who built the P. & R. refinery at Parco and those who buiic the Texas 
refinery at Cody? 


Mr. Ferguson. At that time production had not developed in Kan- 
sas and Oklahoma to the present extent. That was immediately fol- 
lowing the war period, and Wyoming gasoline was necessary to 
supply the demand of that eastern territory. Therefore, those refin- 
eries could operate and sell their product profitably without difficulty, 
but as soon as sources of crude supply grew up in the Mid-Continent 
area and the Chicago district the trade area of Wyoming was limited, 
and if those same companies were called upon to make a refinery 
investment in Wyoming I think it would be on a much smaller scale. 

The Chairman. What is the difference, if any, between the condi- 
tions under which the petroleum industry must operate in M'^yoming 
and the conditions in Colorado, Montana, and New Mexico? 

Mr. Ferguson. Well, as I indicated in my opening statement, if 
you have a refinery in the Mid-Continent field or the Gulf Coast or 
the Atlantic Seaboard, you manufacture gasoline and you add the 
cost of transportation from the refinery to the delivered price at the 
point you supply. For example, take all of the quoted prices in the 
journals, Mid-Continent, Gulf, Atlantic Seaboard, they are base prices 
at those primary markets, and you can sit down with a pencil and 
figure what the price is at a point 100 miles away or 200 miles away. 
You simply add the freight. Now when you locate refineries in 
Wyoming of a capacity which necessitates the exportation of 80 per- 
cent of all the gasoline made in the State to distant points where the 
markets are lower, instead of adding the freight rate to your Glen- 
rock base price, you don't go very far until you have got to take 
a lower price, and still a lower one and still a lower onp- 

The Chairman. Because of the proximity to those other markets 
of other sources of supply. 

Mr. Ferguson. Correct. 

The Chairman. What is the effect upon the industry and the price 
of crude, and the price of the finished product to the consumer, of 
the building of pipe lines and the transportation of the crude to 
distant refineries for processing? 

Mr. Ferguson. I should say the public in Wyoming, if properly 
advised, would welcome the construction of pipe lines and an en- 
larged market for their crude-oil production. There are dislocations 
that we all regret in connection with any change of methods of doing 
business. There would possibly be some diminution in railroad em- 
ployment due to the use of pipe lines instead of the rails to trans- 
port crude, but for the long run the State of Wyoming, rich in natu- 
ral resources, with 14 oil fields shut in entirely, should welcome any 
instrumentality that would enable them to get their raw material to 

In the Rocky Mountain States, what are the markets? There are 
only two cities in the Rocky Mountain States where you can afford 
to transport crude any great distance; one is Denver and the other 
is Salt Lake City. They are the only two areas that have a suffi- 
ciently large local market to justify a high cost of transportation 
for the raw material. 

The Chairman. What is the c^ect on the independent producer of 
the construction of pipe lines? 

Mr. Ferguson. The independent producer is enormously benefited 
by having a market for his oil that he would not otherwise have. 


The Chaikman. You and I were present at a hearing in the De- 
partment of the Interior within a month or so, at which the question 
of what price should be fixed for Government royalty in relation to 

_abject ' ■ • c!> 

partment had issued an order fixing the price for royalty oil at $1.14, 
but the contract to the new pipe line was fixed at 77 cents, was it not? 

Mr. Ferguson. Yes. 

The Chairman. The independents contended that that had the 
effect, or would have the effect, of reducing the income which they 
would receive from their crude oil below the point which should be 

Mr. Ferguson. Well, of course, as I said in that hearing, nobody 
likes to make a 6-year contract for the sale of petroleum. Nobody 
is wise enough to know whether they have made a good contract or 
a bad one, on either side of the deal. The contract to which you 
refer was a contract to sell the Utah Oil Refining Co. for transporta- 
tion to Salt Lake City crude through the pipe line which the Utah Oil 
Refining Co. was then projecting. The producers of crude in the field 
and the Utah Co. dealt at arms' length; the negotiations were quite 
protracted and quite heated. When they were over the Utah Co. 
agreed to pay the present field price until July 1, 1941, and to pay 
13 cents a barrel more than that after July 1, 1941, and they said 
they couldn't possibly afford to build a line to afford this additional 
outlet for the field without some assurance for a length of time that 
they had to have to amortize an investment of four or five million 
dollars. Now, whether the independents would have made a better 
deal or whether we made a poor deal and the Utah Co. a good deal 
or the Utah Co. a poor deal and we made a good one, I think, Mr. 
Chairman, is in the lap of the gods. Six years is a long time. 

The Chairman. Wliat would be the final effect of such a trend upon 
the price of crude oil ? It would be to lower that price, would it not ? 

Mr. Ferguson. I think normally it would be to lower the price, but 
I think the construction of the pipe lines affording a cheaper means 
of transportation to distant markets tends to offset that. If the crude 
had to be transported out of the State by rail as heretofore, I think 
the crude would have to take some adverse differential in order to 
absorb that cost. 

The Chairman. You intimated a moment ago that there was some 
prospect in your opinion of a reduction of the freight rates on gaso- 
line. On what do you base that opinion ? 

Mr. Ferguson. The entire freight-rate structure on petroleum prod- 
ucts all over the United States is in a condition of what might be 
called flux, due to trucker competition, and also possibly barge com- 
petition and pipe-line competition, but so far as Wyoming is con- 
cerned it is principally interested in the trucker phase of that compe- 

The railroad companies have been maintaining scales of rates on 
refined petroleum products that are so much higher than the cost of 
transporting such products by truck that the railroads have simply 

1 A hearing on appeal of certain producers from the price set by the Secretary of the 
Interior for oil produced from Government-owned fields. 


been losing most of the business. They now propose to put into effect 
what miglit be called almost revolutionary adjustments from Okla- 
homa and Kansas into the Rocky Mountain area, which, of course, 
must be followed by similar adjustments within the area. 

The Chairman. You say tliey propose to do that. How was that 
proposal made? 

Mr. Ferguson. I perhaps shouldn't speak for the railroads, but I 
have spoken with the railroad people often enough to know that the 
railroads are trying to get together some kind of a scale that they 
think will be fair to all. They have been a long time at it. We are a 
little impatient about the length of time they are taking, but I think 
they will eventually arrive, and very soon. 

The Chairman. Well, where are the negotiations at the moment ? 

Mr. Ferguson. With the railroad companies, so far as I know. 

The Chairman. You know of no proposal to the Interstate Com- 
merce Commission? 

Mr. Ferguson. If you consider the Rocky Mountain area as a 
whole, a very drastically reduced rate was filed from Portland, the 
Pacitic coast, into southern Idaho, and in the Spokane section. That 
has been suspended, as I understand it, by the Interstate Commerce 
Commission on the piotest of the truckers, who contended the rail- 
roads have come below the trucker cost. There have been new rates 
published in Nebraska and Kansas, but so far as the interstate rates 
from group 3 into the Rocky Mountain territory are concerned, I 
think no new rates have yet been filed with the Interstate Commerce 

The Chairman. How about intrastate rates in that area ? 

Ml-. Ferguson, The intrastate rates naturally would be adjusted 
following the adjustment of the interstate rates, but I think that if 
the railroads delay too long there will be an adjustment of intrastate 
rates due to the oil companies going to trucking and not waiting for 
them. I might say there, Senator, as an interesting item in the 
Wyoming situation, the capacity of Wyoming refineries is largely 
determined by the amount of fuel oil they can dispose of. There is 
no fuel-oil market except to the railroads. There has been some delay 
in going to trucking in Wyoming, not due to any agreement with the 
railroads or any discussion with them, but we know that if we go 
to trucking out of refinery they will lose so much traffic that they 
can't consume as much fuel oil as they are consuming in handling 
that traffic and we will get into that vicious circle. 

One of the largest items of freight in Wyoming is the handling 
of refined petroleum products out of those refineries. Now if that 
is taken away from the railroads, no matter how much they might 
like to buy our fuel oil, they simply won't need it. That factor has 
to be considered there. 

The Chairman. Of course, you are not in position to express an 
opinion as to what is likely to be done about this freight-rate re- 

Mr. Ferguson. You mean whether such a reduction is to be made? 

The Chairman. Yes. 

Mr, Ferguson. I am perfectly confident it will be made. If it isn't 
made the railroads might as well go out of the business of hauling 
petroleum products entirely. 


The Chaibman. Is the marketing of gasoline and petroleum prod- 
ucts conducted at a profit in the Kocky Mountain area? 

Mr. Ferguson. That again involves the question of departmental 
accounts. I should say, generally speaking, the profit, if any, is a 
small one. 

The Chairman. There was testimony here some days ago to the 
effect that the large integrated companies, such as the Continental, 
make profits in the production and in the transportation of oil but 
suffer large losses in refining and marketing, and the statement has 
been made that the refining and marketing operations are not segre- 
gated in the accounting procedure in such way as to make it possible 
to tell which one contributes the largest amounts to that combined 

Mr. Ferguson. Well, I think that involves, as I said, the diflSculty 
of departmental accounting. A company that has its own crude-oil 
production, its own refineries, and its own markets, can make any one 
of those departments make or lose, depending on the method of book- 
keeping. We call the transfers from one department to another 
transfer prices. Now, -whether the refinery makes money or not 
would depend upon what we elect to transfer our crude production 
to the refinery for. Whether the marketing department would 
make money or not would depend largely upon what we elected as a 
matter of bookkeeping to transfer our products from refinery to 

I again say that I think all departmental figures of integrated 
companies are likely to be very misleading and not comparable one 
company with the other. 

The Chairman. Can you speak for the Continental ? 

Mr. Ferguson. The way we keep our books we sometimes make 
money in marketing in the Rocky Mountain States and sometimes 
we do not. We have not for the last year. That is the way we 
keep our books. 

The Chairman. How do you make your reports to your stock- 
holders ? 

Mr. Ferguson. We report the over- all results of the company as a 

The Chairman. And the over- all result of the company as a whole 
for a number of years has been profitable or unprofitable? 

Mr. Ferguson. It has been profitable, although in 1932, which isn't 
so long ago, I think we lost $11,000,000. Last year we made a little 
over a dollar a share, which we would think on the total investment 
we have in the business would be a very small earning, I should say 
not more than 2 or 3 percent. 

The Chairman. What is the effect upon the independent refiner 
of the operation of the integrated company by and large? 

Mr. Ferguson. Well, of course each independent refiner would 
be confronted with a different set of circumstances. But I say this : 
While I have no statistics to support the statement, while 1 don't 
know much about the rest of the United States, I feel very confident 
that in the last 15 years there has been an increase in the Rocky 
Mountain territory of independent producers, independent refiners, 
independent jobbers and dealers, out of all proportion to the increase 
in total business. If the effect is adverse there are apparently a lot 
more of them that want to try it. 


The Chairman. What is the trend of the petroleum inddstry with 
respect to the proportion of the retailing business which is cairied 
on by independents? I am not classifying the lessee operator as an 

Mr. Ferguson. You are not talking about dealers generally, are 

The Chairman. Yes; I am talking about dealers generally. 

Mr. Ferguson. I should say the tendency definitely is to turn 
over the retail end of the business to the independents. With respect 
to the jobber who buys in tank-car lots, a wholesaler in- the business, 
I can't express an opinion with respect to the United States as a 

The Chairman. 1 am just talking about the Rocky Mountain area. 

Mr. Ferguson. In respect to the Rocky Mountains there has been 
a constant increase in the number of independent jobbers operating 
in that territory, a proportionate increase in the product which they 
sell as against the major companies. 

The Chairman. How did that compare with the increase of the 
number of outlets of the major companies? 

Mr. Ferguson. Again, if you are speaking of retail outlets 

The Chairman (interposing). I am. I am talking' now of filling 
stations rather than bulk plants. 

Mr. Ferguson. I would hesitate to answer that question in the 
locality with which I am more familiar other than the city of Denver 
where I live. I should say that there have been more independent 
service stations constructed in the last 6 or 7 years than there have 
been service stations constructed by the major companies. 

The Chairman. The picture that I get from your testimony is that 
of an industry, particularly as applied to Wyoming, in which the 
bulk of the crude oil is sold to the major companies, the bulk of the 
crude oil is either refined or transported out of the State by the- 
major companies, and the bulk of the gasoline which is manufactured 
in the State is manufactured by the major companies, sold in the 
State and exported out, so that we have a petroleum industry which 
is dominated by the major companies, and I am curious to know 
what your opinion is as to the effect upon the public interest, and 
the public interest of course is just as diverse as the interests of the 
integrated company. What is the effect of it upon employment 
within the State as well as the effect upon the price which the 
consumer has to pay? 

Mr. Ferguson. That of course is a rather large question that I 
would much prefer to think about longer than I can at this moment 
before answering, but 

The Chairman (interposing). Let me interrupt to say this. We 
see clearly that this industry is carried on by agencies which have 
been brought into existence outside of the State of Wyoming. Now 
what is true of Wyoming is true everywhere. This industry and 
many other businesses are conducted by corporations which actually 
are not subject to the jurisdiction of the community in which they 
operate to any effective de^'ee,^ 

Mr. Ferguson. I should say in answer to your question — and I 
would myself appraise my answer as bein^ worth very little — in 
the first place, the independents in the oil business are not dominated 
in any sense that I am conscious of by the major companies. In 

124491 4C -pt 17 sec. 4 3 


the area with which I am familiar, as I have said, more and more 
of them are coming into the arena, and I think making money. 
Many of them I know, and they seem to be gettmg along pretty 


Now as to the effect on employment, both of capital and labor, it 
is hard for me offhand to see that the total of employment would be 
any less, or possibly any greater, if the business is largely done by 
major companies or by mmor companies. The crude oil has to be 
produced, it takes so many men to do it; the product has to be 
refined, it takes so many men to do it ; it has to be distributed, and 
I can't see that the total employment of labor would be very different 
whether the business is conducted by independents or major 

The Ch trman. What is the effect of this upon the control of 
prices, or t .e price structure? 

Mr. Ferc ison. I think there is very little control of prices or 
price struct re except by some of the most strenuous competitive 
forces that e ist in any business today. 

The Chairman. Do you testify that there is complete competition 
in the sale of crude oil?_. 

Mr. Ferguson. Yes. If anybody would come along and offer us 
more for our crude than somebody else, they can have it, but in the 
purchase of crude oil the competition is necessarily different from the 
competition surrounding a service station. It is a different type. 


The Chairman. How about the competition at the service station ? 

Mr. Ferguson. I should say the competition at the service station 
is complete, 100 percent. 

The Chairman. What is the story about price leadership, so-called ? 
I ask you that question with the thought in the back of my mind 
that the Continental is regarded as the price leader in this area. 

Mr. Ferguson. I think the Continental. Oil Co. is regarded as the 
price leader in the Rocky Mountain States, and if we had anything 
to do about the matter, we would like to retire from that position. 

The Chairman. How did you acquire that position? 

Mr. Ferguson. The only way we acquired it, if we ever had it, 
was because we happened to be the largest single marketer of petro' 
leum products in each of the States, although I think in Montana 
today the Texas Co. markets more than we do. But as I see this 
matter of price leadership, if we reduce a price we are real leaders 
because we market so much of the product that the other companies 
have to come down to our level. If we attempt to raise a price, we 
are becoming less and less leaders of anything. Every time we 
have raised a price in the past 2 or 3 years, it has been an experir 
ment, and I am not so happy about the results of those experiments. 
We frequently had to drop down and down again to the old level. 

The Chairman. You have occasionally tried to raise the price, 
though ? 

Mr. Ferguson. Oh, yes. 

The Chairman. How does it come that a company like Socony- 
Vacuum will go into a State like Wyoming and purchase a refinery 


set-up and follow the leadership of the Continental in the retail 
price? And how does it come that the Standard of California will 
come into the State and establish service stations and follow the 
price of the Continental ? If there were real wide-open competition, 
would not the tendency be for those companies to try to take the 
gallonage away from you and drop below your price ? 

Mr. Ferguson. I am not sure that they do follow our prices. If 
the word "price" be looked at in a large way, they may be making 
concessions of one kind or another to get business away from us 
that are the equivalent of price. At any rate, I have- heard many, 
many complaints of that kind from our marketing people. If they 
go out openly and cut price and they are sufficiently important in the 
market, everybody will drop down to that level to meet them and 
they haven't gained anything, but sometimes they do the equivalent 
of cutting price by loaning equipment or something of that sort, 
which we don't do now, but competition in those lines is becoming 
so severe, how long we can stay out of it I don't kno,/. 

The Chairman. There has been considerable testixnony here from 
which one might draw the conclusion that there wasii't a great deal 
of price competition among the majors, and therefore among others 
also, but that the principal methods of competition had to do with 
secret concessions and loaning of equipment, and the improvement 
of filling stations, and the like. Does that exist in the Rocky Moun- 
tain area? 

Mr. Ferguson. I think that there is competition there and else- 
where in the United States with respect to price. It is going on all 
the time. You can't go into a city, a town, in Wyoming where you 
can't buy gasoline at different prices. Sometimes the competition 
is between the majors and sometimes between the independents them- 
selves, or between majors and independents, but the reason there is 
not more competition in price, as I see it, is that if anybody attempts 
to compete on an, open-price basis and they are sufficiently impor- 
tant, everybody else will immediately drop down to that price. 
Prices always tend to level theniselves off in a competitive situation. 
The Chairman. What about the exchange of gasoline at the refin- 
eries ? 
Mr. Ferguson. In Wyoming? 

The Chairman. Yes; and anywhere, in your experience. 
Mr. Ferguson. Well, I think it is a natural method of saving trans- 

The Chairman. I understand, for example, that the Standard of 
California sells under its own brand in Wyoming at its filling stations 
the gasoline refined by Sinclair at Parco. 

Mr. Ferguson. In that particular case, the Standard of California 
opened up an oil field at Medicine Bow. The refining capacity of 
Wyoming was already overdone in their judgment. The Sinclair 
Co. had some uHused capacity. The California Co. deliver their crude 
to the Sinclair Co. and pay them for processing it according to their 
specifications, so that when it comes out of there, I presume it is the 
same type of gasoline that the Standard of California markets else- 
where, or at least have elected to market in that territory. 

We have no exchanges of gasoline that are not based upon specifi- 
cations. If the particular product isn't already in line with our speci- 


fications, we would insist that a different type of product be made, or 
else we ourselves would reform or reprocess it. 
The Chairman. Do you exchange gasoline? 
Mr. Ferguson. Yes; we have exchanges. 

The Chairman. And am I to unders^^und that it is never exchanged 
except upon the basis of particular specifications? 

Mr. Ferguson. Never. If the product happens to approximate our 
fs]3ecifications anyway, so that the modification would be a very slight 
one and immaterial to its value, we might make an exchange without 
insisting on a change in the specifications, but I have negotiated for 
several exchanges which have fallen doAvn because we were unwilling 
to satisfy the other company as to their specifications and they were 
unwilling to satisfy us. 

Mr. O'CoNNELL. May I ask a question? I was quite interested in 
what you had to say about price and the fact that under an open 
price system there is really no advantage in reducing a price because 
tlie other suppliers will almost immediately meet the price, so that 
you have gained no advantage in terms of your gallonage. In terms 
of your company, which is apparently a very large marketer in the 
Rocky Mountain area, what would induce you to lower price ? . 
Mr. Ferguson. Competition from all sources. 

Mr. O'CoNNELL. You mean someone else has first lowered the price ? 
Mr. Ferguson. Yes; or we will lower it ourselves. If the price of 
crude should go down or any basic change in condition take place, we 
would lower tne level of our whole market. 

Mr. O'CoNNELL. For what purpose? Not to meet competition? 
Mr. Ferguson. That in a sense would be to meet competition be- 
cause if the price of crude goes down, the price of gasoline always 
goes down with it, it has to. 

Mr. O'CoNNELL. Don't you mean then if you did not lower your 
price, someone else would and you would ultimately be forced to? 
What I am getting at, is there any point from the point of view of 
your company to first lowering a posted price, or isn't it ordinarily 
a result of undercutting, secret price cutting, that sort of thing which 
you, in effect, meet? 

Mr. Ferguson. I should say, generally speaking, that is true, but 
if we should maintain our prices too long when basic conditions, to- 
gether with competition, required a reduction, we wouldn't be a price 
leader in that area very long. 

Mr. O'CoNNELL. You mean someone would take your leadership 
away from you ? 

Mr. Ferguson. Someone would take the business and with it the 

Mr. O'CoNNELL. Then your reduction in price would be for the 
purpose of meeting another price or of keeping your business rather 
than an attempt to get additional business by virtue of a price differ- 

Mr. Ferguson. Yes; we don't a.ttempt to get additional business 
by virtae of a price differential. 

Mr. O'Connell. And if all companies took the same view we would 
never gjet a price reduction. 

Mr. Ferguson. I don't think that follows, because I think the gen- 
eral changes would still be made, based upon basic conditions, such 
as the price of crude which I mentioned by way of illustration, but 


many other things would enter into it — the general level of commod- 
ity prices as a whole. For example, you couldn't maintain a price 
of gasoline of $1 a gallon when the farmer was getting 25 cents for 
his wheat. He couldn't afford to use gasoline to move his wheat 
to market. 

Mr. O'CoNNELi.. You couldn't do that if you were the only sup- 
plier of gasoline, of course. 

Mr. Ferguson. You would have price reductions, even if there were 
no competition. 

Mr. O'CoNNELL. One more question along a little different line. I 
understood you to say in 1938 your company made about $1 a share. 
How many shares do you have outstanding? 

Mr. Ferguson. 4,700,000 shares. 

Mr. O'CoNNELL. Was 1938 as good as 1937? 

Mr. Ferguson. No ; in 1937 we made about $3 a share, roughly. 

Mr. O'CoNNFLL. Are you in position to say anything about this 
year as compared to either ^38 or '37 ? 

Mr. Ferguson. The first" half of this year was not good. The 
second half might be a little better. I should say that so far as 
Continental is concerned we might do about as well this year as last 

Mr. AviLDSEN. Mr. Ferguson, you say you do not use price induce- 
ments to get additional volume, but your men are out trying to get 
additional volume I suppose. Would' you tell the committee what 
inducements you do use to get additional volume ? 

Mr. Ferguson. We have a great many sales aids. In the first place 
we spend a good deal of money advertising our product, which is a 
sales help. We have an organized selling force. That selling force 
attends in effect selling schools from time to time to teach them 
merchandising methods. We devote a great deal of tim^ and money 
to maintaining the quality of our products, so that the salesmen can 
talk superior quality and demonstrate superior quality. 

We have various demonstrating devices that they use in connec- 
tion with the sale of lubricating oils to show the advantages of our 
products. I don't want to be taken at this moment as boasting 
that our product and our methods are superior to that of any other 
company, because the other responsible companies employ the same 
methods to get business without resorting to price inducements only. 

Mr. AviLDSEN. As a consumer, what do you give me as an in- 
ducement to buy? The other man reduces his price, you will say, 
but you wouldn't do that. You give me a lot of advertising and 
what else do you give me ? 

Mr. Ferguson. We give you, as against some of the price reduc- 
tions, convenience of location, courteous service, and a variety of 
other things that you don't get from the man who cuts the price 
most drastically. 

For example, a type of price cutting in the oil business grows up 
around trackside stations, but in a town of any size a man isn't going 
from the residence district down to the railroad to buy gasoline 2 
cents a gallon cheaper. He is offered the convenience of location, 
v.'hich determines the sale to him. 

The Chairman. Do you use the credit card in marketing? 

Mr. Ferguson. We do not. 

The Chairman. Is it used in tlie Roekv Mountain area at all? 


Mr. Ferguson. It is becoming more common there and we regret 
it very much. 

The Chairman., Is the interchangeable card used in Wyoming ? 

Mr. Ferguson. It maj^ be, Senator, but we don't use it at all so I 
am not personally familiar with that. 

The Chairman. Is it used in any of the areas in which you operate ? 

Mr. Ferguson. As I stated, some of the companies that have ccme 
into the area are putting out credit cards. It is not nearly as 
prevalent' in the Rocky Mountain area as it is in other parts of 
the United States, Whether it is growing or not, I don't know. 
I hope it isn't, but it may be. 

The Chairman. Wliy? 

Mr. Ferguson. We think it is an expensive metnod of marketing. 
We don't think the expense of keeping all those accounts- is war- 
ranted. That is our viewpoint. 


The Chairman. I have here a memorandum on Wyoming gaso- 
line prices which was prepared as a result of the questionnaires, 
and it is accompanied by a table of gasoline freight rates which 
was secured by the United States Attorney at Cheyenne from the 
Wyoming Public Service Commission. I thought it would be a 
proper thing to put this in the record but before putting it in the 
record I would like to submit it to you for your examination, in 
case you cared to make any comment about it.^ 

Mr. Ferguson. It is impossible for me to testify in confirmation 
of all of these figures. 

The Chairman. I didn't expect that. I wanted to submit it to 
you in case 3^ou wanted to make any comment on it. 

Mr. Ferguson. I notice among other things that the cost per- 
gallon of making gasoline is involved, and I can only reiterate my 
statement that all departmental accounts of that kind are mis- 
leading, and they are not comparable as between different companies 
making the return. 

The Chairman. When you say they are misleading, just what do 
you mean? They don't mislead you — or I should say rather the 
marketing division of Continental in fixing its tank wagon price, 
do they ? 

Mr. Ferguson. I don't think we fix our tank wagon price at a 
certain percentage over cost of auinufacture. Our prices are com- 
petitive and we have to look at the whole picture when they flow 
in from all sources. 

The Chairman. Of course, that might be, but without preventing 
you from knowing exactly what you were doing. 

Mr. Ferguson. We have these estimates of cost made up m order 
to guide us in the matter of pricing, but principally to guide us 
in how far out we can go in selling the gasoline. 

The Chairman. So you have a pretty definite idea in your mind 
what you ought to sell your gasoline for in order to operate at a 
profit, don't you? 

Mr. Ferguson. To illustrate again what I mean, the Continental 
cost is lower, much lower, than any of these other companies in 
the State o f Wyoming. I think that is correct. The reason it is 

'Admitted to the record Infra, as "Exhibit No. 1296"; appears in appendix on p. 9S17. 


lower is not due to any superiority of manufacture, because I don't 
claim it, but it is due to the fact that we are getting our own crude 
oil from the Lance Field, producing it with our own money from 
our own wells, transporting it from our own pipe line into Glen- 
rock at 33 cents a barrel less than the Casper refineries are paying 
for Salt Creek crude into their refineries. Now suppose we switch 
the 33 cents to our producing department. Suppose they said, "We 
are still in the red here a million dollars." We don't do that, 
because that happens to be the field price in that field and we charge 
the refinery the field price, but a proper distribution of earnings 
as between that refinery and the field would give our producing 
department in the Lance Creek field at least what the producers in 
the Salt Creek field get, but we can't get it. 

The Chairman. Do you mean to tell us that you are manutac- 
turing gasoline cheaper at GJenrock now than you were 5 years ago ? 

Mr. Ferguson. Yes; due to that artificial condition. 

The Chairman. If the 'other companies operating in the Rocky 
Mountain area and the Continental operating at other points than 
Glenrock were able to manufacture their gasoline at the cost price 
put down there in your questionnaire, obtaining at Glenrock, these 
companies and the Continental would be making larger profits at the 
present cost. 

Mr. Ferguson. Yes; all of the companies would be making larger 
profits, but today I think the Continental Oil Co., due to having its 
own production and its own pipe lines at Glenrock, has an advantage 
over these other companies. I think it is an advantage due to loca- 
tion and due to the fact that we risked our money getting the 
production and risked our money in pipe line. 

The Chairman. If you had that cheap crude oil in your own pipe- 
line, why wouldn't it be a good idea to expand the Glenrock re- 
finery ? Let me send a telegram out home tonight that you are going 
to expand the refinery. 

Mr. Ferguson. Could you sell the fuel oil, do you think? I don't 
think we could, I know we couldn't. 

The Chairman. The answer is, from your previous testimony, that 
the reason refineries do not operate at the fields to the same advan- 
tages as the marketers is that they cannot dispose of the byproducts 
profitably at the fields. 

Mr. Ferguson. And transportation cost on the raw material in is 
always less than the transportation cost out on refined products. 

The Chairman. Did you care to have any other comment on that 
memorandum ? 

Mr. Ferguson. I am in no position to confirm the statements made, 
but I have no objection to their being put in the record for what 
they are worth. 

(The memorandum referred to was marked "Exhibit No. 1296," 
and is included in the appendix on p. 9817.) 

The Chairman. Could you give me the names of the companies 
which are turning to the credit card in the Rocky Mountain area? 

Mr. Ferguson. I think that practice in the Rocky Mountain States 
was brought into the territory by the California companies, the com- 
panies operating in California. That may not be the whole story, but 
that has been a very prevalent practice in California for many years. 


As the companies operating in California began to extend their ac- 
tivities into the Rocky Mountain territory I think they brought with 
them that credit-card practice. 

The Chairman. And the credit-card practice includes the inter- 
changeable card which may be presented at any filling station of any 
of the major companies? 

Mr. Ferguson. We have no such thing. 

The Chairman. I know you don't, but I mean that is the practice, 
is it not? 

Mr. Ferguson. I don't know. I am not by any means qualified to 
discuss credit cards. 

The Chairman. I thought you might have observed that. 

Are there any other questions? 

Mr. Ferguson, we are very' much obliged to you for your pre- 

The committee will stand in recess until 2! 15. 

(Whereupon, at 12:40 p. m., the committee recessed until 2:15 
p. m. of the same day.) 


Wliereupon, on the expiration of the recess, the hearing resumed 
at 2 : 45 p. m. 

Tlie Chairman. The committee will please come to order. Mr. 
La Fleiche, will you be sworn, please ? Do you solemnly swear that 
the testimony you are about to give in these proceedings shall be the 
truth, the whole truth, and nothing but the truth, so help you God ? 

Mr. La Fleiche. I do. 

The Chairman. Will you be good enough to give your name to 
the reporter? 

Mr. La Fleiche. Pierre La Fleiche. 


Tlie Chairman, Where do you reside? 
Mr. La Fleiche. Casper, Wyo. 
The Chairman. What is your business? 
Mr. La Fleiche. I am in the oil business. 

The Chairman. How long have you been in the oil business? 
Mr. La Fleiche. Twenty years. 
The Chairman. Have you held any official position? 
Mr. La Fleiche. I Was mineral supervisor for the State of Wy- 
oming -6 or 6 years. 

Spuator King. You are not in that position now? 

Mr. La Fleiche. No, sir. 

Mr. AviLDSEN. What is your position in the oil business today? 

Mr. La Fleiche. Geologist and independent oil operator. 

Mr. AviLnsEN. A producer? 

Mr. La Fleiche. No ; a prospective producer, I hope. 

T]]e Chairman. You may proceed with your statement, please. 

'I'lii: i-K'ii'.oLEuar industry in Wyoming 

Mr. La Fleiche. Wyoming has produced crude petroleum for 
commercial purj^oses since the yeai- 1863, when oil from springs was 


bartered by the Seminole Indians to early settlei-s. Since that time 
107 oil and gas fields have been discovered. From the first dis- 
covery and development of oil and gas to July 1, 1938, the best 
available records show a total of 8,071 wells drilled at a total cost 
estimated at $96,858,000, or an average cost of about $12,000 per 
well. Of these wells, 4,291 were drilled on public lands of the United 
States and 3,780 on State and privately owned lands. A further 
classification of wells as of this dsle shows 34 percent actively pro- 
ducing, 18 percent shut in, 46.5 percent dry^oles and abandoned 
producers, and 1.5 percent drilling. 

Of the oil and gas fields in the State, there are sliut in, due pri- 
nuirily to a lack of suitable markets for their production and also 
inadequate transportation facilities, 2 light-oil and 14 black-oil fields, 
and 9 gas fields. 


Mr. La Fleiche. To July 1, 1938, there had been produced a 
total of 411,579,402 barrels of light oil and 32,527,095 barrels of black 
oil, or a total of 444,106,497 barrels. Of this. Salt Creek has pro- 
duced 279,705,587—63 percent; Big Muddy, 25,903,000 barrrels, or 
6 percent; Elk Basin, 10,427,127 barrels, or 2.5 percent; Grass Creek, 
26,311,782 barrels, or 6 percent; Lance Creek, 13,346,441 barrels, or 
3 percent; Lost Soldier, 19,156,000 barrels, or 4.3 percent; Rock 
"River, 17,643,318 barrels, or 4.5 percent; and Oregon Basin, 9,129,971 
barrels, or 2.3 percent. Thus 8 fields have produced about 91 percent 
of all oil produced in the State and the other 99 fields about 9 percent. 

The Chairman. Mr. La Fleiche, may I interrupt to ask whether 
you have any information with respect to whether or not this produc- 
tion is produced by so-called independents or by so-called majors? 

Mr. La Fleiche. I don't have any actual statistics on the percent 
of production produced by majors or so-called independents. How- 
ever, I would estimate that the major portion of the oil is produced 
by the major oil companies. 

The Chairman. What proportion? 

Mr. La Fleiche. I would say approximately 75 percent. 

The Chairman. And how about these reserves of which you were 
speaking? You testified that there are 11 shut-in fields ; are there ? 

Mr. La Fij^iciie. There are 2 light oil and 14 black-oil fields, mak- 
ing 16 fields. 

The Chairman. Have you any information or impression with re- 
spect to who controls those fields, whether independents or majors? 

Mr. La Fleiche. That is a very hard question to answer. Senator, 
because I don't know personally about the nature of the ownership 
there. However, it is my impression that the majority of these fields 
are owned by the larger oil interests. 

The Chairman, When you say "owned" 

Mr. La'Fij:iche. They have the development rights. 

The Chairman. You mean the development rights? 

Mr. La Fleiche. Yes ; that is what I mean. 

The Chairman. Many of these fields I suppose are in the public 

Mr. La Fleiche. Yes: they are mixed, State lands, public lands, 
and patented, lands. 

The Chairman. All right, sir. 


Mr. La Fleiche. The total cumulative production of the State to 
date is about 470,000,000 batrels of oil. 

Amongst the oil States, Wyoming stands tenth and has produced 
about 2.3 percent of the crude oil of the United States. 

No proration of Wyoming production by a regulatory agency exists 
nor is there statutory provision for such regulation. The production 
of Wyoming oil has been much below the Bureau of Mines estimates, 
and as long as this condition exists there is little need for such con- 
trol. The market defines the production and proration is thus 

Wyoming is a public-land State, and much of the land within its 
boundaries belongs to the United States of America. A recent tabu- 
lation reveals the fact that about 56 percent of the oil produced in 
the State was from the public lands, 33.5 percent of it from privately 
owned lands, and 10.5 percent from State lands. Koyalties paid to 
the United States on oil produced from public lands in Wyoming to 
July 1, iy38, amount to over $57,000,000. Of this, 371/^ percent was 
paid direct to the State for school and road purposes, 521/2 percent 
accrued to the reclamation fund of public-land States, and 10 percent 
went for administrative purposes. Koyalties on oil from State lands 
amounted to over $18,000,000 and to fee-land owners an estimated 

Senator King. Does the Federal Government make any account- 
ing for the disposition made of that 10 percent for administrative 
purposes ? 

The Chairman. That goes into the Treasury under the Oil and Gas 
Leasing act. 

Senator King. What I am trying to get at is whether it was just 
an arbitrary amount or whether that was actually needed for admin- 
istrative purposes. 

The Chairman. I think it was an arbitrary amount fixed at the 
time that the leasing act was passed. I didn't know whether the 
witness was as familiar with it as you and I. 

Senator Kjng. I wanted the record to show if this witness knows 
that a large sum is reserved or disposed of for administrative purposes, 
much larger, in my opinion, than is necessary. 

Mr. La Fleiche. I imagine at the time this law was made that 
the amount of revenue from royalties was a matter of anticipation; 
resulting from years of royalty payments perhaps now there is some 
basis for a determination of whether or not the amount is excessive 
or inadequate. 

The Chairman. Inasmuch as Senator King has raised that ques- 
tion, it might be proper for me to interrupt at this time to say that 
earlier in the year I obtained a statement from the Department of the 
Interior with respect to the income from royalties under the Oil 
Leasing Act, and this statement shows that for the fiscal year 1938 
the total receipts from oil royalties in all of the oil States amounted to 
$3,353,866.82, and tnat to June 30, 1938, the total receipts amounted 
to $55,635,868.99. I think it may be proper to insert this letter in the 
record at the conclusion of the testimony of the witness.^ 

You may proceed. 

Mr. La Fleiche. Wyoming's reserves are estimated at 156,000,000 
bai-rels of light oil and 250,000,000 barrels of black oil, or a total of 
406.000,000 barrels or recov(Tfi])]e oil. The United Sta<es as a whole 

'Admitted intra as 'Exhibit No. 1300" ; appears in the appendix on p. 9840. 


is exhausting its reserves at a rate of over 1.6 percent times that of 

For a State as sparsely settled as Wyoming, it refines a high per- 
centage of its crude-oil production. For example, of the States pro- 
ducing over 7,000,000 barrels of oil per annum, Arkansas refines 78 
percent, California, 85 percent; Kansas, 72 percent; Louisiana, 73 
percent; Michigan, 51 percent; New Mexico, 4.5 percent; Oklahoma, 
17 percent; Texas, 70 percent; and' Wyoming, 64 percent of its pro- 
duction in the State. These figures are for the year 1937, but for 
1939 will not vary greatly. 

The ChairmaiI. What was the comparative production in those 
States there mentioned, or in what order would you list them on the 
basis of the amount of production ? 

Mr. La Fleiche. I don't recall 

The Chairman (interposing). Louisiana, for example, would pro- 
duce more oil than Wyoming, would it not ? 

Mr. La Fleiche. I believe that all of these States here produce 
more oil than Wyoming. I believe Texas has a production of over a 
million barrels a day, and next in order possibly California. I am 
taking these in round numbers because I don't know what the pro- 
duction of these States is, but, to get the approximate position of the 
State of Wyoming, California, I think, is around 500,000 or 550,000 
.barrels a day, and someone tells me now that Illinois ranks about third 
on the production list. I don't know whether that is true or not, but 
Wyoming produces itself about 60,000 barrels a day of oil at the 
present time. The run is from 20 to 22 million barrels a year. 

The Chairman. And you think it is still refining 64 percent of 
that production? 

Mr. La Fleiche. Yes; over a period of several years it has kept 
that relationship very closely. 

The Chairman. What will be the effect, in your opinion, of the 
construction of the pipe line from Lan^e Creek to Salt Lake City on 
that percent? 

Mr. La Fleiche. I doubt that it will have a great deal of effect 
on the refining of oil in Wyoming for the simple reason that there is 
at the present time a refinery in Salt Lake that is marketing in a 
certain district there. 

The Chairman. You don't think that will affect the percentages? 

Mr. La Fleiche. 1 don't believe it will ; no. 

The Chairman. Proceed. 

Mr. La Fleiche. Production costs appear to be among the highest 
in the United States, according to data compiled by the Petroleum 
Administrative Board in 1934. Costs as used include "general and 
administrative overhead, exploration, research, interest on invested 
capital, and actual operating expenses." These costs were given at 
$1.13 per barrel in 1931, $1.18 in 1932, and $1.08 during th© last 3 
months of 1933, and will probably approximate that amount in 1939. 

The Chairman. Do you know how broad that survey was from 
which this was made? 

Mr. La Fleiche. Senator, I don't know. T was furnished a copy 
of this survey, and how extensive it was I don't know. 

The Chairman. Well, do you think that the selling price of crude 
oil is sufficient to cover tliis averasre? 


Mr. La Fleiche. No. The average selling price, that is the sell- 
ing price of average Wyoming oils, is less than these costs for the 
period of the years mentioned. 

The Chairman. Is there any difference in costs as far as you know- 
between that which the independent must meet and the major pro- 
ducer meets? 

Mr. La Fi>eiche. The costs of production? 

The Chairman. Yes. 

Mr. La Fleiche, Most of the independents, that is the small inde- 
pendents, calculate their costs different than this set-up. Very few 
of them have exploration departments, and a number of the items that 
are mentioned here would probably not be included in an independ- 
ent's cost. 

The Chairman. Would you understand this to be a cost of a major 
company ? 

Mr. La Fleiche. That is correct; yes. I believe the major com- 
panies would be the only companies that could furnish this informa- 
tion to the administrative board. 

The Chairman. But the authority for this statement is that of the 
Petroleum Administrative Board? 

Mr. La Fleiche. That is right. 

The Chairman. Very well. 

Senator King. Is the cost of production by independents greater 
or less than the cost of production by the large companies ? 

Mr. La Fleiche. I would say it is less. 

Senator King. Then the superior advantages, if there be advan- 
tages, from large production and a wider market are offset by smaller 
profits compared with those made by independents? In other words, 
the independents have an advantage, if I understand you rightly ? 

Mr. La Fleiche. The independents do have some advantage in 
that respect; yes. 

Senator King. They can produce cheaper per barrel than the big 
company ? 

Mr. La Fijeiche. As a oeneral statement I would say yes. 

The Chairman. Wliy is that so? 

Mr. La Fleiche. The independents — and I am classing all per- 
sons producing oil as independents — don't include the number of 
charges that the major oil companies include. 

The Chairman. Do they incur those charges? ; 

Mr. La Fleiche. Beg pardon? 

The Chairman. Do they incur those charges? Do they have to 
meet them? 

Mr. La Fleiche. In some respects they do, and in some respects 
they don't. I consider independents as operating properties them- 
selves. They usually make no allowance for their own wages or 
superintendence from that standpoint. In other words, they have 
been able to take small stripper fields with wells of small productive 
capacity that a major oil company wouldn't attempt to operate. 
The.v will operate those successfully; they will return themselves a 
profit. However, if the methods used in accounting were those the 
larger oil companies use they probably would show a loss. 

The Chairman. Well, of course, the question fundamentally is 
whether the independent by and large can produce oil more cheaply 
than the major. That seems to be raised by what you are saying, and 


that question seems to be raised. It would be a matter of great 
significance if it were a fact that it cost the major companies more 
to produce a barrel of oil than it does the independents. But as 
you qualify your statement, am I to understand that you mean the 
independent can produce more cheaply than the major because he 
operates properties which a major company wouldn't handle? 

Mr. La Fleiche. That in a measure is correct; yes. 

Senator King. I suppose the major companies expend consider- 
able money in exploration and experimentation. You stated a 
moment ago, if I correctly understood you, that about 34 percent 
of the large number of wells which have been drilled were dry 
holes, dry wells. I assume that most of those wells which were 
not productive were drilled by the major companies, coming back to 
the question now of those preliminary observations. I assume that 
a considerable part of the costs of the major companies are incurred 
in their exploration and experiments, drilling in ground, perhaps, 
which had not been explored ; whereas independents, from your state- 
ments, were taking ground where there had been exploration and 
where it was demonstrated that there was oil, but perhaps the amount 
which would be recovered would be so small that the major com- 
panies didn't care to undertake the development? 

Mr. La Fleiche. Small independent companies and the inde- 
pendent operators who come and go — by that I mean those that or- 
ganize a company to drill a well, but if that is a failure, it is charged 
off and is forgotten. If a major oil company drills that well they 
pay for it and that cost is carried along in cost of future oil that 
might be taken from the ground. 

Senator Kjng. So many of the independent companies drill a hole 
and they don't get anything, and perhaps the company is dissolved. 

Mr. La Fleiche. That is usually the case. 

Senator King. And there would be no accounting as to the cost 
of that fruitless effort. 

Mr. La Fleiche. That is right. 

The Chairman. And that loss is not passed on to the public, 
whereas the loss of a major operator, controlling large reserves, is 
passed on to the public. 

The subject is one of great interest because when the Leasing 
Act was passed, Congress endeavored to outline a policy of encourag- 
ing the so-called small operator, the prospector, the independent, and 
the limitation w^as placed upon the amount of land which one oper- 
ator could hold in a particular field or in a particular State, but 
the testimony before this committee seems to coincide with what you 
have just testified to, namely, that the major companies control by 
far the largest proportion of oil reserves in the United States. You 
testify that in Wyoming at least 75 percent of production comes 
from the operation of the big companies. Now then, if that is true, 
would one be justified in drawing the inference that encouragement 
of independent production would tend to lower the Cost of produc- 
ing and therefore lower the cost of petroleum to the public? 

Mr. La Fleiche. I would say that it would ; yes. 

Senator King. What proportion of that seventy-odd percent that 
you have just indicated was produced by the major companies comes 
from the publicly owned lands and what proportion from State- 
owned and what proportion from privately owned? 


Mr. La Fleiche. I wouldn't have the information to answer 
that question, Senator. I don't think that the information has ever 
been broken down as your question was put. The percentage of 
prospective lands or percentage of reserve production owned by the 
State and by the Government, by patented -land owners, varies in 
the different fields to a great extent, and the only reason a person 
would want to get that information would be for statistical purposes, 
and I don't believe anybody has ever gone to the expense of attempt- 
ing to obtain it. 

The Chairman. Doesn't your testimony with respect to the classi- 
fication of the lands from wliich oil has been produced in the State 
substantially answer the Senator's question? 

Mr. La Fmiiche. That is on the basis of barrels produced, and 
a person has to take into consideration the fact that the productivity 
of lands varies greatly over an individual pool. Perhaps as a general 
picture, it gives an idea of the relative ownership, but not necessarily so. 

Senator King. That is to say, one pool on public land might pro- 
duce a great deal and a number of pools upon State lands or privately 
owned lands would produce a limited amount, measured by the larger 
quantity produced by the pool upon the publicly owned lands. 

Mr. La Fleiche. In a given pool you might have three leases of 
equal area, one is State land, one is patented land, and one is Gov- 
ernment land or public land. Ninety-five percent of the production 
might come off from public land and the other 5 percent production 
off from the other two classes of land. That is possible. So in these 
figures, it may give a general index, inasmuch as they are broad all 
over the State, as to the relative amounts of productive oil land 
owned by the respective interests, that is, the Government and the 
State and private citizens, and I think it is a fair index of that 

Senator King. From your observations in the State, what would 
be your opinion as to the ownership of the lands in Wyoming in 
which the reserves may be found ? In other words, would the greater 
part of it be on public lands or State-controlled or privately owned 

Mr. La Fleiche. I would say the greater proportion of it is on 
Government land ; yes. 

The Chairman. Most of the oil fields in Wyoming which have been 
brought in are on the public domain, are they not? 

Mr. La Fleiche. As a general statement ; yes. 

The Chairman. Of course, there are privately owned lands in 
various fields and the State owns lands in various fields, but the 
largest proportion of the acreage is on public domain, is it not ? 

Mr. La Fleiche. There are some exceptions. For instance, the 
Byron and Garland fields. Originally those fields were developed 
in irrigated sections in which the title has passed to private citizens. 
In those fields the private citizens owned, by a great majority, the 
lands and the structures. On some other oil pools, the situation is 
reversed. As a general rule, most of our oil pools are found in very 
poor areas. 

Senator King. Have any of the fields been exhausted ? The reason 
I make that inquiry, I recall the testimony of one of the witnesses 
from Texas and his testimony indicated the oil sands penetrated to a 
very great depth, indeed they hadn't discovered, hadn't reached the 


depth yet. I was wondering if similar situations prevailed in any 
of the oil fields in Wyoming. 

Mr. La Fleiche. I don't know, Senator, that any field in the world 
has ever been exhausted. That would be a physical impossibility. 
It might be economically exhausted so far as the recovery of any oil 
at a profit is concerned, but there is always a portion of the oil that 
remains in the reservoir. It may be an increased price of petroleum 
would allow more of that to be taken out by the present methods of pro- 
duction or that new methods of production might be found that would 
allow it to be taken out at the present price. There are lots of 
fields that are not commercially productive. 

Senator King. I recall that a number of years ago statements were 
made that certain fields in California had been exhausted. I didn't 
ascertain whether or not they were economically exhausted or whether 
as a matter of fact all of the oil had been obtained from the sands 
by pumping or by pressure. But in your State, so far as you know, 
the fields have not been exhausted? 

Mr. La Fleiche. I don't know of any that have been exhausted; 

The Chairman. You may proceed. 

Mr. La Fleiche. Exhibit A shows crude oil prices from 1924 to 
July 1, 1938. 

I have two small charts here. Senator. I have only two copies of 
them. I will pass them over for your inspection. 

The Chairman, Is this Exhibit A? 

Mr. La Fleiche. The first one there is Exhibit A ; yes. 

The Chairman. It may be admitted to the record. 

(The chart referred to was marked "Exhibit No. 1297," and is 
included in the appendix on p. 9820.) 

The Chairman. This consists of six pages ? 

Mr. La Fleiche. That is correct. 

Charts 1 and 2 show some comparative prices of Wyoming and 
Mid-Continent oil. Those are the charts you have in your hand. 

The Chairman. And this you offer as Exhibit B, comparative 
schedule of Mid-Continent and Wyoming light oils, and a compara- 
tive schedule of Wyoming black oils? 

Mr. La Fleiche. That is correct. 

The Chairman. These then are Exhibits B and C. What do they 
purport to show? 

Mr. La Fleiche. Some relative relationships of prices of black 
oil and the prices of light oils.relativ6 to certain Mid-Continent prices. 

The Chairman. This compares the posted price in Wyoming with 
the Mid-Continent posted price? 

Mr. La Fleiche. It does on the light oil. 

The Chairman. And how about the black oils ? 

Mr. La Fleiche. In the black oils there is really no basis of com- 
parison. It does show the price trends of certain black oils. 

The Chairman. The exhibits may be admitted. 

(The charts referred to were marked "Exhibit No. 1298," and are 
included in the appendix on p. 9838.) 

The Chairman. You may proceed. 

Mr. La Fleiche. It is significant to note that, up until 1925, when 
Salt Creek ojl was placed on the Mid-Continent schedule Wyoming 
light oils were sold at a differential from. 35 to 75 cents under equal 
grades of Mid-Continent oil. For instance, during 1914 the differen- 


tial for Salt Creek averaged 55 cents under; 1914, 85 cents; 1917, 70 
cents; 1918, 1919, and 1920, 75 cents. 

The Chairman. Seventy-five under? 

Mr. La Fleiche. Under Mid-Continent equivalent grades. 1921, 
30 cents; 1923, 30 cents; and 1924, 40 cents. The extinguishment 
of this unfavorable differential may be attributed to competitive fac- 
tors entering into crude-oil purchasing field, and primarily to the 
trunk pipe line extending to Missouri. 

Black oil prices from 1922 to 1938 are compared on chart No. 2? 
A general downward trend is to be noted until in 1938 in the instance 
of Hamilton Dome crude : n all time low of 35 cents per barrel is 
posted, and, with the exception of a period in 1933 and 1934, is also 
a low for Grass Greek heavy. (See also Exhibit A.)^ 

Comparison of Wyoming crude oil prices with the prevailing mar- 
ket prices of oils produced elsewhere in the United States, as listed 
by the Oil and Gas Journal, for the months of October and November 
1938, reveal the interesting fact that Hamilton Dome and Grass 
Creek black oils bring the lowest prices of any oil of any gravity; 
Grass Creek and Elk Basin are among the lowest of any comparable 
oils in the United States. 

Senator King. Is that because of inferior quality, chemically 
speaking ? 

Mr. La Fleiche. I can't explain why those oils should be so low 
in price. I can tell of some of the reasons that are given as to why 
the oils are so low in price. 

The Chairman. What are the reasons that are given? 

Mr. La Fleiche. The reasons given are largely a matter of com- 
petition. In other words, in the Big Horn Basin, the black oils are 
forced to compete on the fuel oil market and in the asphalt or road 
oil market. They are primarily valuable for those two purposes. 
Gasoline and some of the other lighter fractions are incidental m the 
manufacture of road oil and fuel oil. 

The fuel oil market, as I have been told, for black oils is primarily- 
in the Minnesota region, around Minneapolis and through there, and 
of course some of it gets up into Montana and North and South 
Dakota and through that region. 

The 10 percent increase in freight rates granted here about a year 
or a year and a half ago shut out some of the Minneapolis market. 

The Chairman. You are referring to the blanket increase? 

Mr. La Fleiche. That is the blanket freight increase of 10 per- 
cent ; yes. 

And the Illinois fields that are producing today have taken a good 
share of the fuel market of the Minneapolis district. 

Further than that, our Wyoming black oils have a high sulphur 
content that does make refining more difficult than some other black 
oils produced in the United States. 

Senator King. That would be regarded as a deleterious admixture ? 

Mr. La Fleiche. That is correct. 

Senator King. Solvent or insoluble. 

Mr. La Fleiche. The light oils produced in the State I believe with 
the possible exception of some of the oils in the Big Horn Basin 
region, should be on a parity with Mid-Continent. 

•■Exhibit No. 1298," appendix, p. 9838. 
' "Exhibit Np. 1297," appendix, p. 9820. 


Senator King. Weil, i assume from your statement — if 1 am in- 
correct will you please correct me — that there are a number of factors 
that enter into the determination as to why oils in One section are 
a higher price than another; freight rates are primary 

Mr. La Fleiche. I don't really know, Senator, how the price of 
oil is determined, especially in' a specific instance. I'here is a com- 
petitive factor, and there is the .value of crude for refining purposes, 
and the refining purposes in some sections of the country mav be 
different than in another section for a similar. grade of oil. . 

The base that I prefer to go on ,is the relative relationship that 
those oils have enjoyed in the past as compared with tlie relationship 
they enjoy today. In other words, I believe that is something that is 
more tangible to work upon. 

Senator King. All oils are not the same; they don't have the same 
heat units, they don't have the same specific qualities, the same chem- 
ical qualities, if I may use that expression'; there may be more oxy- 
gen, more hydrogen, more carbon in one oil than in another. I am 
not sufficiently acquainted with the specific elei\ients that enter into 
the composition of oil to discuss that, but you mention light oils and 
heavy oils, oils for heating purposes, this purpose or that. Appar- 
ently then all oils are not of the same quality. 

Mr. La Fleiche. That is correct. 

Senator King. And therefore prices would differ from place to 
place or with respect to the uses to which the oil was put, the purposes 
for which it was required. 

Mr, La Fleiche. Well, we make more or less of an arbitrary 
classification of oils. We call our light oils, oils that have an olive 
green color, we will say, and high gasoline content, and relatively 
small amount of asphalt in them, we call those light oils; black oils 
are black colored oils that have a large percentage of asphalt and 
are suitable for road oil, fuel-oil purposes, and don't carry a very high 
percentage of gasoline. It is more or less of an arbitrary classifica- 
tion because nearly all of our oils are mixed base; in other words, 
they have some asphalt and some paraffin ; in the hydrocarbon series 
they have some differences, and there are no two oils that are 

Senator King. Therefore there would be different prices for oils. 

Mr. La Fleiche. There will be ; yes ; different prices for oils. 

The Chairman. Well, these differences exist elsewhere, do they 

Mr. La Fleiche. All over the United States. 

The Chairman. In other words, the difference's you are talking 
about now are not characteristic of Wyoming oil 

Mr. La Fleiche. That is correct. 

Senator King. I didn't assume that Wyoming was to be differen- 
tiated from the rest of the United States. 

The Chairman. You may proceed, Mr. La Fleische. 

Mr. La Fleiche. Already the low price of Lance Creek oil has. 
undermined the price structure and production of Osage crude. This 
oil is being trucked almost into the Osage field Itself by refiners here- 
tofore operating exclusively on Osage crude. Furthermore, it threat- 
ens to ruin the market and seriously upset the production from other 
of the older Wyoming fields. The situation of the oil producers in 
a number of Wyoming fields is extremely precarious, and it is indeed 

124491 — 40— pt. 17, sec. ^ -t 


marvelous that the producers can continue to exist under the high 
transportation costs, high wage scale, adverse operating conditions, 
and low crude-oil prices. It is significant to note that under the 
Bureau of Mines recommendations of production for November, Wyo- 
ming was producing a less percentage of such recommendation than 
any other State in the Union. In addition, drilling operations in 
Wyoming were fewer than in any other oil-producing State, with the 
exception of Montana, Colorado, and Indiana. 
Those figures are for November 1938. 


Mr. La Fleiche, Until the completion of the trunk pipe line to 
Freeman, Mo., in 1924, Wyoming depended largely upon intrastate 
refining facilities and the railroads for dtsposal of its petroleum and 
refined products. The completion of the said pipe line permitted 
Salt Creek crude oil to compete with Mid-Continent crude. This line 
was closed to traiSic in, I thmk, about 1925 or 1926, and then reopened 
to traffic in 1936. The production of the Salt Creek field greatly 
exceeded the ability of the market to absorb the crude, and from 1920 
to 1925 the storage of oil above ground increased from 600,000 barrels 
to over 25,000,000 barrels, which constituted one of the most top- 
heavy storage stocks in the United States. Additions were made m 
substantial amounts to this storage until the year 1936, when the 
trunk line to Missouri was reconditioned and removal of storage oil 

The crude oil requirement of refiners located in the Salt Lake City, 
Utah, district is transported by pipe line and then by rail from 
southern and western Wyoming fields. A pipe line is, however, now 
under construction which will carry Lance Creek oil and also the 
production from other fields mentioned. It will be interesting to 
observe if this cheaper and more economical means of transportation 
will effect any increase in the prices of crude oil sold from the fields, 
contributory to this line. This is doubtful as a 6-year contract has 
already been made for Lance Creek crude that specifies a price of 25 
cents below 36 gravity Mid-Continent oil for a 2-year period and in- 
creases 13 cents effective during the last 4 years. A pipe line has also 
been constructed from Lance Creek through southern Wyoming to 
Denver, Colo., but this construction has resulted in no increased prices 
to the producer over those prevailing under previous less favorable 
and more costly transportation. 

The Chairman. In other words, you are saying that the construc- 
tion of the pipe lines which afford a cheaper means of transportation 
IS not resulting in any benefit to the producer but to the purchaser 
of the oil. 

Mr. La Fleiche. I can say that it has represented no price bene- 
fits to the producer, that is, the price for^nide petroleum, but as for 
the benefits to the refiner or the transporter of the crude I don't know, 
it depends on how that split is made. 

The Chairman. Well, let me put it on the basis of benefits to the 
purchaser. If the price is reduced the purchaser gets the benefit and 
It becomes a buyer's market instead of a seller's market ? 

Mr. La Fleiche. You mean the purchaser of the crude oil? 

The Chairman, That is right. 


Mr. La Fleiche. The purchaser of the cruae would get the benefits. 

Mr. AviLDSEN. Mr. La Fleiche, isn't it a fact that the owner of 
those wells out there is benefited indirectly by this pipe line to this 
extent, that, let us say, a certain oil company is taking that oil now 
through its pipe line, not giving him any advantage in transporta- 
tion, but later on that oil company could buy oil elsewhere at a few 
cents less ; they would be less apt to go to that other market for their 
oil, now that they have their investment in tbis pipe line, that they 
are more likely to stay there and buy from that producer. Isn't 
that producer better off by that pipe line having been pUt in there ? 

Mr. La Fleiche. That has certain adva..^ages to the producer; 
yes. In the instance of, we will say, oil produced from the La Barge 
field, which goes exclusively to the Utah refinery, that oil is trans- 
ported by pipe line down to a loading rack, a siding called Opal. 
The rate I believe is 35 or 40 cents a barrel. Now unquestionably this 
pipe line from La Barge to Opal would be connected into the 
pipe line leading from Lance Creek to Salt Lake City. The question 
is, will the field benefit by an increased price as a result of the prob- 
able decreased cost of transportation of that crude? Now there is 
no competition to this field over there. There is no oil produced or 
very little oil produced in Utah. The La Barge field is the closest 
field. It has the Utah market and it is unreasonable to presume 
that any other field under existing conditions could take that market 
away from La Barge. 

Also in Medicine Bow and Rock River and Quealy. Now a goodly 
portion of those crudes has gone into Salt Lake City by pipe line and 
then by rail. Now those oils have for a large number of years enjoyed 
a certain relationship with Mid-Continent oils ; that is, the price has. 
"When this pipe line is constructed, and the pipe line is, next to water, 
the cheapest means of transporting oil known, when this is con- 
structed, are some of these benefits going to be passed on to the pro- 
ducer in the form of increased crude prices or is the transporter going 
to gobble up all of the benefits? 

Senator King. Or would the consumer get some benefit? 

Mr. La Fleiche. If the refinery is able to get cheaper crude it 
is reasonable to presume that they will give the consumer cheaper 
manufactured products. 

Senator King. Generally speaking, throughout the United States, 
has not that been one of the objectives, to get the price of crude oil 
as low as possible in order that the conversion of the crude into 
gasoline — the result might give a cheaper product to the consumer? 

Mr. La Fleiche. No; I don't believe that there has been any 
specific effort to make crude oil as low as possible so the consumer 
could get it cheaper. 

Senator King. I didn't speak so much of crude oil, but the 
cheaper you can get your crude oil, the cheaper, all things else being 
equal, the same factors being involved, the cheaper should be the 
gasoline to the consuming public ? 

Mr. La Fleiche. Not necessarily. There is a certain point that 
that ceases to be true. For instance, if you would deliver a barrel 
of crude to a refiner, free of all cost at his plant, it still would cost 
him so much money to refine it, load it on the tank cars, transport it to 
the jobber, and then deliver it to the retailer to put in the tank of the 


Senator King. I didn't make myself clear. The cost of the crude 
is an element, in determining the ultimate cost of the gasoline? 

Mr. La Fleiche. That is correct ; yes, sir. 

Senator King. To the consumer? 

Mr. La Fleiche. That is very true; yes, sir. 

Tlie Chairman. Now the building of the first pipe line to Missouri 
had the effect of extinguishing the differential, you testified? 

Mr. La Fleiche. That is correct. 

The Chairman. So that the construction of that pipe line brought 
the price of Wyoming crude up ? 

Mr. La Fleiche. To a parity with similar grades of Mid-Continent. 

The Chairman. Of Mid-Continent, but now do I understand that 
in your opinion the construction of the Continental Oil Co.'s pipe 
line to Denver, and the construction of the new Utah Oil & Refining 
Co'.'s pipe line to Salt Lake City is going to have the reverse effect 
of reducing the price of crude again? 

Mr. La Fleiche. It shouldn't, but in the instance of the Con- 
tinental line to Lance Creek it certainly hasn't resulted in any in- 
crease in the price of crude. The old price basis, which came about 
through an original contract of the Ohio Oil Co. with the Sinclair, 
for the purchase of about 1,000 to 1,500 barrels of crude oil for delivery 
to the Parco plant. This price was set at 77 cents which, as I 
imd^irstand it, was the price that allowed Lance Creek oil to com- 
pete with Salt Creek oil, delivered into Parco. 

T le Chairman. Well, in your opinion, is there any basis now for 
a diTerential between Wyoming crude and Mid-Continent crude? 

Mr. La Fleiche. In the crude that we are discussing, Lance 
Creek, I would say no. I beljeve that Lance Creek oil should be 
on a parity with similar grades of Mid-Continent crude. 

The Chairma||. Why? 

Mr. La Fleiche^ For the simple reason it can be laid into the 
same places just as cheap. 

The Chairman. How about quality? 

Mr. La Fleiche. I believe the (quality is superior to 40 gravity 
Mid'Continent crude. Now that is a very debatable question. It 
might be more valuable to some refiners'than to others and there 
is also the octane value of the gasoline manufactured from Lance 
Creek crude, which I understand is slightly lower than Salt Creek. 
But Sinclair was willing to pay as much for Lance Creek crude 
as he was for Salt Creek crude, providing it could be delivered for 
the same price at the Parco plant. So it seems to me that would 
establish— they being in the refining business and a responsible oper- 
ator, would establish apparently a value of Lance Creek crude and 
Salt Creek crude. 

^ A considerable amount of oil from eastern and northern Wyoming 
fields has, in the past, been shipped by rail to refineries in Montana 
and Canada, but subsequent development of Montana oil fields and 
the recent Canadian fields has severely cut into this market, and at 
the present time no Wyoming oil is moving into Canada. Of the 
eastern Wyoming fields, considerable of the crude is now being 
shipped by truck to small refineries located in South Dakota and 
in Nebraska. 

The major oil fields ol the State are connected by pipe line to 
refineries or to loading racks on railroads serving such refineries. 



A number of the black-oil fields, however, lack pipe-line facilities 
and are shut in. Truck transportation of crude oil from a number 
of the fields is becoming highly competitive with existing pipe-line 
and railroad services. The crude requirements of most of the small 
refineries, or skimming plants, is transported by 'this means. Wyo- 
ming pipe lines and their published tariffs are as follows: 



Fargo-Western: So. Casper Cr. to Casper 

Illinois Pipe Line: 

Grass Creek to Chatham.. 

Oregon Basin to Cody . ■,.. 

Mule Creek to Dakoming 

Byron to Greybull -.. 

Elk Basin to Greybull (July)... 

Grass Creek to Greybull (July) 

Hamilton Dome to Greybull (July) 

Rex Lake to Hutton 

Lance Creek to Lusk 

Lance Creek to Ft. Laramie 

Rock Creek to Rock River 

Medicine Bow field to Medicine Bow 

Byron to Lovcll 

Button Creek to Rock River 

Continental Oil: 

Lance Creek to Manville 

Lance Creek to Cheyenne 

Rocky Mt. PL Co.: Lance Creek to Denver. 

The California Co.: Quealy-4& Rock River. .. 

Wyoming Oil & Gas: Osage field to Osage 

Osage Trust: Osage field to Crites 


Casper to Parco 

Ferris to Parco 

Lost Soldier to Parco , 

Salt Creek to Parco 

Salt Creek to Casper 1 ,.. 

Standard Oil Co. of Ind.: Salt Creek to Casper 

Stanolind Pipe Line Co.: Welch (Clayton) to Sugar Creek, Mo. 

Stanolind Pipe>Line Co.: Lance Creek to Sugar Creek, Mo 

Standard Oil Co. Indiana: LaBarge to Opal 

Atlantic Pacific: Dallas-Derby to Wyopo.. 

Yale Oil Co.: Hidden Dome to Worlaiid 






102. 40 






























10 plus 10. 

'■ 24 plus 5. 

The natural market for product.s refined in the State of Wyoming 
is in the States immediately adjacent. However, in the early 1920's, 
favorable export conditions and export rail rates together with a' 
price differential against Wyoming oils permitted the sale and ex- 
portation of large quantities of Casper-made gasoline. These ship- 
ments "''VM-e eventually discontinued due to increased competition 
from Soutli American and Mexican oils. The Colorado market is 
highly competitive, as products from western Kansas and Oklahoma 
and northwest Texas can be moved into the Colorado territory under 
very favorable I'ail rates, and here again trucks arc also a factor. A 
market formei'ly enjoyed in tlie Minnesota and eastern North and 
South Dakota regions has been taken })y means of a gasoline line 
from tlie Mid-(>jntinent. 

The development of the oil fields and refining fucilities in Mon- 
tana has also seriously affected the marketing of refined products 
in these States. Water shipment of refined products from California 
up the west coast and up the Columbia E-iver shuts AVyoming oils 
out of a portion of western Montana and Wa.shington, Oregon, and 
Idaho points. Unfavorable freight r^tes have.also affected the market 


for asphalt as at one time California road oil was moved into Lara- 
mie, Wyo., at the same rate of transportation as from Casper, Wyo. 
Evanston is now the point of balance of these rates. A large amount 
of the fuel oil manufactured by the Big Horn Basin Refiners moved 
into the Minneapolis territory, but that has now been supplanted by the 
increased production from new Illinois fields. 


Mr. La Fleiche. Of 45 refineries located in the State, only those 
operated by major oil interests have modern cracking facilities. 

The Chairman. How many of them are operated by the major 
interests ? 

Mr. La Fleiche. Well, there is a refinery at Parco ; there are three in 
Casper ; there is one in Greybull, one in Lovell, and one in Cody. 

The Chairman. One in Glenrock? 

Mr. La Fleiche. And one in Glenrock. 

The Chairman, Those are major company refineries? 

Mr. La Fleiche. Yes; I am fold that the Bay is a major re- 
finery. However, I have nothing to substantiate that. 

The Chairman. How many of these 45 refineries are skimnling 

Mr. La Fleiche. All except the ones I mentioned as major refineries. 

The Chairman. In other words, these include, in addition to the 
eight major plants just listed, practically only the small skimming 
plants ? 

Mr. La Fleiche. That is correct. There are 37 skimming plants^ 
and 8 of the larger cracking. 

The Chairman. And the total output of all of the skimming plants 
doesn't begin to be as much as that of the eight large plants ? 

Mr. La Fleiche. No. 

The Chairman. Very well. 

Mr. La Fleiche. Those not possessing such equipment are classed 
as skimming plants. The majority of the smaller refineries market 
only third structure gasoline, not having a license to add the tetra- 
ethyl lead necessary to rai'Se the octane rating the required amount. 


Mr. La Fleiche. Wyoming refineries must seek an outlet for 
their products in adjoining States as Wyoming consumes only about 
20 percent of the gasoline manufactured. 

With the exception of the southeastern section of the State, there 
is very little price competition in regular leaded gasolines at the filling 
stations. Such competition as there is is in service to the consumer 
and advertisement of the merits of respective brands of gasoline 
and motor oils. 

The Chairman. Do you know whetlier or not the smaller re- 
fineries have desired to have that license for the use of the tetraethyl 
lead? ^ 

Mr. La Fleiche. At one time, as I understand the situation, and 
I was never in the refining business, so I can't justify this from any 
personal experience, merely what has been told me ; it was very diffi- 
cult at one time for the small refineries to secure a license for leading 
gasoline. I think within the last 2 or 3 years that condition has been 


changed and now it is possible for any refinery to obtain these licenses. 
The cost, however, is prohibitive for most small plants ; not the cost 
of the lead, but the cost of the necessary equipment to mix the lead. 
The lead is very dangerous to handle and it requires strict super- 
vision and standard equipment. 

The Chairman, This is a patented process ? 

Mr. La Fleiche. What is that ? 

The Chairman. This is a patented process? 

Mr. La Fleiche. I understand it is a patented process. 

The Chairman. Do you know who owns the patent? 

Mr, La Fijeiche. I have been told it is held jointly by the General 
Motors and Universal Oil Products Co. I believe those are the two. 

The Chairman. What is the Universal Oil Products Co. ? 

Mr, La Fleiche. I couldn't answer that question. 

The Chairman. You don't know who owns that? 

Mr, La Fleiche, I don't know who owns that. 

Senator King. Has it been demonstrated to the satisfaction of 
chemists, if you know, and of the users of gasoline, that this product 
which is patented is superior and if so to what extent ? 

Mr, La Fleiche. Well, Senator, that is a very difficult question 
to answer. I will say this, however, that in modern high-compression 
internal-combustion engines such as are used in the modern auto- 
mobile, the addition of lead or some other compound to reduce the 
detonation rate or reduce the tendency of the engine to knock under 
load makes it necessary that there be a gasoline that will prevent that. 

In other words, you are getting a greater efficiency out of leaded 
gasoline than you are out of the ordinary gasoline, and there are other 
processes ; some of them I understand are in the state of development, 
that will possibly eliminate the use of lead, but at the present time 
the addition of lead to gasoline makes a much better motor fuel for 
the ordinary modern automobile than the fuels without lead in them. 
Now the question as to whether or not the addition of this lead to 
make, say, 70 octane gasoline is worth 2 cents a gallon more, I couldn't 
answer that question. 

The Chairman. You may proceed. 

Mr. La Fleiche. There is, however, severe price competition in 
sales to large individual consumers of gasoline and, fuel oils such as 
contractors, truckers, municipal light plants, and so forth. There has 
been much criticism of the gasoline price to the average consumer in 
Wyoming as the consumer cannot understand why gasoline prices are 
higher at the point of manufacture than in States to the east and 
south that have few oil fields. 

The retail prices in States bordering on tlie north and west are 
similar to" those prevailing in Wyoming. The refiners maintain that 
the higher prices prevailing in Wyoming are necessary to enable them 
to maintain a balance with the sales price in competitive territory, 
and thereby maintain an adequate plant throughout, Wliether tlie 
prices are too high or not is a moot question and against this must 
be carefully weighed the possibility that the saving to the consimier 
in reduced prices will be offset by further refinery curtailment or a 
drastic reduction in the price paid for crude petroleum. It is very 
probable that the competition now existing in the southeastern part 
of the State will rapidly expand over the entire State due to the 
increase of cheap truck transportation and force prices down. 


Another factor in the high gasoline price situation is the dealer 
margin which will average from 4 to 5 cents per gallon against an 
average of about 3 cents in the low price States to the east and the 
south. There are now about 1,275 licensed retail stations with aii 
average daily sales of 137 gallons. Each station will employ an 
average of two men. A reduction in the dealers' margin alone would 
make cheaper gasoline, but it is a question if such reduction would 
not also cause a loss of employment of many service-station workers. 

The so-called independent has not been a serious factor of com- 
petition in Wyoming and the production, transportation, refining, and 
marketing of petrol^sym has long been under control of the large 
integrated interests. The public-land policy and the rapidly in- 
creasing cost of well drilling has a tendency to further concentrate 
production in the "hands of the large companies. However, stiffer 
competition is appearing in the refining and the marketing branches. 

It is my conclueion that of paramount economic importance to the 
State of Wyoming is the maintenance of a stable and equitable crude- 
oil price structure. Also of great importance is the careful regula- 
tion of pipe-line rates so that the economies of such means of trans- 
portation may bring commensurate benefits to the producer and also 
to the ultimate consumer and not operate solely to the benefit of the 
transporting agency. The public-land policy should be such as to 
encourage the leasing and bona fide development and operation of the 
public lands by the smaller compptitive interests. 

The Chairman. You referred awhile ago to the Bureau of Mines 
estimates, saying that Wyoming does not produce as much as tN» 
Buresiu has estimated for it. How long has that been the case? 

Mr. La Fleiche. I don't have any recent figures on that. At the 
time I invc Hcrated that, that had been the case up to about a year 

The Chairmax. For how long a period back? 

Mr. La Fleictte. For. I would say, several years. 

The Chairman. Wlint is the reason, if you know, why the State, 
with apparent r:n);K'ity to produce, has not contributed as much to 
the national crude-oil market as the Bureau of Mines has estimated 
for it? 

Mr. La Fleiche. it simply hasn't had the market outlets for 
its crude oil. I believe tht;t the construction of trunk pipe lines will 
now relieve tliat situation, and it may possibly make a balance in 
the other direction, but as long as we wore dependent primarily 
upon movement of crude oil out of the State by means of the rail, 
there was little chance foi- overproduction. 

Senator King. Tlien you assume there will be some benefit to the 
producer of crude oil in AVyoming if there is a larger demand beyond 
the })onndai'ies of the State for the crude production in Wvoming? 

Mr. Ija Fleiche. Yes : I do. 

Senator^ King. Whether that increased consumption beyond the 
borders of the State of ci-nd;' oil results from cheaper railroad rates 
or cheapei pipe-line ra'."- oi' cheaper trucking rates, whatever will re- 
sult in finding a yx'uiov nun'ket ''or your crnde oil will be advanta- 
geous to tiie State. 

Mr. La Fleiche. Very much so; yes, sir. 

:Mr. O'Connell. Would you say that so far as the pipe-line trans- 
portation is concerned tliat it would depend on cheaper cost of trans- 


portation by pipe lines or cheaper rates of transportation by pipe 
line ? 

Mr. La Fleiche. Well, I believe that the costs of pipe-line trans-' 
portation are lower than any other means, with the exception of 
water shipment. 

Mr. O'CoNNELL. So I understand, but l also understand in some 
areas the rates for transportation by pipe line are equal in many 
cases to the transportation by rail,. so the benefits that you envisage 
might depend somewhat upon the rate structure rather than upon 
the actual cost. 

Mr. La Fleiche. Yes; I see no justification in any instance for a 
pipe-line rate to a certain point as great as the rail rate to that point. 
In other words, there is no justification for construction of a pipe line 
under those circumstances. They are simply taking business from 
the existing transporting agency. 

Senator King. That is to say, if the railroads furnish adequate 
transportation facilities for the crude oil, and furnish them cheaply 
enough, there is no reason for the construction of pipe lines, but if 
their rates are too high, then there is a justification for trucking or 
pipe lines. 

Mr. La Fleiche. There is one item in favor of the pipe line other 
than the cost of transportation, that is the loss of oil in handling. 
.It is necessary to handle the oil several times in rail transportation 
and there is loss by evaporation, there is a greater liazard there, and 
the movement isn't as continuous or as speedy. 

Senator King. There are advantages then in the utilization of a 
pipe line as against trucks or as against railroads in the transporta- 
tion, particuParly over a long distance. 

Mr. La Fleiche. I beg your pardon. 

Senator King. There are advantages, are there not, in economy as 
well as in other respects, in having a pipe line available for the con- 
veying of your oil as against a railroad or trucks ? 

Mr. La Fleiche. The pipe line is the normal, economic method 
of transporting crude petroleum. 

Senator Kjng. There would not have been such large sums ex- 
pended in the construction of pipe lines if there had not been eco- 
nomic advantages resulting from them. 

Mr. La Fleiche. That is correct ; yes. 

Senator King. Economic advantages to the public at large as well 
as to those who are engaged in the production, manufacture, and dis- 
])osition of oils and their products. 

Mr. La Fleiche. The pipe line is indispensable to the oil business, 
and it has contributed greatly to the low price of gasoline to the con- 
suming American public. 

The Chairman. What suggestions do you have with respect to this 
recommendation that you just made about the public-land policy and 
the encourageinent of smaller competitive interests? 

Mr. Xa Fleiche. I believe that there are certain features in the 
present public-land policy that tend to inhibit the smaller interests 
from acquiring public lands for purposes of development and opera- 
tion. I believe that those things can be very easily removed. I think 
that the removal would result not only in benefits to the small oil 
man, but also in benefits to the Government. 

The Chairman. What are they, specifically? 


Mr. La Fleichb. For instance, I have no objection to the law 
under which these public laws are administered. 

The Chairman. You mean the Oil Leasing Act? 

Mr. La Fleiche. The Oil Leasing Act, but under the regulations, 
for instance, the cost of acquiring these lands is a rental of 50 cents 
an acre for the first year, and thereafter a rental of 25 cents an acre. 
This rental, insofar as Wyoming rents are concerned, I believe is 
excessive. The lands are not worth that for the purpose of ex- 
ploration. If that rental were 10 cents an acre, I believe that the 
Government would probably lease 10 times more land. 

The Chairman. Would you say that a high rental of that char- 
acter tends to handicap the small independent operator? 

Mr. La Fleiche. Yes ; I would. 

The Chairman. And your opinion is that it would be beneficial to 
the State and to the petroleum industry if the Government by reduc- 
ing the rental should invite the small operator into the field? 

Mr. La Fijeiche. Yes; it is. 

Senator King. It would be disadvantageous, however, to the small 
operator if by this reduction it were possible for the large, the major 
companies to secure larger holdings. 

Mr. La Fi/Eiche. Well, I understand there is a limitation by law, 
isn't there, on the amount of acreage the larger companies may get ? 

Senator King. Yes ; but I am assuming that if your thesis is sup- 
ported, it would postulate that the larger companies should not de- 
rive advantages to the disadvantage of the independents. 

Mr. La Fleiche. No. The larger companies would derive some 
advantage by virtue of the reduced rental, yes; but not to the dis- 
advantage of the small operator.- They would both get it. 

Senator King. I am in sympathy, if I may say so, with the view 
expressed by Senator O'Mahoney. I think that so far as we can, 
without discrimination or unfairness, and with due regard to the 
public interest, we ought to encourage the small man, the independ- 
ent, to develop the oil resources, as well as the mining resources of 
our country. 

The Chairman. Are there any other questions? 

You have no questions ? 

Mr. Snyder. No, sir. 

The Chairman. Do you have anything to add to the statement, 
Mr. La Fleiche? 

Mr. La Fleiche. I also think in the matter of leasing of public 
lands, a benefit to the small oilman would be the. elimination of the 
$1,000 corporate surety bond required on the execution of the lease. 
I can't for the life of me see any particular need for it. 

The Chairman. I may say some of us have been urging that upon 
the Department of the Interior. 

Mr. La Fleiche. If there were any specific need for the bond it 
would be a different matter. Also, under the leases that are issued, a 
$5,000 bond is required upon the commencement of drilling opera- 
tions. It would seem to me that it would be in the interest of con- 
servation if that bond could be commensurate with the nature of the 
proposed development. In other words, to the Government there is 
much more risk or much more chance of damage in a 10,000-foot well 
than in a 500-foot well. You ask for a $5,000 bond on a 500-foot 
well or a 10,000-foot well, it makes no difference. If that bond could 


be adjusted to suit in a general way the individual requirements, for 
instance if there is an operator over here who is getting production 
from a sand at, say, 300 feet, those wells would make a half barrel 
or maybe 2 or 3 barrels, and if he has to put up a $5,000 bond it 
shuts him out of the picture. If he could put up, say, a bond com- 
mensurate with the amount of protection the Government would 
require in an undertaking of that nature, then he could go ahead 
and develop these small reserves that are of no interest whatsoever 
to the large operator, but nevertheless do furnish employment and 
contribute to the oil taken from the ground, they add to our re- 
sources, and I think that the picture would be much more flexible 
than it is at the present time. 

Senator King. I would like to ask about adopting a policy that 
would preserve for a period beyond this generation some of our oil 
reserves. I was very much interested in the exposition made by the 
representative of the oil interests from Texas; it seemed to me that 
the proration system there had its advantages, it prevented great 
gushing of oil lar in excess of the demand. You speak about there 
being smaller pools, smaller reserves, that might be worked by 
smaller producers. Have you thought of the fact that it might be 
wise in view of the fact that we are producing more oil than there is 
a demand for, to hold in reserve some of these oil pools and oil fields 
{ind not encourage an overexpansion and overdevelopment ? 

Mr. La Fleiche. I thought about that a great deal myself. Sen- 
ator, and the matter of the desirability of shutting in fields as reserves. 
We do in Wyoming because we just simply can't find the market for 
it, but with a Nation that is consuming well over a billion barrels 
of oil a year, with an estimated 12 to 15 or 16 years' supply of oil in 
sight, that is, discovered reserves, it seems to me we can't lag too far 
behind in the discovery of fields. 

The Chairman. You spoke about the sum of royalties received by 
the United States on public lands in Wyoming. Have you a com- 
parable figure on the royalty received by the State from the opera- 
tion of State oil lands? 

Mr. La Fleiche. Yes; that figure was $18,000,000. 

The Chairman. I overlooked that. Is that the total amount re- 
ceived by the State of Wyoming from the leasing of its lands? 

Mr. La Fleiche. At the date of that 

The ^Chairman (interposing). The preparation of this table? 

Mr. La Fleiche. Yes, sir. 

The Chairman. Do you have any figures showing the way that 
has been divided among the counties? 

Mr. La Fleiche. No ; I don't have the figure. 

The Chairman. The State laAV provides for distribution to the 
school districts and also for the construction of roads throughout 
the State. Have you anything to add to your statement with re- 
spect to the likely trend of the price of crude, or w^bnt could or 
should be done about it, if anything? 

Mr. liA Fleiche. I don't know what can be done about it except 
I do believe in the regulation of pipe lines and a very definite assur- 
ance had as to the cost of this transportation. I understand that 
on the pipe line that is being constructed from Lance Creek to 
Salt Lake City, no tariff has yet been posted. At the same time, 
they have said what they would pay for the oil. It would seem 


to me that the costs of carrying, the charges to the refinery for 
transporting this oil, would be a factor that should be known first. 

Senator King. May I ask where there are so many geological 
considerations to be taken into account and that would be involved 
in the construction of a pipe line for hundreds of miles, can you 
determine in advance what the tariff should be? You encounter 
faults, you may encounter formation that would be very difficult 
to penetrate, and the cost of driving your tunnel and making the 
necessary ditch for the pipe line would be very much greater than 
in a different formation. Therefore you can't tell what the tariff 
should be. Perhaps you can approximate the cost of the construc- 
tion of the pipe line from the oil field to Salt Lake City. 

Mr. La Fleiche. They have had sufficient experience at the pres- 
ent time in the construction of pipe lines to Imow very closely what 
those costs ought to be, and with the exception of about 70 miles, 
practically all of this territory is at the present time traversed by 
one type of pipe line or another. For instance, there is a gas line 
that runs from South Baxter Basin into Salt Lake City, so they know 
what those conditions are. There is a pipe line from Lance Creek 
to Denver, and a portion of this line will parallel that line. They 
know what those conditions are. 

The Chaibman. Mr. La Fleiche makes the interesting point that 
a 6-year contract for the sale of oil to be transported through this 
pipe line was made at a fixed price before the transportation tariff 
was announced. 

Mr. La Fleiche. That is correct. 

Senator King. That may be to the advantage of the Salt Lake Co. 
or to its disadvantage, depending upon the uncertamties that it en- 
counters in the construction of the pipe line, the cost, and so on. 

Mr. La Fleiche. I don't know what the set-up is on this pipe 
line, but I understand the pipe line is being constructed by the Stano- 
liiid Pipeline Co. 

The Chairman. I see Mr. Ferguson in the audience, and I wonder 
if he would care to comment on that point. 

Mr. Ferguson. When that contract was made we were not par- 
ticularly interested in what rates they would publish. We had our 
own estimates of the cost of transportation. We had built pipe 
lines ourselves — when I say "vv^e" I mean the Continental Oil Co. — 
and we had some idea of what a 500-mile line would cost. We had 
some idea of the volume that they vrould run througli the line and 
what the operating cost would be. We knew sometliing about the 
market in which they had to sell their products, and we took all of 
those factors into consideration in determining what we thought 
was the best price they could pay for crude. As I said this morning, 
conditions may change. We may have a prolonged war and prices 
of all kinds would be shot to pieces. Whether we made a good deal 
or a bad one I don't know, but we thought at the time, taking all of 
those factors into consideration, that that is all they could afford 
to pay. 

The Chairman. Have you anything more to aad? 

Mr. La Fleiche. No, sir. 

The Chairman. Are theie any further questions? 


The committee is very much indebted to you, Mr. La Fleiche. 
I'he committee will stand in recess until tomorrow morning at 10 : 15, 
when Mr. Schuch will be the witness. 

I shall file for the record of the committee the transcript of a hear- 
ing which was held before the attorney general of Wyoming on Sep- 
tember 12, 1939, in an inquiry made by the attorney general of the 
State into the price of gasoline; and, for inclusion in the record, I 
offer a' letter and two charts I have received from the Department of 
the Interior relating to accretions to the Reclamation Fund. 

(The transcript of the hearing referred to was marked "Exliibit 
No. 1299" and is on file with the committee. The letter and charts 
referred to were marked "Exhibit No. 1300" and are included in the 
appendix on p. 9840.) 

(At 4 : 05 p. m. the committee recessed until 10 : 15 a. m. on Wed- 
nesday, October 18, 1939.) 



United States Senate, 
Temporary National Economic Committee, 

Washington^ D. C. 

The committee met at 10 : 30 a. m., pursuant to adjournment on 
Tuesday, October 17, 1939, in the Caucus Room, Senate Office Build- 
ing, Senator Joseph C. O'Mahoney presiding. 

Present: Senator O'Mahoney (chairman) and Representative 
Sumners (vice chairman) ; Senator King; Messrs. O'Connell, Lubin, 
and Brackett. 

Present also: Representative Mapes (Michigan), Edward C. 
Eicher, and Quinn Shaugnessy, representing the Securities and Ex- 
change Commission ; Clarence Avildsen, representing the Department 
of Commerce; W. B. Watson Snyder, Hugh Cox, F. E. Berquist, 
Christopher Del Sesto, special assistants to the Attorney General; 
Roy C. Cook and Leo Finn, Department of Justice. 

The Chairman. The committee will please come to order. Mr. 
Schuh, will you be good enough to be sworn ? 

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. Schuh. I do. 

The Chairman. You may be seated. The chairman understands 
that you desire to present a prepared statement before subjecting 
yourself to questions ? 

Mr. Schuh. Yes, sir. 

The Chairman. That will be quite agreeable. You may proceed. 


Mr. Schuh. My name is Wilmer R. Schuh, of Milwaukee, Wis. I 
am appearing before the committee as an individual, at my personal 
expense, in response to a subpena, to answer certain charges made 
against me in testimony before the committee on October 12, 1939. 

I operate a gasoline service station. That is to say, I sell at retail 
to automobile owners gasoline which I buy from suppliers. At the 
present time I sell Mobilgas. Until a few months ago I sold Bams- 
dall gas. In no one year has my income exceeded $1,000 a year. I 
have no other income. I am probably what people would call a small 
independent dealer. 

My filling station is located at 136 North Water Street, Milwaukee, 
Wis. I entered the business in April 1931. Prior to that time I was 



a salesman of service-station supplies and equipment. My station is 
not owned, leased, or controlled directly or indirectly by any major 
oil company or other supplier. For more than 5 years I have not had 
a sales agreement or contract with any supplier. I have never been 
associated with any major oil company, nor have I ever received 
compensation of any sort from an oil company or an oil-company 
official. I do not own a share of stock or any interest in any oil well 
or oil company. 

I am a member of the Retail Gasoline Dealers Association of Mil- 
waukee, which is a member of the Retail Gasoline Dealers Association 
of Wisconsin. This association is, in turn, a member of the National 
Association of Petroleum Retailers. I am one of the charter mem- 
bers and past treasurer of the Milwaukee Association, past president 
of the Wisconsin Association, and a former member of the Wiscon- 
sin Code Committee. I was appointed to the Planning and Co- 
ordination Committee for the Petroleum Code by President Roose- 
velt. I was elected secretary of the Midwest Code Conference, which 
office I still hold. I am a member of the national committee of three 
appointed by the Midwest Code Conference for furthering the Fed- 
eral Trade Commission Code. At the present time, I am chairman 
of the board of directors of the National Association of Petroleum 
Retailers, an office which I have held since September 14, 1939. Prior 
to that date, I was president of the National Association of Petroleum 
Retailers, an office to which I was elected in October, 1934, 1935, and 
in 1936 for 3 years. 



Mr. ScHUH. The National Association of Petroleum Retailers is an 
association whose membership consists solely of retail oil dealers. 
The present active membership does not exceed 10,000 dealers, or less 
than one-fortieth of the total number of retail dealers. No supplier 
is, or can be, a member of the association. No station which is oper- 
ated by a rnajor oil company or a jobber is permitted membership 
in the association. The association is not subsidized, directly or in- 
directly, by any major oil company, or any other supplier. It has 
no connection of any description with the American Petroleum Insti- 
tute, or with any organization of oil producers or suppliers. 

The National Association was former! in July 1933 for the purpose 
of giving small retailers adequate representation in formulating the 
Petroleum Code. To this end, it opposed on the one hand, the price- 
fixing proposals of the Federal Government, and on the other the 
pooling and marketing agreements proposed by the industry; and 
finally obtained a 1 cent margin increase for the retailer during the 
code period. Its principal purpose is to bargain collectively for the 
independent dealer or retailer. What we are trying to do is to get 
him enough profit to live on. The association necessarily champions 
the cause of the small retailer. Among other things, it fought, suc- 
cessfully, for the adoption of the Iowa plan for taking the major oil 
companies out of the retail business. It sponsored proposed legisla- 
tion in Wisconsin to separate completely wholesaling and retailing 
of petroleum. It has obtained revision of leasing agreements so that 
they no longer can be canceled on a 24-hour to 30-day notice, but are 


on a yearly basis. It has obtained from one major company a fran- 
chise, or zoning, system for placing stations to prevent overbuilding 
It has consistently approved open-price posting as opposed to secret 
price and secret rebates. This is necessanly a very incomplete list, 
but it illustrates my point that the association has been working, and 
is still working, to improve the condition of thousands of small 
operators in the retail industry 

On October 12, 1939, Mr. L. A. Hartley, secretaryof the Petroleum 
Retailers Association of Kansas City, and Mr. A. W. Hewett,^ presi- 
dent of the same association, appeared before this conynittee and made 
certain charges of misconduct which directly affect me. These 
charges were presented in the form of a written statement, which 
purported to be a stenographer's report of a meeting between myself 
and eight representatives of the Kansas City association on January 
19, 1939. This so-called stenographer's report, however, is not a 
transcription of what I said, or what anyone said, at that meeting. 
It is not even a statement of fact. It is a statement of the conclu- 
sions of a stenographer and signed by soipe, but not all, of the 
persons present as to what was said at the conference. It attempts 
to summarize, in two paragraphs, what was said in a 5-hour discus- 
sion between nine men. At least two of the representatives of the 
Kansas City association refused to sign the statement. The stenog- 
rapher who supposedly prepared it, while concealed in another 
room, did not sign it or attest its veracity. Of course, I was given 
no opportunity to see it or comment upon it, before it was presented 
to this conmiittee. 

Before I come to the substance of this document, I would like to 
point out that the whole procedure followed by these men — the con- 
cealment of a stenographer in an adjoining room, the secret prepara- 
tion of a report, and its equally secret transmission to the Federal 
Government — indicates more clearly than I can, the character of the 
men who are making the charges. They appear to be more inter- 
ested in sensational publicity than iji sticking to the facts. The 
whole thing sounds more like conspirators in a small-time melodrama 
than like sober businessmen considering the problems of the retail 
oil business. I submit that this suggests why the Kansas City asso- 
ciation, under its present leadership, has been the source of so much 
concern to the national association, and the reason for the meeting 
which occurred on January 19. 

I wish to state here, unequivocally, that every one ol the so-called 
conclusions of the discussions are erroneous, and contrary to fact. 

The charges made by Mr. Hartley may be summarized as follows : 

(1) That I threatened to revoke the charter of the Kansas 
City association, and to organize a rival association. 

(2) That I laid down the following conditions for reten- 
tion of their charter from the national association : 

(a) Cease opposition to major oil company marketing 

(6) Cease publicizing major oil companies as monopolistic. 

(c) Cease offers to appear before the Senate Monopoly 

(d) Cease offers of legal aid to members who feel them- 
selves unfairly dealt with by major oil companies. 

^ See testimony of these gentlemen in HearingB, Part 16. 
124491 — 40 — pt. 17, sec. 4 5 


(e) Cease giving voluntary information to the Department 
of Justice involving major oil companies. 

if) Recognize Government indictments at Madison as the 
cause of the widespread demoralization of the retail gasoline 

ig) Observe a certain formula for fixing upward or down- 
ward prices of gasoline. 

(3) That I was supported and encouraged in the fore- 
going program by the major oil companies. 

I am amazed that anyone could take away from the meeting the 
impression Qonyeyed by this statement. I did not threaten the Kansas 
City organization, nor did I impose the conditions stated, nor did I 
contend that the major oil companies were backing me up or advo- 
cating any such program. And very emphatically, I did not threaten 
Mr. Hartley or anyone else if they testified before this committee. 

The meeting was called at my suggestion to discuss certain poli- 
cies of the local association which I considered to be in violation of 
the bylaws of the national association and injurious to the best inter- 
ests of retail oil dealers generally. The policy and bylaws speci- 
fically provide that all intraindustry complaints (price structure, 
marketing conditions, and so forth) should first be presented- to the 
national association for approval or for action before they were pre- 
sented to the public or to the Government for legislation. This 
policy was approved by the Kansas City organization when it ac- 
cepted its charter. Nevertheless, Mr. Hartley and the group he 
represented had persistently ignored it. For example, as Mr. Hart- 
ley testified, he prepared and published without consulting us a 
pamphlet entitled "Facts About the Kansas City Price War," which 
savagely attacked the price structure of the industry and particu- 
larly the major suppliers. He was also publicly threatening to ask 
for a Federal grand jury investigation of the Kansas City area. 
Now, however one may feel about the major suppliers — and there 
are naturally differences of opinion — Mr. Hartley's repeated attacks 
on the industry were causing retail dealers much embarrassment and 
doing our efforts to reduce the suppliers' margin no good. So far 
as I was concerned, the one issue, and the only issue at the meet- 
ing, was whether such complaints should be presented directly to 
the national association or whether Mr. Hartley should continue to 
"go off on his own hook." 

