But, I must have to tell you, we do not have a missing 8 cents. If we got an additional 8 cents a gallon profit, our profits would be very substantially higher than they are.

Senator METZENBAUM. How many gallons do you sell in a quarter? Mr. BURCH. About a billion. A little over a billion gallons.

Senator METZENBAUM. A billion.

Mr. BURCH. Of gasoline.

Senator METZENBAUM. It is interesting. Mobil sells about 2 billion, and they made about 25 percent of that-about $456 million, $473 million.

In a quarter, you sell a quarter of a billion? Is that what you said? Mr. BURCH. About a billion.

Senator METZENBAUM. About a billion. You made an additional $123 million.

You sell 4 billion a year, do you?

Mr. BURCH. About 4 billion a year.

Senator METZENBAUM. Four billion. So, that actually, would come out to about 12 cents a gallon. I am not suggesting that is a direct relationship.

I am saying, it is interesting that as you sell more gasoline, you also make that much more profit. Yet, now I have had two witnesses, both of whom have said that really has nothing to do with our increased profits.

I say to you that that is difficult for the American people to believe. Mr. BURCH. Your numbers might be interesting, but I don't think they are relevant to our business.

Senator METZENBAUM. Tell me what is relevant.

Mr. BURCH. Well, I would have to say—

Senator METZENBAUM. Tell me where the money came from. Where did you make that extra

Mr. BURCH. I thought I read it from the statement by our chairman. It came largely from the production end of the business, production being gas and crude oil production due to Federal Government policy which decontrol crude oil.

Senator METZENBAUM. So it is directly by reason of decontrol that you made $123 million extra?

Mr. BURCH. I am saying this was a major contributor.

Senator METZENBAUM. That is what I have been saying to the President, but he hasn't heard me. [Laughter.]

Mr. BURCH. In our manufacturing and marketing end of the business, we did have some improved earnings in our petrochemical end of the business for the first quarter. That I might say has since turned about downwardly rather dramatically, because of supply and demand. The other facet of our business that did better than the comparable quarter in the prior year was cur lubricants business. This business had been in a loss position in the first quarter of 1979. We turned it around until we made some profit in the first quarter of 1980.

Senator METZENBAUM. But when all is said and done it all comes down to a three-letter word called "oil." And by reason of higher prices for lubricants, higher prices for gasoline, higher prices for petrochemicals-that relates also to the oil industry-when all is said and done, you have been able to exploit the market. I am not saying that you are doing anything illegal, but I am saying that it

has hurt the economy, that oil companies have increased prices when normal competitive factors should have caused prices to come down.

Mr. BURCH. Well, I get a little confused. We have a national policy to decontrol crude oil prices. We increased the price of natural gas to encourage production. We are pouring this money back, that doesn't fall into the U.S. Treasury through the so-called windfall profits tax which really is an excise profits tax, an excise tax, I should say. We are pouring these moneys back into the energy business. This is precisely what the national policy is.

Senator METZENBAUM. But you only put 9 percent back in 1979. And the fact that you didn't buy Becton-Dickinson isn't because you had not made a very substantial commitment to buying it. You were paying 43 percent over book. You had really moved in to take over that company. It had nothing at all to do with energy. It was a very major number of dollars. I forget how many hundred million, but it was well up into the hundreds of millions, as I recall it.

Mr. BURCH. The increase in investments in the oil industry that you are quoting, you quote from the annual report. I am sure they are right.

However, we have had a very major change in policy. I tried to indicate that to you. Part of that change in policy came about as a result of the change in the Federal policy. Everything was under control. Profits were being held down in the oil business. We are in business to see our business survive. Survival didn't seem to be the way that we would end up if we pursued the energy business in total prior to the time when we began to see some change here down in Washington.

Senator METZENBAUM. Mr. Burch, the American people can hardly cry for your company when your senior vice president back in 1978 talked about what you were going to do with the extra $1 billion you had. Since then your profits were up, 1979 over 1978, by 91.8 percent, and your profits were up the first quarter of 1979, over the first quarter of 1978, by 96.1 percent.

Do you think that the American people are really cheerful about the condition of the American oil industry?

Mr. BURCH. Well

Senator METZENBAUM. When they are paying these kinds of prices. Let's see, there is your's over here, $1.33.4, and $1.28.4. That is pretty good. [Laughter.]

Mr. BURCH. Mr. Chairman, let me mention one little fact about Sun's business. We are short. We are not self-sufficient in crude oil.

