under restraints of limited available tankage. However, we General Lincoln's response, dated November 29, was to thank Mr. Yancey for his letter and to observe: I only wish everyone in the industry were in your fortunate position as to distillate inventory. ARCO LETTER On December 1, 1972. L. M. Ream. Jr., Executive Vice President of the Atlantic Richfield Company, wrote to General Lincoln to clear up some unanswered questions the General posed at a meeting the men had the previous November 17. On the subject of refinery operating rates, Mr. Ream said that the refining industry "cannot sustain, for an extended period, rates greater than 92-93 percent" of capacity. As to why the refineries were now operating below 90 percent. Mr. Ream attributed the causes to "an uneconomic ceiling price on heating fuel"; low supplies of low sulphur crude oil and mechanical inability to run high sulphur crude oil; environmental standards which preclude utilization of high sulphur residual fuel; and tightness in the Middle East crude market. Mr. Ream went on to say: We respectfully submit that the only effective response that can be taken to the situation as we analyze it, is prompt Executive action to afford some relief from government price constraints to meet our mutual objective of sufficient supplies of heating fuels available at a reasonable cost to the consumer. MOBIL LETTER Rawleigh Warner, Jr., Chairman of the Board of the Mobil Oil Corporation, discussed his firm's efforts on the fuel oil problem in a December 1 letter to General Lincoln. Mr. Warner said Mobil refineries were now producing the maximum amount of heating oil "of which they are reasonably capable.” In addition, Mobil was also taking steps to import more No. 2 oil. However, Mr. Warner said, trying to help out in the fuel oil shortage was causing an "economic penalty" to be inflicted upon Mobil. At fault was the price ceiling on distillates, Mr. Warner said, and while Mobil was prepared to absorb the loss no matter what, the ceiling might cause "other companies to be more reactive regarding the amount of heating oil they manufacture." TEXACO TELEGRAMS Speaking for Texaco, Inc. its executive vice president, J. H. Pipkin, wired General Lincoln December 6 to request his help in obtaining for the company authorization to import 1 million barrels of crude oil against its 1973 quota. Mr. Pipkin explained that Texaco had already used up its 10 percent draw on 1973 quotas but needed the extra 1 million barrels of crude oil to insure that its refinery at Port Arthur could achieve "previous levels" of operating "as soon as physically possible. General Lincoln heard again from a Texaco officer when on December 14, Maurice F. Granville, Chairman of the Board, sent a copy of a telegram the firm had forwarded to C. Jackson Grayson, Jr., Chairman of the Price Commission. The Texaco wire to Mr. Grayson cited the tight heating oil supply, asserted that Texaco's refineries had begun "maximizing production of middle distillates" September 15, 1972 but noted the "economic penalty" that Texaco suffered due to the price ceiling on distillates. Mr. Granville said that it was "imperative" that fuel oil prices be allowed to be raised. He explained: Failure to permit such increase, and imposition of a base price based on 1971 summer prices creates a severe hardship on our company in regard to sales of this product. In our system, no immediate increase in the yield of No. 2 fuel oil would be anticipated if improved price levels are granted, but such improved price levels will affect future increases in production when new equipment is installed. To the extent that there may be unutilized refinery capacity in the industry for the maximum production of No. 2 fuel oil, improved price levels along with sufficient crude should result in increased supplies of No. 2 fuel oil. CHAPTER IX. ATTEMPTS TO DEAL WITH THE FUEL OIL SHORTAGE REFINERIES ASKED TO STEP UP OUTPUT The Joint Board on Fuel Supply and Fuel Transport was created by President Nixon on September 29, 1970, and was located in the Office of Emergency Preparedness. Its purpose was to work with industries and state and local governments to identify and solve fuel and energy problems that develop. In November of 1972, the Joint Board issued a report and said that "additional effort" would be required to meet fuel oil requirements for the 1972-1973 winter. The Board said refineries were operating below capacity and they were making more gasoline at the expense of fuel oil. The report said price controls may be a "disincentive" to fuel oil production and declared: The reasons for the lags in production of distillate compared to estimated demand apparently include a refinery preference for production of gasoline . . . With reports showing both feedstocks and refinery capability available, there is a need for a general and immediate effort by the refinery industry to increase production of distillates in order to assure the needed supply. The Board concluded that if the refineries would not produce more distillate fuel oil, shortages would occur and they would have to be met by "maximizing drawdown on stocks," stepping up imports and. "in a severe situation, conservation." The Board continued: The general situation is fair. . . . Crude oil is sufficient with additional supply possible as a result of the President's action on September 18, 1972, to assure import availability. On the other hand, the Board's review shows that refineries have been operating below capacity and also with a lower proportion of their production devoted to distillates than projected in September. Consequently, distillate inventories have not been built as rapidly as anticipated.... and maybe insufficient to meet an