Of the 5 difference in the retail price, the supplying oil company made 80% of this profit (4) and the dealer and distributor 20% (14) of the difference.

(b) Discrimination does exist between northeastern Minnesota and the Twin City area dealers. A distributor dealer testified before our committee that during a price war in Chisholm the competitive price allowance was denied to the dealers in northeastern Minnesota while it was retained in the Twin Cities and St. Cloud. Competitive price allowance is a situation where the oil company guarantees a price allowance to the dealer during a price war, regardless of the retail price per gallon. The dealer is assured of a profit of 2 to 4 per gallon. Oil companies can sell for approximately 67 less per gallon when competitors drop prices. They meet price by a competitive price allowance to dealers.

MILLER EXHIBIT NO. 1

STATEMENT OF AMERICAN PETROLEUM REFINERS ASSOCIATION

(Walter Famariss, Jr., president; Arthur A. Steffan, general counsel; Hon. Steven L. R. McNickols, special counsel)

Presented by Ralph E. Miller, vice president

SECTION 1

The market structure and competitive behavior of the various segments and levels of the gasoline industry

The market structure for the past 3 years has had a consistency of poorly made jelly. For many years the market was fairly and equitably established with the major companies at one retail level and independent marketers at 2 cents per gallon under their posting. The market changes were effected for the most part only by (1) excise tax increases or (2) the up and down of the posted price of crude oil.

Excise tax increases were passed on in the exact measure to the consumer through the "refiner to jobber to dealer" route. For many years the domestic crude oil price changes had been reflected in formulas that said "for each 5 cents up or down on the posted price of crude there would be a one-eighth cent per gallon adjustment to the nearest one-quarter cent on the wholesale prices of refined light end products. Heavy products where established as "nearcost" items and were based on supply and demand.

The downward moves in wholesale prices which were occasioned by a lowered price in crude awaited the majors to make their move. Occasionally this lowered crude price was not an exact reflection. It was during these instances when the industry took the opportunity to overcome increases in cost, such as were related to labor, technology or increased octane requirements. As an example, a drop of 35 cents per barrel in the price of crude may only reflect a lowering of one-half cent per gallon with the refinery holding on to three-eighths of a cent.

Twenty-five years ago

Twenty-five years ago the majors relied on an honest DTW which permitted 3 cents per gallon for the cost of distribution and 5 cents per gallon to the station operating cost. At the same time independent refiners established a "dock price" which would be approximately 9 cents per gallon below the retail price of the major. Independent retail outlets sold for 2 cents per gallon below the major and this allowed a gross of 7 cents between the refinery dock price and the independent retail price. The 7 cents was usually split 3 cents to the jobber and 4 cents to the retail dealer.

Thus the major jobber and the independent jobber enjoyed a comparable realization of 3 cents per gallon. The major jobber with his 3 cents usually had a small franchise area and less volume than his independent counterpart, however, the major jobber had a lessor investment in his business since he had to furnish little more than the delivery tank truck. The station equipment was usually furnished by the company and in most instances the inventory was on consignment.

The independent jobber received the same 3 cents per gallon for his services but received only negligible assistance from his supplier. This assistance usually amounted to a 50-50 advertising deal on book matches and road maps. Identification symbols such as decals, pump globes and a modest station sign were supplied as standard items by the independent refiner. The independent jobber furnished his own pumps, tanks, air compressor, bulk storage facilities, transportation and made his own arrangements for station outlets. Quite often the independent jobber furnished his own identification which permitted him more freedom since he was not necessarily tied to one supplier. It also allowed him to work in a larger territory.

The major company's station dealer received 5 cents per gallon as a profit on gasoline from which he paid station rent (unless he owned the station), his overhead and his profit. The major company dealer usually sold other services and other items of merchandise to enhance his earning position.

The independent station operation received 4 cents or less and relied almost entirely on gasoline and oil sales for his profit. Such stations were low investments, low overhead and were usually operated by one or two men.

Major suppliers usually provided all the necessary equipment, facilities, sales promotion, etc. and in doing so held absolute control over their outlets. On the other hand, independent refiners furnished practically nothing with their products, sold them for less and maintained practically no control-in doing so the independent refiner performed in a completely free arena of competition.

Fifteen years ago

Certain of the larger independent refiners began to increase their stature by integrated growth and/or merger. Some began to look like majors, but didn't choose to act or perform in the same manner. Simultaneously, private brand chains with multipump operations filled in the spaces to become a prime mover of gasoline with good locations, good service, good facilities, good products, and good merchandising schemes, all of which, along with the 2-cent price advantage, made them quite attractive to the consumer.

Major companies, as usual, were concentrating on crude oil production and pipeline transportation, while becoming considerably bright eyed on foreign crude fields where tremendous reserves had been established without any production controls.

Ten years ago

The large independents established themselves on a regional plus basis with station facilities, services, advertising, and product quality as good as any. These large independents were a more potent force in markets with more and better quality outlets than many of the smaller majors and they continued to press unfairly for the 2-cent price advantage.

By now the private brand chains, with their multipump outlets, were in full stride. The majors had a great appreciation for their aggressiveness and success as a mover of products—but more important as a mover of the “long end” of the barrel of crude and they wanted in on it.

