refining and marketing divisions as a means for providing a controlled outlet for profitably produced crude. The questionnaire issued in the fall of 1963 by the House Small Business Subcommittee on Distribution sought to determine the exact extent to which production activities were being used to subsidize refining and marketing. However, the crucial questions on this point were labeled as "optional" by the subcommittee and satisfactory responses were not received. I understand that this Commission has ample authority to invoke compulsory process to accurately determine the facts on this point. The major integrated companies (which control some 85 percent of domestic refining operations and a comparable percentage of crude pipeline and purchasing operations) establish the price which the independent refiner must pay for his principal raw material, crude oil. It is apparent that the power to establish the price of crude oil gives the major company a tool for the elimination of the independent refiner. If major companies sell in competition with the independent at a price which is below the independent's cost, taking into account the full price of crude oil as established by the majors, the independent obviously cannot survive. The drastic implications of the elimination of the independent refiner on competition in the marketplace and on the availability of supply for the independent marketer have been defined and underscored by the recent Justice Department antitrust complaint concerning marketing of gasoline in the New Jersey area. The situation is one which cries for a remedy. One effective. approach would be for the Commission, by a trade regulation rule, to declare the sale of refined products below cost to be an unfair method of competition unlawful under section 5 of the FTC Act, except where such sales are made in good faith to meet competition. Although it is frequently asserted that a cost of a gallon of gasoline cannot be determined, this is not true. The following definitions would be relevant in determining whether gasoline is sold "below cost": First, with respect to crude oil, the "cost" of crude oil, which is either produced by the refiner or obtained upon exchange for such produced crude, should be not less than the value assigned by the refiner in computing depletion under the Federal income tax laws. Cost of purchased crude would be the actual purchase price. To the cost of crude there would be added cost of transportation to the refinery. Second, to the cost of the crude oil and transportation, the cost of refining and marketing gasoline would be added. It is at this latter point that definition becomes more difficult if one is to provide a simple, fair, and enforceable definition. A definition of cost must, of course, require an allocation to the various products manufactured from crude oil of all costs reflected in the refiner's statement of income. Naturally, all costs that are solely attributable to the manufacture or distribution of gasoline would be directly charged to gasoline. The principal problem is that of allocating the joint cost of raw materials and the joint costs of refining to a single product, such as gasoline. Within the industry various accounting methods are in use to allocate joint costs among the individual products. The most common methods are enumerated by the American Petroleum Institute, Financial and Accounting Division, as follows: (1) The "sales value method": In this method, allocable costs are spread to the products on the basis of their relative selling value. This method assumes that the same rate of gross profit is earned on each product. (2) The "byproduct method": In this method, it is assumed that the entire profit is made on gasoline. The market value of other products is subtracted from total refining cost, and the remainder is the "byproduct cost" of producing gasoline. It must be appreciated that a byproduct method of calculation results in a lower cost for gasoline than does the sales value method. Indeed, were profits from so-called "by products" sufficiently large (as, for example, in a petrochemical complex), cost for the principal product, gasoline, could approach zero. (3) The "replacement cost method": In this method, fuel oil is considered to be a by product and all other products are regarded as joint products with gasoline. In addition to these methods, various modifications and combinations are used by different companies to serve their particular situations and needs. Of the methods discussed, the sales value method appears to have been most widely adopted. In May 1964, the API division of finance and Accounting reported on answers to a questionnaire regarding cost-accounting practices relating to inventory valuation procedures. Of the 19 replies received to the questionnaire, 12 companies stated that they used the sales value method. Only one company reported using the byproduct method. Five companies reported use of the replacement cost method, and one other company identified its method as a "standard cost" basis. The best approach would be to determine "cost" in every case on the basis of the "sales value method." This method is the most popular and indeed most logical. The records of any company, regardless of method used in that company, could be easily translated to this basis. The adoption of a uniform method for this purpose would prevent different refiners from arriving at different costs for gasoline, merely by using different accounting methods. A single method of apportionment would provide simplicity and predictability in the enforcement of the law. A rule along the lines I have described would accomplish the following: (1) It would establish a definite Federal prohibition against sales of gasoline below cost. (2) It would prevent companies having a high ratio of crude production to refinery runs from using the profits in crude production to destroy nonintegrated refiners. (3) Each company would be able to determine for itself the point at which its sales prices were deemed destructive of competition rather than merely competitive, and each company would be able reasonably to estimate the competitive costs of its competitors, an important consideration in shaping an effective competitive course. (4) Marginal costing of gasoline--that is, taking into account only the variable cost of incremental units of refined productswould not be permissible in defending an action premised on sales below cost. Shortly after Mira's petition for a trade regulation rule proceeding was filed with the Commission, I found myself, as president of Mira, besieged with requests from dealer, jobber, and marketing associations at the State, regional and National levels to speak at their annual conventions, for the purpose of explaining the implications of Mira's proposal. While researching in advance of my remarks at these conventions I was surprised to find literally hundreds of quotations in the industry press from individuals at the highest level of the largest petroleum companies in America on the problems of and chaos in oil marketing. I found myself in wholehearted agreement with these statements. Almost universally they decried the terrible state of affairs in oil marketing particularly gasoline. Among the statements I found attributed to major company executives were the following: "Gasoline price wars plague our industry." "The marketing segment of our industry is afflicted with a debilitating illness which threatens its whole future." "It is almost impossible to localize price wars." "If Federal control comes we have ourselves to blame." "Marketing is in a sadistic rut that could result in economic suicide." To present a complete picture of the general feeling within the industry for a need for some remedy to marketing problems, Mira has published a compilation of statements from persons in all phases of gasoline marketing. I would like to introduce this compilation into the record for the information of the Commission. Chairman DIXON. It will be received and made part of the record. Mr. MURPHY. In my talks at industry meetings, I not only referred to these many quotations but wholeheartedly agreed with them. What disturbed me was that while many sources bemoaned and decried the situation-no one seemed to be doing anything about it. There was no question in my mind that these words were earnestly and honestly spoken and written and sincerely meant, but in spite of all the pleadings-nothing was done. This Commission saw fit on December 28, 1964, to call today's hearing. I pray something will come out of it. Mira is convinced that action by the Commission is essential for the health of the entire industry and particularly for the survival of the independent refiner. In behalf of MIRA, I wish to thank the Commission for the time it has allowed us. Chairman DIXON. Commissioner Elman? Commissioner Reilly? Commissioner Jones? Before you sit down, sir-have you reviewed the method of costing presented by Tidewater at yesterday's hearing? Mr. MURPHY. No, I have not. Chairman DIXON. Then I don't guess you could tell me whether you agree with their approach or not. Mr. MURPHY. Well Chairman DIXON. Would you look it over and give us a supplementary statement? Mr. MURPHY. We will check into it, and be happy to file something with the Commission. Chairman DIXON. You bring up one point-I think I see it a little clearer here-in your statement, page 5. At the top of the page you say: It is apparent that the power to establish the price of crude oil gives the major company a tool for the elimination of the independent refiner. Now, if I understand this, this in effect you are saying is that you are in a price squeeze. Is that another way of stating thisthat because they have the power to hold the crude price up, and the power to lower the end product price gasoline, you are in a squeeze? Mr. MURPHY. I think this was handled by both Mr. Rodman and Mr. Moore. I am saying there, what MIRA is saying is that the major companies having 80 or 85 percent of the crude production, control of most