I did not threaten to revoke the Kansas City charter. Mr, Hart- 
ley knew, and everyone present at the meeting knew, that I had no 
authority to revoke their charter. Charters are granted and revoked 
by the board of directors of the national association. Recommen- 
dations to revoke a charter are presented by the Ways and Means 
Committee, of which I was not a member. I did caution the group 
that violation of the bylaws was a cause for revocation of their 
charter, which would automatically come before the Ways and Means 
Committee in due course. I delivered no ultimatum of any kind. 
Mr, Hartley wanted to take a vote immediately to determine whether 
they should continue in the association or give- up their charter. I 
dissuaded them, stating that they should think over my position 
and Mr. Hartley's position, and that the matter would be discussed 
further before the Ways and Means Committee in 30 or 60 days. 


In the course of a 5-hour meeting, a great many things were dis- 
cussed. To the best of my recollection, my statements with respect 
to the matters mentioned in Mr. Hartley's charges were as follows: 

(1) "Cease opposition to major oil company marketing 

I did not, and could not possibly have made such a statement. 
The national association, and I, personally, have consistently opposed 
many of the oil companies' marketing methods. As I have already 
stated, we fought the major oil companies to ge^ the -"Iowa plan." 
We have fought and obtained concessions from the major companies 
on leasing agreements and overbuilding. We have consistently 
opposed efforts of major oil companies to dictate retailers' prices. 
I have made several speeches on this subject, which are available to 
anyone. There are many other instances, too numerous to mention 

(2) "Cease publicizing major oil companies as monopo- 

The point I was making and emphasizing was that what Kansas 
City dealers needed more than anything else was a lower tank- 
wagon price, and that they could not expect reductions from sup- 
pliers if they persisted in publishing attacks upon them. 

(3) "Cease offers to appear before the Monopoly Com- 

My only recollection of any -conversation on this point was that 
Mr. Hartley said he intended to appear before the committee. I told 
him that I also expected to appear. I also stated that I did not 
think it would get us anywhere if he went to Washington with the 
same baseless complaints which he had been publishing. I did not 
tell him not to appear, and it is ridiculous for him to say that I 
threatened to take away their charter if he did appear. 

My willingness to be of assistance to this committee in every pos- 
sible manner was stated by me, before I ever met Mr. Hartley, to your 
Mr. ScannelP a year ago. I quote from my prepared and signed 
statement made at the request of Mr. Scannell at that time (reading) : 

I regret that time does not permit me to go into many of these subjects more 
in detail, but I shall be very willing to do anything I can in my capacity to 
assist the National Economic Committee in its endeavor to aid business in the 
United States. 

(4) "Cease offers of legal aid to members who feel un- 
fairly treated by major oil companies." 

This is another statement I did not make. We urge all of our 
associations to employ legal counsel so that assistance can be given to 
dealers when they are in trouble. That is a function of any good 
trade association. 

(5) "Cease giving voluntary information to the Depart- 
ment of Justice." 

As I have already stated, I indicated that if they wanted to com- 
plain to the Depiartment of Justice, or anyone else, as to problems 

1 George H. ScanneU, attorney with the Federal Trade Commission, which is represented 
on this committee. 


arising in Kansas City, the rule of the national association was that 
they should come first to us, and then, if we couldn't help them, they 
were free to make their complaint elsewhere. But where any mem- 
ber of our organization has reasonable grounds to believe there has 
been an actual violation of law, there is no rule of our organization 
which opposes a direct approach to the Department of Justice. On 
the contrary, our association approves a direct report to the Depart- 
ment of Justice. In fact, our association made a formal complaint in 
1935 of what we had reason to believe was an illegal conspiracy by 
certain major oil companies to injure their competitors. 

(6) "Recognize the Madison indictments as the cause of 
the present demoralization of the retail market." 

It is my personal opinion that the Madison indictments have ad- 
versely affected dealers in Kansas Gity and elsewhere, since the com- 
panies have ceased taking distress gasoline off the markets, with the 
.result that markets sagged and cut-rate dealers benefited. I ex- 
pressed this opinion, but I did not recommend any course of conduct 
to them in connection with it. 

(7) "Observe a formula for fixing upward or downward 
retail prices of gasoline." 

This is simply the "N. A. P. R, formula" for allocating between the 
supplier and dealer the spread between tank-car price and the retail 
price. It computes the supplier's cost as 1 cent and the dealer's cost 
as 3 cents, and suggests that they should share equally in any excess 
margin. The formula is intended as a basis for negotiation between 
individual dealers and their suppliers. If accepted, it would cut 
substantially the present supplier's margin and enable the dealer to 
drop the retail price to meet cut-rate competition without selling 
below cost. The basic assumption of the :^ormula is the tank-car 
price, but Mr. Hartley is entirely mistaken that acceptance of the 
formula forecloses him, or the national association, from attacking 
the tank car price if conditions seem to require it. At the present 
time I do not think they do. 

Finally, Mr. Hartley charged, in effect, that I am in league with 
major oil company officials; that I represented at the meeting that 
conversations with these officials had convinced me that the Secretary 
of the Kansas .City association was in disfavor with them and that 
the "conditions" quoted above were identical with major oil company 
demands. This is a misstatement, with no foundation in fact. Mr. 
Hartley asked me if I knew any major oil company officials and I 
stated that I did. I knew them from my work in Washington, as a 
representative of the retail dealers, in connection with the Oil Indus- 
try Code and fair practice rules. I knew them also because it was my 
business to bargain with them as president of the National Associa- 
tion of Petroleum Retailers. Usually we were on opposite sides of 
the fence, and I have fought them tooth and nail on many occasions, 
as many of them will testify. 

I may have stated to the meeting that the Kansas City situation 
was distasteful to major oil company officials. It would be hard to 
imagine any other reaction on their part in view of Mr. Hartley s 
repeated public attacks upon them. But I certainly did not state that 
any official of any oil company had laid down conditions for the 
Kansas City area or had approved any plan of mine for dealing 


with the local association. Mr. Hartley's statement specifically men- 
tions Mr. L. L. Marcel, of White Eagle. I have had infrequent tele- 
phone conversations with Mr. Marcel on occasions when I was in 
his territory. I have never met him personally, and do not know him 
well. On the only occasion on which we ever discussed the Kansas 
City association, his only remark to me was that he "thought it was a 
situation the dealers in Kansas City should work out for themselves." 
Apart from this there is no basis whatever for the assertions con- 
tained in Mr. Hartley's statement. 

I believe that I have covered the charges made by Mr. Hartley and 
his associates. I regret that his erroneous impression that the na- 
tional association and the oil companies are trying to "exterminate" 
him has gained such wide currency and has occupied so much of the 
time of this committee. The national association has a tough job on 
its hands trying to bring some order out of chaos in the highly dis- 
organized retail field, a condition which has existed since the major 
oil companies withdrew and left the field wide open. The situation 
in Kansas City is not unique. It is paralleled by many other markets. 
Unquestionably I am not qualified to discuss the economics of the 
situation, but I do think that the efforts of Mr. Hartley and his asso- 
ciates to shift the blame to other shoulders are not helping but hurt- 
ing attempts to solve the problem, both by our national organization 
and by small retailers everywhere. 

The Chairman. Mr. Cox, have you any questions? 


Mr. Cox. Yes. Mr. Schuh, does any part of the income of your 
association come from the major oil companies? 

Mr. Schuh. The only part of our income that comes from any 
oil company or any supplier is in connection with the sale of this 
book,^ and I would like to present each member of the committee with 
the book that you may see what it is. 

The Vice Chairman. Can't you just tell us in a word or two? 
We haven't time to lead them. 

The Chairman. Those will be distributed, Mr. Schuh. 

.Mr. Schuh. I believe that I will have to explain the nature of this 
book and how it was prepared and who prepared it. This is a book 
that was first worked on in April or May of 1936 and for the next 
2 years was in the process of compilation and preparation. It was 
finally printed in April of 1938 and this is sold to dealers, suppliers, 
in any library, schools, universities — anyone that wants to buy this; 
they are sold by our organization at retail for $2.50. In larger 
quantities the price drops until it gets down to $1.25 or half price in 
lots of 500 or more, and we have sold these very widely. I believe 
there are 25,000 that have been sold. 

Mr. Cox. How many of those 25;000 have been sold to the major 
oil companies, Mr. Schuh? 

Mr. Schuh. I wouldn't be able to answer anywhere near correctly. 

Mr. Cox. Can you give us an approximate figure ? 

Mr. Schuh. No ; I can't even approximate it. I haven't the figures 
here and I don't know the figures. Our records would show that 
very clearly. 

^ The book, entitled "Service Station Manual," and published by the National Association 
of Petroleum Retailers, wa?, tiot introduced for the record. 


Mr; Cox. If I should suggest to you that by far the greater part 
of them were sold to the major oil companies, would you accept that 
suggestion ? 

Mr. ScHUH. I think that would be true. 

Mr. Cox. Some of the major oil companies buy rather large num- 
bers, don't they? 

Mr. ScHUH. Some don't buy any. 

Mr. Cox. I realize that; but some of them buy a lot, don't they? 

Mr. ScHUH. That is right. 

Mr. Cox. Now, can you tell us, for example, last year what part 
of your income of the association came from the sale of these books? 

Mr. ScHUH. No ; I can't ; I don't have the figures. 

Mr. Cox. It is true there again, isn't it, that by far the greater 
part of your income 

Mr. ScHUH (interposing). Well, it has been the sustaining feature 
of our organization. 

JMr. Cox. In other words, it is the sale of these books that keeps 
you alive. Is that correct? 

Mr. ScHUH. The sale of the books and similar services. 

The Vice Chairman. Mr. Cox, what about similar services? 

Mr. Cox. I am going into that. Do you care to tell the committee 
what it costs you to prepare this book? 

Mr, ScHUH, The actual printing, that is the original preparation — 
what I am talking about now is the actual printing — is somewhere 
in the nature of 42 cents a book. The preparation of the book itself 
entailed considerable amount of time and effort and money, and I 
would say that that would add enough to the book to bring the cost 
up to somewhere around 68 or 70 cents. I want it clearly understood 
that that is an estimate of mine, but I sincerely believe it would be 
fairly close. It might be a little higher, but I don't think it would 
be any lower. 

Mr. Cox. You say you sell some of these books in large quantities 
for a price as low as $1.25. Is that right? 

Mr. ScHUH. That is right. 

Mr. Cox. And some of them are sold singly or in smaller quanti- 
ties for a higher price? 

Mr. ScHUH. That is right. 

Mr. Cox. And that price is sometimes as high as $2 ? 

Mr. ScHUH. $2.50. 

Mr. Cox. $2.50. So that the difference between the price of $2.50 
or $1.25, as the case may be, and 60 or 70 cents is the net„return on 
the book. Is that right ? 

Mr. ScHUH. That is right. 

Mr. Cox. Mr. Schuh, who is Carl C. Hodges? 

Mr. Schuh. Carl C. Hodges up until a week ago was executive 
secretary of the Illinois Association of Petroleum Retailers, an affili- 
ate of ours in Illinois, and today he is executive vice president of the 
national association. 

Mr. Cox. Did he hold any position with the national association 
in September 1939? Is that the same position he holds today? I 
am sorry. I withdraw that. I will put it this way. You said a 
moment ago that today he is executive vice president of the national 
association. Did he hold that position in September of this year ? 

Mr. Schuh. Unfortunately I had to leave the final meeting of the 


board of directors to make a talk before the Drake University com- 
merce students and I wasn't at the final session but I understand 
that he was selected at that session as executive vice president. 

Mr. Cox. So that in September he would have held that position. 

Mr. ScHUH. I don't think he took active office until about a week 

Mr. Cox. Mr. Schuh, we found in your files what purports to be a 
carbon copy of a letter written by Mr. Hodges dated September 26, 
1939, to Mr. J. R. Connery, 4902 Washington Avenue, Houston, Tex. 
I ask you to look at this letter and to tell the committee first whether 
in your opinion it is a correct copy of a letter which Mr. Hodges 
wrote, and, second, whether in your opinion at that time he was 
probably acting as executive vice president of the association. 

Mr. ScHTJH. I can't identify this letter because I have never seen 
it before. 

Mr. Cox. Can you account for its being in your files, in the files 
of the association ? 

Mr. Schuh. No ; I have not been active since I retired as president 
in September of this year to go back to my own station and take 
care of it because it was in such shape, so I have spent no time in the 
office since then. 

Mr. Cox. You have no way of knowing whether in fact that is a 
letter by Mr. Hodges? 

Mr. Schuh. I could not honestly identify it. 

Mr. Cox. Is there anyone here who could identify it ? 

Mr. Schuh. Whether our office manager could or not, I don't 

Mr. Cox. Is she here ? 

Mr. Schuh. Mrs. Loos is here. 

Mr. Cox. I shall ask you or your counsel to submit the letter now 
to Mrs. LooSj if you will, and ask her if she can identify it. 

The Chairman. Is Mrs. Loos here? 

Mr. Cox. I think she is. 

The Chairman. Let her be sworrj, too. 

The Chairman, Mrs. Loos, will you please be sworn? 

Do you solemnly swear that the testimony that you give in this 
proceeding shall be the truth, the whole truth, and nothing but the 
truth, so help you God? 

Mrs. Loos. I do. 


Mr. Cox. I call your attention to the initials at the bottom of this 
carbon copy, "CCH: L" and I ask you if the "L" stands for Loos? 
Mrs. Loos. Yes. 

Mr. Cox. Does that mean you typed this letter ? 
Mrs. Loos. Yes. 

Mr. Cox. Was the text of the letter dictated to you by Mr. Hodges? 
Mrs. Loos. It wasn't dictated. He wrote it and I copied it. 
Mr. Cox. He wrote it out in longhand and you copied it? 
Mrs. Loos. Yes. 
Mr. Cox. So it is Mr. Hodges' letter, is that correct? 


Mrs. Loos. That is right. 

Mr. ScHUH. I think one question ought tO' be asked in fairness to 
the Association that hasn't its counsel here, as to whether the letter 
was authorized or not. 

The Chairman. One step at a time. The question is, was it writ- 
ten? Apparently it was written. Are you going to read the letter, 
Mr. Cox? 

Mr. Cox. Yes ; I am going to read it. 

The Vice Chairman. Who wrote the letter? 

Mr. Cox, The letter was written by Carl C. Hodges, executive vice 
president of the National Association of Petroleum Retailers. 

Senator King. Would you deny the ^authority of Mr. Hodges to 
write a letter relating to the business of the association? 

Mr. ScHUH. Looking at that letter, I would deny that I had any 
part in this letter. 

Senator King. T didn't ask you that. Would he have the author- 
ity to speak for the organization ? Were his duties so defined that 
he would be authorized to write a letter of this character, or would he 
have to submit it to the Board before he circulated it? 

Mr. ScHUH. I believe a letter of this kind would have to be sub- 
mitted to the committee on ways and means before he sent it out. 

Senator King. That is, if he sent it out without submitting it to 
the committee on ways and means you think he exceeded his 
authority ? 

Mr. ScHUH. I would say so. 

Senator King. 'WHiat are the duties of the executive vice president? 

Mr, ScHUH. The copy of the bylaws would state definitely what 
those duties are, but I would say offhand that he is to carry into 
execution the orders of the board of directors and any committees 
properly selected. He takes, in effect, the place of the president and 
handles the work of the president. 

Senator King. While the president is present or in his absence, 

Mr. ScHUH. In his absence. 

Senator King. Wliat position do you have at this time? 

Mr. ScHUH. I am chairman of the board of directors 

Senator King. You are not the president? 

Mr. ScHUH. I am not the president. 

Mr. Cox. Now, Mr. Scluih, I am going to read to you portions of 
this letter,^ and I ask you to direet your attention to those portions 
because I shall wish to ask you some questions about them. This 
letter is addressed to Mr. Joe R. Connery, and it begins [reading from 
"Exhibit No. .1303"]: »= l t 

I promised you in Dos Moines we would get so much mail in the N. A. R. P. 
office that it would make your bead swim. It is the first shot from me but I 
think it will prove to you that we are already on the job and aot wasting a 
minute in our effort to go to town in our 1940 convention down in Houston. 

I take it the 1940 convention he is referring to is a convention of 
the organization which it is planned to have held in Houston: is that 
right? ' 

Mr. ScHUH. Yes, sir. 

'The letter was introduced inTra, p. ^45;^. as "F.xliibit No. ISOn," and is included ii 
the appendix on p. 9844. 


Mr. Cox. The next paragraph of the letter reads as follows : 

The first thing we have done is to send a copy. of the enclosed letter to each 
of the writers of the letters which were so nicely bound in that convention 
booster you brought from Houston. We have figured out a story for you 
and your buddies to tell those fine oil companies, and we believe that we have 
a right to be proud of this method of securing help for our convention because 
we feel, and I know you do, too, that we have something of definite value to 
offer them for their money instead of just accepting a contribution as an out- 
right gift. Our Service Station Manual, as you know, is not a method of 
extracting money under false pretenses but is a legitimate method of giving 
something of equal value for money expended by the oil companies. 

I ask you to look at that paragraph, the second paragraph of the 

May I have it back, please ? 

Now I ask you, Mr. Schuh, whether you agree with this statement 
in here [reading] : 

Our Service Station Manual, as you know, is not a method of extracting 
money under false pretenses but is a legitimate method of giving somethings 
of equal value for mofaey expended by the oil companies. 

Mr. Schuh. I could only answer that this way, and that is that 
the Manual was prepared for two purposes, one to bring before the 
dealers and to have a manual that would accomplish what many of 
us have felt was necessar ^ as part of our program, and that is, better 
education of service station managers, as well as a means of getting 
it distributed and making it worth while for us to have it distributed ; 
in other words, to make a profit on the thing. 

Mr. Cox. Well, it was also devised, was it not, as a method of 
getting something of equal value for money expended by the major 
oil companies? 

Mi*. Schuh. No; it wasn't. It wasn't devised for that purpose 
at all. It had a dual purpose and if it was merely a method of ex- 
tracting money we would have put out a very cheap type of book 
and let it go at that. We prepared the finest and best manual 
that we could possibly prepare. __ 

Mr. Cox. You don't agree with MrfHodges that it is a legitimate 
method of giving something of equal value for money expended by 
the oil companies? 

Mr. Schuh. Absolutely not. 

Mr. Cox. It wasn't intended for that purpose? 

Mr. Schuh. It was not intended for that purpose. 

Mr. Cox. Although of course it does serve that purpose. 

Mr. Schuh. If it does that, that is incidental. 

Mr. Cox. You testified a little while a^^o that if it weren't for the 
money that you get from the sale of this manual, your Association 
would have difficulty in surviving, did you not? 

Mr. Schuh. In spite of the sale of the manual we have had diffi- 
culty in surviving and we had difficulty long before the manual was 
ever put out. 

Mr. Cox. You would have even more difficulty if you didn't sell 
the manual to the major oil companies; wouldn't you? 

Mr. Schuh. We would probably have had to curtail many of our 
services to our associations. 

Mr. Cox. And is it your opinion that the fact that the greater part 
of your income comes from the major oil companies doesn't influence 
your judgment or the association's judgmeiit one way or another 
on these problems that are involved in this industry? 


Mr. ScHUH, Not one iota ; not one bit ! In spite of the fact that 
the Standard Oil Co. of Indiana bought manuals from us, we went 
down and knocked their ears down and we will again if the occasion 
warrants it, and if you don't think we knocked their ears down you 
ought to see the correspondence that we have on it. 

Mr. Cox. Is that true of all the major oil companies? Have you 
differed with all of them on 

Mr. ScHUH (interposing). We have differed with practically every 
one of them and we are at present fighting them today because of 
their insistence on selling to commercial accounts at such a low price 
that it is taking the busuiess out of our stations. 


Mr. Cox. Of course sometimes the major oil companies have come 
to you, though, haven't they, Mr. Schuh, in an attempt to get you to 
suppress or adjust complaints that have been made against them 
within your ranks? 

Mr. Schuh. No; they have never come to me and asked me to 
suppress complaints from any place. They have called to my atten- 
tion at times untenable situations, merely for my information. 

Mr. Cox. Who is Mr. K. C. Arnott? 

Mr. Schuh. Mr. C. E. Arnott is vice president of the Socony- 
Vacuum Oil Co. 

Mr. Cox. I am going to hand you a letter addressed to you under 
date of November 16, 1936, by Mr. Arnott on the letterhead 26 
Broadway, New York, and ask you if you received that letter 
and enclosure.^ 

Mr. Schuh. Yes; I received this letter. 

Mr. Cox. That is a letter, isn't it, where Mr. Arnott is complain- 
ing about some adverse publicity? 

Mr. Schuh. That is right. 

Mr. Cox. He wrote it to you? 

Mr. Schuh. That is right. 

Mr. Cox. Do you have any idea why he should think you could 
do anything about that? 

Mr. Schuh. Because Mr. Arnott and myself from the early days 
of the N. R. A. Code had worked together on the Federal Trade Com- 
mission Code and we had been constantly endeavoring to get a Fed- 
eral Trade Commission code, and situations like this that I called 
to his attention and he called to my attention are things that we 
probably could have ironed out under a code, and he sent them 
to me for my attention so that I would know what 'was going on in 
this particular area and what it was all about. 

Mr. Cox. This enclosure which he has here is a four-page docu 
ment entitled "Pump Handle" and apparently published by the 
Master Gasoline Association, Inc., Cleveland, Ohio; was it not? 

Mr. Schuh. That is right. 

Mr. Cox. And it contained an attack upon the Iowa plan 

Mr. Schuh. That is right. 

Mr. Cox. And Mr. Arnott said to you : "I am wondering why this 
particular publication cannot be more constructive," in his letter, 

1 Exhibit No. 1301," appendix, p. 9842. 


Did you talk to anybody in the Master Gasoline Operators' Associa- 
tion in Cleveland, Ohio, about this publicity? 

Mr. ScHUH. Not to my recollection. I would prefer to say "No, 
I had not." 

Mr. Cox. Are you quite sure you didn't? 

Mr. ScHUH. I am quite sure I didn't. 

Mr. Cox. So that so far as this letter of Mr. Arnott's was con- 
cerned it didn't call forth any action on your part ? 

Mr. ScHUH. May I have that date once more? 

Mr. Cox. The date is November 16, 1936. 

Mr. ScHUH. No ; I am quite sure I didn't, because of the situation 
that prevailed at that time. 

Mr. Cox. Yon never talked to them at any time after November 
1936 about their attacks on the Iowa plan? 

Mr. ScHUH. Not to the best of my recollection. 

Mr. Cox. Are you prepared to say definitely now that you didn't? 

Mr. ScHUH. I have answered to the best of my ability. I say I 

Mr. Cox (interposing). You don't remember? 

Mr. ScHUH. I don't remember — I don't think I did. 

Mr. Cox. I am going to offer this letter from Mr. Arnott and, the 
attached enclosures. 

The Chairman. The letter and the enclosures may be received. 

(The letter and enclosures referred to were marked "Exhibit No. 
1301," and are included in the appendix on p. 9842.) 

Mr. O'CoNNELL. Mr. Schuh, as I recall one statement made in your 
prepared statement it was to the effect that your organization fought 
the major companies in connection with enforcing the adoption of 
the Iowa plan. Is that correct? 

Mr. Schuh. Yes, sir; that is right. 

Mr. O'CoNNELL Would it not appear from the tenor of the letter 
just referred to that j-ou at least were not engaged in. a battle with 
the Socony -Vacuum Co., with regard to the Iowa plan? 

Mr. Schuh. No; that wouldn't, because we fought the Socony- 
Vacuum's local company tooth and nail in Wisconsin and they did 
everything they possibly could to kill the bill that we had intro- 
duced in the State Legislature in Wisconsin to put them definitely 
out of the retail field. 

Mr. O'CoNNELL. You didn't quite understand my question. My 
question was, that it would appear to me from the tenor of the 
letter received from Mr. Arnott of the Socony-Vacuum Co., that there 
was no quarrel between Mr. Arnott at least and your organization as 
regards the adoption of the Iowa plan. Is that correct? 

Mr. Schuh. I think if you put it this way that there was 

Mr. O'CoNNELL. Is my statement correct or is it not? 

Mr. Schuh. No; it is not. There was no quarrel between Mr. 
Arnott and myself. 

Mr. O'CoNNELL. I said between Mr. Arnott and your organization. 

Mr. Schuh. I wouldn't say that. 

Mr. O'CoNNELL. You and your organization were not as one as 
regards the Iowa plan. 

Mr. Schuh. No ; we wanted the Iowa plan. 

Mr. O'CoNNELL. Did you personally want it? 

Mr. Schuh. I wanted it. 


Mr. O'CoNNELL. Did Mr. Arnott want the Iowa plan ? 

Mr. ScHUH. Not at the beginning. 

Mr. O'CoNNELL. Did he want it at the time he wrote that letter? 

Mr. ScHUH. He had it. 

Mr. Cox. He apparently didn't like attacks upon it at that time. 

Mr. ScHUH. The nature of these attacks as I remember that is 
that the majors forced this thing down their throat. In order to 
clear this up it takes a little time. 

Mr. O'CoNNELL. I would prefer not to go into that in detail. 1 
was under the impression from the tenor of that letter that at least 
at the time this letter was written the Socony- Vacuum as represented 
by Mr. Arnott were suggesting to you that attacks on the Iowa 
plan were not desirable. 

Mr. ScHUH. I don't believe that that was entirely what he meant. 
A few words may explain this. The group that published this paper 
were amalgamated by us a short two or three months before this was 
published, this particular article was published. It consisted of 
a radical group over on this side that were known as the Master 
Gasoline Operators Association, and the Independent Oil Dealers of 
Cuyahoga County, two groups who had been fighting amongst them- 
selves, and we drew them into a meeting in August and forced an 
amalgamation in order that the convention might be put on success- 
fully the following month. They both wanted to put it on and 
they both wanted to go their own way. In the Master Operators 
there were two or three fellows, including the one that wrote this 
publication, who was sincere, very sincere, and a very likeable fellow, 
who just had to have his own way and nothing else would prevail, 
and the reason that I feel certain I took no action on this is that I 
knew eventually that the thing would be ironed out and tamed down 
and they would get together and work together rather than r?.ch one 
going his own way. 

Mr. O'CoNNELL. I think we are getting quite far afield from the 
thought that I had when I started. I was merely trying to develop 
whether the statement made in your statement relative to a fight 
between your organization and the major oil companies regarding 
the adoption of the Iowa plan was borne out by this particular letter 
from Mr. Arnott, and I take it that at least at the time Mr. Arnott 
wrote the letter he was suggesting to you that attacks on the Iowa 
plan were undesirable from his standpoint and possibly from yours. 
Is that correct? 

Mr. ScHUH. I believe he suggested the type of publicity was un- 
desirable, not so much as what was being attacked as the type of 
publicity. At least, that would be my idea. 

Mr. Coa?. Did Mr. Arnott ever make any contributions to your 
association ? 

Mr. ScHUH. Never a penny. 

Mr. Cox. Has he ever paid the expenses of any of the members 
or directors of your association to any of their conventions or any- 
thing of the sort? 

Mr. ScHUH. No ; the only time that Mr. Arnott has ever met with 
a group of our people was in Detroit in 1935 and we had dinner 
and I paid the bill and charged it to the Association. 

Mr. Cox. Do you get many of these, or have you in the past re- 
ceived any letters similar to the one just introduced in the record 
from Mr. Arnott? 


Mr^ ScHUH. I don't think I received very many. There have been 
situations called to my attention. I believe I received another one 
from Mr. Arnott relative to the Detroit situation, if my memory goes 
back, I think I did ; I am not positive. 

Mr. Cox. Was that another case of criticism of some of the policies 
of the major oil companies? 

Mr. ScHUH. No; in that instance, in the Detroit instance, as I 
remember it, suits were filed in Detroit against some companies, but 
I don't think against the Socony-Vacuum and the executive secre- 
tary of the Detroit group wrote to all companies complaining and 
listing a list of complaints. I think Mr, Arnott wrote to me about 
those and asked me what I knew about it, or something like that. 

Mr. Cox. Did you take any action with respect to that situation? 

Mr. ScHUH, I had been working on it for months. I think I 
worked on it for 18 months. 

Mr. Cox. What kind of work was that, Mr. Schuh ? Wliat exactly 
did you do? 

Mr. Schuh. Meeting with the group in Detroit, talking to them, 
and pointing out what was happening to them and their member- 
ship, and they just refused to listen to us, and after 18 months they 
found- out that the fellow had just about taken their pants and walked 
off ; I mean they learned that we were right in the beginning in cau- 
tioning them against the tactics that this fellow was pursuing. 

Mr. Cox. That was the result of those conversations? Did they 
discontinue the lawsuits? 

Mr. Schuh. No; they lost the lawsuits. 

Mr. Cox. Could you tell us who Mr. Girling is? 

Mr. Schuh. Mr. Girling is, I believe, secretary of an organization 
that never would affiliate with us, with their headquarters in Rock- 
ford, 111., I believe. 

Senator King. Ma"^^ I ask a question there ? I didn't hear the testi- 
mony of the witness before and perhaps other testimony which was 
offered would clarify this situation; but for my own information, 
was it the purpose of your organization to bring all retailers m a 
given section or in any part of the United States under one organiza- 
tion? And to fi^ht those individuals or groups who did not affiliate 
with your organization? 

Mr. Schuh. No ; our hope was that some day in the distant future 
we would have all retailers under one man. 

Senator King. In every part of the United States? 

Mr. Schuh. I believe that is the hope of every union or organiza- 
tion, to get as many members as they possibly can. 

Senator King. You were trying, then, to build up a powerful retail 
organization of all individuals or groups who were selling oils at 
retail ? 

Mr. Schuh. That is right. 

Senator King. And in so doing was it your plan to prevent the 
major oil companies or the producers of oil or the distributors of oil 
through tanks or through pipe lines from vending oil and products? 
Did you expect your organization and the organization which you 
hoped to set up to be the sole distributor all over the United States of 
oil produced in every part of the United States ? 

Mr. Schuh. No. No ; we never had such aims. Our principal aim 
was to have as large an organization as we possibly could have to 
fight for the retailers' rights. 


Senator King. Against whom? 

Mr. ScHUH. Against anyone who encroached upon our rights. 

Senator King. Who are those that would encroach, the public ? 

Mr. ScHTjH. No; major oil companies, jobbers, cut-raters. 

Senator King. You wanted a monopoly — and I don't use the term 
offensively — you and your organization, and similar ones, the re- 
tailers, wanted a complete monopoly of the distribution of oils ? 

Mj". ScHUH. No; the reason that we wanted other companies 
out — — 

Senator King (interposing). What other companies out? 

Mr. ScHUH. The major companies and the jobbers — most of the 
major companies are out, but the jobbers are noj out today, and we 
have made some effort, but very little effort, to get the jobbers out, 
because it is an impossible task. 

Senator King. Why did you want the jobbers to refrain from sell- 
ing the products of oil ? Why did you want a monopoly ? 

Mr. ScHTJH. We didn't want a monopoly; we merely wanted fair 
competition, but when a jobber who buys 2 to 2I/2 cents cheaper than 
we do engages in the retail business, very often unfair practices and 
price-cuttmg — unfair price-cutting — goes on that injures our mem- 

Senator King. Then if a jobber could buy oil 2 or 3 cents a gallon 
or barrel cheaper than you, you intended to drive him out of busi- 

Mr. ScHUH. No. 

Senator King. Even though he sold to the public at less price than 
your organization proposed to charge? 

Mr. ScHUH. As a general rule, that type was a secret discount. I 
can probably illustrate it this way. 

Senator King. Supposing that you got the same price from the 
manufacturer of oil that the jobber did, did you object to the jobber 
engaging in the retail business? 

Mr. ScHTTH. No; not at all. It is only when they took unfair ad- 
vantage with the excess profit that they had and used that profit to 
attempt to destroy us that we had any complaint against any of them. 

Senator King. At any rate, your purpose generally has been to 
bring all of the retailers of all oil products under your organization, 
or under retail organizations, and then consolidate those retail or- 
ganizations into one national organization and thus prevent the major 
oil companies or the jobbers or any intermediaries from selling at 
retail ? Has that been the purpose of your organization ? 

Mr. ScHUH. No; it was the hope that some day — we never ex- 
pected and never could — I have yet to see any one of our organizations 
have more than 33, or let us say 40 percent I think would be high — 
of the dealers in any given locality as members and our set-up would 
prevent the unbranded price-cutters from joining us, so that there 
would always be, no matter what happened, about 18 to 28 or 30 
percent of the volume going through another group of dealers, the 

Senator King. A price-cutter is one who sold at less than the price 
which your organization and the retail organization fixed, is that it? 

Mr. ScHUH. We never fixed prices. 

Senator King. Who are the price cutters who sold below you ? 

Mr. ScHUH. Those who sold below the prevailing price. 


Senator King. Your organization plus the other retail organiza- 
tions, it was your hope, would fix the retail price of all of the com- 
modities of the oil companies? .< < 

Mr. ScHUH. No; we never fixed price and I constantly discour- 
aged price fixing amongst our people. 

Senator King. Well, if some member of your organization sold in 
one town at a less price than some member of your organization in 
an adjoining town, then he would come under the condemnation or 
regulation of your organization, wouldn't he? 

Mr. ScHUH. No; in one town the price of gasoline levels itself 
off so quick that there can be only two prices, one for unbranded 
merchandise and one for branded merchandise. If there is a dif- 
ference in price between, we will say, a Mobilgas dealer and a 
Texaco dealer, pretty soon that levels itself off; either the Texaco 
dealer com^s up or the Mobilgas dealer goes down, or vice versa. 

Senator King. How many members are there of your organiza- 
tion ? 

Mr. ScHUH. Out of over 400,000 retailers in the entire United 
States I think we have less than 10,000 active members now. 

Senator King. And the other 390,000 retail dealers, have they or- 
ganizations ? 

Mr. ScHUH. No. 

Senator King. They are acting independently ? Each one for him- 

Mr. ScHuH. That is right. 

Senator King. And you are trying by persuasion or otherwise 
to bring them under your organization? 

Mr. ScHUH. We have many problems in a large organization. 

Senator King. Are you trying to bring them under your organi- 
zation or to bring all the retailers under one or more organizations? 

Mr. ScHUH. I am not doing anything any more actively. 

Senator King. Well, did you in the past ? 

Mr. ScHUH. I encouraged all groups to form organizations and 
to affiliate with us. 

Senator King. You wouldn't call your organization, then, monopo- 
listic or designed to foster monopoly in any way ? 

Mr. ScHUH. Distinctly antimonopoly in any way. 

Senator King. There might be a difference of opinion. 

Mr. Cox. Now, I want to go back to Mr. Girling. You said he 
was connected with the association at Rockford, 111.; is that right? 

Mr. ScHUH. That is right. 

Mr. Cox. Do you recall sometime in 1938 he wrote to you making a 
complaint about some of the practices of the major oil companies in 
that area? 

Mr. ScHUH. After he had been up to see me. 

Mr. Cox. He came and talked to you about it? 

Mr. ScHUH. That' is right. 

Mr. Cox. And then didjrou write to any of the major oil companies 
about his complaint? 

Mr. ScHUH. I believe I wrote to the Mid-Continent Oil Co. 

Mr. Cox. And did they reply? 

Mr. ScHUH. Yes ; I believe they did. 

Mr. Cox. And did you talk to Mr. Girling again after you re- 
ceived a reply from Mid-Continent Petroleum Corporation? 


Mr. ScHUH. No. 

Mr. Cox. Did Mr. Girling tell you when he talked to you that he 
had filed a complaint with the United States district attorney in 
Chicago with respect to practices of major oil companies? 

Mr. ScHUH. Yes. 

Mr. Cox. Did you discourage him from pursuing that complaint 
or pressing it? 

Mr. ScHTJH. No. 

Mr. Cox. Can you explain why he afterward withdrew that com- 
plaint ? 

Mr. ScHOH. I don't believe that he withdrew it. I believe that 
he and Hodges and the group including some of our officers met 
with the United States district attorney in Chicago and I don't 
believe the complaint was withdrawn. At least to my knowledge it 
hasn't been withdrawn. 

Mr. Cox. Well, if I suggest to you that the information the De- 
partment of Justice has received here in Washington is that the 
complaint has been withdrawn, would you have any explanation as 
to why that course might have been taken by Mr. Girling? 

Mr. ScHUH. No; because I talked to Hodges about that within 
the last month and asked him whether he had ever heard anything 
of the complaint that they had made, and he said no. 

Mr. Cox. You are quite clear that after you got letters from the 
Mid-Continent Petroleum Corporation you didn't encourage or per- 
suade Mr. Girling to withdraw that complaint? 

Mr. ScHUH. Not at all. 

Mr. Cox. Who is Mr. E. C. Shanks? 

Mr. ScHUH. Formerly executive vice president of our organization. 

Mr. Cox. Was he the executive vice president in February 1937 ? 

Mr. ScHUH. Yes. 

Mr. Cox. I am going to hand you what purports to be a copy of a 
memorandum which was discovered in your files apparently addressed 
to you by Mr. Shanks. I am going to ask you whether you remember 
having received it? 

Mr. ScHUH. Yes; I remember distinctly the memorandum. 

Mr. Cox. This is a memorandum headed "Truck discounts," ad- 
dressed to you at the Hotel Ealeigh, Washington, D. C, dated Feb- 
ruary 17, 1937, apparently written by E. C. Shanks, and reads as 
follows (reading from "Exhibit No. 1302") : 

Brewer has sent us information that official Sinclair signs are appearing 
around Chicago in the form of an upper and lower bar tangent to a circle. On 
the upper bar it is stated "Just ahead on right," or "Just ahead on left." In 
the circle are the initials "H. C." On the lower bar is "We cater to trucks." 
On the back of the sign is a statement, "Anyone found molesting this sign will 
be prosecuted to the fullest extent of the law." Joseph D. Ahern Company. 

While the sign does not say so, the intent is obvious and the inference is 
that a discount was available to trucks. 

Now stopping at that point, Mr. Schuh, would it be correct to 
assume that from that part of the memorandum the situation which 
was being discussed was one which the Sinclair Co. granted a discount 
of some kind to people who took delivery in trucks? Is that correct? 

Mr. ScHiJH. No ; the intention of the sign is a typical sign used by 
service stations to advertise without saying so that they are giving 
secret rebates. 

Mr. Cox. To whom? 


Mr. ScHUH. To truck owners. Similar signs, "We cater to triicke,'' 
"Truck stops," and so on, are very often used as "well as three little 
red lights up above their sign meaning 3 cents off and two lights 
means 2 cents off, and so on, to truck drivers. 

Mr. Cox. A kind of code? 

Mr. ScHUH. It is a code amongst them and very often it is in viola- 
tion of State laws that provide you shall post the price at which 
you sell, and sell at that posted price. 

Mr. Cox. I see. Now, I will start reading again the memorandum 
(reading further from "Exhibit No. 1302") : 

This is just one more offense on the part of Sinclair, and it is suggested that 
you take this up with Arnott and with Carnes, calling Carnes on long distance 
from Washington. It might even be advisable for you to go to New York and 
discuss this entire situation, and with reference to the building activities of 
Sinclair. This company is going to have the dealers slow down on us and 
it is certain the company is going to suffer severely if you don't correct some 
of the bad practices which they are instituting today. 

Certainly Sinclair is offsetting all the good work which is being done by the 
N. A. P. R. and by such leaders as Arnott. 

Now, who was Mr. Carnes ? 

Mr. ScHUH. Mr. Carnes is vice president of the Sinclair Eefining Co. 

Mr. Cox. Now, why would Mr. Shanks suggest to you that you 
talk to Mr. Arnott, who is connected with Socony Vacuum, about a 
practice which was being indulged in by the Sinclair Co.? 

Mr. ScHUH. During the N. K. A. code this type of practice was 
specifically outlawed and, thank God, the industry adhered to those 
rules and policies up until the latter part of 1936. Then the tendency 
was toward a break-down. If you will consult the Federal Trade 
Commission records on the day that that letter was sent to me air 
mail, special delivery, Mr. Arnott and Mr. Hadlick and myself were 
appearing before the Federal Trade Commission about ^tting an- 
other code, and the object of his calling that to my attention was to 
point to Arnott that here was another bad practice that was creeping 
in and as a reason for selling the code to the Federal Trade Com- 

Mr. Cox. Now, was Mr. Arnott in those negotiations with respect 
to this code representing all the major companies? 

Mr. ScHTJH. I wouldjn't say he was representing. I would say he. 
was the refiners' representative. I don't know that he went to them 
and got authority, but he took the part of the refiner in the negotia- 
tions. He was not — I did not talk to him in connection with this, 
as far as the Socony Vacuum Co., but as an industry leader. 

Mr. Cox. Well, did you complain to him about it so far as the 
practice was being indulged in by the Sinclair Co. ? 

Mr. ScHUH. No ; I believe I met him at the Washington Hotel and 
walked over to the Federal Trade Commission and I just called his 
attention to one more practice creeping into the industry as a result 
of having no code or no rules of the game. 

Mr. Cox. Of course, Mr. Arnott wasn't in a position, was he, to 
do anything about the practices of the Sinclair Co. I 

Mr. ScHUH. Nothing at all, except to know that the things were 
breaking down. 

Mr. Cox. Is this letter merely for the purpose of calling attention 
to the existence of this practice? Wasn't it a suggestion that some- 
thing be done about it? 

124491 — 40— pt. 17, sec. 4 6 


Mr. ScHUH. With the Sinclair Co., and that is what was done. 

Mr. Cox. Then why did you say anything about it to Mr. Arnott 
if it was to be done by the Sinclair Co. only? 

Mr. ScHUH. Because of Arnott's position and my position in rela- 
tion to this code. I believe that at the Federal Trade Commission 
meeting — and their complete record some place will show — I pointed 
out this very fact. I remember the date distinctly, February 17, 1937. 

Senator King. May I ask a question or two without conveying 
my own views definitely ? Was it not your purpose, the purpose of 
your organization, to prevent the major companies or the jobbers, 
or even individuals, from granting benefits or lower prices to pur- 
chasers who were purchasing large quantities in contradistinction to 
purchasers of very small quantities of oil products? Were you trying 
to establish, in other words, a uniform price for everybody in all parts 
of the United States who was buying or distributing oil? 

Mr. ScHUH. Senator, that is very inclusive, and I can't give you a 
yes-or-no answer to that. Most of the State laws, and they are pass- 
ing them every year, recognize no distinction between anyone driving 
into a service station buying gasoline. If you want quantity prices, 
you must put in your own pump and tank, but you may drive into 
my service station, as one of my customers, and being a driver- of an 
automobile that covers a lot of mileage, you may buy more than half 
the trucks that come into my station, and it is obviously unfair for 
me to charge you full price and to give a truck a discount because 
he has a box on the back of his wagon. And it has been recognized 
in the .industry and in every law that has been passed that discrimi- 
nation between buyers, unless it is based on a sufficient quantity — and 
the largest tank attached to the carburetor of a truck is some 25 
gallons — there isn't enough difference there to warrant the distinction 
in price. 

Senator King. You mentioned the code several times. Was it your 
purpose to perpetuate the N. R. A.? 

]\Ir. ScHUH. The good practices. 

Senator King. And you were to determine, of course, what the 
good practices were. You remember, do you not, that there was a 
volume of opposition all over the United States, from every indus- 
try — that is, the consumers — because of the practices under the code? 
And you have referred to it several times with approval, and it 
seems to me from your testimony you were seeking to perpetuate the 
practices under the code and to obtain either National or State legis- 
lation that would enable you to carry out the same policies that 
were carried out under the N. R. A. 

Mr. ScHUH. Frankly, I have given everything that I have had to 
get a fair trade-practice set of rules from the Federal Trade Com- 
mission, because I felt that it was so necessary for our small people 
who have no other way of bringing before these bigger companies 
their problems. We had a code for the petroleum industry and for 
the people generally; it was the finest thing in the world, and the 
little opposition that we had to the Petroleum Code came from the 
dirty, lousy chiselers who were gypping the public in many ways. 

Senator King. That expression is frequently used, is it not, by per- 
sons in business because- somebody undersells them and still makes a 
legitimate profit? 

Mr. SciiUH. We don't object to anybody underselling us as long as 
they are fair about it. 


Senator King. Have you not attempted to force individuals who 
didn't want to join your organization into your organization? 

Mr. ScHUH. Never. 

Senator King. Have you practiced any espionage upon tlie small 
individual gasoline seller in order to bring him into your organiza- 

Mr. ScHUH. No. 

Senator King. You have visited him frequently, have you not, and 
pointed out what you conceive to be tlie advantages of having the 
same price and joining all one organization? 

Mr. SciiuH. I have called on very few individual dealers. My 
general duty is to speak before a group of dealers. I am called in 
to speak before a group of dealers in open meeting, and generally 
I have a prepared talk that I give them, word for word. Unfor- 
tunately, I didn't have such u prepared talk in Kansas City. 

Senator King. And your organization has spent a good deal of 
time and no little money in tiying to secure legislation in various 
States, have you not? 

Mr. ScHUH. Our national organization has never spent a penny 
to my knowledge to secure legislation. 

Senator King. You have spoken several times here about legisla- 
tion obtained in the States. "\Ylio were the promoters of that legis- 
lation ? 

Mr. ScHUH. Either local or State associations. 

Mr. Cox. I would like to offer that memorandum. 

The Chairman. The memorandum may be received. Have you 
finished questioning on it? 

(The memorandum referred to was marked "Exhibit No. 1302" 
and is included in the appendix on p. 9843.) 

Mr. Cox. I think so, on that. 

The Chairman. Mr. Schuh, may I call your attention to the last 
sentence in this memorandum (reading frojii "Exhibit No. 1302") : 

Certainly, Sinclair is offsetting all of the good work which is being done by the 
N. A. P. R. and by such leaders as Arnott. 

What did Mr. Shanks mean by that statement ? 

Mr. Schuh. The work that we were doing, trying to hold the in- 
dustry to fair trade practices. 

The Chairman. And were you doing that work, were the N. A. 
P. R. doing that work with Mr. Arnott ? 

Mr. Schuh. Mr. Arnott and Mr. Hadlick and myself are members 
of that committee of three. Mr, Hadlick is secretary of the National 
Oil Marketers Association,^ and the three of us are on that com- 
mittee and we have endeavored to get a code since July 1936. 

The Chairman. Am I to infer from this statement that the N. A. 
P. R. — this 'doesn't even mention Mr. Hadlick, this refers to the 
N. A. P. R. — and such leaders as Mr. Arnott were actively engaged 
in doing certain good work, as he called it? 

Mr. Schuh. The three of us were. 

The Chairman. This doesn't refer to any three, it refers to two, 
so I am just questioning you about the sentence that is in this memo- 
randum which you have identified, and we can deal with that di- 
rectly, Mr. Schuh. The sentence is, "Certainly, Sinclair is offsetting 

iMr. Paul Hadlick, whose testimony before this committee appears in Hearings, Part 16. 


all of the good work which is being done by the N. A. P. K. and by 
such leaders as Arnott." I am just asking you what was the good 
work that the N. A. P. R. and such leaders as Arnott were doing. 

Mr. ScHUH. I think first that Shanks was bragging just a little 
bit, I think that, and the good work that we were doing was in 
attempting to encourage the industry to stand fast on good, sound, 
fair business practices. 

The Chairman. Against these discounts that you are talking about, 
that is one thing. 

Mr. SchCh. Against secret rebates as one thing; against loaning 
equipment as another. They dropped away from open-price post- 
ing to secret rebates not only in our business, but the refiners, the 
jobbers and so on, and from time to time Arnott, myself, and other 
people issued public statements urging the industry to hold fast, to 
hold on here until we could get something in the nature of a code 
so that when they did come up, they could be brought before the 
Federal Trade Commission. 

The Chairman. Then the N. A. P. R. and Mr. Arnott were co- 
operating at the time this memorandum was writte"" ? 

Mr. ScHUH, Very much so. 

The Chairman. Did you follow the suggestion given to you by 
Mr. Shanks in this memorandum? 

Mr. SciiuH. In talking to Jack Carnes? 

The Chairman (reading) : 

It might even be advisable for you to go to New York and discuss the entire 
situation with reference to the building activities of Sinclair. 

Mr. ScHUH. I did go to New York and I did talk to Mr. Carnes 
about it. 

The Chairman. Did you talk to Mr. Arnott? 

Mr. ScnuH. Not in New York. 

The Chairman. Did you some place else ? 

Mr. Schuh. The oply conversation I had with Mr. Arnott was 
from the Washington Hotel to the Federal Trade Commission Build- 
ing and that time I called his attention not only to this, but there 
were several other things on my mind at that time, for instance, 
jobbers coming to some of the customers of our dealers and the com- 
plaints we had received, verbal complaints, offering to put in a tank 
if this fellow would buy his gasoline from them when he had been 
buying from a service station. 

The Chairman. So.vou were in touch with him by telephone? 

Mr. Schuh. No, personally • I walked and talked with him at this 

The Chairman. This memorandum, let me call to your attention, 
is dated February 17, 1937. "Exhibit No. 1301," which was a letter ad- 
dressed to you by Mr. Arnott, on his stationery, 26 Broadway, bears 
the date November 16, 1936. Is it the correct inference that through- 
out this period from November 1936, at least to February 1937, you 
were in conference at one time or another, and in communication with 
one another? 

Mr. Schuh. Well, we are today. 

The Chairman. You are still carrying on 

Mr. Schuh (interposing). We are still friends. 

The Chairman. Oh, well — there is cooperation for the improve- 
ment of the industry ? 


Mr. ScHUH. Not since the 14th of September when I retired as 
president. Up until that time, yes. 

The Chairman. You are now chairman of the board? 

Mr. ScHUH. That is right. 

The Chaerman. And your activities have ceased? 

Mr. ScHUH. All I do is preside at a meeting twice a year. 

The Chairman. Now I noticed this sentence in the letter of No- 
vember 16, 1936, written to you by Mr. Arnott. After character- 
izing the pamphlet issued by the Master Gasoline Operators Asso- 
ciation as "unfortunate," he said (reading from "Exhibit No. 1301") : 

I am wondering why this particular publication cannot be more constructive 

Did you interpret that to be a suggestion that future issues of the 
publication should be more constructive ? 

Mr. ScHUH. I would interpret that as his wish. 

The Chairman, Wliat happened? You testified in response to an 
inquiry made by Senator King that it was sort of tamed down there- 

Mr. ScHUH. No, there was a change in management in the asso- 
ciation. Now whether it was a month later or 6 months later, I 
don't know. 

The Chairman. Do I understand you directly to say that the 
Master Gasoline Operators Association, Inc., which published this 
pamphlet entitled "The Pump Handle' was afterward absorbed by 
your organization? 

Mr. ScHUH. They were members then, but prior to this, a couple 
of months, there was a more or less radical group who were for- 
merly — they joined the union, although they had no business to; they 
joined the union and had grdeal with the union. 

The Chairman. What is a radical group? What do you mean 
by a radical group? 

Mr. ScHUH. A group such as the original Master Gasoline Oper- 
ators, who were just in hot water all the time, not giving serious 
consideration to what they did before they did it. I can't accus/^ 
them of it, I wouldn't accuse them of it, but at one tirne there was 
a series of pumps smashed and broken and things like that Some- 
body wouldn't post the same price. We never would tolerate that 
and didn't want it in our organization and constantly urged and ad- 
vised dealer groups not to pursue any such tactics. 

The Chairman. Now the editor of this pamphlet, his name was 
given as Gust C. Linsenmann. Do you know him? 

Mr. Schuh. He wns the president of the Master Gasoline Oper- 
ators Association. They changed their name a couple of months 
after that to the Cleveland Association of Petroleum Retailers, Avhen 
the amalgamation took place and the ill feeling between the two 
groups died down. 

The Chairman. Is he still associated w ith N. A. P. R. ? 

Mr. Schuh. He is no longer a director. He was at one time. 
Whether he is a member of the Cleveland group I couldn't say. I 
believe so. 

The Chairman. Does this publication still- appear ? 

Mr. Schuh. I haven't seen it lately but I think it does from time 
to time. 

The Chairman. The first article in the first issue attached to the 
letter by Mr. Arnott contains an article entitled "Iowa Plan Ex- 


posed." Your original statement this morning said: "As I have 
already stated, we fought the major oil companies to get the Iowa 
plan," Do I interpret your statement this morning correctly when 
I take it to mean tliat you wanted the Iowa plan? 

Mr. ScHUH. Definitely so. 

Tlie Chairman. And Mr. Linsenmann opposed the plan? 

Mr. ScHUH. That is right. 

The Chairman. And what w\as the attitude of the N. A. P. K.? 

Mr. ScHUH. We wanted the plan. 

The Chairman. The N. A. P. R. as a wdiole supported the Iowa 
plan ? 

Mr. ScHUH. That is right, and you are bound to have some differ- 
ences of opinion and those people who haven't fared so well — they 
may say because of it or not, some of them are howling to high heaven 
and want it retracted, but w^e have always taken the position that 
no major oil company has the riglit to dictate the amount of money 
that we can make, and that is what they did prior to the dealer 
marketing plan or the Iowa plan. 

The Chairman. Apparently from that letter Mr. Arnott had the 
same view as you. He wanted the Iowa plan and he objected to the 
criticism of the Iowa plan contained in this pamphlet. 

Mr. ScHUH. I couldn' t agree with you, because Mr. Arnott and 
I have tangled on various occasions because of just what I have talked 
about, and that is the margins that we were allowed. 

Tlie Chairman. That is aside from the issue. This letter com- 
plained about the unfortunate articles in this pamphlet. Now, the 
first article was, "Iowa Plan Exposed." Now evidently Mr. Arnott 
didn't like that exposition, whether it was right or wrong I don't 
pretend to say, you understand. 

Mr. Schuh. 1 would like to say this, as I remember the article 
and I think I do. After we fought the major companies and got it, 
this fellow came out and blamed the major companies for pushing it 
down our throats. 

The Chairman. That is right, and Mr. Arnott was complaining 
about that sort of publicity and he asked you if you didn't think 
that this publicity could be more constructive, and apparently there- 
after the publicity did become more constructive, or at least that sort 
of publicity was abandoned, is that correct? 

Mr. Schuh. No ; after that there were several tirades. 

The Chairman. But then it was absorbed and amalgamated and 
the publicity was tamed down, to use your language here. 

Mr. ScHTTH. It was quite a while after that. There were several 
tirades after that, against particularly the Standard Oil Co. of Ohio. 

The Chairman. But after the amalgamation of this Master Gaso- 
line Operators Association which was publishing this pamphlet, with 
your organization, there were no more attacks upon the Iowa plan. 

Mr. Schuh. Oh, yes; when this was published they were part of 
our group and had sat through meetings, .which were more or less a 
jubilation because we had succeeded in getting the Iowa plan and 
this fellow sat through that meeting and heard us say how hard it 
was to get it and what a fight it was, and in spite of that he wrote 
this article and I think it was Arnott's natural reaction, "You fellows 


hollered for this, now here is a group of yours kicking about it. 
What is the matter?" I think that is his reaction. 

The Chairman. After amalgamation this publication ceased? 

Mr. ScHUH. No ; we were amalgamated at that time and after 
that, for, I would saj^ a year — but the records w^ould show it, up to a 
year at leastj as long as Linsenmann was in, and I had nothing to 
do with getting him out or anybody I know about, I think he just 
retired. As long as he was in he continued to let loose these tirades 
and I paid no attention to it. I thought he w^ould learn as time went 
on what it was all about. 

The Chairman. And he did? 

Mr. ScHUH. I don't know\ He left his active participation in the 

The Chairman. This memorandum has been admitted to the recoixl. 

Mr. Cox. Mr. Schuh, I want to refer to another sentence in the 
letter of September 26, 1939, by Mr. Hodges; the third paragraph 
in that letter reads: 

"We have already sold approximately twenty-five thousand man- 
uals to oil companies in the Middle West." 

That, I take it from your previous testimony, is a substantially 
accurate statement, is it not? 

Mr. Schuh. I couldn't say yes or no until I saw the statement. 
I would say that it is over 20,000. I would say it was over 20,000, 
I wouldn't know exactly, 

Mr. Cox. Then w^e can conclude, can we, that upwards of 20,000 
copies of the manuals w^ere sold to major oil companies. Is that 
correct ? ^ 

Mr. Schuh. We have had 34,000 printed. There were 34,000 
manuals printed, 22,000 the first time and 12,000 the second time, and 
I would say that upwards of 20,000 had been sold. What balance 
they still have there I don't know. 

Mr. Cox. Upwards of 20.000 have been sold to the major oil 
companies ? 

Mr. Schuh. That is right. 

Mr. Cox. I will ojffer this letter for the record. 

The Chaibman. It may be admitted. 

(The letter referred to was marked "Exhibit No. 1303," and is 
included in the appendix on p. 9844.) 

Mr. Cox. When was this luncheon that you said you had with 
Mr. Arnott? 

Mr. Schuh. October 1935. 

Mr. Cox. Your organization had some kind of a committee meet- 
ing in Chicago in the summer or early fall of 1936, did you not? 

Mr. Schuh. With whom? 

Mr. Cox. Your organization had a committee meeting of some 
kind in Chicago in the late summer or early fall of 1936, did it not? 

Mr. Schuh. I wasn't in that part of the country until after Au- 
gust 1 of 1936, and it is very probable that we had some committee 
meetings. Whether I was present or not I don't know. 

Mr. Cox. We have from your files what purports to be a carbon 
copy of a letter written by E. C. Shanks to you, dated at the top 
"Tuesday, 6-10-^6." and the sixth paragraph on the first page of 


this letter which I shall show you in a moment reads as follows 
(reading from "Exhibit No. 1304") : 

I had a nice visit with Arnott Monday afternoon after you left in which 
we discussed a number of phases of the current situation and in which I gave 
him information he desired relative to the Kentucky jobbers' group and the 
Master Association of Cleveland. Arnott was much interested in the pro- 
posed board meeting here and asked many questions relative to the number 
of eastern directors we had and similar subjects. He stated that if we wanted 
to bring six or seven of our eastern directors to Chicago at the time of the 
standing committee there, he would be able to see that their transportation was 
paid and he wanted all of our directors who were at the meeting to be hia 
guests at a luncheon to which he would also invite a number of refiners. In 
thinking this matter over after leaving Mr. Arnott, it was not clear to me 
whether he meant he would pay transportation by any means or whether he 
meant that he would pay transportation under an arrangement similar to that 
by which we propose to bring our western directors to the eastern meeting; 
that is, four or five in an automobile. Brown is of the opinion that he meant 
by any method of transportation and that all we would need to do would be 
to present our bill and Brown asked me also if he might be included in the 

I ask if you remember receiving that letter. 

Mr. ScHUH. I do not. It is entirely new to me. 

Mr. Cox. It is addressed to you, Mr. Schuh. 

Mr. Schuh. I don't remember ever having seen it. 

Mr. Cox. Could you explain how a letter addressed to you might 
get in your files when you had never seen it ? 

Mr. Schuh. This letter is marked "Memo, 6-10-36." I was not 
in Milwa;ikee at that time. Where I was I would have to deter- 
mine, but I did not get the letter, and if it was mailed to me it was 
misdirected and never reached me. I never saw that letter nor had I 
heard anything of the contents of that letter. 

The Chairman. How do you know you were not in Milwaukee at 
that time? 

Mr. Schuh. At that time I was out talking to dealer meetings. 

The Chairman. How do you fix that in your mind ? 

Mr. Schuh. From April until July 31 of that year I did practi- 
cally nothing but talk to a meeting every night. If I got to Mil- 
waukee it was on a Saturday or Sunday sometimes, and I left again 

Mr. Cox. Of course, this letter was addressed to the La Salle Hotel, 
Chicago, 111., so that not being in Milwaukee wouldn't have made 
any difference. Were you in Chicago about that time, do you recall? 

Mr. Schuh. Well, I can't say definitely whether I was there but 
I don't believe I was in Milwaukee on that date. 

Mr. Cox. Do vou have any substantial doubt that this is an 
authentic copy of a letter which was written by Mr. Shanks to you, 
regardless of whether you saw it or not ? 

Mr. Schuh. I think that is unfair to ask me. 

Mr. Cox. Perhaps Mrs. Loos can help us again. 

I hand you the letter we have just been discussing and ask vou if 
that is a carbon copy of a document which is in the files of your 

Mrs. Loos. Yes ; it looks like it. 

Mr. Cox. Do you recall ever having seen this letter ? 

Mrs. Loos. No. 

Mr. Cox. Do you have any doubt that it does come from your 


Mrs. Loos. No. 

Mr. Cox. You don't recall whether you received this letter? 

Mrs. Loos. I wasn't employed at that time. 

Mr. Cox. Wliere is the letter from? 

Mrs. Loos. It is from the office of the association in Milwaukee; 
this letter wouldn't have come from there, anyway, unless it was 

Mr. Cox. All right. 

Mr. Schuh, what was this meeting that was talked about in the 
letter; do you know? 

Mr. Schuh. I don't. He mentions the standing committee, and 
the standing committee was a group of jobbers, refiners, and dealers 
who were the top of the selected group to complete the code and to 
work for its adoption, and from that committee the three of us, as 
I named before, were selected as representatives of the standing 

Mr. Cox. Is this the first time you ever heard of Mr. Arnott's offer 
to pay the expenses of certain of your directors to this meeting? 

Mr. Schuh. That's right. 

Mr. Cox. Do you know whether or not that offer was acted upon ? 

Mr. Schuh. I don't remember a meeting of the standing com- 
mittee at that time. As a matter of fact, we haven't met since Feb- 
ruary 27, 1936. 

Mr. Cox. Was there any kind of meeting 

The Chairman (interposing). That was not the question. 

Mr. Cox. Were you at any meeting in Chicago after the date of 
this letter in 1936 ? 

Mr. Schuh. I probably have been to hundreds of meetings in 

Mr. Cox. Did you meet Mr. Arnott there at any time after the 
date of this letter in the year 1936? 

Mr. Schuh. I think I did. 

Mr. Cox. And were there any of your directors present at the 
time you met Mr. Arnctt? 

Mr. Schuh. Not that I recall. 

The Chairman. Do yon know of any occasion upon which the 
expenses of any members of the board of directors were paid by Mr. 
Arnott, or by any of the major companies, to any such meeting? 

Mr. Schuh. Never did I know of it, and I would have raised hell 
if it had been done. 

The Chairman. And will you say that expenses have never been 
paid for any of your officers or directors, so far as you know, to 
any such meeting? 

Mr. SciiuH. So far as I know, never. 

Mr. Cox. Are you suggesting now that you would have rejected 
such an offer if it had been made ? 

Mr. Schuh. Absolutely. 

Mr. Cox. There is nothing in this letter that suggested that any 
such offer would have been rejected. 

Mr. Schuh. I would have rejected it, because so far as being presi' 
dent of the group, I would never have "olerated that. 

Mr. Cox. Do you think Mr. Shanks might have tolerated it? 


Mr. ScHUH. It is very possible that Shanks wanted to get directors 
from far away to attend this code meeting, and it is very possible 
that he may have considered it. 

Mr. Cox. He did a little- more than consider it in this letter. He 
seems to view the proposal with at least temperate enthusiasm. 

Mr. ScHTJH. He may have proposed it. 

Mr. Cox. You think he may have proposed it? 

Mr. ScHTJH. He may have proposed it. 

Mr. Cox. Was he in the habit of suggesting to Mr. Arnott that 
Mr. Arnott pay the expenses of the directors to the meeting? 

Mr. ScHUH. But from the tenor of the letter it looks like a sales 
letter to me, and he must have decided against sending it to me. That 
is why I never got it. 

Mr. Cox. I should like to offer this letter. 

The Chairman. The letter may be received. 

(The communication referred to was marked "Exhibit No. 1304" 
and is included in the appendix on p. 9844.) 

The Chairman. I should like to see the letter. 

Did you ever write any letter or make any communication whatso- 
ever to Mr. Shanks with respect to the subject matter of this memo- 
randum ? 

Mr. ScHUH. No, sir. I didn't know the memorandum had been 

The Chairman. That might be, and still you might have commu- 
nicated about the subject. He said, "I am to see Arnott upon this 
further toward the end of the week, probably Friday, and suggest 
(hat you communicate the reaction of those at 3'our .meeting to me 
upon this point." That prompted me to ask the question whether you 
ever did commiuiicate the reaction of those at your meeting on this 
point to Mr. Shanks. 

Mr. Schuh. I don't know what meeting he has reference to, and he 
probably wanted me to take this up at a meeting of some committee, 
but I never got the memorandum. 

The Chairman. Did you ever talk with anybody about the pay- 
ment of the expenses of directors to a meeting of the eastern group? 

Mr. Schuh. No; never. 

The Chairman. And you never communicated with Mr. Shanks 
about such a thing? 

Mr. Schuh. Never. I say that so positively because his chief com- 
plaint against me wns because I didn't write often enough. I am a 
pooi- letter writer. 

Mr. Cox. Now, Mr. Schuh, I call your attention to the statement 
here that Mr. Shanks makes that he gave Mr. Arnott certain infor- 
mation relative to the Kentucky jobbers' groups and the Master Asso- 
ciation of Cleveland. Do you have any idea what that information 

Mr. Schuh. No; I don't. As I say, this Master Gasoline Operators' 
Association at that time was not an affiliate of ours. The Independ- 
ent Oil Dealers were. 

Mr. Cox. Is this the same Master Association of Cleveland that was 
publisliing tlie document which lias already been introduced in 
evidence here ? ^ 

Mr. Schuh. That's right. The Independent Oil Dealers were dead, 
or practically dead, and the Master Operators were going, ana I 

i"E.\bibit No. moi' 


don't know what information he could have had, unless it is probable 
that something else developed, as he explained to them. 

The Chairman. The committee will stand in recess until 2 : 15. 

(Whereupon, at 12: 15 p. m., a recess was taken until 2: 15 p. m. of 
the same day.) 


The hearing was resumed at 2 : 25 o'clock, upon the expiration 
of the recess. 

The Chairman. The committee will please come to order. Are 
you ready to proceed, Mr. Cox? 

Mr. Cox. Yes. 

Mr. ScHUH. I would like to ask leave of the committee to make a 
statement that I believe will clarify something that transpired this 
morning, and will probably save some time. 

The Chairman. Very well. 

Mr. Schuh. That is my association with Mr. Arnott. I would like 
to point out that I first met Mr. Arnott after having been appointed 
to the Planning and Coordination Committee by President Roosevelt 
and he had been apointed to that same committee under the N. R. A., 
and we met and worked on that committee for a considerable period 
of time, and at many times we fought across the table, and after the 
"N. R. A. was killed by the sick chicken, the group of oil men — also, 
that Mr. Arnott had been appointed in charge of stabilization by 
Mr. Ickes, Secretary of the Interior, and that we worked together. 

The Chairman. What do you mean by stabilization? 

Mr. Schuh. Well, at that time, to ]iaraphrase Mr. Ickes' ^ words, 
the retail markets were completely demoralized throughout the coun- 
try, and Arnott was appointed by Mr. Ickes to help to bring order out 
of that chaos, and at the time that the N. R, A. was declared illegal, 
this group of independent oil men (no major companies were 
present at this meeting) met at the Mayflower Hotel, and subsequent 
to that meeting we went over to see President Roosevelt, and at that 
time we thanked him for everything tliat tlie Government had done 
for the petroleum industry under the code and told him that we had 
just issued a statement asking the entire industry to abide by the 
policies and practices adopted under the rode insofar as they were 
legal, and the President at that time said "That's fine." 

So subsequent to the decease of ihe code, the N. R. A. Code, we 
met to formulate a proposed code for submission to the Federal 
Trade Commission under their .egular procedure. That code met 
with very little acceptance. 

The committee that drew that consisted of sixty-five or seventy 
representatives of all branches of the industry, under the leadership 
of Mr. A.rnott, who Tvas then vice president in charge of marketing 
for the A^merican Petroleum Institute, and they were primarily rep- 
resentatives of trade organizations and in some companies on that 
committee. A little over 6 months later a group of independent re- 
finers from the Middle West called a meeting at Chicago to con- 
sider the advisability of developing a code, and if it could be agreed 
upon to develop this code, then to go forward with it. 

* Hon. Harold Iclses, Secretary of tbe Interic* 


The Chairman. Under what authority? 

Mr. ScHUH. To submit to the Federal Trade Commission. 

The Chairman. That is a code of fair-trade practice. 

Mr. ScHTjH. A code of fair-trade practices. As a result of that 
meeting in Chicago a code was drafted and it was taken home and 
submitted to the various groups by the representatives there who 
included retailers, jobbers, small refiners, and large refiners. 

On the 27th of February we met in Chicago once more with our 
reports on the code as our people, our different groups, felt about it, 
and at that meeting the standing committee was formed and the 
standing committee selected Mr. Arnott to represent the refiners, 
and Mr. Hadlick to represent the jobbers, and myself to represent 
the retailers. 

The Chairman. That had to do with the study of proposals to 
go into a code to be submitted to the Federal Trade Commission. 

Mr. ScHUH. That is right. 

The Chairman. Did it embrace anything else? 

Mr. ScHUH. Nothing else. It was strictly on the code. 

The Chairman. So that the conversations of yourself, Mr. Had- 
lick, and Mr. Arnott were strictly confined to code consideration. 

Mr. ScHUH. That is right. 

The Chairman. Now is that true of your conversations with Mr. 

Mr. Schuh. Yes. 

The Chairman. Is that true of your conversations and commu- 
nications with Mr. Arnott? 

Mr. Schuh. Yes; I believe that it was. 

The Chairman. Now you express a little doubt about it. I can 
understand why, having read that letter this morning. 

Mr. Schuh. Senator, I would like to say this, that I want to be 
absolutely honest. I am under oath; I want to tell the truth. 

The Chairman. The committee appreciates that, 

Mr. Schuh. It is quite difficult to say that I never talked about 
anything else, because I may have talked and I have talkeji about 
football games and other things, but there never was anything 

The Chairman. Of course, we are not interested in your opinion 
or predictions, even on football games. 

Mr.. Schuh. I mean there was never anything illegal or had a 
tendency to be illegal. 

The Chairman. Now let me set your mind at rest, Mr. Schuh. 
What this committee is concerned about, if I understand the minds 
of the committee members, is the economic problem. Obviously 
there is a problem here because everybody is talking about it, every- 
body in every branch of this industry and in almost every other. We 
are concerned to know what sort of a recommendation, if any, we 
should make to Congress and to the President with respect to the 
solution of these very difficult problems. 

Now the preparation of a code is one thing, and any plans that the 
leaders of industry may have with respect to regulating privately 
the action of retailers or refiners, or those who lay pipe lines, is quite 
another thing. 

The adoption of a code of fair practice under the authority of law 
through the Federal Trade Commission is one thing; the adoption of 


a private understanding is quite another, and whether or not there 
is such an understanding, or was an attempt to make such an under- 
standing, is a matter of interest to this committee in determining 
what its recommendation shall be. Do I make myself clear to you ? 

Mr. ScHUH. Yes, yes; very clear. 

The Chairman. This is not a grand jury investigation; we are 
not trying to find out whether you ever violated the antitrust law 
or anything of that kind, but we are interested in knowing what 
the organized members of this industry have done and what they 
want to do. 

Mr. ScHUH. Senator, I unnderstand perfectly and the reason I 
wanted to make the statement in clarification is because the code to 
me, the N. R. A., is dead and then the next code that came up was 
the one of the Federal Trade Commission and the only code. 

The Chairman. Now then, let me ask you this question, reading 
again "Exhibit No. 1301," the letter of Mr. Arnott, November 16, 
1936, addressed to you. 

The attached is rather unfortunate. 

The attached being two issues of the Pump Handle, one of which 
contains the article "Iowa Plan Exposed." Then going on : 

I am wondering why this particular publication cannot be more constructive. 
Frequently it is violent in* its accusations against almost everyone in the 

Did that letter have anything to do with the code or the formula- 
tion of a code? 

Mr. ScHUH. I would say no. 

The Chairman. Then how about the memorandum which was pre- 
sented from your files this morning, a memorandum prepared — the 
(me of February 17 from Mr. Shanks? ^ 

Mr. Schuh. I am familiar with the one you mean. That did have 
something to do with the code because the practices complained of 
in this particular thing were things that we had in the rules and 
the code that was proposed to the Federal Trade Commission. 

The Chairman. Do you have that exhibit here ? It might be well 
to send for it in order that we may have it definitely before the 
witness. That memorandum — you have it clearly in mind, I think — 
seemed to me to go a little bit beyond any consideration of a code. 
It referred to a particular sign which the Sinclair Co. had out and it 
suggested that you confer with an officer of the Sinclair Co., not 
about any code, but about this particular practice, and then it also 
suggested that you talk with Mr. Arnolt, not only about this practice 
of the Sinclair Co. of erecting signs to indicate to truck dealers that 
they might get a concession on gasoline for trucks at the Sinclair 
stations, but also with what appeared to be the Sinclair program with 
respect to the construction of stations. Do you recall ? 

Mr. Schuh. Yes, sir. 

The Chairman. Wliat had ^hi. to do with the code? Wasn't that 
dealing clearly with a day-to-dny practice that you were going to 
alter, that you and Mr. Arnott, in your conversations with Mr. 
Cames, were going to try to alter? 

Mr. Schuh. I would say so. Mr. Arnott at that time was vice 
president in charge >of marketing of the American Petroleum Insti- 

1 "Exhib" \o. 1302," appendix, p. 9843. 


tute and on numerous occasions when difficulties developed that 
more than one company was responsible for 

The Chairman (interposing). Do you mean he was vice president 
in charge of marketing of the A. P. I. at the time this letter of No- 
vember 16, 1936,^ was written? 

Mr. ScHUH. Yes, sir ; and we have called to the Institute's attention 
practices that we have felt were bad when indulged in by more than 
one company — unfair trade practices that we thought were bad, that 
in our own opinion just didn't make sense and we felt that the 
Institute ought to communicate to its own members bad trade prac- 
tices and just point them out to them that complaints are coming in 
about them. Mr. Arnott was vice president at that time and he was 
acting in this capacity when he originally started to work on a code 
for submission to the Federal Trade Commission. 

The Chairman. Now you are on the stand here today as the result 
of a subpena because the testimony was given here last week that 
certain efforts were being made to enforce a particular type of pro- 
gram upon dealers in the industry. Now what is your opinion, what 
is your recommendation to the committee ? Should that be done ? If 
it IS done, is it a proper practice, or was it never indulged in at all? 

Mr. ScHUH. It was never indulged in at all. 

The Chairman. Then what was Mr. Arnott doing when he wrote 
you this letter? Why was he calling your attention to something that 
seemed to him to be objectionable, if there was no intention o.i his 
part to prevent that sort of activity ? 

Mr. ScHUH. As I understand it, he was calling it to my attention 
purely to indicate to me that here was someone who didn't under- 
stand the actual situation, and even though he didn't like it, it prob- 
ably appeared comical to him, that here is a group of dealers that 
urged us to get out, and now we have gone out and they tell us we 
jammed it down their throat. And he probably thought that I had 
the opportunity — I don't know, I am drawing a conclusion here and 
I probably haven't any right to, but I would say that he thought that 
if I talked to this fellow and explained what happened and how we 
had fought the companies to get out, that this man would have a 
clearer understanding of what had gone on. 

The Chairman. Well, have you finished your statement, the state- 
ment you made a request to submit? 

Mr. Schuh. With this e- ception, that from the standing com- 
mittee time on, we have called on the Federal Trade Commission 
very many times and gone over the rules that were submitted to them 
in the hope that the Federal Trade Commission would give us a Code 
of Fair Trade Practices under their regular procedure. 

Mr. O'CoNNELL. Have they approved the code? 

Mr. Schuh. They have not as yet. 

Mr. O'CoNNELL. What do you understand to be the legal effect 
of their approval of the code, were they to approve it? I take it 
you think it important that they, act on it. 

Mr. Schuh. They must act on it or we wouldn't have a code. 

The Chairman. May I interrupt. I have "Exhibit No. 1302." To 
show you, Mr. Schuh, what I have in mind, I am reading now from 
the exhibit, a memorandum of Mr. Shanks, addressed to you. He 
describes the Sinclair sign 

1 "Exhibit No. 1301," appendix, p. 9842. 


Then he says: 

While the sign does not say so, the intent is obvious and the inference 
is that a discount was available to trucks. This is just one more offense on the 
part of Sinclair, and it is suggested that you take this up v?ith Arnott and 
with Carnes, calling Carnes on long distance from Washington. It might even 
be advisable for you to go to New York and discuss this entire situation, 
and with reference to the building activities of Sinclair. This company is 
going to have the dealers slow down on us and it is certain the company 
is going to suffer severely if you don't correct some of the bad practices which 
they are instituting today. 

Now, what does that have to do with a code'^ Ihat seems to me to 
apply dirc:tly to a program which was very clear in the mind of 
the author of the memorandum and which the author assumed would 
be clear in your mind, of activity right now to correct what you 
regarded as offenses, immediately, not by any code to be submitted 
to the Federal Trade Commission. 

Mr. ScHUH. You are right in that the offenses committed were 
being committed right then and there. 

The Chairman. And you wanted to stop them right then and there. 
Ir. ScHUH. And I wanted to stop them right then and there, and 
subsequently I went to the Sinclair Co. 

The Chairman (interposing). So that we are dealing with two 
things. We are dealing, first, with whatever discussions you may 
have had with Mr. Hadlick and with others with respect to a code 
to be formulated and submitted to the Federal Trade Commission, 
and you are also dealing with the day-to-day problems of the in- 
dustry and the way you approach them and handle them. 

Mr. ScHUH. That's right. I think I made it clear this morning 
that some of these things that were complained of in this memoran- 
dum we used — for instance, I used this very statement before the 
Federal Trade Commission that day as a further indication of the 
need for a code, that here a company was building and leasing serv- 
ice stations, what we termed "indiscriminately," ^nd it was further 
evidence, and I used it in that connection, and I believe that that is 
the reason it was rushed to me by air mail, because it got to me the 
same day it was sent, so that I would have that information when 
I went to the Federal Trade Commission. 

Also, we always tried, and we always will try, to stop practices 
that we think are to the detriment of the retailers. 

The Chairman. What reason did you have to believe that you 
could persuade the Sinclair Co., or any other company to abandon 
competitive practices of this kind? — Because that was a competitive 

Mr. ScHUH. I would like to term it a destructive practice. 

The Chairman. Very well, you may. 

Mr. Schuh. It might have been competitive but it was also de- 
structive. For instance, if Sinclair had moved into Wisconsin with 
that they would be urging dealers to violate a law that we had 
there, and we think it is a bad practice to discriminate between cus- 
tomers, so that we were anxious to stop it, and in very many in- 
stances when we could complain bitterly enough and make them 
understand this sort of thing wasn't right, it wasn't fair, it wasn't 
the honest thing to do with their dealers, I would like to explain 
this particular situation of indiscriminate building. They had a 
dealer in Racine, Wis., had him tied up hand and foot, and built a 


station two and a half blocks away from him, paid $150 a month for 
that station and leased it to a lessee for $35 a month, and he was 
taking business away from their other dealer that didn't cost them 
a penny, and things like that that we felt we had a right to complain 

And that particular thing was shown to them. We know that we 
can't tell Sinclair or anybody else, "You can't build any more sta- 
tions," but we try to prevail upon them to use good judgment and 
not build them any old place they find a vacant lot. It reminds 
me of a statement that Norman Myers made when he was secretary 
of the Petroleum Administrative Board, that the oil industry ought 
to give the corners back to the saloons. 

Mr. O'CoNNELL. How did you propose to deal with the problem 
that you referred to as tlie indiscriminate building of stations in the 
code that you presented to the Federal Trade Commission? 

Mr. ScHUH. We couldn't. 

Mr. O'CoNNEix. Well, I understood you to say that you also pre- 
sented that particular situation to the Federal Trade Commission. 

Mr. ScHUH. The discount in connection with the open price post- 
ing section that we had; the open price posting section would have 
prohibited discounts at service stations. 

Mr. O'CoNNELL. I am talking about the indiscriminate building of 
service stations. 

Mr. ScHUH. That wasn't brought up, excepting in this way, that 
the companies by loaning and giving equipment to anyone who 
wanted to build a station could do it. Up to that extent that was 
considered, and there was a rule in the code providing the banning 
of the giving of free equipment. 

Mr. O'CoNNELL. Yes ; but I take it there was no attempt made in 
the code to deal with the problem you referred to just now as the 
indiscriminate building of service stations by Sinclair or by any 
other company. Is that correct? 

Mr. ScHUH. Excepting to. prevent theiu from giving equipment 
which accomplished the same thing. 

Mr. O'CoNNELL. So that to the extent that Mr. Shank's memoran- 
dum referred to meeting a problem created by the indiscriminate 
building of service stations, you had no hope of treating directly 
with that problem through the code, but rather through private 
negotiations or dealing with the Sinclair Co.? 

Mr. ScHUH. That is right. That is part of our code — part of our 

Mr. O'CoNNELL. Part of your what ? 

Mr. ScHUH. Our creed, which condemns the indiscriminate build- 
ing of service stations and urges the industry to cease and to use 
common sense. 

Mr. O'CoNNELL. I see ; but you had no hope of putting that in the 

Mr. ScHUH. No. 

The Chairman. Just another illustration of trying to hold over- 
production in line ? 

Mr. ScHUH. Well, we have a service station now for every oil 
well, and I think they are building stations about as fast as they are 
drilling new wells, and we haven't been able to stop it, and I am not 
optimistic enough to believe that we can ever stop it. A fellow has 


a corner; he is going to put a station on it if he can get someone to 
help him or has the money to do it. 

The Chairman. Mr. Shaughnessy, you wanted to ask a question? 

Mr. Shaughkesst. Yes. Mr. ^huh, these practices that your 
association condemns and that are condemned in the code that was 
submitted to the Federal Trade Conmiission are generally admitted 
as bad by the major marketers when you complain to them, are tliey 

Mr. ScHUH. Yes; I would say that they may recognize them as 
bad practices, but they don't discontinue them. 

Mr. Shaughnessy. They don't admit that they do it ? 

Mr. ScHUH. No ; very often they don't. 

Mr. Shaughnessy. So there is sort of an unwritten law in this 
industry in respect to certain things? 

Mr. ScHUH. I wouldn't say it was an unwritten law. 

Mr. Shaughnessy. But it is;i't looked upon with favor. T.-mean, 
a sales manager won't admit that his company's dealers are giving 
secret discounts? 

Mr. ScHUH. Oh, no. 

Mr. Shaughnessy. He won't admit his company is loaning equip- 

Mr. Schuh. Oh, no. 

Mr. Shaughnessy. He won't admit various types of competitive 
practices ? 

Mr. Schuh. They try to keep it hidden as much as they can, be- 
cause there are other companies in this industry that have guts 
enough, when they find one of those situations prevailing, to cut it 
wide open, and so naturally they try to keep what they are doin<^ 
secret. Very often they don't do these things directly, but they 
employ a second-story slugger to do it, and I might define a second- 
story slugger as a distributor appointed by this company to operate 
in the same area in which the company distributes, and they are 
"holier than thou" and keep their hands folded and pray every 
Sunday, but their distributor just cuts everybody's throat. 

The Chairman. Has that been done to any great extent? 

Mr. Schuh. Very much. 

The Chairman.- You have known of that prg^fctice to your own 
per^nal knowledge? 

Mr. Schuh. -Yes. 

The Chairman. Carried on by what company ? 

Mr. Schuh. Well, I have to be fair ; the only one I do know that 
doesn't do it is the Sun Co. 

The Chairman. That is quite a general practice, then, in the 
industry ? 

Mr. Schuh. Let me say this : It is done in areas. We don't have 
it in Milwaukee, for instance. There is none of that done in Mil- 
waukee, there is no dual distribution, but in the intensely competitive 
metropolitan areas. I don't like the practice, but I understand how 
it came about ; it is that a jobber handling a certain company's pn^d- 
uct goes out on his own and does something, and another compaify 
can't get a jobber like that who will do that, so he gets himself a 
distributor to be comj)etitive with this jobber, and it doesn't make the 
practice a good practice. I mean, I understand how it comes about. 
We have condemned it roundly every time. 

124491 — 40— pt. 17, sec. 4 7 


The Chairman. And you are still condemning it. 

Mr. ScHTJH. I still condemn it. I think it is dirty. 

The Chairman. Does it still exist? 

Mr. ScHUH. It still exists, and a code, we felt, would go some way 
towai'^ eliminating that. 

Mr. Cox. I think when the committee rose, Mr. Schuh, that I was 
asking you about the conversation referred to in "Exhibit No. 1304," 
specifically about the statement of Mr. Shanks, in which he says that 
he gave Mr. Amott certain information with respect to the Master 
Association of Cleveland, and I either asked or was about to ask you 
if you knew what that information was. 

Mr. Schuh. I wouldn't have the slightest idea. 

Mr. Cox. That was the same association that had been publishing 
the Pump Handle, was it not? 

Mr. Schuh. That is right. At that time they were not an aflSliate 
of our group; that is, at the time that this supposed memorandum 
is dated. 

Mr. Cox. And you don't know whether that conversation between 
Mr. Shanks and Mr. Arnott had anything to do with this same 
complaint that Mr. Arnott made to you ? 

Mr. Schuh. I don't know, excepting that I point out that the dates 
are somewhere near 4 or 5 months apart. 

Mr. Cox. That is why it occurred to me it might be connected. 
You said this publication had been taking that line for some time, 
did you not? 

Mr. Schuh. I wouldn't know prior to the time they came to work 
with us. I would only know after that. 

Mr. Cox. Have you had any assistance from the major oil com- 
panies obtaining members for the association ? 

Mr. Schuh. No; we have had major companies oppose, or not 
exactly oppose but help to prevent, dealers from joining our group. 

The Vice Chairman. Will you develop how they do that? 

Mr. Cox. Yes. Perhaps the best way to develop that is to have 
you explain to the committee how they do oppose that. 

Mr. Schuh. Well, in the particular case of one company that I 
know of in a certain community, every time that we have attempted 
to hold a meeting the manager of that company calls his dealers into 
a meeting the same night so they can't attend our meeting. 

Mr. Cox. Tell us what company that is. 

Mr. Schuh. The Standard Oil Co. of Indiana. 

Mr. Cox. How long has that been going on ? 

Mr. Schuh. I would only know from the report that our man 
from, down there has given us, and ever since its inception, the 
organization's inception in that community, Aurora, 111., he has been 
bucked by the manager of the Standard Oil Co. there. 

Mr. Cox. Has that been true of any other towns in Illinois, to your 
knowledge ? 

Mr. Schuh. I can't report to my knowledge, but I know that in 
numerous instances we have run up against similar trouble. 

Mr. Cox. In Illinois? 

Mr. Schuh. I think in various places. 

Mr. Cox. Always trouble caused by the Standard Oil Co. of Indi- 
ana ? 

Mr. Schuh. I wouldn't say it was that company alone. I think 
we have had some difficulty up in Minnesota with either that com- 


pany or other companies, but we probably have more trouble with 
Standard Oil Co. of Indiana than any other company. 

Mr. Cox. That hasn't been the attitude of all the major companies, 
has it, Mr. Schuh ? 

Mr. Schuh. No ; the Continental Oil Co. has been very fair and I 
would like to pay them the tribute ; they have been the squarest and 
the whitest company, that I know of ir this business so far as we 
are concerned. Any time we have had anything to complain about 
they have gone down through their house to make sure they weren't 
doing what we were complaining of, providing it was- a legitimate 
complaint, and they haven't nesitated to tell their dealers that they 
ought to be in an organization, and even have said that they ought to 
be part of our organization. 

Mr. Cox. They sent a circular letter to their division managers in 
1936, didn't they, Mr. Schuh, recommending that dealers join your 
organization ? 

Mr. Schuh. I don't know whether they sent a circular letter on 
that. I know that they sent a circular letter, and as I remember it, 
in that letter this would be about the quotation, that "We want our 
friends, the retailers, to have an opportunity to handle a very diflS- 
cult task, at its best, and we want to put nothing in their way to 
prevent that." Do you have the letter there? 

Mr. Cox. Well, I will hand you a group of documents, the first of 
which purports to be a carbon copy of a letter written by Mr. 
Shanks, dated August 20, 1936, to Mr. Harry J. Kennedy, vice presi- 
dent of the Continental Oil Co., Ponca City, Okla. ; the second docu- 
ment is a letter from Harry J. Kennedy to. Mr. Shanks, dated Au- 
gust 13, 1936, and there is attached to that what purports to be a 
carbon copy of a memorandum or circular entitled "Encouraging the 
Right Type of Dealer Organization." I ask you whether that re- 
freshes your recollection as to the action which the Continental Oil 
Co. took at that time. 

Mr. Schuh. May I comment on these as I come to the documents ? 

Mr. Cox. Yes; of course. 

Mr. Schuh. The first copy, a letter from the executive offices of 
the National Association of Petroleum Retailers, dated August 29, 
1936, to Mr. Harry J. Kennedy, vice president of the Continental 
Oil Co., has reference to a general letter that went out to all oil 
companies calling to their attention various practices that we were 
complaining of. 

I would say that the letter dated August 13 from Harry J. Ken- 
nedy to Mr. Shanks was a fair statement of the company's position. 

Relative to the memorandum sent to the division officers, district 
managers, or whatever you call them, by Mr. Kennedy, dated Au- 
gust 13, 1936, I think that is a clear statement of the company's 
policy, and that they have a;t least as has been indicated to us pur- 
sued "that policy, and I think they pursue it today. I would like to 
point out that Mr. Kennedy at one time had a very different opinion 
of me ; he thought I was somewhat communistic, at least a little bit 
"red" in some of the things that I had done, and they had watched 
our organization from the time of its inception until this date before 
they ever made any comments on what we were doing. 

The next one dated August 11 from Mr. Kennedy to Mr. Shanks, 
I believe that was in response to a letter that was written to Mr. 


Kennedy asking if there were any dealers in Denver or that area 
where we had no organizations at all, and if they could recommend 

Mr. Cox. Now, Mr. Schuh, I call your attention to a statement 
which appears on page 2 of this memorandum which was attached 
to Mr. Kennedy !s letter, which was apparently a memorandum sent 
to division managers, the paragraph m question reading as follows 
[reading from "Exhibit No. 1305"] : 

Experience has also shown that when the leadership of Messrs. Schuh and 
Shanks of N. A. P. R. and the various regional oflBcers and directors of their 
association has 9.en heeded only constructive results have followed. We de- 
sire to give these men any assistance we can in encouraging the right kind 
of organization.. 

I understood you to testify a moment ago that you regarded that 
as a fair statement of the Continental Oil Co.'s policy. Is that 
correct ? 

Mr. Schuh. And I regard it as a compliment. 

Mr. Cox. I am sure you should, Mr. Schuh. Do you know whether 
or not any other major oil companies circularized their managers or 
their dealers in the same way the Continental did? 

Mr. Schuh. Unfortunately they haven't. 

Mr. Cox. I should like to offer this letter. I -am indifferent to the 
question of printing but since it has been discussed I think it ought to 
be admitted. 

The Chairman. The exhibit may be received. 

(The letters referred to were marked "Exhibit No. 1305," and are 
included in the appendix on p. 9846. ) 

The Chairman. Were you going to make some remark ? 

Mr. Schuh. One other company that has circularized its dealers 
as a result of our organization is the Standard Oil Co. of Indiana. 
After a year and a half quarreling with them, they finally put out a 
letter such as we felt ought to go out to tell their dealers exactly 
where they stood as relates to price and the right the dealer had to 
set his own price. I want to be perfectly honest, there is that one 
other time. 

Mr. Cox. When was that done? 

Mr. Schuh. That was done — wasn't there a copy of it in this? I 
have a copy of it here. I would be perfectly willing to have you have 
it, because we fought with them for a year and a half and finally 
got them to tell their dealers where they stood. 

Senator King. By that do you mean that you attempted to influ- 
ence producers and dealers to accept your views? 

Mr. Schuh. Senator, I didn't understand that. 

Senator King. I understood from your last answer that your point 
was that you were trying to influence some company to take the 
proper course with respect to its dealers, that is to the retailers, and 
the retailers to be amenable to that company. 

Mr. Schuh. No, Senator ; just the opposite. We wanted this com- 
pany to let its dealers alone. They never did, and I don't think ever 
will endorse this organization. 

Senator King. That is your organization ? 

Mr. Schuh. Our organization. I don't think they ever will, be- 
cause of the blood that has been spilled between us and the Standard 
Oil Co. 


I might explain that some of their people have constantly harassed 
their dealers to keep their prices down, at the same time the company 
taking all the profit that it could, and under the Iowa or dealer 
marketing plan we felt the dealer should be entitled to arrive at his 
own price without dictation from any company. If the company 
wants to dictate the price, then they ought to take the station back 
and take the burden with it, but they shouldn't lease the station out 
and still have complete control of it. 

Senator Kjng. Would this he a fair statement, if you will pardon 
me, Mr. Cox, that the benefit which you and your associates and 
others derived in having fixed prices under the N. R. A., and having 
more or. less of a monopoly, has exercised its influence upon your 
proceedings since, and the proceedings of others, so that they would 
like a sort of regimentation of business such they had under the 
N. R. A., and that your efforts have been in order to secure regimen- 
tation, or at any rate to secure such organizations as would influence 
prices and determine what' prices should be charged? 

Mr. ScHUH. No; that would not be a correct statement. In the 
first place, under the N. R. A. we never had fixed prices at either 
wholesale or retail in the gasoline business. We have never had fixed 
prices, and we fought the proposal that the Federal Government 
made wherein they were going to establish fixed prices. We do not 
believe in fixed prices. 

Senator King. You believe, do you not, in getting as many re- 
tailers in your organization as possible, and then to determine the 
policies which will be pursued by that organization, the policies 
respecting the acquisition and the sale of your commodities ? 

Mr. ScHUH. No, no; we are only interested in the retail dealer 
obtaining a cost-recovery price. I am clearly on record many times, 
and I have had loads of "dead cats" thrown at me because of it, that 
we have got to keep our prices down, that t'tie tendency was too often 
to take too high a price. I am opposed to price fixing, and I am 100 
percent in favor of fair competition, and I represent in saying that 
the consensus of opinion of the organization. 

Mr. Cox. Since you brought up the matter of the Standard of 
Indiana, Mr. Schuh, I would. like to ask you some questions about 
that. Was your objection to their marketing policy grounded on the 
fact that they had been encouraging their dealers to lower prices? 

Mr. ScHTTH. Our objection to it was the interference with the deal- 
ers in establishing prices. 

Mr. Cox. Wliat form had their interference in fact taken? Had 
they been encouraging them to lower prices or to raise them? 

Mr. Schuh. Generally to lower prices below the levels of other 
branded dealers in that area. 

Mr. Cox. But although that had been their policy in fact, as I 
understand your answer a moment ago, your objection was not based 
on the fact that their influence had been exerted in the direction of 
lowered prices, but merely on the ground of principle ; is that correct ? 

Mr. SoHUH. The way that we feel about it is that we see eye to 
eye that the prices must be reasonable, and we are opposed to, in many 
instances, the same things they are opposed to, and we frankly told 
them so, that we were opposed to higli prices in areas where they 
were too high, but regardless of that, even though we saw eye to 
eye with them on ihpJ. , diey had no business dictating price. 


Mr. Cox. Did you object to them about any specific instance where 
they had used their influence to raise prices rather than lower them? 
Mr. ScHUH. I dpn't know that they have ever used their influence 
to raise the price. 

Mr. Cox. So their influence had always been exerted in the other 
direction ? 