At this point some majors were supplying a good number of private brand chains through contracts provided they were not too troublesome in the marketplace. Some private branders had become financially obligated to their major company supplier and were thus solidly controlled. Like the old maid who had nothing against marriage-she just wanted to get in on it-the left out majors started after the solid gallonage, private branders who were as yet unattached.

"Jersey bought Oklahoma" and the race was on. Almost all the large private brands were either contracted, bought, or indulged with a price control program in order to gain handsome gallonage, which, when multiplied by 271⁄2 percent makes the barrel of foreign crude really worth while.

With the better jobbers gone to price protection under branded programs complete with credit cards, advertising, financing, etc., and the large private branders lost to the situation described in the previous paragraph-the small independent refiners were left high and dry. Many have dropped out of business. The rest are barely hanging on-thanks to the benefits of the import program.

SECTION II

The pricing of gasoline at all levels of distribution

Major company pricing schedules and policies of fictitious tank wagon price and competition allowances will not be discussed by this writer for lack of absolute current information, such information being too easily available to those conducting the inquiry.

Attached is Skelly Oil Co.'s current dealer tank wagon program for Texas, which only serves to point out a method in dealing with the variables of isolated pricing. This is marked "Exhibit A."

Semimajors, and those very large integrated independents extend a pricing program for jobbers similar to the one attached as exhibit B. This pricing program is set up to establish temporary competitive allowances during times of price distress. This exhibit is the price program issued on March 1, 1965, by Premier Petroleum Co., a Texas marketing subsidiary of D-X Sunray. Same is self-explanatory and only serves to point out that at the lowered retail prices (21.9 cents; 20.9 cents; 19.9 cents) the marketing company, considering freight allowances, realizes less than the price of crude as a net back.

The two instances above, while related to Texas marketing, are typical across the Nation.

Smaller independent refiners still sell by a "dock price" or a posted price, which permits the jobber 3 cents per gallon and the station dealer 42 cents per gallon when the full retail price is in existence. As the retail price is lowered this unbranded jobber and his dealer merely tighten their economic belts in a cooperative effort to stay alive. The "dock price" will average 10% cents per gallon excluding taxes for regular.

The independent unbranded retailing effort has almost completely resolved itself to a situation where the selling is done by a marketer (a marketer being a person or company who operates several stations and absorbs the jobber and dealer profits). This permits the unbranded operator to have his best chance to stay competitive with gasoline prices which are being subsidized by crude oil profits and privileges. Since few unbranded jobbers are left, the small refiner whose main products are motor fuels has, in many instances, skipped the jobbing activity by direct transport sales to station dealers.

SECTION III

The causes and effects of so-called price wars

The causes or fundamental facts of price wars are elementary. To begin with, shortly after World War II the Government, with aid of industry pressure, decided that refining capacities should be expanded by 8 million barrels a day in order to be completely adequate for the next such national emergency. A quick 2-year writeoff was extended for inducement.

To satisfy everyone in the business the 8 million barrels per day ended up as a 12-million barrel expansion of daily throughputs. These new capacities added increased meaning to the word "incremental."

This was followed quickly by the rush for lush foreign oil production with its uncontrolled flow of cheap oil. Qualified guesstimators have pegged the present laid-in cost of Middle East oil to our east or gulf coast ports via supertanker at between 30 and 60 cents per barrel. The average oil well in the Middle East produces 5,000 barrels per day from a depth of only 5,000 feet.

The foreign barrel of oil is just so much better than the domestic stuff which already had all of the goodies one could imagine. For instance, large domestic crude producers set their own prices for what they pay themselves for their own crude. In itself this would not seem to be so bad-but by the same token these large companies can establish their own tax exclusions. This tax exclusion is better known as a tax depletion allowance.

This type of corporate control over its tax situation compares with permitting the individual to pay taxes on what he has left in the bank at the end of the year, rather than on what he has earned during the year. If the individual were permitted the same privilege he could determine and control the amount of tax he pays.

Anyone can quickly figure that 272 percent of $3 is a larger amount than 272 percent of $2. This situation, along with such "conservation" governing bodies as the Texas Railroad Commission, completely eliminates any reaction to the law of supply and demand. The controlled prices of domestic crude have varied only slightly in recent years with most of the “demand” increase being absorbed by foreign oil.

As an example, the Texas Railroad Commission, under the guise of conservation forbids any overproduction. The commission receives "orders" for a certain amount of crude from four or five major producers and anticipates the balance of the monthly requirement. Then it sets the number of barrels or the number of producing days for those producers with allowables and this holds the price of crude at a fixed level without any reflection from refinery or consumer demands. Therefore, the basic cause of price wars is that since gasoline is the largest single item in the barrel of crude, the large major producer must go all out in its efforts to sell gasoline to reach the profits and privileges stored in that barrel of crude.

All other causes are incidental and related to the large integrated companies' efforts to catch the eye of the motor fuel consumer. Such other causes are (1) the subregular pricing program, (2) competitive price allowances through dealers and jobbers, (3) major companies playing both sides of the street by participating with and/or directly operating independent brands, (4) large ($300 million assets) integrated complexes, such as American Petro-Fina, Signal Oil & Gas Co., Champlin, Kerr-McGee, Tenneco, Ashland, etc., claiming independent status solely on being outside the "Top 21 Club."