OIL: UNBRIDLED GIANT

...In addition, anti-trust restraints on pooling information have been dropped for MEEC members— although some of the companies are facing anti-trust litigation...

...It niay well be that the men who run the international oil firms possess the cleanest character and are motivated by the highest patriotism...

...These are some of the impressions that emerge after four months of work by a joint Senate subcommittee headed by Senator Joseph C. O'Ma-honey, Wyoming Democrat, which has been looking into the facts behind the oil lift to Europe and the questionable price increase most of us are paying at the corner gas pump...

...The source of the original false report remains a mystery...

...A vivid example of how Texas has been misleadingly cast as villain shows up in the history of the 12 per cent crude oil price increase set off January 3 and largely attributed to Texas avarice...

...Texas oilmen, of course, have long contended that a crude oil price increase was past due —and have argued that excessive imports keep prices down...

...18, 1957 to the combined Senate Anti-Trust and...

...For several months, little was heard of the program...

...By August 10, the Middle East Emergency Committee (MEEC) was functioning formally with a membership which eventually grew to 16 oil companies (of these, six companies control six of the others...

...It was reported that Europe was getting at least 80 per cent of its oil needs— five per cent more than the original MEEC target...

...It was said that the Administration lacked the staff and the trained manpower to take over and run—as some felt it should—the entire oil lift program...

...Standard of New Jersey, largest of the internationals, estimates that about 75 per cent of its 1956 net earnings of $800 million derive from overseas holdings...

...On January 27, Felix E. Wormser, Assistant Secretary of the Interior, warned that supplies of crude oil had slumped to a dangerously low level...

...The simple economic explanation is that Middle East and Venezuelan crude oil costs far less to produce than domestic oil mainly because it can be drilled more efficiently...

...Few businesses are cloaked in as much secrecy...

...199,457,589 192,742,624 Total costs, expenses, other deductions...

...Spokesmen for the international oil companies—compilers of most of the data—explain that forecasts are only estimates and that a human error was involved, which, charitably, may be the truth...

...its special tax privileges have no parallel in the business community...

...62,151,985 49,306,516 that the story was deliberately planted to discredit Texas producers...

...1956 1955 Shell Oil Co.......................................$138,847,693 $125,531,950 Standard Oil of California...

...Here are some of the earnings figures as compiled by Time, April 1,1957...

...In announcing the price advance, Humble said (and Jersey reiterated) that it had been unable "to secure its requirements at former prices" because of the sharp upsurge in crude oil demand when Middle East shipments had been "drastically curtailed...

...But on February 21—nearly two months later—President Baker of Humble was asked by the O'Mahoney committee if the higher price had indeed increased the firm's supplies...

...But the question really is whether it serves the national interest to permit the oilmen—as was apparently the case in the MEEC—to dictate policies of global import without significant public participation...

...On February 5, 1957, Flemming told the O'Mahoney committee: "I have been disappointed to note an increase in shipments of crude oil from Venezuela to the United States...

...Public Lands Subcommittee...

...282,377 56,200 inability to enforce even a modicum of public control in turning over— as in the oil lift program—decisions of governmental magnitude to the giant oil companies...

...Overseas oil now supplies roughly 15 per cent of our domestic needs and the level will probably rise...

...Baker replied, "As far as I know, it has not...

...Dr...

...Flemming said bluntly that the government had "no right" to ask the companies for a price rollback.* Several arguments were used to justify the government's impotence...

...The story was quickly picked up and the obvious moral drawn...

...According to minutes made public by the O'Mahoney Committee, the oilmen accurately predicted that a Suez blockade would "skyrocket" tanker rates and create strong pressures for a crude oil price increase...

...Oil industry sources came up with figures showing that —instead of failing—the oil lift was a success...

...After narrowly failing to get a protection bill through Congress, the independents turned to the Office of Defense Mobilization, an agency empowered to recommend import curbs on grounds of defense essentiality...

...Reporters were told that the balky Texans were the main problem...

...It had been thought by the Administration that the Middle East stoppage would require diversion of Venezuelan oil to Europe, opening up some markets to the more costly domestic petroleum...

