9. Interrelationships between the crude controls and the tax privileges generate excess capacity, increasing costs, and create periodic oversupply. These two factors coupled with massive integration mean that the marketing level catches the brunt of the pressures generated by the artificial factors working in the industry. It is my opinion that Fortune magazine in 1940 made the best succinct statement of this when it stated:

It is clearly in the interest of large integrated companies to keep profits locked securely in crude oil *** and far away from the point where the refined products meet the pressure of the market. Under such a system, gasoline price wars touched off by dealers are incessant; but the marketing company usually cushions the shock before it gets to the crude margin, The general strategy of running an oil company might be defined thus: Make big profits on the crude, protect the profits by owning pipelines and tankers so that transportation earnings do not get siphoned off to others; and, finally, own sufficient refining and marketing equipment to dispose of your products at cost or better.

Statements of various industry leaders have agreed with this analysis. For example, Forbes magazine (Jan. 1, 1963) quoted Kerryn King, vice president of Texaco as saying:

We are the largest domestic producer of crude, and we have a home for every barrel that runs through our refineries. So we can afford to be objective about price wars. We make our money on crude regardless.

The struggle for "controlled" gallonage has led to a rash of buyouts and mergers. The National Petroleum News Fact Book issues for 1962, 1963, and 1964 (see app. I, supplemental material) contained summaries of leading mergers and acquisitions. Although the figures are incomplete, the majors had 61 acquisitions plus 3 refinery acquisitions. Including the Standard of Kentucky station figures this represented 8,859 stations acquired. The largest acquisition of stations were by Standard of California (over 8,000) and Humble (117). Semimajors acquired 3 refiners, made 38 total acquisitions, and the listed stations acquired totaled 88. I am sure a detailed investigation would reveal that the acquisition trend favors the majors-particularly the Big 8— even more than these partial figures indicate.

Keep in mind that there are, in fact, many hidden monopolistic trends in this industry. The economic coercion of dealers is documented in many leading antitrust cases. Jobbers have at times acted as a countervailing force to the majors. In recent years, however, jobbers, both branded and private brand, have to an increasing degree become dependent upon their suppliers for price protection stopouts and financing. Many majors have bought substantial stock interests in large branded and private brand marketers. (Marathon's acquisition of stock in Gastown and in Consolidated Oil of Wisconsin, for example.) Branded jobber franchises afford little legal security so as to afford jobbers a measure of independence. The available facts indicate that branded jobbers are a declining factor in the industry.

Chairman DIXON. Are you using the word "jobber" as a wholesaler? Mr. HEWITT. Yes, sir; as an independent marketer, as distinguished from a commission agent. To be technically accurate, I should call branded jobbers "distributors." But I have always referred to both branded and private brand wholesalers as jobbers.

The tax gallonage studies I have made in Indiana indicate that the private brand jobbers' share of total gallonage dropped from 16 percent in 1955 to 12 percent in 1962. I have recently acquired figures on Illinois which show the same trend (see app. II).

RECOMMENDATIONS

What, if anything, can or should be done?

1. First, the Federal Trade Commission can do this industry and this country a great service if it can acquire some additional facts on some of the issues discussed. For example, do the integrated companies in fact earn substandard returns on their marketing investments? If so, is it the intent of Congress that these crude controls and tax privileges be used in this fashion and with these anticompetitive results? Can standardized accounting and reporting methods be devised so as to make public facts on alleged margin squeezes, subsidization of marketing, and other discriminatory practices? Can a disclosure system be devised which would be fair to the reporting companies and not become a device for impairing competition?

2. Can the Commission devise trade regulation rules that would really get at the root of the problem? I am unable to suggest rules that would effectuate the basic changes that should take place.

Again, I repeat the problem is to reduce the arbitrary advantages due to tax advantages, integration, size, in relation to crude.

3. On the other hand, I believe that modern authoritative studies clearly demonstrate that the production level is in fact being "managed" contrary to the purpose and intent of the antitrust laws. I cannot believe that a majority of Congress ever intended to authorize State agencies acting in combination with giant enterprises to control production and prices in so vital an industry. In fact, article V of the interstate oil compact prohibits production controls for pricefixing purposes and since 1955 the Attorney General is required to make reports on compliance with this article. The last report was extremely critical of the action of the State commissions and flatly charged that the Texas commission "managed" the market. This conclusion is in agreement with those reached by virtually every authoritative study of the industry. The Attorney General also pointed out how this market management was contributing to monopolistic trends in the industry. And I have the quotes from the Attorney General's report in my appendix to this effect.

While it is true that the Connally Act prohibits shipment in interstate commerce of oil produced in excess of State conservation laws, the U.S. Supreme Court in earlier cases ruled that laws controlling oil production "to demand" violate due process of law and are unconstitutional. The evidence seems overwhelming that the present

system is subject to serious legal challenges on both antitrust and constitutional grounds.

I believe that if presented with the proper case and an economic brief, the U.S. Supreme Court would rule that the present cartelized structure for the maintenance of artifically high crude prices operates contrary to the Sherman Act and is a principal factor contributing to monopoly trends in this vital industry. In addition, I suggest that this Commission explore the possibility of instituting "unfair competition" charges under section 5 of the FTC Act against the major companies to the end that these companies be ordered to cease and desist from any joint participation in any type of production control scheme other than one related to true conservation (the utilization of the most efficient production methods).

Sooner or later the FTC, Department of Justice, or some private litigant (perhaps a nonintegrated producer or refiner) is going to challenge this irrational, wasteful, and monopolistic structure. I am convinced, as were Dean Rostow of Yale, Dean Griswold of Harvard, and many other leading scholars-including Mr. Turner who has recently been nominated for the Department of Justice staff-that if the American public understood the true facts-changes would be forthcoming. For all of these reasons I urge that the FTC consider further action along the avenues suggested.

