This is not a program which contemplates somehow or other the domestic industry has to make up a 10 percent reduction below what we need next year. Congressman Hungate said he would have preferred that the President had simply increased imports 10 percent with no strings attached to next year. Congressman Hungate said that while no one knew just how much of the 10 percent borrowed import authority the oil companies would use, it did seem likely that the oil companies would use some of that authority. To that, Mr. Bennett replied: Yes, we hope so. Then we will feel we weren't doing a useless act. CHAPTER VIII. THE FUEL OIL SHORTAGE ARRIVES GENERAL LINCOLN'S EVALUATION OF OCTOBER 1972 In early October of 1972, General Lincoln detailed some of his own thoughts on the No. 2 fuel oil situation. On October 2, he noted that the "excessively warm weather" of 1971 had resulted in high inventories of fuel oil and that these inventories were "very unsatisfactory" for the industry. General Lincoln said the bad news for the industry was "undoubtedly of some benefit" to the consumer because of "softened prices". On October 5, in a paper titled "Notes on No. 2 Oil Situation," General Lincoln said that, barring "a cold snap." supplies of No. 2 oil may reach "desirable" levels within a few weeks. He went on to say that the refineries would have to be run at 92.5 percent capacity "to meet requirements." In the September hearings Lincoln and Wakefield had indicated that demand under usual weather conditions could be met if industry operated at 92 percent of capacity (crude oil runs to stills) in the final quarter of 1972. In the previous two weeks, the refineries had averaged capacity utilization runs of 91.8 and 91 percent, the General said, adding: Again, there is some basis for belief that, barring a cold snap in the next month, there might be what could be considered a normal inventory situation by the end of the first week in November. SURVEY REVEALS CAUTIOUS OPTIMISM In its October 9, 1972 issue, the Oil and Gas Journal reported on the findings of a survey it conducted as to what fate awaited the oil industry in the waning months of the year. The judgment was a heavily qualified optimism. If refinery runs were high and if the winter was not extra cold and if a stock buildup occurs if all these factors work out the fuel oil supply would be tight but adequate and the nation would make it through the winter with fuel oil equal to its needs. The Journal did speculate that independent marketers might have difficulty obtaining fuel oil as inland production of crude oil declined and refiners resorted to imports. But, on balance, things didn't look all that bad as the Journal concluded: Most industry analysts think that a moderate stock buildup will occur over the next two months and that the emergency imports granted recently also will add significantly to supply. These observers also point out that it's easier to step up distillate yields than gasoline by reducing the cuts for kero sine, jet fuel, diesel [fuel] and by reaching deeper into No. 3 They believe that with a late stock buildup, new imports INDUSTRY CONTACT WITH GOVERNMENT-OCTOBER During October, petroleum companies were supplying the OEP with their own analyses of the crude and finished product inventory situation. In an October 2 memorandum, Robert E. Plett recalled the September 29 meeting with Mobil Oil spokesmen Roger Williams and Bonner Templeton. At that meeting, Mobil officials said crude feedstock availability for its Chicago and Detroit refineries was 100,000 BD below the level required to permit its refineries to run a maximum capacity. Howard H. Roberts, Jr. of the Office of Emergency Preparedness reported October 16 on the October 12 meeting with the West Coast Independent Operators and Marketers represented by Walter Simas of Ashland Oil and Simas Brothers, Jerry Herbst of Herbst Oil Company, Robert Roth of World Oil, Finn Moller, of U. Save Automatic Corporation, William E. Thompson of Power Thrust and three attorneys, Elmer L. Hoehn, John Healy and Edward Webber. They indicated that independent terminal operators were being squeezed out of their normal gasoline supplies. Such regular suppliers as Coastal States, Phillips, Fletcher, Powerine and Signal, due to the shortness of gasoline supply, were no longer selling to independent distributors. Instead, what product they had was being sold to the major oil companies. Mr. Simas said Ashland had been granted an allocation of 183,000 barrels of gasoline by the Oil Import Appeals Board, but that this was not enough to make up a ship load or justify reopening the terminal. COMPETITIVE IMPACT OF SHORTAGES Howard H. Roberts of the Office of Emergency Preparedness wrote General Lincoln a memorandum October 21, 1972 in which he discussed the competitiveness of the American oil industry. In a 600-word memo, Mr. Roberts summarized key trends in the industry which were working to drive out of business smaller companies and would bring about an oil industry composed only of 15 or 20 "vertically integrated" major corporations. Mr. Roberts said the trend leading toward the destruction of the independent marketers was the result of factors of economics, resources and the marketplace-for the most part, impersonal factorsand that "no malevolence has to be assumed on the part of the larger