Oil Import Controls

the phaseout of the sliding scale beyond the normal phaseout periodSection 340c.

With these expressed reservations and in the absence of any real study of the differences in oil industry structure which justify the sliding scale, the task force's comment adverse to the sliding scale is weak, indeed.

In his report to the Senate Subcommittee on Antitrust and Monopoly on March 3, 1970, Secretary Shultz was more precise in his comments on the sliding scale. He erred so seriously on this issue of so much importance to independent refiners that each of his points deserves

comment.

I have listed in my prepared statement five points and rebutted each of them. I would like to draw particular attention to two of them.

The second point is Secretary Shutz's claim that the industry's structure, which creates these great differences in import control impact, "is not attributable to import restrictions" and correction thereof "should be addressed separately" rather than through import control methods. Let me emphasize we do not seek to use import controls to correct other problems. But Secretary Shultz ignores the fact that the Government's import controls-whether through tariffs or otherwise-operating on the existing industry structure, create as a result of Government action, even greater distortions than existed before. If the effect of Government action is to distort the competitive situation, then measures should be taken to eliminate or moderate such distorting effects. This has been done through the sliding scale. Another claim made by Secretary Shultz is "The information submitted to the task force indicates at least three respects in which the existing program actually tends to cause or increase dependence of independent refiners or refiner marketers on integrated companies.” Time does not permit an analysis of the three aspects referred to. Let me say that we are unaware of any information in the public files of the task force of the sort to which Secretary Shultz refers. The information may be in the form of economic analyses by some of the Task Force's temporary economic staff.

If the example cited by Secretary Shultz exists at all, we say it is the rate exception rather than the rule. It conflicts with the views of our independent refining company members who are actually on the competitive firing line. In their view, the existing program. with its sliding scale, tends to foster a competitive equality with the majors which would not otherwise exist and without which the independent refiner would cease to exist: (a) as a source for independent marketers; (b) as an outlet for independent producers; and (c) as a competitive business entity.

The other points that Secretary Shultz made are covered in my prepared remarks, but I will not develop them now.

I think it should be emphasized that the graduated scale is part of the formula by which quotas are distributed among refiners. As such, any change would result merely in a redistribution of quotas within the refining class. If the refining class as a whole is content with a system which includes the sliding scale, that should be determinative

We submit that the refining industry as a whole endorses the existing quota system, including its sliding scale provisions. No company demonstrated any substantial injury resulting to it from the sliding scale. I developed the arithmetic in the footnote. Quotas advanced on the sliding scale amount to less than seven percent of the total restricted imports.

We submit, therefor, that the sliding scale is not only necessary to avoid uneven impact in the operation of the control system, but it has been established as such from the start and is now generally accepted by the refining industry.

The sliding scale was created as part of the original oil import program by the Secretary of the Interior acting within a broad delegation of authority from the President. Subsequently, in order to put an end to periodic attacks upon the sliding scale, this feature of the program was specifically included in the underlying Presidential Proclamation. We suggest that a similar approach should be followed with respect to any legislative enactment setting the shape of oil import controls so that this feature of the program, like others specifically covered in any basic legislation, will be settled as the wish of the Congress.

Ahead of that, however, we urge a favorable report from your Committee specifically endorsing the sliding scale aspect of import controls. A matter so basic to an equitable distribution of import quotas, and so critically necessary to the independent refining industry in this country, should not be left open to doubt or misconstruction of this important Committee's views.

I would like to turn to another dimension to this problem which is made pertinent by the Task Force's emphasis on savings to the consumer. Large savings to consumers, estimated between one and two billion dollars per year, exist because of the competitive role of the independent refiner. The basis for these estimates is set forth in a Memorandum by IRAA dated January 27, 1970. I submit copies of this memorandum for the information of the committee, and I ask that it be included with our statement as part of the record of this hearing. Mr. EDMONDSON. Mr. Dryer, I have just been going through the memorandum which you have submitted, and I believe it does contain some very useful information that would fit very well in our hearings, and with the appropriate identification as an exhibit of the Independent Refiners Association of America, that memorandum will be, without objection, made a part of the record following your presentation. Mr. DRYER. Thank you, Mr. Chairman.

Suffice it to say here that these large savings will be lost if the independent refiner disappears.

We thank you for the opportunity to present these views today. (The memorandum above-referred to, follows:)

INDEPENDENT REFINERS ASSOCIATION OF AMERICA,
Washington, D.C., January 27, 1970.