...In February, in the midst of the national uproar over Texas, the Railroad Commission substantially raised output...

...Several members emphasized, however, that there would be strong counter pressures that would limit the abilities of individual companies to be effective in this regard and that to obtain any joint action in this respect would require express direction from the government...

...468,087,135 452,336,195 Net Earnings...

...267,890,801 231,138,655 Gulf Oil Corp...

...Yet all crude sells at virtually uniform prices set at the Gulf Coast...

...The Eisenhower Administration, despite a warning from oilmen that a price increase was likely if the Suez was blocked, gave the international oil firms virtually a free hand to run the oil lift to Europe and made no apparent provision to protect American and European consumers from the predicted price rise...

...Among other things, the O'Ma-honey committee—and a House group drilling in the same field— has brought to light testimony showing that: • Texas oil—cast as villain—has come through with cleaner hands than the big international oil operators, who are giving the domestic producers a lesson in public relations and a drubbing on the bitterly-fought import question...

...But with Suez, the letter remained unwritten and the hearings were quickly called off...

...Aramco) to the O'Mahoney committee...

...income taxes...

...Few would debate the strategic importance of their operations or would deny this country's obligation to concern itself with their legitimate needs...

...This special tax privilege contributes heavily to oil company profits, which mounted last year to record heights in most major companies...

...Some argue THE PROFITS OF OIL Most major oil companies chalked up record earnings during 1956...

...Standard practice has been to place a government official at the head of similar committees (MEEC's vice chairman is also a Jersey, officer and the committee's lawyer represents Jersey in an anti-trust suit...

...After the Suez Canal was closed November 3, the MEEC was given wide powers to pool its resources to replace Europe's temporarily-blocked Middle East oil...

...its impact on domestic political life is felt on every level of government...

...But the damaging publicity harvested by the Texas oilmen could not have completely displeased the international oil companies...

...A week later, President Eisenhower hinted at federal action if Europe's needs were not met...

...91,070,812 80,709,954 Cities Service Co...

...See table on this page...

...In the light of the parent company's bland contention that Humble acted as an autonomous subsidiary, it is interesting to study the little-publicized findings of the O'Mahoney committee...

...The explanation given by international oil firms for this paradox was that Venezuelan imports were mainly specialty crudes which could not be diverted...

...The second justification, repeatHerblock in The Washington Post "Don't say I'm not a good watchman— I watched the whole thing" edly stressed by Standard spokesmen, was that increased costs, particularly for discovery of new reserves, made a price boost likely in 1957...

...The reason the internationals may have welcomed headlines unflattering to Texas goes back to a battle over imports that has riven the empire of oil into warring camps...

...This does not explain why the increase could not have been postponed a few months until Western Europe was over its oil famine...

...A more difficult problem than the profits of oil was brought to light by the Senate committee...

...But in addition to benefiting by a depletion credit of $121 million for 1956, the company also is favored by a 1918 U. S. tax law which permits a company to get an offset credit on foreign taxes...

...The first false alarm, with its ugly suggestion of unbridled greed, has clung like an albatross to the Texas producers ever since...

...On February 21, Hines H. Baker, president of Humble, told the committee that in the latter part of December he had a discussion with M. J. Rathbone, president of Standard of Jersey, in which "I told him that we were contemplating an advance in crude prices...

...Four days later, in preparation for a world oil crisis, the Administration activated a committee of international oil companies to prepare plans for an emergency oil supply program...

...Aramco, holder of the fabulous Saudi Arabian oil concession, will apparently pay King Saud $280 million for its 1956 operations there, but pay only $282,377 in U. S. income taxes...

...The feud first took bitter form in 1948, when cheaper Middle East oil began moving in substantial amounts into American markets...

...By December, the time was apparently right...

...The story starts July 26, 1956, when Egypt's President Nasser nationalized the Suez Canal...

...According to Baker's testimony, Rathbone said that "a price increase was past due" and that "he could see no objection to a price increase of the order of magnitude we were talking about...

