February 8, 1973
Page 4072
FUEL OIL CRISIS – TESTIMONY BY SENATOR McINTYRE
Mr. MUSKIE. Mr. President, in recent weeks we have been hampered in our efforts to seek a realistic solution to the current fuel oil shortage by misleading, contradictory and inadequate information concerning the ability of the major oil companies to provide adequate supplies.
Now, with the end of the phase II price controls, the major oil companies have announced price increases on heating oil products amounting to over 8 percent. It is difficult to see how such an increase can possibly be justified to American consumers without more information than has been provided thus far by the oil industries.
Yesterday, in testimony before the Cost of Living Council hearings on the recent price increases, Senator THOMAS J. McINTYRE presented a thorough and incisive evaluation of the present situation. I know his remarks will be of considerable interest to my colleagues and the public.
Mr. President, I ask unanimous consent that the text of Senator McINTYRE's testimony be printed in the RECORD.
There being no objection, the testimony was ordered to be printed in the RECORD, as follows:
STATEMENT BY SENATOR THOMAS J. MCINTYRE
It is indeed a pleasure for me to appear before you today as a witness at the public hearings you are now holding on the recent price increases by the petroleum industry on No. 2 distillate or as it is better known in my region of the country – home heating oil.
I am sure you are aware of the intense interest that I have with regard to this matter and I hope that these hearings today are in and of themselves an indication that Phase III of the wage and price control program is more than a "toothless tiger" and will, in fact, require the various segments of our domestic economy to "toe the line" on prices and wages and not allow us to enter into another inflationary spiral.
Today's hearings by the Council are concerned with recent home heating oil price increases, and I make no pretense of appearing as a witness having any professional expertise as to the justification of the recent action taken by several oil companies. I do appear, however, as a representative of the consumers of heating oil in this country, particularly of those consumers living in my State of New Hampshire.
I would like to raise several points that I hope the Cost of Living Council will examine closely in its consideration of the appropriateness of these recent price increases:
1. PRICE
Of course, the primary reason for these hearings today is to make a determination as to whether the recent increases in consumer costs for home heating oil can be justified and whether they meet Phase III guidelines and standards.
As an indication of the magnitude of these recent increases, I would like to cite a few figures.
At the present time, annual national consumption of home heating oil is approximately 2 million barrels a day. With 42 gallons in a barrel this 2 million b/d figure equals 84 million gallons a day.
Of this 2 million b/d national consumption rate, the East Coast of the United States uses approximately 2/3 or 1.3 million b/d. Out of this figure, the New England region alone uses approximately 400,000 b/d, or 20% of total national demand. For every one cent increase at wholesale heating oil costs in New England alone are increased by $62 million a year.
Nationally the cost is over $300 million a year. And this is just the initial wholesale increase.
This fuel is not only used for heating homes throughout the United States but is also a basic boiler fuel used by electric utilities, hospitals, public and private buildings, and business.
Each cent of increase at wholesale has a rippling effect throughout the entire economy that cannot be easily established as a net consumer cost. I am, however, sure that no one would disagree that substantial cost increases in such a basic commodity certainly applies strong inflationary pressures on many segments of the economy.
The question immediately arises as to what benefits will accrue because of increases in price.
Does this mean that the industry will increase production of this product, thereby alleviating shortage or near shortage situations facing several areas of the country or does it mean that the industry will find it more profitable to continue to limit production of this product thereby maintaining a continuing tight supply situation which can be used as a basis for additional price increases?
This is one issue that I think should be thoroughly explored by the Cost of Living Council with definite assurances by the industry, substantiated by convincing data, that price increases will in actuality result in increases in supply. If the industry cannot show this, I feel that the Cost of Living Council would find it impossible to approve the recent actions taken by the industry.
Another point that is of great concern to me is the fact that as early as last August, several major refiners were indicating even that early that without price increases there would be no incentive to increase production of home heating oil. I categorized that attitude as "blackmail" at that time, and I think the term applies equally as well today.