of the transmission lines for crude; they post a crude price. Chairman DIXON. In other words, the transmission line is the buyer here he sets the price of what crude is bought at; doesn't he? Mr. MURPHY. No I think I am right, and some of my friends can correct me. The seller is the owner of the crude, and the buyer is the refining company that is willing to pay the price posted for the crude. Chairman DIXON. We heard a producer representative in here yesterday, and he was quite disturbed about what was facing him. Then we have heard other witnesses say there is only one pipeline, or maybe two, a "gatherer," I think was the expression. If you are in that field, the gatherer makes an offer, and he said unless you had a big bookage, you had to sell it at that price. Mr. MURPHY. I maybe, at this point, better confess that my operations in the oil business were local up near the Canadian border, and there was one price of crude, and it came down from Canada, and we obtained it there, and that was the story. It was not the same picture as here in the midcontinent. Chairman DIXON. One final question. As the vice president of an independent marketing company in Minneapolis, did you have any experience with a major posting within 1 cent of the posted retail price of your company there? Mr. MURPHY. Oh, for 10 years. Chairman DIXON. When a major comes within 1 cent of you as an independent, does this materially affect your volume? Mr. MURPHY. Well, I would put it this way. I would say-of course, Minneapolis-in Minnesota we are going to the extreme end of the northern part of the country. Independents in Minnesota, if we go back far enough-the margin of the independents, their price posting was lower than the majors, more like 3 cents through a period of years, and it is only in later years that it dropped down to 2 cents. Chairman DIXON. Commissioner MacIntyre wishes to ask you a question. Commissioner MACINTYRE. Mr. Murphy, this is the booklet that you asked be included in the record? Mr. MURPHY. Yes. Commissioner MACINTYRE. I have noted in these statements, or what purport to be quotations from statements of quite a number of people. Mr. MURPHY. Yes. Commissioner MACINTYRE. Prepared in various places. Mr. MURPHY. Yes, sir. These were for the most part taken from oil publications or annual reports. Commissioner MACINTYRE. But there are quite a number of people involved in these statements. Mr. MURPHY. Oh, yes. Commissioner MACINTYRE. And you are offering this to the Commission as information upon which you think it should rely in its consideration of these matters? Mr. MURPHY. These annual reports, these quotations, these speeches made by the individuals involved Commissioner MACINTYRE. Just there. You are placing this before the Commission on your assumption that these individuals really know what they are talking about, then. Mr. MURPHY. That is right. They are bemoaning and becrying the terrible situation, and we agree with them. At this point I expect we are in total agreement-the majority of the majors and the independent refiners. Commissioner MACINTYRE. You consider this great number of individuals whose quoted statements are in here you consider they really know what they are talking about? Mr. MURPHY. I would say they do as to the destructiveness of the price situation of gasoline at the market level. Commissioner MACINTYRE. You think they know sufficiently what they are talking about and are so accurate in their statements that the Commission could rely on these quotations as reflecting facts? Mr. MURPHY. I would suggest that-this is submitted indicative of the fact that universally in oil marketing majors and independents, that everyone sees clearly the chaos in oil marketing-the reliance on what they say or how they put it together is in the minds of each man who said them, and I could not speak to that. Commissioner MACINTYRE. One I notice is from Mr. Carl Reistle of Standard Oil Co. You consider he is well informed on this situation. Mr. MURPHY. Yes, he would be well informed. He spoke, I believe, at the meeting just a month or so ago of the National Petroleum Refiners Association at Houston. Commissioner MACINTYRE. There is another one by Mr. Whiteford, of the Gulf Oil Corp. You consider him well informed? Mr. MURPHY. I would suggest he has been a high and great man in the oil business for many years, and he should be reasonably well informed. I don't know how well informed very top executives are in the dayby-day battle in the marketplace for that last gallon, which is what causes the problems which exist. Often I would suggest they are more concerned about finance and obtaining of foreign crude oil, and things of that sort. Commissioner MACINTYRE. That is all. Chairman DIXON. Thank you, sir. Mr. MURPHY. Thank you. Chairman DIXON. We will hear now from the Standard Oil Co. of Indiana. Mr. CHAFFETZ. I hope we can finish tonight, Mr. Chairman. We are going to cut our presentation down-we will take an hour and a half, if we can have it this afternoon and finish. |