Chairman DIXON. 12.17 on premium? Mr. LOGAN. Right. Chairman DIXON. So for you to make any money you had to charge more than that for it? Mr. LOGAN. Yes. Chairman DIXON. Now, you have said that you have your method of figuring this out. Would you submit that to us to be made a part of this record? Mr. LOGAN. I am not in a position to do that. I would be glad to contact our accountant, Lybrand, Ross Bros. & Montgomery, and see if they would be so kind as to submit it. Commissioner ELMAN. If you do that, would you ask them specifically if they get the cost figures from you, or whether they determine them themselves? Mr. LOGAN. Yes. I might say for the record Chairman DIXON. If you don't want it made public, you tell us so when you submit it to us Mr. LOGAN. There is no secret. I have here our auditor's report for the year ending December 31, 1964. And they have a footnote, No. 2: "Inventories are valued generally at the lower of cost or market or realizable value." Now, in order to determine which was lower, they obviously had to arrive at a cost. Chairman DIXON. They followed some method. Mr. LOGAN. I believe they did. Chairman DIXON. This is the way you operate in your business on that figure, isn't it, or something near that figure? Mr. LOGAN. Yes, sir. Chairman DIXON. Now, if you look backward to 1964, when you are doing business in 1965 you have to use that as a base, as an estimated base, and it could be different? Mr. LOGAN. It probably is different at the present moment. Commissioner JONES. Would there be any way of allocating it on just the amount of crude used for each of your products? Mr. LOGAN. This, in effect, is what is done. Commissioner JONES. I understand you use the sales value in order to allocate it. Mr. LOGAN. In order to allocate certain costs. But many costs are allocated directly to gasoline, because gasoline involves a larger share of costs of operating the refinery. Commissioner JONES. But if you had your cost, could you do it on a volume basis, just the amount of crude used to produce gasoline and the percentage used to produce gasoline, and to make your allocation to just the volume used? Mr. LOGAN. Of course, it could be done this way. But our auditors have to arrive at a value for our inventories before they are willing to produce a balance sheet for their certification. And they elect to use their own methods. Chairman DIXON. All right, Mr. Logan, will you go ahead? I would like to introduce now Mr. Wendell. Chairman DIXON. Give your full name, sir. TESTIMONY OF JOHN P. WENDELL, EXECUTIVE VICE PRESIDENT, UNITED REFINING CO., WARREN, PA. Mr. WENDELL. My name is John P. Wendell. I am executive vice president of the United Refining Co. Chairman DIXON. Proceed, sir. Mr. WENDELL. United Refining Co. is a corporation organized under the laws of the Commonwealth of Pennsylvania, with its offices and principal place of business in Warren, Pa. It has been continuously engaged in the refining and marketing of petroleum products since 1902. We are the only independent refiner in district 1-if an independent refiner is considered to be one having crude oil refining capacity of less than 100,000 barrels per day as listed in U.S. Bureau of Mines Survey published July 15, 1964 which is solely dependent upon the manufacture and sale of gasoline and other conventional fuel products. All other independents in this district specialize in the refining of either lubricants or asphalts and operate on locally produced crudes which are adaptable for these purposes. The above-mentioned survey ranks us as the 57th largest refiner based on crude charging capacity out of the 131 definers who qualify for import quotas. Our refinery has a capacity of 15,000 barrels per day and has been completely modernized during the last decade. We possess a catalytic cracking unit, alkylation unit, catalytic reforming unit, and all auxiliary equipment necessary to manufacture gasolines of equal or superior quality to those of our competitors. During 1964 approximately 52 percent of our refinery production consisted of gasoline. Kerosene, home heating oil, and diesel fuel amounted to 21.6 percent, asphalts and residual fuels comprised 19 percent of refinery production, with the balance being accounted for by such products as LPG, wax, and refinery fuel. Out of total sales of $22,500,000, gasoline accounted for $13,100,000 or 58.2 percent. Our sales territory consists of certain portions of western New York State and the western two-thirds of Pennsylvania, as well as northeastern Ohio. In this area we account for less than 5 percent of total gasoline sales. Last year approximately one-third of the 117 million gallons of gasoline, which we refined and sold, reached consumers under our Keystone brand name. The balance was sold to other refiners, independent jobbers, and retailers, as well as direct consumers. For many years we have been an important source of supply of gasoline and other fuels for hundreds of independent marketers both large and small. All of our crude oil supplies are purchased from others and transported to the refinery by pipeline from such States as Montana, Colorado, and Oklahoma. We qualify as an importer of crude oil under the oil import program administered by the U.S. Department of the Interior. In 1962 and twice in 1964 we filed appeals with the Oil Import Appeals Board requesting relief