companies." Mr. Roberts said the most challenging competitive problem in the oil industry was seen in the inability of independent refiners and marketers to buy adequate supplies at competitive prices. He explained: This problem, however, cannot be attributed to monopolistic power in the traditional sense. In comparison to many other U.S. industries (steel, automobiles, etc.) or any other The big oil firms-those which own operations from the wellhead to the service station pumps and are, therefore, termed "vertically integrated"-have benefited from developments within the petroleum industry. These developments, Mr. Roberts said, were increased demand, static growth rates in domestic production and refining capacity, improvements in the efficiency of the exchange market, and an increased reliance by the major firms on pipelines for product transportation. Increased pipeline transportation has enabled vertically integrated companies to adjust "existing imbalances" by exchanges with other integrated companies, Mr. Roberts said, asserting: There are obvious and definite advantages to dealing with another vertically integrated company. Mr. Roberts continued: Environmental requirements with respect to unleaded gasoline will, of course, hasten the demise of the small, non-integrated refiner. Should the predictions come true that the oil industry would be left one day with only 15 or 20 giants, the industry still might be competitive, "assuming the Anti-trust Division of the Department of Justice was sufficiently active," Mr. Roberts said. The crux of the competitive problem in the oil industry, Mr. Roberts said, "was that as the demand for petroleum went up and the supply went down, the sources of petroleum for the independent firms dried up." Mr. Roberts wrote: Classic economic theory states that vertical integration is not anti-competitive as long as competition exists at each level. However, there is nothing in the U.S. Code which requires a company . . . to compete at each level. If all the vertically integrated companies opt for and achieve balanced (self-sufficient) operations at each level, non-vertically integrated operations will be driven out of the market. He concluded: ... those companies now in the industry which are not integrated and balanced must either become vertically integrated and balanced or be absorbed by the vertically integrated companies or forced out of business. Mr. Roberts said his conclusions had been influenced by a study called "Report on Crude Oil and Gasoline Price Increases of 1970." PRICE FREEZE LIMITING PRODUCTION OF FUEL OIL Fuel oil refinery expectations were less encouraging in November than they had been in October and the qualified optimism gave way to realization that a shortage was quite likely. CITIES SERVICE MEETING Mr. Plett recounted the November 6 meeting with Cities Service in a November 7 memorandum. Attending the meeting for Cities Service were the firm President, C. J. Waidelich, and R. H. Chitwood, C. F. Froeb and Admiral Lattu. Cities Service reported that it would have to run its refineries at 91 percent capacity to meet distillate demand and recommended that Government relieve the tight fuel oil situation by ending price controls, reducing sulphur specifications on residual oil and allowing refiners "on a temporary basis" to use 5 percent of the 1973 quota to import distillates. The Cities Service officials said their company was making 111⁄2 cents more a gallon from gasoline than it would from distillates. Mr. Plett said of Cities Service: While the company has the ability to switch [from gasoline to distillates], they do not plan to do so. The company (and the industry) has a market for all the gasoline they can produce. HUMBLE MEETING The November 3 meeting with Humble Oil executives was summarized in a November 8 memorandum prepared by Mr. Roberts. Representing Humble were Randall Meyer, Russell H. Herman, L. D. Woody, T. A. Kirkley and Don Smiley. Humble spokesmen acknowledged that the oil industry would have to run at 93.9 percent of capacity the rest of the year to produce adequate distillate supplies. But "economic incentive to operate at these levels does not exist", they added. Recommendations for Government action put forward by the Humble Oil men included proposals to (1) adopt a vigorous jawboning policy; (2) remove the crude conversion option for No. 2 tickets; (3) require all 1973 tickets to be used in the first quarter; and (4) grant price relief by raising the price ceiling or putting oil under term limit pricing. In an October 25 note to himself as he prepared for the meeting with Humble Oil officials, General Lincoln dictated the following memorandum for the record. I asked Randy Meyer when he comes at 9:30 a.m., on November 3, to be ready to speak to the question: "What's our contingency plan if we have our coldest winter in the last five years?" It is not apparent from Mr. Roberts' summary of the meeting if General Lincoln asked Mr. Meyer that question or that, if he did ask the question, what Mr. Meyer said the answer was. TEXACO MEETING A. M. Card, the Senior Vice President of Texaco, W. R. Young. the Executive Vice President and General Counsel, and James Pipkin, the Executive Vice President for Government Relations, represented Texaco at the November 8 meeting with the Office of Emergency Preparedness. |