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MULTINATIONAL CORPORATIONS AND
UNITED STATES FOREIGN POLICY
7%o19~
HEARINGS
BEFORE THE
SUBCOMMITTEE 0N
MULTINATIONAL CORPORATIONS
OF THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
NINETY-THIRD CONGRESS
SECOND SESSION
ON
MULTINATIONAL PETROLEUM COMPANIES AND FOREIGN POLICY
JUNE 5 AND 6, JULY 25, AND AUGUST 12, 1974
PART 9
0
~7 2~5T?L&~
Printed for the use of the Committee on Foreign Relations
U.S. GOVERNMENT PRINTING OFFICE
45-426 WASHINGTON 197~
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402 - Price $2.70
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COMMITTEE ON FOR,EIGN RELATIONS
I. W. ~IJTMItIGHT, ~rl~an~a~s, dhdlrm~an -~
JOHN SPARKMAN, Alabama
MIKE MANSFIELD, Montana
FRANK- C~1URCIT, Idaho
STUART SY~IING~UON, Missouri
CLAIBORNE PELL, Rhode Island
GALE W. McGEE, Wy~ming~
EDMUND S. MUS~IE~4aine
GEORGE McGOVERN, South Dakota
HUBERT H. HUMPHREY,Minnesota
PAT M. HOLT, chief of Staff
An~rnun M lAmt, £Yhi~fCZerk
1 ~UBCOMMI~EE 6N~ MULTH~AT~ONAL OORPbEA~UIONS
FRANK CHURCH; Tdah6, Chairman
STUART S7MIN~JPO$~ $is$ourl CL1FPORDP,CASE~ ~nw ~rsey
EDMUND S. MUSKIE, Maine CHARLES H. PERCY, illiuois
JIiROMK LEVINSON, Oliléf iJounsa
JACK 13LJpt,.48sOciat~ Countei
(II)
d-~ORGE D. AIKEN, Vermont
* CLTFFORD P. CASE, New Jersey
JACOB ~. JAVITS~N~w ~forl~
HUGH SCOTT, Pediis3th1ani~
JAMES B. 1~EARSON, gansas
cIU-RtE~ ii.~1~RCY, ~Wnois
* ROBE-AT ~: cFRrFrr~~; Michigan
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CONTENTS
Hearing days: Page
June 5, 1974 1
June 6, 1974 73
July 25, 1974 167
August 12, 1974 231
Testimony of:
Blair, John M., Professor, department of economics, University of
South Florida, Tampa, Fla 192
Collado, Emilio G., director and executive vice president, Exxon Corp 118
Katz, Hon. Julius, Acting Assistant Secretary of State for Economic
and Business Affairs 146
Kauper, Thomas E., Assistant Attorney General, Antitrust Division,
T)epartment of Justice; accompanied by Richard Sayler, and
Joel Davidow
Simon, Hon. William E., Secretary of the Treasury; accompanied by
Gerald L. Parsky, Assistant Secretary of the Treasury 231
Stobaugh, Professor Robert B., chairman, Harvard Business School
energy project, Harvard University, Cambridge, Mass 167
Sawhill, Dr. John C., Administrator, Federal Energy Office; accom-
panied by Joseph C. Bell, Assistant General Counsel, and Mel
Conant, Assistant Administrator, International Energy Affairs - - - 1
Tavoulareas, William P., president, Mobil Oil Corp.; accompanied by
George A. Burrell, general counsel, Mobil Oil Corp 73
Insertions for the record:
Prepared statement of Dr. John C. Sawhill, Administrator, Federal
Energy Office 6
Statement of Senator Clifford P. Case 14
Prepared Statement of Thomas E. Kauper, Assistant Attorney
General, Antitrust Division, Dept. of Justice 45
Prepared statement of William P. Tavoulareas, president, Mobil Oil
Corp 79
Letter to Dean Rusk, Secretary of State, from John MeCloy, dated
January 11, 1967 115
Letter to Lyndon B. Johnson, U.S. Senate, from Herbert Hoover, Jr.,
Acting Secretary, dated September 28, 1955 117
Letter to John Foster Dulles, Secretary of State, from Senator Lyndon
B. Johnson, dated September 9, 1955 118
Prepared statement of Emilio 0. Collado, director and executive vice
president, Exxon Corp 123
Chart-U.S. taxes paid by U.S.-based major oil companies 133
Responses of Atlantic Richfield Co. to questions submitted by Senator
Frank Church 144
Prepared statement of Robert B. Stobaugh, professor of business admin-
istration, Harvard University Graduate School of Business Admin-
istration 182
Gulf Oil Corp., world petroleum supply and demand, March 1970 207
Documents-agreement effected by exchange of notes between the United
States and the United Arab Republic on investment guarantees, dated
June 29, 1963, and July 16, 1974 250
Response of Hon. William E. Simon, Secretary of Treasury, to a question
by Senator Clifford P. Case 257
Responses of Hon. William E. Simon, Secretary of Treasury, to questions
by Senator Charles Percy~. 268
Responses of Hon. Gerald L. Parsky, Assistant Secretary of Treasury, to
questions by Senator Clifford P. Case 279
(III)
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MULTINATIONAL PETROLEUM COMPANIES
AND FOREIGN POLICY
WEDN~SDA~', JUNE 5, 1974
UNITED STATES SENATE,
SUBCOMMITTEE ON MULTINATIONAL CORPORATIONS
OF THE COMMITTEE ON FOREIGN RELATIONS,
Washington, D.U.
The subcommittee met, pursuant to notice, at 10:10 am., in room
4221, Dirksen Senate Office Building, Senator Frank Church [chairman
of the subcommittee] presiding.
Present: Senators Church, Case and Percy.
Senator CHURCH. The practice of this subcommittee has been to
swear the witnesses.
Would you stand, please, and be sworn?
SWEARING OF WITNESS
Do you swear that everything you are about to testify to in these
hearings will be the truth, the whole truth, and nothing but the truth,
so help you God?
Dr. SAWHILL. Yes, sir.
Senator CHURCH. You have a prepared statement for the subcom-
mittee. It is rather lengthy. Would it be possible for you to summarize
the statement as you go through it?
TESTIMONY OP DR. JOHN C. SAWHILL, ADMINISTItATOR, EED1~BAL
ENERGY OFFICE; ACCOMPANIED BY JOSEPH C. BELL, ASSISTANT
GENERAL COUNSEL; AND MEL CONANT, ASSISTANT ADMINIS-
TRATOR, INTERNATIONAL ENERGT AFFAIRS
Dr. SAWHILL. Yes, sir.
Senator CHURCH. And submit the entire statement for the record.
Dr. SAWHILL. Yes, sir.
Senator CHURCH. Please proceed.
Dr. SAWHILL. Thank you very much, Mr. Chairman.
Our statement today addresses the role of the Federal Energy
Office [FEO] in the international energy arena and also specifieull~,
some of the actions we have taken recently to better define the rela-
tionship in international oil between the United States and other
countries and the international oil companies.
First, I would like to give you an overview of what the Federal
Energy Office is doing as it interacts with a number of agencies in the
executive branch in the international energy area. We are preparing
(1)
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2
for discussion with other consuming countries' elements of the coordi-
nated system of stockpiling and conservation. We are working with
~other countries to establish a data system which will allow for more
precise and coherent means of evaluating and forecasting the world
~energy market. We are working with other governments to develop
joint research and development projects. We are developing a set of
international energy policy recommendations as part of an overall set
of Project Independence proposals; and, finally, we are working with
some of the international oil companies on the current round of
negotiations, particularly as it relates to priee.
If I could, before getting into the details of some of the specific
things we are doing, disci~ss some of the recent developments in the
international ep~rgy areaS, Of coilrrse, in the upcoming meeting in
Quito, Ecuador, OPEC will be considering ~ proposal to inci~ease the
produ~cer government tax on company-owned or equity oil from 55
percent of the postedprice to 87 percent. To us, this is not a matter
of indifference, and it would be an error to assume that the companies
would be able to absorb such a tax increase. This action, should it be
adopted, would raise the price of international oil. Td date, the pro-
ducing companies have been mixing their equity oil with the more
expensive participation or buy-back oil which they have purchased.
Their prices have in turn been based on the weighted average cost of
both their cheaper equity oil and the more expensive buy-back oil.
The recent OPEC staff proposal to increase the tax on equity crude
will raise the price of equity crude virtually to that of buy-back crude
and eliminate the companies' ability to sell a cheaper composite
barrel.
Parenthetically, there has been some confusion about the prof-
itability of international oil companies. For example, if we take
Saudi Arabian light, crude, the difference between the cost of equity
crude, $7.11; per barrel and buy-back crude at $10.86 ~er barrel is
$3.73; but it would be erroneous to assume that this is the profit
on the transaction because the transaction is really a combination of
the buy-back crude ajid the equity crude, and the profit narrows
considerably when. we look at these, as a combination.
As I indicate intlie testimony on page 5, if we takéa hypothetical
example using a 60 to 40 ratio of buy-back to equity crude, a weighted
average cost for equity and buy-hackcrude would be $9.34 per barrel.
If the world oil price, therefore, is in the $10 range, this cost would
yield a profit margin of about 66 cents rather than the higher figure of
$3.73.
One other recent development that we might comment on briefly
is the proposal by Saudi Arabian Minister of Petroleum Yamani
on lowering the posted price of oil from $11.65 to $9, that is a reduction
of $2.65. Since we do not know yet how this proposal might be com-
bined with other issues such as participation agreements or the
taxation rate on equity crude, it is difficult to draw any firm con-
clusion or to really assess the full implication of the Yamani proposal.
Now, if I could turn to our regulatory framework. With respect
to prices of oil in the United States, we have a comprehensive regiila-
tory system of price regulations for petroleum products administered
by our office under the Emergency Petroleum Allocation Act of 1973.
The act requires that producers bepermitted to pass forward to con-
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sumers increased product cost on a dollar per dollar basis. For im-
ported product in crude, these increases are measured by increases in
landed cost, that is, the cost of crude or product landed in the United
States.
We discuss in some detail in the testimony the definitions of landed
crude and how we require accounting practices to be administered,
Basically, turning to page 8, FEO has two sets of controls over
transfer prices. First, we require companies to measure cost by
customary accounting practices which arO generally accepted and
historically and consistently applied and; secondly, we have explicit
authority to go beyond the general standard and insure in specific
cases that companies use a proper measure of cost to justify allowable
price increases. In transactions between affiliated entities, the landed
cost or transfer price charged by a foreign affiliate to its U.S. affiliate
may be computed in a variety of ways, and companies naturally
chose those for which the tax and other legitimate business reasons
are most advantageous to their collective enterprise. Ordinarily,
these transfer prices will not affect prices in the marketplace as market
prices will be determined by ordinary supply and demand conditions.
Under price controls, the determination of transfer prices is very
important. if the transfer price between the international affiliate
and the U.S. affiliate is accepted for determination of landed costs,
the profits of the affiliated entity as a whole can be increased by raising
the transfer price. And this is the way in which that can occur: profits
will be higher for the international affiliate due to the higher transfer
price, but the U.S. affiliate will not suffer a corresponding decrease
in profitability because under current controls it can recover the
higher transfer price through higher domestic prices. In sum, U.S.
users will pay higher prices which will be reflected in higher profits to
the international operations of affiliated entities.
There is an obvious incentive for transfer prices to be increased,
that is in order to maximize profitability, but such an increase to the
disadvantage of U.S. consumers.
In the fall of 1973, the Cost of Living Council's Energy Division,
working in conjunction with the Internal Revenue Service, for-
malized its process of reviewing price increases put into effect by
refiners pursuant to the predecessor of section 212.83, which is
currently in our regulations; and the testimony goes on to describe
how in January we iiiitia ted a refinery audit review program consisting
of a team of IRS auditors which we trained in latter January and
early February to conduct the audit process. We now have dispatched
auditors to the headquarters of 30 of the largest refiners in the country
to begin an on-site audit process. This is still continuing with 94
auditors already in the field and with plans to add about 60 more in
the future. Under this audit program, specifically as it relates to this
transfer price question, we have issued a notice of probable violation
to Gulf Oil Corp. questioning the validity of $463/2 million in cost
claimed by Gulf in support of price increases since November 1973.
rrhe FEO questions whether Gulf had consistently applied its
customary accounting procedures in a generally accepted manner in
the computation of landed costs with respect to certain imports of
crude oil purchased from foreign affiliates.
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4
We are presently reviewing the answer which Gulf submitted last
week in response to this notice.
In addition, based upon preliminary information from the audits,
it appears that certain firms are using accounting procedures which
do not accurately reflect costs. Such procedures may have enabled some
multinational oil companies to increase crude oil costs to their U.S.
affiliates and may explain in part some of the significant increases in
international profits reported by major oil companies.
One should be cautioned that any inflation in transfer prices is not
necessarily the result of deliberate violation of F1EO regulations but
in many cases may result merely from the application of customary
accounting procedures which because of present market conditions,
do not accurately reflect costs. As this committee knows well, prices
for foreign crude have accelerated dramatically over the past year.
The use of different accounting methods which formerly may have
produced relatively insignificant differences may now result in sub-
~tantial differences in cost and have a significant impact on product
prices to American consumers. In addition, the present unsettled
market conditions have apparently resulted in various companies
giving quite a different meaning to the word "market" when this
entity is used as an accounting standard for setting transfer prices. In
light of this problem, FEO determined that it was necessary to exer-
cise its powers pursuant to our regulations to disallow increased costs in
excess of increased actual cost. Accordingly, we published in the
Federal Register on May 20 some proposed regulations. In general,
these proposed regulations attempted to determine what the actual cost
of crude oil or product would have been to the U.S. affiliate if it had
purchased the crude oil or product in an arms-length transaction.
rfhis yardstick is used in order to find a transfer price equal to that
which would have resulted from ordinary market forces. To the extent
that it is successfully applied, the arms-length measure should result
in refiners having as nearly as possible the same measure of actual
cost whether or not the product is purchased from a related party..
Our preferred method of cost is the comparable sales method pur-
suant to which a comparable market price is computed on the basis
of all sales to unrelated parties in the month of measurement. From
these sales we exclude certain very high and very low prices and try
to take an average of the middle 60 percent, In cases where we do
not have sufficient information from independent sales to determine
in a timely manner and with reasonable precision the comparable
market price, we provide as an alternate a net cost method as a means
of computing the transfer price.
Turning now to another subject: international coordination.
Representatives of key nations involved in the Energy Coordinating
Group {ECG} have been informed of our proposed regulations affecting
transfer pricing as they will apply to U.S. international oil companies
or any importers of crude. In doing so, we have recognized the wide-
spread international interest in the subject and the intention of a
number of governments to take comparable action. We are asking
the representatives of these governments to review our proposal
and make whatever comments they wish.
Moreover, we believe such a step on our part is a necessary extension
of our priority effort to enlarge upon our knowledge of international
oil pricing.
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It is highly likely that the ECG meetings will result in an agreement
to exchange comparable information between and among states. It
is then particularly important that the key importing states have a
common approach to the issue of gathering and exchanging data on
the activities of the oil companies so that the information received and
exchanged can be readily assessed.
In this area, we have submitted a proposal to the Energy Coordinat-
ing Group which, with minor changes, we think will be accepted.
rrurning now to the next session of my testimony, on page 16,
insuring reasonable prices and s~ipply security. As I have already
mentioned, we have underway a series of related studies which will
lead us to select the most effective course the U.S. Government should
perform in helping insure reasonable prices and supply security. Since
we are dealing with an international commodity in which other govern-
ments play a crucial role, we have been examining the techniques
utilized by other countries to extend their influence over oil in interna-
tional trade. We have been assembling information on the practices
of such countries as Germany, United Kingdom, France, Italy,
Canada, as well as Saudi Arabia, Iran and Indochina. In parallel
with this effort we have begun an intensive and far-reaching study of
the alternatives open to the U.S. Government in order for it to have
an effective voice on the terms by which oil is imported into this
country. The principal conclusions of the study will be transmitted
to this subcommittee as soon as they are available.* The study will
benefit from proposals which have come from many sources, including
congressional committees. Your own inquiry, we feel, is a very vital
source.
