THE VIEWS OF THE PRICE COMMISSION STAFF

General Lincoln spoke on the telephone with James McLane, Cost of Living Council, November 21, 1972. The two men discussed the impact of the low price controls on the production of No. 2 fuel oil.

General Lincoln wrote a memorandum for the record the next morning. He said that Mr. McLane told him that low price controls were not causing low production of fuel oil.

General Lincoln said Mr. McLane told him that the

.. Cost of Living Council/Price Commission staff have concluded... that the oil industry can make a profit on current prices of No. 2 oil, and they know it.

General Lincoln said Mr. McLane next advised him that the Cost of Living Council/Price Commission staff also concluded that about 12 of the oil companies should be taken aside and told:

that unless they get going on the production of heating oil better than at present, it will be necessary for the Price Commission to have exhaustive public hearings on the cost accounting, etc., of the oil industry.

The second assertion was to be acted upon soon apparently for General Lincoln noted in his memorandum that Mr. McLane said the Price Commission would be contacting the Office of Emergency Preparedness to ask for "suggestions on the companies to call in."

On that question, General Lincoln said, "We will consult Interior." General Lincoln also recounted Mr. McLane's recommendation that in the event of a "fuel emergency," the Environmental Protection Agency be asked to "lift" ecological standards.

About this recommendation, General Lincoln said:

I asked [Mr. McLane] who identified the fuel emergency, and Jamie McLane said he thought I did. I did comment that I questioned the extent to which the authority to lift standards is with EPA.

PRICE COMMISSION VIEWS EVALUATED

James McLane's observations on how the Price Commission staff proposed to face the fuel oil shortage must have been referred by General Lincoln to Howard E. Roberts, Jr., of the staff of the Office of Emergency Preparedness.

"Asinine" was how Mr. Roberts characterized the suggestion that one solution was to declare a fuel emergency and lift EPA ecological standards.

Mr. Roberts made this characterization in a draft memorandum November 27, 1972, in which he said that "the potential for a crisis. stems directly from the failure of the price controls system to recognize and provide for seasonal adjustment of heating oil prices."

Mr. Roberts said that calling together several oil companies and threatening exhaustive public hearings on the oil industry's cost accounting system-which was what the Price Commission staff reportedly proposed was an "ill-advised" idea since of the major oil companies interviewed only Cities Service had admitted it was deliberately producing less fuel oil because of economic reasons.

Mr. Roberts said Humble, Mobil, Phillips, Sun and Shell all told the Office of Emergency Preparedness that they were making the "economic sacrifice necessary to produce near maximum levels of distillate."

Mr. Roberts said the "critical questions" were these:

What are the benefits to be gained from the Price Commission's refusal to raise the No. 2 ceiling?

How do these benefits compare with the obvious costs associated with a severe No. 2 fuel oil shortage?

WAIT AND SEE

In a memorandum for the record dated November 29, 1972, Lincoln noted the points covered in a telephone conversation with Peter Flanigan:

We discussed the pricing situation. I explained that this rests with the Price Commission and is being handled by Lou Neeb. He expressed confidence in Neeb and indicated that perhaps we should wait to see what Neeb comes up with.

IN-HOUSE STAFF REPORT ON PRICE CONTROLS

Philip Essley of the Office of Emergency Preparedness wrote a draft report November 28, 1972 entitled "The Distillate Fuel ProblemPerspective."

In this report, Mr. Essley said the most recent data on oil imports, products, refinery runs and prices showed that fuel oil levels were down and were likely to stay down unless government dangled some incentives in front of the industry to ecourage more production and higher No. 2 oil refinery runs.

A mild winter would cause "some local shortages" but the nation would make do by using higher than usual inventory drawdowns or by increasing imports, Mr. Essley said.

A colder winter, he said, would require "massive stimulation of production" and increased imports to prevent "serious supply shortages" from developing.

Mr. Essley said relaxed price controls on fuel oil would help quite a lot. He said:

A price increase of 1 cent per gallon should yield sufficient additional supply to meet the anticipated demand for a normal winter. An increase of 112 cents to 211⁄2 cents per gallon likely would be required to prevent shortages from developing during an abnormally cold winter.

THE PRICE CONTROL ISSUE AGAIN

The effect that low price controls were having on the supply of fuel oil was discussed again at the highest levels of government December 4, 1972, in a memorandum from Philip Essley of the Office of Emergency Preparedness to John F. Schaefer, an aide to President Nixon.

Mr. Essley said a shortage of No. 2 oil would occur but if the winter were not too cold "additional stock drawdowns" would mean "some local shortages" but otherwise a "manageable" situation.

However, if the upcoming winter were extra cold, needs would be met only by additional production, increased imports and conservation measures to reduce demand, he said.

But, finally, there wouldn't be a shortage of No. 2 fuel oil, Mr. Essley said, if there weren't price controls on No. 2 fuel oil. Here are his words:

The industry has the capacity to increase distillate production to a level high enough to meet even an excessively cold winter.

However, because of the current low distillate price, they have no incentive to do so.

The marginal costs of producing the additional distillate would exceed the price.

Consequently, to obtain additional distillate production will require either a price increase or some type pressure to induce refiners to act contrary to their best economic interests.

PRICE CONTROLS "A DEAD ISSUE"

Platt's Oilgram, a periodical containing news of the oil industry, said on December 4, 1972 that the industry viewed the government's policy of not relaxing price controls on fuel oil as having been "disastrous" and "politically sensitive."

Platt's Oilgram said "economic incentives" still encouraged refineries to make gasoline rather than fuel oil and that oil executives would continue their present course despite "government rhetoric."