Now, sir, I will be glad to have your questions.

Chairman DIXON. Now, your supplemental material is entitled, at least the first page, "Crude Control" and it continues.

Mr. HEWITT. Yes, sir. I am not going to read that, sir. All of that is intended as supporting material for my summary statement. I do have a very short statement that I would like to present on behalf of the organization SIGMA-unless you want to stop and ask me questions.

Chairman DIXON. I am going to make this supplemental material a part of the record.

(The supplemental material referred to was marked "Hewitt Exhibit No. 1" and appears in the appendix at p. 958.)

Chairman DIXON. Now you can read your SIGMA statement. Mr. HEWITT. I would like to say that as to my principal statement, the organization SIGMA endorsed my analysis, but some of the members disagreed on one of my recommendations.

Chairman DIXON. For the record, SIGMA is the Society of Independent Gasoline Marketers of America?

Mr. HEWITT. Yes, sir.

Chairman DIXON. Their headquarters are where?

Mr. HEWITT. In St. Louis.

Chairman DIXON. Go ahead.

Mr. HEWITT. Last week the officer of SIGMA requested that I give this Commission some information concerning the relative share of the private brand marketers. I called Mr. Yarley, and he said it would be permissible for me to cede 10 minutes of the time granted to me for this important topic.

I suggest that the reports that private brand marketers have upward of 20 or 30 percent of the market and are making great inroads on the majors is not in accordance with the facts. The figures and published reports indicate quite the contrary is true. The pri

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vate brand share is substantially less than 20 percent even in a State like Indiana where private brands are relatively numerous. Furthermore, the figures I have indicate a decline in the private brand share of about 25 percent since 1956, for the State of Indiana.

Oil & Gas Journal (Apr. 19, 1965, p. 61) had market share percentages for the leading majors and for independents for three major States as follows:

In 1964 NPN did a study entitled "Who's Who in the Detroit Market." The figures show the majors had 91.6 percent of the market. Semimajors (Leonard and Ashland) had 0.6 percent. Clark had 2.7 percent. Private brands had 7.8 percent.

On February 8, 1964, an article appeared in Oil & Gas Journal (p. 50) entitled "Top 10 Gasoline Marketers in 6 Regions of the United States." The percent of market figures by region were:

These shares do not include the totals for other majors in the same markets. On the west coast no semimajors were in the top 10. The Rocky Mountain area included two integrated semimajors (Frontier and Tenneco) with 5.1 percent (total) of the market. The Midwest, Northeast, and Southeast had no semimajors in the top 10. The Southwest included one semimajor (American Petrofina) with 3.8 percent of the market.

In this article it was said that the independents average 20 percent of the market in the 45 States. "Independents" as used here obviously includes major secondary brand gallonage (Wilshire, Douglas, Malco, etc.) and may even include branded jobber and commission agent gallonage. (Note the contrast between these Journal figures and those previously given for the Pennsylvania-Delaware-New Jersey area.)

In other words, in the Northeast it shows 84 percent in this February issue here and-but it seems completely at odds with the 8 percent given for three of these States in the April issue.

Besides including secondary brands (i.e., Wilshire, Malco, etc.) in as independent gallonage the independent figures released by major sources include private brand jobbers totally or partially supplied by majors. As table 1 indicates there has been a dramatic shift in supply sources for the 30 SIGMA members reporting. Between 1960 and 1965 the majors gained 17 percent at the expense of the independent refiners. The semimajors held steady. The majors, of course, enjoy the bulk of the profits (on crude) to be made off of this gallonage and

now supply about one-half of the supply of these reporting marketers. I have a copy of the questionnaire which I sent out. Chairman DIXON. If you will furnish it, we will make it a part of

the record.1

Mr. HEWITT. Table 1, "Supply sources 30 private brand marketers": TABLE 1.—Supply sources-30 private brand marketers

Source: Questionnaire returns SIGMA membership. Percentages were applied in both years to the gallonage figures for 1965. This would tend to understate the trend in favor of the majors. No gallonage figures for 1960 are available.

In addition, these independent figures include private brand jobbers substantially financed and even owned by major companies. The tax gallonage figures in Indiana, Illinois, and Ohio show a decline in the share of private brand marketers.

I was not able to get the figures from Ohio in time for this report. I ran into problems of classification, finding out which company was which, and for that reason I would like to exclude Ohio in that state

ment.

Chairman DIXON. When will you have that for Ohio?

Mr. HEWITT. I will see what I can do on it. There is a real problem of classification here of some companies. Maybe you can give me a suggestion. How should I classify gallonage which is all supplied by a major company on a long-term contract to a private brander who sells at the same price as do private brands but is financed substantially by the major? Is that private brand or major gallonage?

Commissioner ELMAN. We call it a hybrid.

Mr. HEWITT. Well, then I will have to redo all of my columns. I will see what I can do with that.

I am convinced that a nationwide study would show that private brand marketers-including those supplied by majors but excluding secondary brands-account for no more than 10 percent of the gallonage and that this share has actually declined in the past 5 years.

Now, that is a surmise. I am guessing that it is so, because the only firm figures I can get, where I know the basis of classification of marketers, indicate that the private brand share runs somewhere between 10 and 15 percent. But it would be interesting to find out what the true facts are on that.

That completes both of my statements.

Chairman DIXON. Commissioner Elman?

Commissioner ELMAN. I gather that you believe that the problems of competition in the marketing of gasoline derive from the structure of the industry, which you characterize as irrational, wasteful, and

1 The information referred to had not been received at the time of going to press.