Since the issues involved are so important and pressing, we have
taken several critical steps to make fully evident to the international
oil companies the depth and extent of the U.S. Government interest
in the matter of oil. We have asked that FEO be informed in advance
of any agreements which would have an important effect on the terms
under which oil is supplied to our country. I have, along with others,
repeatedly cautioned the companies to be fully alert to the need to
bring prices down. Moreover, we have through bilateral and multi-
lateral diplomatic channels, made clear to producer governments the
serious concern of the U.S. Government over the present high prices
and their effects on the world economy. While the United States is
exercising its regulatory power to affect the cost of imports where
transfer prices are involved, our activity may need to he increased to
give effect to general U.S. Government energy policies. For example,
it may be advisable that oil companies be required to file with the
U.S. Government all their agreements with producer governments.
In doing so, I feel we may want to move deliberately. We know that
the international system for the supply of oil is an immensely compli-
cated underta1~ing and is performing with impressive efficiency.
1\/iillions of barrels of oil a day move around the world through a
vast logistics system. It is a system which is an essence of international
concern with the vital interests or the great majority of states in-
extricably involved. It is not a system that we or others can afford to
*See Subcommittee on Multinational Corporations committee print, "U.S. Oil Companies
and the Arab 011 Embargo. The International Allocation of Constricted Supplies," Jan. 2,
1975.
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see diminished in its effectiveness. Steps which the United States and
other governments may take with regard to this system must have
an impressive degree of coordination lest the actions of individual
states, taken singly and without due regard to the actions of others,
fragment or vitiate the whole effort.
Turning briefly to overall energy policy. As you know, it is the
goal of Project Independence, the focal point of our overall energy
policy, to eliminate the critical vulnerability of the United States
to substantial interruptions in supply. Elements of the project-such
as domestic resource development, energy research and conserva-
tion-are being rapidly fashioned. Our target date for the completion
of the "blueprint" study is November 1 of this year.
We are reviewing our past effort to improve our capability should
another embargo occur. We are also actively participating in the
development of international arrangements to deal with the effects
of any supply interruption, no matter what its cause, through common
efforts. Critical to this effort is the long-term effort to conserve.
This area is the one and truly vital area in which consumer govern-
nients can take immediate steps of considerable consequences both
to reduce their dependence upon imports and to improve their ability
to handle sudden supply cutoffs.
Finally, I would like to talk about interagency coordination. You
have asked for our assessment of the adequacy of interagency co-
ordination in the international energy area. In view of the short
time which all of us in the Government have had to deal with the
new challenges of the energy crisis, I believe that excellent progress
is being made in bringing together the various parts of the U.S~
Government in order to successfully pursue the definition and imple-
nientation of a sound U.S. energy policy. We have obviously still
not yet achieved as close an interaction as we all want, but there is
daily evidence of expanding and continuing interchange with CIEP,
[Co-uncil on International Economic Policy~, NSC [National Security
Council], the Department of State, Treasury, Interior, Commerce,
and Defense, as well as with other interested agt~ncies. I believe that we
are now in a position in which the U.S. Government can marshal
and coordinate its efforts to deal effectively with our energy problems.
Thank you. I have with me Mr. Melvin Conant who is Acting
Assistant Administrator for International Affairs in the Federal
Energy Office and Mr. Joseph Bell from our General Counsel's office.
They will assist me in answering your questions.
[Dr. Sawhill's prepared statement follows:]
PREPARED STATEMENT OF Dn. JOJIN C. SAWHILL, ADMINISTRATOR, FEDERAI~
ENERGY OFFICE
Mr, Chairman and members of the committee, I am pleased to have the op-
portunity to appear before you this morning to discuss the Federal Energy Office's
role in the international energy arena. It is clear that the U.S. Government must
play a larger role in the international system of acquisition, processing and
distribution of oil. We are attempting to determine the best way of doing this
while a;~ the same time preserving and. supporting the industry in those areas
where it makes a major and virtually irreplaceable contribution to world energy
markets.
In particular, I would like to discuss with you, today some of FEO's views
toward the international oil companies and the potential consequenes ot some
of the most recent proposals for pricing by OPEC and individual producing
countries. I also wish to deal with our proposed regulations on the standards
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governing transfer prices between domestic ~nd interbational affiliates of inter~
national oil companies, along with the other questions raised in your request for
testimony.
Let me first give you an overview of FEO activities in the international area.
Basically, FEO assures the consistency of energy related policy and actions
taken domestically with those taken internationally. In that role, FEO interacts, on
a wide .variety of matters with the other agencies of the Executive Branch con-
cerned with international affairs. Some of the specific activities which we are
actively involved in include:
Preparing for discussion with other consuming countries elements of a en-.
ordinated system of stockpiling and conservation, as well as the sharing of inter-
national energy resources in the event of an interruption in supply.
Working with other countries to establish a data system which will allow for a
more precise and coherent means to evaluate and forecast the world energy mrket.
Working with other governments to devclop joint research and development
projects.
Developing a set of international energy policy recomrnenda~ions as part of
the full set of Project Independence proposals which are to be submitted to the
President later this year. Au important part of this work is an interagency study
which we have underway which will for the first time indicate the full true cost of
imported oil including risk of interruption and national security implications,
Working with international oil companies in an effort to solicit their active
cooperation in obtaining lower prices.
We hope that these efforts and others which I will discuss in more detail in
this testimon~r will provide the basis for a more stable and secure international
market for energy.
RECENT DEVELOPMENTS
Before discussing specific FEO activities with respect to the price and supply
of oil, I would like to mention recent developments which could have significant
impact.
At its upcoming meeting in Quito, OPEC will be considering a proposal to increase
the producer government tax on company owned, or equity oil, from 55 percent of
the posted price to 87 percent. This is not a matter of indifference~ and it.would be
an error to assume that the companies would be able to absorb such a tax increase.
This action, should it be adopted, would, raise the price of ipternational oil.
To date, the producing companies have been mixing their equity oil with the
more expensive participation, or buy-back oil which they purchase. Their prices
have in turn been based on the weighted average cost of both their cheaper equity
oil and the more expensive buy-back oil. The recent OPEC staff proposal, to
increase the tax on equity crude will raise the price of equity crude virtually to that
of buy-back crude and eliminate the companies' ability to sell a cheaper "compos-
ite" barrel.
Parenthetically, the complexity of the international crude oil pricing system
and this mixing of equity and buy-back crude has led to some cotifu~ion concerning
company profits on these crudes. For example, using Saudi Arabian Light, a
common reference crude oil, the difference between the cost of equity crude at
$7.11 per barrel and the price of "buy-back" crude, provisionally established at
93 percent of Posted Price or $10.84 per barrel, is $3.73 which if it constituted
"profit" would look enormous. But this is not necessarily the case.
In fact, the buy-back price does not necessarily represent the market price and,
as I have pointed out, the cost to the company is a composite of both the equity
crude it is permitted to lift and the buy-back oil ~hieh it must take. The ratio of
buy-back oil to equity oil and the price of buy-back oil have not yet been fully
determined in some countries, and consequently the precise cost of oil to the
companies is not known.
However, constructing a hypothetical example using the 60/40 buy-back to
equity ratio and again using Saudi Arabian Light prices, a weighted average cost
for equity and "buy-back" crudes would be $9.34 per barrel. If the world market
price for oil is in the $10.00 range, a $9.34 cost would yield a profit margin of about
66 cents. Profits will, of course, vary from company to company and country to
country, and this should be considered only an illustrative computation.
REOTILATORY FRATTEWOITK
With respect to prices of oil in the United States, we have a comprehensive
regulatory systeni of price regulations for petroleum products administered by
FEO under the Emergency Petroleum Allocation Act of 1073. The Act requires
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that producers be permitted to pass forward to consumers their increased product
costs on a dollar-for-dollar basis. For imported product and crude, these increases
are measured by increases in "landed costs"-that is, the cost of crude or product
landed in the United States.
The term "landed costs" is defined in FEO regulations to mean, for purposes of
complete arms-length transactions, the purchase price at the point of origin plus
the actual transportation costs. For arms..length transactions the price paid is, of
~course, an actual cost to the purchaser which we must be permitted to recoup. For
purposes of products purchased in a transaction between affiliated entities, the
landed costs of the product is computed by use of the "customary accounting
procedures generally accepted and consistently and historically applied by the
firm concerned." That is, the regulations look to the "transfer price" which the
company has customarily used between its affiliates. Similarly, in the case of
products shipped pursuant to a transaction between affiliated entities, the trans-
portation element in landed costs is computed by use of the same standard.
In some cases, however, customary accounting practices may not accurately
reflect actual costs; To deal with these cases, the regulations contain language
enabling FEO to look behind company accounting procedures. Specifically, the
regulations provide in Section 212.83(e) that:
"Whenever a firm uses a landed cost which is computed by use of its
customary accounting procedures, the FEO may allocate such costs between
the affiliated entities if it determines that such allocation is necessary to
reflect the actual costs of these entities or the FEO may disallow costs
which it determines to be in excess of the proper measurement of costs."
Thus, FEO has two sets ox controls over transfer prices: first, FEO requires
companies to measure costs by customary accounting practices which are
generally accepted and historically and consistently applied; and second, it has
explicit authority to go behind that general standard and insure, in specific
cases, that companies use a proper~ measure of costs to justify allowable price
increases.
In transactions between affiliated entities the landed cost or "transfer price"
charged by the foreign affiliate to its U.S. affiliate may be computed in a variety
of ways, and companies naturally ch~ose those which for tax and other legitimate
business reasons are most advantagdbus to their collective enterprise. Ordinarily,
these transfer prices will not affect prices in the marketplace as market prices
will be determined by ordinary supply and demand conditions.
Under price controls the determination of transfer prices is very important. If
the transfer price between the international affiliate and the United States affiliate
is accepted for the determination of landed costs the profits of the affiliated entities
as a whole can be increased by raising the transfer price. Profits will be higher for
the international affiliate due to the higher transfer price, but the U.S. affiliate
will not suffer a corresponding decrease in profitability because under current
controls it can recover the higher transfer price through higher domestic prices.
In sum, United States users will pay higher prices which will be reflected in higher
profits for the international operations of the affiliated entities. There is an obvious
ipcentive for transfer prices to be increased in order to maximize profitability, but
to the disadvantage of U.S. consumers.
ENFORCEMENT
In the Fall of 1973, the Cost of Living Council's Energy Division, working in
conjunction with the Internal Revenue Service, formalized its process of reviewing
price increases put into effect by refiners pursuant to the predecessor of Section
212.83. In January 1974, after the authority was delegated to FEO, Form FEO-96
was issued, requiring refiners to enumerate all the calculations called for under
the pricing formula in order to justify their price increases. These forms must be
submitted on a monthly basis and FEO has required refiners to file forms covering
the period beginning with the month of November.
In addition, on January 10, 1974, FEO announced the establishment of a Refin-
ery Audit Review Program (RARP), designed as a comprehensive audit package
to verify the costs which refiners had been reporting in support of price increases.
A team of Internal Revenue Service auditors was trained during the latter part
of January and in early February to conduct the audit process, and an exhaustive
set of guidelines (an audit checklist) was developed as an enforcement tool for
~use by the auditors. Beginning in early February, these auditors were dispatched
to the headquarters of 30 of the largest refiners to begin the on-site audit process.
PAGENO="0013"
9
This audit is ~sti1 continuing with 94 auditors already in the field ~tnd with plans
to add about k~O more in the futureS
One enforcement action has already been initiated by FEO On May 8, 1974~
tt Notice of Probable Violation was issued to Gulf Oil Corporation questioning the
validity of $46.5 million in costs claimed by Gulf in s~ipport of price increases
since November 1973. The FEO questioned whether Gulf had consistently
applied its customary accounting procedures in a generally accepted maimer in
the computation of landed costs with respect to certain imports of crude oil pur-
chased from foreign affiliates. FEO is presently reviewing the answer which Gulf
submitted last week in response to the Notice.
In addition based upon the preliminary information from the audits, it appears
that certain firms are using accounting procedures which do not accurately
reflect costs. Such procedures may have enabled some multinational oil companies
to increase crude oil costs to thefr U.S. affiliates and may explain in part some of
the significant increases in international profits reported by the major oil corn-
panics. One should caution, however, that any in~ation in transfer prices is not
necessarily the result of deliberate violation of FEO regulations but in many
cases may msult merely from the application of customary accounting procedures
wlb1icb, because of present market conditions, do not accurately reflect costs. As
this GommIttee knows well prices for foreign crudes have accelerated dramatically
over the past year. The use of differcht accounting methods which formerly may
have produced relatively insignificant differences may now result in substantial
difference in costs and may have a significant impact on product prices to American
consumers. In addition, the present unsettled market conditions have apparently
resulted in various companies giving quite different meaning to "market when
that is used as an accounting standard for setting transfer prices.
I'nopOsnti REGULATIONS
In light of these problems, FEO h~s determined that it is necessary to exercise
its powers pursuant to Section 212.83(e) to disallow increased costs in excess of
increased actual costs, Accordingly, FEO has published in the Federal Register.
of May 20, 1974, proposed regulations setting out in detail the standards which
FEO proposes to use in exercising this authority.
In general, the proposed regulations attempt to determine what the actual
cost of crude oil or product would have been to the U.S. affiliate if it had purchased
the crude oil or product in an arms-length transaction. This yardstick is used
in order to find a transfer price equal to that which would have resulted from
ordinary market forces, and to the extent that it is successfully applied, the arms-
length measure should result in refiners having as nearly as possible the same
measure of actual costs whether or not the product is purchased from a related
party.
FEO's preferred measure of costs is the comparable sales method pursuant to
which a comparable market price is computed on the basis of all sales to unrelated
parties in the month of measurement. From these sales the regulations identify a
representative contract price by excluding both very high and low prices.
In cases where there may be insufficient information from independent sales
to make it po~sible to determine in a timely manner and with reasonable precision
the comparable market price, the proposed regulations provide that the net
cost method will be applied. Under the net-cost method, cost increases are meas-
ured on the basis of increases in the net cost of the product to the affiliated entities
plus the market value of any services performed by the non-United States affiliates.
In some instances the use of market prices ma~ not permit a firm actually to
recover all of its increased cost outlays, and in those instances the firm may
calculate its costs on the net-cost basis,
To the extent that increased costs calculated pursuant to the customary
accounting methods used by affiliated entities exceed increased actual costs as
measured either by increases in comparable market prices or in net cost, they will
be disallowed by FEO pursuant to the authority of Section 212.83(e), This
authority will be exercised with respect to all landed costs incurred beginning
October 1973.
INTERNATIONAL COORDINATION
Representatives of key nations involved in the Energy Coordinating Group
have been informed of FEO's proposed regulations affecting transfer piicing as
they will apply to U.S. international oil companies (or any importers of crude).
In doing so, we have recognized the widespread international interest in the
subject and the intention of a number of governments to take comparable action.
PAGENO="0014"
10
We are asking the representatives of these governments to review our proposal
and to make whatever comments they wish.
Moreover, we believe that such a step on our part is a necessary extension of our
priority effort to enlarge upon our knowledge of international oil pricing. It is
highly likely that the ECG meetings will result in an agreement to exchange
comparable information between and among states. It is particularly important
that the key importing states have a common approach to the issue of gathering
and exchanging data on the activities of the oil companies, so that information
received and exchanged can be readily assessed.
In this area, U.S. representatives have submitted a proposal to the working
`group of the Energy Coordinating Group which, with minor chauges accepted it
subject to the approval of the participating governments. It provides for the
establishment of an international data system. which will collect and evaluate
empirical data to answer specific questions submitted by participating states. Data
will first be gathered from the public domain. To the extent that gaps remain, the
Finance Ministries (Treasury in our case) will supply further data needed to
answer the specific questions. States have the obligation to submit only those data
which will be of a non-discriminatory and non-proprietary nature. Non-discrimi-
natory is defined to mean that no stAte must give data to another which the
recipient state would not have access to under an equal application of its own laws
and institutions. If, after this procedure there is still a data gap, then a specific
request for data will be submitted to the companies for reply.
We believe that this system provides a valuable first step in providing adequate
information an the international oil' companies without infringement upon their
apprOpriate rights. We expect that this FEO initiative represents only the first
step in deepening our effort to be fully informed on oil import terms.
ENSURINO REASONABLE PRICES ANR SUPPLY SECURITY
As I have already mentioned, we have underway a series of related studies which
`will lead us to select the most effective course the U.S. Government should per-
form in helping ensure reasonable prices and supply security.
Since we are dealing with an international commodity in which other govern-
ments play a crucial role, we have been examining the techniques utilized by other
countries to extend their influence over oil in international trade. We have been
assembling information on the practices of such countries as Germany, the United
Kingdom, France, Italy and Canada; as well as Venezuela, Saudi Arabia, Iran and
Indonesia.
