TESTIMONY OF W. H. BURNAP-Resumed

Commissioner REILLY. Yesterday, if you recall, the man from American, Mr. Miller, American Petroleum Refiners Association, mentioned the fact that gasoline sold in Yellowstone Park for 43 cents a gallon. And I think the point he was making was that there were no independent outlets in Yellowstone, or near it.

We found since then that Conoco handles the service stations in Yellowstone National Park. Am I correct in that? Are you the only ones in there, or do you know?

Mr. BURNAP. No. We supply the gasoline to the people who operate the service stations in the park. Their name is Hamilton Stores. They operate their own stations.

Commissioner REILLY. So you only supply?
Mr. BURNAP. We supply the gasoline to them.

Commissioner REILLY. Do you know whether that statement as to 43 cents a gallon-is gasoline that high in the park?

Mr. BURNAP. I don't know the exact price of gasoline out there. It may be higher than it is in some sections of the country, because those stations are open only a very few months during the year, maybe 2 or 3 months during the year.

Commissioner REILLY. The information we have is that the gasoline price in the park is the same as the price that some service stations outside the park sell, in various local Montana towns.

Do you know anything about that?

Mr. BURNAP. I am not that familiar with the market that I know the relationship between the park itself and immediately outside of the park.

Commissioner REILLY. How do you supply them? At a tank wagon price, or regular wholesale price? Do they have a special contract?

Mr. BURNAP. I don't know the exact basis. I believe it is a negotiated contract with these people. With Hamilton Stores.

Commissioner REILLY. Do you know whether the negotiated-do you know whether the price at which you are selling Hamilton Stores is less than the tank wagon price or more than the tank wagon price in the surrounding area?

Mr. BURNAP. I believe their price would be a jobber type of price. They have a number of stations.

Commissioner REILLY. It would be a jobber price. So it would be a jobber margin or jobber discount off the tank wagon price more than likely.

Mr. BURNAP. Yes. More than likely.

Commissioner REILLY. In a situation

Commissioner ELMAN. If I may interrupt-in other words, Hamilton Stores pays less and charges more. Is that it?

Mr. BURNAP. Near an independent operation.

Commissioner REILLY. I don't think you said that you knew they charged more.

Mr. BURNAP. I don't know that they do.

Commissioner REILLY. They pay less.

Commissioner ELMAN. Probably pay less, and apparently charge

more.

Mr. BURNAP. Less than what?

Commissioner ELMAN. Than the dealers immediately outside the

park.

Mr. BURNAP. Well, but

Commissioner ELMAN. Are there any differences in the cost of transportation or distribution or getting the gasoline inside the park?

Mr. BURNAP. There always are differences in transportation costs. Whether there is more or less than someone else's, we would have to determine who it is we are talking about, and what locations we are talking about.

But I suspect that they are buying on a regular jobber type of basis. Chairman DIXON. The point is they have a monopoly in Yellowstone Park on gas.

Mr. BURNAP. I don't know of any other stations out there.

Chairman DIXON. The same thing happens going down the turnpike. You need gasoline, you stop at that filling station, unless you get off and look for one. If you stop there, you are going to pay the price posted right there.

That is monopoly.

Mr. BURNAP. Well, normally those deals are made with a State. Chairman DIXON. But does the State tell you what to charge? Do you know of any State tells you what your posted price at retail is going to have to be?

Mr. BURNAP. No. I think the conditions the State usually imposes is that your price should not be higher than representative prices near there. We don't have any of those locations.

Chairman DIXON. It would seem like the State is more interested in making money than they are in the consumer.

Commissioner REILLY. The price the gasoline is sold in Yellowstone Park is approved by the Superintendent of Parks, so we don't have the problem the Chairman is talking about, I don't think.

Who would handle this transaction with Hamilton Stores in the Conoco operation? Would it be a regional thing, or bid upon, or negotiated by the home office?

Mr. BURNAP. Continental has had that business for many years. How many, I don't know.