Mr. ScHUH. Yes; but I want to irState thai- it wasn't because they 
were lowering the prices, it was because they were dictating prices 
to their dealers. That was one part of it, and the other part was that 
many of their dealers felt that they were hanunering merchandise 
down their throats in a way that just wasn't fair. 

If you don't object I will explain that we went to them, we talked 
with them, we pleaded with them, 5^'e did everything but cry on 
their shoulders and got no place, and as a result the board of di- 
rectors in meeting last April decided to prosecute a campaign 
against the Standard Oil Co., and so publicly announced. 
Mr. Cox. Was that the press release of April 8, 1939 ? 
Mr. ScHUH. That's it. 

Mr. Cox. There is a sentence m here that rather interests me, which 
I want to read to you and then I will let you look at it. This is the 
second paragraph, and reads as follows: Definite steps were taken 
by the directors to prosecute a campaign against the Standard Oil 
Co. of Indiana for the clumsy manner in which it attempts to control 
retail price." I will let you look at that. That suggests to me that 
what you are objecting to is not the control of price, but the way in 
which they were doing it. 

Mr. ScHUH. I think that states just what I said, that we didn't 
disagree with them, when the prices got too high it was wrong. We 
didn't disagree; we did disagree with the clumsy manner that they 
did it in. If they could walk into a dealer and sell him legitimately 
good business prmciples, such as we have preached, we haven't any 
objection to that. That is all right. But when they come into a 
dealer and say, "Well now, your lease is coming up for renewal next 
month, and we are kind of worried about the volume through this 
station; don't you think you ought to get your price down?" What 
was the poor dealer going to do ? He was either going to put his price 
down or else he was going to lose his lease, at least he felt, and that 
is what was meant by that statement. I think it bears out what I 
said before, that it was.l't where they were putting the price, but it 
was the way they were doing it. 

Senator King. Were you dealing with the Standard Oil ? 

Mr. ScHUH. The Standard Oil Co 

Senator King. Were you buying oil from it? 

Mr. ScHFH. No. 

Senator King. AVliat business was it of yours to butt into the 
matter — I don't use this by way of criticism — when you were not one 
of their clients? 

Mr. ScHTjH. We have hundreds of Standard Oil dealers in our 
association and we were their representatives, selected by them. 

Senator King. Did you think tliat your knowledge of the economics 
and the problems and the factors involved in the fixing of prices 
was superior to that of dealers in various parts of the United States 
and the <5ompany itself, so that you ought to determine what the 
prices should be in Arkansas or some other State, rather than the 
one in which you lived? 


Mr. ScHUH. We have never made any effort to determine what 
the prices ought to be. The only thing that we could do is to point 
out broad economic principles and warn dealers that you can't violate 
the laws of economics. 

Dr. Ltjbin. Mr. Schuh 

Senator King (interposing). One question. Did you think you 
understood the law of economics better than other patrons of thb 
oil companies? 

Mr. Schuh. Not better than — I wouldn't say — ^tnan others. 1 think 
I understood them just as well, and at times I was tempted to be- 
lieve that I understood the law of economics better than some of the 
people in the Standard Oil Co. 

Dr. LuBiN. Mr. Schuh, a minute ago, in replying to a question 
that was asked you, you said you objected to the clumsy methods of 
one of the oil companies, and you recommended your own methods 
of doing business. There was put into the record last week "Exhi- 
bit No. 1266," ^ which purports to t>e a circular letter received by the 
Petroleum Eetailers Association, signed "National Association of 
Petroleum Eetailers, Ways and Means Committee, Fred L. Brewer, 
chairman; W. M. Boutin, and M. E. Holland." Do you know of 
that document? 

Mr. Schuh. I did not prepare it. It was prepared in the oJEce. 

Dr. LuBiN. It is an official document of your organization? 

Mr. Schuh. I understand it was prepared and submitted to our 
counsel, a lawyer that we had employed, and that it was passed by 
the Ways and Means Committee. 

Dr. LuBiN. So it represents the business policies that your organi- 
zation attempts to put into practice? 

Mr. Schuh. Well, I don't believe that I can say "yes" to that. 

Mr. LuBiN. Will you say it does not represent the recommenda- 
tions of your Ways and Means Committee? 

Mr. Schuh. Well, I would like to say about all of the bulletins 
that were submitted, that the 

Mr. Beedy.2 Before this statement is made — ^I don't want to prevent 
the completion of it — it becomes my duty, I feel, to claim such privi- 
lege or immunity as Mr. Schuh has under the Constitution, and to 
say to him that after he has made this statement I shall instruct him 
not to answer any more questions, and, of course, the committee may 
torce him to do so as it has the right. 

The Chairman. Now, perhaps befoie that point is reached I think 
we might better have the document offered to the witness by Mr. Cox, 
if you please. 

Mr. Beedt. I understand reference is made to one of the bulletins. 

The Chairman. This will identify ^t now, Mr. Beedy, please. Mr. 
Cox, do you have it? 

Mr. Cox. I have the original document here, which was introduced 
in evidence last week, Thursday and marked "Exhibit No. 1266^" 
which I now hand to Mr. Schuh. 

Mr. Beedy. Now, Mr. Chairman, the document having been identi- 

1 Included in Hearings, Part 16, appendix, p. 9307. ^^ ^„ ^ „ 

= Carroll L. Beedy, attorney for Mr. Schuh. See Hearings, Part 16, p._ 9147, for Mr. 
Beedy's statement as to the witness's need for advice of counsel at the committee table. 


The Chairman (interposing). It hasn't been identified as yet. 

Mr. ScHUH. I recognize the document as one of the bulletins issued 
by the Association., 

The Chairman. This is the document, then, to which you referred 
when in response to the question of Mr. Lubin you said that though 
it was not prepared by yoji it had been passed upon by the Ways and 
Means committee, you assumed ? 

Mr. ScHUH. It was, they having signed it. 

The Chairman. But you recognize it as a circular that was issued 
bytheN. A. P. R.? 

Mr. Schuh. By the Ways and Means committee of the N. A. P. R. 

Senator King. Was it endorsed by the organization before it was 
put out? 

Mr. Sohuh. Well, this committee has the authority to develop the 
policy and program of the association. 

Senator King. Are you a member of that committee, Ways and 
Means committee? 

Mr. Sohuh. I was not, excepting ex officio as president. I would 
like to say this relative to this and any of the other bulletins of this 
kind' that were put out, that I did not write them and that they were 
prepared — I imagine prepared in the office, submitted to legal advice, 
what little we could afford, and passed by the committee. I would 
like to call the committee's attention, also, to the fact that the men 
mentioned here are all operators of service stations, running relatively 
small units. 

The Chapman. Your testimony is that this is an official document 
of the association of which you at one time were president, of which 
you are now the chairman of the board; that it was submitted to 
the counsel of the association, passed upon and cleared by that coun- 
sel, passed upon .and approved by the Ways and Means committee, 
and issued by the Association. 

Mr. Schuh. I presume, that that is a correct summary of the facts. 

The Chairman. Well, it is a correct summary; is it not? 

Mr. Schuh. To '' e best of my knowledge. 

Mr. Cox. There are one or two questions I would like to ask if I 
may. Can you tell us, Mr. Schuh, whether the Association keeps 
a file of all circular letters which are sent out? 

Mr. Schuh. I believe we do now. 

Mr. Cox. Did you at the time this letter was sent? 

Mr. ScHDH. I don't know. 

Mr. Cox. Do you know where that file is ? 

Mr. Schuh. I don't know whether there was one, that there was 
a file at that time. I might say this, that everything that we have 
in our records has been sent doVn here. I was asked what to send 
and I looked at the subpena and said, "Move the office down," so that 
everything that we had is here, and if it isn't here I would say that 
there is none, because nothing was disturbed. 

Air. Cox. I ask these questions because although we made very 
diligent search of the records which were produced in response to 
the subpena we were unabl6 to find any copies of this circular letter 
or of any other circular letter, and I was going to inquire whether 
you could give us any assistance in the search for those documents. 
^ Mr. Schl'h. Since this was put out we have moved and since Mr. 
Shank.s lias left ;he Association some 2 years ago we have cleaned 


out a lot of these bulletins and they probably were never filed, because 
the supply was on a little shelf that we have, and that was cleaned 
out and!^ probably we never filed it, but I do know that lately every 
bulletin that has been sent out to the association has been filed. Since 
we are in the new offices I am quite positive that every one that 
has been sent out was filed, or at least instructions were given the 
office to file them. 

Mr. Cox. You have no suggestions as to what steps the committee 
might take to find a copy of this circular in your file or copies of 
other circulars of the same kind issued at about the same time? 

Mr. ScHtiH. When does it refer to? 

Mr. Cox. There is no date on the docu ^nt itself, but I think 

Mr. ScHUH (interposing). What does he call it? 

Mr. Cox. It is headed "Circular letter." It is headed "National 
Association of Petroleum Retailers, Ways and Means Committee, 
251 Republican Hotel, Milwaukee, Wis. Raising prices. Do's and 

Mr. ScHUH. That is this one. 

Mr. Cox, Yes. 

Mr. ScHUH. That is this one. I don't know where you would find 
another copy of it ; that is over 3 years ago. 

The Chairman. When was it exactly, do you know? 

Mr. ScHTjH. I can only say by memory. There is no date on 
here. Somewhere the latter part of 1936. 

The Chairman. What was your position with the association at 
that time? 

Mr. ScHUH. President. 

The Chairman. Any other questions, Mr. Cox ? 

Mr. Cox. No. 

The Chairman. Now, did you want to ask any questions with re- 
spect to the document iiself ? 

Mr. Cox. Yes. 

Mr. Beedy. To save time, do I understand counsel is going to pur- 
sue questioning about this bulletin, the "Do's and Don't's" bulletin ? 

Mr. Cox. That is correct. 

Mr. Beedy. Then because the provisions of the statute seem to 
make it incumbent upon me to raise the question of immunity, I do 
instruct the witness not to answer any questions, and to clailn his 
constitutional privilege. 

The Vice Chairman. Mr. Beedy, do you raise that point generally 
as to any question with reference to this bulletin ? 

Mr. Beedy. Yes, sir, Mr. Congressman; because he said that he 
did not write, did not assist in the preparing of it, and knew nothing 
about it except that he was told that it had been submitted to 

Senator King. Is it based upon the grounds that it has not been 
sufficiently identified or sufficiently shown that he approves and en- 
dorses it? 

Mr. Beedy. I think I may state that my objection is based upon 
the grounds of some considerable question as to the propriety of that 
bulletin, and the provision in the statute creating this committee 
which brings forward and makes operative here that provision with 
reference to immunity wliich was contained in the Public Utilities 
Act of 1935, and which provides that any statement made by a 


witness here, or because of it, he will not be prosecuted, and no for- 
feiture or penalty will be imposed upon him, his immunity having 
been claimed. Therefore, I claim the immunity and instruct the 
witness not to answer. This committee has full authority to force 
him to do so, and he is then protected. 

The Chairman. It is recognized, in other words, by the witness 
and by his counsel that the witness is not excused from refusing to 
answer questions. He must answer any question that is propounded 
but if he does answer, after having claimed this immunity, he may 
not be prosecuted for anything that may be revealed by his answer 
except in the case of perjury. 

Mr. Beedy. That is precisely my understanding ot it. 

The Chairman. That being the understanding, of course the com- 
mittee may proceed in asking any questions that it may desire. 

Mr. O'CoNNELL. Mr. Chairman, I may be a little obtuse on it, but 
I don't understand that is exactly the situation. As I understand it, 
the witness has the right to claim immunity on the basis of the fact 
that a question or a line of questions may tend to incriminate him, 
and if he takes that position based upon questions which would rea- 
sonably tend to incriminate him, he may not be forced to answer 
without being granted immunity. I have heard no questions asked 
of the witness yet 

The Chairman (interposing). This was all preliminary. 

Mr. O'CoNNELL. But I don't understand that any question which 
is now asked of the witness is one in which he is necessarily granted 
immunity at this point. From all counsel for the witness has indi- 
cated, I see no basis for the claim at all, as I understood you to say, 
prefacing your claim, the witness did not prepare the statement, he 
has no personal knowledge, possibly, as to its contents, and if that 
be so I rather fail to see the basis for your claim of immunity as to 
what he is threatened by the questions that have not yet been asked. 

Mr. Beedy. I am trying to make what I think is a proper record. 

The Chairman. In other words, to save the record and expedite 
the hearing, he is making a sort of blanket claim of immunity. I 
fancy that there will be no special objection to that. It was just 
preliminary, Mr. O'Connell, and, of course, the witness, I think, 
would have to make the claim himself when a question which he 
thinks may incriminate him is propounded. 

Mr. O'Connell. I will be satisfied if it is understood that the 
immunity does not exist as regards any particular question that is 
asked from here on unless claimed by the witness und granted by 
the committee. In other words, I might want to ask the witness a 
question and lie might desire to obtain immunity and for that reason 
refrain from answering unless granted immunity. It then might 
follow that I would rather he did not answer the question. 

The Chairman. I don't want to get into a debate with you, Mr. 
O'Connell, but I don't believe the committee has any authority to 
grant or withhold immunity. The immunity is granted by the law. 
The law says that a witness must answer any question propounded 
by this committee, but if he claims immunity he may not be prose- 
cuted for anything he reveals thereafter, except for perjury, and we 
have no jurisdiction to say the witness is immune or is not immune. 
All bur right is to ask questions and compel the answer and then 
it is in the courts to decide whether or not there is any right in- 


fringed or whether any violation of law which is cognizable in the 
courts has been revealed. 

Mr. O'CoNNELL. Mr. Chairman, I don't want to labor the point, 
either, but from my standpoint if I ask the witness a question and he 
claims that he is entitled to refuse to answer on the grounds that it 
may tend to incriminate him, I then have the option of not pressing 
the question, and in that event no immunity for prosecution as 
regards the transaction arises. 

The Chairman. Of course, if there is no answer, there is no immu- 
nity claimed. 

Mr. O'CoNNELL. But he doesn't have to answer unless the person 
putting the question presses it. 

Mr. Beedt. If no answer is given, there is no evidence upon which 
to base prosecution, so it is all the same. 

Senator King. Assuming that a bulletin or paper is tendered and 
the witness is asked concerning it and if it be conceded by any and all 
persons that there was nothing in it which would tend to incriminate 
the witness, would he be justified in claiming immunity ? 

Mr. Beedy. I have stated, Senator, that the reason I am making 
this claim to immunity is because there are grave doubts in my own 
mind as to the legality of certain of the phrases, provisions, of this 
particular document. If I thought there was nothing about it that 
•was harmful, I certainly shouldn't claim any immunity. 
• Mr. ScHUH. I don't believe that I could agree to any interpreta- 
tion put on that ; just leave it that way. It is very general and vague. 

Mr. Cox. What methods were contemplated by the association to 
control secret discounts? 

Mr. ScHUH. The principal method used by the association to con- 
trol secret discounting was under the N. E. A. through the code com- 
mittees. In the State of Wisconsin and other States having a price 
posting act by proper procedure under the provisions of whatever act 
provided for price posting. 

Mr. Cox. Well, this circular was issued after the N. R. A. Code 
had ceased to have any legal effect, did it not'* 

Mr. ScHUH. Yes ; but you asked what procedure we pursued. 

Mr. Cox. Well, what procedure did the association have in mind , 
when this policy was formulated as of the day it was circulated ? 

Mr. ScHXTH. The application of the existing laws of the various 

Mr. Cox. Are there laws in every State in which you have mem- 
bers against secret discounts? 

Mr. ScHUH. Not in every State, but in many States. 

Mr. Cox. Was this circular only to go to States in which there were 
laws against secret discounts? 

Mr. ScHUH. I can't answer that; I don't know, 

Mr. Cox. Well, assume for a moment that it was sent to all of 
your membership, it would go to some States where there weren't 
such laws, would it not ? 

Mr. Beedt. I object. 

Mr. Cox. I think by taking a little time I could demonstrate pretty 
conclusively even to your satisfaction lliat it was sent to most of the 
membership, and in view of that fact I think it is only reasonable 
to indulge in that hypothesis. 


Senator King. I think possibly it may be in the twilight zone be- 
tween alleged violation of law 

The Chairman. Let us not talk about twilight and darkness. 

Mr. Beepy. I am trying to perform my duty conservatively. 

The Vice Chairman. May I make this suggestion? I don't know 
what there is at all in the proposition, but the committee ought to be 
given an opportunity in reference to each of these questions to de- 
termine whether or not when pre§sed for an answtr, it should not 
exempt the witness from prosecution and would prefer not to have 
the testimony than to give the exemption by asking the question. I 
think we could. 

The Chairman. Well, I think that is correct. 

The Vice Chairman. We can handle that as we run along. 

The Chairman. The chairman has been endeavoring to present 
this matter in an orderly fashion. That is why the Chair wanted 
Mr. Cox to present the document and have it identified. It has now 
been identified by the witness. Now no question has been asked 
as yet and the witness has himself not as yet claimed his immunity. 

Now I think the regular course is for Mr. Cox to present a material 
question and then the committee can decide whether it desires to 
pursue the matter, or to allow it to rest upon the claim of immunity. 
The document is in the record. 

Mr. Cox. I shall pursue that line, if I may, Mr. Schuh 

(Conference between Mr. Schuh and Mr. Beedy.) 

Mr. Cox. Do you recall when you first saw this document? 

Mr. Schuh. No ; I don't recall the first time I saw the document. 

Mr. Cox. When did you first know the document had been circu- 
larized by your association? 

(Conference between Mr. Schuh and Mr. Beedy.) 

Mr. Schuh. I would like to at this time claim my immunity under 
the Constitution. 

The Chairman. You refuse to answer on the ground that your 
answer might incriminate you? 

Mr. Schuh. Yes, sir. 

The Chair^ian. Is it the desire of the examiner for the committee 
to proceed in the matter ? 

jNIr. Cox. I am content to have it stand that way and to have the 
claim of privilege remain upon the record, and I do not insist upon 
the committee pressing the matter, but I should like to ask some more 
questions, to have the record perfectly clear. I will only ask a few. 

The Chairman. Very well. 

Mr. Cox. Will the reporter please read the last question? 

(The question was read by the reporter.) 

iVIr. Cox. I now ask you, Mr. Schuh, whether you saw the docu- 
ment before it was circularized by your association ? 

Mr. Schuh. No; I did not see it before it was circularized. 

Mr. Cox. Then is it your testimony that you saw it for the first 
time after it was placed in the mails? 

Mr. Schuh. May I hear that question again, please? 

(The question was read by the reporter.) 

(Conference between Mr." Schuh and Mr. Beedy.) 

Mr. Schuh. I don't remember when I saw it the first time. 

Mr. Cox. Do you know to whom it was sent ? 

Mr. Schuh. No. 


Mr. Cox. Well, do you know whether it was sent to anyone? 

Mr. ScHUH. I don't know that it was sent to anyone. 

Mr. Cox? You testified a moment ago you were a member of the 
executive committee ex officio at that time; is that correct? 

Mr. ScHUH. The Ways and Means committee, but I did not at- 
tend all their meetings. 

Mr. Cox. Did you attend any meeting of the executive committee 
of the Ways and Means committee where this circular letter was 
discussed ? 

Mr. ScHUH. No ; not to the best of my knowledge. 

Mr. Cox. Does that committee keep minutes of any kind? 

Mr. ScHUH. After a fashion. 

Senator King. Did it have a secretary ? 

Mr. ScHUH. Mr. Shanks was secretary. 

Senator King. Was he secretary then? 

Mr. SoHUH. Yes; of that committee. 

Senator King. Is he still secretary? 

Mr. ScHuH. No. 

Senator King. If minutes were kept, in whose possession would 
they be? 

Mr. SoHUH. They would probably be in our records here some 
place. I would like to volunteer this information. I don't believe 
it was until later, considerably later, that they actually kept minutes 
of the meetings. I believe it was pretty nearly a year later before 
they had a regular procedure of keeping minutes. The fact that it 
was signed by the three indicates that here is a document that they 
went over, and signed it, and that was it. 

Mr. Cox. Well, Mr. Schuh, were you familiar, at the time that this 
circular letter was prepared, with the policy of your association ? 

Mr. Schuh. Yes. 

Mr. Cox. And was that policy determined by the Ways and Means 
committee ? 

Mr. Schuh. Yes. 

Mr. Cox. Did you take any part in the determination of the policy ? 

Mr. Schuh. I would like to claim my immunity under the Consti- 
tution on that question. 

The Chairman. You make the same claim you did before ? 

Mr. Schuh. The same claim. 

Mr. Cox. My disposition is the same now as it was before. Now, I 
call your attention to the item No. 4 in this circular letter, under the 
heading "Things Not to Do." Item No. 4 reads as follows : "Attempt 
a price raise until you have secret discounting under control." And 
I ask you whether that injunction to your members is an accurate 
statement of the policy of your association at that time ? 

Mr. Schuh. Will you repeat that question? 
(The reporter read the question.) 

Mr. Schuh. I would say that that represents definitely a policy 
of the organization to do everything to bring secret rebating and dis- 
counting under control. ... 

Mr. Cox. And was that a policy which you in your official position 
with the association had approved? 

Mr. Schuh. Yes ; I believe that the record is very clear throughout 
my entire stewardship of that group that I was opposed to secret 


Senator King. Supposing that paragraph implies more than secret 
rebating, do you approve of the legitimate and proper interpretation 
that would follow the wording of the provision? It may call for a 
conclusion, but if you can answer it I would be glad. If not, i shall 
not press it. 

Mr. ScHUH. Could I have that read ? 

(The question was read by the reporter.) 

Mr. Beedt. I want to make my position clear. For this man to 
determine on the spur of the moment whether a single question, if 
answered, might make him liable to prosecution for offense which is 
criminal under the antitrust law, is some task for any lawyer, and 
therefore, because I apprehended that all these questions would be 
directed to that very thing it might take me some weeks even to 
decide whether it was a, question that shouldn't be answered. I can 
see only one way to protect my client's rights and that is. to make a 
blanket objection to all these questions with reference to the policy set 
forth in this document, his knowledge as to when it was printed 

The Chairman (interposing). The chairman recognized the posi- 
tion which 5^ou took as counsel for the witness and the committee has 
been perfectly willing to permit you to sit beside him and to advise 
him with respect to these matters, although I think it will be recog- 
nized that as a matter of right he probably couldn't demand that 
his counsel sit beside him, but that is neither here nor there. But 
the chairman sought to have this matter brought before the commit- 
tee and placed upon the record in an orderly fashion, and the chair- 
man felt that the claim of immunity by counsel would not be suffi- 
cient, therefore it was suggested that questions be asked by Mr. Cox 
formally for any disposition that the witness himself made. Now, 
if the witness desires to claim his immunity on these questions, that 
then raises the question as to whether or not as a matter of policy 
the committee will insist upon an answer or whether it will allow 
the matter to stand in that way. Mr. Cox has already indicated 
quite clearly that it is his disposition to recommend that the matter 
be dropped upon the claim of immunity. 

Mr. Beedt. Then in order to save time 

The Chairman (interposing). Lret the witness answer. 

Mr. Beedt. Let the witness refuse to answer each question without 
stopping to try to analyze its legal significance. 

The Chairman. That will be the procedure. 

Mr. Beedt. The witness declines to answer. 

Mr. Cox. Now, Mr. Schuh, T call your attention to paragraph 6 
under that same heading of things not to do, which reads as follows 
[reading from Exhibit No. 1266] : 

Attempt a price raise until you have a suflScient following among the 
retailers to insure its being general. 

I ask you if that is an actual statement of the association's policies. 

Mr. Schuh. I decline to answer that. 

The Chairman. On the same grounds? 

Mr. Schuh. On the same grounds. 

Dr. LuBiN. Mr. Chairman, what is the disposition of counsel? 

Mr. Cox. My disposition is the same with respect to all of the 

Then I call your attention — in the interest of brevity I am going 
to cut this short — ^I think I will ask only one more question with 


regard to paragraph 17 under the heading "Things to do," and that 

If you have to use the blockade method, be sure that it is friendly and peace- 
ful, so as to prevent injunctions for disturbing the peace or disorderly con- 
duct or assault, conducting yourselves as customers who are making small 
purcnases, and utilizing the free services which the station offers to the public, 
and block the driveway for a short time only, but during the busiest part of 
the day — 

and I ask you whether that is an accurate statement of the associa- 
tion's policy. 

Mr. ScHUH. I must refuse on the same grounds. 

Mr. Cox. My disposition is the same, and I think with that I 
shall abandon this questioning. 

The Chairman, The disposition of counsel for the committee in 
this hearing is to allow the matter to rest so far as the examination 
of this witness is concerned upon this document. Do any members 
of the committee desire to pursue the matter? 

Dr. LuBiN. Mr. Chairman, I should like to ask Mr. 8chuh whether 
it is customary in his organization for the Ways and Means com- 
mittee to circularize memoranda or letters to the membership with- 
out the authority of the officers' 

Mr. ScHTJH. They are the officers. 

Dr. LuBiN. Without the authority of the president or \vithout 
his knowledge ? 

Mr. ScHUH. I believe that that has been done. 

Mr. LuBiN. Is it the policy to circularize them without the knowl- 
edge of the chairman of the board? 

Mr. ScHUH. I don't believe there was a chairman at that time. 

Dr. LuBiN. Can you give us for the record such instances where 
circular letters have been sent to members without the knowledge of 
the president or chairman of the board or both ? 

Mr. ScHUH. No ; I can't, oflHiand. 

Dr. LuBiN. On what grounds, then, do you believe that it has been 
done ? 

Mr. ScHUH. Nothing to stop it. 

Dr. LuBiN. Do you know whether it has been done ? 

Mr. ScHUH. I believe it has been done. 

Dr. LuBiN. Do you know whether it has been done ? 

Mr. ScHUH. Without picking out a particular circular, I wouldn't 

Dr. LuBiN. So you don't know whether it has been done or not? 

Mr. ScHUH. I believe it was done in this instance. 

Dr. LuBiN. But you do not to your knowledge know? 

Mr. ScHUH. I know that on occasions there have been circulars 
going out. You asked for a particular instance, and I have been 
thinking of one; a labor policy that we put out I didn't see before 
it was circularized. 

Dr. LuBiN. I should like .to ask you relative to "Don't No. 8," 
namely, "Don't attempt price raise until you have sufficient following 
among the retailers to insure it being general." 

Has it been the policy of your association, either with or without 
your consent, to attempt to get your membership to follow such a 
policy ? 

Mr. ScHUH. I must decline to answer that. 

Dr. LuBiN. Mr. Chairman, I insist that the witness answer. 


Mr. O'CoNNELL. Just a moment, Dr. Lubin. 

Dr. Lubin. I withdraw my request. 

Mr. Beedy. I will be very glad to have him testify. 

The Chairman. I will say for the benefit of me committee that 
the disposition of the chairman is to follow the suggestion of Mr, 
Cox and to allow the matter to rest. The witness has formally 
claimed his immunity, has declined to answer these questions dealing 
with this particular document upon the ground that to do so would 
tend to incriminate him. The document is in the record; it speaks 
for itself. 

Mr, Beedy, "Might" tend to incriminate him. 

The Chairman, Might tend to incriminate him. 

Mr. Cox. I would like to ask the witness with respect to this docu- 
ment, "Exhibit No. 1266," whether the record and the letters in the 
upper right-hand corner — to wit, "Bulletin WM-1" — have any sig- 
nificance to him. Specifically, do those words and letters indicate 
that this bulletin is the first of a series of bulletins ? 

Mr. ScHUH. I believe it is a little gingerbread that was put on to 
make it look a little bit more important. 

Mr. Cox. It doesn't mean anything? 

Mr. ScHUH. It may have been the first of a series. I think it was 
put there more for that purpose, because on other occasions he put 
two or three other letters with No. 1 and 2 and so on. 

Mr. Cox. Have you ever heard of a bulletin of your association 
lettered "No, WM-7-1236" and entitled "Dulling the Chisels"? 

Mr, ScHUH, I seem to have some recollection of the title "Dulling 
the Chisels." 

Mr. Cox. It is a very good title, I think that is a bulletin, as 
a matter of fact, that was sent to you yesterday. Do you have a 
copy of that? 

Mr. ScHUH. Yes; I have it. Is that the blockade bulletin? 

Mr. Cox. Mr. Schuh, you have the advantage of me, because I 
am not sure that I have ever seen it. 

Mr. Schuh, I call your attention to the fact that this bulletin, like 
the other one, contains in the upper right-hand corner the words 
"Bulletin WM-7-1236." Does that suggest to you that there were 
other bulletins of the same kind which followed the one we were 
looking at a moment ago, "Exhibit No. 1266" ? 

Mr. Schuh. I don't know what the numbering means, excepting 
I believe it is some gingerbread up here. 

Mr. Cox. Gingerbread in both cases? 

Mr. Schuh. It may mean — "WM" may mean Ways and Means 
No. 7, but what the 1236 means — it sounds like football -^signals 
to me. 

Mr. Cox. The fact that this, bulletin is numbered "WM-1" and the 
fact that that is numbered "WM-7" indicates that there may have 
been some intervening bulletins? 

Mr. Schuh. That is possible. 

Mr, Cox, This bulletin, entitled "Dulling the Chisel," is cast in the 
form of an allegory or fiction. The chairman may wish to look at it. 

Mr. Schuh. I would like to point out to the committee that this 
bulletin, like many of these bulletins, I don't remember ever having 
seen before they went out. I never read them through until I got 


this one, and I had, nothing to do with their preparation, so that my 
knowledge is definitely limited. 

Dr. LuBiN. Mr. Schuh, how does your association define a chiseler ? 
What is a chiseler so far as jour association is concerned ? 

Mr. ScHTJH. I would prefer to take the definition that President 
Roosevelt placed upon a chiseler, when he first" advocated the 
N. R. A., and that is "That 10 percent in any industry that through 
unfair trade practices cuts the price, much to the detriment of every- 
body else in the business." 

I think he did a better job than anybody I know. 

Dr. LuBiN. Would you accept the President's defiiniton of unfair 
trade practices? 

Mr. Schuh. I don't know what his definition is. 

Dr. LuBiN. Then how can you accept the definition of the word 
"chiseler" if the fundamentals of it you don't know ? 

Mr. Schuh. I heard his speech. 

Dr. LuBiN. You say you don't know how he defines unfair trade 
practices ? 

Mr. Schuh. I don't remember how he defines them, but whatever 
he said at that time impressed me with being pretty good sense. 

Dr. LuBiN. What would you say would be the unfair practices 
that characterize the chiseler? 

Mr. Schuh, Well, indiscriminate price cutting with the object 
and intent of gaining a huge volume in order to undersell everybody 
else. I might illustrate it— I am limited in just what I can say. I 
try to be practical, but we will take a marketer who moves into 
Milwauke^e and opens a station, buying at wholesale and selling at 
retail. He cuts the price 5 cents a gallon so that he actually loses 
money in that operation until he has built up a large volume, and 
then, with every price change, he moves up a little bit closer to us, 
so that now, having the volume, he starts to get the money back out 
of the public. I think that, in my estimation, would be a chiseler of 
the first magnitude. 

Senator King. I would like to ask one question, if you have passed 
out of the realm of this pamphlet. 

Did your organization, as far as you know, attempt to impress 
upon other retail organizations whatever policies; good, bad, or in- 
diflFerent, that were followed by your organization ? 

Mr. Schuh. Did we try to impress upon them — — 

Senator 'King (interposing)-. Try to get them to adopt your 
policies, and to join with you— I will pause right there. 

Mr. Schuh. Well, we, at all times, attempted as an organization to 
develop sound marketing policies and to sell them to our members. 

Senator King. Yea; but did you go outside of your own members 
and try to induce other organizations outside of Milwaukee in other 
parts of the United States to follow the practices which you were 
seeking to inaugurate? 
Mr. Schuh. You mean other retail dealer organizations? 

Senator King. Yes. Outside of your association. In other words, 
did your association confine its activities to members of its association, 
or did it seek to extend its operations into other fields and to induce 
other associations in other parts of the United States to adopt prac-. 
tices in part qr in whole which characterized the operations of your 
organization ? 

124491 — 40 — pt. 17, sec. 4 8 


Mr. ScHUH. Well, we always attempted to get more members, and 
in doing so, we naturally had to explain the policies and the pro- 
gram of the national association, so that we naturally talked to other 
groups and advised them with their problems and on our policies in 
different parts of the country. 

Senator King. Did you try to undermine other groups or other 
associations to get members of those associations to become members 
of yours? 

Mr. ScHUH. No; we never undermined any. 

Senator King. Did you try to cooperate with other organizations 
and have them adopt in part or in whole policies and measures 
which you and your organization adopted and followed? I am 
trying to ascertain whether you were, so to speak, a lone wolf going 
by yourself, or whether you were trying to impinge upon other fields 
and bring other organizations, either by coercion or persuasion or 
any other methods you might adopt, to come within the operation 
of your organization. 

Mr. ScHUH. We did everything we could to get new members. 
When I say everything we could, everything we could legitimately. 

Senator King. Did you try to get other organizations of retailers 
in various other States to join, to adopt the policies of your organiza- 
tin, so they would be sort of integrated? 

Mr. S'CHTJH. Yes. 

Senator King. So that they would adopt your policies, and to 
that extent increase the monopolistic power of your organization, 
if it had any monopolistic power. 

Mr. ScHTjH. We never had any. I would like to explain again 
that at no time would it be possible to get the majority of dealers, 
I don't know where it- has ever been done, even in one town. I found 
out, much to my surprise today, that there is a new organization in 
Washington. We had one here at one time but they died, and I heard 
one was formed, but hadn't paid much attention to it, and I find 
there is one here today that doesn't belong to our group, and I 
don't believe we have ever contacted them and they have been in 
existence, I think, for over a year. 

The Chairman. Mr. Cox, you had no desire to offer this allegory ? 

Mr. Cox. No. 

The Chairman. I might remark it is not an allegory, it is a fairy 
story, according to its own designation. 

Mr. Cox. I suppose a fairy story may be an allegory. One of the 
finest allegories of all times was entitled "the Faerie Queene." 

Mr. Schuh, I am now going to call your attention to a memoran- 
dum which was found in your file, which I shall show you in a 
moment, which reads as follows : 

From N. A. P. R. Executive Division— 12/15/37. 

To W. A. M. C. Note : To be Given Immediate Attention. 

Suggestion : Send letter to industry— letter to be confidential with request to 
destroy, requesting statement from them denying their intention to go into retail 
field with key stations in 1938, this letter because of recent stories concerning 
the above action. 

Can you tell the committee by examining this document who wrote 
it and to whom it was addressed ? 

Mr. Schuh. I don't know who wrote it. 
Mr. Cox. Have you ever seen it before ? 


Mr. ScHUH. No; I have never seen it before. 

Mr. Cox. Do you know whether that suggestion was acted upon? 

Mr. ScHUH. Yes. 

Mr. Cox. Was it acted upon? 

Mr. ScHTJH. Yes. 

Mr. Cox. And a letter was sent to the industry in the words of this 
memorandum ? 

Mr. ScHUH. Every supj)lyin^ company got a letter. 

Mr. Cox. To all the major oil companies? 

Mr. ScHUH. And the larger independent refiners, everybody that 
we know of that markets any size at all, over any appreciable area. 

Mr. Cox. Could you assist the committee in any way in getting a 
copy of that letter, because we have been unable to find if. 

Mr. ScHUH. I assisted in the prepartion of the letter. 

Mr. Cox. I am asking you now whether it would be possible for us 
to see a copy of it, because we have been unable to find it in your files. 

Mr. ScHUH. I wouldn't know where there would be a copy of it. 

Mr. Cox, Did the letter in fact contain a request that it be de- 
stroyed after receipt? 

Mr. ScHUH. I wouldn't remember that. It wasn't a usual proce- 
dure that we followed, I know. 

Mr. Cox. If it wasn't usual, that might be an additional reason why 
you would remember. 

Mr. S.CHUH. Yes, I would have remembered. I would say that we 
obtained, and that as a result of the letter which wasn't — wait a 
minute, it wasn't a confidential letter, as I remember it. It was not 
a confidential letter, it was a letter that was sent to every company 
asking for a public statement. 

Mr. Cox. And your testimony now is that it didn't contain a re- 
quest that it be destroyed ? 

Mr. ScHUH. Because it was not a confidential letter, I know. 

Mr. Cox. What is the N. A. P. R. executive division ? 

Mr. ScHUH. The executive division at that time was composed of 
the executive secretary and the office staff, along with the president. 

Mr. Cox. Were you the president at that time ? 

Mr. ScHUH. Yes. 

Mr. Cox. So that this memorandum at least on its face purports 
to come from a division of which you were a part. ' 

Mr. ScHUH. (Affirmative nod.) 

Mr. Cox. But you don't remember ever having seen it before? 

Mr. ScHUH. No. I know how it originated. 

Mr. Cox. How did it originate? 

Mr. ScHUH. My instructions to the office to make a note that we 
ought to get a statement from the companies whether they were going 
to come back into the retail field or not, because at that time there 
were rumors circulating that this company and that company was 
contemplating entering the retail field. 

Mr. Cox. When you made that suggestion did you also suggest 
that the letters be confidential and contain a request to be destroyed ? 

Mr. ScHUH. No. 

Mr. Cox. Who is W-a-m-s ? 

Mr. ScHUH. Warns, the Ways and Means Committee. 

Mr. Cox. I see. A moment ago you said you didn't know where 
we could get a copy of that letter. 


Mr. ScHUH. I don't have a copy of it, I know, and there was 
nothing to — ^yes, I think I know where you can get a copy. It was 
published in the Gasoline Retailer, 

Mr. Cox. Published about 2 weeks after this? 

Mr. ScHUH. Yes. It was an open letter. It comes more clearly 
to my mind. I think it was an open letter to all companies saying : 
Are you coming in or are you not ? So it would tend to make lessees 
more secure. The fellows were sitting in the stations with rumors 
that companies were coming back in with key or pilot stations and 
we felt an expression by the industry at that time would help the 
lessees and they would feel more secure that they were going to be 
in their stations a year or two years from then. 

Mr. Cox, Did you talk to anyone in the major companies about 
this situation? 

Mr. ScHUH. Yes ; I believe I did, 

Mr, Cox, Whom did you talk to? 

Mr, ScHUH, I believe I talked to the Standard Oil Co, of Indiana ; 
I believe I talked to the Shell Petroleum Co, 

Mr, Cox, Did you talk to Mr. Arnott ? 

Mr. ScHUH. Not that I recall, 

Mr. Cox, Did you talk to anyone else in the Socony-Vacuum ? 

Mr, ScHTjH, Not that I recall. There is one other company that I 
can't place now because I remember it was a very definite answer 
"No," and why, but I just can't recall the company, 

Mr. Cox. Can you explain why this memorandum should have con- 
tained the suggestion that the letters should be confidential and should 
contain a request to destroy ? If you can't explain it, of course, thiat 
is all right, but I am curious to know. 

Mr. ScHUH. I can't explain any such request. 

Mr. Cox, Now, this morning I think you testified, when I asked you 
about the sources of your income, that you received certain income 
from services that you performed. What are those services ? 

Mr. ScETUH. Well, very often a company such as the Commercial 
Credit Co,, who finance equipment, had a bulletin that they would 
like sent out, and they paid the postage and some expense on the 
clerical help and we inserted it, and sometimes the association wants 
some mail to go to our mailing list, and it is principally for mailing 
things to other people, 

Mr. Cox, Well, do you get amounts of money in excess of the cost 
of that work? 

Mr. ScHUH. Very often, 

Mr. Cox. Now, there was a time, was there not, between 1936 and 
'37 and '38 when you had a steady source of income from the A. P. I., 
did you not? 

Mr, ScHUH. No; never from the A, P. I., but we did have from 
the American Petroleum Industries committee, 

Mr. Cox. Now, what is the American Petroleum Industries com- 
mittee ? 

Mr. SoHUH. That is a committee of members or industry people in 
a State who are organized to fight taxes, gasoline taxes, principally 
in a State, and they are headed up into a central committee, as I un- 
derstand it, called the Central Committee — ^the Central American Pe- 
troleum Industries Committee. 


Mr. Cox. Do you know whether that has any connection with the 
A. P. I. at all or not? 

Mr. ScHiJH. I wouldn't know. I don't know. 

Mr Cox. Do you know who is the central organization of the 
American Petroleum Industries Committee? 

Mr. Schuh:. I know some of the people; yes. There are jobbers 
and refinery officials. 

Mr. Cox. I call the committee's attention to a booklet published in 
1037 entitled "Petroleum Facts and Figures," published by the Ameri- 
can Petroleum Institute. This book snows on page 223 the xVmerican 
Petroleum Industries Committee's staff, and this statement i? immedi- 
ately preceded by a list of the officers and members of the board of 
directors, executive committee, and the committee of the American 
Petroleum Institute. This leads me, at least, to the conclusion that 
there is some relation between the two organizations.^ 

Mr. Cox. Now, Mr. Schuh, between '36 and '38 you did receive some 
payments from the American Petroleum Industries Committee, did 
you not? 

Mr. ScHTJH. Yes, sir. 

Mr. Cox. And those payments varied from $75 a month to around 
$150 a month, did they not? 

Mr. Schuh. That is right. 

Mr. Cox. And those payments continued until between about Oc- 
tober 1936 to around June 1937, did they not? 

Mr. Schuh. I don't recall that they were regular. I mean, there 
may have been some months in there that they did and there may not ; 
I don't recall that, but I would say that in that period we had done 
a great deal of mailing work, so that it is possible we received it. 

Mr. Cox. What kind of work was that you did for the American 
Petroleum Industries Committee? 

Mr. Schuh. Well, I don't know how many thousands of tax dollars 
we mailed out, for instance. They were dollars showing that the 
average price of gasoline was so much, the tax was so much, and the 
total indicated the bill. There is a picture of one of them in here in 
the manual,^ page 198 ; a picture of one of j:he dollars. 

Mr. Cox. It was work mailing material of that kind largely, was 

Mr. Schuh. Yes. 

Mr. Cox. Did you collect any material for them, distinguished from 
sending out material? 

Mr. Schuh. No. 

Senator King. Did they prepare it and deliver it to you for mail- 

Mr. Schuh. Yes ; they were sent up to us in bundles. 

Mr. Cox. You just used your mailing list to send them out? 

Mr. Schuh. To send them out. 

Mr. Co::. Now, was this 

The Vice Chairman (interposing). Mr. Cox, will you ascertain 
whether or not the mailing list was available to the persons for whom 
they sent the material out? 

Mr. Cox. Yes; I will ask that precise question. Did you under- 
stand Congressman Sumners' question? 

1 The American Petroleum Industries Committee was created by tlie board of directors 
of the American Petroleum Institute in December. 1932. 

' A service station manual published in book form by the National Association of 
Petroleum Retailers. 


Mr. ScHUH. The question is, I believe, was that mailing list 
available ? 

The Vice Chairman. Yes. How did they happen to come to you 
to send out this material to which you refer ? 

Mr. ScHUH. Because a rule of our board of directors was that 
our mailing list was not to be given out to anybody. 

The Vice Chairman. The answer is, then, it was not available to 
these people ? 

Mr. ScHUH. It was not available to anybody. 

Mr. Cox. Were these payments you received in excess of the cost 
of the work that you did ? 

Mr. ScHUH, Possibly a little, but very little. Pretty much in 
the mailing because in the size it took it up in the cost of the wrap- 
ping and sending them out ; took up most of it. There may have 
been a little excess^ I believe. I would like to make the point that 
it wasn't an appreciable amount in excess of what it actually cost us. 

The Vice Chairman. What was the total amount received from 
that source? 

Mr. Cox. Between the records which our accountants have com- 
piled, Congressman, it shows between October 1938 and May 16, 
1938, the payments, gross payments, were $1,932.10, about $2,000. 

Senator King. To that company? 

Mr. Cox. Of the American Petroleum Industries Committee. 
Those payments stopped sometime in 1937, didn't they? 

Mr. ScHUH. I think they stopped about then. I don't recall any 
since then. 

Mr. Cox. There have been none since then, but about the same time 
the payments stopped you started selling books to the major oil 
companies, didn't you ? 

Mr. Beedy. Well, Mr, Cox, I refrained from saying anything this 
morning, but since further reference is made to the books I think 
the committee will recognize that they are following an authorita- 
tively established and well-recognized precedent in the issuance of 
their books. 

Mr. Cox. I think counsel was about to make a point which I 
wanted to make this morning and didn't feel I could, and I heartily 
agree with him, if I apprehend what is in his mind. 

Mr. Beedy. I should like to have you elicit from the witness what 
they first contemplated doing and what they finally did in the nature 
of this book. 

Mr. Cox. I am not sure that I follow you there, sir. 

Mr. ScHUH. Would you like to have nie tell the story of the prepar- 
ation of this book? 

Mr. Cox. I have no objection. I thought that was done this 

The Vice Chairman. May I ask a question before you get to that, 
to see if there is any connection or not. At the time that these 
periodical payments ceased, was there any discussion between you or 
anybody connected with your organization and the major oil com- 
panies with reference to the stopping of the contributions, or what- 
ever they were with reference to mailing and their taking these books 
from you at the price indicated? 

Mr. ScHUH. As far as we were concerned, there is no connection. 
We were rendering a service for this one thing of which 


The Vice Chairman (interposing). We understand about render- 
ing the service, but as to the specific point at the time they ceased 
to make contributions, periodically, and the time they began to buy 
these books, right in that period of change, was there any discussion 
between you or anybody connected with yoar organization and the 
people who bought the bpoks with reference to stopping the one and 
beginning the other? 

Mr. ScHUH. No; absolutely not. 

Senator King. Was this service to which you have referred based 
entirely upon efforts to reduce taxes , upon gasoline in the various 

Mr. ScHUH. Yes. 

Senator King. Or to prevent an increase in taxes ? 

Mr". ScHUH. Both. 

Senator King. There was no relation, then, between your service in 
that regard and the sale of these books? 

Mr. ScHUH. There was ho relationship whatsoever. 

Senator King. Well, when you effected, if yoii did effect, any satis- 
factory results in preventing an increase in the gasoline tax, did they 
stop making those contributions? 

Mr. ScHUH. Do I understand, the chances of an increase were over ? 

Senator King. Yes. 

Mr. ScHUH. Well, I believe that would for that particular year; it 
would be a good assumption that, starting in October to handle taxes 
and the legislatures meeting in January and by the end of June or 
May the legislatures mostly had adjourned, so that would be a natural 
time for a tax campaign, and I would say that that was 

Senator King (interposing). Payments were made, then, during 
the tax campaign? 

Mr. ScHUH. That is right. I would like to say that the original 
idea in putting out a book of this type was, a data book, containing 
all sorts of data about automobiles, the various capacities, tire pres- 
sures, and we called it the N. A. P. K. Year Book, and we were just 
in the midst of preparing that and having articles written for it when 
the Democratic Year Book scandal came out, and we immediately 
killed it, and threw the whole thing away because the scandal was just 
such that we couldn't afford to even think of that, and we went to 
work on a new tack. 

We found that there were any number of data books out, anyway, 
and that we would be just duplicating something that already existed. 

The Chairman. You mean the plan that yon were adopting when 
adopted by somebody else was called a scandal, and therefore you 
abandoned your own project? 

Mr. ScHUH. No; I wouldn't say that. 

The Chairman. That is what you said, isn't it ? 

Mr. ScHUH. No; I said that the name was so similar, not the type 
of book. I did not see — except I had a glance at a Democratic 
Yearbook — and possibly the picture of the President was worth the" 
price they charged; I don't know. But we had no such inducement 
that we could put into any book to sell it; Vve had to have facts and 
figures, and we tried to develop a book that was valuable to the 
dealer, but there is a place, and even today 

The Chairman (interposing). But you didn't examine that other 
book ? 


Mr. ScHUH. I say I didn't. ,1, 

The Chairman. So what you say about the other book is wholly 

hearsay? ... 

Mr. ScHUH. Yes, sir; but I may be dwelling on this a little too 
long, but I am mighty proud of the book. I think it is — and I have 
a sheaf of letters 

The Chairman (interposing). And you want it distinctly under- 
stood that in your opinion it is not a scandal ? 

Mr. ScHUH. It is not a scandal and it is the finest book that was 
ever prepared for the service-station operators of this country, and 
the sheaf of letters that we have received from all over the world — 
this book is on every continent; Canada — we have sold any number 
of them up there — New Zealand, Australia, Germany, England, Cuba, 
South America ; the demand for the book from others than oil com- 
panies, even though the number wasn't as great, indicates the value 
of this book. I have one letter in which a man says that he wouldn't 
sell his for $100 if he couldn't get another, and I should add now 
that we only charge $1.25. 

Mr. Cox. I thii^ at this point it might be appropriate for me to 
offer for the record a compilation which has been made by the ac- 
countants of the staff showing that, as of the present time, 26,076 
of these books have been sold to the major oil companies. I am 
prepared, if the committee so desires, to have the accountant take 
the stand and testify to the computation. I have reason to believe 
it is correct, and if any inaccurracy is discovered, I would, of course, 
be willing to have it corrected. 

Senator King. I think the statement of ^the witness this morning 
would be corroborative of what you have just said. 

Mr. O'CoNNELL. Mr. Cox, do I understand you to say twehty-six- 
thousand-odd books have been sold to the major oil companies? 

Mr. Cox. That is correct. 

Mr. O'CoNNELL. Have you any figures of the number of books sold 
by the organization in total ? 

Mr. Cox. The witness testified this morning about 27,000 have 
been printed. 

Mr. O'CoNNELL. How many have you left? 

Mr. SoHUH. I don't know. I don't believe there are very many 

Mr. Cox. Our staff is still working on some computations in con- 
nection with the sale of books. 

The Chairman. The tabulation may be admitted. 

(The tabulation referred to was marked "Exhibit No. 1306" and 
is included in the appendix on p. 9849.) 

The Chairman. Let me ask what the price was to the companies? 
I observe that the book itself is marked $2.50 a copy, but you just 
testified that you offer it for $1.25. 

Mr. ScHUH. The Tidewater Co. that has bought 5, 10, rarely over 
10 at a tune, has paid, I think, either $1.75 or $2 for it. Any com- 
pany that bought from 25 to 100 paid $1.75. I think I do have the 
figures here. 

The Chairman. You didn't have any secret discount on these 
boolcB ? 

Mr ScHUH No, sir. As a matter of fact, the Standard Oil Co. 
ot Ohio, the bookkeeper made a mistake in adding up 1,000 times 


$1.25 and arrived at the "figure of $964, and mistakenly our oflBce 
accepted the order with that price and we are now fighting to get 
$36 to complete the $1,000 that they owed us. 

Mr. Beedt. Possibly, the Senator remembers this morning the 
witness explained that in a 500 order lot the price went down as low 
as $1.25. 

Mr. Cox. The organization is still soliciting orders for this book 
from the major oil companies, is it not, Mr. Schuh? 

Mr. SoHUH. From anybody. 

Mr. Cox. I specifically asked you about the major oil companies. 

Mr. Schuh. 1 can't speak for what the organization has done 
since September 14, 1 don't know, but up until the time I left, yes. 

Here is a price list or order blank. 

Mr, Cox. You have no reason to believe that that" policy has been 
changed, have you? 

Senator King. You mean in the sale of books ? 

Mr. Cox. In the solicitation of orders from the major oil com- 

Mr. Schuh. I should believe if thej have any left they would try 
to sell them any place, to the major oil companies; even if the com- 
mittee here would purchase a quantity, we would be very happy to 
sell them. I would say that we are making or did make 

The Chairman (interposing). You are not going to bill us for 
those copies you distributed this morning, are you ? [Laughter.] 

Mr. Schuh. No, sir. We have been putting more effort into sell- 
ing schools lately than anything else ; that is up until the time I left 
the effort was made to sell schools. I don't have another one of 
these here. I would like to put the price list into the record. 

The Chairman. Just read it into the record. 

Mr. Schuh. One to 9 copies, $2.50 each ; 10 to 24 copies, $2 each ; 
25 to 99 copies, $1.75 each ; 100 to 499 copies, $1.50 each ; 500 or more, 
$1.25 each. 

I would^ like to add that the Phillips Co., for instance, is selling 
these manuals to their dealers at a profit. 

Mr. Cox. Mr. Schuh, while you were president of the association 
you did have occasion from time to time to discuss with the major 
oil -companies the competitive conditions existing in the marketing 
field in different areas? 

Mr. Schuh. As it applied to specific complaints? 

Mr. Cox. Yes. 

Mr. Schuh. I did. 

Mr. Cox. That is, if I understand your answer, complaints would 
come from your membership and you would take up the complaints 
with the major oil companies concerned and attempt to remedy the 

Mr. Schuh. Yes; I believe that you found in the file a complaint 
file that is quite exhaustive. 

Senator King. Did your association attempt to give any preference 
to one major company in the purchase of oil over another, or did you 
indicate to the members of the association that they should deal with 
representatives of one oil company rather than all? . 

Mr. Schuh. No. The membership in our g-ssociation is composed 
of the customers or dealers of all different kinds of oil companies. 
.We couldn't possibly urge them to buy from any one. They bought 
from whomever they wanted to. 


Senator King. You didn't try to influence, then, the members of 
your organization as to whom they should buy their oil from? 

Mr. ScHTJH. Never. 

Mr. Cox. Mr. Schuh, I am going to call your attention to a docu- 
■ ment that purports to be a carbon copy of a letter which apparently 
was dictated by you, dated March 2, 1937, and addressed to Mr. 
Walter Teagle, Standard Oil Co. of New Jersey, New York City. 

(The letter referred to was marked "Exhibit No. 1308" and is in- 
cluded in the appendix on p. 9850.) 

It reads as follows : 

Your attention is requested to the enclosed copy of a report to me concern- 
ing the market situation in New York. Although the report is self-explanatory 
it seems in order to add that the situation of unrest is probably more critical 
than realized. It is believed that you will agree with us that a complaint to the 
Federal Trade Commission at this time would be disastrous and that it should 
be avoided. The number of persons concerned is so small that immediate action 
by those involved to eliminate cause for complaint should be a simple matter. 
The leaders who have appealed to our oflSce are trying to do a real job along 
constructive lines and deserve all the cooperation that can be given. They are 
on the spot, and national leaders may find themselves in a similar position if 
the complaint of the retailers is continued. 

I have observed this condition at first hand during recent visits to New York 
and conferred there with the dealers upon it, advising them to keep the retail- 
ers in line until something could be done. Consequently I know that there is 
truth in the report and if you have information upon this subject your advice 
will, be appreciated. 

Will you tell the committee whether in fact you did write that 

Mr. Schuh. Yes; I wrote the letter. 
- Mr. Cox. And were similar letters addressed to a number of other 
major oil companies operating in that area? 

Mr. Schuh. Every oil company operating in the New York area. 

Mr. Cox. Just what was the problem that you were referring to 
in that letter ? 

Mr. Schuh. It was a combination of second story sluggers and we 
had reason to believe some special deals that were made by contract 
in which dealers bought below other dealers, which was obviously to 
our way of thinking a violation of the Robinson-Patman Act, and 
we called their attention to it and as a result of it, I understand, 
most of the deals were canceled that could be canceled excepting those 
by contract for a length of time that couldn't be, but the situation 
subsided, the dealers in New York benefited thereby. 

Mr. Cox. When you speak of second story sluggers, you mean that 
certain companies had distributors set up who were cutting prices 
and offering discounts? 

Mr. Schuh. Doing many things, offering discounts. As a result 
of this trouble here a price posting ordinance has since been passed, 
in the city of New York alone, which is unusual. I don't know of 
any other town or any other city that has a price posting ordinance. 

The Vice Chairman. You mean they passed an ordinance to re- 
quire that everybody buy gasoline at the same price ? 

Mr. Schuh. Everybody that buys from any one station gets the 
same price as anybody else that buys from that station. 

Mr. Cox. In other words, they could post any price they like but 
once the price is posted everybody has to buy at the same price ? 

Mr. Schuh. Tliat is right. 


Mr. Cox. Did you receive this letter, Mr. Scliuh, which is on letter- 
head 26 Broadway, New York, dated March 25, 1937, addressed to 
you and signed by R. T. Haslam ? 

Mr. ScHUH. Yes; I received that letter. 

Mr. Cox. Who is Mr. Haslam? 

Mr. ScHUH. I have only met the gentleman twice, I believe. I 
don't know his exact title. 

Mr. Cox. Is he connected with some major oil company? 

Mr. ScHUH. The Standard Oil Co. of New Jersey. 

Mr. Cox. And this letter was in response, was it not, to your letter 
of March 2, which I just read ? It so states. 

- (The letter referred to was marked "Exhibit No. 1307" and is 
included in the appendix on p. 9849.) 

Mr. ScHUH. I believe so. 

Mr. Cox. It reads in part as follows : 

"We feel sure there is no marketer of petroleum products in the eastern part 
of the United States who through the years has devoted more effort than this 
company to maintaining price parity between its several similarly situated 
companies. We continue to believe such price parity should be maintained. 
We are relatively a newcomer in the New York market. A newcomer in a 
market must be competitive t© maintain any position. While we must be com- 
petitive, we continue to hope for the arrival of the time when we and our 
competitors will be able to maintain price parity to similarly situated customers. 

• Is it your testimony now that it is your opinion that price parity 
thereafter was established with similarly situated customers ? Is that 

Mr. ScHUH. I would say yes, in accordance with the established 
law. In other words, I think the Standard Oil Co. and every other 
oil company bent every effort to eliminate discrepancies within their 
own customers. 

Mr. Cox. Did you receive replies from other major oil companies 
to that letter? 

Mr. ScHUH. Were they in the file ? 

Mr. Cox. There were one or t\. o, but not from all the companies. 

Mr. ScHUH. Do you recall one from the Continental Oil Co.? 

Mr. Cox. That is right. That is the only one I saw. 

Mr. ScHuH. I think that is the only other one. 

Mr. Cox. Those were the only two companies? 

Mr. ScHUH, Yes. 

Dr. LuBiN. Mr. Schuh, is there any relationship between price parity 
between competitors and posted prices? 

Mr. Schuh. I can only make an explanation. It is an involved 
question. Where you have large marketers operating in an area 
there can never be any appreciable difference in prices between them. 
There is usually what they call a market leader, who decides what 
his price shall be, and everybody in that area must follow that. If 
he doesn't follow it, if he goes below it, the so-called pacemaker will 
immediately meet his price, and if he goes above it he won't get any 
price. I mean it is a competitive situation because of the highly com- 
petitive nature of this industry. I wouldn't buy from the people 
I buy from if I could buy from Barnsdall considerably cheaper. 
I would immediately go to Barnsdall. I have no contract, and there 
are many more like me. I certainly wouldn't pay Socony-Vacuvm a 


Dr. LuBiN. How do you reconcile that statement with the state- 
ment you made previously of instances where people come into a 
community and cut prices and maintain the cut prices? How can 
the other people stay in business? As you say, nobody would buy 
from them ; everybody would meet that price cut. 

Mr. ScHUH. I am drawing the distinction between big marketers 
and little marketers. The little marketer is the one that comes in 
and does that. I say little — Coryell is a good example. He operates 
some 500 stations in eight States, but he started out small and has 
come into localities and wormed his way in until he is a factor, and 
if Coryell gets too far out of line we have to meet him. 

Dr. LuBiN. Well, as I understood your statement, you said that 
in the city of New York different retailers were selling ^soline at 
different prices. You wrote a letter to the Standard Oil Co. 

Mr. ScHUH (interposing). Let me correct you. One company. 
Some companies didn't do it; but we have no way of knowing what, 
their secret contracts are. 

Dr. LuBiN. But the retailers were selling gasoline at different 

Mr. Sghuh. Not necessarily, but certain companies, let's say the 
Jones Oil Co., is a big major oil company and Jones has three cus- 
tomers; to two of them he is charging one price and to the third a 
lower price, which is discrimination, and the fellow that he is selling 
at a lower price is out cutting prices to the detriment of the other two 
because he is getting a lower price. We say that that is wrong, it 
is a violation of the Robinson-Patman Act if it is persisted in. I 
don't know whether the act was passed at that time or not, but it 
certainly was in process of being passed. 

Mr. Cox. Do you just object to such discrimination when it is 
illegal or do you object to it in any event? 

Mr. ScHUH. I would say that we would be in no position to draw 
the line as to whether it was illegal or not. We object to price dis- 
crimination of any kind. 

The Chairman. If you could draw a plan or a code for this in- 
dustry what would be the principal points in that code ? 

Mr. ScHUH. That is a pretty big order, but I would say one, that 
through the Federal Government some help be given the refining 
section of this industry to the end that they can obtain a reason9,ble 
price for their refined products and have an established tank car 
market upon which we could build our prices. 

The Chairman. Do you think the refiners do not get a fair price 
now? s F 

Mr. ScHUH, It certainly hasn't been over the last 7 years, it hasn't 
been a fair price., 

The Chairman. The refining industry as a whole in your opinion 
ought to have some help from the Federal Government. 

Mr. Sohuh. I believe a modified cartel would do it. I don't be- 
lieve in a cartel, but a modified cartel, where the Federal Govern- 
ment could watch and see that no practices that were not in the 
interests of conservation and weren't in the best interests of the 
public— I believe that should be closely watched. I believe a modi- 
fied cartel that would allow the refining industry to set up some 
such agency as the Allocation Committee under the Petroleum Code 


which worked out very well, having a fair tank-car price, to base 
other prices on. 

The Chaikman. What would be the supervisory powers of the 
Federal Government in this modified cartel? 

Mr. ScHUH. The power to cancel the whole thing the minute that 
anything was done that wasn't in the best interests of the public. 

The Chairman. You would clothe some committee with discre- 
tionary power to pursue this policy? 

Mr. ScHTJH. The President, or one of the Cabinet members. 

The Chairman. What else would you do? 

Dr. LnBiN. May I interrupt at that point, Mr. Chairman? Am I 
to understand you to say that in your opinion the prices that the 
public has had to pay have not been in their interest in the past 
7 years? 

Mr. ScHUH. Decidedly so. The prices have constantly been re- 

Dr. LuBiN. It is against the consumer's interest, then, to have those 
prices reduced. 

Mr. ScHUH. No ; that isn't against their interests. That is in their 

Dr. LuBiN. I thought you had been stating that the situation dur- 
ing the past 7 years has been one in which public interest has not 

The Chairman (interposing). Oh, no; you misunderstood; he 
said that the refiners were not profiting. The suggestion of his was 
not in the interest of the consumer, it was in the interest of the 

Mr. Sohuh. The refiners. I am particularly selfish in this view- 
point because as long as we have small refiners we can tell the big 
refiners where to go. The minute the small refiners are put out of 
bup^ness we have nobody to buy from. 

The Chairman. Is it your opinion that the small refiners are being 
put out of business under the present methods in the industry? 

Mr. Schtjh. I wouldn't say they were being put out of business, 
but they have certainly had pretty tough scratching for the past 8 
years, and I know any number of them that have had tough scratch- 
ing and haven't been able to get any place. 

The Chairman. And to what do you attribute that? 

Mr. ScHUH. Vicious competition. 

The Chairman. So your theory is that vicious competition should 
be brought under control by some form of Government supervision 
through a modified cartel. 

Mr. ScHUH. I believe that that to me appears to be the best answer 
that I can think of. It kills the argument of Government control that 
everybody howls about, and it still protects the public, and I believe 
it is the duty of Congress to protect the public. 

The Chairman. Do you howl about Government control, if every- 
body does? 

Mr. ScHUH. If it gets too far. 

The Chairman. But nevertheless you would set it up under a pro- 
gram if you had the power. 

Mr. Schtjh. I don't call it Government control ; I call it Govern- 
ment help. 


The Chairman. Here you have a modified cartel by which I under- 
stand' you to mean that the industry would in a sense fix its own 
prices and stabilize the entire industry 

Mr. ScHUH (interposing). No, no. 

The Chaikman. Subject to supervision by the Federal Government 

Mr. ScHUH. No. 

The Chairman. Then I didn't understand you. 

Mr. ScHUH. I will never go as far as clothing anyone with the 
power to fix prices. That isn't needed. 

The Chairman. Then what would you have the cartel do? 

Mr. SoHUH. The cartel should allow them — production is pretty 
well brought within control by State regulations. I think that refin- 
ery runs ought to be brought somewhere within control to meet the 
demand, so that there isn't homeless gasoline flowing around cracking 

The Chairman. In other words, you want to set up some sort of 
system by which overproduction of gasoline can be controlled? 

Mr. Schuh. Just as overproduction - of crude oil is controlled by 
State governments today. 

Mr. Cox. You want to apply the proration system to the refinery 
end of the business? 

Mr. Schuh. Proration or allocation. 

The Chairman. But that you would have supervised by the Gov- 
ernment ? 

Mr. Schuh. Yes ; I think it must be supervised by the Government. 
And then I believe that we ought to have just a Federal Trade Com- 
mission code approved by them, under their trade-practice rules, set- 
ting forth more or less broad general principles that are recognized 
unfair competition, and any meeting held ought to have a Govern- 
ment representative there. 

The Chairman. What do you call unfair competition? What are 
the unfair methods that most offend your idea of what is right in this 
industry ? 

Mr. Schuh. I believe that one of the most important is an open 
price posting rule to bring it right out into the light of day where 
everybody can look at it. 

The Chairman. That is not an objectionable feature. That is one 
that you would recommend. 

Mr. Schuh. That is one I would recommend to curb a lot of these 
abuses, such as the second-story sluggers and those things, that cOuld 
be cured by an open price posting system. Second, I would have a 
rule barring the subsidization of any company or service station or 
anybody else by a supplier. 

The Chairman. Now what form of subsidy do you object to, 
principally ? 

Mr. Schuh. Low rentals, better prices, furnishing them with all 
kinds of equipment, building driveways for them, giving them tanks, 

The Chairman (interposing). You are referring to practically the 
same practices which were mentioned by Mr. Swensrud of the Stand- 
ard of Ohio when he was describing to the committee the competitive 
methods used by the major companies.^ 

Mr. Schuh. Well, I didn't read his testimony, so I don't know, 

1 Sidney A. Swensrud, vice president, Standard Oil Co. of Ohio, whose testimony ap- 
pears in Hearings, Part 15. 


The Chairman. He mentioned secret discounts and driveways and 
buildings and the same practices wliich you have just now mentioned: 

Mr. ScHUH. Mr. Swensrud is an excellent economist and I have 
a lot of respect for his judgment. 

The Chairman. You would abolish all of those? 

Mr. ScHTJH. I would abolish all of those in so far as they created 
unfair competition. 

The Chairman. Well, somehow you seem to be drawing a line. 
I would like to get it clear in my own mmd just where you would 
draw the line and what you would permit and what you would 

Mr. Schuh. I think in order to help this and help competition, 
that sales contracts of every type ought to be outlawed. 

The Chairman. Do you have competition if you have supply con- 
trol and prices posted. 

Mr. Schuh. Yes; very stiff competition. Every company has ma- 
terial to move and it is going to move it, and I don't think that you 
should go beyond a certain point when you have a foundation to build 
on. In other words, if you did, then you would have price fixing all 
the way up the line, and the tendency is to keep inefficient units in 
the business. 

The Chairman. When is price cutting properly denominated 
second story slugging, and when is it properly denominated compe- 
tition which you recognize as desirable? 

Mr. Schuh. When it is done by the so-called second-story slugger 
to accomplish an aim for a larger company that they wouldn't do 
themselves to break into a market. This company isn't in Washing- 
ton. They want to get in here. So they come in and get no place. 
Then they put in a second-story slugger to come down to me and talk 
to me and say, "Schuh, if you take Jones' gasoline we will give you 
three nice computing pumps, we will give you a lift and paint your 
building, and if you need a new wash rack we will help you build 
it on." The company wouldn't do that, but the distributor would, 
and by getting a better price they are paying him for doing it; by 
giving him a better price they are paying him for doing just that 
thing. That isn't fair competition. If this company wants to come 
in it can come down to me and say, "We will sell to you and we have 
a much better product, and I will show you why," and convince me 
I should buy from Jones because they have a better product, then I 
think you have fair competition. 

Dr. LuBiN. Does Jones have a better product ? 

Mr. Schuh. That is open to argument. 

Dr. LuBiN. Then what form does your competition take, if it is 
open to argument? 

Mr. Schuh. I think that the company whose product I sell has a 
better product, and I sincerely believe it has. They consistently 
try to bring to me a better product, and more helps to me to help 
me sell my merchandise, and that is the reason I changed. 

Dr. LuBiN. What helps do they bring to you ? 

Mr. Schuh. They have sales clinics two or three or four times a 
year, practically every season, and they have experts that tell us 
how to sell merchandise and how to grease automobiles, and all about 
the new cars. They come out with post cards that tie in with their 
ads, with my station's name on it, that I can send to my customers. 


SO that they pick up Time Magazine and they see an ad, and the 
next day comes a card from me with the same thing on it. All of 
those helps I consider valuable to me, and that is the only reason I 

Mr. O'CoNNELL. Do I understand you recently changed the com- 
pany with which you deal ? 

Mr. ScHUH. Yes. 

Mr. O'CoNNELL. And I would also understand you to mean that 
the methods that they used in persuading you to change were what 
you would consider to be proper and legitimate methods. 

Mr. ScHUH. Yes, sir. 

Mr. O'CoNNELL. Suppose you tell us what they did to persuade 
you to change ? 

Mr. ScHUH. Having had the experience and having seen the differ- 
ent companies as well as I have, they didn't have to do much to sell 
me, and I changed to that company and kept it quiet for fear of 
being pestered by everybody else in town for a week before I was 
ready to change. I kept it quiet and just decided to change to this 
company, and so notified them. If not, all of them would have 
bought my dinner for a week and I would have got no work done. 

Mr. O'CoNNELL. I take it you were probably approached by the 
company and were to some degree at least persuaded to change from 
another company. Now I want to know, if you can tell me, what 
inducements or what considerations led you to change from your 
prior supplier to your present supplier. 

Mr. ScHUH. Just my knowledge of that company. They came 
down and went through their whole book, which was a waste of time, 
because I knew what the company was putting out and nothing was 
discussed as to what you are going to give me, excepting that I was 
trying to arrange for a lease on the property that I have from my 
landlord, and I said to the vice president of this company, "If I 
can get that lease you can do more for me," and he said, "What do 
you mean, do more. We don't do anything for anybody." 

So they just didn't offer a thing. I could have got a better deal 
so far as cash was concerned, not a better price, but so far as different 
helps in fixing up my station, and equipment and so forth, from any 
other company, but I couldn't have got the sales helps to help me 
make my place successful. In my' opinion I couldn't have got as 
good from any other company. 

Mr. O'CoNNELL. You referred a moment ago to stationery printed 
for you. 

Mr. ScHUH. We pay for it. 

Mr. O'CoNNELL. So they offered you no inducement at all of the 
type you have been discussing? 

Mr, ScHUH. No inducement whatsoever. 

Mr. O'CoNNELL. And other companies in the past had offered you 
inducements of one type or other, to which you had not succumbed ? 

Mr. ScHUH. The Shell Petroleum Co. had a salesman on my neck 
from 1 to 6 hours a day for 30 days and they wouldn't budge on 
price but they did offer me everything else they had in the book, and 
some that wasn't. 

The Chairman. You must have a pretty good station. 

Mr. ScHUH. I haven't a very good station, but at that particular 
time it meant a lot to be able to say, "We have signed up Schuh," 
because there w" s a fight between Barnsdall and Shell, and Shell had 


bought out the former Barnsdall company or jobber, and Barnsdail 
had to start anew, and Shell wanted very much to take all of this 
jobber's business with them. 

Mr. O'CoNNELL. Whose company do you now buy from? 

Mr. ScHUH. Mobilgas. 

Mr. O'CoNNELii. What company is that? 

Mr. ScHUH. Wadham's. 

Mr. O'CoNNELL. Is that Mr..Arnott's company? 

Mr. ScHUH. That is Mr. Arnott's company. 

Mr. O'CoNNELL,. When did you change ? 

Mr. ScHUH. The 17th of August. 

Mr. O'CoNNEix. Of this year? 

Mr. ScHUH. Of this year. 

The Chairman. You were suggesting in response I one of my 
questions that you thou^t the Federal Government should gh^e 
some aid to the refiners. r>id you define the sort of aid you thought 
it ought to give? 

Mr. ScHUH, I said in the lorm of a modified cartel that wouM, 
enable a refiner in this industry to just • 

The Chairman (interposing). You said in allowing them to form 
the modified cartel. That was your only suggestion ? 

Mr. ScHUH. Yes, sir. I would like to say this, that distressed 
gasoline to the petroleum industry is just as serious a problem as 
distressed corn is to a farmer, or distressed pork is to a farmer. It 
is the same thing, and distressed gasoline is what knocks prices down. 

The Chairman. Of course, that suggestion is not at all new to any 
Member of Congress. The control of so-called surpluses has been 
suggested in numerous fields and denounced and praised on both 

Now you have offered proration of gasoline as well as proration 
of crude. Have you any other suggestions? 

Mr. ScHUH. No; I don't. 

The Chairman. What about marketing? 

Mr. Schuh. Excepting that we have a code. If this committee can 
do anything to encourage the Federal Trade Commission to give us 
a code that we can work under 

The Chairman (interposing). The purpose cf a code would not 
be to fix prices but to prevent the unfair underc^'uttiiig of prices, is 
that your idea? 

Mr. Schuh. That's right, to brin^ about open price posting. 

The Chairman. You said somethmg this morning about elii^inat- 
ing jobbers, I thought. Did I misunderstand you? 

Mr. Schuh. I never said anything about that. 

The Chairman. I probably misunderstood you. 

Reviewing your testimony this morning, which was an answer to 
certain allegations which were made to this committee by Mr. 
Hartley, of the Kansas City association, he testified with respect 
to some alleged conversations in which you participated, and you 
say^ J'The meeting was called at my suggestion, to discuss certain 
policies of the local association which I considered to be in violation 
of the bylaws of the national association and injurious to the best 
interests of retail oil dealers generally." What were those policies? 
That is the first sentence of the last paragraph on page 7.^ 

" Of Mr. Schuh's prepared statement. 
124491 — 40— pt. 17, sec. 4 9 


Mr. ScHUH. The question is, What were the policies? 

The Chairman. The question is, What were those policies that you 
called this meeting to discuss? 

Mr. ScHUH. We have a published statement of policy. 

The Chairman. No, no ; this doesn't deal with the published state- 
ment of policy. You refer here to certain policies of the local asso- 

Mr, ScHTJH. The policies of the local association? 

The Chairman. Which you consider to be a violation of the by- 
laws of your organization. Now, what were those policies ? 

Mr. ScHUH. One was complaining to various governmental agen- 
cies without first approaching us, giving us an opportunity to look it 
over, and if it was possible, such as in the New York case, instead of 
complaining to a governmental agency, they called it to our attention 
and we went to the refiners and corrected it. 

The Chairman. You went on and said: 

The bylaws specifically provided that all intra-industry complaints (price 
structure, marketing conditions, etc.) should first be presented to the national 
ussociation for approval or for action before they were presented to the public 
or to the Government for legislation. 

That was the policy of your association, was it ? 

Mr. ScHUH. Yes. 

The Chairman. No member should make petition or complaint to 
any branch of the Government without first receiving your per- 
mission ? 

Mr. Schuh. Without first notifying us. 

The Chairman. Notifying and securing your approval; should 
first be presented to the national association for approval or for 

Mr. Schuh. Yes: that is true. 

The Chairman. You think that is a wise policy for an organiza- 
tion to follow with respect to its Government? 

Mr. Schuh. Well, further on I say that where there is an obvious 
violation of law — I cover that— where there is an obvious violation 
of the law. 

The Chairman. Well, I am trying to determine just what sort of 
complaint you feel should not be made. 

Mr. Schuh. Well, I might explain the whole thing this way. 

The Chairman. Or is this just an indication of your belief that 
there ought to be a modified cartel and that the trade association 
should be authorized to exercise a certain amount of control over all 
its members so long as it wasn't violating the law? 

•Mr. Schuh. Let me say this, that I don't believe in clothing any 
trade association with governmental authority. 

The Chairman. I am not talking about governmental authority; 
I am talking about the sort of authprity that you are evidently at- 
tempting to exercise^ and I am trying to find out just what it is. I 
am trying to define it. 

Mr. Schuh. I think I can explain it this way, that if the Depart- 
ment of Justice or the Federal Trade Commission would get a com- 
plaint from us and we had established 

The Chairman (interposing). Now you are talking about some- 
thing else. I am trying to determine why you passed this bylaw 
and what you have been doing under the bylaw, and what you think 


that bylaw comprehends. Now this has nothing to do with the Fed- 
eral Trade Commission because it was a prohibition against sub- 
mitting anything to the Federal Trade Commission. 

Mr. ScHUH. I just wanted to point out that if we investigated the 
complaint and found that it was perfectly legitimate and that there 
was some wrong being done here, and we put our weight behind it, 
the local group would go much further and get more action than by 
their complaint alone. 

The Chairman. That isn't what you said. Now, is that what you 
mean ? 

Mr. ScHUH. That is our policy. Some dealers in Pennsylvania 
asked for an investigation; some dealers in Michigan asked for an 
investigation, and after a lot of running around for a couple of years 
nothing was accomplished, but a lot of eneinies were made, and the 
industry was held up to ridicule because of some of the things that 
were brought out that weren't violations, of laws, but they were made 
capital of by certain papers. 

The Chatoman. And your organization wants to exercise a super- 
visory power over the public acts and complaints of its members? 

Mr. ScHUH. I wouldn't say that, excepting in an army the cor- 
poral obeys the sergeant and the sergeant obeys the captain. We 
have an organization and in organization there must be order, there 
must be a certain amount of order if an organization is to succeed. 
You can't possibly get any place with everybody going their own 
Way and calling it an organization. 

The Chairman. Now you mention here specifically price structure. 
Now what authority does your organization, under its bylaws, exer- 
cise over price structure, by its members ? 

Mr. ScHUH. None. 

The Chairman. Then what did you put it in the statement for? 

Mr. ScHUH. If there is a question of price structure and the dealers 
feel that they are paying too high a price and we can lend our weight 
to helping them ^et a lower price, I think that is a legitimate aim 
of the trade association. 

The Chairman. Very well, but why would the association want to 
prohibit one of its members from making the complaint until the 
complaint was first submitted to the association and approved ? Why 
wouldn't you come in afterwards and lend your approval and help? 

Mr. Schuh. The only way I can answer that is that the complaints 
that were made were obviously so foolish and without the slightest — 
and without being based on any facts. 

The Chairman. So you wanted to set up, and you have set up, an 
organization which undertakes to pass judgment in the first instance 
upon the legitimacy of complaints that various members of your 
organization make? 

Mr. Schtjh. After we have passed judgment. If we can't do any- 
thing for them or won't do anything for them, they are still free 
to take it any place they want. I would like to quote the rule. The 
rule of the national association was that they should come first to us 
and then if we couldn't help them 

Mr. Beedy. He is reading from page 11, right in the middle of the 
page. Senator. 

Mr. Schuh (continuing). They were free to make their complaint 
elsewhere. In other words, we have never prevented a group from 


making a complaint. We have urged caution upon them, to be sure 
that what they were complaining about was legitimate. 

The Chairman. Now you were setting up a channel through which 
all complaints should flow, and they must come through the heads 
of your organization? 

Mr. ScHUH. In order to help the dealers. 

The Chairman. Well, that, of course, was your judgment as to 
what the purpose was. Now then, Mr. Hartley alleged that you 
threatened to revoke his charter. You denied that. You say : 

I did not threaten to revoke the Kansas City Charter. Mr. Hartley knew, 
and everyone present at the meeting knew, that I had no authority to revoke 
the charter. 

Then skipping a few sentences: 

I did caution the group that violation of the bylaws was a cause for revoca- 
tion of their charter, which would ultimately come before the Ways and Means 
Committee in due course. 

Now, is that consistent with the statement on page 11, which your 
counsel has just called to your attention ? It is on the top of page 9, 
"Violation of the bylaws." In other words, making a complaint with- 
out first submitting it is cause for revocation of a charter ? 

Mr. ScHUH. I think that is consistent. 

The Chairman. May I ask you this question : Is there any danger 
that the charter of this Kansas City outfit will be revoked now ? 

Mr. ScHUH. They let it lapse. 

The Chairman. They have no charter in your organization? 

Mr. ScHUH. They have it, but they let it lapse. 

The Chairman. I see. 

There was just one other question that I wanted to ask you. Ee- 
turning to your testimony this morning : 

The National Association has a tough job on its hands trying to bring some 
o/der out of chaos in the highly disorganized retail field, a condition which 
has existed since the major oil companies withdrew and left the field wide open. 

Am I to infer from that statement that you feel it was disadvan- 
tageous to the industry for the majors to withdraw? 

Mr. ScHUH. No; there has been a certain amount of pressure from 
different associations throughout the country put on some of us to 
try to get us to admit that the Iowa plan has failed, and there have 
been reams printed about the failure of the Iowa plan, but I say 
that essentially the Iowa plan is sound marketing and merchandis- 
ing, and in spite of the fact that we are still having a lot of trouble 
it doesn't mean that the plan has failed. 

There is a lot of disorder, but when you have 380,000 or 415,000, 
or whatever it is, dealers, each one having to post his own price, and 
there is bound to be trouble and chaos. 

The Chairman. You say here, or at least you seem to imply, that 
the withdrawal of the major companies disorganized the retail field. 

Mr. Schuh. It did. 

The CHAreMAN. Well, then, would it be proper to infer that you 
would like to see the major oil companies resume full control of. 
their outlets rather than follow the lease plan? 

Mr. Schuh. No; absolutely not. I believe that we have got to 
come to a level, and I made a talk in Sheboygan a year ago warning 
the dealers throughout the country that we were headed for nar- 


rower margins and we had to give the public a better price, a cheaper 
price, and take less for ourselves, and uistead of depending on gaso- 
line lor our living, that we had to sell other products and merchan- 
dise and services in order to make our stations pay, so that we could 
operate on a smaller margin and give the public a better price and 
be more competitive. 

The Chairman. Is the position of the independent retailer im- 
proving or becoming more difficult? 

Mr. SoHUH. I would say that in the majority of cases, the wide- 
awake independent dealer today is better off now, much better off 
now than he was 5 or 6 years ago. 

The Chairman. Judge Sumners, you wanted to ask some questions. 

The Vice Chairman. Yes; I want to ask you a few questions on 
a different phase of the matter. I understood your testimony a 
moment ago to be to the effect that it is necessary to continue the 
independent refining business if yOu are to continue the independent 
retailer in business. 

Mr. ScHUH. That is right. 

The Vice Chairman. The independent refiner selling merchandise 
that doesn't have an established reputation — how does he do it if he 
can't sell to the major companies at less price? 

Mr. ScHUH. Sell at a lesser price, I mean supply the cut-raters, 
and I say the cut-rater has a place in this picture, that is the fellow 
who sells at a lower price, as long ab he doesn't try to get all the 

The Vice Chairman. Now, a small manufacturer who produces 
just as good a quality of gasoline as a big manufacturer has no way, 
does he, speaking practically, of letting the public know that he, this 
particular manufacturer, is producing a high-grade gasoline ? 

Mr. Schuh. Yes; there are any number of refiners such as you 
describe who don't prefer to have their own distribution system, and 
therefore sell to jobbers who sell either under their own brand or 
under that refiner's brand, I mean small companies, and they are 
doing a marvelous job of merchandising. 

The best example is the Pate Oil Co., of Milwaukee, who entered 
the business in 1933 in the depth of the depression. 

The Vice Chairman. Are they refiners? 

Mr. Schuh. No; they are a jobber, handling some of Anderson- 
Prichard's materials, and Pate today in 5 or 6 years has some of the 
nicest stations in Milwaukee and is selling a good volume of gasoline. 

The Vice Chairman. He sells it as Pate? 

Mr. Schuh. He sells it as Pate for this Anderson-Prichard re- 

The Vice Chairman. Now, the person going down the road who 
wants to get some gasoline, there is some place he wants to go and 
he wants to be pretty sure he gets there, ordinarily would he buy 
gasoline unless he knew its quality? I think we had better put it 
this way : Would he buy gasoline except gasoline that is sold under 
a trade name that is known to him and which is believed by him to 
be a good gasoline? 

Mr. Schuh. I think I can answer that this way. If you came to 
Milwaukee and drove down the street and saw a Pate station, you 
probably wouldn't go there, but living in Milwaukee and knowing 
the Pate Co. and listening to their radio program on the air, a local 


program, I, if I wasn't in the business, wouldn't hesitate U\ buy from 
Pate because by reputation he has established a good niime. 

The Vice Chairman. Is it possible for any agency to prescribe. the 
essential elements of quality which makes a material a good gasoline 
and see to it that whoever does produce that gasoline of that quality 
shall have something to indicate that he does have that sort of 
gasoline, and which would inspire confidence in the general public 
to buy ? Is my question too involved ? 

Mr. ScHUH. No, no; it has been tried. It has been tried in both 
South Carolina and Utah. I don't believe that it is very successful. 

The Vice Chairman. Is it because of a lack of confidence in the 
agency of inspection and supervision ? 

Mr. ScHUH^ I. think a lot would depend on that. I entered one of 
these testing laboratories and one of the most delicate machines that 
are manufactured by the Waukesha Motor Co. to test gasoline was in 
the same room they were testing concrete in, and the jar and the 
jolt — I don't see how they would get an accurate reading off this 

The Vice Chairman. Your criticism is with reference to the me- 
chanics of the thing, with reference to how they proceeded about it? 

Mr. ScHXTH. Theoretically, I think it is a good idea. 

The Vice Chairman. But it hasn't been worked out practically^ 

Mr. SoHUH. We introduced a bill in Wisconsin m 1933 or '34 to 
establish grading, and withdrew it because we couldn't find any way 
of ascertaining or making certain that the agency set up to grade 
would have the proper information to go on. Since that has been 
developed a little bit, it may be in 10 years we will have the Federal 
Government sending out a set of specifications and material for 
State laboratories to go on. Maybe that is coming. It looks to me 
like a good idea but practically it hasn't worked out to my satis- 

The Vice Chairman. So you don't think in dealing with this gen- 
eral problem there is much to be expected from that source? 

Mr. ScHUH. I would say, Mr. Congressman, that because inspec- 
tions will show that each company is vieing with the other to put out 
a better brand of gasoline, they are doing the best job of grading that 
I know of. Everyone is trying to get a better gasoline so they can 
say Socony is better than Esso, and Shell is better than Socony, 

The Vice Chairman (interposing). That leaves the little man out 
of the picture. How can he do that, as a practical proposition? How 
can a small manufacturer do that ? 

Mr. Schtjh. I saw a sample of gasoline taken out of the new Illinois 
field and the specifications pretty nearly knocked me off the chair. 
Here was just a small refiner, I think he almost had what we call a 
tea-kettle, refinery, turning out some A' No. 1 gasoline. 

The Vice CiIairman. How does the man going down the road by 
his place, coming from California, know that is a good gasoline to 
put in his car when he wants to come to Washington ? 

Mr. Schuh. Hie can determine that by the establishment that sells 
it, by the Appearance of the establishment that sells it. 

The Vice Chairman. How would a man coming from California 
know by looking at the station that that is the place where he could 
^et good gasoline? All he knows is, his wife says, "There's a gaso- 
line station, let's stop and get some." 


Mr. ScHTTH. If he has an attractive looking place and is attempt- 
ing to do everything to satisfy the tourist and do a good job, he 
would naturally have good gasoline or lose what business he has. 

The Vice Chairman. Not if he caught every sucker that came 
down the road, 

Mr. ScHUH. You can't, because if you come into my place and buy 
good gasoline and you drive, on for 10 blocks you know whether you 
got good gasoline, and if you didn't, you will never stop at Schuh's 

The Vice Chairman. I have understood in my State, whether it 
is true or not, that some of the small manufacturers in East Texas 
have made a pretty good gasoline but it is always classified as East 
Texas gasoline, and if that goes into general consumption it has to 
clear through one of the major companies that have an established 

Mr. ScHUH. No; I am somewhat familiar with that. 

The Vice Chairman. I imagine you are and that is why I am 
asking you these questions. 

Mr. Schuh. I have encouraged the East Texas refiners, in order 
to get a better price for their product, to sell it under one brand 
name, and many of them are now doing that under the Dixie brand. 
I know many of those people there, and that has been a serious 
problem because of the inability to get a reasonable price for that 

The Vice Chairman. You think that that holds some hope for 
those independent refiners? 

Mr. Schuh. The Dixie Jobber, Inc., which is a wide organiza- 
tion — and I have always admired them — are doing a splendid job. 

The Vice Chairman. I don't think we had better go any further. 
It is getting pretty late. 

Dr. LuBiN. I would like to ask just a question. I take it from 
your statement, Mr. Schuh, that so far as you are concerned, you feel 
that coijipetition in the disposition of gasoline should be based 
primarily on quality, and that the man who puts out the better 
brands will get the business away from somebody else and that there 
is competition in the industry to force improvement of product. 

Mr. Schuh. There is a stiff race for quality. 

Dr. LuBiN. Did you ever hear of the exchange of gasoline between 
major companies? 

Mr. Schuh. Yes. 

Dr. LuBiN. What advantage, then, is this quality business if there 
is exchange of gasoline sold under different brands at different 
pumps and the product being identical ? 

Mr. Schuh. I am not familiar with any particular exchanges. I 
know that in certain instances I have heard of where it is reproc- 
essed. Otherwise it is made to specification, which is very often 
done. My company — that is, the company whose product I sell — 
buys a great deal of third-grade — at least they used to — and they 
have a superior third-grade because their specifications that they 
issue to the companying making it for them compel it to be a superior 

Dr. LuBiN. But have you ever heard of company A gas being sold 
in company B tanks? 

Mr.-' Schuh. Not in just that way. 


Dr. LuBiN. You never have heard of that being done? The rea- 
son I raise that question is that the president of one of the large oil 
companies, which has. a very large refinery, told us that this question 
of advertising qualities is somewhat exaggerated, that as a matter 
of fact the same gas may not be good for two cars produced by the 
identical producer in the same year, that there are such tremendous 
variations in cars and in motors that it is absurd to say that brand A 
is the kind of gas that you need for your car. That, from an expert 
in the industry, a refiner himself, contradicts your statement rela- 
tive to the competitive situation so far as the retail dealers are 

Mr. ScHuH. Well, I certainly don't want to contradict him, but I 
can't feel that I should push mj product feeling that it is merely as 
good as somebody else's. That isn't salesmanship. 

Dr. LuBiN. In other words, as far as the consumer is concerned 
there is little difference what he gets, it is a question of salesmanship. 

Mr. ScHUH. I think a great deal. In my hfeart I honestly feel 
that the gasoline I sell is better. 

Dr. LuBiN. I would like to ask one further question which bears 
upon the question asked you by the chairman. If I went into the 
business or if I were in the refining business and wanted to develop a 
market, and decided to set aside $100,000 this year to expand my 
market, and decided to do it by making additions to stations, poten- 
tial distributors, and you were in the same business, but you decided 
that you wanted to expand your ^Msiness but you wouldn't do it that 
way, you would spend that $100,000 on sales talks and advertising 
and post cards, is one less fair than the other, in terms of fair com- 
petition ? 

Mr. SoHUH. I think one is less fair than the other because when 
you loan me money to improve my station you tie me up hand and 
foot and I can't quit you when I want to. 

Dr. LuBiN. Let's assume I give you free services instead of loan- 
ing you money. 

Mr. ScHUH. Well, within reason I don't believe — for instance, if 
you said, "Well, I will supply you a man to comb this neighborhood 
for you and call on customers to come to buy from you," I don't 
think that would be any more unfair than the other company hold- 
ing sales meetings and clinics and so forth. 

Dr. Ltjbin. Well, let's as ume that I said, "I will put these new 
tanks in for you under Vciy reasonable conditions," new pumps, 
rather, is that less fair? 

Mr. ScHUH. Well, those -reasonable conditions might bind sooner 
or later. There is a tendency to tie the dealer up, and the minute 
that you tie a dealer up you start to restrict competition, and when 
you start to restrict competition the tendency is then to retract and 
have a dealer tied up and give him nothing. 

Dr. LuBiN. Then the unfair part is not furnishing the services 
but, having furnished them, taking advantage of them. 

Mr. ScHUH. I think it is, a chain. 

Dr. LuBiN. Well, I am trying to figure out what you mean by 
fair conipetition. Apparently if I spend my money one way on my 
dealers it is fair and if I spend it another way, assuming that I am 
equally straight and I have no intention or desire to tie them up, 
why is it less fair to do it that way than it is your way? You are 


against price competition, you are against servicu, competition. I am 
trying to find out what kind of competition you are for. 

Mr. ScHUH. I am not against price competition, excepting that it 
should be in the open j it should be right out where everybody could 
see it. I can make a deal in Milwaukee with one of the jobbers and 
get a half a cent better than I am getting now ; and if I am very sharp 
and a good chiseler, I could get some more, and that is prevailing all 
the time ; but as long as he does it openly, I don't find anything wrong 
with it, because the other fellow will meet it. 

Mr. O'CoNNELL. You mean you have no objection to price cutting 
by retail outlet or jobbers so long as it is according to a posted price. 

Mr. ScHUH. That is right. 

Mr. O'CoNNELL. You mean that a price cutter is not a price cutter 
in your view so long as he does it openly ? 

Mr. ScHUH. Excepting as we term — it is a term to me. It really 
doesn't mean what it says. I should use the term "unbranded" — who 
always cut the price. 

Mr. O'CoNNELL. Is that all right? 

Mr. ScHUH. It is all right. They have a place in the picture. The 
independent refiner has to sell his merchandise, and as long as he is 
within reason and doesn't try to take all the business. 

Mr. O'CoNNELL. That is what I want to understand. When does 
*he stop being within reason ? I take it a person who would cut prices 
or undersell you or another dealer would be doing it for the purpose 
of getting ♦more of the business. When should he stop? Are you 
entitled to a share of the business ? 

Mr. ScHUH. I have got to fight for it. 

Mr. O'CoNNELL. I know ; that is right. 

Mr. ScHUH. And- as long as I can hold mine against a fair price, 
all right. 

Mr. O'CoNNELL. When does he become unfair? When does it be- 
come unfair for him to compete on a price basis? You say so long 
as he doesn't take too much of the business. 

Mr. ScHUH. Let's get practical. The Clarke Oil Co. in Milwaukee 
since 1931 has come from nowhere, one little station, to third position 
by cutting price. He is the third largest distributor in the city of 
Milwaukee. He will push Standard and Socony- Vacuum off that 
pedestal if they don't look out. I think, obviously, the fellow is 
foolish, because he is just trying to get too much business. 

Dr. LuBiN. Apparently he is making money by the deal; he is 
building stations. 

Dr. ScHTjH. Yes; he is making money. 

Dr. LuBiN. What is unfair about it? 

Mr. ScHUH. Sooner or later some place he is going to trip and fall. 

Dr. LuBiN. That is going to be his hard luck; but in terms of fair 
competition, what is unfair about it ? 

Mr. ScHUH. In every instance he built a station kitty-corner to two 
or three established stations, and he cut the price until some of those 
fellows -have gone bankrupt. When you cause that, I think that isn't 
clean competition. 

Dr. Ltjbin. In other words, you think that nobody should charge 
less than enough to keep everybody in business. 

Mr. SchuhT No. 

Dr. LuBiN. Where do we draw the line? 


Mr. ScHUH. A fair price. 

Dr. LuBiN. Apparently his price is fair ; he is making good profits. 

Mr. ScHUH. No ; it is only fair because he has been able to grab the 
volume by adopting the methods that I describe. 