In parallel with this effort we have begun an intensive and far~reaching study
of the alternatives open to the United States Government to have an effective
voice on the terms by which oil is imported into the U.S. The principal conclusions
of the study will be transmitted to this subcommittee as soon as they are avail-
able. The study will benefit from proposals which have come from many sources
including Congressional committees. Your own inquiry is a particularly vital
source.
Since the issues involved are so important and pressing, FEO has taken several
critical steps making fully evident to the international oil companies the depth
and extent of United States Government interest in the matter of oil. We have
asked that FEO be informed in advance of any agreements which would have an
important effect on the terms under which oil is supplied. I have-along with
others-repeatedly cautioned the companies to be fully alert to the need to bring
prices down. Moreover, we have `through bilateral and multilateral diplomatic
channels made clear to producer governments, the serious concern of the U.S.
Government over the ptesent high prices and their effects on the world economy.
While FEO is exercising its regulatory power to affect the cost of imports where
transfer prices are involved, our activities may need to be increased to give effect
to general United States Government energy policies. For example, it may be
advisable that oil companies be required to file with the U.S. Government all
their agreements with producer governments.
In doing so we want to move deliberately. We know that the international sys-
tem for the supply of oil is an immensely complicated undertaking, performing
with impressive efficiency. Millions of barrels of oil a day move around the world
through its vast logistics system. It is a system which is the essence of "inter-
national" with the vital interests of the great majority of states inextricably
involved.
It is not a system that we or others can afford to see diminished in its
effectiveness. Steps which the U.S. and other governments may take with regard
PAGENO="0015"
11
to this system must have an impressive degree of coordination lest the actions
of individual states, taken singly and without due regard to the actions of
others, fragment or vitiate the whole effort.
OVERALL ENERGY POLICY
It is the goal of Project Independence, the focal point of our overall energy
policy, to eliminate the critical vulnerability of the U.S. to substantial inter-
ruptions in supply. Elements in the Project-such as domestic resource develop-
ment, energy research and conservation are being rapidly fashioned. Our target
date for the completion of the "blueprint" study is November 1 of this year.
We are reviewing our past effort to improve our capability should another
embargo occur. We are also actively participating in the development of inter-
national arrangements to deal with the effects of any supply interruption, no
matter what its cause, through common efforts.
Critical to this effort is the long term effort to conserve. This is the one and
truly vital area in which consumer governments can take immediate steps of
considerable consequences both to reduce their dependence upon imports and to
improve their ability to handle sudden supply cut-offs. There is full appreciation
of this effort among our allies.
INTERAGENCY COORDINATED
Finally, you have asked for my assessment of the adequacy of interagency
coordination in the international energy area. In view of the short time which
all of us in the Government have had to deal with the new challenges of the
energy crisis, I believe that excellent progress is being made in bringing together
the various parts of the U.S. Government successfully to pursue the definition
and implementation of a sound U.S. energy policy. We have obviously still not
yet achieved as close an interaction as we all want, but there is daily evidence of
expanding and continuing interchange with CIEP, NSC, the Departments of
State, Treasury, Interior, Commerce and Defense as well as other interested
agencies. I believe that we are now in a position where the U.S. Government can
marshall and coordinate its efforts to deal effectively with our energy problems.
Mr. Chairman, thank you. I would be pleased to respond to your questions.
Senator CHURCH. Thank you, Mr. Sawhill, for your statement.
THE ROLE OF THE OIL COMPANIES IN THE MIDDLE EAST
During our earlier hearings when this subcommittee looked rather
thoroughly into the role of the multinational oil companies in the
Middle East, the elaborate arrangement into which they had entered
among themselves and with the governments, we had a number of
executives of the oil companies here to testify and one of them admitted
in his testimony that the companies really had no further leverage in
dealing with the governments. This admission was coupled with an
inability on the part of any of these witnesses to demonstrate that
the companies had an economic incentive, to try very hard to bring
the price down. Obviously their profits have gone up in tandem with
the tremendous revenues that are now being realized by these oil
producing countries. So if it is true, and the testimony seems to bear
it out, that there is hi~tie incentive and no leverage, then does it not
follow that if we are to have influence on oil prices in the future the
U.S. Government must take a more active role?
GOVERNMENT MUST BE MORE ACTIVE
Dr. SAWHILL. Yes, sir. As I said in my testimony, it seems to me
that we must take a more active role. Tne thing that concerns me is
the nature of that role. We do have a mechanism that is working. We
PAGENO="0016"
12
do, as you say, h.ave some problems with that mechanism because
our companies do not have adequate leverage in. dealing with foreign
governments; I agree with that. The question is as to what kind of
role the Government should take?
I have already initiated certain steps. We may need legislation to
go beyond that. I have asked the companies, as I said in my testimony,
to file with me any major agreements that they make with international
countries.
I have met with company executives and tried to use the weight of
my office, if you will, to (liscoura~e them from signing any long-term
agreements at current inflated prices; I have communicated to them
our Government's feeling that the present price is too high and they
should use their best efforts to reduce prices.
Further, we have initiated the regulations that I described, which
are fairly complex in nature, which would govern the transfer price
between foreign affiliates arid domestic companies.
Senator CASE. Would you permit a question--
Senator CHURCH. Yes.
Senator CASE [continuing]. Just for clarification?
TRANSFER PRICING
What is the effect of your determination of a transfer price that is
allowable for what purpose? Would you testify a little bit?
Dr. SAWHILL. Yes, sir.
Senator CASE. What is your authority and what happens if you
make a decision in this matter?
Dr. SAWrnLL. If I could step back for a minute.
Senator CASE. Please do, because this is a very complicated thing
and I would like to put it in one syllable words instead of the jargon
that we all so easily slip into that the trade has used for a long time.
Dr. SAWHILL. Yes, sir. The reason why this price is so terribly
important is that it sets the basis for which consumer prices in the
country are determined. rfhe oil companies transfer oil into this
country at a price, and we then permit them to use this price to deter-
mine the cost of the crude oil in their refineries. That price can pass
right through on a dollar-for-dollar basis to the gasoline pump or to
the heating oil truck.
Senator CASE. In other words, to get down to the very brass tacks,
you do have authority to fix prices?
Dr. SAWHILL. Yes, sir.
Senator CASE. What prices? Do you fix the price at which the
company sells gasoline at retail?
Dr. SAWHILL. What we do: we fix the margin of profit that they
make. We require them to limit their margins to the margins that
they maintained in May 1973.
Senator CASE. Profit on particular sale~ or margin of profit overall?
Dr. SAWHILL. The margin of profit on particular products like
gasoline, for example, or heating oil; but the margin of profit you
see is based on the price at which they bring oil into this country.
Senator CASE. And you have the authority to tell them you can take
account only of x dollars of the cost?
Dr. SAWHTLL. Yes, sir..
PAGENO="0017"
13
Senator CASE. In other words, you determine what their cost is,
in effect, in cases where there is no arms-length transaction?
PROPOSED REGULATIONS
Dr. SAWIIILL. That would be the effect of the proposed regulations
that we have issued.
Senator CASE. You have not done that so far. All of this is tentative
and hypothetical and for the future?
Dr. SAwmLL. Well, let us not say it is hypothetical. We have
issued regulations for comment for a 30-day period because it is such
a complex subject.
Senator CASE. I am. not critical, I am. trying to find out where we
stand.
Dr. SAWHILL. We initiated a refinery audit program in early Jan-
uary. We sent auditors to the 30 largest refineries, and we then de-
termined that this was the subj ect on which we were going to have to
issue regulations. In May, we issued that regulation for a 30-day
comment period. I would expect we would have final regulations on
this subject about the first of July. But they will be retroactive; they
will apply to transactions since October 16, I believe.
Senator CASE. how will they apply to an individual who goes to the
gas station and buys gas?
Dr. SAWHILL. If we find that this transfer price has been inflated
and then used in turn to inflate gasoline prices, we will require the
companies to reduce their prices in subsequent months until they have
made up tile overcharge, if you will. Incidentally, we used this same
technique when we found errors or violations of our regulations in
this country, forgetting about the transfer price. When we found a
company, for example, that had a margin wider than that permissible
on its gasoline sales, in the next month we required them to have a nar-
rower than permitted margin in order to compensate for the previous
wider margin.
WHY GASOLINE PRICES DIFFER
Senator CASE. The reason I bring this out is most people have been
wondering what the dickens is going on with gasoline prices fixed by
the companies in different places at different amounts and what kind
of regulation is it? The answer has been: there has been none in effect
so far except the threat that there might be what you call a rollback
or a requirement that the company reduce prices in the future if you
determine now that they have charged too much in the past. Up to
now there has been no price regulation, right?
Dr. SAWHILL. No, sir; that is not correct.
Senator CASE. Please tell us why it is not.
Dr. SAWHILL. As in the past, there has been no regulation on the
transfer price.
Senator CASE. That is the price that the company is allowed to
charge itself for what it pays its affiliate when it brings oil into
the country?
Dr. SAWHILL. Yes, sir. As you know, that accounts for only 38
percent of our supplies. 70 percent---
Senator CASE. Thirty-eight percent of the supply of gas?
45-426--7~---2
PAGENO="0018"
14
Dr. SAWHILL. Petroleum.
Senator CASE. Sold in this country?
Dr. SAWHILL. Yes, sir. The remaining 62 percent is supplied by
our own domestic production, and that we have had control on all
along. We have maintained controls on the companies for all of the
products that they sell in this country. In other words, we have had
a price control program in effect ever since the Cost of Living Council
initiated the program.
Senator CASE. The thing that I am trying to get at is to give you a
chance to explain to the people why it does not seem to be working
more effectively.
Dr. SAWHILL. It is working
Senator CASE. Why does the price of gas vary so much?
Dr. SAWHILL. From one part of the country to another?
Senator CASE. Yes; and from one city to another.
Dr. SAwrnLL. The reason it varies so much is that some companies
are more heavily dependent on imported oil, and some companies
are more heavily dependent on domestic oil.
Senator CASE. In New Jersey where much more than 38 percent
seems to be-
Dr. SAWHTLL. Imported because ~t comes into the Bayway Refinery.
That comes in at a higher cost than the domestic price which we
control, and the gasoline stations have to charge a higher price since
they are selling oil from foreign countries.
Senator CASE. What you are telling us for the first time and I am
not being critical, because it is complicated and a delicate mechanism
that we do not want to destroy-up to nbw we have not had any
handle on the price that a company is allowed to charge itself for
gasoline that it buys from its affiliates?
Dr. SAWHILL. Yes. The honest answer to you is that we have not
done it effectively. We have had regu'ations requiring them to use
customary accounting practices.
Senator CASE. You have already indicated, and I have a little
statement here, Mr. Chairman, I would like to put in the record,
with a fine quotation from Sir Josiah Stamp and it is generally en-
lightening of the proceedings here, some literary cuts to them. On
this point, that the use of these customary procedures has resulted
in great distortion of actual facts.
[The information referred to follows:]
STATEMENT OF SENATOE Cnirronn P. CASE
Since we are going to talk about statistics for the next few minutes, I thought
I'd quote to you from Sir Josiah Stamp, who in 1896 became head of the Inland
Revenue Department of England, their version of the Internal Revenue. Said
Sir Josiah:
The Government are very keen on amassing statistics. They collect them,
add them, raise them to the nth power, take the cube root and prepare wonder-
ful diagrams. But you must never forget that every one of these figures
comes in the first instance from the village watchman, who just puts down
what he damn pleases.
Within the next two weeks, the Department of Commerce will publish revisions
of the United States balance of payments of every year since 1966 in order to
correct for a major reporting problem which resulted in the over-statement of
the income this country receives from its niultinational corporations by as much
as $1.5 billion per year.
PAGENO="0019"
15
Apparently oil companies for tax reasons have operated outside the United
States through domestically-incorporated branch entities which lose money in
order to take advantage of the depletion rate on wells located outside the United
States. At the same time, reporting their dividends from their ownership of com-
panics like Aramco, the same U.S. oil companies have included sums which never
were sent to this country. The income figures were overstated because they did
not include trading losses which, for legal and tax reasons, were taken by a domestic
corporation. These unreported outflows were included in the "errors and
omissions" entry in the balance. There does not seem to have been any deliberate
intention to mislead the Government.
The overstatement of U.S. national income from oil companies was considerable.
In 1973, the total excess in stated inflows was $1.5 billion. Earlier in the 1970's,
the benefits to the U.S. balance of payments from multinational investment
appears to have been overstated by around $1 billion per year. It is worth noting
that the massive study of multinational corporations published by the Finance
Committee a year ago estimated that the total multinational corporation-
generated balance of payments inflow to the United States in 1970 was $5.8 billion.
We have now learned from the Commerce Department that the supposed
balance ot payments benefit to the U.S. of the untrammelled expansion of foreign
direct investment has been overstated by around 20 percent because of the
reporting system used by the oil industry alone. This cannot but raise questions
in our minds about other parts of the balance of payments reporting system.
Yet, in calculating the costs and benefits of the multination~J corporation to the
domestic economy, balance of payments statistics are in some ways the most
clear-cut. Estimates of the -employment effects of foreign investment for example
are far more prone to error, since such numbers can only be derived at all through
a hypothetical argument: what the U.S. job picture would be like if multinational
investment had not taken place.
Since the political and tax costs of virtually unlimited direct overseas invest-
ment by U.S. multinational corporations must be balanced against the flow of
payments and the creation of jobs, the factual data must be as reliable as possible.
I commend the Commerce Department's decision to revise the balance of pay-
ments numbers for the oil industry. We must also learn from this revision a
certain amount of skepticism regarding statistics and regarding the benefits of
foreign investment they are adduced to prove.
Dr. SAWHILL. Yes, sir; that is why I say we have to get much
more deeply involved in that subject.
Senator CASE. And without being critical, at least without charging
malice to the companies, what they have done is give a picture to
themselves and to the world that does not reflect the facts and we
are trying to get to the bottom of it.
Dr. SAWHILL. I should have said in our investigations we found
some companies that have maintained consistently a very narrow
margin on the oil coming into this country so that we should not hope
that this is going to result in some kind of a massive price rollback
because many companies in fact have been following practices which
have maintained their margins at the May 1973 levels even on the
oil they are bringing into this country.
BALANCE-OF-PAY MENTS EFFECTS OF COMPANIES
Senator CASE. Well, I just want to at this point, because you did
raise it then, I will not interrupt again because you have got your
flow of questions, I know. This is in a very important part of this
subcommittee's interest in the matter.
Dr. SAWHILL. Yes, sir.
Senator CASE. Because roughly 20 percent of balance-of-payments
benefit attributed to the companies has been the result of overstate-
ment. That is a lot when you are talking about balance of payments
PAGENO="0020"
16
and when you are trying to figure out whether we benefit, this country
benefits more from this kind of investment than not. A 20-percent
error just in this one industry or 20 percent--
Dr. SAWHILL. I am not quite clear on the 20-percent figure that
you are talking about.
Senator CASE. Well, the Commerce Department suggests that
the supposed balance-of-payments benefit to the United States of
the expansion of foreign investment has been overstated by about
20 percent because of this reporting system used by the oil industry
alone.
Dr. SAWHILL. Well, I was not familiar with that.
Senator CASE. The Commerce Department study, I think you
will have access to it and you will use it, of course.
Dr. SAwrnLL. Yes, sir.
Senator CASE. I think it is an enormously important development.
Again, not being critical, in the sense of charging anybody with
malice, malevolence or anything like that, when you do not have the
actual facts, you might just as well be subject to some kind of malevo-
lent influence.
Dr. SAWHILL. Yes, sir.
Senator CASE. It is just as important from the standpoint of the
job you are trying to do and it is a ~crery important job.
Dr. SAWHILL. I have a copy of your statement here which I see
refers to that.
Senator CASE. That is right. Thank you.
Senator CHURCH. Would you like the full statement to appear in
the record?
Senator CASE. Yes, at the initiation of these proceedings, following
the comment by the subcommittee chairman.
Senator CHURCH. All right, without objection, the statement of
Senator Case will be published in the appropriate place in the record.
Mr. Sawhill, as I see the picture, there are two maj or subj ects to
consider. One is how we can temper the price that will be charged for
crude by the producing governments; the other has to do with the price
control mechanism downstream.
Dr. SAWHILL. Yes, sir.