Currently our acquisition costs of crude, our average cost of crude, based on our numbers compared to published numbers by the Department of Energy, our cost of crude is running somewhere between $2 to $3 a barrel above the national average. And that is quite a bit of money.

If you see our pump prices a little bit higher than others, that to a very large extent accounts for it.

Senator METZENBAUM. Well, as a matter of fact, SoCal which has a good crude supply, better than yours, had profit increases that weren't even as high as yours. So, even though you are a procurer rather than a supplier of all of your own product, the fact is, your profits increased

by reason, at least in part, of higher prices, even with respect to the lubricants. You had more ability than in the past to raise prices there.

As a consequence, you are now making money in that end of the business where you weren't making it before.

Mr. BURCH. Yes, sir.

Senator METZENBAUM. Mr. Burch, I don't know if you have anything further, but I am trying to keep things rolling.

Mr. BURCH. All right.

Senator METZENBAUM. If you do, I will be very happy to have any further statement. I don't mean to cut you off in any way, sir. Mr. BURCH. Fine.

Senator METZENBAUM. Thank you very much.

Mr. BURCH. Thank you very much.

Senator METZENBAUM. I appreciate your being with us, as well as the other two gentlemen.

The prepared statement of Mr. Burch follows:]

PREPARED STatement of Warren E. BURCH

I am Warren Burch, vice president of operations for Sun Petroleum Products Company, the industrial and wholesale marketing and manufacturing division of Sun Company, Inc. We are responsible for fuels, petrochemical and lubricants businesses. Your invitation to testify stated in part that "over the past five months, gasoline prices have continued at a high level despite a large surplus of oil domestically and internationally." The question at today's hearing is what is "high" relative to both prices and inventory. Under the circumstances we face today neither is too high in our opinion.

I will speak first to the industry inventory levels.

For security reasons the twenty participating member nations of the International Energy Agency (IEA), of which the United States is one, have agreed to maintain a ninety day supply of oil in inventory. Even with the current inventories, the United States has about a 60 day supply if one considers the tots! inventory of crude, refined products, and the approximately 90 million barrek in the strategic petroleum reserve. A less comforting fact is that the United States distribution system requires large volumes just to maintain operations and those stocks are unavailable for use.

According to a recent study of minimum operating inventory levels by the National Petroleum Council, the United States has approximately 88 million barrels of crude oil above that minimum. That represents about a 61⁄2 day supply of crude oil excluding the SPR. The gasoline volume available over the minimum operating requirement is 56 million barrels or equivalent to about eight days of demand.

These inventories are higher than those normally carried by the United States petroleum industry. The higher than normal stocks are due to concerns about security of supply, the rising price of crude oil, and the lower demand due to conservation efforts.

The foregoing is to assist you in understanding the issue of inventory levels. Specifically-how high is high. Incidentally. I would like to remind you that about a year past, the industry was accused of deliberately lowering inventories in 1978 prior to the Iranian crisis thus creating shortages after the crisis. The implication was that we should have planned for that unforeseen event.

Business decisions by some companies may call for reductions in gasoline inventories. However, presently Sun's gasoline inventories are lower than normal due to plant shutdown for maintenance on some of our major gasoline producing units. Sun does not have a surplus of gasoline; in fact we have been purchasing gasoline, at high prices, during 1980 to supply our customers.

Your letter inviting Sun to appear at this hearing indicates that you may be more concerned about price than inventory level.

Turning to pricing, we believe that gasoline market prices are cost-driven in a market controlled by competitive forces. This market reacts and adjusts to many complex factors such as:

w material costs, manufacturing and distribution costs, profit margins, tainty of supply, and governmental actions.

r raw material costs, principally crude oil, have risen 17.2 cents per gallon e six months from November, 1979, through April, 1980.

erating costs for this same period have increased by 2.5 cents per gallon. response to these cost increases the gasoline prices for December through have increased by about 19 cents per gallon for a margin decrease of about nts per gallon over the past six months.

believe it would be useful at this point to briefly discuss profit margins to cost and price changes in perspective. Although we are unable to precisely mine the cost of manufacturing individual products, we can averge costs all products to approximate profitability. In 1979, the U.S. manufacturing marketing divisions of Sun earned just under 1% cents per gallon on all ucts, which includes fuels, petrochemicals and lubricants, This margin red in a return on capital employed of 13.4 percent. We firmly believe that each ent of our business must be self-sufficient and generate sufficient profits to fy the very sizable capital investment. This modest profit margin leaves no to make product price reductions particularly with rapidly rising crude osts. rude oil supply from OPEC nations is uncertain at best. Quantities of foreign ract crude have been curtailed forcing Sun and others into a more expensive market for a greater portion of the crude requirements. The result is a disntive to purchase additional crude oil or in any way promote additional ded. Since our national goal is to reduce crude oil imports, the result is consistent ■ that goal.