Dr. LuBiN. What is the function of business, of the businessman? 
It is to increase his output and increase his volume, isn't it, and if you 
can do it cheaper than the other fellow and still do it at a profit so 
that you are not taking unfair advantage of the other fellow in the 
sense that you make it impossible for him to make a profit because you 
are willing to forego a profit, what is unfair about it? Isn't that the 
essential of a modem business scheme? Isn't that the essential of a 
competitive system and private enterprise? Are you advocating we 
change our whole competitive system and eliminate it ? 

Mr. ScHUH. No. 

Dr. LuBiN. What would you substitute for it? 

Mr. ScuuH. I wouldn't substitute anything for it, but in this par- 
ticular instance, if the companies had given us a competitive price, 
that is, had given us a price that we could pay, this man wouldn't have 
made the progress that he has made. 

Dr. LuBiN. Couldn't you have gone out and done the same thing 
he did? ^ 

Mr. ScHUH. Yes. 

Dr. LuBiN. What is unfair about this? 

Mi". ScHUH. Because I don't think, in my opinion, that it is fair. 

Dr. LuBiN. What is unfair? What is your criterion of unfairness? 
What is your test? 

Mr. ScHUH. My criterion of fairness is to be reasonable and not to 
take advantage of your fellow businessman. 

Dr. LuBiN, In other words, you are unreasonable if you want to 
make a profit. 

Mr. ScHUH. No. I think you are entitled to a profit. 

Dr. LuBiN. You are unreasonable if you are unwilling to make the 
maximum profit. 

Mr. ScHUH. No. 

Dr. LuBiisr. Then what is your test of reasonableness ? 

Mr. ScHUH. Your test of reasonableness is being fair about the 
prices that you establish. 

Dr. LuBiN. What is the test of fairness? 

Mr. ScHUH. Well, in many cases they stay a cent below us. 

Dr. LuBiN. But what is unfair about staying a cent below you if 
he can sell the product a cent cheaper than you can and still make 
money in the process ? 

Mr. ScHUH. They claim that they are entitled to a- differential be- 
cause they haven't an advertised product. Let me say this. This 
whole question has been argued and reargued both by the Petroleum 
Administrative Board and by the code committee, and Mr. Ickes finally 
decided that they are entitled to a half a cent. 

Mr O'CoNNELL. Obviously the whole problem is far from being 
solved, but you have suggested, or at least you have taken a position, 
and it IS to my mmd a little bit difficult to be very realistic and take 
the sort of position you have taken. I mean, what is reasonable 
and what is a fair price? That has very little to do with the com- 
petitive system. 


The Chairman. Don't cut the prices so far as to drive anybody out 
of business. Now that is what you are driving at, isn't it? 

Mr, ScHUH. Not quite. I think somebody should be driven out of 
business, and that is the type of fellow that sits on his seat and is 
too lazy to work. 

The Chairman. But you would have somebody in charge of a 
modified cartel who would decide which ones would be driven out, and 
which ones would not? 

Mr. ScHUH. I don't believe in that. 

Dr. LuBiN. May I ask a final question? You were president of 
this association for how many years? 

Mr. ScHtJH. From 1934 until September of this year. 

Dr. LuBiN. What salary did you receive as president? 

Mr. ScHUH. Nothing up until January 1, 1938, and from January 
1, 1938, until — there is an argument as to whether I am going to get 
paid for the last 2 months — I received enough to replace a man at 
my station, or $100 a month. 

Dr. Ltjbin. Did you have a travel account, expense account to 
travel on? 

Mr. ScHUH. No; no definite account. 

Dr. Ltjbin. You just traveled at the expense of the Association? 

Mr. ScHUH. Of the Association. I would like to add to clear this 

•thing up that I am definitely on i^ecord urging the dealers to keep 

their prices low enough to be competitive. That they had to recognize 

this competition that I was telling you about, and come as close to 

it as they possibly could. 

Dr. Ltjbin. How can you be competitive without taking business 
away from the other fellow? 

Mr. ScHTjii. Well, we always lose business; we always gain busi- 

Dr. Ltjbin. Certainly, but if I didn't go into business you would 
lose less, wouldn't you. Because I came in and became a competitor 
I either took some existing business away from you or limited the 
possibility of your getting more business as it expanded. That is the 
function of the competitive system? 

Mr. ScHUH. That is right. I would like to say this, that strictly 
speaking, under the competitive system your rugged individualist, and 
I don't claim to be a rugged individualist 

Dr. Ltjbin (interposing). He has been dead for years. 

Mr. ScHUH. No; I don't believe so; I have seen him in operation 

The Chairman. Let me call the attention of members of the com- 
mittee to the hands of the clock. 

Mr. Shaughnesst. I think I know what Mr. Schuh means by unfair. 

The Chairman. Proceed ; let us have it ; that would be illuminating. 

Mr. Shaughnesst. This unbranded price-cutter, you don't dare 
meet him because all the other branded distributors or dealers will 
come down to meet you. so yon are in a position where your hands are 
tied, unless yon tolerate him? 

Mr. Schtjh. That is right. 

Mr. Shaughnesst. O. K. 

Mr. Cox. May I ask one question ? 

The Chairman. Yes, indeed, Mr. Cox. 


Mr. Cox. Am I to understand from your statement this morning, 
Mr. Schuh, that you regard the bylaws of your association as violated 
if the member gives vohmtary information to the Department of Jus- 
tice or some other governmental agency without first consulting the 
national organization? 

Mr. Schuh. That question is so general that I would have to qual- 
ify it. 

Mr. Cox. Well, look at page 11 of your statement, the item 5 there 
says "Cease giving voluntary information to the Department of Jus- 
tice," and you say — 

As I have already stated, I indicated that if they wanted to complain to the 
Department of Justice or to anyone else as to problems arising in Kansas City, 
the rule of the national association was that they should come first to us and 
then if we couldn't help them, they were free to make their comi»laint elsewhere. 

Mr. Schuh. Well, that was merely to prevent a lot of half-baked 
stuff coming up to the Department of Justice. 

Mr. Cox. Well, does your bylaw recognize any distinction between a 
complaint to the Department and merely giving voluntary informa- 
tion to the Department on the Department's request ? 

Mr. ScHiJH. If the department requested information, by all means 
it should be given. There has never in our association's history — 
have we ever thought of turning down information requested or help 
that, was requested. 

Mr. Cox. Is it all right for a local organization to give it? 

Mr. ScHUH. Yes, anybody; that is perfectly all right. 

Mr. Cox. So you didn't mean here that it was any violation of the 
bjdaws when volunteer information was given in response to a request 
by the department ? 

Mr. Schuh. That is right, but where it was volunteered and in this 
pavticular instance they didn't know what they were talking about, we 
thought it was asinine to bother. 

Mr. Cox. Now one more question. I suppose it is your opinion that 
the tank-wagon price in Kansas Citv is a competitive price, is it, Mr. 

Mr. ScHUH. Well, no. 

Mr. Cox. You think it is not a competitive price ? 

Mr. ScHUH. It is not a competitive price. 

Mr. Cox. You mean by prices fixed by someone? 

Mr. ScHUH. No ; it is not a low enough price. 

Mr. Cox. Well, what I am asking specifically is this, do you think 
any one person or any combination of persons fiies that tank-wagon 
price ? 

Mr. Schuh. No. 

Mr. Cox. Is it controlled by economic forces? 

Mr, Schuh. Yes. 

Mr. Cox. Then why did you suggest Ihat the reason you wanted 
the Kansas City Association to stop acnsi ng the major oil companies 
of monopolistic practice was because if they didn't stop they couldn't 
expect any reduction from the major oilcompanies in tank-wagon 
prices ? 

Mr. Schuh. Well, because of the situations arising in the oil fields 
and, as I say, the vicious price competition that the dealers had ; the 
companies sat by and let these poor dealers go with the high tank- 


wagon price, expecting them to live and meet a competitive situation 
that the companies should have recognized. 

Mr. Cox. Was it your opinion that the major companies could 
control their tank-wagon price in any way? 

Mr. ScHUH, Well, if the Socony-Vacuum is charging me too much 
money and I go down to point out to them I have got to have a lower 
price and they reduce it, they are an appreciable factor in the market 
and the other companies have got to follow. 

Mr. Cox. In that event, then, it wouldn't really make any differ- 
ence whether they stopped accusing the major oil companies of being 
monopolistic, if that tank price operated that way in response to 
competitive conditions they could get it anyway. 

Mr. ScHUH. Most dealers were afraid to approach the suppliers 
because of what the association was doing. 

Mr. Cox. You mean these harsh words they were speaking didn't 
scare the majors but they scared the other retailers. 

Mr. ScHUH. Many of them were concerned about it. 

The Chairman. There are no other questions? 

Mr. Schuh, you may step aside. The committee has finished with 
your examination. 

The Chair will announce that there are three additional sessions, as 
it were, of this committee. Tomorrow afternoon at 2 : 15 the com- 
mittee will hear some representatives of the National Resources 
Planning Board. This was at the request of the representatives of 
che Department of Commerce. On Friday morning at 10 : 15 we shall 
begin the testimony of Mr. Del Sesto. The committee will then 
recess over the week end and on Monday Mr. Farish, president of the 
Standard Oil of New Jersey will be the witness, provided we finish 
our examinations. 

The committee is now in recess until 2 : 15 tomorrow. 

(Whereupon at 5 : 40 p. m. the committee recessed until 2:15 p. m. 
Thursday, October 19, 1939.) 



United States Senate, 
Temporary National Economic Committee, 

Washington^ D. G. 

The committee met at 2:25 p. m., pursuant to adjourimient or 
Wednesday, October 18, 1939, in the Caucus Room, Senate Office 
Building, Senator Joseph C. O'Mahoney presiding. 

Present: Senator O'Mahoney (chairman) ; Representative Sumners 
(vice chairman); Senator King; Representative Williams; Messrs. 
O'Connell, Henderson, and Brackett. 

Present also : Clarence Avildsen and Robert McConnell, represent- 
ing the Department of Commerce ; Quinn Shaughnessy, representing 
the Securities and Exchange Commission; Representative Mapes 
(Michigan) ; W. B. Watson Snyder, F. E. Berquist, Hugh Cox, Chris- 
topher Del Sesto, special assistants to the Attorney General ; Roy C. 
Cook and Leo Finn, Department of Justice. 

The Chairman, The committee will please come to order. 

During the testimony several days ago of Mr. Orvis ^ there was pre- 
sented a letter from M. H. Champion, president of the Petroleum Rail 
Shippers Association. This was one of numerous communications 
which the committee felt should not be admitted to the record until 
authenticated by some person who had either written or received it. 

The committee is now in receipt of an authentication of this letter, 
transmitted by Mr. Champion to Secretary Brackett. Without objec- 
tion, therefore, the original letter and the letter of authentication, to- 
gether with the affidavit of Mr. Champion, will be received for the 

(The letter and authentication referred to were marked "Exhibit 
No. 1309" and are included in Hearings, Part 16, appendix, p. 9368.) 

The Chairman. This afternoon the committee is to hear a presen- 
tation on behalf of the National Resources Planning Board, with 
Mr. Watkins speaking first. It has been our custom to swear the wit- 
nesses. Do you and each of you solemnly swear 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 ? 

1 Eugene Orvis, attorney, Jersey City, N. J., whose testimony on transportation prac- 
tices in tlie industry appears in Hearings, Parts 15 and 16. 




Mr. Watkins. I do. 

Mr. McLaughlin. I do. 

Mr. Cattelx,. I do. 

Mr. Stabler. I do. 

The Chairman. You may proceed, Mr. Watkins. 

Mr. Watkins. Is it customary, Mr. Chairman, to identify one's self? 

The Chairman. Oh, yes. 

Mr. Watkins. My name is Ralph J. Watkins. I am economic ad- 
viser on the staff of the National Resources Planning Board. I 
directed for the National Resources Committee last year the study 
which has recently been published as House Document No. 160, under 
the title "Energy Resources and National Policy," a study which was 
concerned with conservation and wise use of the Nation s energy re- 
sources — coal, oil, gas, and water power primarily. 

I am an economist by training and a research director by experience. 
I am a graduate of the University of Texas. I did my graduate 
work at Columbia University thereafter, and for the past 10 years 
or so I have been engaged in the direction of economic research, and I 
have just mentioned a little while ago my direction of the study of 
the National Resources Committee, which, as you know, is now the 
National Resources Planning Board. 

Mr. Henderson. You directed the two- volume study of the iron 
and steel industry also, did you not ? 

Mr. Watkins. Yes; I also directed — while at the University of 
Pittsburgh as director of the Bureau of Business Research there — the 
two- volume, or, rather, I should, say, a study of the economics of the 
iron and steel industry, which was published in two volumes in 1937 
under that title. 

At the outset, Mr. Chairman, I wish to say that I am appearing here 
at the request of the Department of Commerce transmitted through 
Mr. Robert E. McConnell, who, I believe, is sitting with the committee. 
Several nveeks ago a report of the National Resources Committee was 
published under the title Energy Resources and National Policy, 
House Document No. 160, Seventy-sixth Congress, first session. This 
study was made at the request of the President, and its purpose was 
concerned with the public interest in the conservation or wise use of 
the Nation's energy resources, chiefly coal, oil, natural gas, and water 
power. This study was conducted during 1938, under my direction. 
Because of the bearing of certa a parts of that report on the present 
petroleum investigation by the Temporary National Economic Com- 
mittee the Department of Commerce through Mr. McConnell re- 


quested the National Resources Planning Board to have me organize 
a brief presentation to this committee on waste and conservation in 
the petroleum industry, in relation to the subject of this inquiry. 

It has seemed best to have this subject discussed by a petroleum 
engineer, by an economist, and by a representative of the Geological 

Accordingly, 1 have arranged to. have the economic aspects dis- 
cussed by Mr. Glenn E. McLaughlin, who is now assistant professor 
of economics. Hunter College, of the city of New York. Mr. Mc- 
Laughlin prepared the chapters on economic analysis of the oil and 
gas industries, in the energy resources study to which reference has 
been made. Through the cooperation of the Secretary of the Interior, 
Mr. R. A. Cattell, chief engineer. Petroleum and Natural Gas Di- 
vision, Bureau of Mines, will discuss the engineering aspects of waste 
and conservation in the industry. 

I may say that Mr. Cattell will follow me; Mr. McLaughlin will 
then come third. 

Mr. Cattell is joint author of the chapter on Phases of Technology 
in the Petroleum Industry in the Energy Resources Study. Likewise, 
through the cooperation of the Secretary of the Interior, Mr. Herman 
Stabler, , chief of the conservation branch, United States Geological 
Survey, will discuss the conservation of petroleum on the public do- 
main and the Indian lands. And, Mr. Chairman, in justice to my 
associates in this undertaking and in justice to myself, I think it 
ought to be said that this presentation is very much of a rush order. 
We had yesterday and this morning to prepare this testimony, and I 
hope you will bear with us if it seems to be lacking in some of the 
earmarks of the ordinary scholarly presentation. 

Senator King. I think we should prefer more of a factual presen- 
tation, perhaps, than a highly scholarly one. 

Mr. Watkins. I might say we have not followed the usual pr- 'cess 
of documenting every statement that we have made in this testimony, 
but in general .the factual statements which I make and the factual 
statements which Mr. McLaughlin makes are taken from the cited 
Energy Resources Stud;^; the statements which Mr. Cattell will make 
come from various publications of ihe Bureau of Mines which he has 

It will, I think, be apparent to the Temporary i^ational Economic 
Committee as the testimony proceeds that these problems of waste 
and conservation are intimately related to the subject of your inquiry 
into the economic organization of the petroleum industry. In fact, 
it may be stated that these problems inhere in the industry's eco- 
nomic organization. In turn, this economic organization of the 
industry has its necessary setting within the framework of certain 
legal principles and institutions, including the rule of capture. No 
individual oil company, nor any group of oil companies, can be 
blamed for the major waste that obtains in this industry. Rather, it 
must be said that the problem is, much more deep-seated and that 
it will yield to a solution only as changes are made in the industry's 
economic and legal pattern. 

My own remarks will be limited to a brief statement on the public 
interest in conservation in the petroleum industry, and I may say, 
Mr. Chairman,^ that my statement will run to about 10 to 12 minutes 

124491— 40— pt. 17, sec. 4 10 


and each of the remaining three speakers will take about 30 minutes, 
if that is your pleasure. 
The Chairman. That is quite all right. 


Mr. Watkins. Let me say first of all that it was the iud^ent of 
the National Resources Committee that conservation in this industry 
means scientific management of oil and gas pools. The committee 
noted that in many States the courts have already modified the rule 
of capture so that a landowner can recover only a certain amount of 
oil within a given period. 

(Representative Sumners assumed the Chair.) 

Mr. Watkins. Although the right of capture has been modified 
somewhat, it needs, in the words of the committee, to be completely 
displaced by a thoroughgoing law of ownership in place, which would 
allot to each producer that proportion of the oil and gas in the com- 
mon reservoir which underlies the land he owns or controls. The 
committee concluded that the economic advantages of unit operation 
and scientific management of oil and ^as pools are so overwhelming 
and so generally approved by technicians that some legal device of 
providing for their adoption and enforcement will surely be forth- 
coming as the threat of exhaustion becomes imminent. It should be 
made clear at this stage that conservation of petroleum does not me^n 
•abstinence from use, or hoarding. Rather, conservation means wise 
use; that is, the efficient use of our petroleum resources in the interest 
of the national welfare, the avoidance of unnecessary waste in pro- 
duction and utilization, and the safe^arding in economic health of 
the industries and pwDpulations on which we rely for the development 
of this vital resource. 

It has been brought out in this investigation of the Temporary 
National Economic Committee that proven reserves of petroleum in 
natural reservoirs have been estimated recently at somewhat more 
than 17 billion barrels, in comparison with 1938 production of 
approximately li/4 billion barrels. 

Senator King. Was there any prophecy made, or any guess made 
as to the unproven fields and the possibility of production there and 
the amount of production ? 

Mr. Watkins. I do not know of any which should receive the 
attention of the committee. 

Likewise, that cumulative production through 1938 has amounted 
to 21 billion barrels. To secure that ' production of oil, almbst 
1 million oil wells have been drilled in the United States, of which 
about 360,000 are now producing. Your committee has heard various 
estimates of the loss of capital represented by the excessive drilling 
of oil wells and likewise estimates of the loss of irreplaceable natural 
resources through dissipation of reservoir energy and through various 
wasteful methods of production which have resulted in a lower 

Percentage of recovery of petroleum deposits than could be obtained 
y application of the best engineering methods. I am not in position 
to estimate the full extent of such losses and wastes, but it appears 
from the testimony you have already heard and from that which 
you will hear at this session that the amount is sufficiently high to 
challenge the best efforts at prevention by both the industry and 
State and National agencies. 


For example, I understand tliat one of your witnesses has esti 
mated that 21,000 out of the first 24,000 wells drilled in the East 
Texas field were unnecessary and resulted in a capital loss of 300 
million doUars. If, however, we assume that onlyi half of the 
60,000 wells drilled in the United States during 1937-38 were excess 
wells, then we secure an estimated Ipss of capital of $300,000,000 a 
year, calculating the cost of an average well at $20,000. No allowance 
is made here for the loss of operating and maintenance costs on 
these assumed excess wells. To continue with this series of assump- 
tions — if we assume that the general or universal application of the 
best engineering methods would raise the ultimate recovery per- 
centage by one-half (e. g. from 30 to 45 percent) , then at the 1937-38 
production level of somewhat more than 1,200 million barrels a year 
the ultimate saving would amount to about 600 million barrels. The 
discount to secure present value of this saving to be realized' in the 
future might well be offset by the increased value of this resource 
as the rate of depletion advances. If so, may we value this hypo- 
thetical saving at around 600 millions of dollars. It is at least sug- 
gestive and provocative to raise these questions. If these assumptions 
are reasonable — and it must be emphasized again that they are as- 
sumptions resting largely on conjecture — they suggest a waste annu- 
ally of perhaps a billion dollars. If the actual waste is only one-half 
of that figure, the problem is a grave one. Even if the actual waste 
is only one-tenth of a billion — and I do not believe anyone would 
place it so low — there is still a serious problem. And let me say 
that if we must assess blame f9r this waste, then logic requires that 
we blame it on ourselves collectively; that is, on government, in- 
cluding the courts, since government is responsible for the legal 
framework within which the industry's economic organization must 
perforce find its setting. 

From the evidence reviewed in the study by the National Resources 
Committee, it appeared beyond argument to the committee that the 
Nation's patrimony in petroleum resources should be safeguarded, 
that a sound national policy must be concerned with the wise use oi 
this resource. The committee likewise took that position with respect 
to coal, oil, natural gas, and water power. And it may be of some 
interest to note that the committee recommended that conservation 
or wise use of coal should be promoted even though the reserves of 
coal have been estunated at more than 2,500 billion net tons of 
equivalent bituminous coal, in comparison with petroleum in proven 
natural reservoirs amounting to the equivalent of only 4 billion net 
tons of bituminous coal and natural gas reserves of similar equivalence 
of about 4 billion net tons of bituminous coal. The dependence of 
our civilization on low-cost liquid fuels and lubricants is so great 
that we simply cannot afford not to concern ourselves with the wise 
use of this resource. The committee pointed out that the rank of 
petroleum as a source of energy, its vital importance in national 
defense, its vulnerability to wasteful forces in exploitation, and its 
comparatively small reserve in relation to the high rate of with- 
drawal, place this commodity in a unique position among the natural 

It was noted by the committee that the interest of the public in 
petroleum revolves around the central probleixi of maintaining an 
adequate supply at a reasonable price as long as possible. , The Na- 


tional Resources Committee's reconmiendations with respect to pe- 
troleum were made in accordance with that public interest. Thus, 
the committee reconmiended that the Federal Government should 
cooperate with the oil-producing States and the petroleum industry 
in the establishment of minimum standards for production designed 
to prevent waste and assure wise use of this unique resource. It was 
reiterated by the committee that the purpose of such standards should 
be to secure the benefits of a continuous stream of reasonably priced 
liquid fuels for as long a period as possible for the national defense, 
for the people as a whole, and for all the States both oil producing 
and nonoil producing. The committee felt that the change from the 
present system does not need to be drastic, although more uniformity 
and better coordination are imperative. It was recognized also that 
the development of minimum standards for the production of oil 
and gas designed to further the wise use of these resources is a 
complex problem; and that it would be a time-consuming process 
which would call for cooperation with State regulatory agencies and 
with the representatives of the industry. 

It is believed that we are depleting our reserves of oil faster than 
the rest of the world. Available evidence shows that we have ac- 
counted for about 60 percent of the cumulative production of petro- 
leum in the world, whereas our reserves amount to about 50 percent 
of proVen world reserves. Moreover, it is probably true that our 
resources have been more adequately explored than have those of 
many other oil-producing regions. Consequently, we must consider 
the possibility of being first among the oil-producing nations to feel 
the pinch of approaching depletion. It is, of course, true that, after 
our natural reservoir oil is exhausted or after the shortage becomes 
serious, we can turn to oil produced from coal, to oil-bearing rock or 
shale, or to a limited extent to alcohol from vegetable matter. But 
liquid fuel is available from these processes only at much higher 
costs. Consequently, although we need not be alarmed over the pos- 
sible break-down of our motorized civilization, we may well concerii 
ourselves over the higher costs that we should have to pay after 
exhaustion of our natural reservoir oil. The protection of that re- 
source, the elimination of avoidable waste, and the assurance of wise 
use of that unique resource are tasks worthy of the best cooperative 
efforts of the petroleum industry, the oil-producing States, and the 
Federal Government. It seemed clear to the National Resources 
Committee in its Energ;^ Resources Study that grave waste of this 
irreplaceable resource will not long fee tolerated by an intelligent 

The Vice Chairman. Thank you very much. Doctor. Now I won- 
der in the testimony that is to be given by the gentlemen who will 
follow you if they will discuss ways and means to any considerable 
degree. I hope they will, as one member of the committee. 

We, of the committee, know pretty generally that there are too 
many oil wells, and we know pretty generally that there is leakage 
flow from one part of a field to the other, and we know gas is 
being dissipated in the air. We know all that. Now what we want 
to do is to get some usable information as to ways and means — I do 
as one member of the committee, and I think my colleagues with me. 

Mr. Watkins. The next witness, Mr. Cattell, of the Bureau of 
Mines, will discuss the engineering prospects of this problem of ways 


and means of conservation. The third witness, Mr. McLaughlin, will 
discuss the economic aspects in which he will take up specific measures 
and discuss such things as unit operation ; so will Mr. Cattell, I might 
add. And finally, Mr. Stabler will discuss ways and means that have 
actually been employed and are being employed on the public domain, 
so I think we will get down to cases. 

The Vice Chaibmak. Thank you very much. 

(Senator O'Mahoney resumed the Chair.) 

The Chairman. And Mr. Cattell is the next witness? 

Mr. Cattell. R. A. Cattell, chief engineer, Petroleum and Natural 
Gas Division, Bureau of Mines. 

Dr. Watkins has told you of the short notice we had for the prep- 
aration of this material. We didn't know about this hearing until 
Tuesday evening. Yesterday afternoon I was asked to include mate- 
rial on unit operation. Members of my oflBce gathered some mate- 
rial together in a short time. 

The statement I have prepared is too long because there wasn't 
time to make it shorter. With your permission as I go through it, I 
shall omit certain parts. Those parts will be available for the record 
if they are desired. 

The Chairman. That will be quite all right. If you desire, we 
will print the omitted parts in the record. 

Mr. Cattell. I have given a copy of the statement, as prepared, 
to the stenographer. 

(Mr. Cattell's prepared statement was marked "Exhibit No. 1310" 
and is included in the appendix on p. 9850.) 

engineering aspects of conservation 

Mr. Cattell. Conservation is a word that brings forth diverse 
views. The word means different things to different men. How- 
ever, few will disagree with the statement of Joseph A. Holmes, the 
first director of the Bureau of Mines, that conservation is a "wiser 
and more efficient use of natural resources." 

Any discussion of conservation involves a discussion of waste, for 
although these words are not exact antonyms, the apt statement has 
been made that "the antidote to waste is conservation." It ha? also 
been said that "what is apparently conservation in some cases is, in 
fact, profligate waste in others, and vice versa." 

Conceptions of waste change with time. In the early days of the 
industry, destruction of oil by fire or spillage on the ground and 
down the creeks were substantially the only wastes recognized. In 
fact, in the early days of barging on Oil Creek, when kerosene was 
the desired product, destruction of the gasoline fraction of the oil 
was not looked upon as waste. In those days little was known about 
underground wastes and virtually no attention was given to them. 
However, their importance gained recognition with the passage of 
time, and in 1921 thought concerning them was stimulated by a Bureau 
of Mines bulletin on Underground Conditions in Oil Fields. 

As domestic and industrial use of natural gas developed, waste of 
gas was looked upon as a regrettable loss of valuable fuel, but full 
realization that waste of natural gas results in loss of the agency for 
moving oil through the productive stratum and up the well came in 
relatively recent years, especially after publication in 1929 'of a 


treatise on the function of natural gas in the production of oil, pre- 
pared in the Bureau. 

Two sources of physical waste are now well recognized — above 
^ound or visible waste, and below ground or invisible waste — and 
it is recognized that in either of the above categories useless trans- 
formations of energy may be more important and represent a greater 
monetary loss than actual waste of the marketable substance. All 
who accept Dr. Holmes' definition of conservation will desire to mini- 
mize the quantity of oil left underground beyond recovery hy eco- 
nomical means, just as they will desire to avoid needless blowing of 
natural gas to the air, loss of oil by evaporation and accidental fires, 
or any other useless expenditure of assets. Those who hold to such 
principles also will desire to prevent wast<» of reservoir energy. 


Mr. Cattell. Probably the most significant trend of thought in oil 
and gas production is the growing realization that a producing struc- 
ture IS to be looked upon not only as a reservoir of oil and gas, but 
also as a reservoir of energy. Such energy, if properly conserved an^ 
used, will move the hydrocarbon fluids to the well and through it to 
the surface, delaying the time when energy must be supplied from 
external sources through gas or air injection, artificial water drive, the *\ V 
pump, or other means. It is well recognized now that effective use of ' \ 
the energy available from a natural petroleum reservoir will decrease ^ 
the ultimate cost of recovery and increase the quantity of hydrocar- 
bons that can be produced economically from the deposit. All who 
are aware of the fluid-energy attributes of a reservoir understand that 
dissipation of energy that could have performed effective ^ork in 
bringing oil froni the formation to the well, and thence to the surface, 
is contrary to efficient operation. 

The Vice Chairman. Would yoii permit a question, please? That 
is, whether or not, from an engineering standpoint, it might be ex- 
pected, even though more expensive, to recapture fi'om the land this 
oil that is left in the ground by reason of too great an escape of gas 
in proportion to the oil removed. 

Mr. Cattell. Much of it can be recovered. When you let the natu- 
ral gas — the gas originally in the reservoir — escape, you are reducing 
the pressure 

The Vice Chairman (interposing). We understand that, but my 
question was whether or not 

Mr. Cattell (interposing). Through air and gas injection, or 
through artificial water drive, oil can be recovered, but at much 
greater cost. In Europe they have gone so far as to mine the sands, 
and that can be done but at much greater cost. 

The Vice Chairman. My only question was whether or not you 
could recover it by some means, even though it is more expensive. 

Mr. Cattell. That is correct. 

The Vice Chairman. Thank you. 

Senator King. I suppose there would be some period where it would . 
be so diluted the cost would be too great. 

Mr. CATrELL. One hundred percent recovery can never be expected. 

Senator King. If the sands are pretty well drained and at great 
depth, the cost would be almost prohibitive, then, of recovering the 
mfirntesim^lly small percentage of oil still remaining. 


Mr. Cattell. The cost goes up as your reserye goes down, and it 
is just a question of how far you can go and stand the cost. 

In general, any action which reduces pressure within a reservoir 
causes a decrease in the energy useful for moving and lifting the 
fluid. Reduction of pressure may result from removal of water as 
well as from removal of oil and gas. Also a considerable decrease in 
usefulness of the energy may result from a change in the positioi^ of 
a fluid, without any suDstantial decrease in its pressure. 

The Vice Chairman. What is the explanation of that? 

Mr. Cattell. The explanation is coming in the next sentence. 

For example, a given quantity of natural gas that has moved from 
within an oil body on the flank of a structure to a position in a gas 
cap on its crest may have become much less useful for moving and 
lifting oil, althougli there may have been no substantial change in the 
pressure to which it is subjected. 


Mr. Cattell. To aid in developing a picture of the manner in which 
oil* and gas are removed from the rocks and to point out the im- 
portance of relations of reservoir energy to movement of the fluids, 
which for convenience we have called fluid-energy relations, it may be 
helpful to quote the following from a chapter H. C. Fowler and I pre- 
pared for Bureau of Mines Minerals Yearbook, 1934 : 

In principle the fluid-energy relations of petroleum properties are relatively 
simple, but in detail they may be extremely complex. To reduce the concept to 
its simplest terms, consider an undrilled oil-bearing geologic structure of an 
ideal or "textbook" type. Its productive bed is a stratum of porous rock of sub- 
stantially uniform texture, lying between two impervious strata, all arched into 
a dome. The strata are inclined downward, but with gradually increasing slope, 
from the crest of the dome to its periphery where they are substantially hori- 
zontal. From the periphery outward the beds are inclined upward, and at some 
point the porous stratum crops out at the surface. Assume for this discussion 
that enough water has entered and is retained in the porous bed to fill its voids to 
the lowest'poLnt of the outcrop. 

From the outcrop downward to the periphery of the dome and thence upward 
toward its crest to an oil-water contact the voids of the porous stratum are 
filled with water. Inward and upward from this oil-water contact the voids 
are filled with oil, which is lighter than water and therefore lies above it. This 
oil contains lighter hydrocarbons, of the range found in natural gas, in solution. 
This simple structure contains more of these lighter hydrocarbons than the oil 
will hold in solution at the existing pressure, so the porous stratum will not 
contain liquid in the higher central part of the dome. Instead, natural gas, 
which is much lighter than the oil, will occupy the voids of the porous bed 
above a gas-oil contact. Thus the structure will contain a so-called gas cap. 

This reservoir, until punctured by the drill, may be considered, for all practical 
purposes, to be in a state of equilibrium. Gravity is acting on "both the rocks 
and the fluids. 

At any level in the water-filled part of the porous bed the fluid is under 
pressure equivalent to a head of water from the lowest point of the outcrop 
to that level, and at any level in the oil-filled part of the porous stratum the oil 
is under a pressure equal to that at the oil-water contact minus the pressure 
exerted by the head of oil from the level in question to that contact. Likewise, 
at any point in the gas caj) the gas is under a pressure equal to that at the gtfs-oil 
contact minus the pressure due to the head of gas between that point anfl the 
gas-oil contact. 

It is apparent, therefore, that in such a virgin structure the forces are In 
balance. The water is pressing upward at the oil-water contact ; but its pressure 
IS counterbalanced by the pressure of the gas, acting at the gas-oil contact and 
transmitted through the oil, plus the pressure due to the head of oil between the 
two contacts. 


If a well is drilled into the oil-saturated part of the porous stratum and opened 
to a lower pressure, the forces are unbalanced. The oil surrounding the well, with 
the lighter hydrocarbons in solution, starts to flow toward the point of lower 
pressure at the well bore. As the prtessure on the oil is reduced some of the 
lighter hydrocarbons come out of solution, forming gas. This gas, in expanding 
toward the region of lower pressure, tends to push the fluid ahead of it toward 
the well, but some of the gas may by-pass the oil and move into the gas cap, doing 
little or no useful work. 

The Vice Chairman. Now, Doctor, how would this gas move from 
its distributed condition into this gas cap, if the gas cap was filled 
with gas pressing downward ? 

Mr. Cattexi.. As the gas is released from solution in the oil it seeks 
its natural level. It is lighter than the oil and tends to move upward 
through the oil, by-passing the oil. 

The Vice Chaikman. You mean when this oil is in process of being 
mined ? 

Mr. Cattell. Yes. When the fluid reaches the well it consists of a 
mixture of oil (still saturated with lighter hydrocarbons) and gas. If 
the pressure and other conditions are adequate, the fluid moves up the 
well, the gaseous part tending to rise faster than the oil and to slip 
past it. As the fluid mixture reaches higher levels in the well, where 
the pressures are lower, more of the lighter hydrocarbons come out of 
fSolution joining the gas. Moreover, as this mixture rises and the 
pressure upon ii, decreases, the gaseous part expands, doing work on 
the fluid above it. 

Then I have some paragraphs which catalog the sources of energy 
and the manner in which that energy is used. I believe it would oe 
besG to omit that part. 

The Vice Chairman. You have used the expression "gas and lighter 

Mr. Cattell. We use the term "lighter hydrocarbons" to refer to 
those hydrocarbons which, under normal atmospheric pressure, are gas, 
but in the reservoir may be a part of the oil. 

The Vice Chairman. When you first contact them they are gas, are 

Mr. Cattell. In the reservoir you have a mixture of hydrocarbons. 
• You may have a liquid and a gas. But as the pressure and tempera- 
ture change, some of the lighter hydrocarbons m the oil — those with 
the smaller molecular weights — come out of solution in the oil and 
move into the gas. 

The Vice Chairman. Doctor, is the gas under greater pressure than 
gas is ordinarily subjected to? 

Mr. Cattell. Ordmarily, as you increase the pressure on an oil-gas 
mixture, gas goes into solution in the 6il. The gaseous phase de- 
creases in volume and the liquid phase increases, but it is a selective 
solution. The gas is a mixture of hydrocarbons, the oil is also a mix- 
ture of hydrocarbons, but the individual hydrocarbons do not go into 
solution m the proportions in which they exist m either fluid. It is 
a selective solution. 

The Vice Chairman. Doctor, I just don't like to continue to ask 
questions, but you know so much more about it than I do it is hard for 
me to know just what you are saying. What I am trying to find out 
is: This hydrocarbon, the lighter hydrocarbon, what becomes of it? 
To what use is it subjected ? Does it become usable gas, what we know 
as gas? 

Mr. Ca-CcelL. Yes. 


The Vice Chairman. Then that is the answer. "Yes" is a very good 

Mr. Cattell. The reason for using the term "lighter hydrocarbons" 
is that the use pf "gas" to designate something that is in solution in 
the oil is misleading. The lighter hydrocarbons in the oil tend to go 
into the gas (become gaseous) with change in pressure. 

Senator King. The pressure produces keat and the heat converts oil 
proper into gas, or may. 

Mr. Cattell. If you have oil and gas in a reservoir and change the 
temperature or the pressure, something is going to happen. Some of 
the liquid will move into the gas or some of the gas will move into 
the liquid. 

Senator King. The pressure may be so great as to produce heat, and 
heat will have its effect up the oil and convert it into hydrocarbon or 
lighter gas. 

Mr. Cattell. The distribution of the many hydrocarbons between 
the gas and the oil depends upon the pressure and temperature to 
whicn the system is subjected. We do get into a peculiar situation 

The Vice Chairman. I didn't mean to lead you into that. I just 
wanted to know one thing : What became of that stuff you were talking 
about ? We have it in the record. 

Senator Kjng. For my information, may I ask one question : Con- 
ceive a situation where the country is so dry and arid/ there is but 
little, if .any, water in the ground for a considerable distance, and yet 
there is oil there. To what extent does the watel- make a contribution 
to the production of the oil? 

Mr. Cattell. In general, the hydrostatic pressure of the water push- 
ing upward jn the oil, on the outside of the structure, is the source of 
energy. That is the source of your pressure, and that water may have 
been in the san,ds for geologic ages. 

Senator Kjng. There are some oil sands, are there not, where there 
is but a limited amount, if any, of water ? 

Mr. Cattell^ True. There are fields where there is little move- 
ment, at least, of water into the sands as the oil is removed. 

Senator King. So that, in that event, it would be heat and pressure 
that would aid in forcing the oil to the surface ? 

Mi-. Cattell. There is little change in temperature, but the oil moves 
to thesijtrface because of the pressure, and when the pressure is gone, 
the only way you can move it to the surface is with a pump, and 
you can't use a pump to pump it through the sand. Its own pressure, 
or pressure you put in by a process such as water flooding or repres- 
suring with gas or air is the onl37^ source of energy. 

The objective in applying knowledge of fluid-energy relations is 
largely to move oil to the. well and lift it to the surface, leaving a 
maximum of energy in the system available to do such work in the 
future. Each of the terms listed in taking stock of applicable energy 
and its expenditure, except the mechanical work represented by the 
lifting of the fluid against gravity from its original position in the 
.sand to the surface, is subject to a measure of control through design 
or method of operation. Hence it is evident that the problem is one 
in which man may use his knowledge and ingenuity to his benefit. 

In the next section, which I believe should be omitted, I have pointed 
out that in general the situation is much more complex than that 
descrrbed in the simple illustration I have given. 


There are all kinds of complexities. We have picked the simple 
case for purposes of illustration. 
Now, a section on the need for technical knowledge. 


Mr. Cattell. The problems of oil and gas production are not 
limited to technology. They cut across the tields of economics, law, 
politics, and hum^n relations. Some legal precedents that have their 
origin in ideas of the occurrence of oil and gas prevalent a half cen- 
tury ago and were based on economic situations greatly different from 
those of today have hampered the application of new scientific knowl- 
edge as it became available. 

Moreover, much thought concerning oil and gas production has been 
based on inaccurate conceptions of the physical phenomena, and legis- 
lative bodies, courts, and the public have been insufficiently informed 
as to the natural laws upon which human action should be based. 

To provide for wise development of the Nation's petroleum resources 
in the future, students of science and technology must supply the 
essential knowledge of natural laws. With a more adequate under- 
standing of physical relations the technologist, economist, lawyer, 
statesman, and student of human relations may assist one another in 
solving problems as they arise. The special concern of engineers, 
chemists, geologists, and others whose chosen work deals with techni- 
cal phases of the oil and gas industry is to gain knowledge of the 
physical relations that determine the behavior of oil and gas and to 
apply such learning toward efficient production and wise utilization 
of these fluid materials. 

Technical advance has been noteworthy in oil and gas production, 
Drake's well was 69 feet deep and was drilled with a derrick 35 feet 
high. Some derricks now in use are five times the height of the one 
Drake used, but a well has been drilled to 15,004 feet, or about 218 
times the depth of Drake's well. In earlier years operations were 
largely by rule of thumb ; now the production of oil is conducted with 
the aid of the best engineering and geological advice and extensive 
laboratory facilities for both service and research. 

Following the earliest period, as wells were drilled to greater depth 
and operating conditions became more difficult, engineers and geolo- 
gists began to correlate undergi^ound formations from driller's logs, 
and by 1920 various kinds of cross sections, subsurface contour maps, 
and peg models in three dimensions were being used extensively in 
attempts to gain a better understanding of conditions underground. 
Now geologic logs made with the aid of micropaleontology have 
largely supplanted the logs based on information supplied by the 
drillers. As more wells were drilled by the rotary system, coring of 
formations developed, and now various devices are used with rotary 
and cable tools to obtain samples of rocks in a condition as nearly as 
possible like that in which they existed before being disturbed. All 
ordinary cores, however, lose fluid through reduction in pressure as 
they are brought to the surface. To provide more exact information 
concerning the rock and its fluid content in the formation the Bure^du 
of Mines and the American Petroleum Institute are cooperating in 
development of a core barrel that will cut and enclose a sample at the 
bottom of the well and bring it to the surface without loss of pressure 
or fluid. 


If time permitted, the improvements in the petroleum technology, 
aided by advances in metallurgy and other engineering fields, might 
be illustrated by discussions of various developments. 

The Vice Chairman. I don't believe we would be tremendously 
interested in hearing about that. 

Mr. Cat tft.t.. I was going to omit this section which refers to the 
various advances. 

On the whole^ the petroleum and natural-gas industries have im- 
proved their' practices through the application of technical knowl- 
edge, and many wastes that were common a few years ago have been 
minimized. The improvements in both efficiency and conservation 
are the result, in a large measure, of technical research and education. 

Senator King. Is it the lack of research and education that ac- 
counts for the enormous number of dry holes ? 

Mr. Cattell. Certainly research will aid in reducing the number 
of dry holes — research along lines of exploration. As the more easily 
found deposits are developed the problem of finding oil becomes more 
difficult, and without the advance in technology of exploration there 
would be a marked increase in the number of dry holes. 

Senator King. Is it the lack largely of geological exploration that 
accounts for such a large number of dry holes ? 

Mr. Cattell. The finding of oil is difficult. The geologist and 
the geophysicist can only use the information they can obtain bj^ their 
known methods of study. Many holes have been drilled without 
the benefit of the best of geological and geophysical' service. Some 
of those holes drilled without the benefit of those sciences have been 
successful, by chance, but the percentage of dry holes in a given con- 
dition of availability of unexplored reserves will decrease as the 
geophysical and geological knowledge increases. 

■ Senator King. It is like it is in mining. They used to say in the 
West that in order to find a mine you must get a man over from 
Ireland, an Irishman, and send him out and he would find it, though 
your professors failed. Most of our mines were discovei^d by Irish 

Mr. Cattell. On the influence of research : Research and improve- 
ments in practice have had a marked effect not only in reducing sur- 
face waste and underground wastes such as losses of oil and ^as to 
barren sands but also in reducing the quantity of oil left in original 
reservoir strata when fields are abandoned. 

On this point my prepared statement quotes from a paper prepared 
by the Bureau of Mines for the Third World Power Conference in 
1936, but I shall simply summarize it now. In 1915 estimates were 
made that from 80 to 90 percent of the oil originally in the sands was 
left when the wells were abandoned. A later study substantially 
verified that. 

Approximately one-half of the total oil that has been produced 
in the United States was taken from the reservoirs prior to 1926, 
but during the 10 years from January 1, 1926, to January 1, 1936, 
8.9 billion barrels of oil were produced, or a little more than all that 
had been produced in the preceding 66 years. 

The Vice Chairman. We know a good deal about how much 
more oil is being produced than used to be produced, but what we 
Want to know is, what are we going to do about that. We know 


that you engineers have done a good job and have been constantly 
improving methods of discovery and methods of extraction. 

Mr. Cattell. Well, I understood that my assignment was to 

The Vice Chairman (interposing). I beg your pardon. 

Mr. Cattell. Build the background of that engineering knowledge, 
and I don't want to take the time unduly. 

Senator King. You are like doctors brought here to tell us about 
bone — they wouldn't care to go into the viscera. 

Mr. Cattell. The only function I had in the report from which this 
hearing arose was to collaborate in preparing a chapter on tech- 

The Vice Chairman. I beg your pardon for interrupting. 

Mr. Cattell. I shall be glad to leave this. With your permission, 
I would like to have it in the record, since it has been prepared. It 
stresses the importance of research and tells what has been done and 
gives an indication of what is needed in the way of future research. 

I shall next take up the section on unit operation, which I didn't 
know I was to prepare until yesterday afternoon. 

UNIT operation 

Mr. Cattell. To avoid taking time, I shall say that the first part 
of this is more or less of an historical statement. Mr. Stabler is 
much more familiar with unit operations on public and Indian lands, 
so we have only touched upon that. 

The Vice Chairman. Doctor, does tiie historical statement you 
have cover the history of the actual application of the unit rule in 
production ? That would be important, as to how the application of 
the miit rule is worked. 

Mr. Cattell. Mr. Stabler can tell you how it is worked on Govern- 
ment lands. In this statement there is a brief review of the way it is 
worked in some domestic and foreign fields. 

The Chairman. Suppose you give us that, Doctor, and summarize 
it. It is really a very important subject. As a matter of fact, it has 
been a subject of some criticism before this committee. The charge 
has been made by some persons in the oil industry that unit operation 
and other methods of controlled production are used as devices for 
controlling price, so of course we are interested in the scientist's atti- 
tude and explanation of the system. 

Mr. Cattell. I think we can omit the introductory and historical 

The Chairman. It will be printed in the record with your pre- 
pared statement. 

Mr. Cattell. We will then come down to a few specific cases. 

It is pointed out in the prepared statement that in general unit 
operations have been on a voluntary basis. An outstanding exception 
is the compulsory unitization of city blocks in Oxford, Kans., prior 
to 1928, and then there is reference to literature on that development. 

The unit development of the Van pool, Texas, operated as if under 
single ownership for the account of the associated companies, often 
has been referred to as an outstanding example of the application of 
efficient engineering technique permitting maximum recovery of oil 
and gas at minimum cost. 


The operating agreement under the Van joint account became 
effective in November 1929, and it is reasonable to suppose that at 
present the operating company has essentially all of the geological 
and engineering information needed to plan a future program of 
extraction to the ultimate life of the field. 

Then the; prepared statement refers to a report on the Van field 
stating that the method of allocating production to each leaseholder 
has approached the ideal — giving to each participant the oil which he 
actually was entitled to have under his lease. 

The Chairman. Now that is a very interesting statement. The 
impact of engineering technique upon the human equation, if I can 
so state it, is the circumstance which develops the conflict in this 
study of proration. You say that this is an ideal system in this 
particular instance. 

Mr. CATTEUi. I am really quoting from someone else, but Van is 
looked upon as an outstanding example of unit operation. 

The Chairman. Do- you mean that in that particular instance 
each individual landowner got exactly what he was entitled to with- 
out any question, with complete mathematical certainty? 

Mr. Cattell. Certainly not. 

The Chairman. The statement was so broad that it might have 
justified that inference. 

Mr. Cattell. Those must be based on estimates. You cannot re- 
duce such figures to exact mathematical certainty. 

The prepared statement ^ gives some information concerning some 
work Bureau of Mines men did at Van to help the operators in de- 
termining the characteristics of their oil in the reservoir in order 
that they might better judge the equities in the settlement. I shall 
not go into that, except to say that it consisted of going into the 
reservoir oil at the bottom of the hole with a special instrument, 
taking a sample of the oil at the bottom of the well, closing it in 
with this special device, bringing it to the top of the well, taking it 
to the laboratory and putting it through a rather extensive analysis. 
That may all seem academic, but it had a very practical application 
to their problem of determining, as nearly as could be determined, 
what the equities were. 

The Chairman. I have in mind an incident that happened in the 
development of the Salt Creek field. Mr. Stabler, who is with you 
here, and Mr. Soyster may recall the incident. A gentleman from 
New York, as I recall it, who had never seen an oil field in his life, 
who was certainly not a petroleum engineer, who knew nothing in 
the world about drilling, was induced to buy a lease in West Salt 
Creek, Wyo. He went out upon the land and every geologist in and 
around the field who had examined the land was of the opinion that 
it was worthless and no one would advise him where to drill the 
well, so he was forced to make the decision for himself. He went 
out on the field with his drilling crew and walked up and down on 
this strange terrain that he had never before seen, and finally he 
said, "We will drill the wellhere." They drilled the well and they 
got large production and my recollection is there wasn't another well 
on, any 40-acre tract surrounding that which ever produced any oil 
in commercial quantities. 

1 "Exhibit No. 1310," appendix, p; 9850. 


Now how would unitization apply in such a circumstance? 

Mr. Cattell. Well, I will have to refer that to Mr. Stabler be- 
cause he haisrbeen up against that problem. I remember the well 
you speak of, but that is Mr. Stabler's "baby." 

The Vice Chaieman. On that point, would you have to dig some 
wells, shall I say, of exploration in order to find out the scope of the 
field and how the sand shades off or thins out, however you want 
to express it? 

Mr. Cattell. Unit operation on an equitable basis requires accurate 
knowledge of i the structure. 
- The Vice Chairman. How can you get that except by drilling? 

Mr. Cattell. That knowledge must be developed as the development 
goes forward, and the thing must be adjusted to take account of that 
new knowledge. 

The Vice Chairman.' Let me get at this. Going into a field, you 
put down one well, and here are a lot of people that own land all 
around it. How are you going to determine whether the man who 
owns the second section from the well is to participate in the first 
production ? How do you know who has a right to be in on the thing 
from the start? 
. Mr. Cattell. Those are difficult problems 

The Vice Chairman (interposing). I know they are difficult, and 
that is why I am asking you how you do it. 

Mr. Cattell. I believe they have been worked out very successfully 
in unitization on public lands. 

The Vice Chairman. How? In public lands you have just one 
owner of that, haven't you ? 

Mr. Cattell. No ; a number of operators have leased lands from the 
Government. Kettleman Hills is an example. 

The Vice Chairman. How do you do it, I ask? 
■ Mr. Cattell. I believe that Mr. Stabler can tell you much better 
. than I can, because he has it first-hand ; that is his problem. 

The Vice Chairman. It is^ pretty good to have somebody behind 
you. [Laughter.] 

Mr. Cattell. Yes; it is very helpful to have somebody to refer 
these questions to. 

Then one of the difficulties in the development of unit operation on . 
private land is that the royalty owner expects his royalty and intro- 
duces another human element that makes an agreement difficult. 

There is a brief discussion in the prepared statement of the Sugar- 
land oil field in Texas, which has been an outstanding example of a 
unit operation, but substantially all under the control, as to lease 
holders of one company. There were several royalty interests, but 
those royalty interests consented to the agreement and have- been 
compensated, and so far as I know, things have worked out pretty 

Senator King. If j^ou will permit my projecting an inquiry into 
your paper at this point, are you familiar with the proration system 
which has been set up in Texas, and as to which we have had some 
valuable testimony? 

Mr. Cattell. Not closely familiar with the administrative details. 

Senator King. Do members of your organization, and I speak of 
the four organizations of which the preceding witness testified point 
to that as one of the methods of dealing with this very complicated 
and complex problem ? That is to say, that the State* may exercise 


its authority, possibly supplemented by the authority of the Federal 
Government in impinging upon the rights of individuals and deter- 
mining how they shall operate their wells and how they shall divide, 
and so on, prorate. 

Mr. Watkins. May I say, Senator^ in response to that question that 
the next witness, Mr. McLaughlin, will discuss the subject of proration 
from the standpoint of its effect on conservation. 

Mr. CATTELii. Tepetate, La., is another example of an outstanding 
field under unit operation. There again, however, it was substantially 
a one-company ownership. 

Then, in foreign lands the operations of the An^lo-Iranian Oil Co. 
and the Iraq Petroleum Co. and of the Standard Oil Co. of California 
on the Island of Bahrein, are outstanding examples of the function- 
ing of unit operation and the application of technical practices on a 
large scale in countries in which concessions permit full control of 
large blocks of acreage comprising one or more geologic structures 
where oil and gas have collected in commercial quantities. 

Then in reference to statements by Sir John Cadman of the Anglo- 
Iranian on the advantages of unit operation as conducted by his 
company under concession: He points out that through those unit 
operations, they have conserved the gas energy to assist in the move- 
ment of oil through the natural reservoir and used the natural ex- 
pulsive forces economically. He discusses advantages that have 
accrued because of lower development cost through elimination of 
unnecessary drilling and multiplication of plants. Then he points out 
that 45 wells have been sufficient for effective delimitation of the field 
and to meet the production requirements of their pipe line with a 
capacity of 30,000,000 barrels per annum. 

The Vice Chairman. How big a field is that? 

Mr. Cattell. I haven't the acreage. This is Kirkuk, which is a 
large field, but I should hesitate to try to tell what the acreage is. 

Haft Kel is another field which has produced approximately 27,- 
000,000 barrels from 40 wells, and they consider those 40 wells, accord- 
ing to Cadman's statement, to be sufficient to determine the limits of 
the field and for their production purposes. 

The Vice Chairman. How big is that field ? 

Mr. Cattell. That is one of the large fields of Iran, but I should 
hesitate to try to give the acreage. I think I can insert it into the 
record if that wbuld be helpful.^ 

1 Later Mr. Cattell supplied the following for the record : 

Ben B. Cox of Socony-Vacuum Oil Company, Inc., has reported that the Kirkuk field of 
Iraq produced about 126,000,000 barrels of oil in 11 years from the beginning of produc- 
tion to the end of 1938, of which about 31,000,000 barrels were produced in 1938 (Pe- 
troleum Development and Technology, 1939, Transactions of American Institute of Min- 
ing and Metallurgical Engineers, vol. 132, p. 569). 

The Kirkuk field may be compared in production with the Kettleman Hills field of 
California and the Rodessa field of Arkansas, Louisiana, and Texas. To the end of 1938 
the Kettleman Hills field produced about 202,000,000 barrels of oil In the first 10 years 
of its life, of which 25,600,000 barrels were produced in 1938, and the Rodessa field pro- 
duced about 83,000,000 barrels of oil in 9 years of life, of which about 27,500,000 barrels 
were produced in 1938 (Minerals Yearbook, 1939, Bureau of Mines, p. 940, and Petroleum 
Development and Technology, 1939, Transactions of American Institute of Mining and 
Metallurgical Engineers, vol. 132, pp. 242, 255, 342, and 410). 

Referring next to the Haft Kel field of Iran : The Anglo Iranian Oil Company reported 
in 1936 that 50 square miles of oil-bearing area had been proved (Petroleum Develop-- 
ment and Technology, 1936, Transactions of American Institute of Mining and Metallurgi- 
cal Engineers, vol. 118, p. 477). In 1939 the same company reported that the Haft Kel 
field produced about 50,00,000 barrels of oil in 1938 (Petroleum Development and Tech- 
nology^ 1939, Transactions of American Institute of Mining and Metallurgical Engineers, 
vol. 132, p. 567). For comparison it may be mentioned that the entire State of Kansas 
produced about 60,000,000 barrels, and the entire State of New Mexico about 36,000,000 
barrels, in the same year (Minerals Yearbook, 1939, Bureau of Mines, p. 939) 


The Vice Chairman. Forty wells in a little field- 

Mr. Cattell (interposing). Those are both large fields. 

Senator King. Have investigations been made by you witnesses here, 
or others, acting under the direction of the committee, to ascertain 
whether or not in these various fields, in Iraq, Mesopotamia, and in 
Mexico, and Rumania, and the oil fields of Baku which I visited a 
number of years ago — whether we have devised better means of con- 
serving the oil and- meeting the definition which was given at the 
outset of your testimony as to the best means of conserving the re- 
sources of the country. Have any of your witnesses ascertained 
whether or not in other countries, in the operation of their oil fields, 
they have developed methods that are more economical and efficient 
than those which prevail in the United States ? 

Mr. Cattell. Personally, I have no first-hand information. 

The Chairman. What is your opinion, Mr. Stabler? 

Mr. Stabler. I have no knowledge of the foreign operations at all. 

The Chairman. Mr. Soyster ? 

Mr. Soyster. I have no personal knowledge but it is my opinion 
that one reason that better methods can be applied is because of the 
ownership of mineral in many of those countries by the Crown or 
the Government. There they can deal as an individual property and 
they lease these large concessions which are controlled by a single 
corporation, then it isn't a question of beating your neighbor to get- 
ting the oil out but producing it on the most efficient basis. 

The Chairman. In other words, the unit ownership under other 
forms of government, and unit control would tend to greater conserva- 
tion than diverse ownership such as we have here. 

Mr. Soyster. Yes, sir; that has certainly been our experience with 
unitization of the public lands. 

Mr. Cattell. There certainly are advantages from the standpoint 
of conservation and efficiency. 

The Cha;irman. Now the engineer is thinking of this problem 
solely from the point of view of conserving the oil in the ground 
and producing the maxiriium eventual output, is that right? 

Mr. Cattell. The maximum eventual output may not necessarily 
be the objective. 

The Chairman. What is the objective? 

Mr. Cattell. It seems to me that the objective is a dependable 
supply at reasonable cost over a long period. 

The Chairman. So that in your approach to this problem, cost 
enters as well as the preservation of a dependable supply. 

Mr. Cattell. It seems to me that it should. 

The Chairman. I am not asking whether it should or should not. 
I am asking whether it does. 

Mr. Cattell. Cost certainly enters your problem. 

The Chairman. But in your study of it, in your approach to it, 
in your action on it, do jou take into consideration both of these 
factors, cost and conservation? 

Mr. Cattell. Yes. 

The Chairman. So that the question of price has a bearing in any 
determination that you as a scientist in the Bureau of Mines would 

Mr. Cattell. It certainly has a bearing on our thinking as to what 
is practicable. 


The Chairman. Then do you think that conservation policy is 
used in any degree whatsoever as a price regulant or regulator? 

Mr. Cattell. That is a diflScult question. Our work in the Bureau 
of Mines has been not on regulation but upon development of the 
fundamental engineering facts. 

The Chairman. Let me ask you then as a scientist, would the 
price which the public has to pay for oil be a circumstance in the 
decision which you personally would reach as to the amount of oil 
which should come out of a particular field under unit operation? 

Mr. Cattell. In considering what is practicable the stand- 
point of ultimate recovery, from the standpoint of dependability of 
supply over a period, the cost of the operation certainly is a factor. 
The thought I had in mind when I made that remark about ultimate 
recovery was that there is no advantage in a flood of oil with re- 
sultant waste and low price at one period at the expense of a' short- 
age and resulting high prices in another. 

The Chairman. Are you using the words cost and price inter- 
changeably ? 

Mr. Cattell. No ; I am thinking in terms of the cost of the opera- 

The Chairman. Are you thinking at all in terms of price to the 

Mr. Cattell. No ; I have been thinking in terms of the cost of the 
operation to the producer. 

The Chairman. Well, then my question recurs: Would the price 
to the consumer have any controlling force in any determination that 
you as a scientist might reach with respect to what the proper pro- 
duction from a field should be under the unit plan ? 
. Mr. Cattell. Only insofar as the price to the consumer is affected 
by the cost of operation. Understand that we in the Bureau of 
Mines have no authority over unit operation anywhere. 

The Chairman. That is why I was putting it on the basis of your 
personal decision. 

Mr. Cattell. Our thought on the matter is from the standpoint of 
a research agency interested in the technical facts. 

The Chairman. What about the function which the Bureau of 
Mines does perform with respect to the estimates of consumption? 
Consurnption is obviously a factor which is constantly under con- 
sideration in the Bureau of Mines. 

Mr. Cattell. Yes. That work is not under my jurisdiction. That 
is under the division headed by A. G. White, and I have no first-hand 
information concerning the statistical work. That is handled in a 
different branch of the Bureau under a different head. 

The Chairman. Well, you know about it. 

Mr. Cattell. I know in a general way of those estimates of de- 

The Chairman. Would you care to say whether or not price enters 
into the determination of those estimates? 

Mr. Cattell. My understanding is that price does not enter into 
the determination, but that is a matter on which I haven't first-hand 
knowledge. A. G. White is the head of that division, and as I say, 
that is statistical work. Ours is technical. But my understanding 
is that price does not enter into it. ^ 

124491 — 10— pt. 17, sec. 4 11 


Senator King. May I interrupt your statement for a moment and 
ask Dr. Watkins a question? I assume, Dr. Watkins, that you and 
your associates desire to furnish information to this committee, as- 
suming that it may be called upon to make recommendations for legis- 
lation, and therefore you are desirous to furnish us full information 
as to the mistakes which have been made, the pitfalls to be avoided. 
Have any persons in your group made studies of the oil industry, the 
oil operations in other countries, vrith a view to getting information 
which would be advantageous to be presented to this committee and 
that might aid us in reaching conclusions ns to recommendations 
which we might make? 

Mr. Watkins. Senator, I don't believe that any of the members 
of this group have made field investigations in these foreign produc- 
ing areas, but I can tell you that the literature on foreign experience 
has been summarized to some extent in this publication, Energy Re- 
sources and National Policy, and that it will be referred to likewise 
in Mr. McLaughlin's testimony. It is lessons of that experience from 
the standpoint of conservation. 

Senator King. There have been criticisms of waste and inefficiency 
in the operation of oil fields in this country. If other nations have 
adopted different plans which have been more effective, it seems to me 
we should have information, not necessarily from persons who had 
visted those fields, but from reading the literature that would be 
helpful to us. 

Mr. Watkins. Mr. McLaughlin does have testimony along that 
line. I think the summing up the Senator gave a few minutes ago 
more or less hit the nail on the head. That is to say, where you have 
unitary ownership you have the possibility of applying engineering 
principles and techniques and procedures in the exploitation of those 
geological structures. You are not confronted then with conflict- 
mg interests coming out of multiplicity of ownership and you can 
look at that reservoir as a machine and you will utilize that machine 
in the most efficient way possible. 

Senator King. But in other countries all of the lands are not owned 
by the Crown and they are not operated in a unit. They are under 
individual ownership and individual development. That was true in 
the Russian oil fields, as I recall. 

Mr. Cattell. In Iran and Iraq and the Bahrein Islands, the opera- 
tion of a field is under the control of one company. 

Senator King. The Bahrein Islands is under the control of an 
American company? 

Mr. Cattell. Yes ; and they can plan their operations on the basis 
of the structure as a whole. 

Senator King. Yes; I am familiar with those oil fields there and 
their plans of operation. I was hopeful we might get some informa- 
tion that might aid us in determining just what, if any, recommenda- 
tions we should make. 

Mr. Watkins. Mr. Chairman, the next scheduled witness is Mr. 

The Chairman. Very well, Mr. McLaughlin. 

Mr. McLaughlin. 1 am a graduate of Colorado College and 
studied at the University of New Mexico, at Harvard University, and 
at Columbia University, and I was at the University of Pittsburgh for 
10 years as industrial economist in the Bureau of Business Research. 


During 1937-38 I was economic consultant to the Pennsylvania Oil 
Industries Investigation Commission, and, as Dr. Watkins has said, 
I am the author of a section of this study on Ener^ Resources of 
the National Resources Committee. At the present time I am assist- 
ant professor of economics at Hunter College in New York City. 


Mr. McLaughi^in. My discussion is of the economic aspects of 
waste and conservation in the production of petroleum. 

The building up of a larger productive mechanism than is neces- 
sary to produce oil and gas has involved the investment of excessive 
funds in the industry. Inadequate State and Federal restriction on 
production in new oil and gas fields has led to the drilling of excessive 
numbers of wells, especially in areas of flush production. The most 
important source of capital waste lies in this drilling of unnecessary 
wells. In the East Texas field alone it has been estimated that 3,000 
wells would have been sufficient for production and that in the drill- 
ing of 21,000 additional wells perhaps $300,000,000 has been wasted 
up to the middle of 1937. Moreover, new and unnecessary wells are 
being added to the field at an additional cost of about $13,000,000 to 
$20,000,000 per year. In the Oklahoma City field it was estimated by 
an oil-company official that $3,000,000 would have been sufficient under 
a rational system of production instead of the estimated expenditure 
of $70,000,000 up to the middle of 1930. Since then, additional mil- 
lions have been invested in the field. 

Competitive development of oil pools results also in excessive costs 
of operation. The loss of reservoir energy resulting from the high 
density of wells requires that pumping be initiated at a relatively 
early stage in the life of the pool. Moreover, the obtaining of the 
remainder of the recoverable crude takes more time, which in turn 
means extra labor and a longer use of capital. Even so, from a 
business point of view rapid recovery is often profitable. The oper- 
ator may be able to get back in a few days his total investment in 
the well. Yet these methods clearly result in social waste and in 
the long run in a decreased company operating profit. In some 
fields the excess cost of obtaining oil under conditk>ns of intense drill- 
ing has led to the bankruptcy of most operators In the Oklahoma 
City field, nearly all operators failed, except some of the large 

These capital 'wastes are clearly worth avoiding but capital is 
more or less replaceable. Even more serious to the Nation is the 
waste of large quantities of natural gas and petroleum — irreplaceable 

For the period 1922 through 1934 the waste of natural gas aver- 
aged 11/4 billion cubic feet of natural gfts per day or a total of 
nearly 6 trillion cubic feet. The wastage equaled nearly one-third of 
the total volume utilized. Great waste of natural gas occurred in 
the Panhandle field in Texas during 1934 when more than a billion 
cubic feet of gas was blown into the air each day. 

While the waste of gas in Texas has been reduced from 400 billion 
cubic feet in 1934 by more effective Stat« regulation and by connec- 
tion with markets, it still amounted in 1937, the latest year for which 
data are available, to nearly 100 billion cubic feet. Part of the tre- 
mendous waste of natural gas was intentional. The gas was blown 


into the air either because of the lack of a market or because of the 
desire to obtain oil as soon as possible. 

The proportion of oil left in the ground which can be classified as 
waste depends on the extent to which the most efficient methods are 
being used. Although variations in recovery depend more on the 
nature of the reservoir there are still significant variations which 
result from the use of more or less antiquated methods. It has been 
demonstrated by the United States Bureau of Mines that where the 
reservoir energy is wasted only about 10 percent of the potentially 
obtainable crude actuallj^ will be produced. Operating methods in 
actual effect were recovering from 20 to 35 percent of the oil in 1934, 
the variation depending largely upon the permeability of the sand. 
At the same time it was pointed out that by the general adoption of 
the most efficient known methods recovery would vary from 30 to 60 

One of the majof causes of waste of oil and gas relates to the 
right of the individual landowner, with few exceptions, to capture all 
of the oil and gas which is produced from wells on his property. The 
migratory nature of oil, when the static-pressure balance in the pool 
is disturbed by drilling, leads to a movement of oil in the direction of 
reduced pressure. Consequently, a well can and often doe^ drain 
reserves from adjacent property. In many fields, the adjacent land- 
owner has no effective way of protecting his subsoil mineral rights 
other than to drill offsetting wells as quickly as he can. In the effort 
to recover the maximum of oil in the minimum of time, a large pro- 
portion of the reservoir energy may be wasted. The speed with 
which new fields are brought into flush production makes it unlikely 
that adequate marketing facilities will be available for the accom- 
panying natural gas until after large quantities of this fuel are blown 
into the air. 

The wastes resulting from the operation of the right to capture 
are accentuated in many fields by the smallness of individuals land- 
holdings. In suburban districts or even within incorporated com- 
munities the intensive efforts to recover oil have led to wells being 
drilled within a hundred feet of each other. Under such circum- 
stances waste is excessive. One of the first successful efforts to 
restrict excessive drilling occurred in the city of Oxford, Kans., in 

Senator King. The waste would be a capital waste, would it not? 

Mr. McLaughlin. Yes ; also a waste of the gas and a waste of the 

Overdrillin^ of the new Illinois oil field is in large part attributable 
to the unrestricted operation of the rule of capture in a district of 
small landholdings. 

The Chairman. Do you mean that in your opinion there is now 
overdrilling in Illinois? 

Mr. McLaughlin. Oh, yes ; from the standpoint of the recovery of 
crude. Waste also results from the fact that oil and gas fields are 
bein^ discovered in a large number of States and that possible oil- 
beanng territory is still very great. In the search for oil and gas 
the most easily accessible and richest deposits are likely to be removed 
first. Such practices lead not only to the removal of some of the best 
grades of crude oil as soon as discovered, but also to the use of less 
costly equipment. The largeness of reserves of oil and gas leads to an 
emphasis on saving capital rather than the saving of rescources. 


The abundance of possible oil-bearing strata and the inadequate 
restriction of drilling efforts lead to serious overproduction if a major 
oil field happens to be discovered in a period of business depression. 
Such a situation occurred in the Seminole field in Oklahoma in 1927 
and in the East Texas field in 1931. The rush to drill wells in a new 
field is just as great in a period of depression as in a period of pros- 
perity. If drilling operations and production are not restricted some- 
what in relationship to the changes in demand, prices of oil and gas will 
fall, and efforts to conserve supplies of oU and gas are likely to be 
dropped. Producers have no time to save gas when there is a race 
between adjacent leaseholders to acquire a greater proportion of the 
more valuable crude oil, nor are efforts to conserve or use residue gas 
successful if there is competition among producers to withdraw the 
natural gas from a field and make natural gasoline from it. The 
possibility of obtaining part of the resource from under another's 
property promises a greater reward than efforts to conserve the oil 
and gas already obtainable. 

During periods of overproduction marginal wells are likely to be 
shut down ; and if the price of oil threatens to remain low for some 
time, the wells may be abandoned and the equipment moved to more 
profitable areas. This practice results in substantial hidden losses in 
ultimate recovery from these abandoned wells ; for if prices had been 
somewhat higher, it might have paid to continue their operation or 
even to install improved equipment. Once oil wells are plugged, it 
may be impossible to open them up again after prices rise above their 
costs of operation. The abandonment of wells because of low price 
of crude has been estimated to constitute a considerable economic loss. 

Probably in every oil and gas field in the country wastes result 
because of the use of inefficient methods and out-of-date equipment. 
The explanation may be related to the low price of oil and gas, to igno- 
rance of the best geological and engineering advice, or to lack of 
capital, and hence inability to take a long view. The advantage of a 
new method is very difficult to establish in the oil industry because of 
the uncertainty about what occurs in the reservoir. Only after con- 
siderable experimentation is a change made to the more up-to-date 
procedure. Thus, only within the last decade or so has the function of 
reservoir energy been fully appreciated, although experiments in some 
kind of control of the gas-oil ratio were made years before.- 

Unit operation is the most thoroughgoing solution to the problem of 
waste, a solution used but rarely in this country outside of Federal 
lands. By unit operation is meant the development as a whole of a 
geological structure according to a definite program, royalties to be 
shared on the basis of acreage, oil in j)lace, or some generally equitable 
arrangement regardless of the location of producing wells. In ef- 
fect, unit operation is the opposite of the present competitive system 
of wastefully developing oil fields. It is recommended primarily 
as a conservation measure, although it may serve the purpose of 
more effective stabilization of the industry and has been advocated 
at different times for this purpose alone. 

The major characteristics of unit operation are preliminary ex 
ploration in the case of new fields — that means the drilling of ex- 
ploratory wells — compulsory pooling of interests, proper well spac- 
ing, acceptance of standard development and production methods, 
controlled withdrawals, and general scientific control. Although 


unit operation may be established in old pools and even in new pools 
without preliminary study of reservoir conditions, careful definition 
of the pool limits and of the nature of the reservoir are desirable 

Effective unit operation requires the compulsory pooling of both 
operatino; and lease interests. Compulsory cooperation among adja- 
cent land owners is a well-known legal procedure. 

The Vice Chairman. How do you do that? You say it is well 
known. I don't want to go too far into it, but is that compul- 
sion exercised by the State under its general powers or by tlie Fed- 
eral Government? 

Mr. Watkins. I think the next sentence will take care of that. 

Mr. McLaughlin. Usually by the State, as -I understand it. For 
many centuries it has been a recognized function of government to 
prescribe regulations for the better and more economical manage- 
ment of properties which adjoin or for some other reason can be 
better managed or improved by joint operation. The police powers 
of the State clearly extend to the conservation of its natural re- 
sources. Under their police power the States can prescribe methods 
for the extraction of oil and gas from a common pool on either of 
two bases: To protect the public interest against waste, or to insure 
a just distribution among collective owners. 

Senator King. There is some limitation, however, is there not, 
ujion the police power of tlie State? 

Mr. McLaughlin. Yes ; of course. 

Senator King. If it waits too long there is a sine qua non which 
warrants legislation. All we need to do is to look at the thousands 
and tens of thousands of little stores set up in various parts of the 
United States, the failures of which every year run into the thou- 
sands and tens of thousands of dollars. There is no suggestion that 
the Federal Government deny you or me the right to get a thousand 
dollars and set up a little grocer}' store, though by the mortality 
tables we would fail at the end of a year, perhaps. 

Mr. McLaughlin. Incidentally, in that connection 1 e Pennsyl- 
vania commission reconmiended the possibility of legislation restrict- 
ing the number of filling stations to be located in certain districts. 

Senator King. Wc have had waste in timberland, too ; we have had 
waste in many of the private activities in wliicli the American ])eople 
are engaged, and capitalistic wastes along those lines have been 
very, very great. The mere fact that there may be losses of capital 
and some waste would not justify, would it, generally speaking, the 
State or the Federal Government stepping in and controlling and 
regimenting the activities of individuals, determinin<T the businesses 
which ihey should operate and the amount of capital which they 
should invest in a particular industr}'. 

Mr. McLaughlin. There are, however, I believe, cases in which 
State regulation has been upheld on the basis of the public interest, 
in avoiding waste. 

Representative Williams. In that connection, what States, if any 
have passed these compulsory unitization laws? 

Mr. McLaughlin. In the State of New Mexico, the regulatory 
commission has the right to require unitization, and the Regulatory 
Commission of Arkansas has a somewhat similar right. 


The Chairman. Texas? 

Representative Williams. Not Texas. 

The Chairman. Not the unit plan, but proration. 

Representative Williams. The compulsory unit-operation plan. 
New Mexico and Arkansas are the only two States that have passed 
legislation on that question? 

Mr. McLaughlin. That is right. There are provisions for uniti- 
zation within well spacing tracts in Oklahoma and Louisiana, but 
their legal position is not quite clear, not quite certain. 

Representative Williams. Has there been any trouble in the ad- 
r listration of that law ? 

Mr. McLaughlin. It hasn't been attempted a great deal except in 
New Mexico. It is more or less in an experimental state at the pres- 
ent time. They are relatively recent laws. 

Mr. Henderson. Mr, McLaughlin, is the power for compulsory 
unitization deriA^ed from the. same source as that for control of water- 
power sites? Is there an analogy there? 

Mr, McLaughlin. Yes; I should think there would be, certainly. 

Mr. Henderson. It is a resource, and this has to do with con- 
servation of a resource, the same as water-poAver resource. 

Mr, McLaughlin. Yes ; I believe it would be sustained on approxi- 
mately the same grounds. 

Senator King. There is a very great differentiation. 

Mr, McLaughlin, I dare say there are differences, though I am 
not a lawyer. 

The Chairman. Tliere is a difference between conservation either 
by the way of the unit ]^lan or proration of the development of a 
national resource and contiol of the number of filling stations as sug- 
gested by the Pennsylvania commission. I think that was the dis- 
tinction between wliat Commissioner Henderson was thinking of and 
what Senator Kiuir was thinking of. The grocery store would be 
analogous to tl\e fillinir station, and the water resource and the oil 
resource would be analogous. 

Mr. McLaughlin. While unit-operation facilitates the general 
adoption in an oil field of the best current engineering and produc- 
tion practices, it does not, of course, guarantee these practices, since 
they are partly a result of effective governmental regulation arid of 
intelligent local management. Preliminary exploration can discover 
the extent and nature of the pool, and continued measurements can 
give a guide to the most effective production procedure. Unit oper- 
ation, for exam.ple, will allow production at various rates, the use of 
wells for somewhat different purposes 

The Vice Chairman (interposing). Wliat do you mean by "using 
wells for somewhat different purposes?" 

Mr, McLaughlin, Some wells can be used for injecting water or 
gas into the field. Wells can be produced at different rates, the spac- 
ing of wells in relationship to the contour of the pool, the abandon- 
ment or shutting in of wells as water or gas ratios become excessive, 
and the adoption of pressure maintenance or other secondary methods 
of recovery. 

Thus unit operation can lead to the reduction of production costs 
by eliminating unnecessary drilling.- 

The Vice Chairman. You speak of conserving the gas necessary to 


press the oil up. What is the proposition, you would choke the vent 
and tend to hold the pressure back so you can get a greater percentage 
of oil? 

Mr. McLaughlin. I think the speed with which the gas is lost 
depends somewhat upon the speed of production. If you produce 
very fast you may make very poor use of the ^as pressure. 

The Vice Chaieman. But I was asking specifically with reference 
to the proposition, for instance, if your casing is this big around, as 
big around as this glass, and you reduce it to a quarter- of an inch 
across; would you expect to extract a larger percentage of the oil than 
if you let it run wide open? 

Mr. McLaughlin. That would depend somewhat on the size of the 
reservoir and the pressure of it. 

The Vice Chairman. In certain reservoirs, then, with considerable 
pressure, you wouldn't have to do that in order to get the maximum 
of extraction. 

Mr. McLaughlin. That is right, as I understand it, but in others 
vou would. The practice is as you suggested, but it wouldn't always 
be necessary. 

The Vice Chairman, Would the necessity to use it be the excep- 
tion or tlie reverse, assuming that you didn't have too many wells. 

Mr. McLaughlin. Well, if you didn't have very many wells it 
wouldn't be necessary. It is only when you have a large number of 
holes punctured at the top of the reservoir that you need to do that. 
Tliat isn't done, for instance, by the Anglo-Iranian Oil C<f. in Persia 
where they will have perhaps only 45 wells in a field, while we will 
have probably 5,000. 

The Vice Chairman. They don't use that? It wouldn't be neces- 
sary then? 

Mr. McLaughlin. No. 

The Vice Chairman. So then in a system of unit production you 
wouldn't have to resort to that sort of method in order to get the 
maximum of oil out. 

Mr. McLaughlin. I should think usually not. I am not an engi- 
neer, but that is my understanding. 

Unit operation can lead to the reduction of production costs by 
eliminating unnecessary drilling, by maximum utilization of reservoir 
energy for lifting oil to the surface, by avoiding a high initial peak in 
capital investment and surface-plant equipment, which is ordinarily 
in use only a short time, by avoiding a similar peak demand for auxil- 
iary services, such as roads, water supply, and staff accommodation, 
and by offering possibilities for research and constant checking on 
production methods. 

The Vice Chairman. Would you let an engineer give an opinion on 
that point we were discussing? 

Mr. Watkins. Mr. Soyster miglit say something on that. 

Mr. SoTSTER. I think, in fact I know, in many fields, even with 
high initial pressure, wells are flowed through tubing more frequently 
than not. 

The Vice Chairman. What do you mean? Do they reduce the 
orifice ? 

Mr. Soyster. Yes. If you had a [)roduction string of a 6-inch or 
8-inch casing, whatever size it may be, they may run a string of 2-inch 
or 3-inch tubing inside that and flow the" oil through the tubing. In 


the first place, you conserve your gas pressure and you produce more 
oil, and, of course, you must regulate pressures and the relationship 
of oil and gas production so as to get the maximum efficient rate of 
flow. You use the smallest volume of gas to lift the greatest volume 
of oil, and only through experimentation with a particular well can 
you determine the maximum efficient rate of flow. No two wells will 
necessarily be the same, even though they be offsets. In some cases 
still further restriction is obtained by putting in a choke or what is 
called a flow bean ; the same principle is involved. The purpose is to 
lift the column of fluid and produce the well over a long period of 
time. In the first place, where you are trying to flow through a .6-inch 
string of pipe you have a greater column of fluid to be lilted, and it 
requires more energy to lift that whole column of fluid 6 inches in 
diameter, or 8, than to lift a column 2 inches in diameter. 

The Vice Chairman. Do you run this small pipe down the full 
length, down to the oil sand? 

Mr. SoTSTER. No; not necessarily clear to thebottom, but depending 
upon the thickness of your sand and the amount of oil in the hole 
where your fluid level might be. 

The Vice Chairman. Is there advantage, so far as conservation is 
concerned, in putting a small choke, or whatever you want to call it, 
not very far down, right at the exit? 

Mr. SoYSTER. As I see it if you choked a well at the surface you 
would reduce the volume of production; of course, you might reduce 
the amount of gas, you probably would. 

The Vice Chairman. But you have your oil right at the mouth. 

Mr. SoYSTER. But you are lifting, and if you only take so much 
out, that fluid in the hole would be held there by the pressure. 

The Vice Chairman. In other words, the lower you go with a small 
tube the 

Mr. Soyster (interrupting). The longer you can flow your well. 

The Vice Chairman. The better the reduction on the pressure. 

Mr. SoYSTER. Of course, you will find variations, as I said, from 
well to well and field to field. Mr. Cattell might add something to 

Mr. Cattell. That problem is a complicated one which depends 
upon the viscosity of your fluid, the quantity of gas available, and 
various other factors. The problem is to produce your oil with the 
minimum quantity of gas, and you cannot lay down any general 
rule as to how that may be done. As Mr. Soyster has pointed out, 
it is a question of the individual wellj the individual conditions. 

The Vice Chairman. We had Some testimony on the question of 

Mr. McLaughlin. Of course, you wouldn't be restricting produc- 
tion and holding it back under the worst conditions in excessive 
competitive drilling. In that case it is a race between adjacent land- 
owners to get out what you can as fast as you can, because even 
though you waste great quantities of oil you have got to get it before 
your neighbor gets it or you get nothing. 

The advantages of unit operation, then, make it possible to have 
production spread over a period of time and to use these better 
engineering practices. 

1 Dr. Joseph E. Po^ue, whose testimony appears in Hearings, Part 14, and Col. Ernest O. 
Thompson, whose testimony appears in Hearings, Part 15. 


Mr. O'CoNNELL. From your standpoint, do you think it is unde- 
sirable to spread production over a longer period of time? 

Mr. McLaughlin. Yes. 

Mr. O'CoNNELL. Apart from the question of the total amount of 
oil obtained from the well? 

Mr. McLaughlin. Well, of course, you can't separate them. 

Mr. O'CoNNELL. I tiiought of it because you indicated that there 
was some advantage to spreading production over a longer period of 
time. Is there any, if no more oil is produced, in total? 

Mr. McLaughlin. Perhaps some advantage in stabilizing the 
— Mr. O'CoNNELL. That is what I was gettmg at, but is that the 
function of conservation? 

Mr. McLaughlin. I think it is so closely related to it that it does 
have to be considered. 

Mr. O'CoNNELL. I have so heard a number of times before this 
committee. It hasn't been made clear to me, though, that the stabili- 
zation of market or the stabilization of price has anything to do 
with conservation of the total supply. 

Mr. McLaughlin., Yes ; I think it does. You can't overproduce 
oil without wasting it. Of course, there is waste m use and waste in 

Mr. O'CoNNELL. You mean that if you produce so much that the 
price goes very low it would be used for what you might think of as 
uneconomic purposes. 

Mr. McLaughlin. Yes 

Mr. O'CoNNELL. It sounds like rationing of oil. 

Mr. McLaughlin. And also the fact that if more oil is produced 
and tlie price goes very low, oil companies won't make any effort to 
conserve ; it won't pay to conserve. 

Mr. O'CoNNELL. They won't what ? 

Mr. McLaughlin. They won't make efforts to conserve the oil, 

Mr. O'CoNNELL. You mean there is going to be a certain amount of 
physical waste of oil after it got above ground; not used at all? 

Mr. McLaughlin. That is right; and, as you suggested, you will 
have temporarily oil taking away markets for coal as long as the price 
is cheap, as indeed occurred in 1931. 

Mr. O'CoNNELL. That is a little different conception of conservation 
from the one I had. That is the reason I was asking the questions. It 
seems to me that you almost go to the point of rationing as to the 
supply of oil over a long period of time under conditions that you 
seem to assume are necessary to meet. 

Mr. McLaughlin. I don't think by conservation we mean to reserve 
any quantity of oil for the future, although it certainly isn't an irra- 
tional thing to consider. The only difference between the production 
costs of gasoline and the production costs of substitutes being in a 
ratio, roughly, of 1 to 4, perhaps three to four times as costly to 
produce motor fuel from coal or other sources, conservation might well 
include some reservation of resources. 

Mr. O'CoNNELL. It is also difficult to ascertain or to estimate the 
importance of that particular factor, since we have no way of knowing 
when we will ever, if ever, reach the point when we will have to make 
oil from coal or from some other thing. In other words, exploration. 


1 takb it, is sti)l d^iveloping new sources of oil as rapidly or more 
rapidly than we are consuming oil 

Mr. McLaughlin. Yes. All w^e know is that every time we find a 
new oil field there is one less oil field to be discovered. 

Mr. O'CoNNELL. But we don't know how many — ^how far we have 
to go. 

Mr. McLaughlin. Not yet. We have in reserves, I suppose, 
roughly, 14 times the present annual consumption. That isn't a great 

Mr. O'CoNNELL. That is more than we ever had before. 
Mr. McLaughlin. That is right. 

Mr. O'Connell. Do you think it is a coincidence that years ago 
when there was a much smaller proven supply of oil and we were 
apparently much nearer the end of our supply there was much less 
talk of conservation and proration than there is now ; that the picture 
is much brighter in terms of reaching the end of the road ? 
Mr. McLaughlin. Certainly. 
Mr. O'Connell. Why do you think that? 
Mr. McLaughlin. I think it is a logical relationship. 
Mr. O'Connell. You do? It seems to me just the reverse. It 
would seem to me more logical to be concerned nbout conserving oil 
Avhen we had less in sight. 

Mr. McLaughlin. Well, it is true what you are interested in, 
tnough, is the ratio between consumption and present use, and that 
is not the highest it has ever been. That is, we have had a longer 
supply available in terms of estimated years of consumption. That 
was true, for instance, shortly after the East Texas field was dis- 
covered, when I think we had something like probably 18 or 19 years' 
of supply in terms of the then annual consumption. Now it is less 
than that ; it is somewhere around 14. 

Mr. O'Connell. That was 15 yearns ago, before Seminole and East 

Mr. Watkins. Fifteen years ago we didn't know what we know 
today about the function of reservoir energy. 
Mr. O'Connell. I understand that. 

The Chairman. Mr. Stabler, do you recall what the predictions 
were from the Geological Survey as to the length of time it would 
take to exhaust the Nation's supply of oil when the first petroleum 
withdrawals were made? 

Mr. Stabler. Senator, I don't think there was any prediction in 
those terms. There were estimates of the known reserves and state- 
"ments as to the length of time at current consumption that those 
reserves or their equivalent might be used up, but no statemjent as 
to the time of exhaustion. 

The Chairman. What was that statement, if you recall, approxi- 
mately? In other words, what was the scientific belief at the time 
the first oil withdrawals were made as to the life of the Nation's 
reserves ? 

Mr. Stabler. Only a few years ahead. We could se^ a few years 
ahead and that was all, not as many as we can now. 

The Chairman. We couldn't see more than 10 years ahead, could 
we, at that time, if that much? 

Mr. Stabler. That is my recollection ; less than 10 years. 
The Chairman. And now we can see much farther ahead- 


Mr. Stabler. Fifteen years, perhaps. 

The Chairman. So the consumption has been tremendously in- 

Mr. Watkins. I would like to say that 15 years is a relatively short 
period in the life of nations. 

The Chairman. Oh, yes. The thought comes to my mind, not 
because of my personal view with respect to this, but because of the 
representations which are made, as to how long before science and 
other engineers, other sciences, may be able to develop a motor fuel, 
say, from corncobs that will be almost as cheap as gasoline. 

Mr. Watkins. If you read this publication "Energy Resources and 
National Policy" you will see the limitations. 

The Chairman. I haven't read the whole publication yet, but there 
is that possibility, is there not, that there may be other sources from 
which society may derive its liquid fuel? 

Mr. Ballinger. You say that we have only about 14 years of re- 
serves. You wouldn't make that as an exact statement, would you? 

Mr. McLaughlin. That is the present known reserve. 

Mr. Ballinger. Isn't it true that only about 3 percent of the land 
in the United States suspected of bearing oil has actually been 
investigated ? 

Mr. McLaughlin. I think perhaps Mr. Stabler can answer that. 

Mr. Stabler. I can't answer that question with any degree of 
assurance, but I am very sure it is more than 3 percent of prospective 
oil lands. Of course the area of prospective oil lands and the num- 
ber of prospective fields, either areally or by depth, is decreasing 
day by day, so the opportunity for exploration is much less now 
than it was 10 or 15 years ago. 

Mr. Ballinger. When you make the estimate of 14 years do you 
take into account the oil control by citizens of the United States in 
Venezuela ? 

Mr. McLaughlin. No. 

Mr. Ballinger. And other areas? 

Mr. McLaughlin. We might not be able to get that when we 
wanted it. 

Mr. Ballinger. But there are vast reserves there, aren't there? 

Mr. McLaughlin. Yes ; but not as great as our reserves. We have 
by far the largest group of reserves in the world, proven reserves, 
definitely proven. 

Mr. Watkins. I think it ought to be made clear that Dr. Mc- 
Laughlm's statement was that our present estimate of proven re- 
serves is roughly 14 times our present annual consumption, not that 
he estimated that our present oil will be exhausted after 14 years. 

Mr. McLaughlin. Oh, certainly not. 

The Chairman. Yes ; I think that is quite clear. 

Mr- SoTSTER. I think it should be realized also that you could not 
possibly produce that reserve in 14 years if you wanted to. 

The Chairman. It is a reserve that once gone can never be replaced. 

Mr. SoYSTER. It may take 30 or 40 years to get that last barrel. 

The Vice Chairman. Anyhow, any oil we have got we have- no 
more right to use— let me put it this way : The generation doesn't own 

^^Z ?°i j^ x^ ^^^^ ^^^ ^^'^^ ^^ ^^^ ^^ "^^ ^^^ conserve to prevent waste 
and hold for the next generation. There may be several generations 
alter we are gone ; you can't tell. 


The Chairman. Of course, we are getting into philosophy now, 
which is merely a question to what a degree society may control the 
individual use of individually owned resources. 

Mr. McLaughun. I will discuss now the extent of the adoption of 
unit operation. This method is invariably practiced in those coun- 
tries where mineral rights are the property of the state or where con- 
cessions covering large areas are given to single operating companies. 
In the major fields of Iran (Persia) and Iraq unit operation is prac- 
ticed by the foreign oil companies holding state concessions. It is 
also used in parts of Venezuela, where foreign oil companies hold large 
contiguous blocks of leases. 

The advantage of compulsory unit operation is considered so great 
that England, in making provision for any possible oil field which may 
be discovered in Great Britain, has provided in the British Petroleum 
Regulations of May 15, 1935, for cooperation among lessees of one 
geological unit, to be effective at first voluntarily, failing which the 
Government, through the board of trade, has the power to require unit 
operation subject to the right to arbitration. 

Voluntary unit operation has been practiced in the United States 
for many years, and particularly since about 1927, when a period of 
overproduction stimulated interest in unit control as a stabilization 
device. Perhaps as many as 30 pools or sections of pools are operated 
under some kind of unit management at the present time, but these 
make up a very small percentage of the total production. 

Many of the more important unit schemes in the United States 
involve Federal land. One of the first major legislative moves in the 
direction of unit operation in the United States was the enactment by 
Congress of laws applying to lands belonging to the United States. 

In a very restricted manner unit operation has been adopted and 
approved by the laws and regulations of Arkansas, Oklahoma, New 
Mexico, and Louisiana. 

The Vice Chairman. May I ask a question, please? What per- 
centage of the probable public land carrying oil iS so related to private 
lands that they may be drained from wells on private lands? Or 
reverse it. I would like to ask it the other way around. How much 
of the public lands of the United States that has oil under it couldn't 
be drained by wells from private lands ? 

Mr. Stabler. It would be a very small percentage. 

The Vice Chairman. That's the answer. 

Mr. Stabler. However, in the unit plans that have been adopted for 
public lands, large areas of private lands have been included. Half 
of the production from Federal lands at the present time is developed 
under unit-operation agreements, combined with private lands. 

The Vice Chairman. The point I have in mind is that if the Fed- 
eral Government owns a considerable amount of ground that may 
produce oil, in these times of heavy private production it seems to 
me probably it ought not to be leased to anybody. 

I didn't want to bring that question up, but it is something we can 

The Chairman. We can discuss that in the Public Lands Committee 
some time. 

The Vice Chairman. Yes. 

Mr. McLaughlin. In a very restricted manner unit operation has 
been adopted and approved by the laws and regulations of Arkansas, 


Oklahoma, New Mexico, and Louisiana, in the sense that pooling of 
mineral rights within well-spacing units can be required by the regu- 
latory authorities of the States. The drilling district or proration 
unit seems to be a step in the direction of compulsory unit operation 
of the entire pool. All that seems to be necessary is that the State 
require that the wells in adjoining drilling districts be operated accord- 
ing to standard regulations and that some method be found of compen- 
sating the owners of the gas cap. 

Unit operation of oil and gas pools has been widely recommended 
by geologists and engineers, oil producers, lawyers, economists, and 
Government regulatory bodies; and in most of these instances com- 
pulsory unitization was recommended. 

Among petroleum geologists and engineers, perhaps one of the 
most significant recommendations of unit operation is that of H. C. 
Miller and Ben E. Liridsly, of the United States Bureau of Mines, 
made before the Cole Committee in the petroleum investigation in 
1934,^ that in their opinion, unit operation presented no insuperable 

Representative Williams. Right there, in connection with this com- 
pulsory unit operation, what formula has been worked out by which 
there is an equitable distribution of the withdrawals? 

Mr. McLaughlin. Well, there is some 

Representative Williams (interposing). How can they determine 
what each one of the different owners is entitled to ? 

Mr. McLaughlin. There is some dispute among engineers as to 
the accuracy with which oil in place can be estimated. Mr. Lindsly 
and Mr. Miller feel that it can be done with sufficient accuracy to 
serve as a basis for division of the pool. After all, all you have to 
determine is the ratio, not the total amount in the reservoir. 

Mr. Watkins. May I ask whether the unrestricted rule of capture 
operates to the equitable distribution of the oil in a given pool ? 

The. Chairman. I assume that Mr. Stabler will have something to 
say about the experience of the Government in unit operation. 

Mr. Stabler. If you so desire. 

The Chairman. It is a matter of much interest, as the questions 
indicate. Proceed, Doctor. 

Mr. McLaughlin. The greatest achievements of unit operations 
are, of course, those in Persia and Iraq. The fields in those coun- 
tries have produced a much larger percentage of oil by natural 
means : that is, by use of reservoir energy, and have been characterized 
by costs considerably less than those in the United States. 

Earl Oliver and J. P. Umpleby, petroleum engineers, further state 
that the greater part of foreign oil is produced from large blocks 
with the competitive feature either absent or very materially re- 
duced, whereas most American oil is produced under competitive 
conditions of waste and high cost. The greater advantage of unit 
control is illustrated by the operation of the Anglo-Iranian Oil Co., 
of the Temple of Solomon field in Persia. From February 1929 
to the end of 1932, according to Sir John Cadman, chairman of the 
board of the Anglo-Iranian Oil Co., no well in that field — 

has ceased natural flow on account of declining pressure or of diminished 
drainage from the reservoir rock. No well has been taken off production on 

1 a subcommittee of the House of Representatives Committee on Interstate and 
Foreign Commerce, pursuant to H. R. 441, 73d Cong., 2d sess. 


account of edge water encroachment, nor indeed has edge water been produced 
in any production well. A certain number of wells have gone to gas and 
been closed in, but this is strictly in accordance with our system of operation. 
The dates on which such wells have gone to gas have corresponded closely with 
estimates existing four years ago, and replacement wells have, where necessary, 
been methodically completed in advance of these dates. The pressure in the 
gas dome of the Masjid-i-Sulaiman field has dropped only five pounds per square 
inch, approximately one percent, during the past four years, although a pro- 
duction of nearly 20,000,000 tons has been drawn from the field during thai 

Sir John Cadman has attributed these achievements largely to 
unit operation, supported by adequate engineering standards. 