CRUDE OIL PRICING
Senator CHURCH. Let us go back to the beginning.
The facts are, as you know, that the price of crude has been in-
creased by staggering proportions in the last year or 15 months. Now
we are told that the producing governments that are the members of
the OPEC organization are considering further increases in the tax
imposed on these oil companies, and you have testified that if that
increase in tax takes effect the companies cannot be expected to absorb
it and, therefore, such a move by these producing governments will
result in further increases in the price of gasoline here in the United
States?
Dr. SAWHILL. Yes, sir; and throughout the world.
Senator CHURCH. Now, given the enormous inflationary thrust of
these oil prices, the fact that all experts tell us that the prices are
not related at all to the economics of oil but are political in character,
then it seems to me that a very real obligation falls upon the Govern-
PAGENO="0021"
17
ment of the United States to take a more active role in trying to
influence the governments, the foreign governments concerned, not
to increase the price still further. And I take it by your testimony,
that all that you are prepared to propose at this time, reading from
your statement, is the following, "It may be advisable that oil coin-
panies be required to file with the U.S. Government all their agree-
ments with producer governments."
Well, I cannot take issue with that, but it seems to me like dropping
a pebble of sand on the beach to stem the tide.
What real meaningful role is that for the Government at all? To say
to the oil companies, after the fact, "Please file your agreements with
us.,'
CONSIDERING REGULATION OF INTERNATIONAL OIL coNTRACTs
Dr. SAwmLI~. I was not considering this would be after the fact.
You know, this is a difficult thing and frankly, we have just begun
to study it and it is something that I hope tO work with your conimit~
tee on in coming up with some solutions because it is terribly important
for the country.
It might be desirable, for example, for there to be a prenotification
of these agreements with the U.S. Government with our Government
having an opportunity to have some say in whether or not the agree-
ment could become effective. That was really the type of mechanism
of my way of thinking.
Senator CHURCH. Let us take, for example, the present highly
significant negotiations that are going on between the Saudi Arabian
Government and the American companies that own Aramco.
Dr. SAWHILL. Yes.
Senator CHURCH. rfhis, it seems to me, gets to the very fundamen-
tals. If the Saudi Arabian Government proceeds to acquire Aramco
it could have very important consequences on the future price of oil
in this country.
There is also the new proposal for increasing the tax on that part
of the oil that you referred to as "equity" oil.
Dr. SAWHILL. Yes, sir.
Senator CHURCH. rihat can have highly important consequences,
as you yourself have admitted in your testimony.
Now, is the Government playing any role at all in these current
negotiations or is this being left to the companies and Saudi Arabia
to work out together?
Dr. SAWHILL. The Govermnent is playing a role. It is playing a
role both through our office and through the State Department. It
is being kept advised of the progress of the negotiations. The Saudi
Arabian Government, as you know, representatives will be arriving in
this country today and stay here through the balance of the week
and, of course, we will express to them our feelings about the need for
lower oil prices, although the principal purpose of the meeting is to
develop a framework for a special relationship between the Saudi
Arabian Government and our country.
Senator CHURCH. I take it from your testimony nothing has
changed. We were told in earlier hearings the pattern in the past
has been for the Federal Government to stand aside while the oil
PAGENO="0022"
18
companies negotiate and then to be informed after the fact. The role
of the Federal Government even at times when the Government's
own permission was necessary to enable the oil companies to join
together and bargain collectively has been very peripheral, and it
seems to me that has not changed, from what you tell me it is still
very peripheral.
DON'T KNOW HOW TO INVOLVE THE U.S. IN NEGOTIATIONS
Dr. S~WHILL, I did not testify at your previous hearings, Senator,
and I have only been in my present assignment for about a month.
Immediately upon undertaking this task we did launch an effort to
study the very subject that your committee has been studying. I
guess what I am saying this morning is we have not really come up
with any very good answer yet about how to involve the U.S. Govern-
ment in these negotiations. I do not dispute at all that the Govern-
ment has to become more involved, has to take a more active role, but
exactly how this takes place I am really not prepared to make any
recommendations to you this morning.
Senator CHURCH. Well, I think that is a fair statement. I do not
mean to press you beyond what is. reasonable here in view of the
fact that you have been in your position only briefly and you are now
looking at this very serious question for the first time. But let me
make this suggestion to you.
The State Department, it seems to me, needs to be apprised of the
serious view you take of these negotiations that are presently under-
way and the impact that they may have upon the economy of this.
country, and I would hope you would use your influence in the
administration to persuade the State Department, if that is possible,
to bring the Government more directly into the picture.
Dr. SAWHILL~ Yes, sir.
THE STATE DEPARTMENT'S OIL RESPONSIBILITY
Senator CHURCH. In the past the State Department's attitude
toward oil has been one of singular abdication, it has all been left to
the oil companies, with the ~onsequences that we have all experienced.
Dr. SAwrnLL. Well, or course----
Senator CHURCH. Right now the State Department is asking the
Congress to approve a very large increase in the aid program. There is a
renewal of aid being advocated for Arab countries despite the fact
that Saudi Arabia and Kuwait and certain of these oil-rich Arab
countries have immense surplus reserves which they are investing in
the Western World-fl--the profits of this heightened, what I call,
"hijacked" price for oil. Congress is being asked to initiate a new aid
program for Arab countries like Syria, Jordan, Egypt, and possibly
others. We are becoming very deeply involved again in the politics
of the Middle East by virtue of the part that our Secretary of State
has played in the disengagement arrangement with Syria, Egypt and
Israel, and all of this, it seems to me, suggests that though the com-
panies may have very little leverago, and American Government does
have considerable leverage, and if we do not use it we are simply
missing an opportunity to temper what now ha.s become the most
serious inflation in more than a quarter of a century and the price of
fuel is the most important factor in the current inflation.
PAGENO="0023"
19
So I would urge you to do everything you can to persuade the
State Department and the administration to bring the Government
more actively into the picture in connection with these ongoing
negotiations.
Dr. SAWHILL. I might tell you this. That iii response to our urging
there was a telegrath that we drafted and the State Department has
sent a telegram to all of the maj or consuming natio~is expressing the
U.S. Government's concern about the price of oil and particularly
about the proposals to increase the tax paid cost. We have thet with
the State Department as recently as last night expressing our concern
about this and developing with them a procedure where we intend
to be meeting with the major oil companies in discussing this subject
with them, keepin.g ourselves informed on the status of negotiations
and telling the companies of the importance we attach to lower price.
Now I know that you are stating and 1 am agreeing that we have
to go beyond this and the way in whieh we go beyond it is something
that we hope that we can work with your subcommittee on formulating
the policy because at this point we just do not have a policy.
Senator CHURCH. Well, we better get one soon.
Dr. SAwHILL. I agree.
Senator CHURCH. Or there will not be much left out there to
negotiate about.
DID THE ARAMCO SHAREHOLDERS CONSULT GOVERNMENT?
Mr. LEVINSON. Elaborating on what Senator Church has said, you
ha ye said that you want a framework at the same time in connection
with the role of the Government and the companies and you are
targeting for November 1. Now, yesterday the directors of Aramco,
which are vice presidents of four major share holding partners, met
with Sheik Yamani, I believe, in Geneva. We were in California last
week and one of those directors had his bags packed and was ready
to take off.
Have any of them consulted you beforehand as to what the U.S,.
Government would think would be, acceptable and favorable terms of
reference for their negotiations?
Put more specifically, one of the issues is the question of trading off
their access, that is, the companies' access to crude on a preferred
basis for price. They want the preferred access to crude. They may be
willing from their point of view to trade off and increase the price.
What role does the U.S. Government have before the fact in dis~
cussing this kind of an issue, because you could express your concern
but then be presented with a fait accomphi.
Dr. SAwmIL. At this point I do not have any authority to do
other than tell the companies that we are very concerned abotit an
increase in price and we have done that. You say what can I do
beyond? I cannot order the companies how to negotitate.
Mr. LEVINSON. Do you need legislative authority to require them
to consult with you before entering into these negotiations? You just
said you do not have authority. Do you need legislative authority?
Should we write such legislation which requires the companies to
~onsu1t with the relevant U.S. Government authorities before entering
into such negotiations?
PAGENO="0024"
20
LEGISLATION IS NEEDED
Dr. SAWHILL. I think we are going to have to have some legislation
in this area, yes. The specifies of that legislation, I do not quite know
what it should be. There are all kinds of agreements that the coin-
pariies make. I think one of the things we are going to have to do is
delineate those kinds of agreements where prior consultation is necos-
sary and those kinds of agreements where it is not. That is part of the
process that we are going to have to go through in order to really
understand and come up with something that is useful as an important
tool for the U.S. Government but at the same time does not interfere
with the day-to-day operations of our international oil system.
Senator CHURCH. May I say since my years in the Senate have
led me to become rather skeptical of consultations as such, because
we often talk about consultation between the executive branch and
the legislative branch and I have never felt that it ever amounted
to much.
Dr. S WHILL. I do not know; I have been up here 75 times since
the first of the year.
Senator CHURCH. Not to consult, to answer questions.
Dr. SAWHILL. That is a form of consultation.
SHOULD GOVERNMENT APPROVAL BE REQUIRED?
Senator CHURCH. But is it within the authority of our own Govern-
ment and would it be useful in connection with any future legislation
that we may consider to require the approval of the Federal Govern-
ment before American owned oil companies could enter into a pact
with a foreign government?
Dr. SAWHILL. Yes, I think we are going to have to move to some-
thing like this. My only difficulty now, and I wish I could be more
specific, is to define those particular kinds of transactions where the
Government should have a right of prior approval and those kinds
of transactions which are more day-to-day kind of transactions, but
in concept-
Senator CHURCH. You are thinking not only in terms of consultation
mmd the supply of information in a timely fashion to the Government
but you are also thinking in terms of the possibility of requiring gov-
ernmental approval?
Dr. SAWHILL. For example--
Senator CHURCH. Before an American company could finalize an
arrangement with a foreign government?
Dr. SAWHILL. Yes. One of the companies that we have been con-
sulting with recently has a partnership with a British company and
the British company has been in prior consultation and has had to
obtain the prior agreement of the British Government. The American
company in fact did the same with us. And then we in turn discussed
with the British Government the kind of terms that would appear
reasonable to both of us. But I think this has to be formalized, it
cannot continue to be as informal as it has been in the past.
Senator CHURCH. Is it your understanding, as it is mine, that exist-
ing law places no requirement upon American-owned companies to
secure any kind of governmental approval, they are free to negotiate
as they please, and as far as the law is concerned can enter into binding
PAGENO="0025"
21
agreements with these Arabian governments whether or not the agree-
ments are thought favorable to the American people by the U.S.
Government?
Dr. SAWHILL. Yes; that is my understanding.
Senator CHURCH. I think ,this is a matter of great interest to the
Congress and your recommendations with respect to how the law can
be firmed up will be very important for us to have.
Senator Case.
Senator CASE. I wonder if your consideration of this point will be
broad enough to permit you to consider the possibility of opening
this whole matter to competition; for instance, requiring a producing
company, if they want to sell oil when it comes to the United States,
to sell it in the open market, or Aramco sell it in the open market, at
whatever price it commands? This is obviously heresy in terms of the
traditional ways the companies have been dealing. That is one
possibility.
Another is to have complete U.S. Government control of these
transactions so if we are in a weak position as a bargainer in respect
to petroleum and other energy sources and in a strong position in
regard to agricultural products and other things that the world wants
from us, the strengths and weaknesses can be balanced. And how can
this be handled in a free enterprise system without Government regu-
lation of exports and imports?
COMPANIES WILL PLAY SMALLER ROLE
Dr. SAWHILL. Well, it seems to me that what we are going to see
evolvmg in the world, the reality of the world oil situation, is that the
companies are going to have less and less of a role to play in the nego-
tiating process because the companies are going to have less and less a
share of oil ownership. In other words, I guess what I am saying is
over time equity oil is going to become less and less important.
Senator CASE. Equity oil, because there are one or two kids out
here who have not heard the word, means the oil that the companies
own as opposed to the share of their production which the producing
countries take; right?
Dr. SAWIIILL. Right. The equity oil is the oil they own and they pay
a tax, a $7 tax, then they can sell in the marketplace for the price it.
will bear. Currently Aramco's agreement is 75 percent equity and 25
percent owned by the Arabian Government.
Senator CASE. Which they sell to the company?
Dr. SAWHILL. To the companies or it is put up at auction or to be
sold to anybody.
Senator CASE. Is there any free market at all?
Dr. SAWHILL. There is a free market to the extent that the com-
panies do not take it.
Senator CASE. Is there any real world market for petroleum as there
is in-
Dr. SAWHILL. There is a free market to the extent that as the coun-
tries are gammg more and more control over the oil-in other words,
as there is less and less equity oil-the countries are beginning tu
put more and more of this oil up for auction.
For example, a few weeks ago Kuwait put up over a million barrels
a day at auction and this will produce a free market. So I guess what I
am saying--
PAGENO="0026"
22
Senator CASE. What did the proceeds, as a matter of fact----
Dr. SAwrnLL. They have not had the auction.
Senator CASE. It has not been had yet?
Dr. SAWHILL. No. But there are instances in Libya, for example,
the price last January was about $14 a barrel. Today there is some up
for auction at $12.40 and there are no takers. Saudi Arabian light,
which is a standard crude, has been up for auction at prices of $10.40
or $10.50 and there have been no takers. So there is a free market to
the extent that the major companies do not take this participation or
buy-back oil.
What I am suggesting is that over time more and more of the trans-
actions are going to be participation oil, less and less equity oil.
In Kuwait, ~s you know, recently they moved to a 60-40 agreement
where 60 percent of the oil is buy-back or participation and only 40
percent is equity.
Senator CASE. In general, are the companies trying to prevent the
auction of crude oil?
Dr. SAWHILL. Well, the companies would like to maintain a larger
share of so-called equity oil beca.~se the profitability on that is greater.
Senator CHURCH. What it seems to me you are saying, Mr.
Sawhill, is that to the extent that a free market is going to be
reestablished in international oil, it will be done by the efforts of the
Arabian Governments and the Iranian Government. Certainly it
will not be done by any efforts on the part of our own Government.
NEGOTIATIONS WILL BE GOVERNMENT TO GOVERNMENT
Dr. SAWHILL. Well, I guess what I am saying because of what is
happening in the world the negotiations will have necessarily been
more government to government rather than company to govern-
ment because the companies will not have any equity participation in
this oil to negotiate with. It will all be participation oil which the
governments are then selling on the world market. The logical buyers
in most cases will be the international oil companies which have the
facility to move this oil around the world and the marketing outlets
for the oil in the other places in the world.
Senator CHURCH. In another part of your statement you mentioned
the effort that is ctirrently underway to coordinate with other con-
sumer governments and work Gut a kind of common policy with
respect to oil?
Dr. SAWHILL. Yes, sir.
AN INTERNATIONAL CONVENTION ON OIL TAXATION
Senator CHURCH. Have you explored or has the State Department,
to your knowledge, explored the possibility of a tax convention which
would enable these consumer governments to impose a tax upon the
oil companies that would be the same?
Here is what I am getting at.
We have discovered in our hearings that for a long time now the
big oil companies have paid little or no tax to the Federal Government
on their foreign earnings. When we point out how unfair this is to
other businesses that have to pay very substantial taxes, the reply
always is that if you tax our foreign earnings you will nut us at a
PAGENO="0027"
23
serious competitive disadvantage with other multinational oil com-
panies that are foreign owned which are not taxed. We have dis-
covered in our contacts with some of these governments that they
are being told the same thing, that when they propose a tax they are
being told you must not do that, that would put us at a competitive
disadvantage with the American companies.
Now, it seems to me that we might establish a common front
between the consumer governments so that some tax could be imposed
upon these very large earnings vtitliout putting any of the companies
at a competitive disadvantage, one with another.
Is that being explored?
Dr. SAWHILL. To my knowledge, it is not being explored. I guess
I have two comments on that.
One, this would require an agreement among a number of different
countries and I think that it has been difficult, as I understand, in the
past for the Common Market itself to agree on a common policy or
tax convention.
Second, we are moving, as I said in my testimony, to collect infor-
mation and to collect information on a common basis with other coun-
tries so that we can jointly approach this problem of how to treat
the international oil companies.
Sen ator CHURCH. Well, we have been told that both the British
and Dutch Governments would be responsive to an American lead.
Their feeling is that the American Government is uninterested in
leading.