MEMORANDUM: PRESENT SAVINGS TO CONSUMERS DUE TO THE INDEPENDENT
REFINER-LOST IF THE INDEPENDENT REFINER DISAPPEARS

1. The consumer's interest served by the independent refiner-gasoline at 2¢ under major brands.

a. The independent refiner and marketer traditionally sell gasoline at an

from FTC Report on Anticompetitive Practices in the Marketing of Gasoline. b. Applying this typical price differential to gasoline produced by independent refiners, the annual saving to consumers is $294,888,190. (See Appendix B, line 6.)

2. The consumer's interest served by the independent refiner-holding the general level of gasoline prices, both major brand and independent, below levels which would apply absent the independent refiner.

a. The independent refiner and marketer play a role which is "entirely disproportionate" to their size "in keeping markets competitive, flexible and dynamic. . .". See Item II in Appendix A hereto, Excerpts from FTC Report. b. For each 1¢ difference in the general price level of gasoline due to the independent, the annual saving to consumers is $819,133,870. (See Appendix B, lines 8, 9.)

3. The consumer's interest served by the independent refiner-providing other petroleum products at lower prices.

a. The independent refiner plays a similar competitive role in respect to other petroleum products: jet fuel, heating oils, asphalt, etc. If the independent refiner disappears, his present supply of these other products to inland areas will have to be replaced. In the case of residual fuel oil and asphalt the extra transportation costs from alternative coastal sources would average 4-5¢ per gallon, and even for lighter oils which could be moved by pipeline the cost may range from 2 to 2¢ per gallon.

b. Applying assumptions of 1⁄2¢, 1¢ and 2¢ as the extra transportation cost of replacing the independent's present supply of other products, the annual cost to consumers will be: at 1⁄2¢ $45,052,363, at 1¢ $90,104,725, at 2¢ $180,209,450. (See Appendix B, line 13.)

4. Consumer benefits vs. costs of independent refiner quotas.

a. The survival of the independent refiner and the annual savings to consumers due to the independent refiner are made possible by a modest share. allocated on a sliding scale basis, of import quotas. The quotas of 113 companies with under 100,000 B/D capacity amount to only 25% of total finished product and crude oil quotas; only 17% of total restricted imports. (See Appendix C, line 6.)

b. In dollars, the cost-benefit comparison is:

(1) Quotas to 113 companies with under 100,000 B/D appendix C) at 1.25 per barrel_.

Cost

$90, 467, 075 Consumer savings $1, 159, 074, 423 2, 113, 365, 380

(2) Combined savings to consumers due to independent refiners
(appendix B, line 14):
From
To

5. The U.S. Government, as world's largest consumer of petroleum products, benefits from the independent refiner's competitive role. A very substantial portion of domestic military oil procurement is from the independents. (See Appendix E.) The independent refiner reduces the cost of government oil purchases a) by actually lower prices on contracts awarded to independents and b) by holding the general level of all bids down.

APPENDIX A

EXCERPTS FROM THE FEDERAL TRADE COMMISSION'S REPORT ON ANTICOMPETITIVE PRACTICES IN THE MARKETING OF GASOLINE

I. RE HISTORICAL 2-CENT DIFFERENTIAL BETWEEN INDEPENDENT AND MAJOR BRANDS

Historically, the independent refiner and marketer has sold gasoline at lower prices than his major competitors. Ordinarily the price spread reflects differences in the degree of consumer acceptance of private brands and major brands. The price differential tends to offset major brand advantages flowing from national advertising, location, tourist services, credit cards and other services and promotions. Although a number of independents assert that the price differential between private brands and major brands has traditionally amounted to two cents on a gallon, there is evidence that the amount differs from market to market. Moreover, it is also clear that some private brands must sell at a greater

II. RE TENDENCIES IN THE OIL INDUSTRY FOR LIMITED COMPETITION AMONG MAJOR COMPANIES

Business realities discourage vigorous price competition between sellers of relatively equal strength in such a concentrated market. Accordingly, it is not surprising that the record before the Commission shows that price competition within the industry pits the large refiners more often against the smaller rather than against each other. (p. X-4)

Equally important as size and degree of integration in identifying a major is a company's attitude toward competition. The major prefers not to engage in price competition. (p. X-5)