The average production per well in the Kirkuk field in Iraq and 
in the Haft Kell field in Iran. Persia, in 1935 was nearly 50 times the 
average production per well during conditions of peak production in 
1933 in East Texas. More than 20,000 wells in East Texas were used 
to obtain a production of 205,000,000 barrels in 1933, whereas in the 
Kirkuk field 45 wells were sufficient to produce 27,000,000 barrels of 
oil in 1935, and in the Haft Kell field 40 wells were sufficient to pro- 
duce 27,000,000 barrels in the same year. 

Significant achievements of unit operation in the United States 
have been made in the Kettleman Hills field in the San Joaquin Valley 
in California, in the Belvedere Gardens and Dominguez Hills fields 
in southern California, in the Van, Yates, and Sugarland fields in 
Texas, the Hobbs field in New Mexico, and the South Burbank and 
other Osage County fields in Oklahoma. The difference in costs of 
production between fields developed cooperatively and those de- 
veloped compeititively is impressive. Kettleman Hills is not an 
example of thoroughly successful unit operation, mainly because 
unitization was not complete. The small noncooperative outside 
interests caused much unnecessary waste; practices existed which 
would not have occurred under full unit operation. On the other 
hand, partial unitization made it possible to avoid many wasteful 
methods. It was not by accident that the lowest operating costs 
among California fields, in 1931 to 1934, were those for Kettleman 
Hills, and the next lowest those for Dominguez, 
■ Now I wish to suggest some other possible conservation proposals. 
First, the requirement of minimum engineering standards, even with- 
out unit operation. 

If regulation is to be continued mainly on the basis of proration, 
that is, production control, important gains in conservation may not 
be achieved unless proration efforts include improved rules and regu- 
lations concerning the ways in which oil and gas fields are to be 
operated. Production restriction creates the opportunity for con- 
servation in that it tends to raise the market price of these natural 
resources. Minimum engineering standards are necessary to see that 
conservation is actually achieved. 

These minimum engmeering standards themselves, in the absence of 
laws and regulations providing for compulsory unit operation, can 
make a considerable improvement in the relative recovery of natural 
resources. One of the most complete sets of rules and regulations 
governing production and conservation of oil and gas is that estab- 
lished by the Oil Conservation Commission of New Mexico under the 
State laws. Arkansas and Louisiana also have thoroughgoing con- 
servation laws, modeled in large part after the New Mexico law. 


The cause of conservation can be doubly served by well-spacing 
regulations which vary with the nature of the reservoir. By restrict- 
ing drilling, especially in proven areas, ultimate recovery can be in- 
creased and at the same time great savings in capital investment can 
be made. 

Eegulation of the rate of flow of oil and gas should be based in part 
upon the control of gas-oil ratios if maximum recovery is to be 
achieved. If production is too rapid, the gas in the structure ia 
given off, and much of the oil can never be recovered even by methods 
of repressuring. Repressuring in any case probably cannot establish 
a solution of gas in oil as complete as that which originally existed in 
the reservoir. If unit operation is not feasible and the regulation of 
the industry must continue primarily on the basis of proratioUj well 
allowables should be determined by reference to maximum ultimate 
recovery and not according to marketing conditions basted upon 
certain minimum production for existing wells. 

The premature abandonment of producing wells because of changes 
in economic conditions may be restricted by regulatory measures. 
The problem of abandonment of marginal wells is likely to be severe 
either in periods of very low prices of crude oil or at time when new 
fields are being brought into production. When a flush field is opened, 
many producers will abandon wells in old fields as fast as they can and 
transfer their efforts to the new proven territory, where a greater 
return can be realized, often in a very short period of time. 

"Without unit operation, a partial solution of the problem of well 
abandonment could be made if regulatory bodies. State and Federal, 
were able to restrict flush production elsewhere, and particularly if 
they effectively limited the number of wells which could be drilled in 
new proven areas of potentially high initial production. 

Regardless of whether unit operation is achievable or not, both oil 
and gas production need to be restricted by regulatory authorities 
approximately to current needs. The demand for oil is, of course, 
somewhat elastic, and consequently 

The Chairman (interposing). Did you say that the production 
ought to be regulated to current needs ? 

Mr. McLaughlin. Yes. 

The Chairman. That is a dogmatic statement of controlled produc- 
tion to meet demand ? 

Mr. McLaughlin. Yes. 

The Chairman. That is a dogmatic statement of controlled produc- 
tion to meet demand. 

Mr. McLaughlin. That's right. 

The Chairman. And do you think price should be a factor in de- 
termining the program ? 

Mr. McLaughlin. Yes ; it is, as I am about to suggest. The demand 
for oil is partly elastic, and the amount you need would depend some- 
what on the price, but the major products of crude oil probably are 
not very elastic. Consumption of gasoline seems to vary much more 
with general business conditions than with price, so it is only in part a 
price problem. 

The Chairman. Well, is it possible to regulate production to an 
estimated demand without a thoroughgoing regulation all the way 
down the line in every factor of the industry ? 


Mr. McLaughlin. I think so. That is more or less what we have 
now, in a haphazard spasmodic sort of way. 

The Chairman. No; I don't think so, and neither did the Penn- 
sylvania commission, which suggested regulating of the output. 

Mr. McLaughlin. I mean we do have now a kind of regulation 
of production of crude oil. 

The Chairman. Well, not very complete. The State of Illinois 
is producing in Illinois without any limitation or control of ahy 

Mr. McLaughlin. Quite so. I- mean the major States — Texas, 

The Chairman (interposing). Yes; but when you have one hole 
in a dike the dike is weak. 

Mr. McLaughlin. That is quite right; and conservation practice 
would be greatly improved if we had adequate control. 

The Chairman. You are giving us a scientific opinion In which 
you state that production snould be restricted to demand. Now, 
that takes no cognizance of State lines or of any other factors that 
tend to work against the realization of this ideal that you have 

Mr. McLaughlin. It is an exceedingly complicated problem. 
There have to be adjustments made for exports and imports, but it 
should be limited, in my opinion, to something like current demand. 

The Chairman. All right. So I am saying to you, can you regu- 
late production to current demand without adopting similar regu- 
lations all the way down the line in the whole industry ? 

Mr. McLaughlin. I think you can. I don't think that involves 
complete regulation. The price changes would more or less take care 
of themselves. Of course, I would certainly advocate adequate ob- 
servation on the part of regulatory commissions as to what is 
going on. 

The Chairman. If you restrict production of crude oil to the 
demand for petroleum products and you don't restrict the retail 
outlets, the inevitable result isi that which has been described here 
by retailers, of their inability to make a living in selling gasoline. 

Mr. McLaughlin. I should think it would make it easier for them 
to make a better living. It would tend to raise the price margins. 

Senator King. You are not so much concerned, then, about the 
consumer ? 

Mr. McLaughlin. I am taking for the minute the temporary 
point of view of the jobber. 1 wouldn't make that statement as too 
dogmatic a statement. 

The Chairman. I didn't say it was too dogmatic. I don't object 
to your dogma. You can adopt that freely so far as I am concerned. 
I am merely trying to determine what your dogma is ; that is • .11. 

Senator King. We are not very orthodox in considering this ques- 

Mr. McLaughlin. I think we have to retain the present wisely 
adopted system of production restrictions ; that is, proration is a sys- 
tem by which production is regulated indirectly to demand. 

Senator King. When you used the words "current demands" did you 
intend to include in that the demands from abroad, or exports, or ]ust 
the domestic needs, because we are selling and perhaps may increase 

124491 — 40 — pt. 17, sec. 4 12 


our exports of oil and gasoline to foreign countries, and the demand 
may increase, and when you speak of current demands I suppose you 
include in that the legitimate current demands which may be made 
by exporters to meet demands from other countries. 

Mr. McLaughlin. Well, that is a problem of regulation ; whether 
or not it would be worth while from the standpoint of national policy 
to restrict exports, that is a big problem, all right. 

Senator King. You are not advocating the restriction of the sale 
of oil or its finished products to Mexico or to Canada or to any country 
with which we have diplomatic relations and commercial relations? 

Mr. ]!tIcLAUGHLiN. All I was advocating there was that we shouldn't 
have excessive overproduction of crude oil. Five-cent crude oil is a 
bad thing from all points of view, conservation particularly. 

Mr. O'CoNNELL. When you were discussing proration as a means of 
bringing production in line Avith current demand, immediately follow- 
ing that you indicated that the demand for gasoline or petroleum 
products was to some extent elastic. Do you know whether any studies 
have ever been made or whether there is any accurate information 
available as to how elastic the demand for petroleum products is? 

Mr. McLaughlin. No. We know that there is a shift in the use 
from coal to fuel oil at certain price levels. That indicates a certain 

Mr. O'CoNNELL. I take it you don't believe it is possible to ascertain 
current demand without taking price into consideration. 

Mr. McLauc HLiN. Yes. 

Mr. O'CoNNELL. So there is a rather imponderable, or at least little- 
known factor of the elasticity of demand which would be a very 
important factor to take into consideration in determining demands. 

Mr. McLaughlin. That is right. It isn't a matter of 100 percent 

Mr. Ballinger. There are two conceptions of conservation, as I 
understand it here. One is that you should let the oil come out of 
your well at a rate so as to insure that a maximum amount of oil will 
be taken out of th«t well. To me that is the real meaning of conserva.- 
tion. The other meaning of conservation is that the rate at which 
that well flows shall only be such as to insure a profitable price to the 
industry. That is the real meaning of proration. If you establish 
scientific control a man ought to be able to take out as much oil as he 
pleases, no matter what the effect on price. Then you have scientific 
production of oil. I think those two concepts are totally at variance. 

Mr. McLaughlin. But you can either operate or not operate a well. 
You can either conserve by not operating a field at all or by operating 
it at the most efficient rate, and I would say it would be a violation of 
conservation when the price of oil would be such that it would seep 
down into all the so-called inferior uses. That is a matter of debate, 
of course. 

Mr. Ballinger. It would be disadvantageous for the oil industry, 
but it might be highly profitable for the industries buying from the 
oil industry. 

Mr. McLaughlin. And highly embarrassing to future generations 
wanting to use the oil for high-grade purposes. 

Mr. Ballinger. When you get to that you get to something so 
utterly imponderable that you are arguing completely in a vacuum. 
I don t see how you can come out with anything. 


Mr. McLaughlin. It is not an easy matter, I grant you, but it 
seems to me it is worth discussing. 

Mr. Shaughnessy. I want to be sure I understand your reply. 
Did you definitely disavow any relation between conservation and 
proration ? 

Mr. McLaughlin. I say proration has certain conservation aspects. 

Mr. Shaughnessy. And they involve the restriction of the rate 
of production ? 

Mr. McLaughlin. Yes; and also, as I will point out later on, the 
collection of much valuable information about the behavior of the 
reservoir and type of engineering practices that could be used under 
a thoroughgoing unit-operation plan. 

Representative Williams. If the known supply of this oil that 
we have now were operated on strictly a conservation basis, on strict 
engineering principles so as to preserve that, that there might' finally 
be the ultimate maximum amount of oil obtained, if it were operated 
purely on that basis, would we get as much oil as we are getting 

Mr. McLaughlin. Well, that is a difficult question to answer. 

Representative Williams. In other words, would tiiat operation 
furnish an adequate supply of oil at a reasonable price ? 

Mr. McLaughlin. I should think so. It certainly ought to lower 
costs. Would you care to comment on that, Mr. Stabler? 

Senator King. Might you not strike out the word "lower" costs 
and insert "higher" costs with more accuracy ? 

Mr. McLaughlin. No. Un^'^r a careful operating system, some- 
thing like unit control, costs are going down. You need much less 
labor and much less capital, and you get much higher yields of 

Representative Williams. Do you think we would get as much oil 
for the market as we have now ? 

Mr. McLaughlin. I think so. I think the average output per well 
would increase enough so that with fewer wells you would get much 
more production : This case I just quoted in Persia, where you got, 
out of 45 wells, something like 25,000,000 barrels, whereas in East 
Texas it took something like 25,000 wells to get out 200,000,000 
barrels. • 

Representative Williams. In other words, theiT, if we could get on 
a strictly engineering basis and a purely conservation basis and so 
operate them, we would not only conserve the oil, but we would also 
have an adequate supply at a fair price.- 

Mr. McLaughlin. I see no engineers questioning the adequacy of 
production under a unit plan. I see no criticism of that sort. 

Representative -Williams. The question in my mind is as to 
whether or not, if ^ that principle were put into operation, it would 
produce sufficient oil to supply the market demand at a fair and 
reasonable price. 

Mr. McLaughlin. I should think so. I should think costs would 
go down. 

The Chairman. The labor costs would do down ? 

Mr. McLaughlin. And capital costs, and yield per well would go 
up. If the engineers are able to help us at all, that would be the 
inevitable result. 


The Chairman. And since one of the subjects of this committee's 
study is unemployment, what would you suggest we do with the people 
that are put out of employment ? 

Mr. McLaughlin. That is a big economic problem. 

Representative Whjjams. I don't quite understand your reasoning 
on that question, because there are a number of wells now that are not 
restricted in operation at all. 

Mr. McLaughlin. But their output is very low ; very low. 

Representative Williams. You have just cited Illinois, for instance, 
QJid there are several other States where we don't have any conserva- 
tion laws at all, and in addition to the States where we do have a 
conservation law it seems to me under our present plan we would have 
more oil produced than under a conservation plan in every State. 

Mr. M!cLaughlin. We have production restrictions in practically 
every major State in the country. We have an informal plan in Cali- 
fornia ; we don't have any kind of plan in Illinois. 

The Chacrman. Here are two illustrations. We had some testi- 
mony here a few days ago with respect to the condition of the petro- 
leum industry in the State of Wyoming. The witness testified that 
there are 16 shut-in fields in Wyoming. Two of them are light oil, 
the others are black oil fields. But there are two light oil fields shut 
in ; no development. The oil is there. There is no conservation law 
in the State of Wyoming. 

In Illinois where, likewise, there is no conservation law, no unit 
plan, production is running wild. 

Mr. McLaughlin. Illinois is near the market, and Wyoming isn't. 

The Chairman. Exactly, but how are you going to adopt a rule 
which will apply to these two different situations ? The natural con- 
ditions with respect to transportation and distance from market re- 
strict the production without a conservation law in one State, and the 
closeness to the market in the other State causes tremendous produc- 
tion of recently discovered fields. 

Mr. McLaughlin. The invokement of Federal authority is the only 
way, of course. 

The Chairman. All right. That brings you down to exercising 
Federal authority over real property within a State, which, under our 
Constitution, is certainly not within the power of the Federal Govern- 

Mr. McLaughlin. Well, you have an irreplaceable natural resource 
underneath that property. I think there surely ought to be possi- 
bilities of an attempt at Federal regulation. 

The Chairman. Your thesis then is that there ought to be a Federal 
conservation law which would apply to this natural resource in every 
State and in all of the possessions of the United States, regardless of 
local conditions. 

Mr. McLaughlin. Certain minimum-required standards of behavior 
on the part of the oil producer. 

The Chairman. That in turn would require the establishment of 
some sort of a supervisory authority in Washington to determine what 
the permissible activi^ should be. 

Mr. McLaughlin. Yes. I see no other way to control it. 

Senator King. We haven't got a Hitler here yet. 

Representative Williams. Then I take it you are in favor of the 
•Cole bill that has been introduced in the House. Are you familiar 
with that bill? 


Mr. McLaughlin. No ; I am not familiar with it. 

Representative Williams. I think that is exactly what that bill is. 
It provides for the creation of a Federal Conservation Board to loot 
after the oil reserves just in the manner that you have specified in con- 
nection with States. 

Mr. McLaughlin. Yes. 

Representative Williams. I just wanted to make that observation 
about the Cole bill, as I understand it. 

Mr. Watkins. I think it ought to be pointed out that the aim of 
our recommendations is to see that minimum engineering standards 
are applied to oil pools wherever they may be and that those geologi- 
cal structures are operated at their optimum rate in order to yield the 
greatest ultimate recovery. 

Mr. McLaughlin. Shall I go ahead or do you have time ? 

The Chairman. How much more do you have ? 

Mr. McLaughlin. I have about two pages more. 

The Chairman. It is now\a quarter to five. 

Mr. McLaughlin. Perhaps I had better file this statement. 

The Chairman. We don't want to shut you oflF. How much do you 
have, Mr. Stabler? 

Mr. Stabler. I have no prepared statement at alX. Senator. 

The Chairman. Kiiowing you for a long time, I know that you 
don't need any. 

I directed a question to Dr. Cattell with respect to the estimates of 
production from the Bureau of Mines, and it seems to me that that is a 
matter of real importance in the consideration of this question. Mr. 
McConnell, I wonder how it would be if we should take a recess now 
until tomorrow morning at 10 o'clock and ask Mr. Stabler to appear at 
that time, and ask that Mr. White, is it, of the Bureau of Mines ? 

Mr. Cattell. Mr. White is in charge of the division that handles 
the statistical work. 

The Chairman. He would be available to come to discuss that phase 
of the question, which is a very important phase, would he not ? 

Mr. Catiell. I presume that he is in Washington; I am not sure. 

The Chairman. I wonder, Mr. Watkins, if you would make it 
your business to ask Mr. Whit© or somebody who can speak for him. 

Mr. Watkins. Mr. Chairman, I wonder if Mr. McLaughlin could 
finish. He needs about 5 minutes, and he is due back in New York in 
the morning. 

The Chairman. Yes; I intended that he should finish these 2 

Mr. McLaughlin. Therefore, a restriction of production to cur- 
rent needs inevitably assumes the maintenance of desirable prices or, 
at least, the restriction of price fluctuations within certain desirable 

Restriction of production will tend to raise the price. In times of 
depressed conditions, such as existed in 1930 to 1932, an increase in 
price may be justified socially if it operates as it might under favor- 
able conditions of regulation to restrict waste. Under such circum- 
stances it appears socially desirable that producing companies 
operate at a profit rather than at a loss. Both economists and jurists 
have held that unless production, particularly from a flush pool, is 
limited to something like market demand, waste cannot J3e prevented 
nor can the correlative rights of the owners of land over the pool be 


protected. The principle of ratable takings is a firmly established 
law. Under the restricted floAv imposed by proration, producers 
have gained more technical knowledge concerning the utilization of 
reservoir energy, and grossly wasteful production practices have been 
greatly restricted. Thus, proration has helped to promote conser- 

Although it has been held that proration offsets the old rule of 
capture, the enemy of conservation, it may nevertheless lead to other 
undesirable operating practices, such as unnecessary drilling and 
overdevelopment of pools, resulting in well allowables too small to 
permit an efficient rate of flow. 

If you restrict production, the oil companies would simply put 
down more wells and get their total volume out of more wells instead 
of fewert wells unless there is adequate well-spacing provision. 

Economists are agreed that of itself proration does not mean con- 
servation and that, as a matter of fact, the results are likely to be 
to the contrary. Yet proration, even as a strict stabilization meas- 
ure, means avoidance of wasteful storage and protection of reserves 
of marginal wells. Moreover, proration procedure has improved 
greatly in recent years. 

The fundamental problem of State quotas is whether they are to 
be related to the best conservation of reserves or whether they are 
to reflect merely existing competitive market trends and priority of 
development, amongst States, for instance, as between Illinois and 
Wyoming. In order that production restriction be equitable and 
judged insofar as possible on a national basis. Federal authority will 
be required. Such authority could prevent a recurrent break-down 
of production restriction caused by conflicting interests among the 
States or by the discovery of important fields in States having no 
proration laws, particularly as they happen to be as Illinois is, near 
the market, and as Michigan is. 

Insofar as possible, allowables should be based on acreage content; 
that is, on estimated oil in place and not on any minimum allowable 
per well. In a situation such as that in East Texas, where 98 percent 
of the district allowables are used in the minimum prorations per well 
according to the Marginal Well Act, there is clearly little possibility 
of basing proration on acreage content or on efficient rate of produc- 
tion. Although the Federal courts have declared that the allowable 
for a good well must be higher than. that for a poor one, the Marginal 
Well Act has forced the railroad' commission to deal with over three- 
fourths of the State's allowable on a basis which ignores any distinc- 
tion between reservoir conditions or more efficient rates of production. 
Insofar as proration is consistent with conservation, its goal should 
be the maintenance of uniform reservoir pressures, and the allowable 
per well should be readjusted upon the basis of careful measures of 
comparative pressure declines. Some States trv to follow this pro- 
cedure. If not accompanied by unit operation,"^ proration should be 
based upon pool allowables and not upon well allowables. 

The Chairman. Are there anv questions now to be directed to Dr. 

Mr. O'CoNNELL. I should like to address one to him. I understood 
you to say in the last few moments that one of the functions of pro- 
ration which tied it in with conservation was to keep so-called marginal 
wells m production ; is that correct ? 


Mr. McLaughlin. Yes. 

Mr. O'CoNNELL. I take it that is the function of the price angle to 

Mr. McLaughlin. That is right; not to have severely depressed 

Mr. O'CoNNELL. Has that any real connection with conservation? 

Mr. McLaughlin. Yes; because if these marginal wells are closed 
down for a period of time, many of them cannot be reopened, the 
casing will collapse, and the resource will be totally lost. 

Mr. O'CoNNELL. Is that apt to be so for any substantial part of the 
so-called marginal wells? We had a small amount of testimony be- 
fore the committee along that line a week or two back, and, while the 
witness Avasn't. particularly definite on the subject, he seemed to be of 
the opinion that if a so-called stripper well had to be shut down be- 
cause it was a submarginal producer and on the price basis was unable 
to stay in production, that at a future date it would be entirely possible 
to recover the oil in the ground if the price structure of itself, through 
the forces of supply and demand, came around to the point that it was 
less than submarginal. You don't quite agree with that ? 

Mr. McLaughlin. Do you know what field he was referring to? 

Mr. O'CoNNELL. He was speaking generally. He was a technical 

Mr. McLaughlin. I think it would depend on the depth of the well, 
the type of reservoir, the type of well, whether it was cemented in a 
certain way. As to the percentage, I don't know. Do any of you rien 
have any guesses? 

Mr. O'Connell. As I recall, it was Colonel Thompson. He was dis- 
cussing proration. 

Mr. McLaughijn. Dr. Katherine Carman, of the Petroleum Divi- 
sion, in the Cole Committee testimony in 1934, stated that a very 
considerable number of wells might not be able to be reopened after 
being closed for a period of 6 months or so. 

Mr. O'Connell. At least it is clear that it is your view that a sub- 
stantial part oi the function of proration is to keep wells which would 
otherwise be submarginal in production. 

Mr. McLaughijn. Yes ; that is right. 

Mr. O'Connell. And to do that, I take it, means it is definitely 
for the purpose of bringing about needed price increases for the crude 
petroleum, crude oil. 

Mr. McLaughlin. Yes. I am referring, of course, to severely de- 
pressed prices, such as you had in 1932, and such as you get whenever 
a large flush pool comes into production and the crude-oil price goes 
1 o 5 or 10 cents a barrel. 

The Chairman. What is the comparative cost of developing or 
producing oil from a stripper well and from a flowing well? 

Mr. McLaughlin. Oh, I am not familiar with costs. A stripper 
well would be, I should say, several times the cost of running a 
flowing well. 

The Chairman. So that if you were to operate a conservation 
program for the purpose of making it profitable to operate the sub- 
marginal wells, you would by that very fact increase the profits of 
the owners of the flowing wells, would you not? 


Mr. McLaughlin. That is right. It might be better for the Gov- 
ernment to get that back in extra taxes rather than face the problem 
of losing this irreplaceable resource, I mean if the Government feels 
it is an excessive profit. 

The Chairman. That is another very delicate question of taxes 
and I don't think we will go into that this evening. 

Mr. McCoNNELL. Did you mean to say that the English are pro- 
ducing 50 'times as much oil from one well in Iraq— was that where 

it was? 

Mr. McLaughlin. Also in Iran. 

Mr. McCoNNELL. Than we are getting from our average well under 
like conditions? 

Mr. McLaughlin. Roughly similar conditions; yes. 

Mr. McCoNNELL. Have you any idea of what the waste of oil is, 
what we are losing in unrecoverable oil by that competitive drilling 
that you mentioned in east Texas as compared with what the English 
will get out of an Iraq pool ? 

Mr. McLaughlin. Not very accurately. I would guess the recovery 
would be about twice as great in Iraq as in east Texas. 

Mr. McConnell. Do you think tliis estimate Dr. Watkins made 
on the unrecoverable oil we have found and gone by, by this offsetting 
drilling of 600,000,000 barrels a year, is too nigh or too low? 

Mr. Watkins. May I remind you that that estimate was in terms of 
certain assumptions. I pointed out that we were dealing with the 
realm of conjecture. 

Mr. McConnell. That was the assumption they would increase the 
recoverable possibilities from 30 to 45 percent. 

Mr. McLaughlin. Yes; I should think that would be right. 

Mr. McConnell. That 600,000-barrel figure you think pi-obably is 
not too exaggerated? 

LIr. McLaughlin. If we were operating all of our wells at max- 
imum efficiency; yes. 

Mr. McConnell. Do you think that excess drilling in this country 
every year, drilling that is unnecessary, would amount to as much as 
$500,000,000, a half a billion dollars? 

Mr. McLaughlin. Yes; if you compare it with an ideal situation 
such as you would have under unit operation ; if you compare it with 
the Iraq system. 

Mr. McConnell. From a geological standpoint there is no differ- 
ence between Iraq and the pools in a good many of the States here? 

Mr. McLaughlin. There are all kinds of pools. The East Texas 
pool isn't the same kind of pool as Iraq. It is more of a water 

Mr. McConnell. But that is due primarily to excess drilling. 

Mr. McLaughlin. Yes, There is some difference among geolo- 
gists as to the desirable density of wells, but under the unit opera- 
tion plan, you put down the first generation of wells and then if the 
reservoir conditions you learn about indicate you need more wells 
,you could put them down instead of putting down an excessive 
n.umber to begin with. 

The Chairman. If there are no more questions 

The Vice Chairman (interposing). I would like to ask one ques- 
tion. Do you mean by your answer a moment ago you leave ftom 


40 to 50 percent of the oil permanently in the ground unless you 
resort to some method the engineers are not now usin^? 

Mr, McLaughlin. Yes; unless you are able to put into effect dif- 
ferent methods. 

Mr. McCoNNELL. This unitized operation is not a theory, it is 
in practice by foreigners who are competing with our production, is 
it not ? 

Mr. McLaughlin. Yes; and it is used in this country. There are 
even cases in this country where oil companies have got together and 
cooperated within a given field, in which they held separate bases 
scattered about in a patch-work system. 

Mr. McCoNNELL. Very few places? 

Mr. McLaughlin. Very few places. 

The Vice Chairman. How do you know, if I may ask you, with 
reference to the accuracy of your answer a moment ago that we are 
leaving permanently, insofar as present engineering methods are 
concerned, 40 to 50 percent of the oil in the ground? 

Mr. McLaughlin. I am depending there principally on the esti- 
mates of Mr. H. C. Miller of the Bureau of Mines in that testimony 
of 1934 before the Cole Committee, in which he showed the differ- 
ence between the average recovery of companies, the actual practice 
and the estimated recovery under the use of the best known methods. 
He said that the existing recovery then was something like 20 to 35 
percent, whereas if best current practice were put into effect, it would 
be something like 60 percent. 

The Vice Chairman. By what process, have they tested fields suffi- 
ciently or is that the theory of an engineer, who of course bases his 
conclusion on what he knows generally? 

Mr. McLaughlin. The engineers among themselves seem to agree 
pretty well on estimates of given fields. Estimates have been made 
of the total amount of oil. 

The Vice Chairman. That is a tremendously important fact, if 
the country is convinced of the accuracy of that conclusion. 

Mr. Watkins. I think Mr. Soyster might say something on that 

(Representative Sumners assumed the Chair.) 

Senator King. Could I ask you just one question? You have seen 
Signal Hill, have you not, near Los Angeles? 

Mr. IMcLaughlin. No ; I haven't, but I know about it. 

Senator King. Wliere there are scores, if not hundreds, of weDs. 
some of them within 40, 50, feet of each other.' Some of them have 
gone to very great depth. Would you venture the assertion that in 
Signal Hill, if they have ceased operation — and they have not — that 
they have not gotten all of the oil out? 

Mr. McLaughlin. Certainly. 

Senator King. They have not ? 

Mr. McLaughlin. That is right. Even if it were the very best 
kind of operating conditions, you don't get a high percentage of recov- 
ery. The oil tends to cling to the sand ; you just can't shake it loose. 

Senator Kt^^g. But that which it was practical to obtain— do you 
mean to say they have not practically exhausted the field? 

Mrf McLaughlin. I mean to say with unit operation of the field 
you have got a somewhat higher return ; yes. 


Senator King. If you have a large number of wells, just a few 
feet apart, doesn't that tend to drain the larger area than if you had 
only a few wells? 

Mr. McLaughlin. It depends somewhat on the nature of the sand. 
I am not familiar with that field. Perhaps Mr. Soyster is. Do you 
know the field ? 

Mr. Soyster. I worked down there a while. 

Mr. McLaughlin. Would you say the recovery would have been 
increased under the unit-operation scheme? 

Mr. Soyster. I would say that the recovery of oil in Signal Hill — 
this is an offhand opinion — ^had the field been unitized and developed 
systematically, you might not have had as many barrels of oil recorded 
to date as have actually been produced, but over the entire life of 
the field I think that the field would produce more oil than it would 
as it is. 

Mr. McCoNNELL. How much more, a little more or twice as much? 

Mr. Soyster. No ; I wouldn't say twice as much. I wouldn't hazard 
such a guess as that. 

Mr. McConnell. It would be a large increased production? 

Mr. Soyster. It would be my rough guess that possibly 50 percent 
of the oil has been recovered from that field up to the present, maybe 
more than that, because of the fact in the first place that it is a 
rather light oil, that is the gravity is relatively high, the sand is a 
rather porous, permeable sand, it isn't tightly cemented and the 
migration of oil and water through the formation meets less resist- 
ance, there is less friction than you would have in a more tightly 
cemented sand. 

Senator King. That would make, would it not, for a larger flow, 
where there was a large number of wells just a few feet apnrt, than 
if you had only one well in a given area. 

Mr. Soyster. That is true. Of course, you can take any sort of a 
reservoir, one of these carbonated water bottles, for instance. If 
you had a dozen tubes in there and opened all of those at once, the 
exhaustion is going to be much more rapid. If you dissipate the 
energy that is behind the fluid, if you produce a greater percentage of 
gas per barrel of oil then you have reduced the flowing life of that 
field and increased ultimately the cost per barrel of oil to be produced 
over the whole life of the field. 

Senator King. I wasn't speaking about cost. I was assuming 
that— take the table in front of you. Supposing that that is 1 
acre of ground there and you drill 1 well in the center, and on 
another acre of similar constituents you drill 40 or 50 holes, per- 
haps 10, 20 feet apart; it would seem to me, from the law of hydro- 
statics or gi-avity or anything else that you would perhaps drain a 
larger amount with your 40 or 50 wells in that acre than if you 
only had 1 well in the center. 

Mr. Soyster. I think time is the element of that answer, because 
if you have one well and the porosity and permeability of the reser- 
voir were uniform or homogeneous, why wouldn't you get all of the 
oil out of that well eventually? It is true enough you wouldn't 
get it in the same period of time. 

Senator King. There is. of course, this possibility. 

Mr. Soyster. We know also that these sands are'not homogeneous, 
that they are not entirely uniform, and, of course, that is the reason 


why, after experimentation and drilling so many wells in a field, you 
are able to determine whether 1 well to 20 acres or 1 well to 40 acres 
or some other spacing basis is the proper spacing basis for the great- 
est ultimate recovery of oil. 

Senator King. Well, the time element is a factor. 

Mr. SoYSTER. Absolutely. 

Mr. McLaughlin. But you might well get more out of one well 
than out of a dozen eventually. 

Senator King. If you want to obtain the last drop of oil, so to 

The Vice Chairman. I asked a question of the gentleman. How 
do you know that you are leaving this oil in the ground? Do you 
make some tests with some cores? 

Mr. SoTSTER. They take samples of the formation, actual core 
samples which are cut from the formation and you determine the 
porosity, in other words the space or voids in that particular sand, 
and, of course, you must assume that 

The Vice Chairman (interposing). Do you analyze that sand to 
see how much oil is left in it ? 

Mr. SoYSTER. Certainly, that can be done. You can determine, 
for instance, the amount or percentage of oil in a sand at any stage 
of the game so far as that is concerned. 

The Vice Chairman. What I am trying to find out is after the 
period of commercial production has passed for a well, then the 
engineers are going to determine this thing that you have been 
testifying to, to ascertain from some core or some sample taken 
from down in the sand as to how much oil is left ? 

Mr. SoYSTER. Let me put it this way. If you ascertain the total 
volumetric capacity of the reservoir on the basis of the porosity of 
the sand, you know that it can hold — whether it does or not is 
something else — so many barrels of oil or water. Now, after you 
determine the productive limits of that field by drilling a well, say on 
two, three, or four sides of that structure, you can estimate the vol- 
ume of oil in that reservoir at that time. Then, of course, as you 
recover the oil you know how much you have produced and if you 
have only gotten out 50 percent of it at least presumptively there is 
50 percent of it left there. 

The Vice Chairman. How do you know that there wouldn't have 
been a good deal of oil left there if you had had fewer wells? 

Mr. SoYSTER. Well, when it comes right down to it I don't see 
that the wells make anj^ difference about the amount of oil left there. 
It is a question of the rate of production, just as I said 

The Vice Chairman (interposing). Pardon me. I thought you 
were contending that if you had few wells you would get more ulti- 
mate production from the field. 

Mr. SoYSTER. The only reason that I would contend that is because 
with fewer wells you have fewer avenues of waste or escape.~~Tn 
other words, you don't have 40 or 50 wells from which you can have 
gas blowing into the air, being produced at an inefficient gas-oil 
ratio. Consequently, there would be a greater volume of gas wasted 
to the air during a given period of time. 

The Vice Chairman. You take out more oil. 

Mr. Soyster. Yes; but in the other event, if you produced your 
fewer wells more efficiently at their maximum efficient rate — ^that is, 


the least amount of gas possible per barrel of oil — you would probably 
use up less energy of the gas — that is, reservoir energy and gas en- 
ergy — in producing an equivalent amount of oil. Now it is conceiv- 
able, of course, that maybe you might with all your wells, if they were 
held down to their most efficient rate, maybe in some case you might 
possibly have a comparable gas-oil ratio ; that is, with the number of 

The Vice Chairman. You choke each one down ? 

Mr. SoYSTER. Yes; and prevent that waste of gas, but there is a 
certain limitation on that. You can't possibly, in some cases, do that 
because, if you have a property on top of the structure where you are 
close to the gas cap, that well may blow a large volume of gas and a 
very small amount of oil ; but if that landowner's property line runs 
along there, what is he going to do? Is he going to sit by and just 
take gas and let the other fellow drain his oil, or what? Of course, 
in the old days they used just to open them up wide and go up in the 
air. Gas wasn't worth anything anyway, and the sooner it blew in 
the oil the better, but they have realized the value of gas now in re- 
spect to its function as a medium of production or aiding in pro- 

The Vice Chairman. Suppose in that field where you have the unit 
production you sunk your wells on top of that gas cap, would you 
have some sort of way to get rid of tliat gas before the oil would begin 
to come up ? 

Mr. SoYSTER. No ; if you do that, you are simply defeating the pur- 
pose of the whole plan, because you are letting out the force which 
would lift that oil. You are dissipating the very energy that 

The Vice Chairman (interposing). The gas is on top of the oil. 
How could it get down under to push it up ? 

Mr. SoYSTER. As I said, it is like a vacuum bottle. Tiiat tube in 
there goes down to the bottom of the liquid, doesn't it, in the bottle, 
and if you open the valve a differential in pressure is created due to 
the difference in pressure inside and outside the bottle ; the gas reacts 
on the top of that fluid and forces it down into the reservoir and 
up the tube. 

The Vice Chairman. "\^^iy wouldn't the man who happens to own 
the land, own that gas cap. put his tube down ? 

Mr. SoYSTER. He may not be able to get into the oil. The oil may be 
clear out beyond the property lines of his property. It may be all gas 
clear through the productive horizon at that point. 

The Vice Chairman. That is what I was asking a moment ago. 
Suppose a well is put down to blow out this oil, and under commu- 
nity ownership you get down under that gas cap. 

Mr. SoYSTER. Under community ownership that doesn't make any 
difference, because each one participates in the ratio that his prop- 
erty bears to the total productive area. 

The Vice Chahjman. If that well is owned by jnst one man or all 
of them it wouldn't seem to me that the well would know whether 
it was owned by all of them or not. 

Mr. Soyster. You are correct, it wouldn't make any difference. 
That IS the whole point in such a case, if you are to get the maximum 
value out of the energy that is in the reservoir you must keep it there 
to produce the oil from whatever wells are actually capable of pro- 
ducing oil. If it happens that the gas cap occupies an area of the 


field on which there is one property owned by an individual or by 
one company, and they can't get any oil there, if they should go in 
and let that gas go to the air they are getting no oil recovery and at 
the same time they are injuring the field as a whole and preventing 
maximum ultimate recovery and recovery at a lower cost so far as 
the oil-producing areas of that structure are concerned. 

The Vice Chairman. Thank you very much. 

Are there any more questions? 

Mr. McCoNiraxii. Mr. McLaughlin, do you think that if the tariff 
were taken off imports of oil, oil products, in this country there would 
be a much larger volume coming from these unitized English fields 
and from Venezuela than at present? 

Mr. McLaughlin. That is a guess. I presume there would be more 
oil coming from Venezuela; yes. 

Mr. McCoNNELL, It is much cheaper for them to produce oil than 
it is for us? 

Mr. McLaughlin. It has been stated that the cost of production 
under a unitized system is much less than under a highly competitive 

Mr. McCoNNELL. Under like conditions how much less? Would 
it be 10 percent less, or a half? 

Mr. McLaughlin. As between East Texas, where you have 20,000 
wells producing 200,000,000 barrels and the Kirkuk field 

Mr. McCoNNELL (interposing). That is an English field? 

Mr. McLaughlin. The Anglo-Iranian Oil Co., with 45 wells pro- 
ducing 27,000,000 barrels, you must have a terrific difference in cost 
of production. 

Mr. McCoNNELL. You think it might be one-fiftieth of the cost 
of the East Texas? 

Mr. McLaughlin. I wouldn't say that. 

Mr. McCoNNELL. It would be a small part of the cost of the East 
Texas production ? 

Mr. McLaughlin. I don't know. I haven't seen any cost figures. 

Mr. McCoNNELL. It might be less than half? 

Mr. McLaughlin. Yes; I should think so. It depends on your 
lease cost and royalty expenses. 

Mr. Ballinger. In the interest of effective conservation, would you 
be willing to limit the use of oil ? That is another way we might con- 
serve. For instance, would it be a good thing to say that every auto- 
mobile owner should only have so much oil or gas per week, or 
something of that kind ? 

Mr. McLaughlin. I wouldn't start in there. I think if I were 
going into that sort of program I would start in places where you 
would have high-grade oil being used for purposes for which we could 
use coal, a resource of which we have much larger quantities. 

Mr. Ballinger. You wouldn't limit the use of oil, but you would be 
willing to control the production so an artificial price would be arrived 
at to automatically limit its use ? 

Mr. McLaughlin. Yes. 

Mr. Ballinger. There is an inconsistency there. If you want people 
to use as much oil as possible, why don't you make the price right so 
they can use as much as possible ? 

Mr. McLaughlin. I don't want them to use as much as possible. 


Mr. Ballinger. Then you should be against their driving down 
Mount Vernon Boulevard and using up the oil supply of the Nation. 

Mr, McLaughlin. I would say that was a superior use. 

The Vice Chairman. We shall stand in recess until 10 o'clock in the 

(Whereupon, at 5:15 p, m., a recess was taken until 10 a. m., on 
Friday, October 20, 1939.) 



United States Senate, 
TEMPORARy National Economic Committee, 

Washington^ D. C. 

The Committee met at 10:20 a. m., piirsuani to adjouniment on 
Thursday, October 19, 1939, in the Caucus Roo^jn, Senate Office Build- 
ing, Senator Joseph C. O'Mahoney presiding. 

Present: Senator O'Mahoney (chairman); Representative Sum- 
ners (vice chairman) ; Senator* King; Representative Williams; 
Messrs. Berge, Henderson and Brackett. 

Present also: Senator Green (Rhode Island); Representative 
Mapes (Michigan) ; Clarence Avildsen and Robert McConnell, rep- 
resenting the Department of Commerce; Willis Ballinger, represent- 
ing the Federal Trade Commission; Quinn Shaughnessy, represent- 
ing the Securities and Exchange Commission ; W. B. Watson Snyder, 
Hugh Cox, F. E. Berquist and Christopher Del Sesto, Special Assist- 
ants to the Attorney General; Leo Finn and Roy C. Cook, Depart- 
ment of Justice. 

Vice Chairman Sumners. The Committee will come to order. 

The Chairman. I think Mr. Stabler is the first witness this morn- 
ing. You completed with Dr. McLaughlin last evening, didn't you? 
You finished with Dr. McLaughlin. 

Mr. Stablor, please. 

D. C. — Resumed 

Mr. Stabler, My name is Herman Stabler. I am Chief of the 
Conservation Branch of the Geological Survey, a position that I 
have held for somewhat more than 14 years. Prior to that, for more 
than 20 years I had been engaged in various public-land activities 
of the Department of the Interior, either in the Geological Survey or 
the Reclamation Service. 



The Conservation Branch of the Geological Survey, I may explain, 
deals almost wholly with public land matters : 

First, the classification of the public lands. That is a job that 
involves the taking of an inventory of the natural resources of those 
lands; and second, the engineering supervision of those lands that 
are under lease or permit or license for minerals or for power. 


Mr. Stabler. In my testimony, if it is agreeable to the committee, 
I will first run very briefly over the steps that have been taken in 
the Department toward the conservation of oil and gaSj leading up 
to the two principal means of accomplishing conservation that are 
current, on© of which is unit operation, which, judging from the 
interest of the committee yesterday, will be discussed at somewhat 
more length. 

The first step taken in the Department toward the conservation of 
oil and gas was in 1865, just 6 years after the discovery of the 
famous Drake well that ushered in the first period of overproduction 
and surplus of oil in this country. 

In 1865 oil was discovered on public land in California. The Com- 
missioner of the General Land Office held that it was the policy of the 
Government not to treat these oil and gas lands as ordinary public 
lands and that they be withheld from disposition. The following 
year, 1866, the basic mining law of the United States was passed. 
Under that law, although it didn't mention, I believe, any specific 
mineral, it certainly didn't mention oil and gas specifically, it was 
held that the public lands should be disposed of, that is the oil and 
gas lands should be disposed of. 

That law had no conservation provisions in it, but it remained the 
Federal oil and gas law for a great many years. 

In 1891 the first act authorizing the leasing for mining purposes of 
Indian lands was passed. Parenthetically, I may say that the Con- 
servation Branch, in addition to working on public lands, acts as a 
service organization for the Office of Indian Affairs and for the 
Navy Departmepit in the supervision of oil and gas operations on 
their lands also. 

That act of 1891 and subsequent Indian leasing acts contained 
no provisions looking toward conservation of the resources. It was 
not until 1897 that a Federal public land law specifically recognized 
oil and gas. That was an amendment to the basic mining law which 
recognized what were termed oil and gas placers, and that remained 
the Federal law as to pil and gas until 1920. 

That act of 1897 also contained no conservation provisions. It 
became apparent that this old mining law was a very unsatisfactory 
act under which to dispose of oil and gas lands. The sentiment for 
the withholding of title to oil and gas lands in public ownership and 
leasing them for development grew until in 1909 quite a new policy 
was established. Beginning in that year an attempt was made to 
withdraw from disposition under the mining law the oil and ^as 
lands owned by the United States. This marked the real beginning 
of Federal oil and gas conservation. 



Mr. Stabler. I should perhaps mention in connection with that 
policy the withdrawal of naval reserves, three of them, two in 1912 
and one in 1913, two in California and one in Wyoming, it being 
thought at that time that the Navy should have a reserve of oil to be 
available when other sources were depleted. 

The Chairman. "NVhat has happened to those reserves? 

Mr. Stabler. That is quite a story, Senator, but I think I can 
touch on it briefly. Naval reserve No. 1, containing several hundred 
million barrels of oil, is maintained as a reserve, not perfect, there 
are some private lands operated on one edge of it, some private hold- 
ings through the middle of it. It would be highly desirable, if I 
may properly express such an opinion, to perfect that reserve and 
make it a real hundred percent Government j-eserve of oil. 

The Chairman. Do you know what the rate of production from 
the private lands is in this naval reserve No. 1 ? 

Mr. Stabler. Now it is quite small. I can't state offhand how 
much is produced, but it is a rather small amount of oil. 

The Chairman. What do you mean by a small amount of oil? 

Mr. Stabler. I will have to guess at that because I have simply 
an impression. I would say possibly 10,000 barrels a day. 

The Chairman. And over how long a period has that operation 
been continuing? 

Mr. Stabler. That was begun, I think, somewhere between 1910 
and 1915. The amount produced was very much greater back in 
those early years, and has continued in some amount ever since, but 
it is confined to the east end of the field. 

The Chairman. What year did you say it began ? 

Mr. Stabler. Between '10 and '15, I can't state exactly the year. 
The reservation was made September 2, 1912, and it was just about 
that time that production started. 

The Chairman. So this reserve has been draining through private 
lands for about 25 years ? 

Mr. Stabler. That is right. 

The Chairman. And the production years ago was much greater 
than it is now, and it now happens it is about 10,QD0 barrels a day ? 

Mr. Stabler. I guess that it is.^ 

The Chairman. That was your impression. Do you know who 
the operator is ? 

Mr. Stabler. The principa,l operator on private lands is the Stand- 
ard Oil Co. of California. 

Representative Williams. What is your plan to make that 100 
percent naval reserve? 

Mr. Stabler. That is a plan of the Navy Department, and I am 
under the impression that Congress recently gave the Navy Depart- 
ment authority to acquire these private lands under some means 
and make it a perfect reserve. 

^ Mr. Stabler subsequently supplied the following information : Production In 1939 from 
the Elk Hl\ls field, including Naval Reserve No. 1, was at the rate of about 10,500 barrels 
a day, 5,000 barrels being produced from patented lands and 5,500 barrels from land of 
the United States. Total production to the end of 1939 amounted to about 150.000 000 

124491 — 40 — pt. 17, sec. 4 13 


Kepresentative Wiixiams. That would necessarily imply the. right 
of eminent domain, wouldn't it, unless you could bargain with the 
private owners? 

Mr. Stabuer. I would think so. 

The Vice Chairman. May I ask you a question in that connec- 
tion? We have some testimony here that engineers can ascertain 
with fair workable accuracy the amount of oil in a given field under 
a given territory, a given acreage. Is that correct? 

Mr. Stabler. If they have a reasonable amount of information 
on which to base their estimates, yes/ They would need, of course, 
some information on the thickness of the sand and its porosity, and 
the limits of the productive area. 

The Vice Chairman. Do you know whether or not, according to 
.the determination of engineers, information to be had, this company 
has already drained its proportionate share of the oil from that 
general field? 

Mr. Stabler. I would be inclined to say that it has drained the 
major part of its proportionate share, but probably not the whole 
amount that underlay the land, or even 60 percent of it, which we 
would say would be a fairly large proportion. 

The Vice Chairman. I am speaking now of the recoverable oil. 

Mr. Stabler. Recoverable oil, yes. 

The Vice Chairman. Do you think that probably if the field 
had been no larger than the privately owned field, there would still 
be left under the ground 60 percent of their recoverable oil? 

Mr. Stabler. No, sir; 60 was the recovery that I am speaking of. 
The percentage of recoverable oil under normal methods of opera- 
tion I would say would be quite small now. 

The Vice Chairman. I am trying to get at oil that can be brought 
to the surface and not oil that stays down there forever. 

I am going to ask you a question you may not be prepared to 
answer, it is probably out of your field, but has the Government ever 
sought to enjoin in a situation sinjilar to this the removal of oil from 
its own property by private operators? 

Mr. Stabler. By drainage? 

The Vice Chairman. Yes. 

Mr. Stabler. Not to my knowledge. 

The Chairman. Has the Government ever undertaken in this par- 
ticular field to require the drilling of offset wells? 

Mr. Stabler. It has. 

The Chairman. Do we have offset wells operating? 

Mr. Stabler. We do. 

The Chairman. How much is the Navy withdrawing through the 
offset wells? 

Mr. Stabler. I can't give you the figure, Senator.^ 

The Chairman. Do you know — have you an impression — as to 
whether or not the rights of the Government, the rights of the Navy, 
are sufficiently protected by these offset wells? 

Mr. Stabler. I think as fully as is possible by offsetting. 

The Chairman. So that even though the Standard Oil of Cali- 
fornia is operating the privately owed lands which drain the reserve, 

* Mr. stabler subsequently supplied the figure : 5,500 barrels a day. 


the offset wells which have been drilled upon the Government lands 
tend to save for the Government its proper portion ? 

Mr. Stabler. That is correct, though, of course, they also drain the 

The Chairman. Naturally. Do you know who operates the n^val 

Mr. Stabler. The offset wells that you speak of? 

The Chairman. Yes. 

Mr. Stabler. The Belridge Oil Co. and the Richfield Oil Co. at 

The Chairman. Do you know whether the Navy takes the oil and 
stores the oil, or whether the oil is sold and the Navy takes a royalty? 

Mr. Stabler. It is sold and the Navy takes a royalty. 

The Chairman. So that actually the field, which is denominated a 
naval reserve, is not being maintained as a reserve at all, but as an 
operating field for the daily production and sale of crude oil. 

Mr. Stabler. Probably 90 percent of its area is being maintained 
as fully as practicable under the circumstances as a reserve. The 
other 10 percent is being operated as a going field. 

The Chairman. Of course, when you use the phrase "as fully as 
practicable" you are using a qualifying phrase which indicates that it 
is not being held as a reserve. 

Mr. Stabler. I intended to use a qualifying phrase. 

Representative Williams. What part of that area is privately 
owned ? 

Mr. Stabler. That is too technical a question for me to answer. 
There are certain legal disputes as to ownership there, and I am not 
prepared to answer. It is a small part, however. 

Representative Williams. I meant as distinguished from the Gov- 
ernment ownership. There may be disputes about who owns the 
balance, but there ought to be no dispute about which part the Gov- 
ernment owns, is there? 

Mr. Stabler. The Government owns a very large percentage, and 
in addition there are two so-called State sections that have been in 
controversy, and still are I believe, as to ownership, whether the 
Government owns them or someone else. 

The Vice Chairman. How long are we going to keep any oil there, 
if you have any information, with private persons operating on their 
own hook and responsibility and the Government leasing to somebody 
who will pump it out and then take it out to the general market? 
What do you mean by reserves? Is there any way of keeping things 
in reserve? 

Mr. Stabler. Not without 100-percent ownership. 

The Vice Chairman. I guess we have gone pretty far afield on that, 
but it is a pretty important development. 

Mr. Watkins. I think it is important to emphasize that that with- 
drawal makes a diminishing reserve and not a fixed reserve, as naval 
policy requires. 

The Chairman. The only way it could be made a reserve would 
be for Congress to authorize the Navy Department or some other 
agency to acquire all of the privately owned lands and to cease develop- 

Mr. Stabler. Did you wish me to pursue. Senator, the fate of the 
other two res^srves? 


The Chairman. If you please. 

Mr. Stabler. Naval reserve No. 2, at Buena Vista Hills, Calif., is 
really not a reserve in any sense of the word. Approximately half 
the land is privately owned and developed, and instead of having the 
reserve perfected by acquiring that land, no action has been taken 
along that line through a long period of years, and so the reserve 
lands are being operated substantially as though they were in private 
ownership, though for the benefit of the Government. 

Naval reserve No. 8 

The Chairman (interposing). Who operates naval reserve No. 2? 

Mr. Stabler. It is in a number of leases; the Honolulu Consoli- 
dated Oil Corporation — that, I believe, is the principal operator there. 

The Chairman. Do you know what its connections are with oihei 
oil companies? 

Mr. Stabler. Well, it is a subsidiary or affiliate of the Matson 
Steamship Line, a Pacific Ocean line, I believe. It, so far as I know, 
is not directly connected with any other oil company there. It has 
rather close operating affiliations with the Standard Oil Co. of Cali- 
fornia in the Buena Vista Hills and elsewhere in California. 

The Standard Oil Co. of California is the principal owner of the 
nongovernment lands within the limits of this reserve. 

The Chairman. So that the operations of this reserve are carried 
on by the Honolulu in conjunction with the Standard of California. 

Mr. Stabler. And certain other companies. Incidentally, recently 
all those companies in the reserve united in a cooperative plan of 
development, so that they are dealing fairly with each other, with not 
undue competition between tracts, and the field is being very well 
developed under that plan. 

The Chairman. You say "Not undue competition between tracts" ? 

Mr. Stabler. Yes. 

The Chairman. So that this arrangement is an arrangement to 
control competition of a certain kind. I ask the question v/ithout im- 
plying any criticism, because obviously any unit plan or proration 
plan is a plan to control competition. 

Mr: Stabler. Well, I think this plan has in common" with all unit 
plans the idea of eliminating competition as between tracts, within 
the particular field. 

The Chairman. Well, of course, the competition isn't actually be- 
tween tracts, it is between the owners of separate tracts. There might 
be two or three tracts under the same ownership and those tracts, of 
course, would be operated as a unit. Such combination does not elimi- 
nate competition. 

Mr. Stabler. Substantially so. 

Naval Reserve No. 3 is located in Wyoming. 

The Chairman. Give it its name. 

Mr. Stabler. The well-known Teapot Dome. That is now a com- 
plete reserve of what oil and gas is there in place. 

The Chairman. There again there is a qualification of what oil and 
gas may be left in place. 

Mr. Stabler. That was a very disappointing field. It was found to 
contain much gas and little oil, so that its value as a reserve for the 
Navy has never been great. It is completely shut in now. We take 


gas pressures trom time to time and find that they hold on a level, so 
that there can be no leakage from that reserve while that condition 

The Chairman. The sum and substance of it is that the only nayal 
reserve which is completely shut in which is bein^ managed as a re- 
serve is a reserve which scientific opinion now believes contains very 
little oil. The naval reserves which contain a lot of oil are being oper- 
ated as commercial fields and not as reserves. That is the sum and 
substance of it, is it not? 

Mr. Stabler. I think that is too strong a statement. 

The Chairman. Well, the modification would be with respect to 
Naval Reserve No. 1, where the only drilling is on private lands with 
the offset wells for the Government. 

Mr. Stabler. That is right. 

The Chairman. But the private lands are withdrawing 10,000 bar- 
rels a day. 

Mr. Stabler. But the grea't majority, as I tried to state quite specifi- 
cally, of the land in that reserve has been untouched, and we believe 
to be totally undrained with original pressures intact. 

The Chairman. That was the impression also with respect to the 
Teapot Dome until the Teapot Dome was leased, and then it was 
found that somehow or another the oil had vanished. 

Mr. Stabler. It never had been there. The pressure was there, the 
gas was there, but there was no oil, no great amount of oil. 

The Vice Chairman. Is there a considerable part of that field you 
are speaking of, reserve No. 1, 1 believe, where the oil would not drain 
for a period of time, any time, ever? 

Mr. Stabler. It is possible that through geologic time it could be 
all drained out at this end, but very little, if any, drainage from most 
of the area could possibly have occurred up to this time. 

The Vice Chairman. Could it be occurring? Would it begin to 
occur when you take pressure out of the area now being drained ? 

Mr. Stabler. Yes. 

The Vice Chairman. It would begin to seep through? 

Mr. Stabler. It would be reflected in decreasing gas pressures 
throughout the area, which would probably be greatest near where the 
drainage occurs and gradually less as one went westward. 

The Vice Chairman. Have you determined with any accuracy in the 
judgment of engineers how far in different types of sand it would be 
possible practically or otherwise to drain territory? We have had 
some testimony that the difference in the porosity of the sand is great; 
therefore I assume the ease with which the oil can be removed is 

Mr. Stabler. That is very true; and on certain assumptions as to 
porosity and permeability I think the distance of drainage, the effect 
of drainage at any distance, could be computed; necessarily some 
assumptions would have to be made. 

The policy of withdrawal that was initiated there in 1909 was 
affirmed by Congress in the following year by the passage of the pct 
authorizing the withdrawal of lands for classification and for a 
immber of other stated public purposes. 

From that time until 1920 there was practically no development of 
public oil and gas lands except those on which filings had been located 
under the old mininsr laws. 



Mr. Stabler. There was, however, a continuous agitation for a leas- 
ing law. In 1916 we had passed the forerunner of the present leasing 
law, an act applicable to lands in the former Wind River Reservation 
in Wyoming. That act, while it applied only to a small area of land, 
had in it many of the same provisions that we now find in the current 
leasing law. 

The Chairman. When you speak of the Wind River Reservation 
you are speaking of an Indian reservation ? 

Mr. Stabler. That is right. Rather of certain lands that had been 
in this reservation and had been ceded to the United States, so that 
they were lands of the United States, though impressed with a certain 
trust on behalf of the Indians; tl'iey were to receive, among other 
things, all the receipts from minerals developed, so that they had an 
interest still in the oil there. 

In 1920 there was passed the general leasing law ^hat included pro- 
visions covering oil and gas land. There are certain provisions there 
that I would like to call particular attention to — provisions in the 
interests of conservation. 

For example, in section 16 we have this language : 

That the permittee or lessee will, in conducting his explorations and mining 
operations, use all reasonable precaution to prevent waste of oil or gas de- 
veloped in the land, or the entrance of water through wells drilled by him 
to the oil sands or oil-bearing strata, to the destruction or injury of the oil 

That is followed by a sentence that makes violation of the pro- 
visions of that section grounds for forfeiture of the lease. 
Then in section 30 we have this language : 

Each lease shall contain provisions for the purpose of assuring the exercise 
of reasonable diligence, skill, and care, in the operation of said property. 

Further down it provides that such other provisions shall be incor- 
porated as the Secretary of the Interior — 

May deem necessary to insure the sale of the production of such leased lands to 
the United States and to the public at reasonable prices ; for the protection of the 
Interests of the United States, for the prevention of monopoly, and for the safe- 
guarding of the public welfare. 

Those provisions are implemented by section 32, which pro- 
vides : 

That the Secretary, of the Interior is authorized to prescribe necessary and 
proper rules and regulations and to do any and all things necessary to carry 
out and accomplish the purposes of this act. 

one of which of course was conservation. 

There is another provision that I think I should call attention to 
in section 27, an antimonopoly provision, because it has a bearing 
on unit operation. The last proviso of section 27 states : 

That if any of the lands or deposits leased under the provisions of this act 
shall be subleased, trusteed, possessed, or controlled by any device i)erma- 
nently, temporarily, directly, indirectly, tacitly, or in any manner whatsoever, 
so that they form part of, or are in anywise controlled by any combination 
in the form of an unlawful trust, with consent of the lessee, or form the sub- 
ject of any contract or conspiracy in restraint of trade in the mining or 
selling of coal, phosphate, oil, oil shale, gas, or sodium, entered into by the 
lessee, or any agreement or understanding, written, verbal, or otherwise to 
which such lessee shall be a party, of which his or its output is to be or 


become the subject, to control the prices thereof or of any holding of such 
lands by any individual, partnership, association, corporation, or control, in 
excess of the amounts of lands provided in this act, the lease thereof shall 
be forfeited by appropriate court proceedings. 

Representative Williams. Under that law how is the royalty de- 
termined ? 

Mr. Stabler. It is provided that the royalty shall be in the amount 
of or value of production and shall be certain specified percentages, 
or not less than certain special percentages, written into the law. The 
Secretary of the Interior is authorized to fix the royalty. 

Representative Williams. As a minimum. Is a maximum set? 

Mr. Stabler, No maximum. 

Representative Williams. What has been the practice, do you 
know, what is the royalty? 

Mr. Stabler. That has varied. Under the present law and leases 
the royalty is set at a minimum 121^ cents with a step scale increasing 
as the production in barrels per well per day increases to a maximum of 
32 percent. 

Representative Williams. The royalty is not the same in all 

Mr. Stabler. That is true. 

Representative Williams. It is not? 

Mr. Stabler. It is not. I may add that the average royalty re- 
ceived under the Leasing Act since its beginning is about 12 percent. 

Prior to the passage of this Leasing Act the Bureau of Mines in 
its duty of developing better "processes of production had been co- 
operating in the Rocky Mountain region, particularly, with operators, 
in attempting to secure the use of better methods of operation, so that 
when the act was passed the Secretary of the Interior delegated to the 
Bureau of Mines the duty of supervising operations under the act, a 
duty which it performed until 1925 when it was transferred to the 
Department of Commerce. That duty was then referred to the 
Geologioal Survey, where it has remained since under the auspices of 
the Conservation Branch. 

Representative Williams. Does that law require unit operation ? 

Mr. Stabler. No, sir. 

Representative Williams. Does the law now require it ? 

IVIr. Stabler. There is a provision in the present law that authorizes 
the Secretary of the Interior to include in any lease in his discretion a 
provision that the lessee shall abide by and conform to such unit oper- 
ation requirements as the Secretary may make ; that is, the lessee is 
bound to unit operation in the discretion of the Secretary. 

Representative Williams. What has been the practice about that? 
Has unit operation been required ? 

Mr. Stabler. I think it may fairly be said that up to date it has 
been voluntary. 

Representative Williams. In other words, it has not been written in 
the lease requiring unit operation. 

Mr. Stabler. Each lease issued in recent years has simply included 
this provision that the Secretary may require it in his discretion, but 
it isn't required in any lease that has been issued. 

Representative Williams. And the Secretary has not, as I under- 
stand you, required — made it mandatory — ^that they operate under a 
unit system. 


Mr. Stabler. That provision of law is quite a recent one, and, to the 
best of my knowledge, the Secretary has not required unit operation 
under that provisicin to date. In a few cases leases have been issued 
subject to a unit plan already in existence. 

The Chairman. Aren't you requiring all permittees and lessees to 
agree to conform to a unit plan ? 

Mr. Stabler. That is the equivalent of this provision of law ; that is, 
they consent to enter into a plan if and when required. 

The Chairman. Has not the Department before it scores, if not 
hundreds, of unit plans ? 

Mr. Stabler. We have had before us something over 1,600 unit 
plans submitted by proponents, among them lessees and operators of 
public lands. 

The Chairman. How many have been approved? 

Mr. Stabler. 112. I am getting a little ahead of myself, though. 
Senator, if you would like to develop this 

The Chairman. I thought, in view of the questions asked by Con- 
gressmanWilliams, that it might be appropriate to develop that here, 
but it is immaterial. I thought perhaps the Congressman might be 
getting an incorrect impression of what the fact is from the ques- 
tions and answers, though the answers were perfectly correct. 

Mr. St^^ler. If you prefer, I can go right into that. 

The Chairman. Develop it in your own way. 

operating regulations UNnEK the general leasing law 

Mr. Stabler. I was about to start on development of the other 
phase of conservation activity ; that is, that performed under what 
we call the operating regulations. In 1921, in order to secure in 
practice the conservation provisions of the act, certain operating pro- , 
visions were adopted, first as a plan for conducting work with sup- 
plementary operating regulations. As the science or art of production 
developed, those operating regulations have been changed, and a new 
edition, somewhat revised, was put out in 1923, another in 1926, and 
we are now operating under regulations effective in 1936. 

Those regulations cover quite a little book. I won't attempt to go 
into detail but their purpose is to make certaiii that drilling of wells, 
plugging of wells, and the producing of wells on the public and 
Indian lands shall be so conducted^as to avoid waste, and that is one 
of the principal means of accomplishing conservation of oil and gas 
on the public lands at this time. 

The other is this matter of unit operation, which we regard as a 
highly beneficial and desirable conservation measure. The Federal 
legislation with reference to unit operation I have extracted here on 
three pages, and if you are willing I will submit this for the record 
without reading, unless you desire to hear these provisions. 

The Chairman. It may be received. 

(The abstract referred to was marked "Exhibit No. 1311" and is 
included in the appendix on p. 9861.) 

Mr. Stabler. That starts out with a temporary act in 1930, a per- 
manent act in 1931, and a supplementary act in 1935 as the chief 
items of legislation. 

Now, under those acts'! tliink we have received more unit plans for 
consideration, have considered more unit plans of various varieties, 


than perhaps any other agency in the world. As I stated a moment 
ago, more than 1,600 of those plans were submitted to us for con- 
sideration, many of them obviously for the principal purpose of 
securing extension of permits, but nevertheless a great many were 
bona fide plans, and of those we have found up to date 112 that we 
considered worthy of approval, so that as of the present time we have 
112 unit plans embracing an area of 1,639,593 acres. 

Here is the frailty of the system : Under those plans, 81 percent 
of the land presumed to be productive and included in the unit area 
is committed to the plan. In nearly every plan there is some hold-out 
area that impairs its value. 

The Chairman. In other words, the law is not strong enough to 
compel the inclusion of all tracts, and as the law has been operated, 
the Department of the Interior has permitted various lessees to for- 
mulate their own unit plans and has not attempted to impose upon 
them a rigid rule as to what the plan should be. 

Mr. Stabler. That is true. We have offered certain suggestions. 
We received so many requests for a form of plan that would be ac- 
ceptable that we have gotten out one or two circulars indicating things 
that we thought should be included in the unit plan. But we receive 
and consider on its merits any form of plan that is submitted, and 
if it will accomplish the desirable purposes, approve it. 

The Chairman. So there is no attempt to impose a particular 
formula upon those who are operating, but there is an attempt to 
permit the idea to grow and formulate itself, as it were. 

Mr. Stabler. That is very largely true. There are one or two 
things that we necessarily require. For instance, the act authorizing 
the unitization of public lands requires that each such plan shall have 
in it a provision authorizing the Secretary of the Interior to modify 
of alter the rate of prospecting and development, and the rate of pro- 
duction, in his discretion, except as that discretion is limited in the 
plan itself. Now, under that provision in general we" have in the 
unit plan recognition of that authority in the Secretary limited to the 
condition that he may change those rates in the public interest on 
order specifying the particular public interest served. 

Senator King. I assume there are no privately owned lands em- 
braced in that million acres plus? 

Mr. Stabler. Yes ; quite a considerable area. # 

Senator King. Privately owned? 

Mr. Stabler. Yes, sir. 

Senator King. Do you attempt, then, to yoke the ox and the ass 
together, the publicly owned and the privately owned? 

Mr. Stabi^er. That is done quite successfully. Our principal 
trouble is that some of the privately owned will not be yoked and 
remains outside. Some of it comes in. 

Senator King. There are no coercive measures employed to yoke? 

Mr. STABiJi:R. None that could be, so far as I know. 

Representative Williams. W^ll, from your study have you arrived 
at any, well I will say, irreducible minimum of standards that should 
be required ? 

Mr. Stabler. In goneral, in these unit plans we — pardon me, do 
you mean standards of operation or standard form of plan ? 


Representative Williams. Well, I have in mind operations, the 
manner in which the industry should be operated so as to conserve 
the oil. ^ ^ . . 

Mr. Stabler. Well, one of the provisions that we regularly msist 
on being incorporated in the plans is that all operations under the 
plan shall be conducted under these oil- and gas-operating regula- 
tions, which themselves set up standards, and under the supervision 
of our engineers in the field. 

The thing must be rather flexible, because conditions vary so that 
in general those requirements are in flexible form, to be made more 
specific in the judgment of the supervising engineers. 

Representative Williams. Well, then, in other words, as I under- 
stand you, there is no effort made to have a real, compulsory unifica- 
tion in the operation of it. 

Mr. Stabler. That is true, but I should probably qualify that state- 
ment by going back into history a little bit. There was a suggestion 
made here yesterday that it might be a good thing to have all the 
public lands held out of operation, since we have a surplus of oil. 
That was attempted back in 1929. The President then declared that 
there should be complete conservation of oil in his administration and 
that no further permits should be issued and no leases should be issued 
except those mandatory under the law. Under this rule a lease would 
be issued only where a discovery of oil or gas under an outstanding 
permit was made. 

That policy was maintained untilj 1932. The idea, of course, seems 
to have great merit from a national viewpoint; from the point of 
view of States with large production and no public lands it would 
seem to be ideal. But, from the point of view of the five public-land 
States who have production of oil, it was considered to be a device 
of the devil. In other words, they depended largely on development 
on public land for their prosperity, for their revenues. They de- 
pended to a considerable extent on oil and gas produced on the public 
lands, ^o that that was very objectionable. 

The pressure got so heavy that in about 3 years the ban was 
removed and in April 1932 the lands were again opened to permit 

Representative Williams. That, I take it, applied only to public 

Mr. Stabler. That is true. 

Representative Williams. That still would not give you 100 per- 
cent preservation by reason of the operation of the privately owned 

Mr. Stabler. That is correct. 

Representative Williams. What I had in mind was whether or not 
there is any effort made, whether it is advisable to make an effort or 
whether it could be done, to apply a compulsory system not only to 
the public lands but to the privately owned lands within that area 

Senator King. Are you asking him as a geologist, or as a lawyer 
interpreting the Constitution and the rights of individuals ? 

Representative Williams. I am asking whether it would be advis- 
able to do that or whether it could be done. 


Mr. Stabler. I think it would be a fine conservation measure if 
that could be done. 

Representative Williams. There has been some talk here about the 
States doing that. There seems to be no question but what the 
States can do that. There may be some question about it, espe- 
cially by Senator King here,- but some of the others seem to think 
that that can be done. In fact it is being done. 

Senator King. Don't put me in any category. I am a free 

Mr. Stabler. I was about to state that in 1932, when the granting 
of permits was resumed, it was with the condition that the per- 
mittee would, or the applicant for permit would, consent to having 
his land placed under a unit plan. That might be regarded as a per- 
suasive m.easure, at least, though not exactly compulsory. 

I wanted to make it clear when I said that there was no com- 
pulsion that there was, nevertheless, a certain amount of persuasion 
to get public lands committed to unit plans. 

Senator King. Have you attempted to get privately owned lands 
where there were no public lands contiguous to submit to the unit 
plan and to submit to your jurisdiction, and to submit to such juris- 
diction as may be set up ? 

Mr. Stabler. Where there are no public lands contiguous ? 

Senator King. Yes. 

Mr. Stabler. No, sir. 

Senator King. Solely to those where there were public lands 
contiguous ? 

Mr. Stabler. Or Indian lands. 

Representative Williams. Are you familiar with the bill which is 
now pending in the House on that very question, to create a Federal 
Conservation Commission and give them the authority to inspect the 
operations of the various wells throughout the country and deter- 
mine whether it is in accordance with conservation principles set up 
under that law ? 

Mr. Stabler. Frankly, sir, I have not read that bill. I have 
glanced at it, and don't have sufficient familiarity with it to 
discuss it. 

The Chairman. The bill was not inspired by the Interior Depart- 
ment, was it? 

Mr. Stabler. I am sure I don't know where it was inspired. 

The Chairman. It didn't come out of the Geological Survey ? 

Mr. Stabler. Not out of the Conservation Branch. I can speak 
for that part of the Survey very definitely. 

The Chairman, Do you know whether or not that proposal has 
been under consideration in any bureau of the Interior Department? 

Mr. Stabler, I have no knowledge of it. Senator, I think some- 
thing like it was at one time referred to the Geological Survey for 
comment, but whether that is the present forin of the bill or not I 
don't know. 

Senator King. A bill of that character may be anticipated, may it 
not, in view of this tremendous drive to centralize authority in the 
Federal Government? 

The Chairman. It is here. The bill is with us. We don't need 
to anticipate it. 

Senator King. Now you may pMce me in a category if you want to. 


Mr. Shaughnessy. Can you tell me whether the existence of hold- 
out acreage has seriously handicapped any of the Government's plans 
for unit development of the public land ? 

Mr. Stabler. It necessarily has. 

Mr. Shaughnessy. Are there any serious cases in which it has 
really caused the unit plan to fail ? 

Mr. Stabler. I wouldn't say to fail — to be not completely successful. 
For example, the first large one that we had, the north dome of Kettle- 
man Hills, there was a certain amount of hold-out acreage there. In 
fact, the actual acreage committed to the unit plan was less than half 
of the area, but about an equal amount of land owned by the Standard 
Oil Co. of California has been operated more or less in harmony with 
the plan ; but certain acreage in the north end, certain acreage on the 
east edge, was operated pretty much on the old competitive system and 
forced the lands in the unit and that owned by the Standard to be oper- 
ated in much the same manner for some distance back from these 

Senator King. I suppose it may be assumed, Mr. Stabler, may it 
not, with more or less of certainty that the unit plan does have advan- 
tages in economy and in conservation over the purely individualistic 
plan of operating the oil fields? Is that accepted as a thesis which 
may not be successfully combatted ? 

Mr. Stabler. The unit plan itself gives the opportunity. The ad- 
ministration of the plan and operation under, it will give the answer 
to your question or your observation. Thejplan is no better than its 
administration, and it is conceivable that a plan might be developed 
that would have no conservational effect. By and large, 1 think it may 
be safely said that lands operated under a unit plan will produce 
considerably more oil — perhaps, on the average, 25 or, 80 percent more 
oil under present methods of operation — than if they were not under 
that plan. Now that is a very hard statement to prove. It is an 
opinion based on such experience as we have. 

Senator King. We are in the realm more or less of speculation. 
Assume two fields of comparative merit, one operated by the individual 
owners, but they operate in a scientific way and with a desire for con- 
servation and efficiency and economy ; and the other field, operated by 
the unit plan, under proper management — would you say there was 
any advantage in the latter over the former, assuming both fields were 
wisely and properly and scientifically and economically administered? 

Mr. Stabler. I don't know of any advantage that the unit plan 
would have. For example, the best-operated field in this country of 
which I know is not under a unit plan. That, however, is under a 
single ownership, under a single Indian lease, and it is just about as 
near perfect as any operation could be under conditions that are rather 

Senator King. Then if a State set up such machinery as would 
require, through supervision or otherwise scientific (I am using that in 
a broad sense) administration of the unit field and scientific operation 
of the individual field, there wouldn't be any particular difference in 
the results ? 

]Mr. Stabler. I wouldn't think so. The unit plan is simply a tool to 
accomplish the results, to make it easier. 

Mr. Watkins. Senator King, may I make a point in that respect? 
It seems to me that you have stated a highly unrealistic comparison. 


You have assumed scientific operation of a pool which is being operated 
on an individualistic basis by various owners and various operators. 

Senator King. I said under proper supervision, so you would have 
just as good mechanics as you would have in the unit plan of operation. 

Mr. Watkins. But it is impossible to secure that proper supervision 
unless you have some authority somewhere which sets specific engineer- 
ing standards, minimum standards, so you don't have in your hypo- 
thetical case a comparison between individualistic operation on the 
one hand and scientific operation on the other. 

Senator Kjng. There can be individualistic operation and yet that 
can be sufficiently supervised in a proper way, and within legal limits, 
and operated just as efficienctly as the unit rule, because Mr. Stabler has 
indicated just now that one of the most efficient fields is one which is 
operated individually rather than under the unit rule. 

Mr. McCoNNELL. That is the unit rule. It i^ operated individually 
by one company. It is a unit rule because it is operated only by one 

Senator King. I am not sure that he had that in mind in the answer 
which he gave to me. 

Mr. SoYSTER. I think, Senator King, that there is one point that 
ought to be brought out, and that is where you have a structure 
operated by a number of individuals, you do not have the same flexi- 
bility of application of engineering principles to the production of oil 
because of the individual-ownership interests which would mean, of 
course, each one is going to endeavor to get his proper share if they are 
willing to go that far, but the fact remains on the apex of the structure 
you may have a gas cap and there are certain wells that cannot be pro- 
duced in that area without dissipating the energy of that structure, 
which would be to the detriment of other properties on that structure. 
Yet if the individual who held that particular tract of land is unable to 
obtain any oil from that tract, I don't know that he would be willing to 
just sit by and have his property drained and get no revenue from his 
expenditure or capital investment. 

Senator King. Generally speaking, then, if I understand the con- 
clusions reached by you scientific men, it is that the unit system is 
preferable to the individualistic operation. 

Mr. SoYSTEK. That is right, because you have then the development 
of a structure as a unit, as a single structure, and you can apply 
your engineering principles to the whole rather than to each individual 

Senator King. It seems to me if there are some obstacles to be en- 
countered, that generally speaking if that could be effected, it would 
be wise. 

Mr. SoYSTER. That is true. 

Mr. AviLDSEN. Mr. Stabler, would you tell us a little bit about this 
field which you speak of which is the most efficiently operated field, 
which is not under unit operation? I don't think that is entirely 

Mr» Stabler. The field to which I had reference was the little 
Hogback field in New Mexico. It comprises about 160 acres of 
Indian land, productive Indian land, under a single lease. It is 
operated by either the Standard Oil Co. of Indiana or a subsidiary 
of that company. There the oil and water are together in the sand 


over the whole jfield. The closure is small, so that it is a very deli- 
cate operation to skim the oil off the top of the water and get clean 

There is a wonderful water drive there — natural. It resolves it- 
self into a question of having wells dispersed at suitable intervals 
over the field and holding down the production so that they can get 
clean oil. As a matter of fact, they open up the spigots, you might 
say, just like you would open up the tap in a house faucet, and oil 
will come out, but if you open up wide, water will come with the oil. 
By holding down the production to that which will give clean oil, 
they have already produced about 60 percent of the oil that was com- 
puted as being in the sand originally, and they are still going pretty 
strong. They will have a wonderful recovery there, whereas if they 
had been in a competitive status and wells had been opened up full 
tilt as they are always in competitive status, the field would have 
gone to water and most of that oil would have been lost. 

Mr. AviLDSEN. Isn't that unit operation, what you have just de- 
scribed ? 

Mr. Stabler. In principle; yes. It is unit ownership, the most 
perfect unit operation you can get, of course. 

Mr. AvLLDSEN. Then I think your previous statement that the 
most efficient field in the United States is not under unit operation 
is not correct. Didn't I understand that was your statement before? 

Mr. Stabler. I may have said that. What I had in mind was 
that it was not under one of these unit plans of development sub- 
mitted for approval under the act authorizing it. In principle it is 
unit operation, no question about it. 

Mr. Watkjns. Perfect unit operation of a geological structure. 

Mr. McCoNNELL. You just said, Mr. Stabler, that they would have 
gotten less than half of that oil if it had not been operated as a unit 

Mr. Stabler. I don't think I said that, sir. I said if it was operated 
in a competitive way, a great deal of the oil that has been recovered 
would be lost. I wouldn't pretend to say whether it was half. 

Mr. McCoNNELL. It would be a very large percentage, would it 

Mr. Stabler. It would depend wholly on how wide open the wells 
were operated, how much water was drawn in, how much of the oil 
was dissipated in the tract. It is a question of speed of production in 
the particular field more than anything else. 

Mr. McConnell. Even though that private ownership were under 
proration you would still not recover the amount of oil you would 
expect to recover under a unitized field ? 

Mr. Stabler. That again I think would depend on the extent of 
proration. If the proration rule had been such as to give the same 
results as the operation that actually occurred, it would have had 
just as beneficial effect, but it is pretty hard to conceive that that would 
have been true. 

Representative Williams. Well, if proration were scientifically ap- 
plied, as it IS in unit operation, you would have reached the same 
result, wouldn't you? That is, if you limited to each well its part, 
wouldn t you get the same result, or would you, as you would under 
a unit operation ? 


Mr. Stabler. Normally I don't believe that you would, as a matter 
of practical application. Proration as it is applied is generally 
an over- all rule. In the instances I know of down in New Mex- 
ico they have a limit of production of each and every well. That 
limit may be all right for some wells, it may be all wrong for others. 
They can't single out the individual well for scientific operations, 
and that is what should be done, and normally would be done under 
unit operation. 

The Chairman. The Interior Department has not as yet in any 
instance invoked the discretion of the Secretary as authorized in the 
law under the unit plans to govern the rate of production, has it, from 
any particular fields under a unit plan ? 

Mr. Stabler. The Secretary, I believe, has never issued such an order 
as is contemplated in one of those unit plans. We have by voluntary 
action of the operators, under persuasion, exercised the equivalent of 
that, but not by order. 

The Chairman. Then by moral suasion or suggestion to the opera- 
tors, you have actually restrained the amount and rate of production 
in certain fields. 

Mr. Stabler. That is true. We do that, I might say, almost regu- 
larly- as a matter of conservation — certain fields, certain wells. 

The Chairman. What criteria govern your suggestions to operators ? 

Mr. Stabler. First of all, we want every well operated at its best 
gas-oil ratio in order to conserve the energy of the pool. That is the 
most important consideration in our operation. I have in mind one 
case in which production from a well under unit operation has been 
limited partly to get the best gas-oil ratio, but partly in order that 
justice may be done to the various parties committed to the unit plan, 
that further exploration may be done so that the benefits may be prop- 
erly proportioned before there is much production from the field. 

The Chairman. Have these suggestions originated with the Depart- 
ment or have they originated with the operators and crystallized into 
agreements without an order from the Secretary governing the rate 
of production ? 

Mr. Stabler. A great deal is done voluntarily by the operators in 
the direction indicated. It is only 

The Chairman (interposing). When you say "voluntary" are we 
to infer from your statement that operators have come to the Depart- 
ment and have suggested that the rate of production should be held 
down, and you have given your approval of that? 

Mr. Stabler. I don't thmk it has come up in that way at any time. 

The Chairman. Wlien you said that it was done voluntarily, I was 
trying to develop whether or not the impetus came from the Depart- 
ment or from the operators. 

Mr. Stabler. Normally our engineers are through the field at fairly 
frequent intervals, and they discuss the problems with the engineer 
in charge on behalf of the operator, and whenever possible there is a 
meeting of the minds there. Whether the suggestion comes from one 
side or the other, I couldn't say. 

The Chairman. Do you take into consideration any other factor 
than that of scientific conservation? 

Mr. Stabler. I think I may say this, that for a good many years 
whenever any lessee of public lands has requested what we call produc- 


ing relief — in other words it is desired to shut in his wells — that has 
been granted freely by the Department when it wouldn't be against the 
interests of conservation. In other words, the Department has been 
favorable in a time of surplus and overproduction to lessees shutting 
down until conditions are better. 

The Chairman. What weight, if any, does the Department give or 
the Bureau give, to the royalty interest of the Government, the Recla- 
mation Service and the State within which the deposit lies? 

Mr. Stabler. In this matter of shutting down 'i 

The Chairman. Yes; in this matter of restraining the rate of pro- 
duction, the rate and amount of production. 

Mr. Stabler. Fundamentally, that can't be separated from the 
problem. We believe that if the oil is shut in until conditions are more 
favorable for production, the revenue of the United States, the States, 
the reclamation fund, will be greater. 

The Chairman. In other words, the receipt might be postponed. 

Mr. Stabler. Yes. 

The Chairman. Now, that is a general theory. Do you consult the 
Reclamation Bureau, for example, in any manner whatsoever with 
respect to the rate and amount of production ? 

Mr. Stabler. No, sir. 

The Chairman. Do you consult any other agency of Government, 
Federal or State, with respect to the amount to be received? 

Mr. Stabler. Of course, the authority to shut in must be O. K.'d by 
the Secretary of the Interior, so that there is consultation between 
the members of the Geological Survey and of the Secretary's closer 
staff and perhaps of the Solicitor, but beyond that there is no consul- 
tation, ordinarily. 

Mr. SoYSTER. Except in the case of Indian land, Mr. Stabler, when 
we do discuss with the Indian Office because of the fact that the lands 
in many cases are allotted lands belonging to individual Indian 

Mr. Stabler. That is true. I was spealdng of the public lands. 

The Chairman. With respect to Indian lands, there is a definite 
criterion based upon the interest of the Indian allottees in their 

Mr. Soyster. That is correct. 

Mr. Stabler. And possibly of the immediate situation of the In- 
dian. He may very greatly need the little royalty revenue that 
comes in. 

The Chairman. What are the factors that enter into your determi- 
nation as to whether or not there is a surplus of oil which would 
justify a shut in ? 

Mr. Stabler. Wellj I suppose possibly you are leading up to prices. 
The most definite indication of surplus is a falling price, of course. 

I had just a word more to say indicating the extent to which unit 
operation of the public lands has gone. Incidentally there are two 
of these unit plans in operation on Indian lands, as well as 110 on 
public. The reserves of oil in the fields operated under those plans 
represent 5.6 percent of the total reserves in the United States, not 
a very lar^e percentage but still quite an appreciable factor, those 
reserves being in the neighborhood of 1,000,000,000 barrels of oil. 
With the approval recently of a plan for the Salt Creek field, now 


approximately half of' the production, 51.5 percent of the month of 
May last, was produced from public lands within unitized areas. 

I think that is all I have to say unless there are some questions. 

Senator King. Just one question: Would you differ from this 
statement which I find in Mr. Kemnitzer's book,^ reading from 
page 85 : 

At present the reserves are generally = considered at about fifteen billion 
barrels, or roughly, fifteen years' supply. However, these reserves are com- 
"puted from developed fields ocqupying less than 2 percent of the 1,043,247 
square miles, already 35 percent of the total area of the Unitec^ States, vrherein 
oil fields might be found. All of this enormous area will not be oil bearing 
but much of it will. 

Would you consider that a fair statement? 

Mr. Stabler.- I would disagree in part with that. I wouldn\ say 
that oil will be found in much of that area. I think it will be- found 
only in a small percentage of that area. 

Senator Kjng. We have found it only in less than 2 percent of 
the billion acres of the country. 

Mr. Stabler. Of the total area of the United States, that is prob- 
ably true. I think all the producing oil fields occupy only about 
5,000,000 acres of land. 

The Vice CHAnniTAN. They found gold in a much smaller per- 
centage of the total area, didn't they ? 

Mr. Stabler. Yes. 

Mr. Watkins. I think Mr. Soyster might add something to that 

The Vice Chairman. It doesn't seem to me it matters how much 
we have ; we shouldn't waste what we have. 

Mr. Stabler. I agree. 

The Vice Chairman. That all we have a right to use is what we 
can use without waste. 

Senator King. Would you differ from this statement made by 
Mr. Byles, president of the A. P. I. ? 

More than a billion acres of geological formation which may contain oil 
remain to be explored. The Nation's deposits of bituminous oU and coal shales 
are capable of yielding supplies of fuel adequate for centuries. 

Mr. Stabler. I think probably that is correct. 

Mr. Watkins. Four or five times the cost of producing oil from the 
natural reservoir. 

Representative Williams. What part of the crude production comes 
from public lands? What percentage? 

Mr. Staijler. A little less than 5 percent ^nd about an equal 
amount from Indian lands. The total is somewhat less than 10 
percent of the production in this country. 

The Chairman. I wonder if by any chance you examined the testi- 
mony of Mr. La Fleiche before this committee a few days ago.* 
He discussed bonds on leases on the public domain. 

Mr. Stabler. I haven't seen his testimony and haven't seen him. 

The Chairman. The statement was made that he thought it would 
be beneficial to the small operator if in the first place the Department 
of the Interior did not require a rental bond, and, secondly, that with 

1 "Rebirth of Monopoly," by William J. Kemnitzer, Harper & Bros. 

2 P. 9406, et seq., supra. • 

124491 — 40 — pt. tl, sec. 4 14 


respect to drilling bonds they should be made commensurate with the 
risk involved in -the drilling of a well. As I understood him, he 
pointed out that a $5,000 drilling bond was required regardless of 
whether the well may be only 500 feet deep or 5,000 feet deep, and 
his suggestion was that it would be of great benefit to the small 
operator to have the bonds so regulated because he says that the 
small and independent operator may; and will develop lands which 
the large operator wouldn't bother with because of the small amount 
of production. Have you any opinion with respect to that? 

Mr. Stabler. I agree with him in principle that the bond should be 
made somewhat commensurate with the risks involved. However, I 
would be inclined to place $5,000 as a minimum and suggest that 
we might require a greater bond where necessary. 

The Chairman. Of course, that wouldn't be of any relief to the 
small fellow who finds it difficult to put up a $5,000 bond. The diffi- 
culty arises from the fact, as you know, that with respect to a drilling 
bond, the bonding companies ordinarily require such indemnity from 
the operator that the small operator is unable to furnish that indem- 
nity; usually cash or United States Government bonds are required, 
and the small operator just doesn't have the capital resources to meet 
the requirement. 

Mr. Stabler. Of course, the maximum requirement necessary is to 
have $5,000 that he doesn't absolutely need to drill with. He can 
invest that in Government bonds and deposit them as security wit]i 
the United States and draw interest on them. If the man hasn't 
$5,000 or can't raise $5,000 for that purpose, I don't believe he has 
any business operating on Government lands. 

The Chairman. Now, then, do you have any opinion as to the 
percentage of Government lands operated by the so-called majors and 
the percTfentage of Gov^-nment lands operated by the so-called 

Mr. Stabler. I don't have a^y very definite impression. We have 
both in large numbers, and I would just guess — it is purely a guess — 
that half or more are operated by the independents. 

The Chairman. I don't know whether you had ever attempted in 
the Bureau or in the Department to make a survey of the character 
of the Government lessees. 

That has not been done? 

Mr. Stabler. I never have done it and I don't know that anyone 
else has. 

The Chairman. The Leasing Act undertakes to limit the amount 
of acreage which can be owned or leased or operated by one lessee, 
does it not ? 

Mr. Stabler. Yes. 

The Chairman. So that in principle the purpose of the act was to 
encourage the small operators. 

Mr. Stabler. Yes, I think that is perhaps the striking difference 
between operations in' this country and in foreign lands. Yesterday 
the question of foreign operations was raised. Undoubtedly the 
foreign fields have much the sam^ geological conditions as we have 
here, the same engineering principles are involved in producing oil 
there, but generally speaking in foreign countries ah operation in one 
field might be conducted as a unit because a lease is given one party 
for the whole area, whereas in this country the leasing law tends 


to split a field up in as many particles as possible and make unit 
operation as difficult as possible, make conservation very hard to 

The Chairman. Scientifically, conservation can best be admin- 
istered when you have centralized control of deposits. 

Mr. Stabler. Within a particular field. 

The Chairman. Within a particular field ; yes. 

Mr. Stabler. There should be, for purposes of operation, a per- 
fect monopoly within a field. 

The Chairman. And then the science of conservation tends to sup- 
port the monopolistic idea within a particular field. 

Mr. Stabler. Within the limits of the field, but one field, of course, 
doesn't control the oil industry. 

The Chairman. Then, on the contrary, the idea which is prevalent 
in our Western States and which is written into the law that the 
independents should be encouraged is at least not in harmony with 
the purely scientific idea of conservation. 

Mr. Stabler. I never have found that phrase in the law, Senator, 
that the independent shall be encouraged. 

The Chairman. No, but the effect was. I didn't find that in the 
law either, but that was the purpose, was it not, of the limitation ? 

Mr. Stabler. I think the purpose of the limitation was to prevent 
any single company in the United States from acquiring all public 
oil and gas lands rather than to encourage or discourage an inde- 

The Chairman (interposing). Let's see. What is the provision in 
the law? Wliat is the limitation as to the leases that one operator 
may hold? 

Mr. Stabler. Shall I read from section 27 ? 

The Chairman. Yes, please. 

Mr. Stabler (reading from the Leasing Act of 1920) : 

That no person, association, or corporation, except as herein provided, shall take 
or hold more ttan one coal, phosphate, or sodium lease during the life of such 
lease in any one State. 

I find I am reading from the original law and not the law as it now 

The present act provides : ^ 

That no person, association, or corporation except as herein provided, shall 
take or hold coal, phosphate, or sodium leases or permits during the life of such 
leases or permits in any one state exceeding in aggregate acreage 2,560 acres for 
each of said minerals ; no person, association, or corporation shall take or hold at 
one time oil or gas leases or permits exceeding in the aggregate 7,680 acres granted 
hereunder in any one state, and not more than 2,560 acres within the geologic 
structure of the same producing oil or gas field. 

The Chairman. Now, that being the provision of the law, making a 
restriction to one lease in the same field, how can you draw the con- 
clusion that the purpose was to prevent one company from acquiring 
all the oil land on the public domain ? Since there is a limitation to 
one lease per OM^er or operator in' a particular field, I take it the 
inevitable effect would be to encourage diverse ownership, therefore to 
encourage the independent. 

Mr. Stabler. Diverse ownership certainly, but whether it shall be 
an independent or a major or a little man or big man isn't indicated 
so far as I can find out. 

1 Reading from the Leasing Act as amended March 1931. 


The Chairman. Oh no, you are quite right about that, but the whole 
purpose of limiting to one lease in a field to three in a State was to 
promote as many diverse operators as possible. Would you not say 

Mr. Stabler. I would like to call attention right in that connection 
to the act of 1935 which states that lands operated under unit opera- 
tion shall be free from these acreage limitations. 

The Chairman. Yes ; I was going to come to that. In other words, 
the point is that the unit operation provisions are contrary to the 
original provisions of limitation and necessarily so because to reach 
the scientific objective of unit operation you must get away from the 
principle of diverse operation. 

Mr. Stabler. Let us say that they are an improvement on the 
original form of law. 

The Chairman. Well, we might even accept that. I am not dis- 
cussing the matter now in the sense of whether it is to be approved or 
disapproved but merely to bring out the diverse factor. Here is one 
system of unit operation which tends to single ownership and here is 
another system of independent operation w^hich tends to diverse owner- 
ship. The testimony of the experts, of the engineers, of the scientists, 
is that you can best conserve the oil with the unit operation but on 
the other hand it is obvious that that tends toward monopoly, as you. 
said, or to unit development as Senator King said. 

Mr. Soyster. There is one other possible answer to that. When the 
1920 act was passed, the reserves, the known reserves, or estimated 
reserves of proven fields weren't as great as they are today, and there 
was a tendency on the part of the Government to encourage develop- 
ment of the public domain, to determine the reserves of petro- 
leum in this country. However, with changing conditions, with an 
available oversupply — that is, that could be produced at any time by 
opening the wells — there is no longer that same necessity to determine 
at least to the same extent that there was originally the reserves of this 
country, and consequently the act of 1935 was passed, a new theory of 
development, one of sticking closely to conservation. 

The Chairman. Do you think that we have an excess amount of 
resecves now? 

~ Mr: SoYSTER. I wouldn't say an excess amount of reserves. "•" would 
say that you might never have an excess amount of reserves. Of 
course, the effect the estimated reserves might have upon the market 
is something that is difficult to say. No one knows 10 years or 20 years 
hence what the us^will be for petroleum, whether it will be as great 
or greater. 

The Chairman. Is it your opinion, are you trying to say to the 
committee that you believe that the development by independent own- 
ership should not be encouraged ? 

Mr, SoYSTER. I will say this : I think that fields should be developed 
according to the best engineering practices known to the industry as 
of a given time. 

The Chairman. Regardless of the effect upon these other factors of 
mdependent ownership, of price, and of income to the States 

Mr. SoYSTER (interposing). That is right. That is what I am try- 
ing to say. 