The industry was arguing that when the price freeze was first imposed by the President on August 15, 1971, home heating oil prices were frozen at their seasonably low point. Their argument continued that this product is seasonal in nature and that by freezing the price at the low point the industry had no incentive to refine substantial quantities.
On August 28, 1972, an article appeared in the Wall Street Journal quoting a vice president of a major oil company as stating that – and I quote from that article – "The industry will turn only about 2.9 (sic) percent of each barrel of crude into home heating oil this winter instead of a maximum potential 25 percent because any higher rate of fuel oil production will just not be economical at present prices." The article went on to state that this vice president said that if the government permits a one cent per gallon price boost, he estimated that the processing rate would climb to 24.6 percent and that would mean about 50,000 more b/d of fuel oil.
It is simply unbelievable that the major oil companies could be as insensitive as to take the position that because their prices were frozen and could not rise that they would not produce a product as essential to the well being and security of this country as home heating oil.
What would have happened to wage and price controls if every other industry had taken the same position as the oil industry?
The tragedy of the situation is that the major refiners of this country did exactly what they threatened to do. They did not get a price increase; therefore, they did not produce the product; therefore, shortages developed. And now they are in here to defend their recent actions.
I feel compelled to say that from my personal point of view no price increase would seem equitable at this point to an industry that acted in such a callous disregard of the health and safety of our citizens as we have just witnessed. And I might add, we are not over the dilemma yet.
There is still the coldest part of the winter facing us, and it could well be that shortages will develop with or without these recent price increases. In fact, it is my understanding that in the last few days the soon-to-be abolished Office of Emergency Preparedness is now in the process of developing a national rationing program for petroleum products.
Another side of this pricing question that the Cost of Living Council should look at is gasoline. If home heating oil prices were caught at their seasonal low point, then the opposite is true of gasoline. The peak demand period for gasoline in this country and a traditional peak point in price for that product is during the summer months. It would appear to me that there must have been some balancing of cost in view of the fact that while heating oil was allegedly frozen at a low point; gasoline was frozen at a higher point. However, I have heard no discussion from the industry on this point.
2. EFFECT OF PRICE INCREASE
I certainly hope that the Cost of Living Council will take a close hard look as to exactly what the industry has recently done with regard to price increases. As I stated earlier, I am not an expert with regard to petroleum product prices and can only rely upon recent press reports. It is my understanding that in the last week and a half there has been an upward price movement throughout the entire industry.
It was begun on January 19 by an announcement by Mobil Oil Company that it would immediately increase wholesale prices on home heating oil by ¾ of a cent a gallon. It is my understanding that within the next few days following Mobil's announcement the remaining major refiners increased their wholesale prices at a minimum level of ¾ of one cent a gallon.
If that was the only action taken, it, in my opinion, would have been serious enough to justify the hearings being held here today. However, that was not the case. The major suppliers not only increased wholesale prices, but, at the same time, removed what are known as "dealer discounts" or temporary dealer allowances (TDA).
These TDA's are actually a reflection of competitive distortions within the industry and of continuing efforts at maintaining a retail price fix on home heating oil and other petroleum products, notably gasoline.
The major suppliers, rather than allowing wholesale prices to fluctuate based on demand, generally try to fix prices at a permanent level which is usually referred to as "rack" or "tank-wagon" price.
It is my understanding that with regard to gasoline, "rack" price is the price at which the gasoline jobber purchases the product and "tank-wagon" price is the price he charges the dealer.
With regard to home heating oil, there is normally one price at this distribution level which is referred to within the industry as "rack" price. Major suppliers follow a pricing procedure called "posted pricing" whereby they try to maintain the price at a certain constant level. Because of competition among other suppliers, notably independent dealers, it is difficult to maintain this fixed posted price and rather than changing the fixed price they allow what is referred to as "dealer discounts" to their distributors. When the major oil companies announced their recent wholesale price increases they also took another step and that was to remove dealer discounts.