The great disparity in size, differences in degree of vertical integration, and differences in self-sufficiency in raw material production, argue that such industry rivalry can end in the "soft" competition of a functioning oligopoly. Industrial history and economic doctrine indicate that such differences naturally lead to fierce conflict which disappears when competitors become similarly structured. The merger movement evident in today's gasoline industry, and the marketing conduct which has been employed, argue persuasively that in the absence of strong antitrust enforcement, structural similarity is inevitable. (p. X-11)

III. RE INDEPENDENT REFINER AS THE KEY TO EFFECTIVE COMPETITION IN THE OIL INDUSTRY

The record is clear that independent refiners and marketers exert a beneficial influence upon competition that is disproportionate to their actual representation within the petroleum industry: they have long been innovators of marketing methods and have been the primary agents in translating efficiencies at the production and distribution levels into lower prices at the retail level.

They play a part in the industrial pattern that is "entirely disproportionate" to their size "in keeping markets competitive, flexible, and dynamic and in preventing a recognition of interdependence and the possible bureaucratic conservatism that go with size and quasipermanent life from stultifying competition." [footnote cites: De Chazeau and Kahn, Integration and Competition in the Petroleum Industry, 383 (Yale Univ. Press 1959).]

Any substantial reduction of sellers in a market is likely to result in a diminution of competitive vigor. The public interest implicit in the statutes administered by this Commission is the fostering and preservation of competition between business entities that will benefit the consumer and contribute to the nation's economic well being in both the short- and the long-run. In fulfillment of its public trust, the Federal Trade Commission is committed to the preservation of an industrial pattern with as many sellers as is consistent with technological progress; an industrial pattern that enables the consumer to make rational selection of product on the basis of price, quality and service; and an industrial pattern that is not shaped through competition waged on the basis of ability to withstand losses, but rather one shaped through competition resulting from efficiencies. (p. X-11)

Page references are to the Report as printed in Antitrust & Trade Regulation Report, Number 312, July 4, 1967.

APPENDIX B

Derivation of certain data-annual savings to consumers attributable to the

1. Total U.S. refinery inputs'.

2. Per year (×365).

3. In gallons (×42).

independent refiner

gallons per year__

4. Independent refiner portion (18 percent)---
5. Gasoline yield, independent refiner (50 percent)-do‒‒‒‒
6. Annual consumer saving (line 5×$.02) __.
7. Total gasoline yield, both major and independent (50 per-
cent of line 3)–

gallons per year__

10, 686, 678 3, 900, 637, 490 163, 826, 774, 000 29, 488, 819, 000 14, 744, 409, 330 $294, 888, 190

81, 913, 387, 000

1 Interior release Mar. 17, 1969.

2 Percent of refinery capacity owned by companies with under 100.000 barrels per day.

APPENDIX B-continued

8. Annual consumer saving if 1 cent per gallon difference in general price level (line 7×$.01).

9. Annual consumer saving if 2 cents per gallon difference in
general price level (line 7×$.02) -.

10. Portion of U.S. refinery capacity represented by independ-
ent refiner at inland points (appendix D)3----percent__
11. Total production by inland independent refiner (12 percent
of line 3).
-gallons per year__
12. Products, other than gasoline, from inland independent
refiner (50 percent of line 11)__
.__do____
13. Annual consumer cost if inland independent refiners' pro-
duction of other products must be supplied from sea-
board at extra cost of:

a. 1⁄2 cent per gallon (line 12×$.005).
b. 1 cent per gallon (line 12×$.01).
c. 2 cents per gallon (line 12×$.02).

14. Combined annual savings to consumer attributable to inde-
pendent refiner (lines 6, 8 or 9 and 13 a or c)
From
Το

$819,133, 870

$1, 638, 267, 740

18, 020, 945, 000

9, 010, 472, 500

$45, 052, 363 $90, 104, 725 $180, 209, 450

$1, 159, 074, 423 $2, 113, 365,380

APPENDIX C

1969 QUOTAS-DISTRICT I-IV

1 Refining companies with total inputs under 100 000 barrels per day.
2. Refining companies with total inputs exceeding 100,000 barrels per day.
Earned on 1st 100,000 barrels per day, 171, 950

Earned on excess, 197, 233

3. Total refiner quotas...

4. Total of finished product and crude oil quotas available for allocation after commitments and overland.

5. Total allowable imports-at 12.2 percent of U.S. production restriction..

6. Independent refiner quotas as a percent of:

(a) Total finished product and crude oil quotas excluding commitments and
overland (line 1 over line 4).

(b) Total restricted imports (line 1 over line 5)..

APPENDIX D