The Chairman. That is what I am trying to find out. There are 
many others who feel that these other factors ought to be given great 

Mr. SoTSTER. That doesn't dej^rive the. individual or the independ- 
ent of an opportunity to have his place in the picture just as he 
lias today. If he comes into such a unit plan and is allocated his 
proportionate ^hare of the production of that field, he ^ets what he is 
entitled to, based upon the best estimates of the productive area. 

The Chairman, But there is no disposition upon the part of the 
Geological Surv^ey or of the Department of the Interior now to re- 
strict the granting of leases, is there? 

Mr. SoYSTER. Not to my knowledge. 

The Chairman. Well, of course, as Mr. Stabler testified in 1929, the 
policy was definitely adopted of closing in all of the reserves upon the 
public domain. 

Mr. SoYSTER. That is rigiit. 

The Chairman. Thereby- penalizing, as it were, the Western 
States, most of whose reserves are on the public domain. 

Mr. SoYSTER. I think the only time there has been any tendency 
toward not issuing a lease is when someone applies for a lease in a 
remote area where you know that igneous rocks occur and the 
chances for production are practically nil, where it appears to be a 
speculative proposition to take what they can get from the suckers. 

The Chairman. Since the policy ot 1929 was abandoned the De- 
partment is not restricting the issuance of leases. 

Mr. SoYSTER, That is correct. 

Mr. Stabler. I would like to make one little oorrecticm to tha,t 
idea, Senator. In proven areas where leases are issued on competi- 
tive bidding, lands are not put up for sale unless we regard them as 
being drained of their reserves. In other words, w^e don't push the 
leasing, though when it is pushed by reason of drainage or applica- 
tion outside of proven fields, we issue them as a matter of course. 

The Chairman. Are there any other questions to be addressed to 
Mr. Stabler? 

Mr. Ballinger. Mr. Stabler, one of yoiu- colleagues said that the 
rost of producir;^ oil from coal would be about four or five times the 
cost of producing it from oil in the ground. I wanted to read in 
the record testimony from hearings on House Resolution 441, Sep- 
tember 1934, page 752. Mr. Pettengill was making the statement : 

Mr. Farish has said we can produce gasoline from soft coal todav with the 
present method of extraction and manufacture at about 12 cents, and if our 
soft coal reserves are unlimited, as is universally accepted, would that lead 
one to the conclusion that if we were to forego the taxes on gasoline we could 
supply unlimited quantities of gasoline from soft coal to the American con- 
sumer at a cost of only 2 cents a gallon or more? 

Mr. Teagle. I should think that was a very fair assumption. 

If you take the present cost of gasoline. 16 cents a gallon 

Mr. Watkins (interposing) . That isn't the cost of producing it. 
Mr. Ballinger. He says, "supply the American consumer." That 
means the distribution cost as well as the cost of manufacture. If 
you add you get 18, if you add the tax on that you get 24, if the 
•tax was 7 it would be 25, if it was 8 it would be 26, but the ratio be- 
tween 16 and those figures would be less than two times the cost. 

Mr. Watkins. May I observe that my statement a moment ago 
lef erred to a statement on the possibility of producing liquid fuels 


from shale and from coal and from vegetable matter, and I said it is 
probable that the cost would be four or five times. I am not sure just 
what the cost of producing gasoline is today, but my guess is that it 
is up in the neighborhood of 4 or 5 cents — I mean to say the cost at the 
refinery — so that was a general statement applied to these liquid fuels 
from other substitutes. 

Mr. Ballinger. Mr. Farish says the cost of extraction and manufac- 
ture today under present methods from coal would be only about 12 
cents, so the ratio would be only two times, not four or five. 

Mr. Watkins. I am not sure just what the cost of producing gaso- 
line is, but I think it is under 6 cents. 

Mr. AviLDSEN. I think it is around 5 or 6 cents at the refinery. 

Mr. Berqtjist. Our figures don't mean anything. 

Mr. AviLDSEN. What do they show — about 6 cents? 

Mr. BERQinsT. Between 5 and 6. 

Mr. AviLDSEN. It might be, then, that on the same basis, tfie cost of 
producing gasoline from coal would be about twice the present cost. 

Mr. Watkins. My guess — I am not an ex.pert in such matters, but 
my guess would be that the cost of producing gasoline from coal would 
be irure than twice the present cost, but mine was a general state- 
ment applied to these substitute sources, coal and shale and vegetable 

M AviLDSEN. Sure. 

Tlie Chairman. Any other questions? Mr. Stabler, we are very 
much indebted to you. 

Mr. McConnell, did you care to make any comment? 


Mr. McCoNNELL. Mr. Chairman, I have made some notes on this 
testimony which represent my understanding or interpretation of the 
. testimony that these gentlemen have given us, and with permission I 
would like to read them. 


Mr. McConnell. The Department of Commerce has felt it desirable 
that the records of the committee's investigations shall disclose more 
fully the vast economic wastes that^re being incurred in the produc- 
tion of crude petroleum in the United States. The facts we have just 
heard were presented by unbiased and expert technicians of the Na- 
tional Resources Planning Board and the Department of the Interior. 
They are not shaded or colored by any self-interest. They are in 
accord with my personal experience ; I believe them to be conservative 
and trustworthy. 

We are confronted with the statement that our present methods of 
operation result in preventable wastes which, in the aggregate, are 
probably well in excess of $500,000,000 a year. This waste is in two 
forms. It is a waste of gas and of oil which remains in the ground 
and becomes nonrecoverable e^jcept at prohibitive cost; and it is a 
waste of labor and materials. 

. 1 In a letter dated October 24, 1939, to Senator O ?3lAhoney, Mr. Watkins enclosed a 
letter from A. C. Fieldner. chief. Technologic Branch. Bureau of Mines, relating to the 
cost of producing gasoline from coal or oil shale. The letters are included in the appendix 
on p. 996^ 


Dr. Watkins, as an example, pointed out that the waste of labor and 
materials last year in drilling wells which were unnecessary probably 
came to some place around $300,000,000. By that overdrilling and 
by the system of proration which was set in, or partial proration, 
there is a further waste in the ground of some 600,000,000 barrels of 
oil. Those figures are merely illustrative. 

The technical leaders of the industry and others have pointed out 
to the conmiittee that this is a preventable waste; that the industry 
itself, together with the State regulating commissions, are making slow, 
painful progress through partial proration and partial miitization 
toward efficient management of production. 

Previous witnesses have shown that one of the principle obstacles 
to the prevention of waste is the so-called rule of capture, which was 
formulated 30 years after the birth of the industry some three or four 
generations ago. This rule of capture probably is a direct descendant 
from the old whaling-industry law, whereby the first man to get his 
harpoon into the whale owned the whale. When the rule was laid 
down judicially, the knowledge and technical understanding of this 
complicated oil industry was practically nil as compared with the 
knowledge possessed by the engineers, geologists, and technicians 

It has been suggested that the major characteristics of unit opera- 
tion are preliminary exploration in the oase of new fields, compulsory 
pooling of interests, proper well spacing, acceptance of standard de- 
velopment and production methods, and scientifically controlled with- 
drawals. Unit operation may be established in old pools as well as in 
new pools. By unit operation is meant the development as a whole 
of a geological unit according to a definite supervised program, royal- 
ties to be shared on the basis of acreage, oil in place, or some general 
equitable arrangement re.gardless of the location of the producing 
wells. The English refer to unit operation as scientific unit control. 

This committee has hetird testimony that some one-half or more of 
the annual drilling is unnecessary to produce the oil and g^s, and that, 
furthermore, through wasteful drilling and production practices we 
have lost and are losing every year hundreds of millions of barrels oi 
oil which will never again be recoverable by any known economical 
method of extraction. 

The problem of unitized drilling is no theory. It is a fact that is 
practiced most successfully by foreign competitive producers. 

The advantage of compulsory unit operation is considered so great 
that England, in making provision for any possible oil field which may 
be discovered in Great Britain, has provided in the British Petroleum 
Kegulations of May 15, 1935, for cooperation among lessees of one 
geological unit, to be effective at first voluntarily, failing which the 
Government, through the Board of Trade, has the power to require 
unit operation subject to the right of arbitration. 

The Chairman. How extensive is the application of that principle? 

Mr. Watkins. There is practically nor oil produced in Great 
Britain. They were looking toward the possibility of discovery. 

The Chairman. Tl\is rule, then, of which Mr. McConnell speaks, 
does not apply outside of the British Isles? 

Mr. Watkins. That is my understanding. 

The Chairman. And there is no oil there. 


Mr. Watktns. Practically none discovered. 

Mr. McCoNNELL. There is a great deal of oil in Persia and Iraq. 

The Chairman. This rule of which you speak doesn't apply to 
Persia ? 

Mr. McCoNNELL. It applies to Great Britain. 

The Chairman. Where there is no oil, so we can't take that criterion. 

Mr. McCoNNMiL. Have you any figures on production of Great 

Mr. Watkins. Practically nothing. 

Mr. McCoNNELL. What is the situation in Venezuela? This rule 
does not apply there. Is that unit operation ? 

Mr. Watkins. There is considerable unit operation in Venezuela, 
where single-lease holding exists, and likewise in various, other parts 
of the world where that condition obtains. 

Mr. McCoNNELL. Is there unit operation in Persia — Iraq and Iran ? 

Mr. Watkins. Yes. 

Mr. McCoNNELL. What percentage of the total production would be 
under unit operation or partial unit operation ? 

Mr. Watkins. I can't answer that. 

Mr. McCoNNELL. Can you answer that? 

Mr. Stabler. Not authoritatively. A very large proportion; I 
f.i'nk it is safe to say that. 

Mr. McCoNNELL.- Does that answer the question ? 

The Chairman. Well, of course, the situation is quite clear. Where 
the state or the king owns the natural resources, why, of course, this 
method can be imposed. In this country, however, except for the 
public domain, the state does not own the resources, so that you are 
confronted with a theory which runs between two extremes. On one 
extreme is complete ownership by the state of all natural resources to 
be managed by the state and developed by the state in the judgment, 
of the state as to what is good for the people. Upon the other hand, 
you have the theory upon which we have been operating in this 
country, that the natural resources go with the land and belong to 
those w^ho own the land, and may be developed by those persons as they 

Now, we have been developing here a theory of conservation which 
has been very difficult to make effective, because we have not only 
diverse individual ownership of lands, but we also have diverse politi- 
cal jurisdiction of the states. There are only two of all the States in 
the United States which produce petroleum which have a compulsory- 
unit plan, and some States which produce petroleum have the pro- 
ration laws. Others which produce petroleum have no proration 
laws'. So we are confronted, therefore, with the question of whether 
or not it would be desirable to establish a national system for the 
control of the development of natural resources like petroleum, and 
that, of course, would go far beyond any of our present political 

Mr. McCoNNELL. Shall I proceed? 

The Chairman. Yes. 

Mr. McCoNNELL. This country i?i possessed of the greatest oil re- 
serves of the world and also the best labor and brains available any- 
where for the production of our oil requirements. Yet, because of 
6ur methods of production, brought about by a misconception gen- 


erations ago concerning this migratory fuel, we are compelled to 
erect tariff barriers to prevent the foreign producer from flooding 
our domestic markets. 

Competitive drilling, as brought about by the interpretation of 
the "rule of capture" and get-rich-quick incentives, calls for a multi- 
plicity of offset wells in place of a few carefully selected wells. In 
a large percentage of the known fields this practice of offset drilling 
has caused the failure of most small operators and heavy losses to 
the major oil companies. 

The vast forests of oil derricks which line the horizons throughout 
the country represent losses that have already been incurred. A sub- 
stantial part of the oil that underlies those derricks has been lost 
forever. Nevertheless, there are tremendous economies that can still 
be effected in these old developed fields. They need not be operated 
in a manner which will cause further excessive loss of the oil reserves 
that still remain below them. Proration as practiced today is a 
makeshift because of the "rule of capture" which has interfered. 

At no time in history have a people been blessed with the plenti- 
tude and excellence of essential raw material resources such as have 
existed in this country, and there is no civilized country in history 
that has been guilty of the great economic crime of waste of re- 
sources that is still going on in the oil industry in this country today. 

There is undoubtedly a means which can be devised entirely equi- 
table to .small and large operators which will permit and compel 
prevention of this enormous waste. The measures affecting the con- 
servation and prevention of waste should applj/ uniformly to the entire 
oil and gas industry in every State in the Union. There is no single 
service this committee can render in this industry that holds greater 
promise of present and future profit to our economy. 

I thank you. 

Mr. Watkins. May I note for the records that the estimates at- 
tributed to me, the estimates of waste, were based on certain hypo- 
thetical assumptions which may or may not be reasonable. 

The Chairman. Very good. 

It is now 10 minutes after 12, but it was our hope to have Mr. 
Del Sesto testify this afternoon and to have a recess over Saturday, 
and if it is agreeable to the committee we will now proceed to hear 
Dr. Wliite, in the belief that his testimony may be disposed of within 
a few moments. 

Thank you very much, Dr. Watkins. 

Do you solemnly swear that the testinaony you are about to give in 
this proceeding shall be the truth, the whole truth, and nothing but 
the truth, so help you God ? 


Dr. White. I do. 

The Chairman. Dr. White, there has been some discussion during 
these hearings of the Bureau of Mines estimates of current production, 
and it was suggested yesterday ^hat it would be desirable to have 
some person from the Bureau of Mines come to the ComrnitJtee and 
explain that method. Are you prepared to do so ? 

Dr. White. I am. 


The Chairman. Will you be good enough to give the reporter your 
name and state your background, please? 

Dr. White. Alfred G. White, chief economist. Petroleum Eco- 
nomics Division, Bureau of Mines. I was with the Bureau of Mines 
from about 1913 to 1919 and returned to this work in 1936, to date. 
Shall I go ahead with the statement? 

The Chairman. Yes ; if you please. 



Dr. White. The beginning of the national forecasts for oil demand 
was initiated under the Federal Oil Conservation Board in 1930, 
1931, and 1932. These estimates of national demand were made by 
voluntary committees and with the cooperation of representatives of 
the Bureau of Mines. During the code period under the N, R. A., 
from August 1933 to May 1935, the Bureau of Mines compiled data 
for the Petroleum Administrative Board on the supply and demand 
of crude oil and its products. Since July 1935 the Bureau of Mines 
has issued monthly forecasts of demand for motor fuel and crude 

These forecasts were initiated at the request of various State agen- 
cies and later, after its formation, on the request of the Inter-State 
Oil Compact Commission. 

A detailed discussion of the methods used is contained in the Report 
on Energy Resources and National Policy, prepared by the National 
Resources Committee and published January 1939. 

On page 401 and the two or three pages that follow, a more de- 
tailed discussion of the forecasts and the methods used is contained. 
Very briefly, two or three paragraphs in that report will indicate the 
primary character of the forecasts. I may say in beginning that these 
forecasts represent factual data and information compiled for policy- 
controlling agencies. They do not represent Federal allowables nor 
are they even recommendations, but primarily are a projection of 
current competitive trends for the demand for crude oil, and motor 
fuel adjusted for usual seasonal stock changes. They represent an es- 
timate of the volume of current operations necessary to maintain a 
reasonable balance between supply and demand, with a view to avoid- 
ing unnecessary and wasteful storage of either crude petroleum or re- 
fined products. 

Senator King. May I interrupt just one moment? Do they take 
into account the influence which exports and imports of petroleum 
and its products would have upon determining what the market re- 
quirement was? 

Dr. White. The first step is an estimate of total motor- fuel de- 
mand, which is a combination of domestic demand and export de- 
mand. There are no imports of motor fuel. We subtract from this 
total demand the natural gasoline which is used which does not come 
from crude oil. The balance gives us the gasoline required to be pro- 
duced from crude oil. Then, on an estimated yield factor, we de- 
termine the amount of crude runs necessary to produce it, from which 
w© deduct the imported crude, giving a net domestic crude run re- 
quired, to which we add exports of crude and fuel and losses, making 
a total demand for domestic crude. 


In other words, we deduct the natural gasoline and the imports of 
crude oil to arrive at the net amount of doniestic crude required to 
meet all demands. 

Senator King. You would have some difficulty now, would you not, 
in projecting yourself into the immediate future, or over the next 
year, to determine the demands for crude petroleum ? 

Dr. White. The forecasts ai-e primarily monthly, and represent a 
short-term projection of available information relating to seasonal 
production, stocks, sales, and consumption. We get in connection 
with the export situation reports on expected exports by all important 
exporters. We have to make some allowance for possible spot busi- 
ness, and we may be wrong at times. Certain months — for instance, 
in September probably the shipments have not been made in some 
cases, but may be made in October or November. When we estimate 
for a given mo/ith, there is always the possibility of a shifting for- 
ward or backward of projected exports. It seems fairly clear from the 
current evidence that as yet no substantial increase in exports over last 
year is expected through October and November. Now it may mate- 
rialize in late November or after that period. 

Senator Kjng. Have you had accurate information respecting the 
shipments of oil from Mexico to Germany and to other countries ? 

Dr. White. Those data come out rather slowly. We do not use 
that in our own forecast work. That is part of our international 
petroleum work, to collect data as soon as they are available of ex- 
ports from foreign countries to the European countries. 

The Chairman. When do you make your estimate, and for what 
period ? 

Dr. White. We have just made — it will be out this morning — a 
forecast for demand for this coming November. It is the middle of this 
month for the demand of the coming month. 

The Chairman. Does that include any estimate of exports from 
this country to Great Britain and France? 

' Dr. White. It doesn't detail it by countries. It includes an esti- 
mate for total gasoline exports and total crude-oil exports. 
■ The Chairman. But the exports to those two countries have been 
included in your estimate? 

Dr. White. They have been included. Of course a good many of 
our exports are to other countries. Canada is a large consumer,' and 
we don't attempt to break it down by countries. We attempt to get 
the estimate of the total exports of gasoline and of crude oil in order 
to balance our estimates of the. total amounts required. 

The Chairman. Has the outbreak of the war had any effect on 
that estimate of exportation ? 

Dr. White. Not as yet. The exports of the last quarter of 1938 were 
extremely high. They included undoubtedly war stocking, or more 
than were necessary for consumption. So far indications are that 
exports in this last quarter will not probably exceed those of last year. 

The Chairman. In making your estimate to date you have not spe- 
cifically taken into account any change, if any change has taken place, 
in the exports of gasoline to Great Britain and France or any other 
European country on account of the war? 

Dr. White.. We have a very slight increase over last year's figures, 
and those are based on reports from all the main exporters of what 
they expect to export in November. 


The Chairman. So that unless those exporters have taken into their 
account the requirements, the excess or increased requirements due to 
the war, you haven't taken them into account. 

Dr. White. We have to add a certain amount to the estimates we 
get for spot business. Almost always reports we get are really con- 
tract business — assured business. 

The Chairman. Have you added anything on account of the war? 

Dr. White. We have added a very small amount, but the shipping is 
so disturbed that those readjustments have not taken place yet. They 
may by December or later. In other words, we use all the facts we have 
and the best judgment we have in estimating these items after con- 
tacting all the people who have specific information on business thai 
has been contracted for. 

The Chairman. Who are these people who have this specific in- 
formation ? 

Dr. White. I think we get reports from some twelve to fifteen com- 
panies who do most of the export business. It is a relatively limited 

The Chairman. Do you have any independent sources of informa- 
tion ? 

Dr. White. Nothing except the usual seasonal factors and the cur- 
rent trends during the year. 

The Chairman. And you rely, ilien, in making your estimates upon 
the reports which are received f lom these companies which control the 

Dr. White. Modified by our own general seasonal trends and the 
conditions during the montlis preceding the immediate "month Ave are 
dealing with. We take no figures direct. We use those as evidence 
to combine with all other information we have to estimate as nearly 
as possible what the set-up will be. 

Mr. O'Connell. From what sources do you get your infoniiation 
as to domestic consumptioii? 

Dr. White. Domestic consumption of gasoline has very definite sea- 
sonal relationships and is closely related to the total number of motor 
vehicles in operation and the consumption per motor vehicle. It is 
very difficult to correlate real consumption data with sales data. A 
good deal of the data we get is sales data. There are stocks that 
we know nothing about. We have bulk terminal stocks of gaso- 
line, but when gasoline passes into the hands of the retailer no one 
has any record of just what those stocks are. If prices apparently 
are going up or down, it may stimulate or reduce sajes, as the cas^r may 
be, so that sales slvq. much more variable tliai] consumptinn is, prob- 
ably ; that is, SQ,les to the final retailer.- We- oftentimes get very unex- 
pected figures for a given month which are usually balanced by the 
next month. 

If sales are high this month, they will be low next month as that 
gasoline is used up 

Mr. O'Connell. I was interested for the moment from what par- 
ticular sources you derived your information. 

Dr. White. That has to be based on the general factors of motor- 
fuel consumption. 

Mr. O'Connell. Do you get reports from particular companies? 

Dr. Wtiite. We collect practically all of the monthly and annual 
figui-es that are collected in the oil industry relating to production and 


stocks — that is, we ourselves have production and stock figures, which 
we combine and publish on a national basis each month. 

Mr. O'CoNNELL. You still don't understand me. You attempt to 
determine a figure which is supposed to be an estimate of the consump- 
tion of gasoline, I understand. From what sources do you get infor- 
mation which assists you in arriving at that figure ? 

Dr. White. In the first place, there are the usual seasonal trends. 
Consumption varies greatly in different periods of the year. It has 
been running this year at a rate of about 6 percent above last year 
fairly consistently, 

Mr. O'CoNNELL. You still are not answering what I have in mind. 

Dr. White. I think I am coming to what you have in mind. You 
have to project usual seasonal trends first if -you are considering 
consumption. We use a business index which has a certain amount 
of influence, though gasoline consumption usually does not follow a 
business index as closely as some other operations. As the business 
index goes down gasoline consumption generally lags. It doesn't 
go down quickly as a business index does. As the business index 
comes up gasoline comes up more slowly. Gasoline consumption is 
a much more stable factor than almost any other line of consumption. 
It is. affected less by change of conditions, and therefore the changes 
are fairly gradual. Then we have monthly figures, the latest available 
figures, on the number of motor vehicles in operation. 

Mr. O'CoNNELL. You have those figures, but where did you get 
them ? 

Dr. White. The registrations are compiled from State and other 
data monthly. Generally there is 1 or 2 months' lag in the set-up, but 
they are published figures of registerations and changes from which 
we can compute the number of motor vehicles in operation. 

Mr. O'CoNNELL. They are figures compiled by State agencies? 

Dr. White. They are based partly on State registration figures and 
on automobile sales figures. It is a combination of those various fig- 
ures. Of course, primarily you take estimated rates of withdrawal 
of cars and sales figures of new cars and compute the total probable 
number of motor vehicles in operation. 

Mr. O'CoNNELL. Specifically you take a sales figure on new cars. 
Where do you get the figure? From whom? 

Dr. White. From the general publications of the automobile 

Mr. O'CoNNELL. From the publications of the automobile asso- 
ciation ? That is one source of information. What are some of your 
other sources of information ? 

Dr. White. Well, that pretty well covers the question of domestic 
demand when you have your motor vehicles representing 85 percent 
of the total consumption. Those things proceed on more or less 
regidar seasonal rates and operations. There is not nearly as much 
differentiation as anyone would think in that set-up. Our estimates 
of total motor-fuel demand in 1938 were only 2,000,000 barrels off, 
or one-half of 1 percent. 

Mr. O'CoNNELL. Off of what was actually consumed? 

Dr. White. Yes. 

Mr. O'CoNNELL. Where did you get the figure of what was actually 
consumed in 1938? 


Dr. White. That is the figure we compile from the total produc- 
tion of gasoline monthly, change in stock 

Mr. O'CoNNEioL (interposing). Wliere do you get that? 

Dr. White. From the refining companies. We have reports from 
some 200 refiners, which practically covers the whole refining indus- 
try and gives us monthly figures of production and stock changes. 

Mr. O'CoNNELL. That is what I was getting at. You get from 200 
refiners the amount of their production month by month by voluntary 
arrangement ? 

Dr. White; Yes; by voluntary cooperation. 

The Chairman. Do you get any other information from the com- 
panies besides their reports oh consumption ? 

Dr. White. Well, we have pipe-line receipts of crude, which 
cover approximate crude production, we have changes in crude 
stocks, the total runs to stills, and various products produced each 
month, which balanced out the refinery output, then for each major 
product the stocks for gasoline, kerosene, and other products, from 
which we get a figure that approximates the total demand. The 
Bureau of Foreign and Domestic Commerce collect figures on exports. 

The Chairman. How do you get the figure on total demand from 
the figure on production? 

Dr. White. Production plus or minus changes in stocks of that 
particular product. It shows the total amount that has gone into 
a market. Then if you subtract from that the exports you get the 
domestic demand. 

Mr. O'CoNNELL. At that point, though, you have merely as^^er- 
tained what the effect of demand was during a particular period. 

Dr. White. Yes. I was adding to it the previous discussion. 
That gives us the latest current data. 

Mr. O'CoNNELL. That gives you the current data as to what hap- 
pened during the previous consumption. 

Dr. White. We have current figures in the industry that are a 
little more up-to-date on that situation. The American Petroleum 
Institute collects figures on refinery operations and gasoline produc- 
tion and gasoline stocks by weeks. We have crude oil stock changes 
by weeks, and there are' various agencies that collect production fig- 
ures, so you can make a current balance within almost a week's 
time of the latest trend in developments. We test those figures. 
They are oftentimes off somewhat, but they give you the trend. In 
other words, I have the approximate trend of oil demand for the 
first 2 weeks in October at the present time, and the motor-fuel 
demand. They don't always check up with our monthly figures, but 
the discrepancies are not so great but that you approximately, have 
at the present time an indication of the trend of October demand. 
When you get into November demand you have got to consider all 
of the factors that are available to finally make an estimate of how 
abnormal or normal November is going to be, so for last year we 
look at the curves of the trend for this year, the latest current infor- 
mation, and estimate what is going to be the demand. 

Mr. O'CoNNELL. How do you use the price factor in that estimate ? 

Dr. White. The price factor has very little to do with the demand 
for gasoline. 

Mr. O'CoNNELL. It has very little to do with it? 

Dr. White. Very little. 


Mr. O'CoNNELL. Is that another way of saying the demand for 
gasoline is inelastic? 

Dr. White. You must keep in mind these are monthly forecasts. 
The change or alteration of a half a cent a gallon in the refinery 
price of gasoline or even 1 cent will not affect consumer demand 
to any extent in a short period. 

Mr. O'CoNNELL. On what do you base that? I am interested in 
the topic because I have heard people positively refute that. 

Dr. WnrrE. Well, if you check out curves of price changes, of 
course things of this kind are hidden by general upward movements 
in demand. It is hard to tell exactly, but there has been no evidence 
in cliecking genera,l price changes that curves of gasoline demand have 
any material influence. There are other factors that are far greater 
than that and obscure any smaller effects that such a change would 
have. In other words, most people operate n^otor vehicles and are 
going to continue to operate those motor vehicles with very little 
differential unless there is a major change in price, which does not 
occur in short periods for which we are forecasting. 

The Vice Chairman. In other words, if a person aimed to go 
somewhere when oil was worth 15 cents, if it got to be 16 cents he 
wouldn't stay at home. 

Dr. White. He wouldn't stay at home and I don't know of any 
such changes that take place in a month's time. We are estimating 
monthly demand. You have had frequently a quarter- or a half -cent 
differential, all of which is not necessarily passed on to the con- 
sumer. It initiates in refinery prices, but the j)rice changes are not 
sufficient to affect short-term demand. There are a great many 
other factors that are much more important. They will affect specu- 
lative sales. That is, if the final dealer expects the price of gaso- 
line to go up, he may buy a little sooner before the price goes up. 
I was talking primarily about the final consumer, while a specula- 
tive sale in a given month may be affected by an anticipation of a 
price rise or he may postpone buying if he expects a price fall. That 
is, the retailer's sales vary and fluctuate with that. That is a factor 
we find it difficult to anticipate, and oftentimes it means that in one 
month the sales will be higher than expected, but that oil is used 
up in the next month and the 2 months will average out. It is very 
difficult to pick on any given month and absolutely estimate the de- 
mand in that month, because many of the factors are speculative and 
unexpected sales factors. But actual consumption is probably much 
more stable than monthly sales. What we get in our figures that 
we collect is primarily refinery sales, because if you take refinery 
production and a change in refinery and bulk terminal stocks, the 
difference is what has passed into the market, and it is primarily a 
sales factor, which is much more variable than a -monthly consump- 
tion figure based on automotive use, which is fairly stable and moves 
slowly upward or downward. 

Senator King. Over a given period of time there is a substantial 
relation, is there not, between the production of petroleum and the 
production of gasoline? 

Dr. White. You mean quantitatively? 

Senator King. Yes ; quantitatively ? 

Dr. White. That over a long period changes materially. During 
the World War, from 1914-17, the yield of gasoline was about 


one-half what it is at the present time. In other words, you had 20 
to 21 percent gasoline yield from a barrel of crude in 1914; now it is 
approximately 44 to 44^/2° percent, which means that other products 
influence the amount of crude required, less than they used to, 
but they are still factors, and we generally make a balance of other 
product requirements, a forecast which we don't generally publish, 
but in order to determine the yield of gasoline we have to estimate 
how much heating oils and other products will be required. 

Senator King, You have reasonably accurate figures irom. the 
various channels to which you have referred, of the petroleum pro- 
duction by the month and by the year, and you have reasonably 
accurate information as to the use to which the crude petroleum is 
devoted, how much to gasoline and for other petroleum products, 
and you have reasonably accurate figures as to the quantity of crude 
on hand and the amouiit of gasoline on hand, the disparity between 
production of crude and the production and consumption of gasoline, 
so that with all these sources of information you think your figures 
are pretty accurate. 

Dr. White. I may say this, that they are, I believe, more accurate 
than anybody else's figures. To forecast anything is a difficult 
undertaking, but we collect all of the forecasts that independent 
engineers or economists make. We go out of our way to find out 
what other people are forecasting. We primarily make our own 
forecasts on our own methods, but we check with what other people 
are thinking and all other sources of information. We are all wrong 

Senator King. As far as I am concerned I think you have demon- 
strated your competence. 

Representative Williams. Through the years that you have been 
operating how nearly has your forecast conformed with the facts 
after they were shown? I believe you gave 1 year, last year, was 
it, that you showed one-half of 1 percent off. 

Dr. White. There are different factors involved in the forecast. 
First is a forecast of gasoline demand, which is properly added on 
a cumulative basis, that is, there are no variables, so that in those 
estimates, roughly speaking, we have been issuing forecasts for 
approximately 3 years now, and in 1936 our gasoline forecast was 
9,000,000 barrels or approximately 2 percent under the actual. In 
1936 there was a period of very rapid market expansion; that is, 
demand was going up so rapidly that it was very difficult to catch 
up with actual demand in making these forecEists 2 months ahead 
of any available data. In 1937, you had a sharp break in demand, 
a depressed condition at the end of the year, so that our forecast was 
about 6,000,000 barrels in excess of a 558,000,000-barrel market, or, 
roughly, 1 percent over. You see, we were 2 percent linder in 1936, 
about 1 percent over in our estimate of demand in 1937, and in 1938 
we were one-half of 1 percent under. So far this year I should 
imagine that we will run certainly within 1 percent. There were some 
months that were very highly variable, but I think we are doing 
better probably than we did last year on the whole, and that the 
differential will be certainly under 1 percent at the end of the year 
in estimating total motor-fuel demand. 

Mr. O'CoNNELL. Isn't it^ entirely possible that the forecasts which 
you make have to some extent an effect on demand ? 


Dr. White. Absolutely not. 

Mr. O'CoNNELL. Well, to the extent that the forecast is used as a 
measuring stick for controUino- the production, and to that extent 
bnnging the supply in line ^Yitb the hypothetical demand, it seems 
to me entirely possible that to the extent demand is influenced by 
price your forecast is pulling itself up by its bootstraps, so to speak. 

Dr. White. Primarily, the object of the forecast is to furnish to 
States who have control agencies an approximate estimate of the 
demand of crude oil from their States. We do not estimate changes 
in crude stocks or production. We estimate the demand, for instance, 
for Oklahoma or Texas oil in this given month. Now, the States 
takes that figure purely as information. There have been times when 
tlie States decided our estimates were low and. they wanted to build 
up those stocks, so they had larger allocations ; there were other times 
when they wanted to definitely cut stocks. We estimate the inarket 
demand on the basis of competitive trends between States. The 
State allowables may go above it or below it. They are policy agen- 
cies who themselves determine whether they want to produce more 
or less than the best estimate we have of what demand for oil will be. 

Mr. O'CoNNELL. Do you bfeak your estimate down by producing 
States to indicate what the allowable will be in that way? 

Dr. White. For crude oil; that is the primary purpose of the 
whole thing, to produce an estimate for the demand, market demand 
for crude oil for a given State. 

Mr. O'CoNNELL. You mean you only give the amount of crude oil 
that will be used in a particular State, or an amount that should be 
produced in a given State? 

Dr. White. It is the demand for crude oil of State origin, or 
Texas crude oil or Oklahoma crude oil as a part of a national 
demand. We take up the gasoline demand to determine national 
demand and then we arrive at a national demand for domestic crude 
oil, which means we break down the estimates for the demand for 
crude oil by States of origin, where it is produced. We don't set up 
a production figure because demand can be met from either produc- 
tion or from stocks. At one time we made some estimates of changes 
in crude stocks, but since I believe October 1936 we have made no . 
estimates of crude-oil stock changes. That is a policy matter which 
we leave up to the agencies that use our estimates'^ 

Now, in order to get at the forecast of crude demand by State^. 
we get reports from each refinery district of their receipts of crude 
oil by States of origin, for refining, and we have approximate figures 
of -exports by States that we can check up trends, one refinery may 
be taking more oil from this State gradually and less from other 
States. We project trends of these receipt figures which show 
the sources of crude oil in each important refinery district to de- 
termine the changes that are taking place in the use of oil from 
given States in the districts, and add them up as a total, which 
gives a trend of the demand for crude oil by States of origin; and 
we have figures of stocks of crude oil by State origin, so that we can 
balance production by States against stocks of State origin to deter- 
mine demand for crude oil by States, and it is that set of figures 
which we use in making these estirnates. We break down this na- 
tional figure into subdivisions by States of origin. That was pri- 
marily what led to the forecasts, the desire to get some general idea 

124491 — 40 — pt. 17, sec. 4 15 


at least of what the trend of demand was for oil in Oklahoma or 
Texas, or some other State. Obviously, any State agency that was 
considering any balance between production and consumption would 
have to have some idea of what the demand would be. They had 
no method of getting it themselves, and that is the service that thi^ 
forecast renders. They take that information and do what they 
please with it. They follow it sometimes or they disagree with it. 
That is their prerogative. We don't set up any allowable. We 
simply say this is the best statement from all the facts in our posses- 
sion of what the demand from your State is going to be. Here is 
the information. 

Mr. O'CoNNELL. Then you consider the service you render as an aid 
in bringing production in oil-producing States in line with consump- 
tion ? 

Dr. White. Now that depends entirely on the State policy. We 
don't consider anything at all. We furnish the information to the 

Mr. O'CoNNELL. For what purpose do you furnish the information ? 

Dr. White. At the request or for the information of the States. 

Mr. O'CoNNELL. For what do they use it ? 

Dr. White. That, as I say, in answering your questions, dej)ends on 
how they use it. If they use it for that purpose 

Mr. O'CoNNELL (interposing). "If they use it" — for what other pur- 
pose would they use it? 

Dr. White, Actually in determining their policies they sometimes 
increase production on their own initiative and sometimes decrease it. 

Mr. O'CoNNELL. But to the extent that your estimates are useful, 
I take it they are useful in connection with controlling production. 

Dr. White. With, the adjustment of production to demand ; yes. 

Mr. O'CoNNELL, So that the function of the Interior Department in 
this regard is to facilitate oil-producing States in controlling produc- 

Dr. White. Yes, I might go one step further — I think your other 
question implied it — that the control of crude production so far has 
had very little effect as a restrictive factor in refinery operations, 
that when you come to the production of refined products, even in this 
production holiday in August refinery operations were higher than 
at any previous time; that is, the adjustment of crude production 
doesn't necessarily mean that you adjust the supply of refined 
products. If crude production was so low and stocks were so low 
that crude was not available, it might, but that point has not been 

Mr. O'CoNNELL. I am still primarily interested in what you con- 
ceive to be the function of the service you render to oil-producing 
States and others. Do you consider it has a conservation function or 
what sort of function has it? We are agreed, I think, that when used 
by oil-producing States, your estimates are used foi* the purpose of 
controlling production of crude in those States. Now, from the 
point of view of the Interior Department, has your service any other 
function ? 

Dr. White. It is primarily a conservation function related to the 
prevention of the unnecessary production of oil above market de- 
mand, and that whole situation has changed largely because the 


amount of storage necessary has changed because of so much shut-in 
production. The whole trend of those factors is changing. 

Mr. O'CoNNEix. Right at that point, we may not be speaking of 
exactly the same thing when we are speaking of conservation. Do 
you conceive the proper function of conservation to prevent more oil 
being produced at a given period than would be sufficient to meet your 
market demand as estimated? 

Dr. White. No; I w^ouldn't quite say that; to prevent oil from 
being produced that might have to go into wasteful and unnecessary 
storage over a long period. 

Mr. O'CoNNEiiL. You are speaking of conservation now as meaning 
something more than the prevention of physical waste in the produc- 
tion of crude oil. 

Dr. White. In the production. There is also waste in storage. 

Mr. O'CoNNELL. You are speaking of waste in storage. Is that the 
conservation function that you conceive you fill? 

Dr. White. That is primarily the presumption, that the forecasts 
are an indication of what the demand is, and then I think the general 
policy of the States in relating their conservation measures to market 
demand has been the principle of not producing oil until it is 
required, until it is wanted. 

Mr. O'CoNNELL. I understand that that is generally the policy of 
the oil-producing States, and I am merely interested in the policy of 
the Interior Department in facilitating that policy. I take it that 
that has nothing really to do with conservation as such, meaning by- 
conservation the prevention of physical waste. 

Dr. White. Well, if you want to indicate that the Interior Depart- 
ment, in complying with the requests of these State agencies for this 
information, in a sense is aiding and facilitating their efforts at State 
conservation, without any question that is true. We assume that this 
type of information is one of the necessary facts, not necessarily a 
primary fact ; that is, theoretically, conservation might be based on 
the best engineering practices. Practically, demand might be such 
that oil would be produced irrespective of engineering practices, but 
where there is an abundance of oil, more than is necessary, this is a 
starting point I think in any proposal of any kind in conservation; 
the relation of production to demand is an important consideration. 
It majr not be a major one, by any means, but it is in a sense a start- 
ing point. You have got to have some idea of whether your produc- 
tion is in excess of demand, and then whether that excess production 
will cause wasteful storage or wasteful methods in its production. I 
look upon the question of demand as fundamental information but 
not necessarily a controlling factor. 

Mr. O'CoNNELL. Is that information made available or collected 
pursuant to any particular legislation? 

Dr. White. Not directly, except in the enabling act of the Bureau 
which permits it to publish information of any kind, and more or less 
indirectly by. congressional action in providing appropriations for 
the expansion of work necessary in connection with these forecasts in 
certain crude-oil products and other work that has been done. 

Mr. O'CoNNELL. It is a matter of administrative policy. 

Dr. White. It is a matter of administrative policy that comes di- 
rectly under the authorization of the Bureau work'^ and funds for 
which have been specifically supplied by Congress. 


Mr. AviLDSEN. About how much does it cost a year to supply that 
information to the oil industry? 

Dr. White. You mean the total statistics that we collect? Of 
course, these forecasts are in a sense a byproduct of the work which 
we are doing. 

Mr. AviLDSEN. The collecting, the forecasting, and so forth— just a 
rough figure. 

Dr. White. I can't break it up into forecasting. We collect an 
enormous amount of statistical material in all aspects of the oil in- 
dustry. I believe our appropriations for this division are in the 
neighborhood of $55,000 to $60,000 annually. 
. Mr. A^^LDSEN. Collecting and forecasting? 

Dr. White. For all of the work of the division, which employs 
about 20 people, most of whom are engaged in statistical work. We 
have field offices in California. That includes the California statis- 
tical work, and also in Oklahoma. But as for our entire work which 
has been carried on for years, practically, we have one man who spends 
most of his time in assembling the* figures for the forecast work 
and even he is our motor fuel specialist who answers many inquiries 
and other work on motor fuel. 

The Chairman. Are there any other questions ? Mr. Snyder ? Mr. 

Mr. Berquist. No. 

The Chairman. I wonder what exact considerations were before the 
Bureau when this policy was adopted to induce the Bureau to under- 
take furnishing this information. . 

Dr. White. Well, I think I may say in that connection that the 
consideration of national forecasts of demand as a part of the oil 
conservation movement has been in the situation since its beginning 
under the Federal Oil Conservation Board in 1930. It has been recog- 
nized that any planning of the relation of supply and demand re- 
quired at least a national forecast. Then wlien the State Conservation 
Acts were passed, it became necessary to break a national forecast 
into demand by States for information for their purposes. In other 
words, it has been a gradual extension into greater detail, but that 
idea seems to have been initiated very early in any discussion of a 
national conservation program. 

The Chairman. Then it was considered desirable to determine 
what the demand should be in order from the point of view of con- 
servation that the production could be kept in line with that demand? 

Dr. White. That is absolutely the first necessary consideration. 

The Chairman. I mean that "was actually before the Bureau when 
it was undertaken. 

Dr. White. Yes. Of course, the Bureau in undertaking this work 
really was performing statistical services for the Petroleum Admin- 
istrative Board under the N. R. A. We had the facts and supplied 
them with data but they being a policy and control agency, used those 
facts as they saw fit but it was necessary to have those "facts and to 
develop more facts than were available. 

The Chairman, Do I understand this was not undertaken until 
N. R. A.? 

Dr. White. Not in the present detailed form in which it is found. 
It really initiated from August '33 to May '35, and then when the 
code period ended, the Bureau was about to abandon that work. 


The Chairman. What general detail now involved was not present 
before 1933? 

Dr. White. We had no data to determine accurately the demand 
for crude oil by States. We had production, but we had no details 
of stocks by State origin. We had no movements by States of origin 
to refinery districts. We couldn't determine whether it was used. 
You might get it in- a year's set-up, but we had to develop a great 
deal of detailed information, and also further information on the 
interregional movements and on details of gasoline consumption. 

The Chairman. What factors actually enter into your determina- 
tion of consumption? First, of course, you mentioned the number 
of automobiles which you compute from the automobile association 
figures, and then you had your reports on production from the vari- 
ous refineries. Were there any other factors? 

Dr. White. We have special export reports that we get on the 
export situation. In connection with the automotive traffic we get 
reports of traffic over a great many major bridging routes in the coun- 
try which is a fair indication of traffic itself. In addition to that 
we have a set of reports which show the receipts of crude at refin- 
eries by origin. 

The Chairman. Do you have any prospective information of any 
kind from any source as to what the development is likely to be ? 

Dr. White. We collect from all of thg people in the industry th^o 
we know give any attention to the trends of demands, their own 
estimates; the independent engineers and company economists. In 
other words, so far as we know, anyone who is engaged in the fore- 
easting operation, we check their estimates of various parts of this 

The Chairman. So your estimate is not based solely upon actual 
data as to past performance, but includes also estimates from the 
trade with respect to future demand. 

Dr. White. Yes. 

The Chairman. Now what is the relative importance of those 
estimates as compared with the factual data on past performance ? 

Dr. White. That is a very difficult question to answer because in 
forecast work of any kind you have to take all of the information 
from any source that is available and finally make up your own mind 
as to what the best set-up is. The projection of statistical curves' 
won't do it because oftentimes events don't follow the projection of 
past curves. 

The Chairman. In determining to what extent you will allow 
weight to the estimates of companies engaged in the petroleum busi- 
ness as to future consumption, how are you guided in that? 

Dr. White. The variation in those estimates is such that you 
wouldn't give weight to any single one of them. In other wordsj 
we collect data. They are not all company by any means, there are 
some independent organizations and associations, and you get a very 
unexpected variation in the estimates of different people who fore- 

The Chairman. Does the Bureau have any regard whatsoever for 
price in making its estimates? 

Dr. White. I should say that in short-term forecasts there is no 
relationship to price involved. 

Thfe Chairman. How about long-term forecasts? 


Dr. White. We don't make long-term forecasts. 

The Chairman. I wondered why you make that distinction. 

Dr. White. It is a monthly forecast. In other words, we are fore- 
casting the middle of this month the demand for next month and not 
for 6 months to come. It has not been practical to do that. Market 
conditions have been such in the last year or two that past perform- 
ance may have very little relation to what is happening. 

The Chairman. Can the committee understand that so far as the 
Bureau of Mines is concerned it does not take into consideration the 
effect of its estimates upon price? 

Dr. White. I think that could be said to be absolutely true. The 
only possible factor that might be involved is the fact that we have 
to make seasonal estimates of certain refined stocks. They go 
through seasonal changes. If the stocks of gasoline are excessive, 
that is build up in winter higher than they normally would, we have 
to take a greater seasonal reduction that normally would take place. 
Obviously that high stock might affect the price of gasoline. We look 
upon any stock recommendations as reducing to a reasonable and 
normal position of day's supply in the industry . In a sense, excess 
inventories may affect the price temporarily, but in a monthly fore- 
cast we follow seasonal patterns of usual performance in reducing 
those stocks. 

The Chairman. Then jou conceive it to be the function of the 
Bureau of Mines to furnish this information first because it is a 
matter of information within your knowledge which you can gather 
under your organiaztion, information which is desired by various 
State agencies clothed with certain functions by law, and, secondly, 
you recognize it as a desirable factor in promoting the conservation 
of oil. 

Dr. WniTE.Yes, sir. 

The Chairman. And you are not concerned about the effect of this 
upon price. 

Dr. White. No, sir. 

Mr. Berquist. In August during the shut-down was production in 
excess of the Bureau of Mines' estimates? 

Dr. White. It couldn't have been in excess. 

Mr. Berquist. I mean at the time the shut-down took place, were 
they running in excess of the estimates? 

Dr. White. I couldn't tell. You are talking about production, not 
runs to stills. 

Mr. Berquist. Production of crude oil. 

Dr. White. That is a weekly factor upon which we have no statis- 
tics except as we take them from published sources. We don't collect 
weekly production figures. We use other people's figures for that. 
Of course, our month's production, which included 2 weeks of shut- 
down showed a 25-percent reduction in total production. For the 
2 weeks oil production was cut 50 percent, which made the monthly 
production a quarter below normal and there was a reduction of 
32,000,000 barrels of crude oil stocks in August, most of which was 
associated with that shut-down period. 

Mr. Berquist. Colonel Thompson indicated that they used Bureau 
of Mines estimates as a basis for setting up State allowables.^ I was 

1 Testimony of Col. Ernest O. Thompson, member, Texas Railroad Commission, on the 
administration of proration, appears in Hearings, Part 15. 


wondering what the production was in the State of Texas as com- 
pared with the Bureau of Mines estimates of demand, whether produc- 
tion had run greatly in excesss of estimates or not for the State of 

Dr. White. Roughly, I should say that — this isn't a monthly figure, 
necessarily. You are speaking just about the August situation? 

Mr. Berquist. Yes. 

Dr. White. I haven't the detailed figures by weeks before me, so 1 
can't tell just what it is. But my recollection is for the last 2 or 3 
months Texas has been somewhat below the Bureau's estimated 
market demand in its production. I haveli't the detailed weekly 
records, and they are not our records in any case, when it comes to 
weekly figures. Tlie only figures we recognize primarily as our figures 
are monthly figures, which sometimes agree with weekly figures or 
sometimes disagree to some extent. ■ 

Mr. O'CoNNELL. Would it be fair to say that the estimates, the 
breakdowns, which you make by States, of crude-oil production, have 
no substantial utility except to implement State proration laws? 

Dr. White. Well, I wouldn't say that. I assume that in determin- 
ing the source of production and the source of marketing of the prod- 
uct of any State, it has an equal value with any market studies which 
attempt to show interstate movements and distribution of products 
Avithin the States. That is, w^e can give a pretty complete picture of the 
interstate movement of crude oil from production to refinery point, 
which I think in itself is a verj'' valuable factor, because it is indicat- 
ing the general layout and changes that are taking place in industry 

Mr. O'Connell. Do_ you think you would make that break-down 
where there are no proration laws? 

Dr. White. We would make it now. We would continue. I think 
the industry has come to appreciate that information to the point that 
it would be continued whether there was State proration or not. There 
iire a great many other people who are using these data besides the 
States, and they are primarily interested in the estimates of the coming 
demand and then checking back on the figures of past months. 

Mr. O'Connell. Let me put it this way. When you first made the 
break-down by States, wliich was, I take it, in 1936 or thereabouts, 
what was your purpose in making the break-down by States at that 
lime; was it not to implement State proration laws? 

Dr. WiftTE. Well, that break-down was started somewhat before 
that. It was initiated beginning with the code period. 

Mr. O'Connell. I understood you didn't make the break-down of 
States until N. R. A. 

Dr. White. That was in the first forecasts of the Federal Oil Con- 
servation BoaiJ in 1931 and '32. The break-down by States was 
not made until the code period was started. 

Mr. O'Connell. At the time it was started did you know any 
useful purpose it served except to implement the proration laws? 

Dr. White. At the time it was started that was what it was 
started for. As to whether there were other values besides that, 
you have to keep in mind we collect this data with the voluntary 
cooperation of the oil companies. We have no mandatory powers of 
oollecting statistics, and most of the data which we collect has been 


developed on the whole as data which they were interested in and 
wanted on the national production and distribution of oil and its 
products, and I would say that probably the petroleum industry has 
more extensive statistics and more current statistics than any other 
industry, and that primarily that data is of use to the people in the 

Mr. O'CoNNELii. As I imderstand you, when the practice of break- 
ing down your oil production by States was initiated it was for the 
purpose of implementing State proration laws biit now it develops 
that it has other uses. 

Dr. WnrrE. Yes. Of course, part of the data was already avail- 
able, just supplemental data to finish the job. We had stocks of 
crude oil, but we broke it down, by districts, not by States of origin. 
I mean we just went one step further, which furnished a little more 
information than data already collected. 

Mr. O'CoNNELL. But for the purpose of implementing State pro- 

Dr. White. Exactly. 

The Chairman. What factors enter into your assignment of allot- 
ments to various States? How do you determine, in other words, 
what shall be assigned to each particular State? 

Dr. White. It is primarily on a moving percentage basis of total 
demand. That is 

The Chairman (interposing). The sum of the allotments to each 
State will equal the estimated total demand? 

Dr. White. Yes. Now the total demand is affected by gasoline 
demand, gasoline stocks, and other factors, but once having fixed a 
national demand for crude, made up of runs to- stills, exports, and 
other uses of crude, that figure is allocated on the basis of moving 
percentage trends of demand, the use of State oil at different refining 
districts. . 

The Chairman. Testimony was given here by Mr. La Fleiclio n 
few days ago that production in Wyoming does not equal the esti- 
mate of the Bureau of Mines. The testimony from Texas would 
indicate that production in Texas has sometimes exceeded the esti- 
mate of the Bureau of Mines. Do you then keep any record of the 
agreement or lack of agreement between actual production in these 
States and your actual estimates? 

Dr. White. Let me clarify that. We do not make an estimate of 
production. We make an estimate of demand. Take Wyoming, for 
example. They have a pipe line that is moving oil to points further 
east., Part of that oil is new production, part of it is accumulated 
storage that is being reduced. Our estimate is the total demand 
for Wyoming oil, includes production and that stock reduction; 
therefore, any production figure where they are liquidating stocks 
would be less than our demand figure. Our demand figure runs 
fairly accurate for the State of Wyoming, but part of that demand, 
as we point out in our forecast, can be met from production. We 
don't estimate production. So much crude oil of Wyoming origin 
is wanted. It may be t^iken by the companies or anybody concerned 
from stocks, or it may be new production. We don't distinguish 
where it shall be taken from. 

The Chairman. I understand that, but I was wondering whether 
there was any relationship to production. 


Dr. White. Not necessarily. It depends on whether stocks are 
going up or down. 

The Chairman. Is there any relationship to the actual amount 
shipped out of the State? 

Dr. White. Not to the amount shipped out ()f the State, because 
it may go into intrastate refinery or to an outside State. 

The Chairman. All right, adding the intrastate uses with the in- 
terstate uses, do you keep any account of relationship of these uses, 
the total uses, with your total estimates? 
Dr. WhittI. We do. 

The Chairman. How do they compare? 

Dr. White. They are fairly accurate on the whole — let me make 
this point which prevents a very accurate addition of 12 monthly 
forecasts of total market demand for crude as a whole or by States. 
You have this peculiar seasonal accumulation of gasoline stocks. 
They rise some 20,000,000 barrels each winter because you have to 
produce heating oils and run more crude to stills than you need and 
therefore the excess gasoline is built up and is used the following 
summer. You take gasoline demands, those we can forecast fairly 
accurately. We have thereafter to estimate changes in gasoline stocks 
along seasonal lines. Even if stocks are already too high, we have 
in November, December, January, February, and March, increasing 
* gasoline stocks, whether they are needed or not. We may estimate a 
build-up. in that period which' may or may not take place. Supposing 
the increase in stocks is several million barrels more than we esti- 
mate is necessary. We have to change our further figures. That 
implies less runs to stills than we originally estimated. 

You have more gasoline than you anticipated and it must be mar- 
keted later, therefore the runs to stills would be less. That is, in any 
»set-up that goes on a month-to-month basis with moving stock con- 
ditions, if stocks are obviously too high the usual seasonal decrease 
would be increased somewhat. We estimate ahead of time what may 
happen. If it doesn't happen we have to keep cumulatively correct- 
ing the later estimates; therefore, our total demand would generally 
have a tendency to be less than the one we originally intended when 
you add it by months. In September, if you end with several million 
barrels more of gasoline than you need, you are going to estimate a 
reasonable reduction in September that isn't really normal, to correct 
that situation before you enter the next winter when it is inevitable 
that stocks are going to go up again. 

The Chairman. Take two adjoining States. How do you deter- 
mine from month to month how you shall change the estimate for 
each of those States? 

Dr. White. That is primarily based on the trend of demand in 
different refinery districts. Some districts seasonally go up or down, 
for instance. Gulf Coast Texas refineries are steadily increasing in 
the total runs to stills and total output, other refineries are losing 
part of their markets and their runs. 

The Chairman. But that information you secm-e in the manner 
already described from the companies and the automobile sources. 

Dr. White. Well, there is one factor, there is a certain element 
of difficulty and some inelasticity that has been pointed out in these 
forecasts, if you estimate the demand m a given ^te for its output 


and they should use that demand figure as an allowable, the question 
is, if the demand is larger, how could they meet it ? If there are any 
accumulated stocks of Texas or Oklahoma oil, as the case may be, the 
demand would be met by withdrawal of stocks and we would pick up 
these figures, our estimated demand would keep on moving upward. 
If you take such a State as Illinois just coming into the picture and 
whose production expands by leaps and bounds, obviously nobody 
can anticipate how far they are going to go up in 2 months' time. 
Practically speaking we are just about 2 months behind what is 
happening in Illinois. The current situation indicates so much de- 
mand for Illinois oil. It may go up tremendously in the next 2 
months. We may still be 10 percent behind. But you can't go 
beyond a certain point in a new set-up of that kind. In cases of any 
stabilized production with plenty of stocks of State origin, if your 
estimate was a little too high stocks would accumulate, if the estimate 
was a little too low they would draw from stocks. 

There is elasticity for every situation except where a new develop- 
ment goes forward by leaps and bounds. If the State were really 
prorating under tliose circumstances they would have to use their 
own judgment if they thought there was a legitimate demand which 
was ahead of our estimate. That is one of the limitations of the 
estimate, where State policy and State judgment come in. If they 
think our estimates are too low they go above our estimates. If they 
think they are too high tliey may cut a little under them. It isn't 
our function. We are giving the best estimate we can of the trend 
of demand. If , the State disagrees with us, if they have a control 
agency that is ""their function, it isn't our function. Our function 
ends when we perform the best service that we can which admittedly 
has "to be based on estimates and collection of as much data as is 
available, for which work we are in a better position probably than 
any other agency or individual in the country, because we have the 
complete data and detail available in our offices. 

Mr. O'CoNNELL. Speaking of Illinois, how have your estimates 
worked out in Illinois? 

Dr. White. Roughly, 2 months behind the actual demand. 

Mr. O'CoNNELL. Taking a particular month I take it you have not 
been able to predict the production of crude oil in Illinois with any 
degree of accuracy. 

' Dr. White. We get production figures but we don't know how 
much of it is going to be used or going into stock. Our figure is 
a consumption demand. 

Mr. O'CoNNELL. You have a figure allocated to the State of Illi- 
nois per month. How close is that figure to being accurate? 

Dr. White. The latest current data for Illinois indicate a con- 
sumption of 319,000 barrels a day. We don't know how accurate 
that figure is. It is the last 2 or 3 weeks' figure. Our estimate 
will be 303,000' barrels a day. It may be too low. They may de- 
velop more pools and get more production. We can't keep up with 
a situation like that. 

Mr. O'CoNNELL. You may not have the figures in mind, but take 
a month like the month of September. I take it you made an esti- 
mate for September and I take it you probably know how close 
that estimate was to beinar correct. 

Dr. White. Not yet. We know what the August figures were. 


Mr. O'CoNNELL. How close were you in August? 

Dr. White. I should judge we have been running twenty-five to 
thirty thousand barrels a day below what they have been doing each 
month. When they get up to 285,000 barrels we probably are 30,000 
barrels below; in other words, at a figure where they were about 6 
weeks beiore that time. We have no basis of knowing when a meteoric 
production of that kind is going to stop. 

Mr. O'CoNNELL. You indicated that if proration were effective in 
Illinois, you would be more accurate! 

Dr. White. Actually, I don't think anybody thinks that produc- 
tion is sound, but that isn't our business. We are projecting competi- 
tive trends as they ekist. We aren't exercising judgment on whether 
Illinois should produce that much oil. We are estimating what the 
demand is. 

Mr. O'CoNNELL. Also where you have a situation such as you have in 
Illinois without proration you aren't able to forecast with any degree 
of accuracy. 

Dr. White. We aren't able to forecast in any State that is increas- 
ing its production °by tenfold in 8 or 10 months. You don't know 
how fast it is going to go up. 

Mr. O'CoNNELL. In other words, you are unable to forecast with 
any degree of accuracy in the States where they don't have effective 
•proration laws. 

Dr, White. No; that wouldn't be true at all. It is just where you 
have a sudden rise in demand. If it is new production, nobody knows 
how much new production is going to be brought in or how much of 
that new production will be marketed. In other words, we have no 
basis, there is no stability in the curve. After a situation once 
reaches a peak, changes take place and are gradual on a more Or less 
established line. When a meteor comes up out of the sea that you- 
didn't expect, nobody can tell just where it is going to go or how far 
up or down, 

Mr. O'CoNNELL. I take it in a State where you have effective prora- 
tion you would have no meteors. 

Dr. White. No. Well, of course, national demand doesn't move in 
the same proportion that Illinois demand does. National demand 
rose only about 6 percent last year, but when a State doubles and 
triples, and even more than that, its production in 4 or 5 months' time 
that is a situation that no forecaster can anticipate except as he moves 
up as fast as he sees any evidence before him. 

Mr. Berquist. Would you say, then, Mr. White, the Bureau of 
Mines estimates do contribute to the stability in the production of 

Dr. White. Well, that depends on what the people do who use 

Mr. Berquist. Do you think it does? 

Dr. White. I should think it probably does ; yes, 

Mr. Berquist. Do you think also the Bureau of Mines' estimates 
also contribute to the price of crude? 

Dr. White. Accepting your question, they would, but I am not 
quite accepting your question, because it depends on the action of 
somebody who takes information. I wouldn't lay it to the Bureau of 
Mines estimates one way or the other. I would say it depends upon 
the State conservation laws. The people who adniinister those laws, 


some of them, make some use of our forest estimates. To the extent 
they do, and the forecasts are a fairly accurate measure of the com- 
petitive demand for oil by States, they are adjusting their production 
more nearly to probable market demand than they would otherwise 
be doing. How far that would produce the results you suggest I 
wouldn't want to state one way or the other. 

The Chairman. Any other questions? 

Mr. AviLDSEN. I have one question I would like to ask Mr. Berquist 
as a lawyer. 

The Chairman. Are you asking for a legal opinion? Can I swear 

Mr. AviLDSEN. I am asking with regard to this estimate made by 
this Bureau, whether they have special legal powers which enable 
them to get this information and make these estimates. In other 
words, could all this be done by a private agency, by the American 
Petroleum Institute or Brookings Institution or not? 

Mr. Berquist. First, thank you for the compliment. I would have 
to refer it to Mr. Snyder, who is the lawyer. 

Mr. Snyder. Let us ask Mr. White whether there is any- industry 
organization that does make a similar estimate. 

Dr. White._ I don't know of any other organization that does work 
of this character. I think if there are other trade organizations that 
do, they probablj^ do it for their own members, rather than for 
publicity purposes. 

Mr. Snyder. How close does the American Petroleum Institute 
come to doing the same work that you do? 

Dr. White. They collect certain clata from members that cooperate 
with them. They don't collect any monthly data that I know of. 
The only data they are collecting; are some of this weekly data which 
we have never collected and which they started collecting, but when 
it comes to. monthly data, I don't think there is any conflict, and 
they could not o-et the coverage we get, which is 99 percent plus on 
a voluntary basis. They couldn't get 99 percent coverage. 

Mr. Snyder. With regard to storage data, every month you have 
to use their weekly data in order to arrive at your estimated storage 
figure, do you not? 

Dr. White. We don't use their weekly data in our monthly figures 
at all, or even our own weekly data. 

Mr. Snyder. Do not the forecasts of storage stocks refer to the 
American Petroleum Institute data? 

Dr. White. Wait a minute. You mean in a preliminary estimate 
of the last 4 or 5 weeks' operations? We finally get a final figure. 
We make an estimate as preliminary evidence. We usually don't take 
the A. P. I. figures direct, anyway. " We know their production figures 
run a little low. We approximate the current data to the best of our 

Mr. AviLDSEN. Has all this got to do with my question as to the 
legality of the thing and the special laws? 

Mr. Snyder. As to the legality of any activities of a Government 
department I do not care to express any opinion whatever. 

The Chairman. The testimony of Mr. White was that there was no 
specific statute authorizing this particular work, but that the Bureau 
conceives it to be within its authority under the general statute setting 
up the Bureau of Mines, and that it has received congressional approval 


in that appropriations have been made from year to j'ear sufficient to 
maintain the overhead of the Bureau in maintaining its staff to do this 
work. I take it there is no specific ^atute authorizing the formula- 
tion from month to month of an estimation of demands. 

Dr. White. That is in those specific terms. The organic act of the 
Bureau permits the carrying out of the economic investigations and 
the collection and publication of factual data. 

Mr. AviLDSEN. Then, Mr. Chairman, would you give us your opinion 
as a lawyer whether a private agency or association of oil companies 
could perform the same service legally ? 

The Chairman. That doesn't require the opinion of a lawyer at all. 
As a matter of fact, of course, any private agency that Avanted to 
undertake that work could, undoubtedly, make its estimate. 

Mr. AviLDSEN. Do exactly the same thing; collect the same infor- 
mation? The}^ don't compel people to report. It is a voluntary 

The Chairman. I know of no reason why any private institution 
that wanted to go to the trouble and expense of maldng estimates 
should not do it or could not do it legally. Of course, the question 
might eventually rise whether estimates of that kind were being pre- 
pared for a purpose of controlling prices, and then a different issue 
would arise, but on the manner in which you stated the question I 
think my observation is correct. 

Mr. Berquist. One other question. Mr. Thompson^ indicated he 
used the Bureau of Mines estimates for purposes of making allowables. 
I'o the extent, then, that the State railroad commission of Texas would 
use those and other commissions would use those estimates, the esti- 
mates that would have an effect to stabilize or affect production and 
in turn would have a further effect to stabilize or affect prices of crude 
oil. Would that be true, insofar as the use of them is concerned? 

Dr. WnrrE. If they consistently used our estimates it might, but I 
think if you take the figures of State allowables for Texas and our 
estimates you w411 find at times very considerable divergences. In 
other words, the State of Texas uses those forecasts exactly as they 
are meant to be used, as the best estimate we have. If for some rea- 
son they want to set up a higher or lower allowable, they proceed to 
do it, and in recent months Texas evidently has desired to reduce the 
stocks of Texas oil and has gone considerably below our allowables 
and has accomplished that purpose. 

The Chairman. Are there any other questions? If there are no 
other questions, the committee will stand in recess until 2 : 30. 

Thank you very much. Dr. White. 

(The Avitness, Dr. White, was excused.) 


Mr. Watkins. Mr. Chairman, with your permission, may I sum 
up the import, as I see it, of the testimony presented to the com- 
mittee yesterday afternoon and this morning? This can be done in 
a few brief statements, as follows: 

The grave waste of capital and of irreplaceable resources that 
obtains in this industry inheres in the economic organization of the 

1 Ernest O. Thompson, member, Texas Railroad Commission, whose testimony appears 
in Hearings, ^ Part 15, p. 8206, et seq. 


industry, including multiplicity of ownership and operating units 
and the legal framework — that is, the rule of capture — within which 
the industry must operate. Consequently, responsibility for this 
waste must be assessed against us all collectively; that is, against 
Government, including the courts, since Government niust determine 
this framework. 

The central aim of public policy toward conservation of petroleum 
should be to maintain an adequate supply at a reasonable price as 
long as possible. 

To pursue that aim it is essential that public authority be invoked 
to assure thai oil and natural gas be produced by such methods as 
will avoid waste of these unique resources. 

The technical device for assuring avoidance of waste of these 
resources is scientific unit control of geological structures. The 
application of such scientific unit control depends on the complete 
displacement of the rule of capture by a thoroughgoing law of owner, 
ship in place which would allot to each claimant his equitable pro. 
portion of the oil and gas in the common reservoir which underlies 
the land he owns or controls. 

The National Resources Committee in its energy resources study 
recommended that progress toward the goal of conservation could 
be made through the development of national minimum engineering 
standards for the production of oil and gas, such standards to b^ 
worked out in cooperation with the oil-producing States and the 

The inherent logic of this problem is one which calls for the exer- 
cise of Federal authority, tempered with recognition of the mutual 
interests of the States and the' Federal Government through co- 
operation in the development and enforcement of minimum stand- 
ards. Only the Federal Government has jurisdiction commensurate 
with the scope of this problem, and surely at this stage it does not 
need to be argued that the elimination of grave avoidable wastes of 
such an essential resource is a proper field of Federal interest. 

Finally, Mr. Chairman, I should like,, on behalf of my associates 
and myself, to express to the committee our deep appreciation of the 
courteous hearing you have given us. 

(The witness, Mr. Watkins, was excused.) 

(Whereupon, at 1:25 p. m., a recess was taken until 2:30 p. m. 
of the same day.) 


The hearing was resumed at 2 : 45 o'clock p. m., upon the expiration 
of the recess. 

The Chairman. The committee will please come to order. 

This afternoon the witness will be Mr. Christopher Del Sesto, who, 
as a member of the staff of this committee has examined and studied a 
good deal of the material, particularly the questionnaires which have 
been submitted to the committee. ' I will ask Commissioner Henderson 
to make an introductorv statement. 



Mr. Henderson. I think it is well to recall, at this time, Mr. Chair- 
man, the nature of the presentation of the oil industry. As you will 
recall, the oil industry was asked, through its established association.^ 
to make a presentation of economic facts^of the industry. The in- 
dustry also undertook freely to supply the committee's staff with 
considerable information relating to its financial and operatmg 

An extensive questionnaire was prepared on behalf of the commit- 
tee staff and submitted to the industry, and may I say that with few 
exceptions there was a complete response from the constituent com- 
panies of the association. The question then arose as to what type 
of analysis should be made of this financial information relating to 
one of the four largest American industries. It was felt that rather 
than make a usual statistical presentation, this industry ought to be 
examined in terms of its financial statements in relation to the terms 
of our basic charter, which consists as you know of the resolution' 
creating the committee and also the President's message which gave 
rise to it.^ 

As a member of the committee staff Mr. Christopher Del Sesto was 
asked to make a critical analysis of the financial facts of this industry 
and to make a presentation to the committee. Mr. Del Sesto is truly 
well qualified to make this presentation, being both a certified public 
accountant and a member of the bar, having graduated from Boston 
University and Georgetown Law School, He was formerly a member 
of the Chief Accountant's staff of the Securities and Exchange Com- 
mission and also formerly State budget director and comptroller of 
the State of Rhode Island. In this connection he had charge of the 
preparation of the State budget under the direction of the Governor 
and also was in charge of the approval of State expenditures. 

As part of this work he headed the bureau of audits of the State, 
which audited all State departments, municipalities of the State, and 
assisted the bank commissioner, insurance commissioner, and public 
utilities commissioner in the audit of banks, insurance companies, and 
public utilities. He was formerly chief accountant in the State treas- 
urer's office of Ehode Island, and had about 7 years of public practice 
in addition to his teaching experience at Boston University and North- 
eastern University. With this qualification I would like to turn the 
witness over to Mr. Cox for the presentation. 

The Chairman. It might be added, I think, that although Mr. Del 
Sesto speaks as a member of the staff which has been working on the 
material presented to the committee, his testimony cannot be regarded 
as an expression of the committee. It is merely the presentation to 
the committee of his conclusions drawn from the material at hand. 

Mr. Del Sesto, will you come forward, please? Do you solemnly 
swear 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 ? 

■1 American Petroleum Institute. 

2 See Hearings, Part 1, "Exhibits Nos; 1 and 2," appendix, pp. 185 and 192. 



Mr. Del, Sesto. I do. 

The Chairman. You may be seated. 

Mr. Del Sesto. Mr. Chairman and members of the committee, I 
have been assigned, as has already been stated, to make a review of 
the financial reports and data that have been submitted by the oil 
companies in response to this committee's questionnaire. I was also 
assigned to the task of reviewing the replies submitted by the oil com- 
panies in response to a supplementary, questionnaire which dealt with 
the cost of gasoline at the refinery gate and with the classification of 
income by branches and departments of business. 

In connection with the first part of the work I present for the record 
a statement which I have designated as staf sment "A," and that state- 
ment is accompanied by two appendices, v/hich I also offer for the 

The Chairman. They may be received. 

(The statement and appendices referred to were marked "Exhibits 
Nos. 1312, 1313 and 1314" and are printed separately as part of Hear- 
ings, Part 17-A.) 

Mr. Del Sesto. In connection with the second part of the work I 
have prepared a statement which I have designated as statement "B," 
which I also offer for the record. 

Senator King. I show you these two. Are either of these "A" or 

Mr. Del Sesto. Statement "A" is designated ; I don't think state- 
ment "B" is. 

Statement "B" is also accompanied by two appendices, which I also 
offer for the record at this time. 

The Chairman. They may be admitted. 

(The statement and appendices referred to were marked "Exhibits 
Nos. 1315, 1316 and 1317" and are printed separately as part of Hear- 
ings, Part 17-A.) 

Senator King. Those appendixes are part of the statement? 

Mr. Del Sesto. Yes; but they are not mimeographed, Senato]-. 

In presenting both of these statements to the committee, I have 
attempted as far as possible to make a factual presentation based on 
the questionnaire, and I have also attempted to raise certain questions 
and issues, which I believe should merit the consideration of this com- 
mittee. I have tried as far as possible to avoid the expression of any 
opinions of my own in the two statements, but at the outset I would 
like to say that to the extent that I have expressed any opinions, or 
to the extent that I do express any opinions today, they represent my 
own views and do not represent views of either the JDepartment of 
Justice, of which I am a member, or of this committee. 

Some of the material which we have prepared for the committee 
pursuant to our review of the financial data has already been pre- 
sented. That ;^'as part of "Exhibit No. 1138," ^ which was the outline 
of economic d|ita, which was presented on the opening day. I don't 

^Printed separately, with "Exhibit No. 1139," as Hearings, Part 14-A. 


want to go over all of that material today, but I think that some of 
the more salient points which were included in that summary should 
be pointed out at this time. 

First of all we should recognize that the petroleum industry, meas- 
ured by the amount of capital involved, is one of the four largest 
industries of this country. It utilizes from 11 to 15 million dollars 
of capital. The industry has had a steady growth, measured in terms 
of gross investment and capital assets. It has grown from 6l^ billion 
dollars in 1921 to 143^ billion dollars in 1938. Those figures are for 
the industry itself as prepared by the American Petrol.eum Institute. 

The industry is also divided roughly into four branches, as has been 
testified in this hearing: Production, transportation, refining, and 
marketing. From the best available figures that have been presented 
we find that the production branch represents approximately 45 per- 
cent of the total investment; the transportation branch represents 
about 15 percent of the total investment ; refining and manufacturing, 
"25 percent; and marketing, 15 percent. 


Mr. Del Sesto. In comparing the earnings of the petroleum in- 
dustry with the earnings of other industries we find two things. First 
of all, the earnings on the whole have been less than the earnings of 
other industries. The average for a 15-year period, 1922 to 1937, for 
135 of the leading companies has only been 4 percent, whereas the 
average for all industries during that same period has been approxi- 
mately 5 percent. 

The Chairman. In determining these percentages among the vari- 
ous branches of the industry what were the sources from which you 
determined the various percentages? 

Mr. Del Sesto. There were three sources, primarily, Senator. First 
was a survey made by the National Petroleum News; secondly were 
some figures presented by Standard Statistics in a review of the 
petroleum industry; and third were our own figures as we got them 
from the replies to the questionnaire.^ 

I might say that the figures are, of necessity, quite rough, because 
while we can measure the larger enterprises in the industry, it is al- 
ways difficult as you get into the smaller units, bitt I think that from 
the available data those figures give an indication of how the invest- 
ment is spread in the four branches of the industry. 

The Chairman. It doesn't purport to be absolutely accurate. It is 
an approximation. 

Mr. Del Sesto. I think any figures with respect to an industry as a 
whole would have to be of that type. 

The Chairman. Would it be proper to draw the conclusion that 
this would represent rather the division in the larger units than in 
the industry as a whole ? 

Mr. Del Sesto. "Well, the larger units comprise such a large part of 
the industry that their figures necessarily will set the pattern, and 
smaller units would hardly affect the totals as obtained. 

.1 said there were two points about the earnings which were signifi- 
cant. The second point about the earnings is "that they fluctuate in 

^ The questionnaire, admitted to the record as "Exhibit No. 1137," appears In Hearings, 
Part 14, appendix p. 7426. 

124491 — 40— pt. 17, sec. 4 16 


the oil industry to a greater degree than they fluctuate in industry in 

feneral, and in our presentation of the opening day we had a chart, 
'able E,^ which compared the income of 82 oil-producing companies, 
producing and refining companies, with 735 industrials and 960 cor- 
porations of all types. 

This chart is alreach^ in the record. I simply call your attention 
to it at this time. You will notice, taking the high and the low 
points, that the low point in the oil industry, as far as earnings was 
concerned, was reached in 1931, and it is generally believed in the 
industry that the cause of that was the overproduction of petroleum 
in the East Texas field. 

Another significant thing about the chart is that in 1937 the oil 
industry had recovered the losses sustained during the depression, and 
that in 1937 the earnings were at a higher level than they were in 1929, 
as far as the oil industry was concerned, whereas industry in general, 
as measured by the 735 industrial companies, was only 80 percent, 
approximately, of 1929, while the 960 corporations of all types were at 
a little less than 70 percent. 

You will also notice in the chart that beginning with 1933 there 
was a steady increase in the earnings of oil companies, and no doubt 
two factors assisted in that. One would be the proration program 
and the other would be the code as a result of the N. R. A., but that is 
merely a conjecture. I just offer that as a suggestion to the committee. 

The Chairman. Well, to what do you ascribe the fact that, as shown 
on this chart, the upward trend of the oil industry continued after 
1935, while the trend of 960 corporations and the trend of 735 indus- 
trial corporations tended to flatten out during that year ? 

Mr. Del Sesto. I don't know what caused that greater increase. 

The Chairman. Well, the trend upward from 1933 to 1936 was 
practically the same. 

Mr. Del Sesto. That is right. 

The Chairman. With respect to all three factors that went in the 
preparation of this chart. 

Mr. Del Sesto. That is right. 

The Chairman. What was the source of the statistics which led to 
the drawing of this draft, 960 corporations and the 735 industries? 

Mr. Del Sesto. Standard Statistics. All of the information in- 
cluded in that chart was obtained from Standard Statistics. 

Mr. Henteeson. If I may be allowed a suggestion, I believe that one 
reason for the continuation of the earnings in the oil industry was 
what might be termed the stability in the price structure that continued 
after the N. R. A, The first real disturbance in the price structure of 
crude was long after the N. R. A. 

Senator King. In the figures or in your presentation have you in- 
cluded the small distributors of crude and of gasoline, gasoline sta- 
tions and so on? 

Mr. Del Sesto. Ih the 28 companies, no. Those 28 companies rep- 
resent the larger companies in the industry, generally integrated com- 
panies, and mostly companies which have securities outstanding in 
the hands of the public. That is why Standard Statistics would com- 
pile those figures. 

» Heatings, Part 14-A, p. 7706. 


Senator Kjng. Well, the net income of the 28 oil-producing and 
refining companies in part was received, was it not, from its gasoline 
stations or its retail disposition of some of its products ? 

Mr. Del Sesto. Yes ; that represents the income from all sources. 

Mr. AviLDSEN. Mr. Henderson, how would you explain the drop in 
1938, which seems to be at about the same rate as the other companies ? 
The N. R. A., you say, accounted for a differential in 1937. What 
happened in 1938? 

Mr. Henderson. No; I said the stability in the price structure in 
the oil industry was not disturbed immediately after the "hot oil" 
decision, and the first real disturbance did not come until later. 

Mr. AviLDSEN. But there was a disturbance in 1938 ? 

Mr. Henderson. Yes. 

Senator King. That disturbance may have resulted from increased 
production ? 

Mr, Henderson. That is one of the things. Senator, we have been 
trying to piece out from these hearings. 

The Chairman. Wliat is the basis upon which 28 oil companies 
producing and refining are to be compared with 735 industrial cor- 
porations? Why 28 in one instance and 735 in the other? What is 
common to both lines? 

Mr. Del Sesto. The unit compared is net income after all chai'ges 
in? both cases, and these are figures put out annually by Standard 
Statistics, and they apparently feel that 735 is a big enough coverage 
of industrial companies so as to give the trend for industrial com- 

The Chairman. Then the selection of the 735 companies was not 
made by you. 

Mr. Del Sesto. Oh, no. Noneof these — ^the selection of 28, 960, and 
735, was made by Standard Statistics. 

The Chairman. So you are merely transmitting to us the chart pre- 
pared on Standard Statistics figures, and Standard Statistics selec- 
tions, and not on your selections. 

Mr^DEL Sesto. That is right. I intend to do this, and then later 
give you our figures based, on 20 companies that we investigated. 

Mr. AviLDSEN. Is this chart made by Standard Statistics? 

Mr. Del Sesto. No ; we used the figures. 

Mr. AviLDSEN. Did they tell you wl>at the namas of the 735 com- 
panies were ? 

Mr. Del Sesto.. No; they don't publish the names. 

As we pointed out in our opening statement, the petroleum industry 
is characterized by a relatively small number of large enterprises, 
constituting probably two-thirds of the investment in the entire in- 
dustry. The remainder of the industry is made up of thousands of 
small producers and marketers, and several hundred refining com- 
panies. These larger units in the petroleum industry are generally 
referred to as major companies, and in this prese. ation on page 2 I 
have listed the 20 major companies.^ Those companies are listed in 
the order of their size as measured by their total assets as of December 
31, 1938. I just want to call your attention to one company. No. 7, 
Cities Service Co. In making the comparison, we did not use the 
total assets of Cities Service Co. because it is engaged not only in the 

1 Hearings, Part 14-A, p. 7708. 


petroleum industry but also in public utilities, so for the purpose of 
this comparison we have used the three principal subsidiaries of Cities 
Service which are engaged in the petroleum industry. 

The total assets of these 20 companies as of December 31, 1938, 
amounted to $8,000,000,000, and analyzing the total assets of the com- 
panies over a 15-year period, starting with 1924, we find that it has 
been an increase from $5,000,000,000 to $8,000,000,000. I have a chart 
that will show that. 

You will notice that this chart is already in the record. It is Chart 
XXII of "Exhibit No. 1138." ^ 

You will note that measured by total assets, these 20 major oil 
companies have increased from 5 billion to 8 billion. 

The Chaieman. These same 20? 

Mr. Del Sesto. The same 20 companies. You notice the only 
apparent drop was in 1932, and in the so-called depression years. 

There were two factors for this drop as I see it. The first iactor, 
of course, is the well-known factor that business in general reached 
its low point in 1932. I think, however, from our examination of the 
financial -data that there was an artificial element which caused the 
drop in 1932 and in subsequent years, and that is a matte^ which 
I will discuss a little later in connection with the restatemenj^ of 
cai:)ital stock and the revaluation of assets. 

Wfr found that subsequent to 1929, and particularly starting with 
1932, many industrial companies, including a large number of the 
oil companies, engaged in the practice of revaluing their assets and 
writing them down, and as a result, the figures after 1932 are on an 
adjusted basis as adjusted by the companies themselves. If it had 
not been for those adjustments, the drop probably would not have 
been so severe. 

Senator King. Were those revaluations pursuant to one of the rev- 
enue acts under the terms of which corporations for the purpose of 
paying their taxes might revalue? 

Mr. Del Sesto. I don't think it had anything to do with taxes, Sen- 
ator. I think they simply found they were on too high a level and 
they wanted to bring down the level at which their assets were stated 
on the books. I go into that matter in some detail a little later. 

As a companion chart to this, I want to draw your attention to this 
chart entitled "Capital Employed of 20 Major Oil Companies," which 
is Chart XXIV of "Exhibit No. 1138." ^ This is the same chart as the 
previous one in that it measures the increase of assets from 5 billion 
to 8 billion but it has an additional factor in that it shows the nature 
of the capital employed by these companies. 

In using the term "capital employed" I use it in its broadest sense. 
In other words, I include not only the common stock and surplus but 
also reserves, preferred stock and funded debt, minority interests in 
subsidiaries, and I include other liabilities. You will find in some 
statistical analyses tliey include in "capital employed" only the first 
two or three. 

The Chairman. Why do you say minority ini>^rests in subsidiaries? 

Mr.DEL Sesto. We are dealing in all of these cases, with one excep- 
tion, with the top holding company and some of these subsidiaries 

^ HearinRs. Part 14-A, p. 7739. 
-Ibid., p. 7742-.' 


owned by these holding companies are not 100-percent owned, and 
this band, "minority interests," represents the investment that out- 
siders have in the subsidiaries of these top holding companies. 

The Chairman. So it is not meant to reflect the capital investment 
of the controlling interest. That is reflected in some other portion of 
the chart. 

Mr. Del Sesto. The controlling interest would be the common stock 
and surplus. 

In connection with this chart, there is something significant so far 
as the oil industry is concerned as measured by the 20 major companies. 
You will notice that a great part of the capital has been raised from 
common-stock holders as indicated by common stock and surplus, and 
uhat the industry has relatively a small amount of preferred stock and 
funded debt. 

The Chairman. You say the capital has been raised from the 
common -stock holders as represented by that proportion of the chart 
which shows common stock and which shows surplus ? 

Mr. Del Sesto. That is right. 

The Chairman. Well, now, is there not some part of that common 
stock which represents stock dividend? 

Mr. Del Sesto. Yes; there were several companies which issued 
stock dividends, but it would have hardly any effect in this chart, be- 
cause when a stock dividend is declared it is merely a transfer from 
the surplus account to the common-stocK account, so it would have a 
tendency to change this lower band, but it would not change the total. 

The Chairman. Do you attach any significance to differentiation 
between the investment which goes into the industry by actual con- 
tribution from those who purchase common stock and the capital 
which goes into an industry by being plowed back from earnings in 
the form of stock dividends ? 

Mr. Del Sesto. Yes ; I was going to get to that in a minute. I was 
going to mention this surplus account. Incidentally I might mention, 
while I am on this, that one company — for example, the Sun Oil Co.— 
makes it a consistent practice to declare stock dividends, and that com- 
pany has show^n quite an increase; and I think, of the years we ex- 
amined, in all but 2 years that company issued stock dividends. 

Another company which issued substantial stock dividends was the 
Gulf Oil Co. 

With respect to surplus, I think I pointed out that 70 percent of 
tliis total capital represented the investment of common-stock holders. 
I want to call your attention to the surplus. A layman generally 
thinks of surplus as accumulated earnings, and as you look at this 
chart you might think that the industry has grown to some extent 
by the reinvestment of its earnings, because the surplus has increased 
during that period from $1,110,000,000 to $2,214,000,000, or an increase, 
of $1,104,000,000. The largest increase was in surplus as measured 
by numbers of dollars, but I want to point out that that surplus does 
not represent all earnmgs; that part of the surplus consists of capi- 
tal contributed by stockliolders, which under the laws of many States 
can be put into a surplus account, and that part of the surplus also 
represents surplus arising from restatement of capital stock, a matter 
which I shall go into more in detail later on, but I thought I would 
call your attention to it at this time. 


The Chairman. Do you know what the proportion is of these two 

Mr. Del Sesto. No ; I haven't made the totals of those itemSj but I 
do point out the companies that have done that later on m the 

The Chairman. Its significance would depend to some extent upon 
the size of these items, would it not? 

Mr. Del Sesto. That is right. My offhand opinion is that the 
amounts are substantial. 

Now another point I would like to bring out is that while there 
has been an increase from 5 billion to 8 billion dollars, a consider- 
able part of that increase has been accounted for by mergers and 
cons'^iiidations. During this period a number of these companies 
bought out other companies, so that it would not be accurate to 
say that the entire increase of 60 percent between 1924 and 1938 was 
entirely due to reinvestment of earnings, or anything like that, but 
a considerable part of it was accounted for by riiergers and consoli- 
dations. It was unfortunate in one respect that the questionnaires 
of the committee did not have a specific question on consolidations 
and mergers so that we could have brought out how much of this 
increase was due to consolidations and mergers. 

We have been talking about 20 companies and we have been giving 
the total amount invested by the 20 companies, but you will realize 
that all of these 20 companies are not equal in size, and in our 
opening statement we had included chart 23 which compared the 
20 mjijor oil companies with one another at 1934 and at 1938. 

I want to call your attention to one fact, that if we take the first 
5 leading companies at December 31, 1938, these 5 leading companies 
account for 60 percent of the total assets of the 20 major oil com- 
panies; so that not only is there concentration within the industry 
as measured by. the assets of the 20 major oil companies, but even 
among themselves there is considerable concentration, and 60 percent 
of the total assets is represented in the 5 leading companies. 

You will notice, for example, the relative position of the Sun Oil 
Co., which is considered a major company, and you had its president 
.here as a witness. Compare that company, for example, with Stand- 
ard Oil of New Jersey or Socony -Vacuum Oil Co., and you will see 
a considerable -difference. 

\ Kissing on to the size of these companies, I would like to discuss 
the earnings of these 20 oil companies. 

The Chairman. This chart, not the one you are putting up now 
but the one you just distributed to us ("Comparison of the total 
assets of 20 major oil companies"),^ shows that there has been some 
change in the relative standing of these companies among themselves. 

Mr. Del Sesto. That is right. 

The Chairman. Particularly the lower 15. 

Mr. Del Sesto. I might offer for the record at this time a chart 
which was prepared showing shifts in the relative position between 
1929 and 1938. 

The Chairman. How does that compare with the chart which as I 
recall was presented by Mr. Gill or one of the other witnesses ? ^ 

i**Exbibit No. 1318.'^ appendix, p. 9863. 

•Referring to "Exhibit No. 1204," introduced by Dr. Robert E. Wilson, president, 
Pan American Petroleum and .Transport Co. ; included in Hearings, Part 15, appendix, 
p. 86q5, 


Mr, Del Sesto. I am not familiar wilh that. 

The Chaikman. You didn't see that chart. 

Do you offer this now for the record ? 

Mr. Del. Sesto. In view of your question, I think it might be help- 

The Chairman. Very well, it may be received. 

(The chart referred to was marked "Exhibit No. 1318" and is in- 
cluded in the appendix on p. 9863.) 

Mr. Del Sesto. During the period 1924 to 1938 the major oil com- 
panies averaged 5.6 percent on their common stock in the matter of 
earnings [referring to "Exhibit No. 1318"] and of the earnings 
earned, approximately 70 percent were declared as dividends and 
30 percent was plowed back intotthe business. I think that was the 
point you raised a few minutes ago. Of their published earnings, 70 
percent was paid out in dividends and 30 percent was plowed back. 

Mr. Henderson. That is a larger percentage paid out in dividends 
than is usual with American industry. 

Mr. Del Sesto. Yes; in that respect, measured by the proportion 
of earnings distributed, the oil industry has done much better than 
industry in general. 

Mr. Avildsen. Mr. Del Sesto, did you figure out how much the oil 
companies made on the total invested capital, I mean the common 
stock, the surplus, the preferred stock, and so forth ? 

Mr. Del Sesto. No, sir. I used two bases. 

Mr. Avildsen. Of the total capital employed, I mean. This figure 
might be a little misleading. 

Mr. Del Sesto. It would not be misleading because we used net 
earnings after deducting interest and preferred stock dividends which 
would be the residue that would gp to the c&mmon stockholders. 

Mr. Avildsen. But you have to include preferred stockholders as 
well as common. Some are the same. Some will have both preferred 
and compon. 

Mr. Del Sesto. We were measuring in terms of the equity of the 
common stockholder. I agree with you that there are many bases 
that might be used, invested capital or total assets, but where you use 
invested capital you don't eliminate interest and preferred dividends 
and we did eliminate those two items, so when I talk about earnings 
I mean the earnings which are applicable to the common stockholders. 

The dividends that were paid out to the common stockholders 
averaged 4 percent during this period. 

Senator King. Did you discover that in some years many of the 
companies, or some of them, paid no dividends at all because of 
losses ? 

Mr. Del Sesto. Yes. 

Senator King. So they have lean years as well as years in which 
they paid a dividend. 

Mr. Del Sesto. That is right. We have introduced into the record 
already tables of the companies, and there is considerable variation 
among the companies themselves. 

Mr. Avildsen. Mr. Del Sesto, referring to this chart * which shows 
1929 and 1938 figures, some of the companies apparently have not 

1 "Exhibit No. 1318." 


changed in size of total assets, others have increased 50 percent, some 
have increased 200 percent, and so forth. Have you made any at- 
tempt to find out why some grew so much faster than others? You 
don't know how much of this is due to consolidations? 

Mr. Del Sesto. No ; in that respect I say it is unfortunate that the 
committee's questionnaire did not have a question on mergers and 
consolidations. I think that would have been interesting. 

Mr. AvuDSEN. But you have no theory or explanation at all as to 
why some companies grew so much faster than others and why some 
stood still? 

Mr. Del Sesto. No. 

As important as these figures may be, I believe, however, that this 
committee is interested in the broad issues which have been suggested 
by the data presented by the oil companies. As I understand it, this 
committee is not interested primarily in the oil industry, but it is 
interested in the broader problem of the concentration of economic 
wealth and power in this country. As I see it, this committee has two 
functions, first to determine whether or not there is concentration of 
wealth and power in any industry, and then secondly, if there is, to 
determine whether or not that concentration has been used in the 
public interest and for the public benefit. 

I think in the case of the oil industry, it has been amply demonstrated 
so far that there is concentration of economic wealth and power in 
the hands of a few interests. We have seen that these 20 integrated 
•companies control about two-thirdg" of the total investment. One of 
the companies, for example, controls about $2,000,000,000 of capital. 

Many of the financial operations of these companies are more ex- 
tensive in scope than many of our States and many of our large 
municipalities, so that the next inquirj?^ is whether or not this wealth 
and power that has been concentrated in the hands of these companies 
has been used in the public interest. 

At the very start we met with two obstacles in determining whether 
or not these companies have been efficient. When I say efficient I 
mean in terms of earnings. There are two reasons for that: First 
of all, liberal State corporation laws, and, secondly, flexible accounting 
policies and practices. State corporation laws now in force and 
current accounting practices and policies make it comparatively simple 
for the management of a corporation to show earnings and to pay 
dividends notwithstanding the faq^that from an economic point of 
view the corporation has been unsuccessful. 

Senator King. You mean undermining the capital structure. 

Mr. Del Sesto. Yes, sir ; I mean just that. 

The Chairman. May I interrupt you to make a comment which is 
interesting to me at Jeast. Of the 20 corporations which you have 
listed in your statement, I find that they have been incorporated in 
various States upon this basis : Indiana, one 

Mr. Del Sesto (interposing). Excuse me. Senator, if you will turn 
to page 1, you will find I have tabulated them for you, page 1 at the 

The Chairman. Oh, yes; nine companies in Delaware, three in 
Ohio, two in New Jersey, two in New York, two in Pennsylvania, 
one in California, and one in Indiana. 

» Part 17-A, p. 9962. 


Mr. Henderson. Of those nine companies in Delaware, do any of 
them have their operating headquarters in that State ? 

Mr. Del Sesto. I doubt it. The Texas Corporation, for example, 
I understand has its headquarters in New York. The Standard Oil 
of California, of course, is in California. The Cities Service Co. is 
in New York 

The Chairman. Now, Mr. Del Sesto, as I count these from page 2, 
there are 10 Delaware corporations. Have I miscalculated that, or 
have you? 

Mr. Del Sesto. I can tell you where the discrepancy might be. In 
Cities Service Co., you probably counted one of the subsidiaries. 

The Chairman. That is right, I did. 

Mr. Del Sesto. In my tabulation I counted only the top holding 

The Chairman. I counted the Empire Gas & Fuel Co. as a Dela- 
ware corporation. 

Mr. Del Sesto. That is a subsidiary company. 

The Chairman. So the Cities Service Oil Co. is also a subsidiary, 
and that was incorporated in Pennsylvania. 

Mr. Del Sesto. That is right. 

The Chahiman. Very well, I see. 

Mr. Del Sesto. Getting back to your question, Mr. Henderson, I 
doubt if any one of the nine companies has principal offices in 

Under present State corporation laws dividends may be paid out 
of the capital contributed by stockholders rather than from earnings. 
On,ly a very few States require that dividends may be paid only from 
surplus arising from earnings. Thus, a steady dividend record of a 
corporation is not at all conclusive that the management has been 

Under present-day accounting practices, management can bury 
certain current operating charges and operating expenses in the sur- 
plus account instead of charging the current income account; man- 
agement can write up and write down assets at will; management 
can reduce or entirely eliminate certain depreciation and depletion 
charges. It follows, therefore, that a current profit of some kind can 
be reported, even though there is actually a shrinkage in the invest- 
ment of stockholders. 

In view of the present corporation laws and current accounting 
practices, there can be no accurate determination of whether the 
management of a corporation was justified in buying or building 
plants, or in the acquisition of other companies. The stockholders of 
a corporation cannot properly appraise the management's action, nor 
can the public at large determine whether the expansion of large 
corporations by mergers and consolidations is justified and in the 
public interest. 

Liberal corporation laws and flexible accounting policies, of course, 
do not obtain only in the petroleum industry, but I thought that this 
was a matter that should be brought to your attention because you 
will probably find some of the practices which I mention prevalent in 
other large industries, and I am suggesting that before this com- 
mittee finishes its work, not only in the oil industry but in other 
industries, at' some time it should make a detailed study of the 
limitations of the State corporation laws now in force and the weak- 
nesses of current accounting practices and policies. 