in the form of an increased oil import quota on the grounds of exceptional hardship. On November 19, 1962, the Oil Import Appeals Board advised us of its decision on the petition of United Refining Co., No. H-5. We quote the following from the Board's decision: On the contrary, this record discloses that petitioner acknowledges that gasoline price wars in its area are the real cause of the unprofitable operation of its refinery (T. 11, 12) and that these price wars are due to factors other than the mandatory oil import program (such as "*** the existence of excessive producing, refinery, and marketing capacity ***"). The Board denied this petition and cited the same findings in the denial of two subsequent petitions. It did not refute our contention of economic hardship but found that this situation was due not to oil import program but to gasoline price wars in our marketing areas. Accordingly, we welcome this opportunity to present our views to the Federal Trade Commission regarding problems in the marketing of gasoline. The increasing trend toward concentration of economic power in the petroleum refining industry should be a source of vital concern to all those interested in the preservation of true competition in the marketing of petroleum products. A recently published study by the U.S. Department of the Interior entitled "An Appraisal of the Petroleum Industry of the United States" reports that in 1950 there were 357 refineries operated by 218 companies. In 1963 these numbers had declined to 304 refineries operated by 151 companies. The annual surveys of the Bureau of Mines reveal that import quotas were granted to 131 companies in 1964, 136 refiners in 1963, and 144 refiners in 1962. The most recent survey shows that the 22 major companies controlled 8,442,900 barrels per day or 83.9 percent of total refining capacity as of January 1, 1964, and the 16 companies next in size possessing from 100,000 to 30,000 barrels per day of crude capacity accounted for 831,230 barrels per day. Thus, the 38 largest companies had 92.2 percent of the total U.S. crude capacity on January 1, 1964, while the smaller independents possessed only 7.8 percent. In contrast, table 43 of an appraisal of the petroleum industry discloses that at the end of 1950 refiners with less than 30,000 barrels per day of charging capacity controlled 14.2 percent of the U.S. total. This constitutes striking evidence of the fact that the small independent refiners, who have played such a significant role in the past, are fighting a losing battle for survival. Independent refiners exert an influence upon competition in the petroleum industry which is disproportionate to their actual share of crude runs. They insure competition by providing an important supply of products for independent marketers. Frequently they provide the only outlets for crude produced in isolated areas or serve markets not easily accessible to the larger refiners. They are the strongest force against monopoly control of petroleum marketing by the major companies. Economic hardship is not new to the independent refiner but today most of them are in an uprecedented squeeze caused by an ever narrowing margin between crude oil costs and product selling prices. More than ever before the oil industry presents a contrasting picture of prosperity and poverty. The major companies, especially those with large supplies of foreign or domestic crude oil, are enjoying accelerated growth and record profits. The tax subsidy provided by the percentage depletion allowance enables them to take advantage of huge taxfree profits arising from the production of crude oil to support their marketing operations. The geographical dispersion of their marketing territories permits the subsidizing of a price war in one area by the revenues obtained from "normal" price markets elsewhere. In this process, needless to say, the consumer in the higher priced area is penalized for the benefit of motorists in the price war region. On the other hand, the independent refiner is the victim of excessive competition in gasoline marketing and cannot benefit from tax free production derived profits, crude imports, and geographical dispersion in any way remotely approaching that of his giant competitors. He sells products in markets made ruthlessly competitive by the majors, while, at the same time, usually purchasing his raw material requirements at prices rigidly maintained at artificially high levels by the same major company competitors. No matter how efficient an independent may be, he is fighting against overwhelming odds. This unequal contest will inevitably lead to increasing concentration of economic power among the major refiner-marketers unless and until the Federal Government decides to alter the rules of the game and accept responsibility for correcting the situation which they themselves have in large measure created. We are attaching herewith our most recent petition dated June 29, 1964, to the Oil Import Appeals Board (exhibit A), as well as a copy of our statement at the oil import hearings conducted March 10 through 12, 1965, by the U.S. Department of the Interior (exhibit B). These statements amply set forth our position as to crude oil prices which we believe to be essential to a full understanding of the problem of marketing gasoline. Chairman DIXON. It won't be necessary to copy exhibit