overnment actions have also added to the cost of gasoline. The granting of half of an entitlement to residual fuel importers to protect Northeast coners directly adds to prices of products. The Government's desire to keep ting oil prices down results in costs being shifted to other products for -mpted recovery.

imilarly, the "gas-first" policy for powerplants and some industry has created epressed residual fuel market in certain regions of the country. These actions e oil companies to attempt to recover costs and make profits by increasing Oline prices.

Note that I said "attempted recovery of cost" because full recovery is not ays possible. Gasoline has been under price controls since August, 1971. In vember, 1973 the EPAA was enacted and followed by the EPCA in December, 5. Both limited gasoline price increases to specific cost increases which are not ng fully recovered by the industry. According to he Lundberg letter, in 1979 unrecovered allowable cost increases for the 20 largest refiners increased from 23 million to $3.7 billion and is continuing to climb in 1980. This is a clear indican that the market is controlling prices. Most refiners are not raising prices as ch as would be permitted by price controls.

Despite the rising raw material costs and increased manufacturing costs, soline prices have been relatively stable over the past two months. Spot gasoe prices have declined reflecting the higher than average inventories. Indications from press reports are prices do not appear to be increasing as pidly as in the past.

Senator METZENBAUM. Our next and last witness is Mr. E. J. Hess, ce president of the marketing department of Exxon Co.

TATEMENT OF E. J. HESS, VICE PRESIDENT FOR MARKETING, EXXON, U.S.A.

Senator METZENBAUM. Mr. Hess, I would guess you were in the om when I indicated my appreciation to the oil companies for coming n short notice. That certainly applies to your company as well. I do ppreciate that kind of cooperation.

I am happy to have you with us this morning, sir.

Mr. HESS. Mr. Chairman, I am E. J. Hess. I am vice president of marketing for Exxon Co., U.S.A. I am here, of course, at your request

to present my company's views on gasoline and other petroleum peruct prices and on crude and petroleum product inventory leve My comments will focus on three areas. These are first, indust supply conditions; secondly, current Exxon supply of gasoline; third, cost and other factors affecting product prices.

My statement is brief, Mr. Chairman, and then, when I am finishe of course, I will be happy to answer any questions that you may bay: First, combined industry inventories of crude, motor gasoline, distillates as of June 6, 1980, were 110 million barrels higher than t average of 1974-78 based on data published by API.

While this appears to be a large volume of oil, it is relatively s in terms of days supply.

For example, the variation from historic levels represents 3 days' crude supply and 5 days of motor gasoline supply, respective Two factors contribute significantly to this situation. The is reduced demand. During the first 5 months of 1980, consumpti of motor gasoline in the United States is down more that 8 perce and consumption of all petroleum products is down more than percent compared to the comparable period of 1979.

Continued availability of supply from domestic and foreign source has also allowed recovery of inventories to these current more se quate levels.

Second, the United States is still dependent on foreign source for over 40 percent of its petroleum supply. Given present uncertainties regarding the future availability of this supply, to the exter possible, it is prudent that suppliers maintain higher inventory leve than in the past as a reserve against unforeseen disruptions.

With regard to gasoline supply, Exxon is currently making ample supply of gasoline available to the market.

In total, Exxon is making more gasoline available than its c tomers are purchasing.

Exxon's allocation fraction for June is 86 percent.

However, a fraction below 100 percent does not necessar indicate reduced motor gasoline availability.

Customers' entitlements with Exxon's current allocation fractic of 86 percent are actually greater than last year's sales. This is be cause regulatory adjustments and assignments have increased th basis for allocation above actual sales in the historical base perio

Although in total Exxon's customers are not taking all the gasoline to which they are entitled, and here, by customers, I mean deale and distributors, some customers do continue to be limited by co trols. Only with decontrol can all customers expect to receive all the product they would like to have.

Market conditions, we believe, illustrate the adequacy of gasoline supply. There are no lines, and service stations have resumed more normal operating hours in recent months.

Finally, with regard to costs, looking first at wholesale gasoline prices, and, of course, you realize Exxon is primarily involved in the wholesale part of the gasoline business, escalating raw material and and other costs continue to put upward pressure on prices, despite the apparent adequate supply.

Crude costs have increased for both foreign and domestic crude, and, in some cases, retroactively.