The Chairman. The allocation of capital stock, capital invested in 
common stock, to surplus is permitted by the Delaware State corpora- 
tion laws. 

Mr. Del Sesto. Oh, yes. I was going to get to that, and inci- 
dentally. Senator, just before I came to the hearing today I was 
in the library and picked up a pamphlet entitled "Delaware Corpora- 
tions," put out by the Corporation Trust Co., advising corporations 
to go to Delaware. I see this thing as one of the inducements : "Pay- 
ment of dividends may be paid out of net assets in excess of capital 
as well as out of net profits, a useful power in certain kinds of 
business," so that is offered as an inducement for management to go 
to Delaware, for that purpose. 

The Chairman. Well, to the extent that Delaware corporations 
are engaged in national business the Delaware corporation law in 
effect sets the standard for national corporation practices. 

Mr. Del Sesto. That is right. I think somewhere in the state- 
ment I make the observation that while we have no Federal incor- 
poration law at the present time, for all practical purposes there is 
a national incorporation law because corporations can go to Dela- 
ware, and since there is competition among the States for corporate 
business, Delaware and other liberal States set the pattern which 
other States follow. 

Mr. AviLDSEN. Mr. Del Sesto, in studying these reports of the oil 
companies, have you >^een any evidence of a substantial amount of 
the capital which has beeii paid in by stockholders having been paid 
out as dividends? We admit that it can be done. Have you seen 
any evidence of it? 

Mr. Del Sesto. Not in just that way; but I might also point out 
that while this paid-in surplus, so-called can be used for dividends, 
very few corporations actually do that. What they do instead is a 
more subtle practice; they take certain ex;)enses, write-offs, and 
charge them to paid-in surplus. That leaves the so-called earned 
surplus account free, whereas if those charges had gone to earned 
surplus the amount available for dividends would have been 

Mr. AviLDSEN. Have you seen in the case of the oil companies a 
tendency to charge off a substantial amount of such items? 

Mr. Del Sesto. There has been no great amount of that in there, 
but I Avould like to point out later on that a number of the com- 
panies have carried to paid-in surplus amounts contributed by stock- 
holders, and that is a potential amount which is available either for 
the payment of dividends or for these write-offs of which I am 

Mr. Henderson. In some of these restatements by the major oil 
companies they have charged off deficits, have they not? 

Mr. Del Sesto. Yes; I was going to come to that. 

Mr. Henderson. Do you not propose today to take up by individual 
companies ^yhat changes did occur and what charges were made by 
each company as a result of this capital statement? 

Mr. Del Sesto. That is true, but as I interpreted Mr. Avildsen's 
question, he had reference more particularly to surplus contributed 
by stockholders upon the purchase of stock. 

Mr. AviLDSEN. That is right. 

Mr. Del Sesto. That is why I answered that question that way. 


Senator King. Isn't it a fact, however, that in some corporations 
as well as in partnerships a condition may arise where by reason of 
very large profits a larger capital structure is not needed and they 
would dispose of some of the capital in the form of dividends ? 

Mr. Del Sesto. Yes ; but in that cstse 

Senator King (interposing). Reducing their capital, in other 

Mr. Del Sesto. In that case those dividends would not be divi- 
dends as we think of them as distribution of earnings. That would 
be in effect a partial liquidation. I have no objection if a corpora- 
tion finds it has too much capital in partially liquidating, but I think 
in the cases to which I have reference there is in practical effect a 
partial liquidation. The stockholder thinks and the public thinks 
dividends are a distribution of earnings. 

Mr. Henderson. Take a case, Mr. Del Sesto, where preferred stock 
relies upon common stock as a cushion, you might say, as a protection 
for its contractual obligations. When there is a restatement, a writ- 
ing down of the capital stock, some part of that protection of the 
preferred-stock holder disappears, does it not ? 

Mr. Del Sesto. That is right. I am going to get into" that in just 
a minute. 

As I said, we ought in connection with this oil investigation at 
least to discuss some of the corporate practices and accounting prac- 
tices which need inquiry by this committee, and I am going to discuss 
today three of them, and I do not imply by that that there are not 
others; there are many others, but I am just going to take up three 
of them. 

The first one is a restatement of capital stock and revaluation of 
assets. The second is the changing concept of surplus in corpora- 
tionSj and the third is this matter of flexible accounting practices and 

In connection with the restatement of capital stock and revaluation 
of assets, I might point out that in the early days of the distribution 
of securities of large corporations among the public, investors placed 
much emphasis in their analysis of the affairs of corporations upon 
their net worth as reflected in balance sheets. At that time it was 
not uncommon for management, from time to time, to inflate artifi- 
cially the net worth of corporations by arbitrarily writing up the 
book value of assets. This practice, known as "stock watering" has 
now gradually disappeared. It has been supplanted by a new prac- 
tice which is more subtle and yet which has more far-reaching effects, 
the restatement of capital stock and the write-down or revaluation 
of assets. 

Senator KiNq. Do you regard that as subtle? Congress passed an 
act- under which corporations are mad© to make a restatement of the 
capital stock for the purpose of assessment. 

Mr. Del Sesto. You are talking about income taxes. 

Senator King. Yes. 

Mr. Del Sesto. I had reference to reports to stockholders and earn- 
ings as reported to stockholders. I think, Senator, that there is some- 
times confusion between what is tax practice and what is practice 
engaged in in -preparation of reports to stockholders. Wliat may be 
proper for tax purposes is not necessarily proper in the preparation 
of reports to stockholders. 


Mr. AviLDSEN. There is nothing necessarily wrong with writing 
down assets if they have declined in value. It is sound business to do 
that, isn't it? 

Mr. Del Sesto. Yes; but, when you combine the two, restatement 
of capital stock and the revaluation of assets, as I point out later, you 
are, in effect, going through a teclinical reorganization, and I am 
suggesting that possibly that procedure should not be in the unlimited 
discretion of the management alone, that since it has some of the 
earmarks of a reorganization, possibly the whole procedure should 
be reviewed either by a court or by some regulatory body. lii this 
country, so far as I know, there is no State which requires management 
to go before a court or a regulatory body when it engages in that 
practice. In England, however, under the English Companies Act 
of 1929, the practice of the reduction of capital stock has to be 
approved by a court. 

Mr. Henderson. Mr. Del Sesto, you are somewhat familiar by rea- 
son of your association with the S. E. C. with this situation. You 
take a restatement that occurs under the Chandler Act by which there 
is a reallocation of the assets in the various classes, and compare that 
with what you suggest may be a quasi-reorganization ; the net effect 
is that in reality there is no distinction except that one is a result of a 
bankruptcy proceeding, and the other is a voluntary act, usually 
initiated by the management group. 

Mr, Del Sesto. That is right, 

Mr. Henderson. So as far as the net effect is concerned, what you 
call a quasi-reorganization is a reorganization of the capital structure. 

Mr. Del Sesto. That is right. I might also point out that under 
the Chandler Act, Congress felt that it wasn't sufficient alone to let 
a court pass on it, but it also required that the S. E. C. step in in the 
case of certain large corporations and give its technical advice to the 
court, whereas here under these technical reorganizations there is no 
review by anybody. 

It is true, as I point out, that these reorganizations, quasi-reorgani- 
zations, are accomplished first by notice to stockholders, secondly bj- 
vote of stockholders. In my opinion, that is merely a ritualistic pro- 
cedure, for two reasons : Some of the corporation laws don't give the 
stockholders enough time in M^hich to make the proper study of the 
cpntemplated practice; and, secondly, as shown in one of the appen- 
dices which I have introduced in the record, less than 1 percent of the 
stockholders on the average attended the meetings of these oil com- 
panies, so management is practically uncontrolled. 

The Chairman. That is characteristic of industry generally and 
not of the oil business particularly. 

Mr. Del Sesto. That is true, but I think it is a matter which is so 
serious. Senator, that we can't emphasize it too many times. Since 
this committee is studying the concentration of economic wealth, I 
think it ought to consider that matter in its study. 

The Chairman. Of course, I quite agree that there is a very impor- 
tant subject for consideration, but I didn't want it to appear that you 
were finding something particularly characteristic of the oil industry. 
It is a customary practice which exists throughout industry, 

Mr, Del Sesto. That is true. 

Mr, AviLDSEN, Isn't it a fact that in recent years a great number of 
investment counselor firms have sprung up in New York and other 


large cities, that they have employed accountants, economists, and 
analysts of outstanding experience, outstanding ability, to analyze 
reorganizations and .tlinigs of this sort, and isn't it a fact that the 
management of a company putting through a reorganization does in 
fact have to submit it to careful examination by competent people in 
that way? 

Mr. Del Sesto. Well, that may be so, but under the Delaware law. 
for example, there are only 10 days required for notice to stock- 
holders, and I doubt if any stockholder, no matter how well equipped, 
could make a proper investigation within 10 days. 

Mr. AviLDSEN. No; but could the management afford to have a 
critical report issued by one of those firms? Even if it did get 
technically through by reason of that 10-day limitation, there could 
be legal action instituted if it was shown that there was anything 
really terribly wrong about the whole proceeding. 

Mr. Del Sesto. I think, however, that stockholders should have 

Mr. AviLDSEN (interposing). Stockholders, for instance, could be 
asked to review the thing and have another vote on it, and so forth. 

Mr. Del Sesto. The stockholder shouldn't be left merely to the 
advice given by these private agencies. It would seem to me that the 
stockholder ought to have protection. 

Mr. AviLDSEN. That may be, but as a practical matter it isn't as 
though it were a lot of little stockholders with one or two shares who 
couldn't afford to employ counsel. There are large holders, invest- 
ment trusts, and so forth, who do employ competent men to examine 
all these things. 

Mr. Del Sesto. That is true. 

Mr. Avildsen. It would be difficult for the oil companies to fool 
those market analysts. 

Mr. Del Sesto. I think after you have gone through one of these 
quasi reorganizations it is very difficult thereafter to make any sta- 
tistical study of a company, because you have got an entirely new 
company and everything that has gone before the quasi reorganiza- 
tion has got°to be forgotten. 

Mr. Avildsen. Let me ask you this. Do you think that the large 
oil companies are today or have been in recent years fooling the 
economists, accountants, lawyers, analysts, employed by the large 
investment trusts, the large banks, and the large investment-counsel 
firms in New York? 

Mr. Del Sesto. Well, I don't know, I can't speak for them, but I 
do know that 

Mr. Avildsen (interposing). Do you think so? 

Mr. Del Sesto. Yes; I do. 

Mr. Avii,DSEN. You think they have been fooling all those experts ? 

Mr. Del Sesto. It is my personal opinion that is so. 

Mr. Henderson. I would suggest to Mr. Avildsen that the S. E. C. 
has just issued a report on the bad advice given by investment counsel. 

Senator King. It is a fact, is it not, that in business conducted by 
individuals and by partnerships they frequently at the request of 
banks where they are getting credit are compelled to or at least feel 
constrained to revalue their capital, their assets, and to adjust their 
accounts and their books with the revaluation. 

Mr. Del Sesto. That is true. 


Senator King. There is nothing wrong if they find they have more 
capital than they need in paying themseb/es, the partnership, or the 
individual, a larger dividend? There is no impropriety in that, is 

Mr. Del Sesto. As I pointed out to one of your previous questions, 
there is no fault to find v^^ith the partial liquidation of any business. 
1 do think there is fault to find when dividends are distributed which 
are ostensibly distribution of earnings and are in fact return of cap- 
ital, and when the funds have been raised by public distribution of 
securities anc^ not the private lunds of management, then I think it 
is a matter of some concern to public authorities. 

Mr, AviLDSEN. You say in the case of the oil companies there is no 
evidence of that being done in substantial form. 

Mr. Del Sesto. Evidence of what ? 

Mr. AviLDSEN. Of the' money paid in by stockholders being paid out 
in the form of dividends. 

Mr. Del Sesto. No; but there is evidence of restatements. 

Mr. AviLDSEN. But I mean this thing just mentioned as a bad thing 
for people to receive as dividends money paid in for stock. You say 
that is not done. 

Mr. Del Sesto. You get it in two ways. You get this return of so- 
called dividends being return of capital, you can get it in two ways ; 
first, when they have one of these restatements, second, when they use 
paidrin surplus for the payment of dividends. Suppose I go on with 
this restatement. . 

Mr. 4-ViLDSEN. In the case of the major oil companies, have they or 
have they not made a practice in recent years of paying out the money 
paid in by stockholders in the form of dividends? I thought before 
you said they had not. There was no evidence that they had done so 

Mr. Del Sesto. Let's see if I can straighten you out on that. There 
are eight oil companies which have restated their capital stock during 
the period of 1929-38, and to the extent that those oil companies paid 
any dividends subsequent to the restatement, dividends I think rep- 
resented distribution of capital and not earnings. 

Mr. AviLDSEN. You mean by capital, paid-in capital. 

Mr. Del Sesto. That is right. 

Mr. AviLDSEN. The whole distribution or part of it? 

Mr. Del Sesto. Part of it. 

Mr. AviLDSEN. What part, substantial or very minor? 

Mr. Del Sesto. I would say substantial part in the case of some 

Mr. AviLDSEN. Substantial part in the case of a substantial number 
of companies? 

Mr. Del Sesto. Yes ; I would make that statement. 

Mr. AviLDSEN. That contradicts your previous statement. 

Mr. Del Sesto. Oh, no; I think we are talking about two different 
things. Also a group of companies have taken part of the cash re- 
ceived upon the sale of stock, which is an entirely different matter, 
and put it into a so-called paid-iij surplus account. Now, with respect 
to those companies there is no evidence that they used that paid-in 
surplus for the payment of dividends and that is what I had in mind 
when I answered your previous question. 


Mr, AviLDSEN. I still don't unaerstand; what did they do? They 
didn't use any money paid in by stockholders, in the payment of 

Mr. Del Sesto. That is right. 

Mr. AviLDSEN. They did not do that? 

Mr. Del Sesto. That is right ; that second group of companies, no. 

Mr. AviLDSEN. But a large group did do so? Did a large number 
of oil companies use money paid in by stockholders for the payment 
of dividends? 

Mr. Del Sesto. Tliis first group of companies which restated their 
capital stock did ; yes. As to the second group of companies which as 
I say allocated part of the cash received to paid-in surplus, there is 
no evidence that they used that paid-in surplus as distribution to 
their stockholders. Possibly this will clear up as I go along and ex- 
plain the two practices. 

On page 5 of the statement, I have listed eight companies which 
have restated their capital stock during the period of 1929 through 
1938, and in addition to that list there was also the Cities Service 
Co., Delaware, the parent company of the Empire Gas & Fuel Co., 
which engaged in the practice. 

Now it will be noticed that of these nine companies which have 
been mentioned, five are incorporated in the State of Delaware. 
Again I would like to point out that this committee may wish to con- 
sider the role played by present State corporation laws in the concen- 
tration of wealth and power. 

I would like to discuss now the restatements as these companies re. 
ported them to the T. N. E. C, and I would like, first of all, to skip 
to the Consolidated Oil Corporation on page 7 of the statement. 

The Consolidated Oil Corporation restated its capital stock on 
January 31, 1932. It reported to the Temporary National Economic 
Committee, as follows : 

As at January 31, 1932, the accounts of the reporting company gave effect to 
a restatement of capital which involved the transfer to Capital Surplus of the 
amount by vphich the stated equity of its outstanding Common Stock without 
par value exceeded the nominal value of $5 per share. Such restatement was 
approved by the stockholders of the reporting company at a special meeting held 
on March 1, 1932. 

Common Stock stated equity account per Company's books at Jan- 
uary 31, 1932 (prior to restatement of capi'tal) represented by 
6,107,408 shares of company's common stocky $251, 315, 390 

Restatement at nominal value of $5 per share 30, 537, 015 

Balance credited to Capital Surplus 220, 778, 375 

The purpose of such restatement as January 31, 1932, was that Capital Sur- 
plus might be created to enable the directors of the reporting company to apply 
so much thereof as they might deem advisable to writing down the valuation 
of certain assets in values more nearly conforming to then existing economic 

Mr. Henderson. In that balance credited to capital surplus, which 
is 88 percent of the previous valuation, there was not a return of the 
$220,000,000 to the stockholders. 

Mr. Del Sesto. No. 

Mr. Henderson. This is not a case such as Senator King had in 
mind where there was a surplus of working funds which were with- 
drawn from the business and passed back to the contributors of the 


Mr. Del Sesto. That is right. 

Mr. Henderson. This was merely a restatement for bookkeeping 

Mr. Del Sesto. That is true. 

The Chairman. Would it be proper to call this the reverse of the 
stock-dividend technic ? 

Mr. Del Sesto. That is right, Senator. That would explain it. 
When you have a stock dividend you transfer from surplus to capital. 

The Chairman. In other words, the technic of a stock dividend is 
that the company has earned additional assets which instead of being 
paid out in dividends to the stockholders is transferred, as it were, to 
the stockholders in the form of additional certificates of stock. 

Mr. Del Sesto. That is true. 

The Chairman. Now it is quite conceivable that perfectly proper 
and justifiable reasons ihight prompt the reverse of that procedure, so 
that the stock would be written down, as it were, a restatement of 
capital stock, in order to meet perfectly proper and justifiable condi- 
tions. It might also be used for improper objectives too. 

Mr. Del Sesto. That is right. It has a potential danger. 

The Chairman. So that the analysis of this system is of impor- 
tance that the public may know what technic can be followed under 
the Delaware law, for example, to affect the value of the stock of 
these national corporations, 

Mr. Del Sesto. That's right. I have here a chart which is already 
in the record, chart 25-B of "Exhibit No. 1138." ^ 

Mr. Henderson. Before you go on, Mr. Del Sesto, may I point 
out that that total amount of write-down of $220,000,000 is equiva- 
lent to the total valuation of some small industries ? 

Mr. Del Sesto. That's right. 

This chart, which as 1 say is part of "Exhibit No. 1138," chart 
25-B, I believe, shows graphically what occurred in the case of this 
company, and I might also say that similar charts are already in the 
record for all of these companies, but I just use this as an illustra- 
tion. You will notice that in 1930, at December 31, 1930, the com- 
mon stock stood at $252,000,000, approximately. Now, you will 
notice that this company had both preferred stock and funded debt, 
and these two classes of, I call them creditors, had every reasoti to 
believe that they had a cushion that would protect their equity to 
the extent of approximately $252,000,000. 

As a result of the write-down and restatement, this cushion has 
been reduced the following year to approximately $71,000,000. 

Mr. Avildsen. Why isn't the surplus a cushion? 

Mr. Del Sesto. I am going to get to that in just a minute. 

Now you will notice also that while there was only a small amount 
of surplus available in '30, in '31 the corporation management has 
this tremendous amount of surplus available. Now it is true that 
this is a cushion so long "as it remains in the corporation, but prior 
to the restatement, by law the cushion was here, at the figure of 
$252,000,000. After the restatement the cushion by law is at $71,- 
000,000, and there is nothing that would prevent the directors from 
paying this out in dividends. 

1 Hearings, Part 14-A, p. 7744. 


Mr. AviLDSEN, Except that it probably represents mostly plant, 
oil wells, and so forth. It certainly wasn't cash. They couldn't pay 
it out. 

Mr. Del Sesto. No; that is true. But the point I am getting at 
is that now they have all of this amount, or some portion, as they 
want to pay out, to pay out in dividends, where prior to the restate:- 
ment they could not pay dividends unless their capital was at leagt 
this large in amount. ' 

Mr. AviLDSEN. Now tell us, in 1929 they had this large amount of 
common stock outstanding. Do you know how much of that w^ 
issued for cash paid in by investors and how much was issued for 
properties of other companies in mergers and consolidations? 

Mr. Del Sesto. No; I don't. 

Mr. AviLDSEN. It might have been, you admit, issued for refinerie^ 
which were valued at high prices, and so forth, and w^hich have since 
declined in value, so they really didn't have that much money in the 
company at any time? ^ 

Mr. Del Sesto. They may not have had cash, but they had asseta 
which would be the equivalent of cash. ' 

Mr. AviLDSEN. Not necessarily the equivalent, because maybe tliey 
couldn't have sold those refineries at any time for that amount of 
stock. That doesn't necessarily mean that the refineries were worth 
that in cash. 

Mr. DelJSesto. The directors thought they were worth that when 
they issued the stock, or they wouldn't have placed it on the books 
at that value. We will assume that the directors thought that was 
the proper value or they wouldn't have issued the stock. 

Now, another point that I would like to point out, as I mentioned 
before, for all practical purposes subsequent to this restat'ementf this 
is a new corporation, because the same things have happened as if 
this corporation had gone through reorganization. Its level has been 
reduced. It has gone through a wringing process, and the equity of 
the common-stock holders as represented by the capital stock has been 

Mr. Henderson. The equity of the common stock? 

Mr. Del Sesto. Yes, sir. 

Mr. Henderson. Are you quite sure about thatJ 

Mr. Del Sesto. At that time there had been no write-down of the 
assets, but after the write-down the equity would be reduced. 

Mr. Henderson. That's right, taking the two transactions to- 

Mr. Del Sesto. There were two steps to the process, a restatement 
of the capital stock and a subsequent revaluation of assets of the 

Mr. AviLDSEN. Why would there be a reduction in the equity just 
because they wrote it dow^n?' 

Mr. Del Sesto. That is true. 

Mr. AviLDSEN. Suppose they made a mistake in writing it down. 
That wouldn't change the true value of it. That is an opinion of 
somebody as to what it is worth. It didn't take anything away from 
the stock. 

Mr. Del Sesto. I think the equity has been reduced. 

Mr. AviLDSEN. It wasn't reduced by a mere write-down. It was 
reduced when the value of the thing went down. 

124491 — 40— pt. 17, sec. 4 17 


Mr. Del Sesto. I think you will find that many of these write- 
downs were far in excess of any possible shrinkage in the value of 
those assets. 

Mr. AviLESEN. Then it hasn't hurt the common-stock holder, be- 
cause he has whatever is left, regardless of what they call it on their 

Mr. Del. Sesto. I think it has hurt the common-stock holder be- 
cause thereafter the depreciation charges and depletion charges have 
been reduced, because of the write down of these assets, and the 
management is able to show earnings when in fact, if it had been 
on the old basis, there would have been no earnings. The manage- 
ment is able to pay dividends where previously it would not have 
been able to pay dividends, and to that extent management can per- 
petuate itself in office, by giving this appearance of relative stability 
in its earnings and dividends ; so to that extent I think the common- 
stock holders have been hurt. 

Mr. A^^LDSEN. If there is dishonest and unscrupulous management 
I admit that, but in the absence of that you can't say the equity of 
the common-stock holders has been changed one iota by the write- 
down of the capital stock or the assets, because he owns the equity. 
It doesn't matter what you call it on the books. 

Mr. Del Sesto. Well, yes; I suppose to that extent 

Mr. AviLDSEN (interposing). I think, Mr. Del Sesto, we have be- 
fore us a lot of large corporations whose stock is held by invest- 
ment trusts, widows, and orphans, and so forth, and you are making 
some pretty serious statements about these big firms, and I think 
they should be qualified very carefully. 

Mr. Del Sesto. I am just presenting the facts, I am not drawing 
any conclusions. 

Mr. AviLDSEN. They are conclusions to a large extent. 

Mr. Cox. Will the reporter please read the next to the last state- 
ment made by Mr. Avildsen? 

(The reporter read the statement requested, ending with the words 
"widows and orphans." 

Mr. Cox. That's what I thought he said. 

The Chairman. Mr. Del Sesto, the surplus of a corporation is 
part of the equity of the common-stock holders, isn't it? 

Mr. Del Sesto. That is true. 

The Chairman. So that the equity of the common-stock holder is 
to be measured by the proportion which the common stock and the 
surplus bears to the total capital structure. 

Mr. Del Sesto. That is true. 

The Chairman. And in a reorganization of any kind, even of this 
kind of which you are speaking, is it not true that the equity of 
the common-stock holder will sometimes increase? 

Mr. Del Sesto. Yes; to the extent that any equities are taken 
away from the bondholders or preferred stockholders. 

The Chairman. Yes. The question was suggested to my mind be- 
cause, examininjT the chart which you have there, I observe that 
the portion of the column representing preferred-stock holders has 
been eliminated in the last column. It appears in the others. 

Mr. Del Sesto. They probably redeemed the preferred stock in that 
year. Yes ; the preferred stock was redeemed in 1938. That is why 
that has disappeared. 


Mr. AviLDSEN. How can the equity be increased by taking away 
securities from the preferred and the bonds, and so forth? 

Mr. Del Sesto. I think that is quite obvious. Prior to the re- 
statement the cushion, as I say, to protect the senior security holders 
was $252,000,000. After the restatement the legal cushion would be 
only approximately $71,000,000. After the restatement the company 
puts itself in the position to pay dividends where probably it would 
not have been in the position to pay dividends previously. 

Now, to the extent that any dividends have been paid, when 
that situation exists, the equity of the bondholders sind preferred- 
stock holders is being diminished. 

Mr. Henderson. There has been a repayment of capital to the 
common-stock holders which presumably was a protection to the 
preferred-stock holders in the antecedent year. 

Mr. Del Sesto. That's right. 

Mr. AviLDSEN. Technically, those preferred-stock holders and bond- 
holders never had those assets as security for their securities if 
the stockliolders at any time had the right to change the valuation 
of the stock and call "it surplus. If that legal right existed at the 
time the bonds were sold to them, then we didn't have — you haven't 
taken away from them anything they had before. If they had it, 
it is because the common-stock holders voluntarily gave it to them. 

Your statement implied that they took something away from a 
bondholder that he thought he had as security. 

Mr. Del Sesto. That is true. 

Mr, AviLDSEN. I don't see how they could do that. 

Mr. Del Sesto. At the time a preferred-stock holder or bondholder 
went in, the stated capital was at a larger figure. 

Mr. AviLDSEN, But he knew they had the legal right to change 
that. His lawyers would tell him "Tliey have the right to change 
that, so don't pay any attention to that." But in certain States you 
can't do that. I don't know what the situation is in Illinois now, but 
it used to be in Illinois that you couldn't do that. You couldn't 
change the capital stock. You couldn't take that security away from 
the creditors of the company. It is only in certain States that you 
can do that. 

Mr. Del Sesto. I think there are only three or four States which 
require any notice to anybody else but the commofi stocldiolders. 

Mr. AviLDSEN. But inasmuch as they could have done that at any 
time, it was not security for the bondholders. 

Mr. Henderson. Isn't it customary in an investment counsel's 
advice as to the purchase of a preferred stock to state very definitely 
what there is in the way of assets as protection for the preferred? 
Isn't that one of the factors considered in giving advice as to buying 
preferred stock? 

Mr. Del Sesto. That's right, and I don't think in the ordinary 
investment analysis you contemplate a restatement. I think it is 
something very unusual, and therefore people buy preferred stocks 
and bonds. 

Mr. Henderson. As I gather, what you are suggesting is that there 
has not been anything illegal in this connection. You are empha- 
sizing that all these transactions were legal. These are changes in 


the rights of creditors, debtors, preferred-stock holders and bond- 
holders which take place with ease at the direction of the manage- 

Mr. Del Sesto. That's right. Maybe I didn't make that point clear. 
In all of these restatements there has been nothing illegal or improper 
under existing law, but I am suggesting to the committee that here we 
have a loophole in the present corporation laws which makes it com- 
paratively simple for management to perpetuate itself in keeping a 
steady dividend record when there are in fact, or may not be in fact,, 
any earnings. 

Mr. AviLDSEN. Have you seen any situations like that in the oil 
industry, in the case of the major oil companies, where they are 
perpetuating themselves by doing what you describe ? 

Mr. Del Sesto. I leave that to your conclusions. 

Mr. AviLDSEN. You have studied them and spent a year on them. 

Mr. Del Sesto. I haven't spent a year on them. 

Mr. AviLDSEN. In the time you have spent on them have you seen 
anything of that nature? 

Mr. Del Sesto. Eight major oil companies have restated their 
capital stock. 

Mr. AviLDSEN. That is not answering my question. 

Mr. Del Sesto. Eight of the 20 oil companies studied have 

Mr. A\tldsen (interposing). That doesn't answer my question 
at all. 

Mr. Del Sesto. I would rather you would draw the conclusion on 

The Pure Oil Co. - 

Mr. Shaughnessy (interposing). Before you finish with Sinclair, 
Mr. Del Sesto, is there any e\adence to your knowledge as to whether 
any independent engineers were employed in connection with that 
write down? 

Mr. Del Sesto. Not in this company. 

Mr. Shaughnessy. Do you know whether it is customary for engi- 
neers to revalue properties? 

Mr. Del Sesto. Some of them do. In the case of the Continental 
Oil Co, they didn't use engineers but they used an accounting firm, 
Arthur Young & Co. I don't know whether the Consolidated used 
engineers. But you will notice, in the terms of the reasons given 
to us, they left it to the discretion of the directors. There is no 
evidence, so far as I know, that it was done by engineers. 

Mr. Shaughnessy. Do you know from your general experience as 
an accountant whether the courts and public bodies, in reviewing 
this typQ of write down, have come to the conclusion that most of 
the write downs are justified or not? 

Mr. Del Sesto. Well, as you know, there has been very little liti- 
gation on this point, for the very obvious reason 

Mr. Shaughnessy (interposing). I said courts and public bodies. 

The Chairman. Let me interrupt there. I hardly think that is a 
proper question, and I don't think the witness ought to be called 
upon to express an opinion with respect to it. The testimony which 
you are giving here is based solely upon the examination of certain 
facts which wer-e brought out by a questionnaire submitted by this 
committee. Tlw- companies to which the questionnaire was submitted 
have not, for example, been asked by the committee, nor were they 


asked in this questionnaire, to state whether or not engineers had 
been consulted with respect, to the matters that were brought forth 
in that information. 

As I understand your testimony, you are not attempting to criti- 
cize the motives of anybody involved in any of these matters. 

Mr. Del Sesto. That is correct, sir. 

The Chairman. You are merely setting forth certain factual data 
which is clear upon the face of the record and which is permitted by 
the laws 6f the States under which these companies are organized. 

Mr. Del Sesto. That is right. 

The Chairman. And you do not attempt to sit here and pass judg- 
ment upon the morality of anything that has been done. 

Mr. Del Sesto. That's right. 

Mr. Shaughnessy. I withdraw the question. 

Mr. Del Sesto. I call your attention to the reply of the Pure Oil Co., 
which is quoted on page 6. Pure Oil Co., said : 

On June 4, 1932, the shareholders of the reporting company authorized a 
change in its common shares from shares of a par value of $25 each to an equal 
number of no-par-value shares with an assigned value of $10 each. The reduction 
of $15 per share applicable to the outstanding common shares aggregated 
$45,575,550, which amount was credited to paid-in surplus. Concurrently, the 
Board of Directors authorized a charge to paid-in surplus in the amount of 
$28,083,742.59 in connection with the revaluation of the company's properties. 

You will notice that the company stated that that was done with the 
approval of the shareholders. We looked at the reply furnished us in 
connection with stockholders' meetings, and you will notice at that 
meeting of June 4, 1932, there were 11,173 shaj:es voted by stockholders 
in person, while there were 3,180,395 shares voted by proxy exercised 
by officers. So while it is true that the shareholders approved it, 
actually it was the management alone, for practical purposes, that was 
present at the meeting. 

Senator King. Do you think that is a fair deduction? 

Mr. Del Sesto. Yes, I do; if the proxies were in the hands of the 
management group. 

Senator King. Are you arguing there ouglit not to be proxies 
obtained ? 

Mr. Del Sesto. No ; I am just calling the matter to your attention, 
to see whether or not this committee wants to go into that matter. 

Senaor King. All right ; proceed. 

Mr. Del Sesto. The Continental Oil Co. reported as follows : 

As of October 31, 1932, the officers and others of the personnel of the company, 
working in conjunction with members of the staff of the company's auditors, 
Messrs. Arthur Young & Company, New York, made an appraisal of the properties 
and investments of Continental Oil Company and subsidiary companies. The 
results thereof were reviewed by the Board of Directors, who approved, and 
submitted to the stockholders for their approval, a revaluation of assets and 
reserves resulting in a net reduction of $61,409,120.50. 

The stockholders of the company, at their annual meeting held May 9, 1933, 
approved the revaluation, and at the same time approved a plan for the revision 
of the capital structure of the company through a reduction of capital and a 
change from shares of no par value to the par value of $5 each, resulting in a 
charge to paid-in capital and a credit to "capital surplus in the amount of 
$105,153,900.81. Against this capital surplus there was charged the above amount 
of $61,409,120.50 and the accumulated earned surplus (deficit) as of December 31, 
3932, of $13,693,333.95. 

Now you will notice that as a result of this procedure, the deficit 
-v^hich was on the books of the company was eliminated and thereafter 


the company put itself in the position, if it wanted to, to pay divi- 
dends to its common-stock holdei*s. 

At that meeting of May 9, 1933, according to the information filed 
with the committee, there were 543 shares voted by stockholders in per- 
son, and 2,681,124 shares voted by proxy exercised by officers of the 

Mr. O'CoNNELL. May I ask a question? Would this transaction, 
or transactions similar to this one, result in any change in the taxable 
status of these corporations ? 

Mr. Del Sesto. No. None of the practices have any affect on the 
income-tax law. Such a procedure could not be used to evade or 
avoid income taxes for the reason that in determining the taxable net 
income of a corporation you are guided by the tax law and by the regu- 
lations under it, and many times the taxable net income as reported on 
our tax returns does not agree with the net income as reported to 

I don't mean there is anything improper in that. There are very 
obvious reasons for it. There are certain types of income which are 
not taxable which would be reported to stockholders; there are certain 
expenses which are proper business expenditures which are deductible 
for reports to stockholders, but may not be deductible for tax purposes. 
Also, in the computation of such items as depletion in the oil industry, 
for example, the basis of computing that is fixed by law at 27.5 percent 
of the gross revenue, whereas the amount of depletion may be com- 
puted on some other basis by the company, so that none of these prac- 
tices would affect the taxable net income reported to the Government. 

Mr. O'CoNNEi.L. This practice would have the effect, however, of 
giving one picture of income for tax purposes 

Mr. Del Sesto (interposing). This type of practice would accen- 
tuate the difference between the tax return and the report to the 

The Chairman. Well, now, it is a reasonable thing to assume, is it 
not, that as of October 31, 1932, the assets and reserves of the com- 
pany had actually decreased to the amount mentioned in value? 
This was in 1932. It was 3 years after the depression. 

Mr. Del Sesto. I don't think. Senator, that that was always true. 

The Chairman, That would be a reasonable conclusion. 

Mr. Del Sesto. That's right. 

The Chairman. And the mere fact that there was a revaluation 
of the assets is not at all an indication that that revaluation was not 
perfectly proper. 

Mr. Del Sesto. That is true. 

The Chairman. And then it is also reasonable to assume that this 
earned surplus deficit of $13,693,000 represents an actual loss. 

Mr, Del Sesto. That is true. 

The Chairman. So that the charging off of the sum of those two 
figures agamst the capital surplus is a perfectly proper procedure? 

Mr. Del Sesto. Yes; it was perfectly proper, 

■The Chairman. And no criticism arises out of the fact that that 
was done of itself. 

Mr. Del Sesto. That's right. The point I am suggesting is that 
from then on it was to all practical purposes a brand new corpora- 
tion, the same as if it had gone through a reorganization process. 


Senator King. You complain because they didn't go into court 
or under the Chandler Act and take a reorganization involuntarily, 
rather than by taking it voluntarily. 

Mr. Del Sesto, I think possibly there should have been some 
supervision, either by a court or by some regulatory body. 

Senator King. There may be difference of opinion there. 

Mr. Del Sesto. That is true. 

The Consolidated Oil Corporation instance I have already dis- 

The Ohio Oil Co., on page 8, also restated its capital stock on 
May 23, 1985. As a result, the par value of the common stock was 
reduced from $100,000,000 to $60,000,000, and a capital surplus of 
$40,000,000 was created. The company reported to this committee 
that the purpose of this restatement of capital stock was to create a 
capital surplus for corporate needs. 

You notice there also, in -summarizing the stockholders who were 
represented at the meeting, that there were a very small proportion 
of outside stockliolders represented. 

Skelly Oil Co. also restated its capital stock. It reported to the 
committee as follows : 

On January 3, 1936, the stockholders authorized the reduction of the par 
value of the common stock of the reporting company from $25 to $15 per share, 
the reduction of the capital of the company by $10 per share on the outstand- 
ing 1,008,548.6 shares of common stock resulting in the transfer of $10,085,486 
from capital stock to capital surplus; the application of $4,940,351.39 out of 
capital surplus to eliminate the deficit of like amount in earned surplus 
(deficit) as of September 30, 1935. 

The purpose of this restatement of capital stock was to provide capital 
surplus out of which could be applied to earned sun^lus (deficit) as of Sep- 
tember 30, 1935, an amount sufficient to eliminate the latter. 

Mr. O'CoNNELL. On the line of the question the Senator asked 
you a few moments ago, if the purpose of a write-down in assets was 
merely to reflect a diminution in their value, would it ordinarily be 
accompanied by an increase in the surplus account? 

Mr. Del Sesto. If they restated, in reducing their capital stock, 
reduced it by the amount simply to cover the amount of write- 
down of assets, there would be no effect in the surplus account after 
the write-down. But if they restated to a larger amount than was 
needed, then there would be an increase in the surplus account. 

Supposing they reduced their capital stock by 40 million and 
only needed 20 million to write down assets. The remaining 20 
million would go into the surplus account and would be available 
for dividends, 

Mr. O'Connell. Then in all of these cases the write down in the 
capital stock was more than a sufficient amount to take care of the 
write down of assets? That difference between the two resulted in 
the bookkeeping increase in surplus. 

Mr. Del Sesto. And in two of these cases they used the restate- 
ment to write down assets and eliminate a deficit. 

The Chairman. There has just been handed to the chairman a 
letter from Dr. Watkins, who testified yesterday and today, submit- 
ting a summary of the import of the testimony as he sees it. He 
made this request that this be made a part of the record. I am 
introducing it now, so that it may be printed at the conclusion of 
this morning's proceedings. 


(The statement referred to was marked "Exhibit No. 1319" and is 
inchided in the text as testimony on pp. 9603-9604, supra.) 

Senator King. The testimony adduced by the organization of 
whiAh he was tlie head ? 

The Chairman. Yes. 

Mr. Del Sesto. In the case of the Skelly Oil Co., you will notice 
that all of these shares voted at the meeting were voted by officers 
and directors as proxies. 

SocQny-Vacuum Oil Co. reduced its capital stock in 1934 from $25 
to $15 per share, and the effect was a transfer of $317,024,940 from 
capital, stock to capital surplus. The company reported to tjiis 
committee that the purpose of the reduction was to create capital 
surplus ' against which to charge off good-will and appreciation of 
properties. Against the capital surplus created there was written 
off the sum of $228,123,580.68, representing good-will and appre- 
ciation of properties, and I list there a summary of the stock that 
was voted at that meeting. 

Now, in the case of the Socony-Vacuum Oil Co. I would like to 
point out that this restatement occurred a few years later to the 
merger of the Standard Oil Co. of New York and the Vacuum Oil 
Co., and I think possibly it might be a fair inference that appar- 
ently the merger had been consummated on an inflated basis, and 
thus it was necessary to write off approximately a quarter of a bil- 
lion dollars soon after the merger in order to show favorable operat- 
ing results in the future. This restatement, I think, was only 2 
years after the merger, and the company felt it necessary to write 
off about a quarter of a billion dollars of assets. 

This has much significance to your committee. Since mergers 
and consolidations are generally accomplished by exchange of securi- 
ties, there is no realistic deterrent to the amount that is paid for 
the acquisition of other companies, particularly when a few years 
later the properties can be written down at the will of the manage- 

Mr. AviLDSEN. Have you any reason to feel that there wasn't a true 
deflation in the value of those assets between those two dates ? Wasn't 
there, in fact, a real depression in this country, with a decline in values 
of all kinds? 

Mr. Del Sesto. This was only 2 years after the merger. 

Mr. AviLDSEN. I know, but a lot of things took place in those 2 

Mr. Del Sesto. And I think m tne case of goodwill, for example, 
they wrote it off entirely. 

Mr. Henderson. May I suggest to Mr. Avildsen that the earnings 
of Socony Vacuum were $5,300,000 in '32 ; in 1934, at the time of the 
write-down, they were $24,000,000. 

-Mr. AviLDSEN. That hasn't anything to do with the discussion. 

Mr. Henderson. It has something to do with the devaluation of the 
assets if they are on that basis. 

Mr. AviLDSEN. Explain that. 

Mr. Henderson. If the company made $5,000,000 in 1932 and $24,- 
000,000 in 1934, there is some evidence that there hasn't been a reduc- 
tion in the value of the assets. 

Mr. AviLDSEN. I don't see why not; if these refineries had been 
overvalued I dpn't think that follows. 


Senator King. Persons that have been engaged in the mining busi- 
ness, the metal-mining business, and have seen the ups and down of 
companies; stock worth $10 today, and perhaps next week or 6 months 
from now worth only $1 ; and then perhaps a year later worth $15 or 
$20 ; stock going from $2 up to $150 and then down again, those fluctua- 
tions depending on w^iether the ore body is continued, or whether the 
price of metal continues, know there are a hundred factors to be con- 
sidered which would affect the value of the stock intrinsically or for 
stock purposes. It seems to me that in the consideration of these 
questions you have to take into account the situation and the char- 
acter of t)\e business, and the factors that are involved in the carrying 
on of these businesses which are more or less speculative and which 
depend entirely upon w^hether the deposits are there, what the mar- 
kets are, and various other factors almost imponderable in character. 

Mr. AviLDSEN. Mr. Del Sesto, what do you think this committee 
should do about a situation like this? Here is a firm that made a 
merger. You say, "There is no realistic deterrent to the amount that 
is paid for the acquisition of the other company." What do you thi:ik 
we should do ? 

Mr. Del Sesto. I think, if you find this practice is prevalent, not 
only in this industry but in other industries, this committee might 
very w^ell make some recommendations to Congress. 

Mr. AviLDSEN. What should we recommend? Wliat is your rec- 
ommendation to us? 

Mr. Del Sesto. I am not prepared to make any definite recom- 
mendations offhand, but I think possibly along the line Senator 
O'Mahoney has been thinking of for several years might be the 
answer, a national corporation law, with some definite teeth in it. 

Mr. AviLDSEN. I am not familiar with the details of that bill. 
What would it do in the case of the merger of two companies like 

Mr. Del Sesto. I think the Senator could discuss that. 

The Chairman, If we are going to get into a discussion of this 

Mr. AviLDSEN (interposing). Mr. Del Sesto says it is ve>ry signifi- 
cant to this committee. I would like to know why it is so signifi- 
cant to this committee. I think it is a fair question in view of the 

The Chairman. If Mr. Del Sesto wants to express his personal 
opinion as to what his conclusions may be from any set of facts, I 
have no objection to it, but I do feel that it ought to be emphasized 
again that as I understand the testimony of the witness, he is not 
attempting to pass judgment upon the propriety of practices in par- 
ticular cases. He is using particular instances to illustrate a legal 
situation. That is it, is it not? 

Mr. Del Sesto. That is true. 

The Chairman. And your testimony is not to be regarded as con- 
stituting a reflection, even in your own mind, upon the management 
of any of these corporations. 

Mr. Del Sesto. That is right. 

Mr. AviLDSEN. I realize that, Mr. Chairman, but he says here that 
there is no realistic deterrent to the amount that is paid for the 
acquisition of other companies. 

The Chairman. From what page are you reading? 


Mr. AviLDSEN. I am reading on page 9, about the third or fourth 
paragraph down. "This has much significance to your committeej" 
and so forth. "There is no realistic deterrent to the amount that is 
paid for the acquisition of other companies." I would like to know 
what Mr. Del Sesto had in mind in the way of putting into effect 
realistic deterrents, because I think management shouldn't pay too 
much for other companies, I agree with you, but How are you going 
to do it, what is your recommendation? 

Mr. Del Sesto. As I suggested, speaking offhand, one of the 
things that could be done might be to have a national corporation 

Mr. AviLDSEN. How would that place a deterrent on management ? 

Mr. Del Sesto. Let me explain — with some teeth in it, which 
would prevent these quasi reorganizations excepting as they are re- 
viewed by some competent public authority. 

The Chairman. The whole point, I think, of the situation as de- 
veloped by this testimony, and as developed by other testimony and 
is common knowledge, is that where a State like Delaware charters 
corporations that are engaged in national and international com- 
merce on capital that is raised not from the inhabitants of Delaware 
but from the citizens of the whole country, we find a situation that 
permits the management to use assets which belong to hundreds of 
thousands of people according to very loose canons of responsibility. 

Now, may I say for myself, as one of the authors of the so-called 
Borah-O'Mahoney bill,^ I don't have the slightest doubt that 90 per- 
cent of business management in this country is actuated by good 
motives, good intents, and by high concepts of responsibility. I 
think there is a growing recognition in corporate management of the 
responsibility management bears to the investor, and to the public, 
and indeed to labor too. But the point of this testimony is that 
there exist wide-open loopholes which may be used by those who are 
not so cognizant of their public responsibility to the disadvantage 
of the public, and I believe that, so far as I interpret this evidence, 
it goes no further than to point out what those loopholes are, without 
in ajiy way reflecting personally upon management involved in any 
of these cases. 

Mr. Del Sesto. That is true. 

Senator "King. And loopholes which challenge the attention, per- 
haps, or might call attention to the various States in which laws have 
been enacted for incorporating organizations, and suggesting to them 
if necessary to make amendments to their acts and to provide against 
these loopholes. 

Mr. Del Sesto. That is true. I might make one further observa- 
tion. Senator. It is my understanding that I w^as not to make any 
definite recommendations as to what this committee might do. It 
was my understanding that I was simply to present these facts for 
your consideration, and so when Mr. Avildsen asks what I recom- 
mend, it is a little unfair, because in the first place I didn't give it 
the thought I ought to give it, and in the second place I don't think 
I ought to make the recommendations, but this committee ought to 
make any recommendations it sees fit after getting the facts. 

IS. 3072, (6th Cong., 1st Sess. : A bill to regulate interstate and foreign commerce 
by prescribing the conditions under which corporations may engage in such com- 
merce, etc. 


Mr. AviLDSEN. I didn't wish to be unfair. I merely thought you 
had some ideas and I was anxious to get them, because I would like 
to put up some realistic deterrents to stop management from paying 
too much for assets of other companies, 

Mr. Henderson. May I suggest, without indicating this is a rec- 
ommendation, that in the case of the public-utility holding com- 
panies Congi^ess did enact a statute which was definitely intended to 
provide a realistic deterrent to just this practice that has been called 
to our attention by the witness. Part of that derived from the 
nature, maybe not the import, of the practice that is definitely consid- 
ered in this revaluation. 

Senator King. It mi^ht be wise for those of us who are listening 
and interrogating the witness to let the witness continue and make our 
interrogations and our speeches subsequently. 

Mr. Del Sesto. I won't take up the time of the committee other 
than just to point out that I have summarized the reply of the Tide 
Water Associated Oil Co. on page 9,^ and that of the Mid-Continent 
Petroleum Corporation on page 10,^ and Cities Service Co., also on 
page 10. 

I would like now to go to another subject, leaving the matter of 
revaluations accompanied by restatements, and go to what I call the 
changing concept of surplus of corporations. I think that is also a 
matter which probably should receive some consideration of this com- 
mittee. Traditionally, at least, surplus of a corporation was consid- 
ered to be the undistributed accumulated earnings of the corporation. 
At the present time that is not necessarily so. We find in balance 
sheets of corporations many so-called surpluses. I think in my state- 
ment I called them mongrel types of surpluses. Sometimes they are 
given a distinctive title, such as paid-in surplus, capital surplus, ap- 
praisal surplus, and so forth, and those types of surpluses do not 
represent undistributed earnings. Many times they represent con- 
tributions of stockholders, part of the original investment, but never- 
theless under the laws of many of the States, these surpluses are avail- 
able for dividend purposes, and so, as I said previously, the mere fact 
that a company has a steady dividend record is not at all conclusive 
that it has actually earned the money to pay those dividends, and in 
many cases, or in some cases, those dividends might be nothing more 
than a return of capital. 

In connection with the sale of stock, par-value stock and no-par- 
value stock, State corporation laws provide that part of the considera- 
tion received for the sale of that stock can be placed in a surplus 
account. In the case of par-value stock, generally the amount has to 
be at least the par value, but anything over and above that maj- be put 
in a surplus account. In the case of no-par-value stock there is abso- 
lutely no limit to the amount that the directors may allocate to capital 
and to surplus, so, to take an absurd case or an extreme case, a company 
might sell stock for $100, no-par value. The directors may by reso- 
lution put $1 into the capital-stock account, which would be the legal 
stated capital, and the directors could allocate $99 into surplus, and 
thereafter those $99 would be available for dividends, notwithstanding 
the fact that the corporation had not earned a single dollar. 

'* Hr.irlnes. Part 17-A, p. 9967. 
* Ibid, p. 9967. 


I think there are only three or four States that require that in any 
dividends paid from that type of surplus the notice should be given to 
stockholders, but you will find in the majority of States that no notice 
need be given to stockholders, so that the rank and file of stock- 
holders may not know that what they are getting on their dividend 
check is nothing more than what they actually paid into the corpora- 
tion, and those dividends are not earnings. 

Take another illustration. A company may buy out another com- 
pany by the issuance of stock ; let's say it issues $100,000,000, or let's 
say the value of the property is $100,000,000. The directors may allo- 
cate 10 million to the capital stock accounts, they may allocate 90 
million to the surplus accounts, and thereafter, even though there 
hasn't been a single transaction, even though the company has not 
made a single dollar in earnings, the corporation is in a position to pay 

Maybe that practice is all right, but at least it is a practice which is 
prevalent. It is a practice which is permitted by law, and I think 
possibly it ought to receive some consideration by this committee. 

Mr. AviLDSEN. Mr. Del Se^to, isn't it a fact that if the balance sheet 
and income account of such a corporation are prepared by a first-class 
firm of accountants, that it will appear from such statements and 
reports that the dividend lias been paid out of surplus, if in fact it has? 

Mr. Del Sesto. If you will look at the analysis of the surplus 

Mr. AviLDSEN. That is right ; I admit a lot of stockholders wouldn't 
do so. 

Mr. Del Sesto. Let me finish the answer please — but there is no 
requirement under the law, except in a few States. 

Mr. A\^LDSEN. I am not talking about the law. I am talking about 
the practice of a high-class firm of accountants. 

Mr. Del Sesto. Will you let me finish the answer? The stock- 
holder gets his information from the annual report sent to him by the 
directors. There is no requirement so far as I know that in that 
report to stockholders there be an analysis of surplus. If the analysis 
of surplus is included in the annual report, the stockholder can make 
his own analysis. 

Now, in the reports filed with the Securities and Exchange <^om- 
mission, of course, there has to be an analysis of surplus, but I Jh int 
out to you that there is no requirement now by which a stockholdir, 
except in a few States, can know of that fact, that what he is getting 
is part of his own money back. 

Mr. AviLDSEN. That is unless it is listed on a national exchange. 
If the stock is listed on a national exchange, then the company is re- 
quired to report the surplus account each year. 

IVIr. Dei, Sesto. To the Securities and Exchange Commission and 
to the stock exchange, but there is no requirement 

Mr. AviLDSEN (interposing). Not to stockholders? 

Mr. Del Sesto. Not to stockholders ; no, sir. It is my understand- 
ing that there is no jurisdiction on the part of the Securities and 
Exchange Commission, for example, over the annual reports to stock- 
holders excepting as they might be filed with the Commission in con- 
nection with proxy statements and things of that type. 

Mr. Henderson. That is correct, Mr. Del Sesto ; "but I would like to 
point out also that some corporations that have many changes in their 


surplus account during the year, like United States Steel, for example, 
have gone beyond what the legal necessity is and have undertaken to 
furnish the stockholders with an analysis of changes in surplus account 
so that the stockholder may be intelligently advised. 

Mr. AviLDSEN. Mr. Del Sesto, you have seen a lot of the annual 
reports of the major oil companies. Have you noticed any that 
omitted analysis of the surplus account? 

Mr. Del Sesto. I might say that in my study of surplus accounts I 
didn't look so much at the annual report as I did at the analyses w^hich 
we required in the questionnaire. 

Mr. AviLDSEN. Do you recall seeing any annual reports which omit- 
ted an analysis of the surplus account ? 

Mr. Del Sesto. I can't speak offhand with respect to all companies, 
but I might point out this — that 'since 1933, which was the year of the 
passage of the Securities Act, there has been a distinct improvement 
in the annual reports submitted to stockholders, and probably the 
Securities Act had considerable effect on that. 

Take the Standard Oil of New Jersey as an illustration. Prior to 
1933 there was no surplus statement in the annual report to stock- 
holders. Subsequent to 1933 there was. In the committee's question- 
naire there was a question which asked the companies to state if since 
1929 they had issued any original issues of stock and liad carried any 
part of "the proceeds to a surplus account. Nine of the companies 
reported that they had, and the appendix I w^hich I have submitted and 
which is already in the record quotes verbatim the replies which these 
companies gave to us. 

Again I would like to point out what these companies did — not 
improperly; it was perfectly permissible under the law; but they did 
allocate part of the proceeds to capital and part of the proceeds to 
surplus ; and I don't mean to imply again that that surplus was imme- 
diately used for dividends ; but it is available for dividends, the same 
as if the surplus had been actually earned. 

Mr. AviLDSEN. You see no evidence of any company's paying out 
such paid-in capital in the form of dividends ? 
Mr. Del Sesto. No; not of these nine companies. 
In view^ of the lateness of the hour, Senator, I won't read the replies, 
but the replies are summarized on page 12 of the statement, and they 
are also included in appendix I, which has been filed in the record. 

Going from the legal phases of the surplus account, I would like 
to go to the accounting phases of the surplus account. Many cor- 
porations are able to maintain an appearance of relative stability in 
current earnings by using the surplus account as a convenient dump- 
ing ground for so-called adjustment and extraordinary charges. 
Thus it is a comparatively simple matter to divert current charges 
from the current-income account and through the back door to the 
surplus account. In other words, if a company has a large expense 
in one year which it may consider extraordinary, there are no defi- 
nite standards now of what should go into the income account and 
what should go into the surplus account, so as a result a company 
may carry that charge to the surplus account and it will not be 
reflected from the total income account. 

The effect of that is this : In reporting the earnings of corporations, 
the earnings are generally reported on a per-share basis. You pick 
up a financial paper and you see the earnings of X corporation this 


year were $4 per share as compared with $3 last year. In computing 
those earnings per share, no consideration is given to those surplus 
adjustments, and so, consequently, there is a potential danger of 
misrepresentation of what the earnings of a corporation actually are. 

Mr. AviLDSEN. Mr. Del Sesto, don't you think we ought to say 
this? I don't know if it appears in your statement but it seems to 
me the record should show that it isn't always the management that 
decide whether these things should be charged to current income or 
to previous year, but in most cases, from my experience, it is the 
firm of accountants who have been employed to prepare the financial 
statements. For instance, in the case of my own little company out 
in Chicago, Price, Waterhouse Co. were our accountants and they 
were the ones who decided whether an item should be charged to sur- 
plus or against the current-year's earnings. We have nothing to say 
about it. 

The Chairman. Perhaps we ought to find out whether yours is a 
Delaware corporation. 

Mr. AviLDSEN. It isn't, it is a Michigan corporation. 

The Chairman. I was going to remark that Illinois has a very 
good incorporation law. I don't know so much about the Michigan 

Mr. Del Sesto. To get back to your question, I don't think that is 
true of the larger corporations. I think the practice in the larger 
corporations is that the financial statements are prepared by the 
management and the accountants merely certify to the financial re- 
ports prepared by the management. 

Mr. AviLDSEN. Do you think that a firm like Price, Waterhouse 
would certify to a charge to surplus of an item which they thought 
wasn't proper? I am not worrying about the McKesson -Robbins 
case, I know what you have in mind, but that was a different proposi- 
tion altogether, that was a question of physical inventories, but there 
has been nothing against Price, Waterhouse so far as book entries are 
concerned, and so forth. 

Mr. Del Sesto. The point I am trying to make is that there is no 
definite standard now as to what is a surplus charge and what is not 
a surplus charge. 

Mr. AviLDSEN. But that is a very serious matter. A large, reputable 
accounting firm is not going to charge a thing to a previous year just 
because the management asks them to. 

Mr. Del Sesto. I would rather you wouldn't put it on the basis of 
any individual company. 

Mr. AviLDSEN. I think that is a serious thing when you say the 
management does it, when in fact I think it is done by a firm of 
outside experts who are called in to pass on the propriety of the 
charge, and so forth. 

Mr. Del Sesto. As I said, in the case of the larger corporations the 
firm of accountants do not prepare the statements; that is as a general 
rule, statements are prepared by the management. 

Mr. A\tldsen. Yes; but they pass on it. If the management pre- 
pared an improper statement they wouldn't certify it. 

]Mr. Del Sesto. They certify tliem. 

Mr. AviLDSEN. If they are certified to as proper, it doesn't make any 
difference who prepared them. 


Mr. Del Sesto. They certify it and if they disagree they note their 
exceptions in a certificate. Now, with respect to surplus account, 
regardless of who prepares the statements, whether management or 
the public accountants, the difficulty is that there is no definite 
standard. For example, I have here a statement of accounting princi- 
ples put out by Sanders, Hatfield & Moore, published by the American 
Institute of Accountants, which is considered quite authoritative. 
The only standard given in that statement is this, that if the amount 
is large, you carry it to surplus, and if it is small, you carry it to 
the income account which I submit is not really a good standard at 

As a result of that, I point out in the statement that some account- 
ing authorities are suggesting that where you have surplus adjust- 
ments, so that you distort the income account, that you go back and 
amend your financial statements for the past years, and give your 
stockholders comparative amended financial statements. In other 
words, you can't avoid these corrections which have to go through 
the surplus account. Other accounting authorities are of the opinion 
that there should be no surplus charges at all, that everything should 
go through the income account, and that the stockholder ought to 
see definitely what expenses have been incurred during the year, 
whether they are normal or extraordinary, and in that way when you 
report earnings per share, due ccmsideration will be given to all types 
of expenses, whether they are extraordinary or normal. 

There are many differences of opinion as to what charges to sur- 
plus should be and as I point out in the statement, sometimes the 
reported earnings are so small and the charges to surplus are so 
substantial that it would take very little difference in opinion to 
change a reported profit into a reported loss, and I cite as an illus- 
tration the case of Standard Oil of New Jersey. In 1932 it reported 
to its stockholders a net profit of only $282,000 out of a gross operat- 
ing income in excess of $1,000,000,000. But during the same year 
there were net surplus adjustments of over $2,500,000. If some of 
those surplus adjustments had been carried to the current income 
account, that company would have had loss that year, would have 
reported a loss, and in that way a steady record of current earnings 
would have been disturbed. 

Mr. AviLDSEN. Do you know anything about that particular item ? 
You say you have seen some of the statements of Standard of New 
Jersey. Do you know what explanation they gave? 

Mr. Del Sesto, There was nothing in the annual report. Again I 
am not implying anything improper. 

Mr. A\t:ldsen. But their annual report did not show it? 

Mr. Del Sesto. The annual report did not show what the surplus 
adjustments were. The questionnaire to the committee did give those 

Mr. AviLDSEN. I thought you said the annual report did show 
analysis of surplus accounts. 

Mr. Del Sesto. Subsequent to 1933. This was in 1932. Did you 
want those charges? 

Mr. AviLDSEN. You see no explanation. 

Mr. Del Sesto. In the reply to the committee, but not in the 
annual report to the stockholders. 

Mr. AviLDSEN. If you can tell us in a few words. 


Mr. Del Sesto. I will just point out some of the larger amounts. 
Where exchange adjustments arising in the conversion of amounts of 
foreign subsidiaries, United States dollars, $5,700,000. 

Reversal of the amount by which South American profits of a 
subsidiary company were written up in 1920, $13,700,000. 

Bad debts written off and reserves provided for claims and other 
receivables, $1,616,000. 

Loss on sale of investment securities, $188,000. 

I am sorry, that ought to be write-down of investment securities, 

Mr. AviLDSEN. Let's take the two largest items, totaling about 18 
million. You say that there was improper charging of those to sur- 
plus? Or do you think they would be a proper charge against the 
income for the year 1932 ? 

Mr. Del Sesto. I think accountants might differ on that, 

Mr. AviLDSEN. "What is your opinion, I mean. 

Mr. Del Sesto. I think same accountants would feel 

Mr. Am;ldsen (interposing). What is your personal opinion? 

Mr. Del Sesto. I think some of those charges could very properly 
have gone to" the income account. 

Mr. AviLDSEN. Some of them. There are only two ; which of those 
two? Are they proper charges against the year 1932 or aren't they? 
That is what I would like to know. 

Mr. Hendekson. I submit, Mr. Chairman, that no accountant in 
my experience could make a determination as to proper allocation 
with just the simple statement of the account named. I don't believe 
that any account 

Mr. A^^LDSEN (interposing). If Mr. Del Sesto wants to say he 
doesn't have enough information that is all right, 

Mr. Del Sesto. I would prefer not to answer the question except 
in this way, that there might be differences of opinion amongst the 

Mr. AviLDSEN. I didn't care about that. I wanted to know what 
you thought of the adjustment. If you don't have sufficient knowledge 
to pass on it, that is another matter. Apparently it is plain you have 
not sufficient knowledge there from the transactions. 

The Chairman. May I remark here again that the significance 
of this testimony, as I get it, is not the opinion of the witness as to 
the propriety or impropriety of practices of this kind, but the fact 
that there is no national standard to govern these things. In other 
words, here are corporations which are obviously national in their 
scope, which handle large properties, assets of almost unimaginable 
size in some instances, the operation of which affects a large segment 
of the public, consumers and those who are employed in the corpora- 
tions, and yet there is no national standard of accounting, though 
accounting is obviously a matter of tremendous importance. 

Senator King. Accountants themselves differ just as lawyers differ, 
just as engineers differ, as to the value of a piece of property or the 
continuity of a vein in the ground. 

The Chairman. That, of course, is true. 

Mr. AviLDSEN, I feel that Mr. Del Sesto's statement as it appears 
here would possibly give someone reading it the impression that 
maybe the Standard Oil Co. shoidd have shown a loss of about 


$21,000,000 that year instead of breaking even, and I just wondered 
if he had a definite opinion on that subject, whether he had examined 
the charge enough to tell us. When I first read that I got the impres- 
sion that probably they should have shown a loss. Now Mr. Del 
Sesto admits that he hasn't sujfficient knowledge to know whether 
or not they shouldn't. 

Mr. Del Sesto. Maybe I had better clear that up. You notice I 
state there that sometimes the reported earnings are so small and 
the adjustments to surplus are so large that it would take very little 
difference in opinion to shift a reported profit to a reported loss. I 
gave Standard Oil of New Jersey as an illustration where the re- 
ported profit is only $280,000. Yet the surplus adjustments were 
$20,500,000. It would have taken only a small shift to turn it into 
a loss. I don't say that those adjustments weren't proper, but in 
the absence of any standards, any definite standards, it is pretty hard 
to determine, even if the facts were known, what charges should go 
to surplus. 

Mr. AviLDSEN. Do you know what firm certified that report that 
year ? 

Mr. Del Sesto. I think it was Price, Waterhouse. 

Mr. AviLDSEN. They made no exception to that surplus adjust- 
ment, so that was in their opinion a proper charge to surplus. 

Mr. Del Sesto. That is true. 

Mr. Henderson. I think I ought to say for the record m connec- 
tion with those items that were read in the registration state- 
ment, some of them very definitely raised questions in the S. E. C, 
as to whether they were charging some of those things not to surplus 
but to a current income account. 

Mr. Del Sesto. Going a little further into this accounting matter, 
I point out that getting away from surplus alone but in the whole 
subject of accounting, we find that in the petroleum industry there 
was no uniform method of accounting. Although the American 
Petroleum Institute has published a uniform system of accounts, it 
is apparent that such a system has not been generally adopted by 
most of the larger companies in the industry. Not only is there a 
lack of uniformity among the various companies in the industry, 
but even individual companies have not maintained consistent ac- 
counting policies from year to year. Consequently, comparisons of 
financial data between companies within the industry and even com- 
parisons of one company's financial reports of one year with those 
of another year cannot be made on the same basis. Because of the 
great flexibility in accounting policies, it is difficult at times to 
ascertain how much of the reported profits are real and how much 
are due to accounting policies or methods; and whether a reported 
profit is actually a profit, or whether it is in fact a loss. 

That observation is not only my own observation, but also an 
observation made by Standard Statistics. It made a review of the 
oil industry and it reviewed the profits and losses and it qualified the 
data, saying that because of these changes in accounting policies and 
this lack of uniformity, that the data had very little value. Since 
each company may determine for itself its own accounting policy, and 
it may vary this policy at will, earnings may be either overstated or 
understated, depending upon the whims of a particular management 
or the expediencies of the moment. 

124491 — 40— pt. 17, sec. 4 18 


I suggest that in this statement, and it is merely a suggestion, this 
committee may want to consider possibly enlarging the authority of 
the Securities and Exchange Commission with respect to accounting. 
It is my understanding that the Commission now has authority to 
prescribe accounting insofar as it affects the reports which are filed 
with the Commission, but that it does not have the same authority 
as the Interstate Commerce Commission has with respect to describing 
the manner in which these accounts should be kept, and neither has 
the Commission the same authority with respect to the general cor- 
porations as it has with respect to the utility companies under the 
1935 act, and I just submit that as a consideration of the committee. 
I also suggest to the committee at that time that possibly some 
thought ought to be given to the annual reports submitted to stock- 
holders. As I have previously said, while the S. E. C. can require the 
correction of reports filed with it, it has very limited if any authority 
over the reports given to stockholders, and there probably ought to be 
some step along that line. 

I have cited in this statement 

The Chairman (interposing. It is true, of course, that the S. E. C. 
cannot exercise authority nor can Congress give the S. E. C. author- 
ity except so far as the power of interstate commerce clearly -goes, to 
control what may be in the jurisdiction of the State which charters 
the company with respect to the structure of the company and what 
it may do. 

Mr. Del Sesto. The S. E. C. and the members of the committee 
are better qualified than I am to point that out. It has a little 
broader power. It is not only related to the interstate commerce 
power but also related to tlie mail power and things of that kind. 

The Chairman. To Federal power. 

Mr. Del Sesto. That^ is right, so it can with respect to companies 
under its jurisdiction probably make those changes which I have 

The Chairman. It is illustrated by the fact that those who want 
to organize a company could go to Delaware and obtain a charter 
with the very, broadest powers, with various classes of stock, some 
of which would be distributed to the incorporators at little or no cost, 
and with complete voting power, the rest distributed to the public 
at much larger cost for the purpose of raising capital ; the S. E. C. 
can do no more than require that the prospectus set forth the facts, 
but if the state law permits it, then it may be done and the stock may 
be sold broadcast throughout the country. 

Mr. Del Sesto. In the statement which I have presented, pages 15 
to 18,^ I have given certain illustrations of the changes in accounting 
policies. Again in presenting those illustrations I don't do it with 
the idea of criticizing these companies or suggesting that there was 
anything improper, but I do suggest that changes in accounting poli- 
cies are not merely academic ; the changes in accounting policies may 
have substantial effects on the operating results of a company. I 
think, for example, one of the cases which was mentioned was one in 
^which the change in accounting policy affected the earnings by an 
Amount of at least $10,000,000. I suggest that possibly there might 
be a possibility of abuse in allowing a company without any standard 
at all to change its policy at will. 

1 Hearings, Part 17-A, p. 9970 et seq. 


I won't take the time to read those, but they are given in this state- 
ment for that limited purpose, to show, first, the effect of changes ia 
policy; and, second, the effect that change in policy might be abused. 

We have already talked about representation at stockholders' meet- 
ings. This committee submitted a questionnaire to the oil companies 
and asked them to state the number of shares of capital stock voted 
by stockliolders in person, the number of shares of capital stock voted 
by proxy exercised by company officers and directors, the number of 
shares voted by proxy exercised by other than company officers and 
directors, and the total number of shares of stock voted by each officer 
and director at each meeting, both as to personal holdings and by 

The detailed replies furnished by 18 of the reporting companies 
have been submitted to this committee and are part of appendix 11 
of the statement which I introduced in the record.^ 

The replies received from the major oil companies indicate conclu- 
sively that the management participates practically alone at stock- 
holders' meetings, and that on the average stock represented at 
stockliolders' meetings by persons other than the management repre- 
sents less than 1 percent of the total. 

The replies also indicate, in the case of many of the major oil com- 
panies, that it is the practice even among the officers and directors to 
give proxies on the stock owned by tiiem to the proxy committee. 
Thus it is apparent that for all practical purposes large corporations 
are in the control of the management group with no interference or 
supervision on the part of the great body of stockholders. 

Another subject which was covered in the committee's questionnaire 
had to do with the compensation of officers and directors. The com- 
mittee requested that the companies report the total amount paid to 
officers and directors during the period 1929 to 1938. The infonnation 
submitted by the con^panies has been tabulated in the tables starting 
on page 29 ^ and the tables compare the compensation paid to officers 
with the net earnings applicable to common stock and with dividends 
paid on the common stock. 

Without going into any detail with respect to the tables submitted, 
I would like to say that we can make certain generalizations : ( 1 ) The 
compensation paid to the management group as represented by officers 
and directors does not fluctuate in direct proportion to either the net 
earnings applicable to the stockholders or the dividends paid to the 
common stockholders; (2) compensation paid to the officers and direc- 
tors is more stable and does not fluctuate as widely as either net earn- 
ings or common-stock dividends; (3) in 1938 the trend of compensa- 
tion paid to officers and directors was generally on a higher level than 
that of 1929, while the net earnings were on a lower level than that 
of the earnings of 1929. 

I have on pages 19. 20, and 21 of the statement sunimarized the 
comparison between 1929 and 1938.^ 

We also found in the replies to the questionnaire that 17 reporting 
major oil companies stated that they had bonus or profit-sharing 
plans, in which the management group participated during this 
period. I might say that some of the profit-sharing plans were not 

» Ibid, p. 0978 et seq. 

2 Ibid, p. 9972 et seq. 

3 Hearings, Part 17-A, p. 999.^ et seq. 


for the management group alone, but that other employees were 
permitted to participate. 

Those plans are summarized on pages 22 through 26.^ 

Mr. Henderson. They are summarized by individual companies, 
Eo that the distinction as to coverage of the plan may be noted. 

Mr. Del Sesto. That is right. In many cases we quoted verbatim 
the replies as given to us. We made no attempt to draw any generali- 
zations from the plans, because the plans were more or less individual 
and there was very little in common among the various plans. 

Mr. O'CoNNEix. Several of them are no longer in effect, too. Isn't 
that true? 

Mr. Del Sesto. Yes; some of them are in effect on the books, but 
the earnings aren't there, so that there is no distribution. Then one 
of the companies also pointed out that it did not have a bonus plan 
or profit-sharing plan, but it had a stock-purchasing plan, but that 
plan was available not only to officers and directors but also to other 
employees. That was the Standard Oil Co. of Indiana, and its reply 
is tabulated on pages 27-28 of the statement.- 

That, Mr. Chairman, concludes the first part of the statement, state- 
ment A, and it will take me only a few more minutes to cover state- 
ment B. I don't intend to go into any detail. 

The Chairman. Very well, you may proceed. 

Mr. Del Sesto. I hope to finish this afternoon on this whole sub- 
ject. In addition to reviewing the broad financial reports submitted 
to the committee, I was asked specifically to review the questions 
which had to do with the cost of gasoline at the refinery gate and the 
costing policies of the oil companies and also with" the question, Which 
of the forf branches of the petroleum industry are profitable and 
which are not profitable, and is any one branch of the industry used 
to subsidize another branch or branches of the industry ? 

On the whole, I would say, Mr. Chairman, that the replies were not 
entirely satisfactory, and that there is still a great deal more that the 
committee would like to know on this subject. I point out that this 
matter of determining unit costs of gasoline, for example, is of quite 
a great deal of importance at the present time. There has been a great 
deal of discussion of proration. We know that proration affects price 
and to some extent possibly is guided by the price of gasoline, and yet 
we have apparently no definite standard of what the price of gaso- 
line is. 

I might tabulate the replies that we received. 

The Chairman. Do you mean to say that proration may be affected 
by the price of gasoline or by the price of crude ? 

Mr. Del Sesto. The price of crude and also the price of gasoline, 
t)ecause in the price of gasoline, of course, there is the price of crude. 
The point I am trying to make 

The Chairman (interposing). I was merely thinking that the testi- 
mony which I recall with respect to price related almost entirely to the 
price of crude. I don't recall any testimony on the price of gasoline 
with respect to proration. 

Mr. Del Sesto. Well, but in the price of gasoline the biggest ele- 
ment is the price of crude, and the point I am getting at is this, that 
in the replies that we have received we don't know yet what the price 

^ Hearings, Part 17-A, p. 9974 et seq. 
- Ibid, p. 9978. 


of gasoline costs, and that is true in all branches of the industry so 
that we don't even know what it costs to produce oil at the well. There 
is some handicap in the operation of proration plans. In other words, 
I am pointing out that if what these companies say is true, there are 
no accurate costs at any stage of the oil industry, either at the refinery 
gate or at the well. 

Of the 20 major oil companies, two companies did not reply to the 
committee's questionnaire with respect to the cost of gasoline. These 
were Standard Oil Co. of California and Mid-Continent Petroleum 
Corporation. Three companies stated that unit costs could not be de- 
termined. These companies were Shell Union Oil Corporation, Sun 
Oil Co., Union Oil Co. of California. Three companies stated that 
unit costs could not be obtained but did furnish unit costs used for 
inventory purposes. These companies were the Atlantic Refining 
Co. ; Socony- Vacuum Oil Co., Inc. ; Tidewater Associated Oil Co. One 
company did not furnish the unit cost per gallon of gasoline, but 
did give us the average unit cost per barrel of crude, without breaking 
it down into the various products coming out of that barrel of crude. 
That was the Gulf Oil Corporation. 

Ten companies did furnish unit costs, and these companies were 
Empire Gas & Fuel Co., Consolidated Oil Corporation, Continental 
Oil Co., the Ohio Oil Co., Phillips Petroleum Co., Pure Oil' Co., Skelley 
Oil Co Standard Oil Co. (Indiana), Standard Oil Co. (Ohio), the 
Texas Corporation. 

One company furnished us the aggregate cost of operating its refin- 
eries or the refineries of its subsidiaries, but it did not show the unit 
costs of producing gasoline at those refineries, and it stated that it 
would submit these costs a a later date. That was the Standard Oil 
Co. of New Jersey. 

In the case of the oil companies which did furnish us^unit costs 
of gasoline, we have tabulated those unit costs in Table A which is 
included, as part of statement B starting on pages 17, 18, and 
through 21.^ In addition to tabulating these unit costs, I have sub- 
mitted as part of the record, as appendix I to this statement, the 
detailed replies of all the companies, both majors and nonmajors, 
on this subject, even in the case of those who said they could not 
furnish unit costs. 

I might point out that the unit costs of gasoline at the refinery 
gate vary. I think if you will look at the entire table you will find 
the cost of gasoline at the refinery gate varies from approximately 
4 to 7 cents. No doubt the size of the refinery and the location 
of the refinery has a great deal to do with that. Even within 
the same State you will find considerable variation as to cost. For 
example, in table A, on page 17, you find that the Consolidated Oil 
Corporation has a cost of $0.0553 at the Parco, Wyo., refinery, whereas 
in the case of the Ohio Oil Co., on page 18, with its refinery at 
Lovell, Wyo., its cost was $0,067 plus. 

I also would like to state that in connection with these unit-cost 
figures, many of the companies furnished detailed qualifications, and 
all of those qualifications, in fairness to the company, have been 
included in appendix I and I think that table ought to be read in 
ion junction with the appendix, so as to give full consideration to the 
qualifications indicated by the companies. 

I Hearings, Part 17-A, pp. 10043-10045. 


The Chairman. That is in appendix I ? ' 

Mr. Del Sesto. Yes ; that is already in the record. 

I have also in tlie statement included some excerpts from letters 
received by some of the oil companies that stated they could not 
determine the costs, and I have quoted that to show what their rea- 
sons for sayin*^ that costs could not be determined were. 

The Chairman. Would you summarize some of those reasons? 

Mr. Del Sesto. The primary reason seems to be this, Senator, 
that in the refining^ process you start off with a barrel of crude and 
you come out at the other end with a number of products. The 
whole process is one process or one continuous process, so they say, 
"We can determine the total cost of the refinery, but when we come 
to attempt to allocate the costs among the individual products we 
have difficulty because the products were all produced at one time, 
produced simultaneously, so we have this difficulty of allocating 
costs,'' and they say although methods have been devised by which 
these costs can be allocated, the methods are arbitrary and they 
refuse to use those methods or some of them feel that those methods 
are so arbitrary that to give you any figures based on those methods 
would not be fair to them and would be of little value to the 

I might in that connection point out, however, that one of the 
witnesses before this committee, I believe it was Mr. Wilson,^ the 
refinery witness of the A. P. I., did go into some detail with respect 
to refinery costs and he did suggest there were three commonly ac- 
cepted methods of obtaining costs, and while he pointed out that there 
may be some quarrel as to those methods, those methods did produce 
costs which were at least of some value to the management in 
determining its policies. 

I might say also, incidentally, that that problem of allocating costs 
in a process like tlie refining process is present, however, not only 
in the refining process of the oil industry but is available in every 
chemical plant where several products come out of the same process 
and is also present in other industries where a number of byproducts 
are made incidental to a main product, and I might suggest that if 
the premise of those oil companies is taken as correct, that you cannot 
determine costs, you have no cost accountant 

The Chairman (interposing). Are you familiar at all with the 
tjieat-packing industry byproducts? 

^Ir. Del Sesto. No, not to speak authoritatively. As I was say- 
ing, if the premise is correct that you cannot determine costs in the 
refining process, then you would have no cost accounting, you prob- 
ably wouldn't have any accounting at all. While those methods may 
be termed arbitrary and may not be exactly scientifically cprrect, 
they do give workable results and I believe most inclustries do use 
those figures. 

The second part of this statement 

Mr. Shaughnesst (interposing). Would there be any place i:: 
normal accounting of one of these companies Avliich would show the 
costs applicable, say, to the producing or refining end of the business? 

Mr. Del Sesto. This is the second point I was getting to. The first 
part had to do with the unit cost of gasoline at the refinery gate. 

sD^K^^r't ^i^;..-^^'^'" printed separately as part of nearincs. Part 17-A. 
n.on^'ytrpea^sx^'Heari^gfpm'ls"" ''"'"'"" Petroleum & Transport Co.. .hose testi- 


The second part has to do with the committee's supplementary ques- 
tionnaire which asked the oil companies to classify their assets by 
branches of business and also to classify their income by branches of 
the industry. There again the replies were not at all uniform. Out 
of the 20 major oil companies, three companies did not furnish any 
information at all. These were Standard Oil Co. of California, Mid- 
Continent Petroleum Corporation, Atlantic Refining Co. Four com- 
panies stated that it was impossible to classify either the assets or the 
income by branches of the industry. These companies were Standard 
Oil (New Jersey), Sun Oil Co., The Texas Corporation, Tidewater 
Associated Oil Co. 

Two companies reported that while assets could be classified ac- 
cording to the various branches or departments of the business, it 
was impossible to classify income. These companies were Socony- 
Vacuum Oil Co., Inc., and Shell Union Oil Corporation. 

There were 11 companies, iiowever, w^hich did furnish the analysis 
of assets and income by various branches of the industry, and these 
companies were the subsidiaries of Cities Service Co., Consolidated 
Oil Corporation, Continental Oil Co., Gulf Oil Corporation, Skelley 
Oil Co., Standard Oil Co. (Indiana), Standard Oil Co. (Ohio), 
Union Oil Co. of California, The Ohio Oil Co., Phillips Petroleum 
Co., the Pure Oil Co. 

I have in the statement on page 10 summarized the replies of these 
11 companies. It seems apparently that, based on this information, 
the transportation branch shows the highest rate of return in do- 
mestic operations, and when I say rate of return I mean the income 
prior to interest and dividends based upon the total assets used in 
that branch of the business, and using that test we find that the 
transportation branch is the more profitable in the case of most of 
these 11 companies that did furnish the data, and in the table which 
I have submitted I have indicated the year in which these companies 
had the highest rate of return in the transportation branch. 

Also, we found that in the marketing branch the lowest rate of 
return was obtained in the case of these 11 companies that reported 
to the committee, and in the table on page 10,^ the second table, I 
have listed the companies and have indicated the years in which those 
companies had the lowest rate of return in the marketing branch. 
These two tables are in summary form only, and I have submitted 
for the record already appendix II of this' statement,^ which gives 
in detail the replies furnished by these companies, and I have also 
included the replies given to us by the non-major companies 

I might say that the data of the non-major companies was not of 
much value in this analysis because not many of them were in all 
four branches of the industry; they were generally in one, two, or 
three branches. 

Also in this statement, starting with page 11 and through 16.^ I 
have tabulated the replies showing the amount or the percent ore- 
ported by the companies as the percent of profit or rate of return 
in these various branches. 

I want to point out and make it very clear that these are not my 
figures; they are not my own computations; they are the figures as 

1 Iloarincs, Part 17-A. p. lOOHO. 

^"Exliiblt No. 13l-t." piiiited separately as part of Hearings, Part 17-A. 

^ lio-nings, Part 17-A, pp. 10040-10043. 


reported by the companies themselves, and we have made no adjust- 
ments of those figures. We offer them to this committee for your 

The Chairman. Do I understand that you are referring now to 
the percentages? 

Mr. Del Sesto. Yes; starting on page 11.^ 

The Chaibman. Take the first one, the Arkansas Fuel Oil Co. 
and subsidiaries for 1936. Was it the company which calculated 
the varying percentages? 

Mr. Del Sesto, Yes. In other words, the committee's question- 
naire required that the companies compute that, and that was to 
avoid any difficulty that we might be using the wrong base or that 
we had adjusted the figures. 

In all fairness to' the companies that did submit this data, I should 
say here again that some of these companies did qualify the infor- 
mation which was submitted; some of them, for example, said that 
this information had limited value, that they in some cases didn't 
have these particular figures on their books, but they merely prepared 
these figures for the committee, and so that in the study of these 
figures, these percentages, I think you ought to consider the appendix 
and take into consideration the comments which the companies have 

I think that covers that. 

In closing, I would like to make this observation, that I have tried 
so far as -^possible to make an objective presentation of the material 
and I have tried to highlight some of the more important issues that 
were presented by the material furnished by the oil companies. As 
I conceive it, it was not my function to make any definite recom- 
mendations to the committee or to express ojjinions, but merely to 
present this data and to raise some questions which I thought were 
of importance and which I thought might be considered by this com- 
mittee in its broad study of the concentration of economic wealth 
and power. 

The Chairman. Are there any further questions? 

Mr. Shaughnessy. Is there any point in the companies' normal 
accounting where it would be required to take into account the profits 
made by the various branches? 

Mr. Del Sesto. It would seem to me that from an operating stand- 
point, a company should know how it is operating in its various 

Mr. Shaughnessy. How about the inventory? 

Mr. Del Sesto. I was going to get to that, and that also in pricing 
inventory a company has to know the costs of its product at its vari- 
ous stages, because these companies are continuing companies and at 
the end of the year when they come to pre»)are their tax returns and 
reports to stockholders, they have to know the cost of the products at 
the various stages because the common practice in valuing inventory 
is cost or market, whichever is lower and the company would not be 
in position to prepare its stock returns or its reports to stockholders 
unless it knew the value of its inventories at the various stages of the 

Mr. Shaughnessy. Do you know what the practice is in the oil 
industry ? 

* See footnote n, preceding page. 


Mr. Del Sesto. Some companies do value iii ^entory at cost or mar- 
ket, whichever is lower, and I think that is common practice. 

I think some few companies take the position that any intercom- 
pany profits that might be in the inventories are so small they would 
not affect the income account substantially, and it would require too 
much time to eliminate the intercompany profits. I think those com- 
panies were in the minority. 

Mr. Shaughnesst. Are the companies that are in the minority in 
accord with accounting practice? 

Mr. Del Sesto. No ; I think the generally accepted practice in ac- 
counting is to value inventories at cost or market, whichever is lower, 
and that would mean the exclusion of any intercompany profits. 

Mr. O'Connell. For tax purposes, would these companies have to 
do that, inventory at cost or market? If that is so how do the com- 
panies operate that say they have no costs? 

Mr. Del Sesto. I think that is so unless the Commissioner of Inter- 
nal Revenue has made some exception in their case. I think that 
under the regulations the Commissioner has that authority and from 
a tax standpoint this thing would work itself out over a period of 
years, but as a general rule it is cost or market. 

Mr. O'Connell. In the long run, the inventory at the intermediate 
stage wouldn't make so much difference, the value given to inventory. 

Mr. Del Sesto. So long as a company used the same basis each year 
it would make very little difference from a tax standpoint what basis 
was used, so long as it was a consistent policy. 

The Chairman. From your examination of the responses to the 
questionnaires, would you care to make any statement on the ac- 
counting practices of the large and small companies, comparatively 
speaking ? 

Mr. Del Sesto. I don't think we can draw the line there. Senator. 
One of the things that impressed me quite a bit is that you can't 

Generalize between large and small companies. You inore or less 
ave to take each company and study it individually. 

The Chairman. It is clear that there was a variation of account- 
ing methods among all of the companies irrespective of size, and 
some had accounting methods of one character and some of another. 

Mr. Del Sesto. That is right. 

The Chairman. And your own opinion as to the value of these 
practices might have varied. 

Mr. Del Sesto. That is true. 

The Chairman. And that was irrespective of size? 

Mr. Del Sesto. That is right, and I point out that so long as you 
have this variation in accounting, and it exists not only in the oil 
industry but in every large industry, it will always be difficult for 
any committee of this type to make a proper analysis of financial 
data, because, first, you can't make comparisons between companies. 
Company A with Company B, because they may not be on the same 
basis. Neither can you make comparisons of the same company over 
a period of years, and unless there is some definite uniform system of 
accounting within the industry you will always be faced with the 
problem that any financial data are subject to many reservations. 

The Chairman. Are there any other questions? You have noth- 
ing to add? 


We are very much obliged to you, Mr. Del Sesto. 

(Th^. witness, Mr. Del Sesto j was excused.) 

The Chairman. The committee will now stand in recess until 
Monday morning at 10: 15, when Mr. Farish will be the witness. 

(Whereupon, at 5:30 p. m., the hearing was adjourned, to recon- 
vene on Monday, October 23, 1939, at 10: 15 a. m.) 



United States Senate, 
Temporary National Economic Committee, 

Washington^ D. G. 

The committee met at 10 : 40 a. m., pursuant to adjournment on 
Friday, October 20, 1939, in the Caucus Koom, Senate Office Building, 
Senator Joseph C. O'Mahoney presiding. 

Present: Senator O'Mahoney (chairman) ; Representative Sumners 
(vice chairman) ; Senator King; Representatives Reece and Williams; 
Messrs. Henderson, Lubin, O'Connell, and Brackett. 

Present also : Representatives Mapes (Michigan) and Disney (Okla- 
homa) ; Quinn Shaughnessy, representing the Securities and Ex- 
change Commission ; Willis Ballinger, representing the Federal Trade 
Commission; Robert McConnell, representing the Department of 
Commerce; W. B. Watson Snyder, Hugh Cox, F. E. Berquist and 
Christopher Del Se^sto, Special Assistants to the Attorney General: 
Leo Finn and Roy C. Cook, Department of Justice. 

The Chairman. The connnittee will please come to order. 

This morning our witness will be Mr, William S. Farish, president 
of the Standard Oil Co. (New Jersey). Would you be good enough 
to be sworn, Mr. Farish? 

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. Farish. I do. 

Mr. Cox. Before Mr. Farish starts, it might save time if I made 
some formal statements for the record with respect to some documents 
that we think should be in tlie record and are not now there. They 
have nothing to do with Mr. Parish's testimony, but before the hearing 
is over I would like to put them in. Perhaps this is as good a time as 

The Chairman. Very well. 

Mr. Cox. There has been a great deal of reference here throuijlioul 
the testimony relative to the answeis which the committee receiM-d to 
the questionnaires sent out to various oil companies. I think, in order 
that that discussion may be intelligible and the evidence all be a part 
of the record, it would be appropriate to offer for the record the 
original answers, the supplemental answers, the exhibits, annual re- 
l>orts, maps, charts, and other document's, which were submitted to 
the committee by the oil companies to Avhom the questionnaire wms 
sent. I think the bulk of these documents makes it inndvisable 'o 
have them printed, but I suggest that they be accepted for (he record, 
so that they mny be a part of the record and be available as public 



I suggest that the way to do this is for me to make an offer now 
of those original answers, supplemental answers, exhibits, annual 
reports, maps, charts, and other documents submitted to the com- 
mittee by this list of oil companies which I now hand to you, sir. 

The Chairman. It may be desirable to print the list of the com- 
panies which have answered the questionnaire, but the other material 
will be received for the record. Without objection it is so ordered. 

(The voluminous record of economic data referred to was marked 
"Exhibit No. 1320" and is on file with the committee. The list of 
companies answering the questionnaire is included in Hearings, Part 
14, appendix, p. 7426.) 

Mr. Cox. The second item that I think I should call to the com- 
mittee's attention has to do with exchanges of gasoline. Members 
of the committee have asked a number of questions about the extent 
to which gasoline is exchanged by the major companies, and after 
exchange sold under brand names. The other day Mr. Snyder made 
certain statements with respect to that matter which were based on 
some information which the Department of Justice collected before 
the hearing was organized to proceed on a different basis. I think 
perhaps it might be well, then, to offer certain material which we 
have that deals with that matter. 

I offer now for the printed record photostatic copies of the answers 
of the Atlantic Refining Co., Cities Service Co., Consolidated Oil 
Corporation, Continental Oil Co., Gulf Oil Corporation, Ohio Oil 
Co., Phillips Petroleum Co., Pure Oil Co., Shell Union Oil Corpora- 
tion, Skelly Oil Co., Socony-Vacuum Oil Co., Standard Oil Co. of 
California, Standard Oil Co. of Indiana, Standard Oil Co. of Ohio, 
Standard Oil Co. of New Jersey, The Texas Co., Tide Water Asso- 
ciated Oil Co., and Union Oil Co. of California to the questionnaire 
which was sent out by the Department of Justice on Novefhber 10, 
1938. These are photostatic copies of original letters which are in 
the files of the Department. 

I think the committee, although this is bulky, may wish to consider 
the advisability of having it printed, since it is the only information 
which the committee has on the subject of the exchange of gasoline. 

The Chairman. Is it your recommendation that it be printed? 

Mr. Cox. We recommend that it be printed ; yes, sir. 

The Chairman. Without objection it will be so ordered. 

(The letters referred to were marked "Exhibit No. 1321," and are 
included in the appendix on p. 9864.) 

Mr. Cox. There is one additional item that I wish to call to the 
committee's attention. I was informed this morning that the civil 
court of appeals in Texas has reversed the decision of the lower court 
which confirmed the decision of the Railroad Commission refusing 
Mr. Dailey ^ a permit to drill on his plot in the Old Ocean field, 
and directed the lower court to issue a mandatory injunction to the 
Railway Commission directing the issuance of a permit. Since the 
record for the Railway Commission was introduced by Colonel 
Thompson ^ and there has been some discussion of that case here, I 
should like to reserve the right upon obtaining possession of a copy 
of the opinion of the court of civil appeals, to offer that opinion after 
it has been inspected by the committee. 

*John B. Dailey whose testimony appears in Hearings, Part 14. 

* Col. Ernest O. Thompson whose testimony appears in Hearings, Part 15. 


The Chairman. Very well. 

The Chair is in receipt of a letter from Mr. A. A. Stanbaugh, vice 
president of the Standard Oil Co. of Ohio, who asks permission to 
submit a certain statement in response to the testimony of George 
B. Ingram ^ before this committee. AVithoiit objection the letter and 
the enclosure will be printed in the record. 

(The letter referred to was marked "Exhibit No. 1322," and is 
included in the appendix on p. 9926.)- 

The Chairman. Mr. Farish, you may proceed. 


Mr. Farish. I presume, Senator, you want the usual identification 
of the witness. 

The Chairman. I think it might be well. 

Mr. Farish. My name is William S. Farish. I have been in the 
oil business in some capacity for some 38 years starting with 
Spindle Top and carrying through as an operator of one kind and 
another in Texas, drilling contractor and producer, and so on, until 
1917, at which time I merged my property interests with other pro- 
ducers, and formed the Humble iDil & Refining Co. 

At the time of organization, I was vice president of the company. 
Two years later I was president of the company and remained presi- 
dent of the Humble Oil & Refining Co. until June 1933, at which 
time I resigned and was elected as chairman of the board of the 
Standard Oil Co. of New Jersey, serving in that capacity for some 
4 years, and the last 2 years as president of the Standard Oil Co. 

Practically all my business life has been devoted to the oil industry. 

Mr. Chairman, I have filed, or I have distributed — it hasn't be- 
come a part of the record as yet — a printed statement attempting to 
sum up as well as I could the pertinent facts in connection with this 
investigation as I have interpreted it. It is not my purpose to read 
that prepared statement, unless it is desirable to pick it up in order, 
but I am hoping that you gentlemen have read it and that it will 
not be necessary to read it in detail in order to give you the oppor- 
tunity to raise any questions relative thereto that you desire to ask. 

I have prepared a brief memorandum from which I can talk as we 
go along that may serve the purpose better than to try to read the 
full paper. However, I am at your disposition in the matter. 

The Chairman. It might be well for you, Mr. Farish, in accord- 
ance with the practice which has been followed by all of the wit- 
nesses, to summarize your statement if you are not going to read 
it all. That will be quite satisfactory. 

Mr. Farish. I think that will save time and I don't know that it 
would do any particular good to read the paper. 

The Chairman. The formal statement will be printed in the 

Mr. Farish. Yes; I will offer that for the record. 

(Mr. Farish 's prepared statement was marked "Exhibit No. 1323" 
and is included in the appendix on p. 9930.) 

1 Mr. Ingram's testimony appears in Hearings, Part Ifi. 

^ An affidavit of the statement referred to, introduced on November 1, 1939, was marked 
"Exhibit No. 1354," and is printed in connection with "Exhibit No. 1322," appendix, 


Mr. Farispi. First, I would like o assure the committee that the 
oil industry has taken this hearing very seriously. They have de- 
voted a great deal of time and effort to analyzing their individual 
situations, answering the questionnaires, and to try to interpret as 
best they could the object of the committee and to make whatever 
contribution they were able to make. As far as we are concerned, 
we have made a serious effort to do that very thing, and in appear- 
ing here I want to assure you I am appearing without any brakes on, 
in an attempt to make whatever contribution it isi possible for me 
to make to the enlightenment of the committee or to contributing 
any facts and knowledge that I may have of the oil industry. 

The Chairman. I am sure the committee appreciates that Mr. 


Mr. Farish. This industry has a long heritage of misunderstand- 
ing. As you all know, the old Standard Oil Co. was dissolved in 
1911. My company accepted that development as an expression of 
public policy, and we have tried ever since to provide no foundation 
in fact for the suspicions which are still widely prevalent. 