A and exhibit B, because they are part of the record already.1 Go ahead, sir. Mr. WENDELL. It seems to us that unless circumstances change it can be assumed that within another decade independent refiners will cease to be a significant factor in the total U.S. gasoline supply. There will then exist a condition which the economists define as oligopoly or control of the market by a few giants. This will have profound effects on the marketing of gasoline, particularly on the role of independent or unbranded retailers. There will still be competition but not as it exists today. The public will not benefit from the wide freedom of choice afforded them in the past. If this is to be prevented, the Government must act to free independent refiners from the shackles of rigid and artificially supported crude oil prices and eliminate marketing practices which tend to weaken or destroy competition. The first step should be a comprehensive review and overhauling of Federal tax policy which now provides excessive incentive and benefits to the large integrated companies. Secondly, the Federal Government's oil import program should be modified so as to assure independent refiners of import quotas large enough to equalize their share of the burden of supporting domestic crude oil prices. Finally, it would be necessary to force all companies to discontinue predatory pricing policies in the marketing of gasoline the industry's principal product. Gasoline price wars have taken place with unprecedented and nearly uninterrupted severity in our marketing area during recent years. In 1964 we were forced to respond to at least 159 major changes in gasoline tank wagon prices. There were 134 such changes in 1963 and 158 major tank wagon price changes in 1962. However, as recently as 1960 1 The exhibits referred to appear in Appendix II. there occurred only 13 such price changes, and in 1959 there were 8 price changes in our territory. We know of no other important commodity which is sold to the public at such widely fluctuating prices as gasoline. One of the results of this situation is that the public is subjected to price discrimination as the result of the changes from time to time and from one location to another. For instance, during 1963 and 1964, the average price of one major brand of gasoline in Cleveland, Ohio, was $0.319 per gallon; 90 miles to the east in Erie, Pa., the average price of another major seller during this period was $0.295. Another 90 miles to the northeast in Buffalo, N.Y., the average retail price of the principal marketer was $0.264, while in Rochester-less than 70 miles distant-a similar average was $0.305. During the same period branded retail gasoline prices in Buffalo reached a low of $0.219 and a high of $0.299. They were below $0.269 for approximately 10 months and above $0.269 for approximately 11 months. Attached to this statement and marked exhibit C you will find a summary of gasoline tank wagon prices in certain parts of Pennsylvania from 1959 through 1964 and a summary of prices in western New York State for the same period. We would emphasize that these exhibits by no means reflect all price changes of every company, nor do they show the many localized differences. Nevertheless, we believe they amply support our contention that gasoline markets have been in a chaotic state in these areas for the past 4 years. At this point we would like to state that the industry's record of constantly increasing efficiency in all phases of its operations and the corresponding benefits which have been passed on to the public in the form of lower prices for all major products over the last several years is an accomplishment in which all those within and without the industry can justifiably take pride. We do not object when economies in the production of gasoline are passed on to the consumer as the result of normal competitive forces. This we believe to be the inherent advantage of our free enterprise system. We are firmly convinced however, that when the vast economic power of giant corporations is used arbitrarily, capriciously, and with predatory intent to destroy traditional price relationships and to increase their share of the market at the expense of much smaller competitors through the medium of below-cost sales and economic coercion, the long-term results in altered marketing patterns will not serve the public interest. We are not here to complain about competition, but to object to abuses which sooner or later will destroy competition. It is no coincidence that the widespread gasoline price wars previously referred to first made their appearance at the same time as the introduction of the so-called subregular grades of gasoline by two major marketers. The effect of the subregulars has been to change radically the traditional marketing patterns and the violent disturbances in prices were merely a part of the overall picture. The subregulars represent a calculated campaign to capture business, through the application of overwhelming economic power, from independent marketers who traditionally have sold their unbranded gasoline at lower prices than the majors. While the pricing policies of the subregular marketers have not always exhibited a uniform pattern, in many markets the subregulars have been priced at the same level as the majority of private branders. Because of the many advantages |