In my opinion, it is over 20 years. Continental operates on a regional basis. This is part of our Rocky Mountain region, with headquarters in Denver.

Commissioner REILLY. Would it be possible for you to give us a statement regarding the facts of this situation?

Mr. BURNAP. What I am wondering about is what is the problem Commissioner REILLY. We will determine that, of course, if there is any problem. You don't have to. I am just asking you if you would mind.

Mr. BURNAP. It is just an ordinary kind of business deal.

Commissioner ELMAN. It was brought up yesterday, and obviously raises some problems. Disparity of prices and so on.

Mr. BURNAP. As far as I am concerned, with consent of counsel, we will tell you what the deal is.

Commissioner REILLY. Fine.
Chairman DIXON. Thank you, sir.

We will recess until 2 o'clock.

(Whereupon, at 12:30 p.m., the Commission recessed, to reconvene at 2 p.m., the same day.)

AFTERNOON SESSION

Chairman DIXON. We will hear from the Cantelou Oil Co., Inc.
The witness is not here.

Let's hear from Mr. Charles M. Hewitt.

TESTIMONY OF CHARLES M. HEWITT, PROFESSOR OF BUSINESS LAW, GRADUATE SCHOOL OF BUSINESS, INDIANA UNIVERSITY

Mr. HEWITT. First, I would like to say I am deeply appreciative of this opportunity to make my views known.

My name is Charles M. Hewitt. I am professor of business law at the Graduate School of Business, Indiana University. I have given testimony before various congressional and State legislative committees concerning various problems of small business. The views I express are strictly my own, and I have no authority to speak for any other person or group.

The oil industry represents a most complex mixture of monopolistic and competitive elements. There are no complete and reliable statistics available concerning most of the vital issues in this secretive industry. It is my hope that I can present, within my time allotment, enough partial facts to demonstrate the urgency of this Commission exercising its power to obtain more facts.

Chairman DIXON. Why do you call this a secretive industry?

Mr. HEWITT. Well, if I may quote from Forbes magazine, for example, they say that the depletion allowance charges are closely guarded secrets, that the charges made by oil companies in their annual statements for depletion allowance have no releveance or are not comparable with the charges made in their income tax forms for income tax purposes. I would say this. Without pointing the finger at anyone because I do not know this to be a fact for sure it is almost impossible to get a complete line of statistics on any issue in the industry. Take, for example, the number of jobbers by major companies. If you go back to the NPN Fact Book in 1955 you will find, as I have in here in one table, that three of four companies will not report figures, or one company will have a figure that includes jobbers and commission agents. And then you jump ahead a few years and try to pick up the statistics again, and there will be a different three or four companies that do not report. Then you jump ahead and you will have a star and it will say that these figures are not comparable with those of last year, for some reason. I have found it is very difficult to get reliable information on profits. It is well known that the Chase Manhattan figures on profits are questionable-Simon Whitney, in his monumental study for the Twentieth Century Fund, made the statement. that the profit returns on investments reported by the major companies are, to use his exact words "wholly deceptive," because many companies, for the purpose of this report, capitalize oil in place, and this drags down the rate of return.

I think that it is secretive in many other respects. I have tried to measure what share of a market the independents have. Well, you never know how to count an independent. Would you count a private

brand jobber who is marketing 2 cents under majors, who is wholly supplied by a major company, who is financed by a major company, and has in effect a blank check to expand-is this properly classified as an independent?

In some cases you can find out information of this kind, and in other cases you cannot.

But I think Professor Kahn summarized this when he said-I have the quote somewhere in my supporting statement-that there are almost no complete and reliable statistics on the basic crucial issues confronting this industry.

Chairman DIXON. Thank you. Go ahead, sir.

Mr. HEWITT. Time limitations force me to paint with bold, brief strokes in this statement; but I believe that convincing support for what I say is to be found in the supplementary material.

Let me begin by making some summary statements and then proceed to my recommendations:

1. Domestic crude prices are in fact "administered" prices. The prices are held at artificially high levels by various State regulatory authorities with additional support being provided by Federal import controls, the Connally "Hot Oil" Act, and the Interstate Oil Compact Commission.