estimated 8% increase in demand over 1971... . A Refining: It appears that refinery production is not now operating to achieve stock levels comparable to those established in 1970 and 1971, despite increasing demand. The overall level of refining operation is at considerably less than maximum practical operating capacity, and refiners have apparently not shifted fully to an emphasis of distillate production consistent with the demand. Demand for both gasoline and distillates B Distillate Fuel Oil: 1. General. The Joint Board reviewed the estimates made in early September on distillate fuel supply. Those estimates showed that refinery capability could provide adequate distillates for the heating season. The President's action of September 18, 1972, expanded crude oil import availability to assure supply. The review shows, however, that refineries have been operating below capacity and also with a lower proportion of their production devoted to distillates than projected in September. Hence, inventories have not been built as rapidly as anticipated. . . . With reports showing both feed stocks and refinery capacity available, there is a need for a general and immediate effort by the refinery industry to increase production of distillates in order to assure the needed supply. 2. Supply and Demand. The forecast winter demand for distillate for 1972-1973, compared to actual demand last winter is 8% higher. Distillate demand for the 1972-1973 winter, from October through March in PAD Districts I-IV, is expected to average 3.3 million B/D, while the distillate production in the same area is estimated to run 2.5 million B/D. . . . The API reports that in the four weeks ending November 3, distillate production amounted to about 24.9% of crude runs. This compares to a projection by the Department of Interior of 26.6% for the fourth quarter of 1972. Last year for the same period, this amounted to only 23.5%, but this was offset by high stock levels at that period. If refineries do not produce the distillate fuel oil required, shortages will have to be met by maximizing draw down on stocks, accelerating imports (authorized imports can be bunched into the heating months) and in a severe situation, conservation. GENERAL LINCOLN ON PRICE CONTROLS General Lincoln apparently was persuaded by November of 1972 that price controls were to some extent responsible for the low level of distillate fuel oil supplies. In a November 14, 1972, memorandum to John Whitaker of the White House staff, General Lincoln said the fact that price controls had held fuel oil prices at low levels had been an incentive for refiners to make gasoline instead. General Lincoln said the oil industry wanted the Price Commission to allow increases in fuel oil but had not formally petitioned the Commission and hoped that a government agency would take the initiative. General Lincoln said that the oil companies had been advised, however, that petitioning the Price Commission was their responsibility, not government's. 530-065 O-74-6 Regardless of who should request the higher price, General Lincoln offered convincing logic as to why one was needed when he said: It is noteworthy that the current differential [between gasoline prices and prices for fuel oil] is higher than at almost any time in the previous five years. In short, refiners can make more money making gasoline than No. 2. They say they lose money using the marginal refinery capacity to make No. 2. General Lincoln said the Price Commission would not take up the issue of a price increase in fuel oil without public hearings and that, therefore, "any price rise incentive is not going to be achieved immediately. . . ." Another way of increasing fuel oil supplies was to increase oil imports but that approach, even if implemented, "does not seem likely in itself to meet the need," General Lincoln said. While price rises and more imports would help and should be considered "if the developing situation so indicates," General Lincoln said what was most important at the moment was to appeal to the refineries to distill more No. 2 fuel oil. General Lincoln said: We need... to move quickly on the appeal to industry because of the immediate need to strengthen our distillate situation. Also, if we fail to act now, we would be subject to the criticism that we did not alert an appeal to the industry on a timely basis. OFFICE OF OIL AND GAS REPORT ON PRICE CONTROLS On November 15, the Office of Oil and Gas completed a draft report on what options were open to the government for trying to increase fuel oil supplies. After stating that the short supplies of fuel oil were due to price. controls that froze fuel oil at a seasonally low price, increased demand for the more profitable gasoline and a generally tight worldwide supply of light, low-sulfur crude oils, the Office of Oil and Gas draft report said its conclusion was that: with no change in the current economic environment, industry will have little, if any, incentive to respond to colder than normal weather this winter. It was then noted that the government could 1) increase the quota on petroleum products imports; 2) increase crude oil quotas; 3) persuade by "jawboning" the industry to increase its fuel oil supplies by more refinery production; 4) make an appeal to the public, in which the American people would be asked to maintain their fuel oil thermostats lower than usual to reduce electrical uses and thereby cut back the amount of fuel oil required to power the turbines that generate electricity; and 5) raise the price of No. 2 fuel oil. The Office of Oil and Gas draft report concluded that the fifth choice-raising the price of fuel oil-held "the greatest promise" of increasing the supply of No. 2 heating fuel. |