Dr. SAWHILL. Let me say this: that our Government through our
Agency has taken the lead in studying the whole role of the interna-
tional oil companies. This is one of the areas in which we have taken
the lead in the energy coordinating group and we are working with the
Italians and the British and some of the other countries in sort of
defining a common consuming country policy in the area, and while
we have not addressed the subject of tax, yet it would certainly be
something that could be on the agenda.
Senator CHURCH. That is fine. I hope you will put that subject on
the agenda). I think it is a very important one. And as you move along
we would appreciate being kept informed of any significant steps
you might take in this field.
[Discussion off the record.]
THE PRICE CONTROL PROGRAM
Senator CHURCH. In nty 10 minutes I would like to move down-
stream considering the price control program that you have had in
effect.
I assume that you are going to work out the problems of the trans-
fer costs so that it will-
Dr. SAwHILL. Yes, sir.
Senator CHURCH. it will result in no more than a dollar-for-doll ar
pass through. But the price control mechanism, it seems to me, is
failing to do its job.
If the companies were to be permitted only to pass through the
increased costs to them, and if, as you say, the price control mechanism
is based upon a formula that is to maintain their margins, why is it
PAGENO="0028"
24
that the profits of the major oil companies have increased so dramati-
cally?
Dr. SAWHILL. Well, I think there are a number of reasons for that.
One, they have increased their profits outside of the United States
that is, in products they sell in Europe and Japan and other countries
where they do not have similar types of price control programs.
Second, in a period of very rapidly rising prices, companies that
account for their inventories on the so-called FIFO (First in-First
out) method find their profits inflated because they are selling bar-
rels that are acquired at a lower price today at a higher price. If their
accounting was on a different basis they would not show these large
profit increases.
Third they have had increases in the profits of some of their related
operations, such as their transportation operations and petrochemicals
operations which have increased in profitability.
And finally, and importantly, the price of domestic oil has increased.
It was allowed by the Cost of Living Council to increase to $5.25 a
barrel and the price of so-called new oil is uncontrolled in this country,
and as a result of congressional action the price of stripper well oil is
also uncontrolled. So we have had very large increases in the new oil
and stripper well oil because of the general increase in world market
prices and I think these are the reasons for the profit increases.
Senator CHURCH. Now the administration chose to release new oil
from price controls.
Dr. SAWHILL. Yes.
Senator CHURCH. The Congress added the stripper oil. Can you give
us the percentage figure on how much of the domestic oil remains
under price control and how much is free of price control?
Dr. SAWHILL. I think of the total domestic oil, approximately 70
percent is under price control and. 30 percent is free.
Senator CHURCH. All right, now, the purpose of the freeing of~ the
new oil from price control was to give an additional incentive to
increase domestic production.
To what extent has this concession resulted in increased production?
DRILLING ACTIVITY HAS INCREASED
Dr. SAWITILL. What it has resulted in has been increased drilling
activity. Drilling activity in the first 3 months of this year was up
some 30 percent over drilling activity in the comparable period in
1973. So to the extent that it has encouraged drilling activity down
the road, it should encourage increased production.
Mr. LEVINSON. Is it not a fact in the last 2 months domestic crude
output was 2 percent less than a year ago?
Dr. SAWHILL. Yes. I do not think that is a very relevant fact. That
is a fact but it is iiot relevant to this discussion. Because the important
thing is what is happening to drilling activity since we would expect
and I think we will find that once drilling activity increases we will
find increases in production. Now, I do not know this for a fact but it
may be that production would have declined even more if we had not
had the higher prices for oil.
The oil production in this country has been declining since 1970.
Exploration has actually been declining since the middle 1950's, and
now we are seeing a turn around in exploration in drilling and that
should lead to a turn around in production.
PAGENO="0029"
25
Senator CHURCH. Well, if you had a 30-percent increase in drilling,
then the present price arrangement has been sufficient to furnish the
industry with at least enough inducement to increase drilling rather
markedly.
Dr. SAWHILL. Yes, sir.
Senator CHURCH. I would hope that that would encourage you to
hold the price line since that is the only way you have to temper the
inflationary impact of these hijacked prices for imported petroleum.
Dr. SAWHILL. It is my expectation, frankly, that we will see prices
top out at current levels and actually begin to decline. If we look at the
world supply and demand picture for petroleum we see that there is
some surplus of supply. The production has returned to its preembargo
levels of about 50 billion barrels a day consumption in the first half of
this year. It will probably be 48 billion barrels a day and maybe
get up to 49 billion in the second half. So we do have some gap between
production and consumption. Whether it is a million barrels or million
and a half is a little bit hard to estimate. But the fact that we have
supplies exceeding demand is one of the reasons we have been urging
the companies to not sign any long-term contracts for supplies at these
inflated prices and also one of the things that leads me to believe that
oil prices will come down, and not only abroad but also in this country,
since the price of new and released oil in this country and stripper well
oil is directly related to the price of the world prices.
Senator CHURCH. Is it not so that absent the controls we now im-
pose the domestic price would rise to the world price?
Dr. SAWHILL. Yes, it would certainly rise. Exactly where it would
level off is a little hard to say, but it would rise significantly above
the controlled level of $5.25 that we will maintain.
Senator CHURCH. You intend to maintain that level?
Dr. SAWHILL. Yes, sir. Our authority for price controls expires
February 1975, so we certainly cannot maintain it beyond that date.
Senator CHURCH. Unless Congress extends your authority?
Dr. SAWH~LL. Yes, sir.
Senator CHURCH'. `I think that in turn depends upon whether you
hold the line* effectively kind not' let' your program go the way that
the general price control program went, which was into a shambles;
and thus there was no public support left for the `extension of' general
controls.,J think there will be real support for your controls if you hold
the line and manage your program in'sueh a way' as to' inspire con-
fidence. ` ` ` ` ``
Dr. SAWUILL. Well, there are really three elements to' the program.
There is price of crude oil, which we have discussed; there is the
maintenance `of margins, and at their May 1973 levels, which we are
constantly auditing to insure its being maintained, and then there is
this transfer price question which we previously discussed,
Senator CHURCH. Senator Case.
Senator CASE. Thank you, Mr. Chairman.
IS VERTICAL INTEGRATION HARMFUL?
First, a very broad question. Will you take into consideration in
your study, and I mean this seriously, the possibility that maybe
we had better not continue the general practice of having the vertical
integration that exists in the oil industry. Perhaps we should have a
PAGENO="0030"
separation between the companies that produce the oil, and the
distribution system which the same companies now operate all as
subsidiaries of the big American-owned companies with one exception?
Dr. SAWHILL. Well, this certainly has to be an important element
of energy policy. I will say this. That we really have not done much in
that area to date. We have, however, and I ,1~ave said, aLthough we
do not have any legal force to achieve this, that I did not think it
was appropriate for the large major companies to acquire additional
gasoline stations and to extend further into the marketing ~side of
the business than they ha\te already extended. Now that is not a
real problem today. Texaco, for example, with its thousands of sta-
tions around the country, owns only 25. I think it would be a mistake
for a company like Texaco to begin making a major move to acquire
a lot of stations as company~owned. stations.
Senator CASE. What I am really getting at is the question of desira-
bility of, separating the oil companies from the production end of this
busines~.
Dr. SAWHILL. Well, the argum~nt-~--
Senator CASE.. The purchasers from the real producers, not the
people, who handle the mechanics, but that is to, say, the oil countries.
Dr. SAWHILL. The argument that has been advanced, as I under-
stand it, for separating the producing end of the business from the re-
fining-marketing end of tl~e business is that through our own tax laws
as well as through the oil companies acëounting method they have
developed most of their profits in the producing side of the business
and the.margins in the refinery and marketing side of the business have
been very narrow. This has. obviously discouraged to some extent
people from entering the refinery and marketing end of the business.
Senator CASE. I am talking about the situation in which these four
big companies through, in Saudi Arabia, Ararnco, really have had a
~ionopo1y on the whole show and there is not any separation between
production and purchase and marl~eting and distribution, except
the increasing intervention of the producing countries. Would it not
be better whatever value of the system had in the past, to separate
the distributing companies from the production business as far as
our. Go~~ernment can bring this, about and have real competition
between the buyers and the distributors for whatever production
is available? *. , ,
Dr~ SAwHILL. Well, it seems to .me that you in eft~ect, will achieve
that as the producing countries take over a greater and greater portion
of the supplies. It seems to me, in effect, you will see a wore competi-
tive market developing.
I was saying as you. find the producing governments taking over
a larger portion of the supplies and putting it up for auction, I think
you will find a more c9mpetitive market developing.
Senator CASE. Would it not be better to let it go the whole way and
really have a free system in which we would see what was going on in
which these companies would be operating for the benefit of themselves
as distributors and not be any lQnger having to fool around with the
producing countries?
Dr. SAWHILL. Well, yes, but to the extent that the producer coun-
tries acquire all of the company's ownership interest in the oil produc-
tion facilities all the companies are really doing in effect, is operating
these facilities for the benefit of the producing countries.
PAGENO="0031"
27
Senator CASE. Yes.
Dr. SAWUILL. And distributing aud marketing the product.
Senator CASE. Under this practice of buy-backs--in which these big
oil companies, or Aramco as their agent, buy from the producing
countries their share and then add it to equity oil which they already
own, the free market is stopped or reduced. A free market, would result
from the coui~tries selling this to the world.
Dr. SAWHILL. Well, some of the oil is sold through buy-back arrange-
ments. Some of it is sold on an open auction to the extent that the
companies do not take oil.
Senator CASE. Do they not take all they can get hold of now?
Dr. SAWHILL. No, not in every case. rfhere are auctions going on.
Senator CASE. You did say that, but it did not seem to me, and I
do not think you suggested that it really produced the kind of open
market where you have plenty of full supply and willing sellers and
willing buyers and so forth.
* Dr. SAwHILL. I think what we will find over time that we are going
to see a great deal more competitive activity in the acquisition of
these foreign supplies..
Senator CASE. What about the question of the separation between
transportation, refining, and retail distribution?
Dr~ SAWHJLL. I would not think that would be so important to see
a separation there. To a large extent you have a separation today that
refiners do not own the distribution facilities, they have franchise
dealers but they do not own the facilities. It is more like the auto-
mobile industry in that regard. I think it would be a mistake to see a
closer, an ownership link develop between refiners, the maj or refiners
anyway, and the largemajor companies and the distribution facilities,
because I think the consumer gets a great benefit out of having a
diverse khid of competition in the marketplace. It has really been the
smaller companies that have come into the market that have brought
with them innovations like self-service stations and 24 hours of service
and lower prices in some cases. I think we need to maintain a very
active independent segment of the market and that is one of my
responsibilities in administering the allocation program.
Senator CASE. Going back, if I might, to the point where Mr~. Levin-
som has pointed out to me in regard to the matter of the amount of
bny~back as opposed to the oil sold at auction. In Saudi Arabia the
great bulk of the~ oil goes to the companies aa part of their
entiti~mentr-~-
Dr. SAWthLL. Yes, sir.
Senator CASE [continuing~. And only 5 or ~ percent:is sold to others.
TilE REASONS FOR EUY-BAC~S
Dr. SAWHILL. Yes, sir. I guOss thei~e are a couple reasons for this.
It is these very companies that have the facilities to transport and
market this oil around the world. On the other hafld, this is a decision
by the Government, not a decision by the companies, so the Govern-
ment itself is making the decision to keep a ready access to the
companies who in turn can market its product for it.
Senator CASE. In effect, as it works in practice for the most part the
companies get the first choice, that is, they have the first refusal?
Dr. SAWHILL. Yes. But as I say, this is because of the relationships
PAGENO="0032"
28
that they have developed with the governments and also because of
the fact that they have the facilities to market it.
Senator CASE. I have about two more minutes. I would like to go
to one other matter which is enormously important to us in New
Jersey.
I am hoping we will never come to another situation of gasoline
shortage like that which we have in the beginning of this year-~-
Dr. SAWIIILL. So am I.
GASOLINE ALLOCATION PROGRAM
Senator CASE. And the latter part of last year. It was characterized,
among other things, as I am sure you know, by inequality among the
States in the amount of oil-gasoline supplied.
Dr. SAWIIILL. Certainly that was true in the month of February
and to some extent in March.
Senator dASE. I want to suggest to you that is intolerable to have
happen again.
Dr. SAWHILL. I do not think it will happen agait~.
Senator CASE. Can you do something about seeing that it does not
happen again?
Will you let me talk for a minute, then I will not open my mouth
while you reply.
The fact was we were continually told more oil, more gasoline, was
going to be allocated in New Jersey, and those statements meant
only a company had said to the administration down here we are
going to send in a little bit more. That was not an allocation. If you
are going to allocate gas, allocate it. It is not possible for us any longer
to continue in a condition of shortage in which inequality among the
various States and areas of the country exist, for whatever reason.
Even if all of the oil in the world was out in one State, they should
not: have a larger supply for their customers than we have in the
most remote section. That is the fUnction of government that has
to be, I think a~sume4 by the Federal Oovernment and operated
through your afflee4 That was not done befbre.
Dr. SAWmLL. Not in February, no.
Senator; C~sE. It certaini~ was net, and Ihope ~ei~y much that this
will burn it~elf in in the ~jonaciou~uess of e~erybody1 if ~you ~re going
to have less than unlimited supply, it has to be allocated so that
everybody has his equal share. By that, I do not mean 83 percent jIl
New Jersey and 100 percent in North Dakota, or something else of
that kind. `And I am only using. North Dakota~it could be any State
because there were States in which this happened and there were no
shortages at all and there was hardship in New Jersey and that is not
a tolerable thing.
Dr. SAWHILL. To some extent I think that was a function of our
own ineptness, as you will, as we moved to regulate an industry in a
very short period of time.
Senator CASE. We kept talking about the effect, we were effectively
allocating, when we were not, w~ were reporting what the company
said they were going to do voluntarily.
Dr. SAWHILL. We were ordering the companies-----
Senator CASE. I did not see a single order go out. Everything I
traced down was the fact the oil company had discovered there was a
little more oil here so they would send it in.
PAGENO="0033"
29
Dr. SAWHII~L. I hate to tell you how many orders we have issued to
the oil industry. It is in the hundreds to allocate supplies.
Senator CASE. 1'he question must follow why did we not have
equality?
Dr. SAWHIIJL. You did not have equality in February because we
were introducing a program----
Senator CASE. It was not then working.
Dr. SAWHILL. Not as effectively as it should have. We were talking
about a program. We had to go out and hire about 2,000 people in a
6-week period who never heard of the oil industry before and did not
have any expertise in it, were not permitted to come from the oil
industry.
Senator CASE. You could hav~e taken all of the gas stations and
companies and made them enforce this system. You could have doiie
it if you wanted to.
Dr. SAwifiLL. No. Listen, the oil industry in this country is terribly
complex and it is not just a question of issuing a lot of orders by some
bureaucrat like me. You have to know what you are talking about and
understand pipe flows in the country. I could have ordered gasoline
to be shipped out of Idaho and into New Jersey and it would have
been physically impossible.
Senator CA~E. Sometime then we had better call the thing to a
halt and start fresh because the inequality among people and the
requirement that a person just has to fight, and I mean literally
physically fight, for a chance to get a little gas which is accidentally
there, is just no system for the future. I am just trying to say for the
future we are not going to stand for this any more.
Dr. SAwHILL. Well, I think we have today a system that is working
much more effectively than the system we had last February. We
have had a little time now to train these people and to understand
ourselves a little better how the oil industry operates.
Senator CAsE. When you 5til say you are trying to persuade the
companies to give you the information about their operations, this
troubles me~
Dr. SAWHILL, No.
Senator CAsE. There should be something, it seems to me, very
clear.
Dr. SAwHILL. I do not think I said that.
Senator CAsE. In your statement-we hope to get the companies
to give us these agreements, to give us this information we are trying
to get the information.
Dr. SAwrnLL. Well-
Senator CASE. It is time we had all of the information.
Dr. SAWI~ILL. We have now authority---
Senator CASE. You say that oil companies should be reqidred to file
with the Government all their agreements with producer governments.