...Since 1950, the company has paid a large share of Saud's royalties in the form of an Arabian income tax —thus enabling Aramco to offset this money...

...Among the many immunities granted international oil there is none guaranteeing exemption from Lord Acton's precept that power tends to corrupt and absolute power to corrupt absolutely...

...It is difficult to detect any meaningful public safeguards in the MEEC apparatus...

...In this case, the internationals have the better of the argument —and have won the better tactical position...

...This arrangement is consistent with the oil industry's past stubborn refusal to participate in any government body it does not dominate...

...282,658,087 218,063,510 Sinclair Oil Corp...

...The Commission's market control is justified mainly on conservation grounds, but it is widely believed that price considerations enter into its monthly production schedules...

...its influence in the field of foreign policy is often decisive...

...Indeed, the way in which special tax benefits fatten earnings for international companies was revealed in an interesting document submitted by the Arabian American Oil Co...

...In Austin, monthly prorations are set by a group named the Texas Railroad Commission...

...However, the increase was not triggered by the Texans but by the Humble Oil & Refining Co., a subsidiary of Standard Oil of New Jersey, and the largest purchaser of domestic crude...

...Nonetheless, Flemming went on to say that he was "disturbed" at the thought that "we are developing some patterns here that are going to be very difficult to live with when we move into a more normal period...

...Consequently . . . additional tanker capacity is made available and it would certainly make sense to get as much moving from Venezuela to Western Europe as it is possible to move...

...One reason, of course, is that other companies promptly raised prices—a move that could not have surprised Humble—and Humble's price edge was erased...

...However, this is not what happened...

...Oilmen are secretive about the exact figures, but in 1946 the Commerce Department estimated that Middle East crude costs about 30 cents a barrel and Venezuelan crude about 50 cents, contrasted with a Gulf Coast figure of $1.85...

...As an aside, it should be pointed out that importing cheaper oil makes economic sense and that the "defense essentiality" argument is often abused...

...Actually, the increase posted by Humble was 35 cents a barrel and it has remained fairly firm...

...MEEC, characteristically, is headed by Stewart P. Coleman, a vice president of Jersey...

...It is estimated that the tiny sheikdom of Kuwait alone has larger proved reserves than the entire Western Hemisphere...

...The reason I have been disappointed to note that is that I know that the run from Venezuela to Western Europe is shorter than the run from our Gulf Coast to Western Europe...

...Of course, Aramco can also deduct royalties as expenses, but the offset device places the company in a more favorable tax position...

...Clearly they are men of ability and energy...

...But when the predicted increase came about, the government went to great lengths to inform Congress that authority was lacking for even a discussion of prices • with the oilmen...

...Soon industry spokesmen were telling Congress that it should "pin a rose" on the MEEC for its magnificent voluntary effort...

...There are about 20,000 independents and domestic producers and, understandably, they did not react passively as markets were closed to their oil...

...It appeared that the need for Texas oil had been grossly overstated —a theory which has been partly borne out by subsequent events...

...80,344,050 78,461,801 Saudi Arabian income taxes...

...When ODM hearings are resumed on imports the independents will find that they have been outfoxed in the forum of opinion, where the image of the Texas oilman as greedy robber baron has been strengthened, and in the marts of commerce, where the importers have bolstered their position under cover of a world crisis...

...Aramco has a 50-50 profit split agreement with King Saud...

...1956 1955 Earnings ............................................$748,898,765 $724,604,860 Royalties and Revenues...

...280,811,650 272,268,667 U.S...

...But this glosses over the context of world emergency in which the government had ample precedent for seeking a more vigorous form of stopgap authority...

...The chairman of the Humble Oil and Refining Co., a Standard of New Jersey subsidiary which had strongly urged production increases throughout the Suez crisis, now conceded that the February increase might have been a mistake...

...In sum, Aramco will pay the Arabian government $280 million, earn a similar profit for itself, but will pay only $282,377 in U. S. income taxes for its 1956 operations...

...Hearings on import control were underway at the ODM before the Suez crisis...