2. Through various means (including buying practices and control of pipelines and refinery runs) but particularly through influencing the decisions of State regulatory commissions, the major integrated oil companies are able to exercise appreciable control over the supply and hence over the prices of domestic crude. Their ownership of domestic crude greatly understates the degree of their influence on crude production and crude prices.

3. The pressure to maintain high crude prices has also come from small crude owners and producers. Prices geared to preserving a place for these marginal producers have resulted in windfall profits for the large integrated producers.

4. Special tax privileges accorded to the production level (in particular percentage depletion and intangible writeoffs) have given added incentive for maintaining this crude regulatory system. The largest companies have always been, and still are the principal beneficiaries of these tax privileges although they do relatively little domestic exploratory drilling the encouragement of the latter being the principal argument used to justify the special tax privileges.

If I may comment on something that you brought out, sir, this morning-the low price of gasoline to the consumer. I think it would be only fair in computing the low price to the consumer also to compute what has been estimated as the $4 billion loss in taxes to the Federal Government due to the special tax privileges.

Chairman DIXON. Are you saying that the low price of gasoline is being subsidized through tax losses?

Mr. HEWITT. I am saying that the retail pump price should not be viewed as including the total cost to the ultimate purchaser, to the public in general, because the public in general is also paying a price in the form of higher taxes because of these special tax advantages. Integration in the industry has progressed far beyond any reasonable requirements of efficiency.

Efficiency should never be confused with mere strategic advantages which massive economic power confers. Although McLean and Haigh ("Growth of the Integrated Petroleum Companies") seem to have concluded that integration in the oil industry came as a result of pressure from profit opportunities and efficiency, their views are not shared by Bain, Rostow, Stockings, DeChazeau, and Kahn and many other eminent scholars who have studied the industry. These scholars, in general, would agree with Rostow ("A National Policy for the Oil Industry") when he said:

An essential instrument of economic power in the oil industry is integration; its essential consequence is size. The two forces are correlative and complementary. The great size of majors is not the result of technological advantage. The smaller units would not represent an abandonment of the advantages of scale in production. The unit of optimum size technologically bears no relation to the size of the great companies.

The "managed" crude price structure, the special tax privilege, and the vertical integration of the major companies have all worked together to create an inhospitable climate for small business in this industry. They have been the principal factors contributing to monopolistic patterns and trends in this industry.

The question was raised this morning why would a company take a profitable operation, such as a foreign operation, and mess it up by cutting prices in a local market. I think to understand this you must understand the integrated structure. A barrel of crude is sold somewhere. In order to make that barrel profitable, you must find markets for the gasoline. I think the point is that the tax privileges encourage the majors (or any integrated compay with crude) to maintain the volume in marketing even though it may not be profitable at the marketing level alone. This enables them to keep the crude throughout, which enables them to take their profits where they have percentage depletion, where they have the protected price structure or regulated price structure, and where it is profitable to make your money. You pay 52 percent taxes at the marketing level.

Chairman DIXON. What difference would this make in an inelastic industry?

Mr. HEWITT. I think it does make a difference, sir. If you have your choice of taking the profits at the production level, where you have the tax advantage, or taking your profits at the marketing level, where you have no tax advantages, it is quite obvious to me that you would take your profits where your effective tax rate may be as lowwell, the estimates vary on this, 20 percent on down, as a result of the special tax advantages.

It is also to your advantage to try shelter the price of crude.

Now, I have extensive quotes in this supplemental material, not only from people who have studied the industry as scholars, but also from interested people themselves. Where I submit that their analysis is essentially the same as the one that I am making here.

It seems to me that the sensible thing to keep in mind about the industry is the interrelationship between high crude prices, the tax privileges, and integration, and that given those factors working together it is inevitable, as Fortune magazine says, that you lock in your profits in crude, and that you hope that you can dispose of your profits at the retail level at cost or better. And I think that this describes