AUTHORITY TO OBTAIN AGREEMENTS LACKING
Dr. SAwHILTJ. Yes, sir; we do not have authority to get those agree-
ments. We do htwe authority, however, to get information on reserves
and costs and inventories and so forth. As a matter of fact, we have
tak~n over from the American Petroleum Institute the publication of
the weekly statistics on the industry because they are all coming into
our office now and we are sending out teams to audit what is happen-
45-426-75---3
PAGENO="0034"
30
ix~g. We do no,t have tj~e village watchman out there putting down
~hat he damn p~e~ses, or i~ ~ie does we send somebody and ~9ok over
his sl4o1~lder. I ~m quoting fr9r~i your sta~tement. ,
Senator CASE. I will take this occasion-this is a little bit offbe~at-
then the end r~sult i~ the American individual consumer we a~ c~_
cerned about and a period like that which we wei~t through before
cannot be tolerated again else we are going to have to have imm~ediate
rationing because whe~a you have a supply less than acleqi~ate for
everybody's desire, YOtI ar~ going to have to ration.
Dr. SA~VHILL. Yes, sir. But y~u put an ~I1ocation program into law.
We haye now put that into, place and we are administering it and I
think that the experience we have gained over the last 6 months would
preclude a situation `ike last winter happening again wl~ere we have
these kinds of inequalities.
Senator CASE. My last comment is please do not come back to us
and say the law is inadequate, tell us iww if tl~ie law is adequate, in
your judgment, and if you need more laws. Later if .we do have ~
crunch we do not want to have Congress told jt was your fault.
Dr. SAWHILL. No; I do not think we feel the allocation law is.
inadequate. We d~d feel that the crude program presented difficulties.
to us and we came up and made some changes but I would say by and
large, we feel the law is working satisfactorily right now.
Senator CHURCH. Senator Percy.
Senator PERCX. Mr. Sawbil, I would first like to say how ple~sed
I am that you have this job. My owi~ rel;ati.onshi~ with yoti on, a
nuwb~ of coin,mittees, the Permanent Investigating Committee of
Government Operations and this conn,n,ittee have indicated, I think,
that the country is well served by your presence in a very, very dif~-
cu~t job.
Dr. S~tWHILL. Thank you very much.
Senator PERCY. What I see and concede as ou~r primary responsi-
bility in these hearings is to learn what we can from the past and
then help chart a course for the future. Taking into account what
new responsibilities tho Federal Government may have in this whole
field of energy, and what we can learn from past and present ex-
periences in many, many different fields., we are going to have to
define what is the role of the private sector, what is the role of
government.
So I. would like in our questioning, to concentrate very briefly on the
role of Government as' it rela1~es to ~he private sector, then get into
the security of our supplies in the fuel and energy field, and finally
to conclude with some policy alternatives touching o~i taxes and data,,
that is how we can operate in this field to get enough information,
to work from.
I would like to a~k your comments on the President's trip to the'
Middle East and what function that cau~ Serve in the futur~ of our
energy problems.
I would like to start on th~e role of, Oov~rnment. It seems to me
we did allocate to the private sector through agreement with the
Justice Department and through the grace. of their letters t~ enable
the oil industry to Operate as a un,it in bargaining `abuoad. And I
think the facts are very clear we have for a period of decades the
lowest fuel costs in the world. There is no question about it, heating
PAGENO="0035"
oil, gasoline, whatever it was. Tt seems to inc our interests were well
served at that time~
Obviously, we should have gone after greater income tax payments
in th~ TJni~ted States during that period of time but that was our
fault and we canno1~ blame anyone but ourselves for that.
But I would like your judgment as to how effective the role of
Government has been since it began to play a larger role. It seems~
to me that thro~ugh the whole testimony that we have had here, an&
you must have followed it, our performance in government ~~ras a
pretty sorry performance. It looked to me like the U.S. Government
pulled the rug out from under the negotiators when they were in
the midst of these very tough negqtiations in 1971. We woold have
been better not to have meddled in this thing and left them to perhaps
a tougher more consolidated position.
Now, have you felt that the role of Government in those negotiations
was particularly helpful and served any unique purpose?
GOITEnNMENP'S nOLE WAS SMALL
Dr. SAWHILL. Well, of course, my own feeling ai~d understanding
of the situation is that the GoveTnment did not play a very large
rol,e and, therefore, I do not think that the Government role helped
or hurt appreciably. I think it was pretty much a role of being kept
informed, naturally advising the companies we wanted a lower price,
but I just do not think the Government was sufficiently involved to
have ha~ a major im~pact on the negotiations one way or the other.
Senator Puncy. Were you familiar with the request that the State
Department made to the oil companies to sp~Iit these negotiations?
That was a very, very crucial point.
Dr. SAWRILL. Yes, sir.
Senator PERCY. In these negotiations the companies obviously, if
they defied the State Department and U.S. Government, might have
e~posed them.sehtes to a great deal of risk, but in retrospect following
the Government ~id net exactly strengthen their hand.
Dr. SAWHILL. No, it did not; and I am really not familiar enough
with that situation to comment on it intelligently.
Senator PERCY. I am concertied ahout the ~ffectivenes~ of the
Federal Government right now. The State Department obviously
has a major role in this but we have a vacancy in the Deputy Secre-
tary position. We have had for months a vacancy in the Under
Secretary for Economic Affairs. We have just appointed a new Assist-
ant Secretary in charge of the Economic Bureau. We are going to
get a new Chairman of the Council of Economic Advisers.
IS THE U.S. GOVERNMENT ORGAN1ZHD TO HELP?
Does it look to you, outside of your particular activity, that we
are really in a position and organized as a Federal Government to
offer a great deal of assistance and help or are we playrng musical
chairs, just moving people around to till these vacancies with people
who can effectively deal with this issue?
Dr. SAWHILL. Well, my own feeling is that our office has got to
play a very important role in this process and that we in our capacity
PAGENO="0036"
32
of having overall responsibility for energy policy and reguTating the
important element of the energy industry, have to bring the expertise
that we have to bear on this question.
We have built up a very dedicated and hard working, and, I think,
knowledgeable staff of people in this area. They have been partici-
pating actively in the agreements with the consuming nations. They
visited the Middle East and we will be working closely with this
committee on trying to define what role the Government should play
and whether indeed, what type of new legislation we might need to
define this role.
As I understand, the Department of State will be here to testify
tomorrow and I think it might be a little inappropriate for me to
discuss their staffing.
Senator PERCY. Would it strengthen your hand if you had really
effective counterparts in other branches of Government, in the White
House, in the State Department, in the Commerce Department, such
as you probably have in the Treasury Department? They have always
been the best organized in this field and they have been under this
administration and they still are today. I trust and hope and believe-
Dr. SAWHILL. I think so.
Senator PERCY. Do we have and are there not things the executive
branch of government should be doing now to beef up their operations?
If we are going to offer assistance and help and be real partners in some
of these problems with the private sector, do we not have a role\ to
play. Should we not go back and say let us get the finest indit~iduals
in this country in every one of these positions and not have~ihe loop-
holes, duplication, overlapping, and confusion that we now seem to
have?
Dr. SAWUILL. To the extent that there ate unfilled posts there and it
is going to strengthen our ability to support the industry and regulate
them to have those posts filled, yes.
Senator PERCY. The Congress is on the verge of adding to the con-
fusion. The leadership of the Senate, Senator Mansfield, Senator
Scott, and others, got together to create a temporary Commission or~
Supplies and Commodities, for 6 months and a quarter of a million
dollars, to take a look at the structure and organization and to make
recommendations. The Commerce Department Committee took that
little bill and increased it to a 3-year commission, made it a permanent,
at least a 3-year term on the commission, and increased the quarter
of a million dollars to $3 million, $1 million each. It will be on the floor
very soon.
I value your judgment as to whether you feel the original concept
of a temporary commission to take a look at the structure and orga-
nization and then get out might be best or would a 3-year long pull,
heavily staffed operation be better. Which would you prefer of these
alternatives?
SHORT STUDY PREFERABLE
Dr. SAWHILL. I think I would prefer the former, that is, the quick
look, because it seems to me we have studied this problem. We have
the statistics. We do not have to rehash those. We need to take adook
at the statistics that we have and come up with some policy recom-
mendations. I do not think we need a 3-year study. I think we need a
quick study so that we can get on the job.
PAGENO="0037"
33
Senator PERCY. I agree with you and appreciate your support be~
cause I think it' will have some weight with some of my colleagues, all,
of whom I know respect you highly.
I would like to talk about and get your thinking on the problem of
sharing oil supplies during a crisis because this may be a fundamental
strategy of the consuming countries in time of critical shortage or
when we are again embargoed or boycotted. What are we going to do?
How are we going to respond? The airlines seem to be able to get to-
gether and share their miseries and profits when they are struck by
one labor union and it has been a very good device to ofiset power with
some power. We seem powerless. We are a pitiful impotent giant in
the consuming areas of the world as we deal with Jamaica on the one
hand and the oil producing countries on the other.
LEAKAGE OF OIL THROUGH THE EMBAiiGO
I would like to look back a little bit to see what we can learn from
this experience. There were news reports that the international oil
companies were diverting oil from non-Arab sources to the United
States. Did such diversion occur on any significant s~ale that you know
of?
Dr. SAWHILL. Not on any significant scale that I know of.
Senator PERCY. How much oil was diverted to the United States in
this process?
Dr. SAWHiLL. I do not really have a good estimate. I can try to
supply you with a better answer to that question for the record.
Senator PERCY. Do you know from what countries oil did come dur~
ing that period?
Dr. SAWHILL. There was some talk, although I never really saw
hard evidence, there were some diversions from Japan, but I would.
have to review the statistics again and make these available to you.
Senator PERCY. From what producing countries did the oil come
from? If you would rather discuss this with us in executive session,
I mean if you feel it would not serve our national interests to have it
public information, I think we would respect that.
Dr. SAWHILL. I think that ~night be more appropriate.
Senator PERCY. I would rather not like you to take the fifth, if,
you don't have to do it. I would like to learn as much as we can and I
think the public should have as much information as we can get, with
the exception of where it might hurt our national interest.
Who cud make the decisions to divert oil to the United States?
Dr. SAWHJLL. The companies did.
Senator PERCY. What criteria were used by the international com-
panies in determining how much oil. to divert and to whom to divert
it?
Dr. SAWHILL. I do not think I have a good answer to that question.
WERE COMPANIES INSTRUCTED ON mvEnsloNs?
Senator PERCY. Did the FEO or any other organ of Government
instruct the companies as to the amount of oil they should bring to the
United States?
Dr. SAWHILL. No, we did not set specific targets for them to bring
1it. We continued to urge them to bring as much as possible. At the
PAGENO="0038"
34
same time we recognized the interest in all of the ~otmtries of the
world in having sOme kind of equitable share of the world's supplies.
SENATOR PERCY. Are you able to ~ at all from your knowl~
edge as to whether internationni oil companies would divert supplies
based upon what they consid~redto be a national need, for ~n~tanoe,
in the United States, or was it simply the prtht and losa compulsion
that motiYa~ted and helped formulatethese decisions.
Dr. SAWrnLL. No, I think it went weTh beyond the profit and loss
statements. As a matter of fact, I think there are imports eomin~ iitto
this country threti today that the oil companies could more profitably
put in other countries of the worId~
Senator P~cr. Were you consulted at FEA, and you were deputy
head at the time, on diversions of' oil to the United States?
Dr. SAWHJLL. Well, we were consulted by the companies as they
explained to us hoW they felt our reg~tiIat4ons were discouraging and
making it less profitable to bring supplies into this country than to
take it mto other parts of the world and we made the point very
strqu~ly that we loft it was important and in our national interest
to br1~g these supplies into thIs co'untr~r.
Senator Pnucy. So the questh~ti of the donflict between the profit and
loss statement and American nation~il interest did arise?
Dr. SAwmLL. l~es.
Senator iPuncv. And what was the companies' attitude?
Dr. SAWHIIAL. I think the companies----
Senator PERCY. Did they indicate it Was difficult for them to over-
look the profit incentive where they could earn more in the world
market by diverting oil other places than iti bringing oil supplies into
this country?
Dr. SAWHTLL. Well, they pointed out that it Was a conflict but I
think almost uniformly they said they felt the national interest came
first.
Senator PERCY. And do you feel that in that respect, in every in-
stance that you know of, and evety company that you know of, na-
tional interest then ruled rather than a profit ai~d loss statement given
the profits looked as they were they were going to be at least adequate?
Dr. SAW~JILL. Yes, I think that I could say yes to that question,
although I do not Want to pretend I have done a thorough study of it
so that It am aware of all of the transactions that took place.
Mr. LEV1NSON. Has anybody in the U.S. Goveñiment? FEO
did not do any kind of a study. I take it that he presumes that no one
else did a study. I am asking whether or not anybody in the U.S.
Government knows, with certainty what transpir~d with respect to
the qu~stions Senator Percy is asking. Dti you know what criteria
prevailed among the companies, within the companies?
Dr. SAWHILL. No.
Mr. LEvTNso~c. Do you know whether anybody in the U.S. Govern-
ment has inquired as to this matter or made any kind of study outside
of FEA?
Dr. SAWHILL. Well, we will know this information because we are
sei~ding a questionnaire to the companies which will develop that
information for us.
Mr. LEVINSON. You are sending a questionnaire to the compan!es
which will develop this information for you?
PAGENO="0039"
Thy. SAWIht~L. yes, sir; ~t is part o~ this ~éuer~J questionMir~ we
are seladrng out in ~conne~ijion *ith our tth~is:té~ of prfcitig i~egulatio~is
to get a Co~pléte undérstandj~ o~ how supplies have nioved through-
~it the ~oi4ct ahd at what prices they have mpveci.
Mi~. ~ And will you report to the Cdng~ss on that~
Dr. ~ ~t *iJ1 b~ h~y to.
Sèñátor ~xifjncii. We ~~rouId like to have ~ co~r of that stud~
Dr. SA*~I~UJ. YCs, sir.
SeiiatOr P~RCy.. ii think t shoI~dd go 1~ácI~ t~ ~nah ~bs~lutel~y
certain that I uñdèrsta~id ybki cor~e~tfy. ~OO tóst~ed that ii~ ~rth~r
pldgmefit atid to ~~our knowledge no significant diversions occurred;
is that cori'ect?
Dr. SAWHrLJL~ Yes, sir; tli~it is correct.
senator P~mcy. We ha~re heard a gr~at dea' about supposed ~eaics,
JiOWeVèt', a~id this *~s disCUsse~ a gre~t deal in the ~ràb
Georg~ Pié~cy ol~ axOn testi~ed before th~~ su7bcoiinmjttee that, to
his kn~leclge, there had been no leaks ~ate~er into the Cnlthd
~t~s fro~xi any Arab cotthtFy after tl~e enibargo had been ini~Osed.
~To your knowledge, *Ci~è theI~e ahy leaks in the embargo.
"LEAKAGE" WAS OiL SHIPPED PEE-EMBARGO
Dr. SAWEILL. We thought at the titne that we were seeing some
leakage but in retrospect it appears that what we thought was leakage
was actually oil that had been shipped prior to the imposition of the
embargo and stored in third countries and later shipped into this
country. So, our *best estimate is that there werC no significar~t
leakages.
Senator PERCY. In looking at the role of Government and what
iole the Federal Government 5h~uld play, do you believe that the
13.5. Government should have taken a more aethre role in directing
the diversion, whatever diversion might hai~~ occurred, and in creating
circumstances favorable fOr leaks?
Dr. SAWiIILL. Well, in terms of creatilig the circumstances favorable
for leaks, that was really almost more of a political question and not
a question that we had a great deal of colitrol ~veF.
Senator PERCY. The national interest was endangered. We were
even talking about getting enough oil for crnr fleets to operate and
certainly rampant inflation running as a result of this. I am just
trying to find what you think the role of Government is and what we
should do in a Crisis. Should we sit there and sweat it out or should we
really get in and do everything we can?
Dr. SAWEILL. I think as a result of what we went through that we
need a much better information base. We need a much better under-
standing of the movements of oil and probably need the authority to
direct movements of oil.
Senator PERCY. As I recall, Mr. McCloy talked a good deal about
security of supply and when people say that the United States gains
security of supply from the fact that American companies are engaged
in the production of oil overseas, are they not really talking about
leaks and diversions then?
~r. SAwmLL. Yes, diversions, certainly.
*Se~ Sübeoi~Eidttee on Mdltinaiioaai Cor~orat1ons committee print, `US. Ofl Coin-
panies and the Arab Oil Embargo: The International Allocation of Constricted Supp1les,'~
Jan. 2, 1975.