It is my understanding that depending upon the area of the country and the supplier, these discounts range anywhere from .3 of one percent a gallon to one cent.
By doing this, it is obvious that the recent price increases on home heating oil are much more substantial than the 8 percent figure that is being referred to by several major oil companies in recent price increase announcements.
In the way of illustrating these increases, I would like to quote some figures I obtained from a Texaco dealer in New Hampshire.
On January 18, he was purchasing home heating oil from Texaco at a posted price of 12.2 cents a gallon. He was also receiving, however, a .6 of one cent a gallon dealer discount which made his actual purchase price 11.6 cents a gallon. A few days after Mobil raised its prices, Texaco also announced an increase in its price from the posted price of 12.2 cents a gallon to a 12.95 cents or a ¾ of one cent increase. However, the company also removed at the same time their dealer discount of .6 of a cent a gallon. So rather than having a wholesale price increase of ¾ of a cent a gallon, there was actually a 1¼ cents increase. This wholesale price increase was immediately reflected in a retail price increase of from 19.9 cents a gallon to 21.5 cents.
So what you have in effect is a percentage increase substantially higher than the 8 percent figure quoted in recent press releases.
This is a point that I hope the Cost of Living Council will look into very closely.
What the major oil companies have done by this action is to hide from the consumer the true cost of these recent price increases. While the oil companies claim that they have only increased prices by ¾ of a cent to one cent a gallon they have actually increased it substantially higher, leaving the dealer to explain to the consumer how it is that there is only a ¾ of one cent increase at wholesale but that his retail prices have gone up by at least 1¼ cents a gallon and maybe even higher.
Another disturbing issue is the question of seasonal discounts. Again quoting from the Wall Street Journal article, the same vice president of the major oil company discussed the fact that heating oil prices here hit at their seasonal low point because the industry traditionally grants summer discounts of up to one cent below normal winter prices to encourage the terminal operators, dealers, and home owner to store the oil in his tank during the summer and that this saves storage costs for the industry.
From the evidence I have been able to develop, it appears that there is a movement underway now to grant seasonal discounts this summer. If this is true then it simply represents an additional price increase that must be borne by the heating oil consumer. In fact removal of summer discounts may well signal even further price increases next fall.
The reason for this is that without a summer seasonal discount incentives are removed for customers of the major oil companies to store this product during the summer.
The industry might well announce later this spring it intends to raise heating oil prices even further next fall. If this is the case then we are not talking about price increases of ¾ of a cent a gallon; or one cent a gallon, or even two cents a gallon; or – God forbid – even three cents a gallon; but possibly as high in the next nine months of four cents to five cents a gallon. And if that is not inflation and price gouging I don't know what are.
3. COMPETITION
Price is a direct manifestation of the level of competition within an industry. Price rigidity is an indication of a lack of a spirit of competitiveness between businesses. This is reflected in higher costs to consumers and often results in distortions within the industry involved. A serious question must be raised in the home heating oil market as to whether these price increases are a sign of meaningful competition or a manifestation of extreme competitive distortions. Normally, in competitive industries price adjustments upward are taken as a last resort and only when the industry as a whole is facing cost increases.
The general area of price competition in the home heating oil market is at the retail level. One question I hope that the Cost of Living Council will direct itself to is whether the major suppliers who are raising wholesale prices intend to continue their normal marketing procedures or whether structural changes will accompany the price increases. The structural changes I am referring to here would be a forward integration into the marketing segment by the supplier rather than continuing to sell to his traditional customers – the small business dealer and jobber.
It may well be that these recent price increases will result in a diversion of needed supplies from the small business dealer to large commercial accounts. This is of grave concern to me in that the dealer is the traditional supplier to the home owner while the major companies normally deal directly only with large institutional purchasers.
I would hope that the Cost of Living Council would receive assurances from the major oil companies that these recent price increases will not result in structural changes in marketing in which the company itself becomes the retailer, thereby forcing its dealers out of business.