Ever since the committee announced these hearings on the oil in- 
dustry, I have looked forward to them as the opportunity for the oil 
industry to tell the public about itself. I have hoped that a state- 
ment of policies and achievements would give the public a better 
understanding of the industry and its contribution to the general 

At this point I offer for the record the formal statement which I 
prepared last week.^ In preparing this statement, I have tried to 
discuss topics which have been of major interest to the committee. 
In the discussion of these various topics I have no intention to white- 
wash this industry. We've got human nature in the oil business just 
as well as in other industries and other walks of life. I am not 
going to tell you that no mistakes have been made in this business. 
Nor do I claim that there aren't bad spots and questionable practices 
here and there. I don't propose to try to offer a blanket justification 
of everything that has gone on in the oil industry; and likewise I 
don't want to claim for my own company that we haven't made mis- 
takes. But I do say most emphatically that, bearing in mind the 
fundamental objectives of your inquiry, there is no condition in the 
oil industry which would justify any drastic overturn of established 
business relationships. 

This inquiry of yours is concerned with broad problems of national 
welfare, as Senator O'Mahoney has repeatedly emphasized. You are 
seeking to clarify the workings of our economic system, to determine 
what are the obstacles that exist to the full employment of men and 
capital. You are especially concerned with the problems of making 
such adjustments to changing conditions as will enable private enter- 
prise to offer the greatest employment and afford the greatest oppor- 
tunities for investment of capital. Then you lay a set of social yard- 
sticks on the petroleum industry, what do you find ? You find good 

1 Admitted to the record as "Exhibit No. 1323." 


products, improvement in products, low prices. You find progress 
over the years in the direction of still lower prices. You find that 
all this has been done with increased wages, with reduced hours of 
employment, with remarkable stability of employment, and with 
good labor relations. Yon find that it has been done without wasteful 
use of capital in refining, but as the same time on sucli an expanding 
scale and with such rapid technical progress that there has been con- 
stant opportunity for the investment of savings. In view of the 
rapid growth of the industry, it is surprising that the growing pains 
have not been sharper. It seems to me the weight of the evidence is 
that the social performance of the industry has been of the highest 
order. Impressive technological advances in all fields have conserved 
resources and effected huge cost savings. These savings have been 
shared with labor and the consumer. The industry's return on capi- 
tal, as measured by that of the reporting companies, has been modest. 
Let me make it clear that the industry does not speak of its achieve- 
ments in any spirit of complacency. We are our own severest critics. 
We are more proud of our progressive spirit than we are of our 

These results came about through the efforts of individual com- 
panies to strengthen their own competitive situations. There is com- 
petition in the petroleum industry, and that competition has been m 
the public interest. Because of the very nature of the oil business an 
adventurous pioneering spirit has always been characteristic. 


TJie Chairman. I take it, if I may interrupt you, Mr. Farish, from 
the manner in which you have made these two statements, that it is 
your belief that competition should be maintained and preserved ? 

Mr. Farish. Yes, sir. I think I have made that very clear in the 
paper, sir. 

The Chairman. And that whatever serves to promote the interest of 
the independent as well as of the larger companies is a desirable 
thing ? 

Mr. Farish. Certainly. 

The Chairman. And that whatever serves to retard the activity of 
any factor in the oil industry is a deleterious thing. 

Mr. Farish. If it is directed at any factor in the industry; yes. I 
believe in open, free competition. I don't think there is any measure 
of w^hether one man is a big man or a little man — -in other words," I 
don't think you can dress competition up in different colors. It is all 
one color. 

The Chairman. Of course, some suggestions have been made by 
some commentators upon industry as a whole. The suggestion has 
sometimes come from high places that there ought to be a limit upon 
the size of industrial units. Have you any opinion about that? 

Mr. Farish. Weil, I have never been conscious of any necessity for 
limiting size. I think size in itself has sufficient handicap to protect 
the public from too great a size. 

The Chairman. Do you think that the small one has any disadvan- 
tage competing with a large unit? 


Mr. Farish. Well, you get into details of definition there that I 
would have to ask — what do you mean by "disadvantage"? Obvi- 
ously the man with $10 can't compete successfully with the man with 
a million dollars. 

The Chairman. Let's put it on the basis which has been so fre- 
quently repeated in this inquiry — the contrast between the integrated 
and the nonintegrated company. Of course, this is a condition which 
is characteristic of other industries than petroleum. 

Mr. Farish. Well, I don't know just what you are driving at, 
Senator. If you think you can set up a system of economics in this 
counti'y where a man with more capital 

The Chairman (interposing). I am not expressing any thought, 
I am not trying to express any thought, Mr. Farish. 

Mr. Farish. You are trying to put thoughts in my mind, then. 
Let's see if we understand each other. 

The Chairman. Not at all. I am merely asking you in terms of 
testimony that has been presented to this committee whetlier in your 
opinion the nonintegrated company is at a disadvantage in competing 
with the integrated company. 

Mr. Farish. Well, in some respects he is. I think I have covered 
that fully. Senator, in the paper,^ and have tried to separate it side by 
side and argue the point, and if I may suggest, I think we would make 
a little better headway if you would let me read through with the brief, 
formal start here and then we can take up any phase of it that is 

The Chairman. Very well. 

Mr. Farish. When a man found oil in one spot he had the urge to 
move on to some other spot and look for oil. You may call that a 
gambling spirit if you want to. But whatever you call it, it runs 
through the oil industry. It is the source of a progressive attitude, a 
continued striving for betterment and improvement, a constant lower- 
ing of costs in a search for competitive advantage. As we see it, our 
achievements and our progressive spirit are definitely the result of 
competition. We regard the industry's record not as a personal trib- 
ute to oil corporation executives but as a fine example of the merits 
of the American system. 


Mr. Farish, Executives in this industry have been forced through 
competition to direct their attention to the lowering of costs. The 
only way in which aggregate profits could be maintained was through 
the reduction of costs in order to keep them under prices. This cost- 
reduction program has required large investments in new processes of 
refining and has resulted in the rapid obsolescence of refinery equip- 
ment. It has been reflected in improved techniques in production; 
and many of the investments in transportation equipment in the mar- 
keting field, such as the transport truck, are the direct result of the 
pressure which competition places on costs. The spirit of this in- 
dustry has developed an economic trend in the direction of lower costs 
and better service to customers which is now so strong that nobody 
can buck it successfully. 

1 "Exhibit No. 1323." 


Perhaps a personal incident will serve to illustrate the importance 
of this cost reduction. When our present sales manager was ap- 
pointed, I told him that I was going to judge the effectiveness of the 
sales department's operations by the extent to which marketing costs 
were reduced. I am happy to state that on a per gallon basis the 
average cost of direct marketing for all products has declined from 
3.09 cents in 1933 to 1.89 cents for the first 6 months of this year. 

The Vice Chairman. Will you come back and make some explana- 
tions later on as to how you accomplished that? I don't mean to 
interrupt you. 

Mr. Farish. Yes, sir. Our company has been able to accept low 
realizations on its products and yet have a profit on its marketing 

Mr. Henderson. In 1933, according to information the Federal 
Trade Commission submitted, the Oil and Gas Journal gave the av- 
erage service station price of gas as about 12.75 cents. In 1938 it was 
13.9 and I understand your company increased its price in the last 2 
weeks. How do you reconcile the two statements ? 

Mr. Farish. What statement now ? 

Mr. Henderson. Your statement 

Mr. Farish (interposing). You go back to '33 with the service sta- 
tion price and what was your next date ? 

Mr. Henderson. The average for '38 was 13.9 and I understand it 
is higher now by virtue of some increases that have taken place. And 
yet there has been a reduction, as you say, in the cost there 

Mr. Farish (interposing). I beg your pardon. What I am refer- 
ring to in these figures is the direct marketing cost which is the whole- 
sale cost between the refinery and the filling station. It has nothing 
to do with the retail price, it has nothing to do with the cost of re- 

Mr. Henderson. Well, but there is a relationship between the price 
at the tank wagon and the price at retail, is there not? 

Mr. Farish. A relation? 

Mr. Henderson. Yes. 

Mr. Farish. Yes ; there is this relation, when the tank-wagon price 
goes up or down, ordinarily the retail price goes up or down. 

Mr. Henderson. That is what I would gatheu from these prices, 
that this reduction in the average cost of direct marketing has not 
been passed along. The consumer is paying higher prices now. 

Mr. Farish. I think if you look at the record it is very clear that it 
has been passed along. The oil industry, for instance, to put it this 
way, is accused by many people of operating th^ir marketing depart- 
ments at a loss. Many times they do. We do have losses. I don't 
know any business that always operates at a satisfactory profit. So 
that the margin of cost — that is a long story if yoii want to go into it 

Mr. Henderson (interposing). No; but what I would like to get tit 
is, if you have reduced your cost of marketing and the retail price of 
gasoline has gone up, does that mean that ;.he retailer has a wider 
margin of your savings ? 

Mr. Farish. In some respects the retailer has gotten a large 

124491— 40— pt. 17, sec. 4 19 


Mr. Henderson. Yet the testimony progressively in the hearings 
has been that there has been a shrinkage in that margin between the 
tank wagon and the retailer. 

Mr. Farish. Over the years that is correct, but you are contrasting 
now 1938 and the present moment. 

Mr. Henderson. I was contrasting the 2 years you selected for your 
comparison of the reduction in the cost of marketing. 

Mr. Farish. Well, during that time — well I think during the 
years — let me put it this way, Mr. Henderson. As I look back over 
tlie record of the petroleum industry there has been a constant re- 
duction of costs. And the industry is proud of the fact that it has 
reduced costs. We have reduced refining costs tremendously. I 
can't give you the exact percentage, but something of the order of 
40 or 50 percent. We have reduced transportation costs in all de- 
partments. We have reduced, as I pointed out here in this period 
of time, and I think this isn't only true of our company ; this is 
generally true of the industry — I happen to have the figures of our 
company is the reason I quote them here — we have reduced market- 
ing costs, and marketing costs in the lar^e companies is the whole- 
saling cost of products, that is, between the refinery and the reseller 
or the consumer. 

Now they have unquestionably come down from 30 to 40 percent. 
Refinery costs have come down of the order of 40 or '50 percent,. 
Transportation costs have come down, and in most instances pro- 
duction costs have com& down, and, of course, in this process all costs 
have come down, and obviously it doesn't take any prophet or any 
analysis to show these cost reductions have been passed on to the 
consumer, because here is an industry that- is not making over 5 
percent on its invested capital, and cost reductions alone have 
amounted to something much in excess. 

Mr. Henderson. I am afraid that doesn't answer me. I am looking 
at this statement you have made here, which shows a reduction 
of 1.2 cents between the refinery and evidently your tank-wagon 
price. And yet in that same period, '33 to the present time, there has 
not been a decrease in the price 

Mr. Farish (interposing). You are talking now about the price to 
the consumer. To understand that, are you taking into your own 
calculations all the factors that enter into the price to the consumer? 

Mr. Henderson. I wasn't making a calculation. I am just 

Mr. Farish (interposing). You must take into consideration all of 
(he factors that enter into the price to the consumer. You are for- 
getting, I take it 

Mr. Henderson (interposing). I am not forgetting anything, Mr. 
Faris^h. I am trying to learn something, not to forget something. 

Mr. Farish. I am trying to tell you. 

Mr. Henderson. Don't make it appear that I am forgetting. I am 
just asking you the simple question, how would you explain the fact 
that that very substantial reduction, on which I think you ought to be 
congratulated, does not reflect itself in the price to the consumer? 
Evidently you want to tell me that some other costs have gone up. 

Mr. Farish. I don't want to tell you anything but the facts, Mr. 
Henderson. I haven't before me the exact facts under which those 
retail prices rested at that time, but my guess would be first that the 


price of crude was much less in '33 than it is at this time, maybe to 
the extent of II/2 or 2 cents a gallon reflected in gasoline. Second, 
that pipe-line transportation and boat transportation rates at that, 
time were higher than they are today. Third, that the cost of market- 
ing in '33 was higher than it is today. That would be my guess. 

Mr. Henderson. If that is your guess, then the price ought to be 
lower. If those costs were higher ia '33 than they are now and you 
have made a substantial saving in your marketing costs and if trans- 
portation costs are lower today, then the price ought to be lower. 

Mr. Farish. All of those things can probably be offset, Mr, Hender- 
son, in the difference in the cost of crude at that time. I will be glad 
to work out a calculation for you on that, if you are seriously interested, 
because I don't think anybody can read the record of the petroleum 
industry and deny the fact that costs have come down over the years, 
and are still coming down. 

The Chairman. Perhaps it might be of interest to the committee 
if we should take advantage of the suggestion that you have now made, 
and ask you at your convenience to prepare a comparison of all of the 
factors which enter into the cost to the consumer as between 1933 and 
the first 6 months of this year, a period during which, as you testify, 
the cost of direct marketing was reduced from 3.09 cents per gallon 
to 1.89 cents. 

Mr. Farish. I will be glad to, sir.^ 

Dr. LuBiN. May I ask you a question in that same connection ? You 
mentioned the fact that the industry has earned an average of about 
5 percent, that that in itself is evidence of the fact that these savings 
have been passed on. As a matter of fact, 5i/^ percent average for an 
industry may mean that one firm may make 100 percent and everj'- 
body else may be losing money, may it not ? 

Mr. F.'RiSH. No, sir; I don't think that is a fair assumption. 

Dr. LuBiN. You can get a 5.5-percent earning on that basis. 

Mr. Farish. I don't think that is a fair assumption. I can't con- 
ceive of a situation where one can make money and all the rest of them 

Dr. LuBiN. Let's assume a dozen made 100 percent and the others 
all lost money, and the net return is 5.5 percent, the average. 

Mr. Farish. If you want to let your imagination run that far I 
agree with you. 

Dr. LuBiN. Your stockholders wouldn't be satisfied if you showed 
losses evei'^^ year yet said "This is a swell industry ; the average profit 
for the industry is 5.5 percent." Is the 5.5-percent figure of any im- 
portance in discussing the profits of the industry, or what the public 
is getting from the industry? 

Mr. Farish. I think it is, because I am quite sure that the average 
earnings of the oil companies in the industry are quite similar. I am 
talking now of the major companies, those companies who are listed 
on the stock exchange. There is, if you will pardon me, some differ- 
ence in swings of earnings as between producers and marketers and 

Dr. LuBiN. A statement has been made time and again, for ex- 
ample, that the retail business in the United States is a losing busi- 

• Mr. Farish read into the record the following day his explanation in response to Mr. 
Henderson's questions on this point. See p. 9736 et seq., infra. 


ness, that if you took all of the investment over a period of years 
the net is a loss not a gain, and yet a lot of people make money in 

Mr. Farish. I don't think the tirst statement is true. 

Dr. LuBiN. It is pretty generally believed. 

Mr. Farish. I don't know any more than you do, but if the first 
statement were true there would be more mortalities and there would 
be more people getting out of the business. 

Dr. Ltjbin. The mortalities run 90 percent over a period of 20 
years. That is pretty high. 

Mr. Farish. I would challenge that. I don't know anything about 
it, but I would challenge any such figure. 

Senator King. You are talking about all the little shops 

Dr. Ltjbin (interposing). Those little shops' losses are losses to 
the industry. You take that investment into the picture when you 
talk about the total. 

Mr. Farish. You may find fairly high mortality with individuals 
running some of these stations and so on. 

Dr. LuBiN. I am not talking about mortality in the oil and gas 
business; I am talking about retail trade as a whole. 

Mr. Farish. I beg your pardon ; I thought you were talking about 
the oil business. -*" 

My point is simply this. I am glad you mentioned that. The 
mortality in the oil industry in any phase of it is nothing comparable 
with what it is in general industry, nothing comparable. Unfor- 
tunately, I haven't made a study and we haven't the facts on it, but 
they are available to this committee. You can study it, you can get 
the facts, and I will venture the assertion that the mortality in any 
phase of the oil industry doesn't compare even to 25 percent of what 
it does in general industry. 

Senator King. I suggest, Mr. Chairman, that we hear the state- 
ment of Mr. Farish, because there are many questions that may be 
cleared up by this statement ; and then when he ^ets through we can 
address ourselves by examination and cross-examination to the state- 
ment which he has submitted. 

The Chairman. The Chair believes the suggestion of Senator King 
is well worth following. It has been the plan which this committee 
has on numerous occasions announced it would follow and always 

Mr. Farish. I am entirely at your disposal. 

The Chairman. The chairman recognizes that, but in the interest 
of the orderly presentation perhaps it would be well to allow the 
witness to make his statement, and then the Chair will recognize each 
member of the committee to ask as many questions as each member 

Mr. Farish. All right, sir. 

Our company has been able to accept low realizations on its products 
and yet have a profit on its marketing operations. This trend of cost 
reduction has been general in the industry. Anyone who hasn't recog- 
nized this trend toward cost reduction and improvement in efficiency 
and adjusted his operations to it has a difficult time in the oil industry. 

By the very nature of my assignment as the concluding witness for 
this industry I naturally was unable^ to prepare my testimony until 
the hearings were nearly finished. Consequently my written state- 


ment ^ was prepared only last week. I presume, therefore, that many 
of you have not had the opportunity to give it the careful atten- 
tion which I hope it merits. If you will look at this prepared state- 
ment you will see that it has several main parts, as follows : Concen- 
tration of economic control, complaints of unfair competition, inte- 
gration, and problems of crude-oil prices and conservation. 

What I have given you, gentlemen, is only a preliminary statement. 
I have here a summary of what is in the prepared statement. I will 
take it up in detail if you like, or I am perfectly willing to submit 
myself to your questions. 

The Chairman. Suppose you take it up in detail, Mr. Farish. I 
think it will be advantageous to members of the committee who may 
not have had the opportunity of reading your prepared statement. 

Mr. Farish. I will try to bring out the high lights of this, and you 
may then open up the subject in the way that you like. 


Mr. Farish. The statements made before this committee and ac- 
cepted without challenge may be stated briefly as follows : 

1. The petroleum industry provides the public with a wide variety 
of good products. 

2. The quality of the products and the services involved in their 
sale have improved markedly over the years. 

3. The products of the industry are low in price. 

4. Over the years prices have declined substantially. 

5. The industry has offered steady employment at good wages. 
Witnesses have demonstrated that the oil industry pays high wages; 
that its employees enjoy high annual earnings; that hours of labor 
have been notably decreased; that there is little seasonal variation in 
employment; that the turn-over of employees is low; that cyclical 
variations in employment have been small ; that the safety record of 
the industry is excellent; and that its labor-relations record is 

6. The industiy has offered opportunities for the investment of 
savings and has attracted capital with a modest return to that capital. 
The statistics published by the T. N. E. C. show that the capital 
employed by the "major" oil companies alone rose from five to eighf 
billion dollars between 1924 and 1938 and that the rate of return aver- 
aged 5.6 percent on the book value of the common stock over the 
same period. 

7. The industry has been quick to abandon obsolete methods and 

I list those subjects I think as not debatable. At least they have 
not been debated or questioned before this committee. 

The industry does not claim that these desirable results came about 
because of altruism on the part of the executives and owners of indi- 
vidual concerns in the industry. Far from it. The industry will 
readily concede that most of these results came about through the 
efforts of the individual companies to strengthen their own positions. 
In essence, the statements mean that there is competition in the petro- 
leum industry, and that competition in the petroleum industry has 
been in the public interest. 

1 "Exhibit No. .1323," appendix, p. 9930. 


Some of this is a slight repetition, gentlemen, of what I have 
summarized but it will bring out the problem, I think. 

No one in the industry furthermore would undertake to denj^ that 
the industry has had the benefit of many favorable circumstances. 

We admit that fully. It should be emphasized what managerial 
skill has been required to accomplish the desirable results. For exam- 
ple, the reduction of the cost of gasoline to the consumer has not been 
obtained by reducing wages; wages have been advanced and hours 
have been reduced at the same time prices have declined. 

It is wholly proper that such claims to beneficial public results 
should be scrutinized carefully by this committee. The industry be- 
lieves that the more carefully the committee examines the evidence 
presented in these hearings in support of the claims, the more con- 
vinced its members will be of heir validity. Since the objectives of 
tliis inquiry as repeatedly emphasized by the chairman of the com- 
mittee have been to determine whether any obstacles exist to the full 
employment of men and capital, the unchallenged results just listed 
are immensely pertinent. Judgment as to whether the petroleum 
industry is free from such obstacles must rest in the last analysis on 
an appraisal of the results of competition as it exists in the industry 


Mr. Farish. Through these hearings much interest has been ex- 
pressed in the extent to which the control of the industry is concen- 
trated in a few hands. A complementary question is that of the 
extent to which opportunities are open to small-business men and small 
business enterprises in the industry. 

It must be conceded at once that there are some very large com- 
panies in the petroleum industry and that taken together these large 
companies do a substantial proportion of the business. At tie be- 
ginning of these hearings figures were introduced to show the pro- 
portion of the business done by a selected list of companies at the 
several stages of the industry. Although there may be some reser- 
vations, as to the accuracy of particular figures, the general picture 
of a substantial proportion of the industry's business being con- 
ducted by large concerns is not challenged. These facts have long 
been known. 

What is important is the interpretation put upon those facts. If 
the committee had their minds made up in advance that the mere 
presence of large concerns in the industry is in itself evil, it is ob- 
vious that there was no point in holding these hearings. I am sure 
we can all agree, therefore, that the fact that there are a number 
of large companies which do a substantial share of the petroleum 
business is merely the starting point. The real purpose of this in- 
quiry, then, must have been to examine the way in which competi- 
tion works in an industry in which large business units and small 
business units exist side by side, and to appraise the results of that 
competition in terms of consumer benefits, in terms of the employ- 
ment of men and capital, in terms of the opport unities open to 
small firms as well as to large firms. 

That there was once a very high degree of concentration in the 
jJetroleum industry is well known. In the days of the old Stand- 
ard Oil Co. liwre than 80 percent of the business was done by a- single 


concern. Followinjy the dissolution of that company, there has been 
in all divisions of the industry an increasinjr number of competitors. 
Over the years since 1911 the proportion of business done by the 
companies succeeding the old Standard Oil Co. has been very greatly 
reduced. The industry believes that overwhelming evid'cnce has 
been presented at this hearing to the effect that competition in all 
its forms is all-pervasive and intense. 

Much confusion has been evident in these hearings in regard to 
the question of concentration of economic control. One of the 
sources of the confusion appears to be in differing definitions as to 
what is meant by concentration of economic control. One type of 
concentration of economic control is that of ownership — and it is 
clear that ownership of oil enterprises has increasingly been dif- 
fused among large numbers of people. 

A second type of economic control which has been mentioned in 
these hearings is the tendency for stockholders to leave power in 
the hands of corporate managers. Much is made of the fact that 
few stockholders appear at corporate meetings or take an active 
part in supervising the managements of their companies. These 
facts are true, but they are equally true of practically all corpo- 
rate business. Any implication that, because stockholders sign 
proxies rather than attend meetings, corporate managers in the oil 
industry are free to manage without regard to the interests of stock- 
holders is most emphatically not true. 

The third type of concentration of economic control to which ref- 
erence has been made is the extent to which ownership of facilities 
in particular branches of the industry is in the hands of some par- 
ticular number of companies. Here almost anything can be shown 
depending on the number of companies selected. Why should the 
number be 20? In the automobile business, which is admitted to be 
highly competitive. 3 companies control a higher percentage of busi- 
ness than do 20 companies in the oil industry. Questions as to the 
bearing of this kind of economic control on competition cannot be 
answered statistically. It is much rnore pertinent to examine di- 
rectly the extent of the competition among the large companies and 
to look directly at the opportunities for small-business men in the 

The extent and intensity of the competition among large oil com- 
panies has been amply developed by the testimony which you have 
heard. I shall therefore not undertake to repeat, that testimony; 
but I do wish to examine in some detail the opportunities for small- 
business men in the industry. 

A definition of certain terms is necessary before this question can 
be discussed intelligently. The word "independent" was formerly 
applied to all companies not associated with the old Standard Oil 
group. More recently some of these independents, such as the Texas 
Co., Gulf Oil Corporation, Pure Oil Co., and others, have been 
grouped with the Standard Oil companies under the term "majors." 
Now, apparently everyone outside the list of majors is called inde- 
pendent. The analysts of the T. N. E. C, for instance, in tables pre- 
pared for the hearing, regularly listed 18 or 20 companies as majors, 
and it is concluded that they place these firms in one general category 
and all others in another category, labeled "independent." 


Parenthetically, it is worth observing that this classification places 
among the independents a number of the companies which were 
formerly in the old Standard Oil group. These definitions mean, of 
course, that the independents include firms of many different sizes. In 
the producing branch of the industry, for instance, such large inde- 
pendent companies as the Amerada Corporation, the Seaboard Oil, 
the Superior Oil, the Barnsdall, the Benedum and Trees interests, 
and Harrison and Abercrombie are at one extreme, and individuals 
with an interest in a single well are at the other extreme. In trans- 
portation, independent enterprises range in size from an individual 
owning a single truck to large steamship companies owning and op- 
erating tankers for charter. In refining, the range is from small 
skimmmg plants requiring investments of a few thousand dollars to 
concerns operating cracking plants which cost several million dollars. 
In. marketing, the size of independent operation varies from the 
single-station unit to the marketer with a substantial position in 
particular territories, as, for instance, the Jenney Manufacturing Co. 
in New England, or the Spur Distributing Co. operating throughout 
the South. In the immediately following sections of this paper atten- 
tion will be directed to the prospects for both small- and large-scale 
independent businessmen in producing, refining, transportation, and 

I pause, Mr. Chairman, in the interest of orderly procedure ; if 
there are any questions to be directed to the question of economic 
control, it seems now is the opportune time to do it. 

The Chairman. Do any members of the committee desire to ques- 
tion Mr. Farish at this point? 

May I say, Mr. Farish, referring to your statement on page 3, at 
the bottom of the page : ^ 

The analysts of the T. N. E. C, for instance, in tables prepared for the 
hearing, regularly listed eighteen or twenty companies as majors, and ft is 
concluded that they place these firms in one general category and all others in 
another category labelled "independent." 

I merely wish to point out that was a conclusion of the witness 
robably not altogether supported by the attitude of the committee. 
For my own part 

Mr. Farish (interposing). It is not important, Mr. Chairman. I 
am only trying to get an uViderstanding of definition of terms. 

The Chairman. Certainly ; but I want to make it clear that the dis- 
tinction in my own mind is that between the so-called integrated com- 
pany and the so-called nonintegrated companies. To what extent, if 
at all, the integrated companies may exercise control over the whole 
industry by means- of leadership, or by other devices, is another ques- 
tion, but I merely wanted to point out that this committee has not 
itself drawn any conclusion from these tables. 

You were going to make some remark? 

Mr. Farish. I was just going to say, since you brought that up, 
when you talk about integrated companies, the record perhaps, as 
written, would give one the impression that the number of integrated 
companies in this industry is relatively small. As a matter of fact, in 
my judgment, the number of integrated companies in this industry 

* Mr Farish read from a previously prepared memorandum, copies of which were dis- 
triboted to those present at the hearing. 


would perhaps run into something of the order of 200, not wholly in- 
tegrated, perhaps, but integrated in part in their operations, with the 
instinctive desire and ambition on the part of each one of them to 
become wholly integrated if possible. 


The Chairman. I am very much interested in your analysis of the 
situation within the large companies. You state, for example, that 
the tendency of stockliolders is to leave power in the hands of the 
corporate managers to be found in the petroleum industry, and that 
it is characteristic of all business, particularly of large business. 

Mr. Farish. I think that is a present trend. 

The Chairman. Tlien you say that any implication that because 
stockholders sign proxies rather than attend meetings, corporate man- 
agers in the oil industry are free to manage without regard to the 
interests of stockholders is most emphatically not true. Now that is a 
very interesting statement. 

Mr. Farish. And I think a very true statement. 

The Chairman. I would like to develop it. There have been many 
examples where, because of the lack of cohesion, may I say, between 
the large number of stockholders and the management, management 
hs' been able to do practically what it liked. To take an extreme 
example, and not with any implication at all that it applies to any 
company that has appeared at this study, I cite the famous case of 
McKesson & Robbins. There was a large diffusion of stock interest. 
Ownership was separated from control, and control did what it 
pleased. Now that opportunity is present, is it not, under the condi- 
tions which you described as characteristic of all large business? 

Mr. Farish. Yes, sir; and that opportunity is present and pos- 
sible in any walk of life. You have no more guaranty that a corpor- 
ate president, a director, is going to be 100 percent honest and 
pure than you have that a preacher is going to be, or a Congressman, 
or anybody else in any walk of life. I think that is a risk of human 
nature that is inherent to life. 

The Chairman. Is it a risk which need be entertained so far as 
a large artificial organization is concerned? We can't very well 
avoid it in the personal relation. 

Mr. Farish. Senator, I sense your approach to the subject, but 
after all, is there any way anybody can guarantee honesty and 
integrity ? 

The Chairman. I don't think there is any way of guaranteeing 
honesty and integrity, no ; but certainly there is a way of limiting the 
opportunities for dishonesty and lack of integrity. 

Mr. Farish. My theory is that the crook, if you will, has a poorer 
chance to keep his head up and swim in a large organization than he 
has in almost any other walk of life. If I may go on just a minute 
on that point, my observation and my experience is, the existence of a 
large organization, within itself even, for effective continuity of oper- 
ation and management, is absolutely dependent on the exaction of the 
highest possible standards of conduct all down the line; and it is 
inconceivable to me that in an organization such as I am familiar with, 
a crook can last any length of time in any job in that organization. 

The Chairman. I can readily conceive that to be true. 


Mr. Farish. Now, we do have a few defalcations, we have a few 
people that are not different, and we don't employ people different 
from anybody else, and there are some slips; some people go wrong; 
but my contention is, and my philosophy is, that in a properly run 
large organization and most large organizations are properly run, 
whether in the oil industry or any other industry — the opportunities 
for a crook to keep his head above water are less than they are in any 
other walks of life. He has more checks on him ; he has more 
observers ; he is just put to a harder task. 

Th» Chairman. I would like to have you in a little greater detail 
explain just A^hat you mean when you say that corporate managers in 
the oil industry are not free — I am changing the sentence by making 
it in the negative instead of the positive — to manage without regard 
to tlie interests of stockholders. Now, here you have 

Mr. Farish (interposing). May I ask this: They are not free to do 
it? Why? That is your question. 

Tlie Chairman. Yes; you have made this specific statement. 

Mr. Farish. I will try to give you an offhand explanation of it. If 
there is any standard that corporate management sets for itself — and 
most corporate management is somewhat in tlie nature of professional 
management today; in other words, people that I know at the head 
of corporations are not job holders in the sense of earning a salary, 
and they are not working for themselves in the sense of rmining their 
own business. They are men who have evolved, if you will, through 
the grind and process of evolution in that industry to the point where 
finally, by the common consent of their group as expressed by the will 
of the board of directors, they are elevated to the position of a director 
and then to the position cf manager or iiead of the corporation. 

NoAv, then, a man who goes through that grind has got to be a man 
whom, first, the organization lias absolute confidence in; and confi- 
dence in him to do what ? To run the business in the interests of the 
stockholders as well as the employees, and in modern days tliere is a 
third panel in that picture. He has got to run it in the interests of 
the public. 

The Chairman. Now that depends all upon the moral character, 
the honesty, and integrity of the men who are in these great establish- 
ments, does it not? 

Mr. Farish. Largely ; I would say the moral character of the group, 

The Chairman. And let me say for myself, and I think for the great 
majority of persons who are in government, the existence of a very 
high standard of honesty and integrity among the leaders of business 
is recognized and there is no implication of any charge to the con- 
trary in anything that I say here, or any question that I direct to you, 
but I now submit this inquiry : If it be true that the protection of the 
investor, the protection of the stockholder, and the protection of the 
worker is dependent solely upon the character of those who happen for 
the time to be directing these enterprises, do you think that the full 
obligation of government toward these organizations has been met? 
You see what I am driving at. 

Mr. Farish. I c:et what you are driving at but I don't accept your 
statement, I don't accept your premise. I don't think for a minute 
that it depends solely. 


The Chairman. That was your answer to my question. That is the 
reason I stated it that way. 

Mr. Faeish. I said it is dependent to a large extent. I don't for a 
minute say that a real crook can't find some way to be crooked, but let 
me put it this way: The management of corporations is not dependent 
solely on tlie integrity of individuals. 

The Chairman, Let's put it in your phrase, "to a large extent." 

Mr. Parish. There are a thousand checks on all management today. 

The Chairman. What are those checks? 

Mr. Farish. They are the checks of — they run all the way through 
the business. ■ 

The Chairman. But they are the checks that are imposed by business 
upon itself. 

Mr. Farish. Partly, and they are largely imposed by government. 

There is no transaction that is not open to investigation on the stock 
exchange, by the S. E. C, within a corporate management. You speak 
of the stockholders' meetings. True, the stockholder doesn't attend, 
and by the way, I would like to say, as a matter of comment, I think 
that it is the highest tribute that could be paid to corporate manage- 
ment. Stockholders don't go there and worry about it; they have con- 
fidence in the management. They say, "Go to it, brothers ; we'll leave it 
to you." 

The Chairman. That may feasibly be so, but 

Mr. Farish (interposing). I have gotten to this point in that con- 
nection, that we have tried in our own organization to stimulate a little 
interest in stockholders' meetings. We have a free luncheon, we have 
free transportation, and last year we had some 200 people there, which 
is quite a remarkable thing. 

Mr. O'CoNNELL. How many stockholders have you ? 

Mr. FARISH. One hundred and thirty thousand. 

Tlie Chairman. How many of those own less than 100 shares each? 

Mr. Farish. The average ownership is 200, I think, Senator. How 
many own less than a hundred each I would have to look at the records 
to say. 

The Chairman. My recollection, from a statement that was made a 
year ago, was about 96,000, I was told. 

Mr. Farish. A considerable amount. 

The Chairman. You speak about the lack of attendance at stock- 
holders' meetings, and I am willing to acknowledge that that in itself 
may be regarded as a tribute to management. How about attendance 
at directors' meetings? 

Mr. Farish. That I can't answer except for my own company. 
We are a holding company and we have 10 board members, two of 
which are inactive. We have 8 members of the board, and it is a 
working board and everj^one of them is there every day, and every 
one of them has a definite, particular job. We operate as an execu- 
tive committee of 4, a permanent executive committee of 4, filled 
in by various other members of the board who total 5. We meet 
every morning at 11 o'clock every worlring day 

Dr. LuBiN. These directors are in a sense officials of the company 
in the sense that they are on the pay roll of the company? 

Mr. Farish._I didn't quite get that. 

Dr. LuBiN. Are all of the directors on the pay roll of the company? 

Mr. Farish. Oh, yes; they are all active workers in the company. 


The Chairman. Is that characteristic of other large companies? 

Mr. Farish. Senator, I haven't made an examination. 

The Chairman. Well, you are more or less familiar with it. 

Mr. Farish. I think it is of some, and I think it is quite general 
in the oil industry. 

The Chairman. But would you say it was general in business, in 
all industries? 

Mr. Farish. I have made it a point in my life never to serve as 
a bank director or as a director in any other corporation. 

The Chairman. So that you can't testify of knowledge? 

Mr. Farish. No, sir. I mean any other corporation. 

Senator King. I suppose those who are directors, managers of 
your organization, the 8 or 10 to whom you have just referred, 
give all their time. 

Mr. Farish. Yes, sir. They are career men, they have grown up 
in the business ; some have been stenographers, some drillers, still- 
men, or what not. 

Mr. Henderson. Mr. Farish, awhile back you said there is not 
an action which is not reviewable by the stock exchange or the 
S. E. C. I think you made a little bit of an overstatement 

Mr. Farish. Probably. 

Mr. Henderson. Because of the powers that are involved. Also, 
I think you are concentrating tests of management on honesty and 
purity, whereas the main questions of management are, as the chair- 
man so ably pointed out, not questions of their character. As I see 
it, they are the tests of managerial ability, and certainly the S. E. C. 
and the stock exchange have no authority to review the operations 
of any particular managerial group. Would you not agree with me 
that so far as the managerial activities are reviewable by the general 
stockholders, it is almost an impossible task ? 

Mr. Farish. By the stockholders? I think I have either given 
you the wrong impre^ion or you have gotten the wrong impression. 
I admit my statement of checks by the stock exchange and the 
S. E. C. was perhaps an overstatement, but I thought I made it quite 
clear that, in my judgment, today no man in the normal course of 
things gets to be an official of one of our major corporations unless 
he has demonstrated this managerial ability of which you speak. 
I think that goes with it. He has also had to demonstrate character 
and integrity. 

Mr. Henderson. Whom has he demonstrated : 

Mr. Farish (interposing). Pardon me just a second. To go on 
to your other point, to what extent stockholders can check that today, 
I don't know. I think we are in a hazy ground there. I can't say in 
all frankness that stockholders can check that thing and measure re- 
sults, and I think it is pretty clear to any students of business that 
many companies have poor management, and when a company 
has poor management and when management is falling down we see 
over the times managements change ; people grow old on the job, and 
they cease to grow with the industry and with the company and they 
are weeded out; there is a constant change going on in that respect, 
but frankly, I doubt whether the stockholder, the average stock- 
holder, today exercises any real influence over that change. I think 
that change comes primarily from within. 


Mr. Hendebson. And cominpr from within may not necessarily 
represent a group that has the maiority of the stockholdings. Is 
that not true? 

Mr. Farish. I think anything is possible there. As far as I know, 
my own judgment is that certainly it is in our shop, our directors 
are entirely unconscious of who own the stock. It doesn't make any 
difference to them who owns the stock. 

Mr. Henderson. You mean in the solicitation of proxies 

Mr. Farish. When you talk about majority stock owners you 
may talk about some group who wants control of the operation, and 
some don't, but thank God we are free of that. 

The Vice Chairman. May I ask you a few questions? Mr. Par- 
ish, you speak basically on the question of concentration of economic 
control, as I understand you. 

Mr. Farish. Yes, sir. 

The Vice Chairman. And the effect of the statement impresses 
me, and I think it is correct that, insofar as economic control on the 
part of stockholders in your corporation and other major corpora- 
tions, it is very small. As a matter of fact, I assume it will be 
agreed that the individual stockholder, even the stockholder with a 
considerable block of stock, couldn't oust any of the management in 
an organization that is functioning along and doing pretty well. 

Mr. Farish. I think that is correct, but I don't like to let it rest 
with just that brief statement. 

The Vice Chairman. We have had a good many investigations 
here of insurance people,^ and I believe the average member of this 
committee came to the conclusion that the distributed stockholder 
or policy holder had very little to do with the management or can 
have very little to do either with the management of the concern or 
with putting somebody else into managerial responsibility whom he 

Mr. Farish. I think, as a simple statement of fact, that is correct ; 
but let me put it this way — and I have given no thought to this 
subject, but if I were a large stockholder — you speak now of a large 

The Vice Chairman (interposing). Well, a large stockholder, a 
small stockholder. 

Mr. Farish. Well, a stockholder who is able to devote soijie time 
to it and spend a little money. 

The Vice Chairman. Yes ; there are very few of those. 

Mr. Farish. I don't know ; I think there are quite considerable in 
most of our corporations. If it isn't true of one it is certainly true 
of two or three, and if he thinks something is so wrong with the 
corporation that action should be taken, to my mind it is a question 
of natural, logical development that others would think the same 
way, and the stockholder is not helpless in thei sense that you picture 
him. If he is willing to fight, if he is willing to go to directors' 
meetirijgs and point out the doubts and make the argument and 
make the fight, I think management could be overturned and any real 
changes necessary could be effected. 

The Vice Chairman. Let me ask you this question, Mr. Farish. 
In the experience of your organization, or any other organization 

^Testimony on the insurance business is included in Hearings, Parts 4, 10, 12, 13, 
and 28. 


that you know, has management been ousted except by another group 
that merely wants the power of management and control in big 

Mr. Farish. Except another group that wants power and control? 

The Vice Chairman. Yes ; except in those cases. 

Mr. Farish. Why, yes ; I think so. 

The Vice Chairman. Would you like to name them? If not, I 
won't press you on that point. 

Mr. Farish. I think the management of the Standard Oil of 
Indiana was changed. 

The Vice Chairman. Wlio did that? 

Mr. Farish. By the major effort of one stockholder. 

The Vice Chairman. Who was he? 

Mr. Farish. Mr. John D. Rockefeller. 

The Chairman. How long did it take him to do that? 

The Vice Chairman. It took him a pretty good while and he 
really was quite a power in that company, wasn't he ? 

Mr. Farish. Yes; he was a large stockholder. 

The Vice CHAIRMA^f. I am talking about the fellow who lives out 
at the forks and the creek and the little town. I won't press it. 
There is no use of his going to a stockholders' meeting. He gets up 
there and the best he could do probably would be that some of you 
folks would take him outi to lunch, he would go to the show, and 
go home and tell his wife he had been to town. I mean that is just 
about all that could happen. 

Mr. Farish. Well, he wouldn't be very seriously affected, Mr. 
Sumners, if he could be bought off that cheap. 

The Vice Chairman. He wouldn't be bought off, he just doesn't 
have anything to sell. I won't press it. 

Mr. Farish. Gentlemen, I am not trying to make a point of that. 
You are getting me all off the line of my comments. I am not try- 
ing to say that any stockholder can change the management of the 
company; of course, it is ridiculous, but I am here to say that any 
management of any company that is inherently wrong will change 
in time and will change probably from within. 

The Vice Chairman. He will either break down or somebody who 
is within will get him out. 

Mr. Farish. Yes, sir. 

The Vice Chairman. That gives us a picture. Practically speak- 
ing, the concentration of the financial power and resources of that 
organization from the managerial and administrative standpoint, is 
centered in the persons who are in the offices whose position comes 
through the process of time. 

Mr. Farish. That is right. 

The Vice Chairman. That is about the picture. 

Mr. Farish. How else would you have it? 

The Vice Chairman. That is it. 

Mr. Farish. How else could you have it and have efficient man- 
agement ? 

The Vice Chairman. Really, I suppose you couldn't. 

Mr. Farish. May I make just a point there, Mr. Sumners? I don't 
want to make a speech about it, but you are pressing on the point. 

The Vice Chairman. May I interrupt just a moment to say that 
that is one of the important points, I think, that the country and 


this committee are concerned about. Everybody knows you have made 
progress in manufacturing oil and producing a lot of things, and 
all that, but the basic thing is, how important, especially in a Govern- 
ment of our sort, is this general trend of economic control? Then, 
of course, the next question — you have to meet it some time, we have 
all got to meet it some time — as I see it, is what chance has the small 
man ? Put it this way : How big does an organization have to become 
until it can become a real competitor of organizations of your sort? 
That is in the picture, too. 

Mr. Farish. Well, I will proceed to go on and discuss that to 
some extent, but I think the smallest possible competitor can get 
into the game. 

The Vice Chairman. Tell us about it. 

Mr. Farish. Well, may I go on? You have left me in the air 
on the other subject just a little bit. I want to make one more 
comment with regard to corporate management. 

The Vice Chairman. Yes. 

Mr. Farish. The average corporate set-up, as I visualize it, is 
founded fundamentally on a good bit of the same basis that your 
governmental set-up is. We have got voters, you have got voters. 
We have a board of directors 

The Chairman (interposing). But we can't get proxies, Mr. Farish. 

Mr. Farish. Oh, yes ; you do. I beg your pardon ; that is a pretty 
active game. 

We have a board of directors and we have an executive committee 
which might be Congress and the Senate, and we have a president. 
And change is taking place all the time. 

Kow, the point I want to get back to, for a minute : There seems 
to be more or less a prevalent idea in the public mind — put it this 
way; in the minds of some of you gentlemen — that this question of 
corporate management, this question of a job of managing or run- 
ning a corporation or being one of the few who manage a corpora- 
tion, is just holding a job. 

The Chairman. We don't think that. 

Mr. Farish. I want to assure you gentlemen 

The Vice Chairman (interposing). Don't argue on that point. I 
don't think anybody thinks that. 

Mr. Farish. So far as my knowledge of this thing goes, and so 
far as I have been able to know and understand the men who are 
really running the corporations of this country, they have a job 
that you couldn't hire a man to do. 

The Chairman. As Representative Sumners has said, Mr. Farish, 
you are arguing a point which doesn't exist. 

Mr. Farish. I understand that 

The Chairman (interposing). Neither the chairman of the com- 
mittee nor the vice chairman of the committee, and no member of the 
committee, states that you are holding a job as a job. 

Mr. Farish. I would like to put this in the record, if I may. 

The Chairman. Let it go into the record as you may, certainly, 
without any hindrance on my part. I want it to be clearly under- 
stood that so far as the chairman is concerned, you are putting up 
a straw man and knocking him down. 

Mr. Farish. Even so, I like this straw man. 


So far as I have been able to measure and interpret the men 
running our large corporations today, and those I am familiar with, 
they are not just jobholders and salary takers. They are men who 
have devoted their lives in most instances to developing and perfect- 
ing their own peculiar abilities to do the very thing that tney are 
doing now. It is the result of a life work, if you will, of service 
and intensely hard work to the final point where they are equipped 
to do a job that they are doing. 

Now, the reward for those men — what I am trying to get over to you 
gentlemen — in the main is not money, it is not the job they do or the 
salary they gtt for that job. It is their life's ambition. It is the cumu- 
lative wave on top of wave of success, of accomplishment, of perfect- 
ing himself to do a better job, and through that evolution we get our 
tops in the corporate set-up in America today. 

The Chairman. Now you are speaking of all corporate set-ups '5 

Mr. Farish. I am speaking of the general proposition ; yes, sir. 

The Vice Chairman. May I ask this question, Mr. Farish : Is that 
ambition that you speak of prevalent in the managerial positions, to 
get bigger and bigger and control more and more business? 

Mr. Farish. I think as part of that, ambition necessarily goes with 
the doing a successful job. 

The Vice Chairman. And getting more and more business and get- 
ting bigger and bigger is part of the notion of success? 

Mr. Farish. Probably that is involved. 

The Vice Chairman. Do you think that ought to be curbed at any 
time, anywhere? 

Mr. Farish. Ought to be curbed ? No, sir ; I do not. I think they 
either kill off each other or they die through lack of efficiency. I think 
the public is served, to put it another way, by that effort. 

The Vice Chairman. You spoke of a very interesting thing a mo- 
ment ago. You made some reference to government, to concentration 
of power in moving up, up, up in government. I guess I won't ask 
anything about that. 

Mr. Farish. I don't get that reference, Mr. Sumners. 

The Vice Chairman. You made some reference yourself a while ago 
to what is happening in government. 

Mr. Farish. I beg your pardon ; I simply drew a parallel between 
the normal corporate set-up and the normal Government set-up. 

The Vice Chairman. That's it. We don't misunderstand each other 
at all. And the normal corporate set-up seems to be that the bigger 
the corporation grows, the less managerial responsibility the owners 
of the corporation, representing the stockholders, can exercise. 

Mr. Farish. I don't think that is true. 

The Chairman. Do you think the average stockholder of a corpora- 
tion as big as yours can have as much relative influence as can the 
owners of a station that sells oil? 

Mr. Farish. Oh, no; I wouldn't say that. You are making the 
spread a little too long. 

The Vice Chairman. That is emphasizing it to get the ends of the 

Mr. Farish. I get that, so I have to say "No." 

The Vice Chairman. I think that is the correct answer. 

Senator King. Perhaps the stockholders of a corporation are some- 
what like the voters down in the district of the distinguished vice 


chairman of this committee. They are so satisfied with him that he 
doesn't need to worry. Many of them never go to the polls. • They 
say, "Judge Sumners is the right man in the right place," and they 
will send him here as long as he lives, if he lives to be a hundred. 

Mr. Farish. I think that is correct, sir. I subscribe to that belief 
myself, having lived in Texas thirty-odd years. 

The Vice Chairman. I think we can drop that. 

Senator King. Let me supplement it by stating that in one State, and 
there are many others, several j^ears ago — a large State — less than 18 
percent of the voters, those entitled to vote, actually did vote, yet it 
was alleged that the machines that ran both political parties were so 
bad or so good that the majority of people never went near the polls. 

Mr. Farish. Senator, I sometimes think that is a defect in the 
American character. 

Senator Kjng. I agree with you. We are too prone to let some- 
body else do it. 

The Chairman. Now your comment which has provoked this dis- 
cussion was, as I recall, that most management, most corporate man- 
agement, is motivated by the professional desire to do a good job in 
the business in which it is situated. Is that 

Mr, Farish (interposing). I think that is the idea; yes. 

The Chairman. Now, of course, perhaps you can't speak with in- 
formation with respect to other industries. 

Mr. Farish. No, sir. 

The Chairman. But when you made that statement you were speak- 
ing of all industry and all corporate management. 

Mr. Farish. Yes, sir. 

The Chairman. Have you been familiar with statistical statements 
which have been made from time to time, some of which were made 
before this committee only last Friday, to the effect that corporate 
managers have, in times of depression, increased their own salaries 
and their own rewards while the returns to the common-stock holders 
were falling off ? 

Mr. Farish. No, sir ; I haven't studied that to the point where I am 
familiar with it. 

The Chairman. Are you familiar with the practice which has been 
followed in some companies, at least, of paying large bonuses to the 
management ? 

Mr. Farish. Yes ; that is public information. 

The Chairman. Then those particular members of management 
were not totally oblivious of the return which they were getting out 
of their jobs. Will you agree with me on that? 

Mr. Farish. Senator, I don't like the "totally oblivious." That 
carries an inference that I didn't put into my statement. 

The Chairman. Let's strike out the "totally," then. 

Mr. Farish. I simply tried to depict 4;he fact that corporate man 
agement was built on something else than earning a salary. If you 
are speaking of high salaries that are built up on the basis of bonuses 
or profit sharing, 1 think some of them are excessive. 

The Chairman. That is the point. Now, what check is there on 
that in this corporate set-up of which we have been speaking? What 
possible check can the small stockholder exercise? 

124491 — 40— pt. 17, sec. 4 20 


Mr. F.iRi^n. The small stockholder, if he thinks it is bad enough, 
can protest, and he can change it in time. 

Tlie Chairman. You are familiar with the story of Bethlehem 

Mr. Farisii. Yes. sir; I have heard a little bit about it. 

Tho Chairman. Protests in that case didn't amount to very much, 
did they? 

Mr. Farish. I think it amounted to quite a bit. I think corpora- 
tions must live — as I express it in my paper, they do live and must 
live in a gold-fish bowl, and the more of those kinds of things that 
are brought out in the stockholders' meetings, the quicker they can 
make the change. 

The Chaii;man. In pursuing this study I don't like to draw a per- 
sonal illustration. 

Mr. Farish. And I don't either, Mr. Chairman, because I want to 
make this statement : Where I say some of these salaries are ex- 
cessive, they are excessive relatively. I would like to put that in. 
There are some men that are running some of these corporations that 
are worth almost anything, but I don't think you can measure their 
value to the corporation in terms of a few hundred thousand dollars. 

The Chairman. I am concerned about the fundamental structure 
of management and its fundamental responsibilities. We have been 
speaking aboiit checks, and it has been your thesis that there are 
sufficient checks in the institution as it now exists. Is that a proper 
interpretation of your position ? 

Mr. Farish. As to salaries that are paid? 

The Chairman. No; as to the action of mangement. I want to 
find out what these checks are. 

Mr. Farish. I would put it this way. I don't know any other 
checks, I don't know any better system, than we have. 

The Chairman. Well now, we don't have any checks exercised by 
the storkholder. We are agreed on that. 

Mr. Farish. No, sir; we are not agreed. 

The Chairman. The small stockholder? Did you not testify in 
response to Mr. Sumners' inquiry that as a matter of fact the small 
stockholder can exercise very little control? 

Mr. Farish. He can't exercise any control, but he can exercise a 
great deal of influence. In other words, we have got to get the dif- 
ference measured here that we are talking about. If I regarded the 
purport of Mr, Sumners' question, it was, could the small stockholder 
overthrow bad management? 

The Chapman. And you gave as an illustration the case of the 
Standard of Indiana. 

Mr. Farish. No ; I said I didn't think he could. I didn't think the 
small stockholder could do that. 

The Chaibman. So far as tharls concerned, the small stockholder 
does not exercise a very effective check. Are we agreed on that? 

Mr. Farish. That is all right. 

The Chaibman. Then what other checks are there upon manage- 
ment that do not flow from within the management itself, that do not 
depend upon manageinent's own sense of responsibility and integrity, 
which I acknowledge is very high? 

Mr. Farish. Wliat are the public checks, you mean, on bad man- 


The Chaibman. Yes. 

Mr. Farish. I don't know, Senator, that I can tell you. 

The Chairman. Do you. think there should be some? 

Mr. Farish. I have mentioned the fact that the company reports 
are submitted to the stock exchange, and they can't borrow money 
without a disclosure of all purposes to the S. E. C, and so on, but 
when 3'ou ask "What are the public checks?" whether the public has a 
method or a means of knowing whether or not Mr. President So-and- 
So io thinking right or doing right, I don't know that. 

The Chairman. Well, do you think that there ought to be any? 

Mr. Farish. I don't; no, sir. I don't know of any that could be 
put in. 

The Chairman. You think that the present system is as perfect as 
human frailty will permit it to be, is that your idea? 

Mr. Farish. I wouldn't go that far, but I think that the present 
system is as perfect as any one that I know. 

The Chairman. We have a system under which, as has been testi- 
fied bpfore this committee and as is well known to everybody inter- 
ested in corporate development and corporate structure, whereby those 
who desire to form a corporation may go to a State which has loose 
charter laws and obtain from that State the corporate power to do 
whatever they please. Is that not so? 

Mr. Farish. Well, I don't know what State you are referring to. 
Perhaps you are referring to Delaware. 

The Chairman. Of course I have Delaware in mind among others. 

Mr. Farish. Delaware is a very popular State for incorporation 
of corporations^ both on the part of the Federal Government and on 
the part of individuals. 

The Chairman. There is no doubt about that, 

Mr. Farish. Thev like to go to D3laware. 

The Chairman. Because of the free rein which the State laws give 
to those who are managing the corporation. 

Mr. Farish. Well, I wouldn't say 

The Chairm/n (interposin.q-). Thnt is one reason, is it not? 

Mr. Farish. I would say "liberal" rather than "free rein," and I 
would say also that there are some other States that are practically as 
liberal as D3I aware. 

The Chairman. Certainly, certainly. 

Mr. Farish. Delaware har)];ens to be close to Philadelphia and close 
to New York and close to Washington, and it has got a drag on the 

The Chairman. And do you think that that is a highly desirable 
situation ? Do you or do you not ? 

Mr. Farish. I don't know just how to answer that. 

The Chairman. Let's forget Delaware. 

Mr. Farish. It is a situation that has developed over the years, 
and all of these States who offer charters to corporations are in a 
sense either competing with each other or saying, "We don't want 
any of the birds here," and they just keep them out. 

The Chairman. That is exactly what we are talking about Is it, 
m your opinion, a desirable thing to have the States competing with 
one another to issue liberal charters^ to use your phras;e 

Mr. Farish (interposing) . All right, sir. 


The Chairman. For corporations to engage in national and inter- 
national business? 

Mr. Farish. I can say most emphatically it is. 

The Chairman. That's right. I wanted to find out what your view 
was. Now, why do you feel that it is a desirable thing to permit cor- 
porations engaged in interstate commerce to write their own tickets, 
as th°ey substantially may, under the liberal laws of some States? 

Mr. Farish. Well, I don't like that "writing their own tickets." 

The Chairman. Isn't that the fact? 

Mr. Farish. No, sir; it is not a fact. I don't know any corporate 
laws that permit any corporation to write its own ticket. Some of 
them are more liberal than others, but none of them permits you to 
write your own ticket. Senator. 

The Chairman. We can write our own ticket in Delaware, let us 
say, with respect to the payment of dividends out of surplus, though 
that surplus may be paid-in surplus. Do you think that is a desirable 
corporate practice? 

Mr. Farish. I do not ; no, sir. But it might be a desirable corporate 
practice if it is labeled as a liquidating dividend. All you have to do 
is call it by another name. 

The Chairman. But the State law of Delaware does not "permit 
(hat. Do you think it is a desirable or undesirable 

Mr. Farish (interposing). The State law of Delaware does not 
permit that? 

The Chairman. Does not provide that it shall be so labeled. 

Mr. Farish. Now, Senator, you are getting me in the details of 
corporate law, and while I like the idea of discussing with you any 
subject, I must admit my lack of information, perhaps, to go down 
the corporate law line. 

The Chairman. Well, then, I won't pursue that, but I was merely 
discussing the statement that you made this morning, that any impli- 
cation that because stockholders sign proxies rather than attend meet- 
ings, corporate managers are free to manage without regard to the 
interests of the stockholder, is most emphatically not true. I was 
merely pursuing that thought, to find out to what extent in your 
opinion there should be a public rule in the public interest to protect 
the stockholder and the public with respect to the management of 
these great organizations which exercise such a tremendous effect 
upon the economic welfare of the people. For example, you testified 
that, with respect to the concentration of economic control, why should 
the number be 20, you asked, with respect to the 20 companies which 
have been cited as the major companies in the oil industry, and then 
you said, "In the automobile business, which is admitted to be highly 
competitive, 3 companies control a higher percentage of business than 
do 20 companies in, the oil industry." 

Evidently you felt that this concentration is more evident in other 
industries than it is in the petroleum industry. 

Mr. Farish. I think that is correct. 

The Chairman. I think it may be properly stated that it is char- 
acteristic of most industry now, of most big business. There is this 
concentration of 

Mr. Farish (interposing). Senator, did it occur to you that there 
is probably less than there has been in the past in a good many 


The Chairman, Well now, that would be a very interesting thing 
for you to develop. We would be glad to know your views on that. 
A great deal of testimony has been presented to us throughout these 
hearings to bear out what you have said with respect to the auto- 
mobile industry, that there is concentration. 

Mr. Farish. Well, I am not prepared to do it now, but will make 
some comments on that before we leave here. 

The Chairman. I will be very glad to have you do it. My point, 
then, is whether or not in your judgment, as the leader of one of 
the greatest of all the industrial companies, there should be any 
public rule to safeguard the public interest when there is such great 
concentration in these economic concerns that are created in States 
but do their business throughout the United States. 

Mr. Farish. Well now, I get the point of the question which, you 
didn't state. By public rule you mean if there should be somo 
Federal regulation requiring 

The Chairman (interposing). Some Federal check, let us say. We 
are speaking about checks. You say the stockholder doesn't exercise 
very much. Should there be any check in the public interest? Boil 
it down to that question. 

Mr. Farish. Any check? 

The Chairman. Yes. 

Mr. Farish. That is a little different. You have got — I will be 
glad to try to answer the question. 

The Chairman. I thought you would be, 

Mr. Farish. But to try to answer it I w^ould like to get a little 
clearer definition of what you mean by check. 

The Chairman. I am trying to get an idea of what you meant 
when you stated this morning that it was emphatically not true that 
the managers in industry are free to manage without regard to the 
stockholders. What are the checks that control or restrain or restrict 
that freedom? 

Mr. Farish. There is no Federal check, if you want to put it that 
way, other than disclosures to the S. E. C. You know, of course, every 
one of these corporations have to make income-tax reports, and thnt 
the Bureau of Internal Revenue probably knows the A B C in con- 
nection with every one of our corporations, and if there is any dust 
under the rug I presume the Internal Revenue 'knows about it. 

Mr. O'CoNNELL. Will you be a little more specific in that ? I don't 
quite understand how the activities of the Bureau of Internal Rev- 
enue operate as a sort of check. 

Mr. Farish. I didn't say they operated as a check, I said they oper- 
ate as a question of information. 

Mr. O'CoNNEix. So it is a check. 

Mr. Farish. As to the activities. I go under the theory, Mr.. 
O'Connell, that if everybody can see everything in th6 goldfish bowl 
that in itself, publicity, is sufficient check. 

The Chairman. How much publicity is there with respect to in- 
come-tax returns? 

Mr, Farish. I doubt whether there is very much, but it is a dis- 
closure, Mr. Chairman, of all of the facts in the case. And my own 
■opinion is, taking the thing all in all, that corporate management to- 
day is pretty well sized up arid checked in many directions, and I 


personally don't know any Federal action that would be helpful in 
the situation. 

The Chairman. Well, then it is your opinion that there should be 
no Federal action of any kind ? 

Mr. Farish. Yes, sir; I state that as my opinion. 

The Chairman. But the checks which are exercised by State au- 
thority over interstate business are how eflFective? 

Mr. Farish. I don't think they exercise any, do they ? 

The Chairman. That is what I thought. You are- not conscious of 
any check in the public interest exercised over your company by the 
State of New Jersey, are you? 

Mr. Farish. No, sir. 

The Chairman. Are there any other questions? 

Senator King. Isn't it a fact that the State of New York has a 
statute under the terms of which there is a rather close check of the 
activities of corporations when they issue stock, the purposes for 
which the stock is to be issued, wh* . 'r dividends are to be paid, and 
the funds from which they are to be paid? 

Mr. Farish. Yes, sir; I think that is true, Senator. I think most 
States ll:\^ -^ rather strict rules, laws, as to corporate activities. 

The Chairman. What effect do those laws have upon corporations 
which are created by the States which have the loose laws requiring 
no chocks? What effect does tne law of the State of New York have 
on a Delaware corporation? 

Mr. Farish. I couldn't answer that. That is a legal question. 

The Chairman. The questiwi was directed to Senator King. 

Mr. Farish. I would like to state in that connection I think we 
have a law in Texas, for instance, that no corporation can pay a 
dividend unless it is earned. 

Senator King. Isn't it a fact that for a number of years 

Mr. Farish (interposing). In other words, from earnings. 

Senator King. Isn't it a fact that for many, many years with re- 
spect to the mismanagement of individual business and of partnership 
business and of corporate business there was considerable sluggish- 
ness and torpidity in the mind of the public? In this spirit of free 
enterprise and competition wa gaid to everybody, "Go into business 
and do the best you can," but later when it was discovered that in- 
dividuals, partnerships, and corporations oftentimes violated the laws 
of ethics and morals, if not statutes which ought to have been passed 
and some of which were passed, with this development of a new 
consciousness the States and municipalities have awakened to the re- 
sponsibility, and that there is a larger control of corporations now by 
the States than ever before, and that that consciousness is developing 
a demand for increased statutes. An investigation which was made 
by Mr. Justice Hughes of insurance companies a number of years ago 
aroused the American people, as a result of which statutes were en- 
acted which largely dealt with the insurance companies. 

So the fact that we have not been as active as we have been morally 
in meeting the responsibilities is no justification, is it, that we shall 
superimpose upon the people powerful Federal control or State con- 
trol which might interfere with legitimate activities? 

Mr. Farish. I agree. I want to add one thing else to what you 
have just said. The modern development of corporate management 
and corporate check and criticism leads me lo the belief, at least, that 


no large corporation can successfully exist today that hasn't public 
opinion with it. In other words, if they haven't the support of the 
public they are just a bad egg. 

Senator King. One other question. We try to ascertain the kind 
of returns which are beiiig made by dCorporations as well as by in- 
dividuals to the Internal Revenue. Isn't it a fact that those returns 
are scrutinized and oftentimes demands are made for an amplifica- 
tion of returns, they look into the capital stock, whether there has been 
a stock dividend, in other words that the Internal Revenue has a new 
procedure, a new technique, resulting in part from acts which have 
been passed during the past 15 or 20 years, and has more of a check, a 
considerable check, over corporations, their plans, their developments, 
the disposition which is made of capital as well as of resources and of 
any income. 

Mr. Farish. Yes, sir. 

Mr. O'CoNNELL. As I understand it, the function of the Bureau of 
Revenue of the Treasury Department is to see to it that corporations 
making returns report and pay income tax on their earned income and 
they have no function as regards corporate practices as such or man- 
agerial policies which may or may not be in the interests of the 
public. I didn't understand that the Bureau of Internal Revenue 
went to the extent that the Senator seems to indicate. 

Mr. Farish. I think I covered that, Mr. O'Connell, a little while 
ago, when I said that simply is an exhibition of the goldfish bowl 
again. They know all there is to know about the corporation and 
what is going on. After all, I am of the opinion that that is the 
best protection for anybody — publicity. 

Dr. LuBiN. Mr. Farish, following along that same line of discus- 
sion, are there any States that you know of which compel corpora- 
tions to give information which makes it possible for any stock- 
holder to know what the operations of his firm are like? For exam- 
ple, reports have come to this committee that iii making purchases, 
purchases frequently go to friends of members of the board of 
directors, irrespetcive of the fact that the purchase may have been 
made elsewhere at a lower price. One hears occasionally of retainers 
that are being taken on who serve no particular function but because 
they happen to be a friend of a certain officer of the corporation 

The Chairman (interposing). Let me interrupt at this point. 
Mr. Lubin is opening a very wide field. It is 12 : 30. Would you 
mind letting that go until this afternoon? If it will be agreeable the 
committee will stand in recess until 2:15 and we will resume the. 

(Whereupon, at 12:30 p. m., the committee recessed until 2*15 
p. m. of the same day.) 


The hearing was resumed at 2 : 35 o'clock, upon the expiration of 
the recess. 

The Chairman. The committee will please come to order. 

When we adjourned this morning Dr. Lubin was about to address 
some questions to the witness. Is the doctor still here. Yes; here 
he is. 


Dr. LuBiN. Mr. Farish, in connection with the problein we were 
discussing immediately before recess, Senator O'Mahoney had asked 
you the question as to what protection there is in law, and after all 
the only laws that affect these corporations in terms of their struc- 
ture are the State laws, either to protect the individual small stock- 
holder against abuses of corporate privileges by the management, or 
even to make it possible for him to find out what is happening in 
this corporation, and I mentioned before adjournment, if you re- 
member, charges that are made, for instance, that in some instances 
it has beeii Imown that the corporation places orders with a given 
company not because their product is any better — the fact is their 
product may be even more expensive — but because somebody on the 
board or somebody in the management had a friend who owns that 
company, and, of course, all of us who have looked into corporation 
problems are acquainted with the hundred and one different charges 
that have been made against the mismanagement of corporate affairs. 

Now, how can the individual stockholder ever find out about these 
things happening? 

Mr. Farish. Well, I think he can go to the annual meeting and 
ask questions. 

Dr. LuBiN. How would he know? I have in mind the case of a 
rather large manufacturer who told me once that for 24 consecutive 
years he bid on a large order issued by a very large corporation each 
year. He never received the order in 24 years, yet in 4 of those 24 
years he manufactured the product for somebody else who got the 
order. In other words, the person who got the order apparently 
could afford to pay him the price that he bid and yet sell it to that 
corporation at a profit. 

How would anybody know those things are going on? 

Mr. Farish. The only way I know to answer that. Doctor, if he 
is interested enough in it to pursue it, he can go to the annual meet- 
ing and put the management on the spot, or put them in the lime- 
light on those questions. 

Dr. LuBiN. That assumes he knows it. It assumes the stockholder 
knows that these practices are actually 

Mr. Farish (interposing). He doesn't have to know it to ask 
questions. He can suspicion it. 

Senator King. Would not the courts be open to him, and he could 
bring a suit in equity alleging the fraudulent or secret actions of the 
board under the terms of which stockholders were deprived of their 
rights, and get a mandatory injunction to compel them to expose to 
his view the books and to restrain them from making contracts that 
were immoral and violative of the rights of the stockholders? I 
know of many cases where, when I was practicing law, a small 
stockholder would bring an injunction suit to restrain the directors 
from executing a policy which he had heard indirectly they purposed 
to carry into effect. The court would compel a disclosure and issue 
a temporary restraining order to restrain the directors from carry- 
ing out that policy which he alleged (the complainant) violated the 
rights of the stockholders and was unjust. 

. The courts will redress wrongs, of course. I agree with the infer- 
enee+hat might be drawn from the situation, that a small stockholder 
ntight not have the means and it would be a very difficult thing per- 


haps for him to inaugurate legal proceedings and carry them through 
to a successful issue for the protection of his own rights and for 
stockholders similarly situated, but isn't it a fact that frequently a 
suit may be brought by one stockholder and he does it in behalf of all 
other stockholders similarly situated, and in many instances a score or 
more of stockholders will associate themselves with the complaining 
witness and adopt his averments in the complaint and join with him 
in asking the relief? 

Mr. Farish. I think that is a possible remedy at law ; yes. sir. 

Dr. LuBiN. All I am trying to get at, sir, is trying to find out 
whether or not there are any ways in which, either through legisla- 
tion or through voluntary action on the part of industry, tho^e people 
who own the corporation can know what is going on in the corpora- 
tion without having to wait until the deleterious results in terms of 
losses and bankruptcy might show up. 

Ml'. Farish. Well, the only way I know, Doctor, is to go back to the 
illustration I tried to picture in talking about the goldfish bowl, and 
that is they can go to the stockholders' meeting, they can air any 
question3 they want to, they can bring out any complaints they care 
lo bring out. and they can put management on the spot on all of these 
quest ions such as you are describing. "^ 

Dr. LuBiN. But you are assuming that he knows what is happening. 

Mr. Farish. He doesn't have to know. He can go there and ask 
these questions whetl^er he know3 them or not. In other words, as I 
look at it, corporate management today is always on the spot. 

The Chairman. Is that a realistic approach to the problem? How 
m^ny corporations do we all know of so as not to make any particular 
reference to a particular cas(\ which are incorporated in one State, 
have their place of business in another State, have the site for the 
holding of stockholdcf,s' meetinji^ in another State, with three prin- 
cipal offices, therefore, stockholdi > scattered throughout the United 
States, and a practical impossibility upon the part of the masses of 
small stockholders to attend stockholders' meetings called in a dis- 
tant State remote from their residence? That is a practical situation 
t hat frequently develops, is it not ? 

Mr. Farish. Why, I don't like the emphasis on "remote.'' I think 
most stockholders' meetings are held pretty close to the center of 
activity and the center of ownership of the stock, and it requires very 
little effort for any stockholder to get to an annual meeting. 

The Chairman. I have known of corporations, and in the petroleum 
industry, operating out in the Rocky Mountain area, whose stock- 
holders' meetings were held up in the State of Maine — utterly im- 
possible for any large number of small stockholders to attend. Now, 
of course, I conceive 

Mr. Farish (interposing). In that case, I grant you that, cer- 

The Chairman. Of course, one very good answer to any question 
dealing with this question of the rights of small stockholders is that 
many of them don't want to exercise any degree of policy control 
over the corporation. I suppose that most of the stockholders in the 
Standard Oil of New Jersey, for example, who own iOO shares or 
less each are perfectly willing to allow the management to continue 
to run the affairs of that corporation and wouldn't be interested in 


attending the stockholders' meetings. It might be interesting to know 
what your experience has been in inducing them to come, how success- 
ful has that been ? 

Mr. Parish. It is not very successful. I think we had the largest 
stockholde'-s' meeting that I can recall in the history of the com- 
pany last & .mmer, and I don't remember the exact figure, but there 
were something over 200 people there. But most of those people, I 
should say not most of them but a large number of them, however, 
were investment trust representatives who probably in turn repre- 
sented a good many stockholders. They are the critics, speaking 
now of my own business and that which I am familiar with; they 
are the best critics, if you want to put it that way, outside of our 
own organization, our own company management. 

Senator King. These investment corporations acquire stock in the 
company or represent stockholders? 

Mr. Farish. Yes, sir; and they make it a business to compare 
corporate earnings, corporate policies, corporate management, and 
they always have a good many questions to ask. 

Senator King. Do you prepare at the termination of the year or 
before your annual stockholders' meeting a statement of the activi- 
ties of the organization during the preceding year, showing its earn- 
ings if it has any? 

Mr. Farish. We issue an annual report before the meeting. 

Senator King. Does that go very much into detail showing the 
activities ? 

Mr. Farish. Yes, sir. 

Senator King. Production and sales? 

Mr. Farish. Yes; bookkeeping changes, and so on. 

Senator King. Is that published? 

Mr. Farish. Published and distributed. 

Senator King. Is any general circulation of the same provided 

Mr. Farish. To all stockholders. Anybody that wants a copy 
gets it if they write in for it but it is sent to all stockholders. 

Senator King. Sent to all stockholders. How many names have 
you on your stockholders' list ? 

Mr. Farish. I think it is about 133,000. 

Senator King. And you transmit a copy of the report to each 
stockholder ? 

Mr. Farish. Yes, sir. 

The Chairman. Isn't it a fact that in recent years there has de- 
veloped more frequently than ever before a difficulty in securing 
the proxies of small stockholders? 

Mr. Farish. Not with us. 

The Chairman. No ; I am sure it hasn't happened to you, but that 
has been brought to my attention on numerous occasions, that stock- 
holders' meetings have had to be postponed because of the indispo- 
sition of stockholders to send in their proxies so that a majority 
under the charter was not present when the meeting was called. 

Mr. Farish. That is probably true. I have no accurate knowledge. 

The Chairman. Now, the question which interests me particularly 
in this whole matter of the corporate structure of a national cor- 


E oration, is the degree to which standards of corporate responsi- 
ility and management should be set in the public interest. Do you 
care to make any comment upon that? 

Mr, Farish. No; no further than I have. 

The Chairman. Well, under the system that we have it is obvious 
that there is no standard set by law, is it not ? 

Mr. Farish. Well, there are some standards set by law, certainly. 

Senator King. Set by the State under which the corporations are 

Mr. Farish. Sta;ndards set by the charter, standards set by the by- 
laws, standards set by obeying the law, and so on. 

The Chairman. Well, there is no standard of accounting, for ex- 
ample, set by the Delaware corporation law, 

Mr. Farish. I couldn't tell you whether there is or not. 

The Chairman. That is a fact. 

Mr. Farish. There probably is, I don't know. 

The Chairman. So the standards of which you speak are those 
which are developed from within. Now let us grant without any 
argument at all — certainly I would be the last one to raise an argu- 
ment about it — that in 90 percent of the cases, management is moti- 
vated by the very highest standards and purposes, but it remains, as 
I think you testified earlier in the morning, that the checks and bal- 
ances upon management are those which management itself devel- 
ops, those which result from living in the goldfish bowl, as you 
express it, but this goldfish bowl of which you speak is only that 
which rests on the table in the stockholders' meeting or before the 
Internal Kevenue Bureau when the tcix return comes in, neither of 
which is very evident. 

Mr, Farish. Well, I would differ to some extent with that state- 
ment. I think the goldfish bowl rests on the financial page of prac- 
tically every newspaper of the United States, it is on the front page 
of practically every newspaper in the United States, it is in the 
legislative hall of practically every State in the Union, it is in the 
Congress of the United States, it is before investigating bodies of 
one kind and another almost constantly, it is represented by not 
only the Bureau that you speak of, it is represented by answers to 
questionnaires, reports on the business filed with Government au- 
thorities in such an innumerable quantity that we can hardly keep 
up with them. 

The Chairman. I recognize that, and this committee has contrib- 
uted a good deal to it. 

Mr. Farish. Just an expression on that point: During the lunch 
hour one of my associates in this hearing handed me a statement to 
the effect that his company in 1937 filed 71,307 reports with gov- 
ernmental authorities, so I think this goldfish bowl is pretty well 

The Chairman. I am not at all surprised at that particular cir- 
cumstance and wouldn't be disposed to question it, but I do suggest 
to you and to those who may be interested in a particular instance, 
that one reason why there are so many questionnaires proceeding 
from Government authority is that there is no national standard by 
which national corporations may be guided. 

Senator King. I would differ from that statement just a bit. In 
the first place, I don't concede that there should be a national stand- 


ard. These corporations are organized under the laws of the States 
and I for one am not willing yet, though there are many who desire 
that, to destroy the autonomy of the State and to turn over corporate 
business and individual business to the control of the Federal Gov- 
ernment upon the ground that A or B or C lives across the line and 
doesn't live in the State in which the organization was formed. I 
don't concede it is important there should be a national standard. 
There is too much standardization now in Germany and in many 
other countries, and I don't want any such standardization here 
superimposed upon every individual and every corporation and every 
partnership and every element of business under Federal control. 

The Chairman. That isn't standardization, that is regimentation. 

Senator Kjng. It is both; but standardization leads to regimenta- 

The Chairman. And as for autonomy, I rather imagine neither 
the State of Utah nor the State of Wyoming exercises very much 
control or jurisdiction over the forms and powers and authority of 
the Delaware corporations which do its business. 

The Vice Chairman. I assume that the witness is not compelled 
to decide which 

Mr. Farish (interposing). I am not the Solomon in this case, 
Mr. Chairman. 

Mr. Ballinger. JMr. Farisli, you presented a very interesting 
theory to the committee this morning that one of the best checks on 
corporate management is the action of management itself. That is 
to say, I got the idea from listening to you talk that if a corporation 
executive or director is betraying his trust, the other good directors 
gang up on him and push him out of the corporation. Is that about 
what you were trying to convey? 

Mr. Farish. Well, you might state it that way. I don't think I 
stated it exactly that way, Mr. Ballinger. What I meant to state 
was that inefficiency and misconduct or wrongdoing in corporate 
management finds its check and its critics a little quicker than it 
does normally in any other realm of activity that I know of. 

Mr. Ballinger. Well now, first I want to make two statements. I 
recall that Mr. Whitney was not removed from the Nejv York Stock 
Exchange until the Government completely discredited him. I don't 
think the Chase National Bank removed Mr. Al Wiggin until the 
Government completely discredited him. I think that is true of 
Mr. Charles Mitchell, and Mr. Grace is still with the Bethlehem 
Steel, and although they got Mr. Stewart out of the way, Mr. Doheny 
and Mr. Sinclair, who were sort of particeps criminis to the matter, 
were not removed. 

I just wonder when this theory of yours is going to work. 

Mr. Farish. I don't propose to get into that argument. You have 
mixed up a lot of things in that statement. Some of them I ques- 
tion, I don't think it is pertinent to this. 

Mr. Ballinger. I think it is very pertinent in testing your theory. 

I want to make a further statement. In the past 8 years the Gov- 
ernment has made many investigations. Anybody who wants to 
read those investigations, and read them thoroughly, is not only 
amazed but highly shocked at the low standards of ethics prevail- 
ing among certain corporation directors in certain industries. Now, 


we have had such a welter of investigations the last 8 years that 
your statement about the so-called uprightness of corporate man- 
agement — I mean I might say — is rather optimistic, and I want to 
read into the record some of those investigations so that somebody 
who might want to compare your statement with the record might 
have the opportunity to do so. 

The Government made a tremendous investigation of the shipping 
industry, and found that industry was not only robbing its Govern- 
ment but robbing its stockholders, and so reported. 

Mr. Farish. What shipping industry? 

Mr, Ballinger. Maritime — the shipping investigation, Govern- 
ment ship subsidies. 

Mr. Farish. Not independent shipowners. 

Mr. Ballinger. Yes; they investigated independent shipowners, 
too. They investigated how they acquired their ships, what price 
they paid for them; they investigated collusion that might have 

Mr., Farish. Do you mean individual shipowners ? 

Mr. Ballinger. Individual companies. 

Mr. Farish. We operate the biggest fleet under the American flag. 
Were we investigated? 

Mr, Ballinger, I don't know. 

Mr. Farish. We were not investigated. 

Mr. Ballinger. You weren't investigated? What company do 
you represent? 

Mr. Farish. We operate the Standard Oil Co, of New Jersey. We 
own the largest fleet flying the American flag, and we were not in- 

Mr, Ballinger, They were investigating shipping companies. Do 
you want me to go get the record and read in here from the so- 
called Senator Black's investigation ? You were spotless here, but the 
others weren't. 

Investigation of the banks of New York City by the Pecora in- 
vestigating committee, in which they found the directors borrowed 
large sums of money from the banks and wrote them off. 

We have before us the failure of the Michigan banks, a topsy- 
turvy story of holding companies and collusion, graft, wheels within 
wheels, until you are fairly staggered. 

You have the failure of the Cleveland banks and the story of the 
Van Sweringens; you have the gigantic investigation of the protec- 
tive committees by the Securities and Exchange Commission, a sort 
of hideous document if you want to read it all the way through. 
You have the investigation of the public-utilities industry which 
resulted in the enactment of the present law. That was quite a story, 

You have the investigation of the aviation industry ; the investiga- 
tion of chain stores by the F, T, C. ; you have the investigation of 
farm machinery by the F, T, C, ; you have the investigation of rail- 
road mismanagement by a special committee of the Interstate Com- 
merce Committee of the Senate, which went into the wrecking of the 
Chicago, Milwaukee & St, Paul and the wrecking of the St. Louis & 
San Francisco Railroads, 


It is well known about the reorganization of the Goodyear Tire 
Co., the story of which is found in a delightful volume called "Graft 
in Business," by John T. Flynn,^ 

You have the investigation of the steel industry in the last 5 
years by the Federal Trade Commission ; you had a shocking story 
of investigation of investment trusts by the attorney general of New 
York State. The S. E. C. is now making a further investigation 
of it. 

You had an investigation of the stock exchange by the, Pecora 
committee, which was certainly startling. You had an investigation 
of tax dodging by the Pecora committee, equally startling. You 
had the Bethlehem Steel Corporation bonus case and the monopoly 
of the milk industry.- 

And so it might go. You might read a great many investigations 
in here. The point I want to make is, if you want to read the record, 
and that is the only thing we can go on, I think your statement is 
considerably optimistic. 

Mr. Farish. All right, sir; you are entitled to your opinion. 

The Chairman. Are there any other questions on this phase of the 
statement? You may proceed, Mr. Farish. 


Dr. LuBiN. May I ask a question of opinion, Mr. Farish? In 
talking about concentration of control in your memorandum this 
morning, the question occurred to me as to whether or not there 
was any fundamental difference between less large aggregates of 
capital which maintain their relationships through holding com- 
panies, and independents who have no such relationship. The thing 
I have in mind is this: Could you, for example, through your hold- 
ings in Humble and other companies, get them to do things which I 
as an independent couldn't do with my competitor because I would 
be subject to antitrust laws and you wouldn't? 

Do you see what I mean? If I tried to get him to do something 
I may be in danger ; but you, after all, as chairman of the board, 
let's say, or president of the corporation, could tell your subsidiary 
to do things which two independents couldn't do in collusion. 

Mr. Farish. What is the point you are driving at? 

Dr. LuBiN. Does that mean that through this integration, through 
holding companies and otherwise, you have a superior position in 
the economic field as compared to the independent competitors who 
can't work together that way? 

Mr. Farish. Superior position in the economic field? I have to 
imderstand just what that means, Doctor, to get at it. Do you mean 
by reason of the fact that a holding company may have a half dozen 
operating companies they cover a broader field, do a larger volume 
of business? 

Dr. LuBiN. Your five subsidiaries can be told to follow a certain 
policy, you see, and they will follow it; whereas five competitors 
couldn't get together and agree to follow that policy for fear of the 
Sherman law. 

» Mr. Flynn's testimony before this Committee appears in Hearings, Part 5. 

' A report of the Federal Trdae Commission on concentration of control of the sales 
and distribution of dairj.' products, marlied "Exhibit No. 370," Is included in Hearings, 
Part 7, appendix, p. 3135.. 


Mr. Farish. Well, they will follow it if it is for the good of their 
orgranizations, for the good of their companies. 

Dr. LuBiN. I mean, tlie very fact that they got together and agreed 
upon pursuing such a policy puts them in a much more difficult posi- 
tion than it puts you wnen you say, "This shall be our policy and you 
other five subsidiaries shall do it 

Mr. Farish. It gives them a coordinated effort, if that is what 
you mean, in the matter of policy. Certainly it does. 

Dr. LijBiN. Which means, from the point of view of getting 

Mr. Farish (interposing). You mean they are enabled, in that way, 
to affect a larger volume of business in the matter of policy than 
six or eight people who are not integrated in holding-company coop- 
erative effort could do by getting together and deciding they will 
follow it. 

Dr. LuBiN. Not exactly. For instance, you use the same market- 
ing policies. Five competitors can't get together and do that with- 
out violating the Sherman Act, or at least fearing to. 

Mr. Farish. We follow in our marketing organization a common 
policy, as far as the Standard Oil Co. of New Jersey and its direct 
subsidiaries are concerned. We have no direct influence on the mar- 
keting policy of the Humble Corporation, for instance. They run 
their own business. 

Dr. LuBiN. I mean if, for example, their policy was in conflict 
with yours, you as the holding company could make their policy con- 
form to yours, should you so wish. 

Mr. Farish. Make Humble's? 

Dr. LuBiN. Yes. 

Mr. Farish. I don't know whether we could or not. We could 
argue with them, but after all the final decision would have to be 
made by the Humble board. 

Dr. LuBiN. And who elects them? 

Mr. Farish. TJie stockholders. 

Dr. IjUbin. Who are the stockholders? 
- Mr. Farish. We own 70 percent of the stock. 

Dr. LxJBiN. So, in other words, you are the stockholder. 

Mr. Farish. The majority stockholder. 

Dr. Ltjbin. So that what you say goes ultimately, legally. 

Mr. Farish. Well, not as to management. If its management in 
general wasn't satisfactory we could fire them, if that is what you 
mean. We could elect other directors. 

Dr. LuBiN. Certainly. I mean, in other words, ultimately you say 
what shall be done. You can say and you have that legal right to. 

Mr. Faeish. I would put it that way, we could say, but there 
again this question of individual management and individual ability 
comes into the picture. If we disagreed seriously enough with the 
management of the Humble board, to take that as an illustration, and 
say, "Well, we are through with you as stockholders, we are going 
to vote you out," I think it would probably be, the worst thing that 
we could possibly do because how are we going to get six or eight 
men that are as capable as those men are, who are now running the 
business, to take their place ? We couldn't do it. It would be like 
running a horse race without a jockey. 

The Chaibman. Do you mean to convey the impression, Mr. Farish, 
that the directors of the Humble Oil Co. as a matter of actual. fact 


exercise complete authority over all the affairs of that company 
without the supervision of the parent company? 

Mr. Faeish. I mean to say that they exercise the final judgment 
and the final decision on all matters connected with that business. 

The Chairman. That, of course, might be very true and still the 
parent company might be. influencing the decision. I am trying to 
find out, if I can, whether there is any line of demarcation with re- 
spect to the amount of authority having to do with policies that 
the directors of such a company actually exercise. Is there any 
limit on it or do they have complete control ? 

Mr. Farish. They have complete responsibility for making the 
final decisions in all matters of policy. 

The Chairman. Biit there again the answer isn't quite clear in 
my mind. Of course as directors they have complete, final, legal 
responsibility for the decision, there can be no doubt about that. 

Mr. Farish. That is correct. 

The Chairman. And if those decisions didn't satisfy 

Mr. Farish (interposing). The larger stockholder. 

The Chairman. The majority owner, the majority company, they 
would vote against them ? 

Mr. Farish. At the next annual election. 

The Chairman. That is right, but in the meantime, as a matter 
of fact, do the directors exercise complete independence, actually, or 
do they consult the parent company in fonnulating the policies, 
though they have the responsibility ? 

Mr. Farish. Well obviously, the parent company being the largest 
stockholder, and being their largest customer, taking some 65 or 70 
percent of all of the crude oil and refined products Humble has for 
sale, they are bound to consult and must consult a customer of that 

The Chairman, I would imagine so. 

Mr. Farish. Our general facilities are the logical outlet for all of 
Humble's products. 

The Chairman. In other words, the policies of Humble are not 
as free from influence on the part of the parent company as they 
would be if the parent company did not hold that stock ? 

Mr. Farish. lliat of course is obvious. 

The Chairman. So that such a subsidiary operates as ^a unit in 
the large corporate structure, does it not? 

Mr. Farish. No, sir; not as a unit. It operates as an aflSliate in 
the large corporate structure. 

The Chairman. So that the policy of a subsidiary and the parent 
company are one policy, they constitute one policy. That would be 
a normal and actual thing. 

Mr. Farish. Well, yes ; you might say one policy, but that doesn't 
cover it, Senator. The Humble's operations are different and they 
are not world-wide, they are confined to Texas, South Louisiana, 
and New Mexico, and the Humble is essentially a producing and 
transporting company, and therefore in the matter of policy there 
isn't much chance of conflict between the general policy of the hold- 
ing company and the Humble Co. The Humble is run and has been 
run since its inception for the benefit of the Humble Co. I was 
in at the beginning, I was the first vice president, and I was presi- 
dent until 1933, when I had that responsibility, and we not only 


had that responsibility from the point of view of a minority stock 
ownership in Humble that hirgely lives in Texas and is vitally inter- 
ested in it, but we had the obligation of law in the State of Texas 
to run the Humble Co. as a unit, as an individual business. 

The Vice Chairman. Whatever is to the benefit of the Humble 
Co. is to the benefit of the holding company, 

Mr. Farish. Yes, sir. 

The Vice Chairman. And that is the reason you don't interfei'e as 
long as they are doing a good job. 

Mr, Farish. That is correct, sir. 

The Vice Chairman. They are entirely independent as long as 
they do just as you want them to do, 

Mr, Farish, No, sir ; entirely independent as long as they are doing 
a good job and running the business efficiently. 

The Vice Chairman, That is the kind of job you want them to do. 

Mr. Farish. Yes. 

The Vice Chairman. That is obvious, I guess. 

The Chairman. Are there any other questions on this phase of the 
statement. You had come to 

opportunities for the independent in producing 

Mr. Farish. "Opportunities for the independent in the producing 
branch of the industry." I might read that. If you have read it, I 
might skim through it. 

The exploration for and the production of crude oil has long at- 
tracted independent businessmen. The prospect of becoming a mil- 
lionaire almost overnight on a relatively small investment has always 
been an inducement to a large number of persons to risk their capital 
in production, 

Mr, DeGolyer^ testified that while the large company has certain 
advantages over independents the "independent will be a wildcatter 
as long as there is any oil industry left to Avildcat in." Mr. Crowley ^ 
testified that the independents had been the chief discoverers of new 
fields as a result of their wildcatting operations. The record shows 
that 18 major oil companies, not including Mid-Continent Petroleum 
Corporation and Standard Oil Co, of California (that is because 
they didn't respond to the questionnaire as I understand) owned 
95,000 wells of some 360,000 in the United States in 1938, Even after 
allowance is made for the unknown data of these two majpr com- 
panies, it is safe to generalize that most of the oil wells in the United 
States are owned by independents. It is impossible to tell how many 
wells are owned by large-scale and how many by small-scale inde- 
pendents. The record is clear as to the past and present opportunities 
for the independents, but the vital question is as to the future. 

The credit for the discovery of America's oil fields goes to the small 
exploratory enterprise rather than the large organization. It is the 
individual, the small company, the so-called independent, the itinerant 
wildcatter who has found America's oil. This has been true in the 
past and it is true today. In my judgment, it will be just as true 10 
years from now. The truth of this statement, that the discovery of 
n&w oil fields is usually made by the small fellow rather than the 
integrated company, is borne out not only by the statistics kept by 

- Testimony of both gentlemen appears in Hearings, Part 14. 
124491 — 40— pt. 17, sec. 4 — r-21 


our own company, but by the observations of others outside our 

The Chairman. Do you think it is more expensive now to discover 
oil than it used to be? 

Mr. Farish. There again, Senator, we have to be a little more 
definite. I am coming to that, I think, in the memorandum, but it 
djepends on the territory you drill, the area, and so on. We have 
always had shallow oil fields and deep oil fields in this coimtry. In 
later years they have become deeper and deeper, but if you let me 
read on, I think I will cover that. 

It is worthy of note that the costs of finding oil in America have 
progressively declined over the last 20 years, in spite of the diminish- 
ing nun tier of oil fields yet to be found, and in spite of the constantly 
increasing depth to which the 'drill must go to encounter new petro- 
leum reserves. In my judgment, finding costs 20 years ago for the 
industry at large averaged 50 cents per barrel. Ten years ago they 
were down to 25 cents per barrel. Today they are estimated to be 
on the order of 15 cents per barrel. 

The Chairman. That is one way of calculating cost. The problem 
that I have in mind is that of the amount of capital which the pros- 
pector must now invest in the search for oil as compared with what 
he wduld have to raise 10 or 20 years ago, and whether or not it isn't 
a fact that since drilling must now be very much deeper, it is not 
now a much more costly enterprise to sink the well, though even- 
tually the cost of producing per barrel may be lower. 

Mr. Farish. May be lower? 

The Chairman. Yes. 

Mr. Farish. Well, yes; but let's look at the most recent develop- 
ment in the oil business in the way of finding oil, what occurred m 
Illinois, and the cost of drilling wells in Illinois is very low. The 
wells are comparatively shallow and it is just as easy for an indi- 
vidual to wildcat in Illinois today as it ever had been in the industry. 
By easy, I mean the opportunity is there and the cost per venture. 

The Chairman. That is because the wells in Illinois are shallow. 

Mr. Farish. Yes, sir; just as has been the case always in the oil 
industry. There are some areas where it is shallow and some where 
it is deep. 

The Chairman. I was thinking of the average to which you were 
referring when you spoke of the constantly increasing depth to which 
the well must go, so that even though there are still shallow fields 
to be found, on the average the industry must go deeper now than 
ever before. 

Mr. Fakish. The deeper-well cost is increasing; yes. 

The Chairman. So that to find oil in the deeper sands requires 
the investment of more capital than before. 

Mr. Farish. Yes, sir; that is unquestionably true. 

The Chairman. And that in turn would make it more difficult for 
the so-called small man to engage in prospecting, but that prospect- 
ing still goes on, you say. 

Mr. Farish. That may be true; but the so-called small man seems 
to be growing larger, and the ability of the so-called small man to 
join with other small men seems to be facilitated, to the end that 
this discovery of new areas by the independents — I go back to the 
word "independent" — is just as good todav aj it ever has been. 


The Vice Chairman. Tliey block out an acreage and then get 
other people to help contribute the money to make the exploration 

Mr. P^ARisH. Yes, sir. To give you one practice that is common 
in the oil country, some entrepreneur — I don't like to call him a 
promoter, but ''j)romoteT" is probably a little more familiar to the 
oil man than tlie other one — some promoter will get the idea either 
from the study of geology or from getting a hunch, if you will, or 
a tip from somebody who has studied the geology and maybe has 
used new geological methods, that a certain area is favorable, and 
ha looks at that area and he sees that it is a very divided ownership. 
In other words, two or three or four major companies will own some 
acreage on it, some of it will be open, and some independents will 
own some. This fellow says, "I am going to promote a well on that 
prospect." The well may £ost ten thousand, twenty thousand, even 
fifty thousand dollars, depending on the probable depth you have 
to go to find oil. 

So this promoter goes to this company and that company, another 
one, and so on, and he says, "I want to drill this prospect. I have 
160 acres there of my own. Obviously I can't drill a wildcat well 
on 160 acres, so are you interested in seeing the prospect drilled," 
and by one way and another he will get contributions of acreage 
from other owners and he will get some contributions of what we 
call in. the industry dry-hole money. In other words, somebody 
will, say, "I don't want to give you any acreage but I will give 
you $5,000 to pay for a dry hole if you drill it thexe, in order to 
prove whether this prospect is productive or not." 

We will assume that this promoter gets several hundred acres by 
donation, several thousand dollars, fifteen or twenty, maybe, and he 
launches out and starts his w^ell. Of course in drilling that well lie 
will have opportunity maybe to sell some of his acreage to others 
who think there is going to be oil discovered there and he would 
like to have a piece of acreage in the field, and he drills his well 
and pays for it, frequently without any cost to him whatsoever. 
That is a common practice in the oil industry and it is going on 
every day, all over. 

So this business of the little fellow. Senator, if I may go back 
to it just a little bit, gets, back in the final analysis to how mujcb 
ability he has got, how hard he is willing to work and how good 
a salesman he is in getting somebody else to pay part of his bill. 

The Chairman. And your testimony is that the door is as wide 
open to the little fellow today in the petroleum industrj- as ever, 
in the search for oil. 

Mr. Farish. I think so, I honestly think that is t)ie truth, sir. 

Mr. O'CoNNELL. Do you have any figuies as to the trend as to 
the ownership of