PAGENO="0040"
36
Senator PERCY. And if the companies are talking about it saying
that this is why we need them to operate abroad and why we need t~
be strongly represented, then why, when we went through the worst
crisis the country has ever been faced with, during which a few nations
standing together, were, blackmailing u~ and embargoing us and
attempting th change our whole foreign policy and having a disastrous
effect upon the value of the dollar and family earnings, and the
economic structure in this country, why were we a pitiful, giant sitting
here doing nothing, unable to capitalize on the presumed benefits we
had because American companies dominated the business in at..
tempting to break this embargo and bring more supplies to the United
States. Yet you testify that during that whole period of time there
were very little diversions, very few leaks.
Dr. SAWHILL. Yes, as I say, I would be glad to review with you the
specifics of this in executive session of the committee. However, you
know I think the term little or very little is probably descriptive. As I
say, I think today if we were to seek a reimposition of the embargo we
would be in a much better position to address this whole question.
because we have a much better information base. We understand~
a lot more today.
Senator PERCY. Do you feel then, based on the information, th~
experience we have gone through, that we would be as a country, as
a Nation and Government, better prepared than we were in the last
crisis?
Dr. SAWHILL. Unquestionably.
Senator PERCY. Providing we fill the jobs that are available and
providing everyone knows what to do on their job, do you think we
are really prepared for a crisis if it came at this date, with as many
vacancies as we have in the Government~ as many changes occurring~
as much confusion as we seem to have?
Dr. SAWUILL. I can only speak for my own area of responsibility
and we have filled our vacancies.
Senator PERCY. What steps can be taken by your office-the
statutory backup for which the Senate has just provided, what can
your office do-to better prepare ourselves for the presumed next crisis
that we always have to count on having, though we hope we will not?
PEA CAN COPE WITH FUTURE EMERGENCIES
Dr. SAWHILL. In terms of future embargo; I think we would be in a
lot better position today with 3,000 or 3,500 trained people on board
to move quickly into an equitable allocation program. I think we
understand a lot more about conservation now and could initiate
conservation measures much more quickly and, finally, we are trying
with the help of the Senate to move ahead on a coal conversion
program to get our utilities converted more rapidly to coal and, of
course, I will not spend a lot of time but you know we are conducting
a number of efforts to just increase our own domestic energy supp1ie~.
Senator PERCY. Do you consider conservation vital and important
enough to receive continuing emphasis?
Dr. SAWHILL. Yes, sir.
Senator PERCY. And is it a part of your responsibility to emphasize
through these public hearings the need for people to not let down,
feel the crisis is over and go back to their old ways of consumption,
PAGENO="0041"
37
because if we do that, in my judgment, we will not have learned a
thing,
Dr. SAWHLLL. I agree with you. And I am not only trying tormake
that point to the consuming public but also importantly to the
business leaders of this country.
THE 55 MILE-PER-HOUR SPEED LIMIT
Senator PERCY. I have introduced a bill, not very popular with the
truckers, but it does have the ~ttpport of Jennings Randolph and
the rankh~g Republican on the Public Works Sub~ommittee, Senator
Stafford, to make indefinite the 55 mile-per-hour speed limit on the
national highways. Does the administration support that position?
Dr. SAWHILL. We will strongly support it and do whatevei~ we
can to see that it is enacted.
Senator PERCY. I appreciate that very much. I think that it' is one
of the very minor sacrifices we can make in convenience and if we
just take into account it will save 8,000 to 10,000 lives a year, just mod-
erating our speeds on the highways. think of what that would do.
There are more deaths, excess deaths because of that extra 15 or 20
miles an hour than we have had in Vietnam year after year.
Dr. SAWHILL. I feel very strongly about that. I sent a telegram to
all of the Governors in all 50 States recently urging them to strictly
enforce the 55-mile-an-hour speed limit.
Senator PERCY. You mentioned that you are doing a report on the
diversion issue which you would supply to us.
Are you asking for the items that were moved and the margins in
the different markets?
Dr. SAWHILL. Yes, I think we will get most of that information.
I am not sure we will have information on margins everywhere in the
world but we will have certainly information on margins in this
country.
PRESIDENT'S MIDDLE EAST TRIP
Senator PERCY. And before I go into the final phase of it on policy
alternatives, I would like to ask about the President's trip to the
Middle East.
Do you feel that by his going to Saudi Arabia and by his going to
the other three Arab countries, that he can by his physical presence
there indicate the great importance we attach to stability and peace
in that area? Do you feel at the same time he can do everything
within his power to insure a reduction in price? Not because of the
damage it does to us, it does daniage to us but we can survive it
better than almost any other country, but the irreparable damage
that this has done to a third of the world, to the developing countries.
It has particularly to those countries that have literally no raw ma-
terials or other exports. The ripple effect will be felt for generations to
come and the oil countries know this.
Can the President by his presence there, ii~ your iudgment, can he
prAvent this tactic and technique from becoming a permanent part
of our bargaining procedures between producing and consuming
countries?
PAGENO="0042"
Dr. SAWHILL. I feel the President's trip will have great symbolic
i~alue to the people all over the world that a chief executive of this
country would undertake to visit these countries and I think it will
iriçleed have a very great effect on bringing the kind of `peace and
stability we so badly need to this part of the world and insuring that
the risk of future embargoes is substantially reduced.
Senator CHURcH. I just want to express my own respectful dissent.
I cannot for the life of me see how a Presidential visit to the very
area of the world, the very countries so deeply involved in havipg
hijacked this price to begin with, is going to `be laid upon as anything~
Qther than a reward to them. The President has nothing to negotiate
* out there. All the negotiation~ are complete. Now, if he gives them
tJ~e h~n\Qr of kiis presence as tjie world watches, it see~rus to me the
only conclusion that will be reached is that the Presidential blessing
has been bestowed. There is hardly anything te bless them for.
Senator PERCY. I would like to answer the Chair. I could not dis-
~gree more.
Senator CHtrRcH. I tb~nk that is clear from your statement and
from mine that we are in disagreement. You made yours and I hav&
made mine.
Senator PERCY. I cannot possibly see why the President's presence
oi~t there in that area of ~the world weui4 not help. I cannot see any'
injury from it. I thjn~ it ~Ls his duty and responsfbility to e~pge in
that trip, when Sadat himself invited the President, the :P~esident
t~o reject it, after Sadat has been extraordinarily helpful as he has
been statesmanlike in this whole matter, without h~s statesmanlike~
attitude we could not have accomplished it, and for the President
to rebuff the invitation. I think would be wrong.
Senator CHURcH. I ini~ist say-
Senator PEnCY. If I could finish and I will be happy to come back
to you.
Second, I cannot help but think it is going to be immensely helpful
to the state o Israel. It will mean a great deal to 2~ million people
for the President of the United States to be in Israel and indicate by
his presence our deep concern `about peace and seouri~ty in that area.
Certainly with the trip from Israel to Moacow, or vice versa, I would
hope it would be possible for the President to bring up delicate and
tender points abnut emigration from the Sovi~et ~Jnion and the~
repression and harassment of Jews in the Soviet Union. I think that
Is~rael would be pleased. So when Israel and Arab states are both
p~ease4 by the trip of the ~re~ident, I will not even go into the sub-
ject 9f Moscow, but I do feel that can be extraordinarily helpful'
and galvanizing of the bureaucracy. 4fter all that trip was set up a
year ago and again lie is there ~t th~e invitation ~of Mr. Brezhnev.
He is not goIng just on his own, asking to go, as the press have implied,,
as a diversion :frorn Watergate. That ~s perfectl,y ridiculous. It is a
business trip ~f grave consequences involviflg again the super powers
,of the world finding a way to lessen the level of terror.
N~ow I will be happy t~ yield.
Senator CIrURCH. I want t~ thank you very much.
Well, first of all, I do not know the Russian trip is relevant to this
discussion and I expect that there is something for the President
to discuss with the Russian leaders. As for Sadat's invitation, my
PAGENO="0043"
i~tnderstanding was it was an o~pen invitation, there was no time date
fixed. ft way be that great good t~an come from ~this tri.p to the Middle
~ast. I suspect some good will come to the ?resldent T~om the trip..
But whatever can be done out there-~
Senator ~P~ncv. He has~earued alittle bit df that,
Senator CHunca. I just wonder what the real purpose of it is.
The reasons that the Senator has g~iven are re~sdns that can be
given for a Presidential trip anywhere to any part of the world at au~
tune.
If tIio~e are sufficient reasons, the President would spend precious
little time in Wa~hington. I find the ai~gument not entirely convindiug.
Then we are disagreed on that point and it really has not any
relevance to the hearing this morning.
So I would like to say to you though, Mr. SaWhil1~, since I do have a
proposal to make, and it comes dire~tly out of your testimony this
worulng, and ~ think a proposal might be helpful-you have suggested
~n vt~rioi~is ways today that you have need for greater ii~formation.
You have suggested in your own testimony today that you think
th~t any settlement reached between the companies and the producing
çgoye~uments ought to be supplied to your office.
We have also est~bli~hed by questions and answers you think the
Government should be entitled to more than information and that
governmental approval of these agreements wo~ild be in order.
So I am going to instruct the staff to prepare legislation that would
give to your office the authority to require timely information from
the companies with respect to any nego~iations on oil prices, thus
enabling you to participate during the meaningful stage of those
negotiations, and also that would require the Government's approval
of any setfleaient between the oil companies and the producing govern-
ments relative to the price of oil.
I would hope that you would be prepared to he'p us in drafting
legislation of this kind.
Do I understand from your testimony that you would be
prepared-
Dr. SAWHILII. Yes, sir.
Senator CRUnCH [continuing]. To support legislation of this kind?
Dr. SAW~rLL. And we will work closely with you in the preparation.
Senator CHUHCH. I would hope so, because I think out of tins
hearing we might draft some legislation to fill the gaps that now exist
and better enable you to do your job.
Senator PERCY. The last area that I wmad very much appreciate
your guidance and help on, all of us would, is in connection with the
tax bill now before the House Ways and Means Committee where
they are proposing to repeal the domestic depletion allowance.
Do you support the House passed or the Ilouse position on this,
the Ways and Means Committee desire to repeal the domestic de-
pletion allowance?
Senator PERCY. Do you believe that the repeal of the depletion
allowance without some countervailing modification of the foreign
ta~ credjt would increase the incentive of oil companies to invest
abi'oad rather than here at howe?
Dr. SAWHILL. Yes, and that is why I think the two have to be
coupled together.
PAGENO="0044"
Senator PERCY. Do you believe it fair to increase tax on domestic
operatior~s while leaving those imposed on foreign operations effectively
at zero?
Dr. SAWHILL. It would seem to me rather than think about it as a
way of fairness it is a question of what kind of incentives do we want
to give the companies? I think the incentives we want to give them
are to invest in this country to develop our own supplies in the Outer
Continental Shelf and Gulf of Alaska and other maior frontier areas
and to the extent that we have a differential burden we are not going
to give them that incentive and we will get greater investment outside
of the United States rather than inside.
Senator PERCY. Is it not our national policy enunciated by the
President, and I would think overwhelming support of the American
people, to develop a greater degree of self-sufficiency? I will not say
total self-sufficiency for I think that is pie in the sky and if I can say
so, political rhetoric. I do not see it in the cards. But certainly we can
get greater self-sufficiency. Will it not be desirable to encourage tax
policies that will provide incentives for investment domestically
rather than abroad?
Dr. SAWHILL. I am not entirely sure what the House position is
but on the question of-
Senator PERCY. It is a phaseout over 3 years.
ENDING DEPLETION INCREASES COSTS
Dr. SAWIXILL. Yes, of the depletion allowance. Of course, to the
extent that we raised the taxes of the companies, we are in effect in-
creasing their cost. And to the extent that these increased costs have
to be passed on to consumers in terms of higher prices, in effect, what
we are doing when we change the tax structure to raise taxes is to
ultimately raise prices to consumers. The alternative would be to re-
duce the profits of the companies, but to the extent that we reduce
profits of the companies then we give them less funds for the important
work that they have to do in bringing on new supplies.
The other things that concern me about the depletion allowance,
and I do not have as good information on this as I should, is that the
group that seems to be most concerned about its elimination is the
independent producer, and the independents in the industry drill
about 70 percent of the wells that are drilled. And to the extent that
this will hurt them and limit their access to the capital markets, as
they claim it will, then eliminating the depletion allowance will result
in a greater concentration in the producing sector in the major oil com-
panies relative to the independents, and I am not sure that would be a
favorable development.
Dr. SAWHILL. Yes, it would.
WILL OIL COMPANY PROFITS DECLINE?
Senator PERCY. I would like to read a portion of an editorial
from the Wall Street Journal that appeared the other day. I do not
know whether you saw it or not. I would appreciate a reaction because
they start to look ahead and they look ahead in a way that is in-
PAGENO="0045"
41
teresting and I am wondering whether their fQrecast is as gloomy
as yours might be, It said:
Now that Europe has built up its inventories to pre~embargo levels, surplus
oil is beginning to appear. As price continues to work against demand and the
high price continues to call forth new supply, the trickle may widen to a gush.
And if during the next six months the world economy softens as central banks
fight inflation, there would be a glut.
If so, Congress should understand that those 1T,S. oil company profits will be
devastated. Forced to pay the artificial OP~EC price in order to maintain market
shares, companies would nibble away profit margins first; OPEC would not be
hit with the problem until the first buyer that runs through its profit margins
drops out of the picture. Congress could hasten this process of destructiveness by
imposing new taxes on the industry at this time, essentially by changing the
treatment of the foreign tax credit.
Do you have a reaction to that?
Dr. SAWIIILL. Well, I think that that probably overstates the case
a little but in terms of the decline in the profitability of the oil com-
pany. I have to agree world supply and demand conditions are abotit
as described in the editorial, that is, we will see some excess of supply
and some lower pressure on prices, but I do not think it necessarily
has to result in a significantly reduced profl1~ margin for the companies.
Senator PERCY. Do you believe that repeal of the foreign tax
credit as it applies to payments to oil producing governments would
tend to increase the pressure on OPEC to bring down the artificially
high priced levels?
Dr. SAWIIILL. I do not think that it would.
Senator PERCY. In 1971 the Shultz Commission suggested that
the United States might establish a strategic reserve by means of
constructing additional crude oil storage and production facilities
which would be held in reserve until needed to avert a crisis. In your
opinion, should this suggestion have been put into effect at the time
that it was made, which would have helped us operate during the
crisis on the embargo?
STRATEGIC RESERVE A POSSIBiLITY
Dr. SAWHILL. Yes, we are continuing to look at the full scheme of
storage, not only of storage of oil but stockpiling of coal, because I
do think one of the ways in which we can reduce our vulnerability
and at the same time maintain access to imports of oil from around
the world is by developing storage facilities in this country.
Senator PERCY. Would you support such a proposal today then?
Dr. SAWHILL. We are still studying the economics of storage. We
certainly support it on a limited basis. I would like to know more about
the economics before I could give my unqualified support.
Senator PERCY. Do you have target dates which you have given
your own people? I would like all of the facts necessary so a decision
may be made and a recommendatioii made by you
Dr. SAWELILL. November 1 is our target date.
Senator PERCY. November 1 of this year?
Dr. SAWHILL. Yes, sir.
tor PERCY. I would like to ask you also about other things you
doing in FEA, to get ready in the event that we do have an
~ency. For instance, are you developing standby plans for gasoline
PAGENO="0046"
42
rationing, going ahead with the study you had on a crash basis end
mothballing and putting at Jeast on the shelf various alternative routes
we can, follow should we be taced wtth this situation again?
F~A' CONTTh~G~ENCY PLANS
Th~. SAWmLL. Yes, we did complete end mothbalF our plan on
gasoline rationing. One of the contingency pI&n~ we are de~eloping is
a contingency plan in~ the ev~t of a coa~I strike this winter beca~use
that would require us to get, ~r might require us to get, into some kiud~
of coal allocation program, so we ai~e currently studying ~onl inven-~
tories, w~ere they are, how many days supply the differet~t utilities
have so we would be in a position to move~qiiiek1y in the event of a
coal stril~e.
Sena~tor PEnc~. Do' yo~ support proposals ~o give the Gerxm~ent~
access as' a matter of right to all financial and reserve figures of the
major oil companies?
I would like to say, in asking the question, that I have fought very
hard to protect trade secrets~ to protect all of those things which are
necessary to preserve incentive in the incentive system. Certniul~y? we
alL go to extreme to pa'~teet incentive system. Certainly we all go bo~
extreme to protect patent policy. We get in the quasi~area here now
where we get into an industry that we all depend on as we are this
thñustry. What is the right national policy now with respect to data,
information, financial figures, production, supply figures? Is it the
right and' duty of the Government to know? Where is the line between
those ateas where we can invade~ and those areas of' privacy that are
perfect1~ legitimate?