On December 6, 1972, Howard H. Roberts, Jr., of the Office of Emergency Preparedness wrote a memorandum to the Director, General Lincoln, and cited the Platt's Oilgram article as being representative of how the industry was thinking.

Mr. Roberts said major oil companies had been queried on the fuel oil issue, had not been very persuasive in their arguments for relaxing the fuel oil price controls and anyway, Mr. Roberts said, even if prices were raised he doubted that "enough additional No. 2 oil would result from a price increase to justify the near-term political cost."

In this memorandum Mr. Roberts did not explain what "near-term political cost" he could possibly be referring to since his memo was dated December 6, 1972, one month after the Presidential election of the previous November.

In a second assertion which seemed unclear, Mr. Roberts went on

to say:

The only question which remains to be answered is what, if any, position the Joint Board on Fuel Supply and Fuel Transport should take with respect to the desirability of lifting the No. 2 oil price ceiling. Unless someone other than the industry or the Price Commission becomes involved, price relief in the near future is most likely a dead issue. Price relief, of course, in mid-January will be academic.

Mr. Roberts attached to his memorandum to General Lincoln data relating to government efforts to determine if several of the big oil companies could be producing more fuel oil.

The government's conclusion was that, in spite of the firms' protestations to the contrary, Humble, Texaco, Mobil, Shell, Atlantic Richfield, Cities Service, Phillips and Marathon probably could produce more fuel at present price control levels.

JAWBONING WITH INDUSTRY

As he indicated he would, Lincoln appealed to industry to produce heating oil despite the price freeze.

In a press release of November 16, 1972 industry was asked to increase production to meet winter fuel needs. The release said:

With reports showing both feedstocks and refinery capability available, there is a need for a general and immediate effort by the refining industry to increase production of distillates in order to assure the needed supply.

The Joint Board noted that the more than 120 U.S. refining companies, operating independently to meet both the demand for gasoline and for distillates, may not appreciate the need for a special effort by the industry as a whole to assure the needed distillate supply. Hence, the Board determined that the industry should be informed that greater utilization of available refinery capacity with a higher proportion to distillates clearly seems necessary.

The same theme was struck in a November 23, 1972 press release that said:

All U.S. refiners east of the Rockies have been personally informed of the need for particular attention to production of heating oil, G. A. Lincoln, Chairman of the Joint Board of Fuel Supply and Fuel Transport, today announced.

On Friday, November 17, the Department of the Interior sent to every refiner east of the Rockies receiving oil import allocations a copy of the press release by the President's Joint Board on Fuel Supply and Fuel Transport which analyzed the heating oil situation.

Attached to the press release was the memorandum that was sent to all refineries receiving crude oil import allocations in Districts I–IV, dated November 17, 1972.

The second paragraph of the memorandum is presented below: As you will note, the situation was recently reviewed by the membership of the Joint Board which concluded that the current inventory situation and projected requirements warrant an appeal to industry to increase production which thus far during this quarter has not measured up to either capabilities or anticipated requirements.

Lincoln carried the appeal to the National Petroleum Council. In a speech on December 11, Lincoln recognized "... that frozen prices [of heating oil] are a disincentive to inventory building. . . ." Regardless, Lincoln implored the refiners to increase their refinery production and their output particularly of distillate heating oil. Lincoln went on to say, "There is also the matter of crude supply. But the announced extension of 1972 allocations, coupled with permission to draw on them immediately should deal with that matter."

CONSERVATION APPEALS

To encourage the public to conserve energy, General Lincoln, in a December 8, 1972 press release, called attention to a bulletin entitled "7 Ways to Reduce Fuel Consumption in Household Heating through Energy Conservation" by the National Bureau of Standards and Mrs. Virginia Knauer, the President's Special Assistant for Consumer Affairs.

General Lincoln advised the public that reducing consumption of electricity during late afternoon and early evening periods contributed to conservation of heating oil since utilities use this oil for fuel to handle peak usage.

General Lincoln said that care in thermostat settings, maintenance. of oil burners and other readily available conservation measures can result in significant fuel savings as well as saving the consumer money. General Lincoln emphasized:

The recent abnormally cold weather underlines the need for a vigorous conservation program, led by industry and state and local government, as well as increases in refinery production of fuel oil.

This conservation effort had been preceded by a massive 236-page study entitled, "The Potential for Energy Conservation."

The study was "part of a continuing systematic Administration effort to focus attention on the need for all Americans to conserve energy," according to OEP Press Release No. 516, of September 19, 1972. General Lincoln said that if all the recommendations for energy conservation were followed by the American people the reduction in demand over 10 years would be equal to the energy contained in 7.3 million barrels of crude oil a day for one year with an annual value of $10.7 billion.

On December 11, 1972, General Lincoln wrote letters to the Governors of the 50 States and urged them to take steps to promote energy conservation at the State and local levels.

Pointing out that this winter's heating oil situation would be "tight,” General Lincoln said to the Governors:

I do call your attention to the need, in any tight developing fuel situation, for sensible energy conservation, including use of more available fuels rather than those in short supply.

The Federal Government's continuous program for energy conservation includes not only economy in the Federal establishment, but also advice to industry and consumers. All can join in renewed emphasis in this effort.

Office of Emergency Preparedness press release No. 529 for release December 17, 1972 reported that natural gas and heating oil supplies were tight in some sections of the nation and that, therefore, General Lincoln was urging consumers "to exercise prudence" in the use of these and other heating fuels.

The press release went on to say:

While the federal government can provide an umbrella of actions in loosening overall fuel supplies, Lincoln emphasized that local fuel shortages can best be handled by state authori