4. SHORTAGES
Mr. Chairman and Members of the Council, as I am sure you are well aware, various sections of the country have been experiencing in varying degrees shortages of home heating oil since the first of December, 1972.
The issue of supply of this essential product should be of primary concern to you in your examination of these recent price increases.
As early as last year, evidence began to mount that this country was on a collision course.
National stocks of home heating oil were slow in returning to their normal levels in 1972, and all indications were that the industry was not preparing for its normal switch-over in refinery runs from an emphasis on gasoline to increased production of home heating oil.
In fact, as early as May of last year, I wrote to the Director of the Office of Emergency Preparedness indicating that during the 1972-1973 winter, shortages could very well develop in many sections of the country.
By August of last year, this prospect was even more obvious.
On the first of September, I wrote to Secretary of the Interior Morton asking that his Department conduct a survey to assure that adequate supplies would be available for this winter.
On September 19 and 20, the subcommittee I chair on the Senate Banking, Housing and Urban Affairs Committee held hearings on the adequacy of home heating oil supplies. General Lincoln of the Office of Emergency Preparedness, and Mr. Stephen A. Wakefield, Deputy Assistant Secretary for Emergency Programs of the Department of the Interior, both testified. During those hearings, Mr. Wakefield submitted to the subcommittee a study done by the Department at my request on fuel oil supplies.
During General Lincoln's appearance before the subcommittee, he stated – and I quote from the hearing record – "I have been assured by several major suppliers that there should be an adequate supply of No. 2 oil during the coming winter. The industry has the necessary refining capacity and necessary feedstocks to insure an adequate supply."
Also, Mr. Wakefield testified that the Department of the Interior study had found: "In summary, the study indicates a tight but workable supply situation for distillate fuel oil in districts I through IV, even with a reasonably severe winter."
The experiences that we have encountered during the past two months clearly show exactly how wrong their predictions were.
In my opinion, it is apparent that either one of two things happened. Either the Federal officials responsible for oil policy in this country displayed an unbelievable level of incompetency or the petroleum industry itself misrepresented the facts. I personally believe that a combination of both factors were at work.
It is clear from the Department of the Interior's study that the industry simply refused to refine the amount of home heating oil necessary to meet domestic demand.
As early as October 13, 1972, the entire Senate Delegation from New England wrote to the President indicating our belief that unless corrective action was taken before November 1 that shortages would develop this winter. The Senate Delegation from New England urged that import levels of home heating oil be increased to assure an adequate supply of this product for the winter heating season.
I also wired the President on November 1, 1972, and again on December 13, reiterating our request and urging an increase in foreign imports.
What we have just witnessed within the past few months is a tragic example of the complete failure of our Federal oil policy.
And the actions taken by the major oil companies in this country, in my opinion, indicate that they totally failed to assume their responsibility and simply allowed shortages to develop as an inducement to force the government to grant price increases. Make no mistake about it, there was no real shortage in the traditional sense. There were supplies of home heating oil, but this country's oil policy did not make them available to the domestic consumer.
5. QUOTA SYSTEM
What I mean when I say there was no actual shortage of product is that since 1959 this country has systematically excluded foreign imports of crude oil and products through the operation of the Mandatory Oil Import Quota System. This quota protects the domestic industry from foreign competition and assures the industry that they will maintain the ability to fix prices in this country at a substantially higher level than the world market.
By carefully controlling the amount of foreign imports allowed into this country, there is only enough supply to meet demand. This destroys price competition and forces the consumer to pay billions of dollars a year more for his oil products.
During the last few months, we have witnessed exactly how unfair this quota system is to the American people. By limiting home heating oil imports to a small percentage of domestic demand, there is a continuing situation allowing the major oil companies to extract ransom prices from the consumer without fear of competition. The real tragedy of this quota system is that it keeps us constantly on the brink of shortage.
What has happened this winter clearly shows the complete failure of the oil import quota system.