...Flemming stated that the government recognized these problems and would be prepared to take such action as might prove necessary in the event of a stoppage through the Suez Canal or the Middle East pipelines or both...

...Most important, it ignores the fact that the oil industry is given a unique 27*4 per cent depletion allowance precisely as a public benefit to encourage discovery of new reserves...

...Like other oil-producing states, Texas production is regulated by a state board whose powers are backed by the federal sanctions of the Connally "Hot Oil" Act...

...In 1955, Aramco's income tax bill at home was apparently a mere $56,200...

...It is the government's apparent unwillingness or ARAMCO'S TAX BILL Here are the tax figures for Aramco, the Saudi Arabian concessionaire owned by four American oil giants, as reported on Feb...

...No business is granted so many special privileges, immunities, and rights—and is regulated less—than international oil...

...And yet this all-pervading industry enjoys an unusual freedom from government regulation and a remarkable immunity in the hands of the nation's press...

...The O'Mahoney committee has made public a report of a December 13 meeting of 21 top Jersey executives at which it was reported that a crude oil increase of 25 cents a barrel would raise Jersey's consolidated net earnings by an estimated $100 million...

...Aramco holds the main concession in Saudi Arabia and is owned by Standard of New Jersey, Standard of California, the Socony Mobil Oil Company, and the Texas Company...

...What lent piquancy to the story was the fact that Texas—where almost half of America's oil is produced KARL E. MEYER, a member of the staff of the Washington Post & Times Herald, has made a special study of the current inquiry into the operations of the oil industry...

...The paucity of news coverage of the hearings is at least as striking as evidence presented to the subcommittee...

...by contrast, the Texas producers are as exposed as a derrick on a prairie...

...Most of the big international firms, of course, also buy large quantities of domestic oil through affiliates, but the largest profit margins come from sales of Middle East and Venezuelan oil...

...But it is best to begin with the problem of Texas...

...Like the domestics, Aramco can apply the 27 V£ per cent depletion allowance to its taxes—although the discovery incentive rationale hardly seems applicable to operations in a land literally floating on untapped oil...

...The minutes read: "With respect to the probable increases in the price of crude at sources of supply nearest Europe, [Defense Mobilizer] Flemming stated his understanding that this was also a matter that the U. S. government should consider with the European governments affected, but that the companies that were members of the MEEC would seek individually to exercise restraint...

...To be sure, Aramco's owners will in turn pay a fairer tax, but on a more favorable base since the pie by then is divided four ways...

...Two main reasons were put forth by Jersey and Humble to justify the increase...

...some have loudly proclaimed their disappointment that Nasser did not block the Canal with twice as many ships...

...But now an extraordinary and still unexplained switch-about came to light before a House Committee headed by Representative Oren Harris of Arkansas...

...was apparently holding down its production, despite rising prices and reports of shortage...

...Defense Mobilizer Arthur E. Flemming has testified that he was then about to certify to the President that increased oil imports were endangering national security...

...The unfortunate implication of this reasoning is that the government is helpless in its dealings with international oil except as a suppliant asking the oilmen to run the program in their own way...

...But one month later, the Commission sharply cut back production again on the grounds that there was plenty of crude oil...

...It is no secret that some Texans had hoped the Suez crisis would provide an opening for an increase...

...The second argument was that price regulation—or even appeals for a rollback—would constitute an improper invasion of the free enterprise system...

...This warning was made at a secret meeting September 19, 1956, attended by top Administration officials and representatives of 12 major international oil companies...

...Yet, strangely, the Administration had been alerted by the oilmen themselves that federal "direction" might be needed to avert a price increase if the Suez Canal was blocked...

...Then, shortly after a January 3 price increase which boosted crude oil prices 35 cents a barrel, a report emanated from London that shipments were lagging and that Europe faced a "critical" oil shortage...

...On a larger canvas, the argument waives the government's positive obligation to seek regulatory powers over an industry vested with vital public interest and liable to abuse its power—and surely few industries touch so many circles of national interest as international oil, with its many subtle contacts with foreign policy, transportation, pipelines, refineries, domestic buyers, dealers— and politics...