Its stated goal is to keep out foreign oil, thereby supporting artificially high domestic prices.
If the Administration had heeded the warnings that a number of us made in the summer and fall of 1972, shortages would not have developed this winter. But, instead, no action was taken to ease import controls until after a month of actual home heating oil shortages.
Why did it take so long before the Administration acted?
In fact, the actions taken and the manner in which they were implemented certainly does not give the consumer any assurance that Federal oil policy takes his needs and concerns into consideration.
Why did the President wait until actual shortages developed before removing import controls on home heating oil?
The coincidences of recent actions both regarding wage and price controls and home heating oil imports raise serious questions in my mind.
On January 11, 1973, the White House announced the implementation of Phase III of wage and price controls. On January 17, 1973, the President removed import controls on home heating oil for the first four months of the year and on January 19, 1973, the major oil companies began announcing price increases.
As early as December 21, 1972, in a submission to the President's Oil Policy Committee by the Independent Fuel Terminal Operators Association, evidence was beginning to mount showing that a number of major oil companies and/or their affiliates were accumulating sizeable stocks of home heating oil abroad.
In its submission to the Oil Policy Committee, the Association states – and I quote"there are indications that several major refiners who operate in the Caribbean and Europe are withholding quantities of No. 2 fuel oil from the market. These refiners may be holding the product in anticipation of receiving permission to import the No. 2 fuel oil themselves." Such permission was, of course, granted on January 17.
On Friday, January 19, 1973, two days after import controls were removed on home heating oil, an article appearing in the Journal of Commerce states – and I quote – "The major oil companies were the big winners in the oil import program revisions announced Wednesday, some industry analysts and critics indicate, with the consuming public finishing barely in the money and the independent importers trailing far behind."
Further on in the article, it is stated that: "The oil was actually available, industry sources say, but not available to the independents – because it was in the hands of overseas affiliates of the domestic majors and the subsidiary companies wouldn't release it. It has been reported for instance, that Phillips has 55 million gallons of home heating oil in storage in England, and Standard Oil of Indiana an even greater cache.
In view of these allegations, it would seem imperative for the Cost of Living Council to obtain from the companies which recently instituted price increases (1) month to month figures showing total overseas stocks of home heating oil held by major oil companies, their affiliates, and other American companies who refine abroad for January of this year and for the last two years; (2) overseas purchases by major oil companies on the spot market from December 15, 1972, to January 17, 1973; and (3) total imports of home heating oil from January 17, 1973 to date by major oil companies.
Certainly this is not admissible evidence in the court of law, but it certainly does provide weight to the presumption that what is good for big oil is good for the country.
At the same time that we are running out of the domestic ability to produce and refine enough oil to meet this country's demands, we are constantly bombarded by ads on TV, radio, and in print, sponsored by the American Petroleum institute, telling us "that a country that is run on oil cannot afford to run short."
Well, there is no doubt about the fact that we run on oil.
There is also no doubt about the fact that we have run short.
The problem is that the shortage is a contrived one with the oil industry and the Federal government joining in an alliance, the stated purpose of which is to assure that we have only enough oil to meet the price.
I can well understand that the Cost of Living Council will assert that the operation of the quota system is beyond its authority. However, it is incumbent upon you to understand that price increases within the oil industry are directly controlled by the oil import program.
The tragedy to my region of the country is that these new price increases plus the quota will cost my region this year alone several hundreds of millions of dollars. And for what purpose? To protect an industry at the cost of the consumer!
It is just as unfair today as it was almost fourteen years ago when this quota was imposed.
Mr. Chairman, in conclusion, I hope that these hearings are not simply pro forma window dressing for a fait accompli but will truly go into the complete justification for these recent price increases.
If we are to control inflation, we must make every effort to hold down prices. This is the first public hearing held on a price increase during the Phase III program, and I am sure that the manner in which the Cost of Living Council handles the matter presently before it will be considered a precedent by both industry and the consumer as to how closely price increases will be monitored in this country over the next few months.