Dr. S~WE1LL. As long as we have the ability to n~aintthn the con~
fidentiality of these records I think that generally we should have
access to reserve any financial information and indeed ~$e do have
access to the financial information because we are currently auditing
the 30 major refiners right now to assess thá~ compliance with our
price regulations, and that of necessity requires us to have access to
their financial records.
Senator Pnacy. Do you believe the statutory power we have
given to your Agency is adequate to get whatever information yore
feel is needed?
Dr. SAWIIILL. Yes.
Senator Fnncv. Finally, just' two inst questions. in looking at
the dev~lopment of alternative energy sourtes~ do you believe that
our coal, oil shale, nuclear, arid othei altern~ative O~nergy supplies
should be controlled by the same companies which control our oil
supplies? What is your feeling about a compafly being an energy
company at against'being an oil company?
OIL COMPANY OWNERSmr OF COAL REsnavns
Dr. SAWHILL. Well, of course, the oil companies have moved out
into this field and on the oriC hand, I must say that it is desh~able
because the oil companies are the only companies really that have the
capital' n~sources to rejuvenate the' coal industry and to make the
very large investments in the nuclear structure that are going to be
required if we are going to bring nuclear facilities onstream. On the
PAGENO="0047"
other hand, I ~tllink~it h a legitimate concern that we not concentrate
all of the energy industry ih this country in just a f~ew large companies.
So frankly, I find i~ somewhat of a dilemma.
Senator PERcY. Yet, I think there is a case not of an oil company
hut I think l(ennecott Copper that owns Peabody-
Dr. ~AwmLL. Peabody Coat
Senator PERCY. They have put in three-quarters of a billion Uoliars
to develop those resources. It does take a huge amount of mOney.
What is your feeling about a copper company being in the coal
business; is that contrary to national interests, or is it perfectly ac-
ceptable, because they do have management, they do have the
resources, and they certainly have the foresight to get into it at a
time when it did not look v~ery profitable to be in the coal business.
Dr. SAWHILL. Yes. I would not want to comment oh the specific
case because it is before the Federal Trade Commission~ In ~ener~i,
I think that I can see nothing wrong with a copper company 6wning
a coal company, particularly when it is willing and ready to supply
this coal company with the capital needed to develop its facilities.
Senator PERCY. Finally, what is your opinion of the proposed Federal
Oil and Gas Corporation which would act as a yardstick of cost and
profits, according i~o the sponsors of the legislation, in the industry?
Dr. SAwHILL. Before giving you my opinion I might give you ah
opinion of a group that is opposed to it, and that is the Sierra Club,
which has called it a rubber yardstick. My own opinion is that we
do not need a Federal Oil and Gas Corporation, +ather we need to
provide some regulation to the industry, and more importantly,
adequate incentives to get on with the important job of dril1~ng.
Senator PERCY. Well, 1 thoroughly concur with you. The last
one, I am not sure how you do feel about it. I feel equally strongly
about chartering oil companie~ putting them under strict Federal
regulation, control, like we h'~d the benevolence of the Federal Gov-
ernment to rejuvenate and enliven the railroad industry all these
years through Federal regulation and cthitrol. How do you feel about
just increasing the regulations and control?
Dr SAWHILL I do not really think that is the answer When we
talk about Project Independence, this is not something that the Gov~.
erument can achieve, this is something that has to be achieved by
private industry I b is our job to provide the climate under which
private industry can get on with the important task of developing
our energy sup~hies4
Senator PERcI I feel very strongly the oil companies have to in-
crease their tax load. Their tax contributions to the U.S. Federa~l
Government should be increased by billions of dollars a year, but I
would like to see it done in such a way there will be no disincentive
for exploration development. Have you proposed or testified~ on this
issue as to the best way you can devise to increase the tax contribution
of oil companies but do so in a way that will not be counterproductive
to the very thing we want, increased domestic sources of suppl5r?
Dr. SAWHTLL. We have not testified on that issue, although we
would be prepared to testify.
Senator PERCY, Would you be prep~ed to testify on that then?
Dr. SAwmLL. Yes, sir.
PAGENO="0048"
44
Senator PERCY. I would certainly urge that our appropriate com-
mittees, the Finance Committee, ask for your testimony and I will
talk to Senator Long about that.
Mr. Chairman, I would like to just express appreciation. to the
witness for the conciseness of his answers. We can cover four times as
much territory without the rambling that sometimes we do here and
we tend to hear. sometime. I think you have been an extraordinarily
helpful witness and I want to express appreciation to the staff that
has done such a fine job in outlining the areas for exploration for us.
It has been immensely helpful to, I know Senator Case and myself,
and I am sure the chairman.
Senator CHURCH. In view of the hour, I do not know whether we
can say the conciseness of the answers would match with the concise-
ness of the questions, but I do~ want to say to Senator Percy that I
agree with him and the emphasis he has placed upon the need to see
to it that the major oil companies pay more than token taxes to the
Federal Government. In that connection, I have in mind the minimum
tax we decided to impose on individual taxpayers, who because of
their various tax havens and various loopholes ended up paying little
or nothing. I think that a similar tax could be imposed on American
companies doing business abroad. If all of the concessions that are
given result in their paying little or nothing to the Federal Govern~
ment there ought to be some kind of minimum tax imposed on profits
from foreign operations in this case and I will have such a proposal to
introduce in the Congress this week. I hope that the Senate can turn
its attention to it. It is particularly important where the oil companies
are concerned because consequences have been such as to provide
tremendous inducement to them to invest abroad rather than here,
ai~d we must turn that incentive around.
Senator PERCY. I would say, Mr. Chairman, history is going to
record the fact probably tb~tt this subcommittee will ha~ve the biggest
return on investment for the American taxpayer of any committee
I have served on. I tend to think weneed to bring out the facts that
were brought out here. I did not realize some of those facts before at
all. I was shocked. I find the business community shocked that we
have this inequity. The need for the past policy has long since passed
and to the credit of the oil companies I think they understand this
and appreciated it. They are primarily concerned, not about paying
more taxes, but having us write punitive legislation. They were ab-
solutely within. th~ bounds of law, that was the policy of the country
at that time, for 20 years, but the policy is now going to change. I
think no committee or subcommittee has done moie to help bring
about that policy change than this subcommittee and I think we should
report that.
Senator CHURCH I think that is a good place to stop this morning
Unfortunately, we will not be able to hear our second witness, Mr
Kauper My apologies to Mr Kauper He might be here in the room
by now. .
Would it be possible for you to return this afternoon at 2 o'clock?
Mr. KAUPER. Yes, I think so.
Senator CHURCH. I~think it would be better if ~e~put the~remainder
of the hearing over until 2 this afternoon.
PAGENO="0049"
45
AFTERNOON SESSION
[Present: Senators Church and Case.]
Senator CHURCH. Mr. Kauper, would you please stand and be
sworn?
Do you swear that everything about which you testify will be the
truth, the whole truth and nothing but the truth, so help you God?
TESTIMONY OP THOMAS E. KAUPER, ASSISTANT ATTORNEY GEN-
ERAL, ANTITRUST DIVISION, DEPARTMENT OP JUSTICE; ACCOM-
PANIED BY RICHARD SAYLER; AN~D ~OEL DAVIDOW
Mr. KAUPER. I do.
Senator CHURCH. I have been delayed by a rolicall vote in the
Senate and I am told that there are other roilcall votes anticipated
this afternoon. I am wondering, Mr. Kauper, if we could insert your
statement into the record and proceed directly to questions. Would
you have any objection to that?
Mr. KAUPER. That is all right with me, Senator.
Senator CHURCH. In the interest of time then we will insert the full
statement in the record as though read and Mr. Blum will commence
with the questions this afternoon.
[Mr. Kauper's prepared statement follows:]
PREPARED STATEMENT or THOMAS E. KAUPER, ASSISTANT ATTORNEY GENERAL,
ANTITRUST DIVISION, DEPT. OF JUSTICE
Mr. Chairman and Members of the Committee: It is a pleasure to appear before
this Su1~committee. These hearings have foci~ised on the broad foreign policy and
Competitive issues highlighted by the current oil shortage and price rise. The
relevant period which these hearings have covered has included events preceding
the fihin~ in 1953, of the Antitrust Division's Oil Cartel case, to the present. I
have bee~t asked to discuss the competitive issues which have arisen during this
timespan, and to explain the past and possible future role of the Department's
antitrust enforcement in regard to limitations on free competition in the inter-
national production, distribution and sale of petroleum,
I think it might be helpful to set out some general antitrust principles which
may be relevant in this discussion. As you know, the prohibitions against monopo-
lization and restraint of trade contained in the Sherman Antitrust Act extend to
the foreign commerce as well as the domestic commerce of the United States. Our
courts have held consistently that if a conspiracy has the intended and actual
effeôt of restraining United States foreign commerce, the violation is not im-
munized because some or all parts of the plan were formulated or carried out
beyond the borders of the United States. On the other hand, it is equally well-
settled that the Sherman Act, like any other United States statute, can have no
direct application to the sovereign acts of foreign states within their territories.
This limitation on Sherman Act jurisdiction is significant at present, since the
period from 1953 to 1974 has been one during which foreign governments have
seized an ever more active role in regard to the ptoduction and pricing of oil.
To my knowledge, it has never been the Antitrust Division's position that joint
ventures for the production of natural resources are per ze illegal; rather, the
reasonableness of a particular joint ventl4re is tested in the context of the unique
facts and economic facets of the industry involved. Such joint ventures, if large
enough to be economically significant, should be analyzed in terms of whether they
are neces~ary devices to spread costs and risks, whether they eliminate actual
competithn or likely potential competition in a concentrated market, whether
they are reasonably open or accessible to firms which need to join them or deal with
them, and whether they are operated in such a way that they artificially restrain
production or raise prices in the markets which they supply.
45_~426_75_L~~_4
PAGENO="0050"
46
From an historical perspective, the more recent activities of the Department of
Justice iii international oil start with the litigation known as the JnternatiQnai Oil
Carlel case.' The complaint in that cdse, Which thO D~partiiient filed in 1953,
allegnd that eompanies~ noW knoWfi a~ 1~x~ton, Mobil, SoCal, texaco and Gulf
had operated a worldwide cartel to insure that each firm would retain a fixedshare
of the market. Specifically, thO complaint alie~ed that the defendants and øther
entities had conspired to:
-securC~ maintain end exercise control of foreign productiofi and supplies of
crude petroleum and refined products;
-cause dom~tic production of' petroleum and products to be curtailed or re-
stricted in ampunts related to importations of foreign petroleum and prodiiets
and to the extent necessary to maibtain the level of dOmestic and world
l)rices of petroleuth and products agreed upon bythe dOfertdants;
-divide among themselves foreign producing and marketing territories;
-agree upon, maintain and correlate domestic and world prices ~f petroleum
and products;
-control hhports of petroleum afid products in the UnitedStatos; and
-exclude United States petroleum companiCs other than defendants and their
subsidiary and affiliated companies from opportunity to import into the
United States petroleum atid products produced in foreign countries by de-
fendafits and othOt petroleum companies.
This description of the complaint is not ex~raustive; the list Of allegations goes
on, as I am sure you are aware.-~Th{s SubcOmmittee has also heard testimony
from current and former Antitrust Division attorneys who worked en that ease.
I have read their testimony andbelieve that a detailed elaboration of the complaint
would only duplicate nmterinl altitady before thl~ Subcommittee.
The Oil Cartel cases were settledin large part by a series of consent judgments
negotiated between 1960 and 19fi3: The case was finally terminated in 1968 by
the dismissal of SoCal and Mobil, without prejudice to our filing a new action.
The decrees which were entered prohibit, among other things, price fixing~ market
allocation, interference with entry by competitors into U.S. and foreign markets
and allocation or limitation of crude oil production in a foreign nation. On the
other band, the decrees provide enpressly that the companies are not prohibited-
that is, prohibited by the decrees-from participating ifl joint production opera-
tions, joint refining operations, joint pipeline operations or joint storage opera-
tions in foreign nations.
This does not mean that these consent decrees legitimized fQr all time joint
arrangements among domestic oil companies in their operations abroad. A business
practice is not renderOd immune from antitrust attack simply because it is es-
pressly not prohibited by a previous antitrust decree. The limitations contained
in the decree merely establish that such conduct would not constitbt~ civil or
criminal contempt of the judgment, but leave entirely open the question whether
such conduct would be upheld if challenged in a new and separate antitrust
suit.
As these hearings have revealed, and I believe usefully so, the history of oil
company foreign joint ventures has always been greatly complicated by foreign
policy and national defense considerations. These ventures, although conducted
by private firlus, have almost never bpen analyzed solely as business activity.
Strong overtones of governmental policy have, it seems, usually affected both the
activities of the companies and those ~g the Gov~rnment charged with overseeing
the companies' activities. For exafttple, it appearC that the large joint venturO
in Iran known as the Iranian Consortiuni ~was created with the encouragement
and involvement of the U.S. Government in oFder to insure the stability of a
relatively pro-Western government in that country. Because of that ipvolvement,
the National Security Council, acting with the concurrence of the President, in
1954 adopted a resolution, which Wa~ made known to the Justice Department,
that the Antitrust Division should make no effort to challenge or dismantle
major oil company joint ventures in the Middle East. Nevertheless, as my ~arlier
testimony indicates, the Department continued to seek and did achieve other
relief in the Oil Cartel case.
I know of no discusSions in recent years between the Justice Department and
the State Department or the National ~ecaiity Council on the subject of the need
to avoid legal challenge to joint ventures for the production of crude oil in the
Middle East.
1 United States V. Standard Oii Conipasiy, Civil No. 1779-53 (D.D.C. 1953).
PAGENO="0051"
4~;7
I ha\Te a1~o been asked to di~c~iss the ant~u~t ~ti~& concerning joint bargaining
rwitli OPEC and the. Bu~ines~ ~e~4ôw cIearanc~s wMch the Antitrust DivIsio~i
b~sued in rega~d1 to that b~rgainitig~ I understand that, ~n late 1970 and sub-
~e~uent1y, OPEC demanded fro!ifl t&ie oil companies a majol' iii~rease in tax take~
posted price and govera~aiental pa!ti~$patidn. OPEC swmmoned the companies to
a conferenue ii! Tehran to diseuss it~Fa4~ion and the OPEC nations' asserted mood
br more revenme. ~t is my understandiflg thmt the oil oompa~ioies consulted with the
l~tate Department c~)acormng the foreign poboy ~n~I natic~na~ security issues arisimg
from the OPEC deman~ and with the Justk~e Department about possible. ~nti-
trust issues. The eom~panies requested the Justice Depattrnent to provide them
with a favorable Business Review letter in regard to the joint negotiating tactics
which the Companies contemplated using.
A general description of the Department's Business Review Procedure may be
in order herC, The Antitrust Division is not permitted to give advisory legal
opinions to private compansss; nor does it have autherity to exempt any condnet
from the operation of the antitrust laws. Nevertheless, persons contemplating
joint business conduct have often been anKious to obtaii'l sothe form of indication
as to the Department's attitude concerning that conduct. The Department has
established a procedure under which a specific proposed course of actiOn will be
reviewed by the Antitrust Divisi&i and in appropriate oases, we will ropl~r with a
"Business Review" letter stating our present enforcement intention in regard to
the intended course of action. Such a letter dces not legally bind the Division,
since it expresses only the Division's present enforcement intentions. Nor does it
have any effect on the right of other parties who have standing to sue under the
antitrust laws.
In 1971, the oil companies represented to the Division thpt they contemplated
two strategies. First, they would create a negotiating team to make unified, lower
counteroffers in respense to OPEC demands, at the same time notifying OPEC
of this approach. Second, in regard to Libyan demands and the threat of Libyan
exprc~priation, they would bind themselves to an oil sharing arrangement so as to
keep in business any firm whose properties in Libya werO expropriated. The
Division felt, at that titne, that the Libyan sharing agreement seemed to provide
important protection for the smaller oil companies operating in Libya which had
no other alteraative sources of crude oil. As this Subcommittee has shown, in
Libya oil concessions to the smaller companies were interspersed wlth concessions
to the majors, and it appeared that the Libyan Government would focus its
demands on a smaller company without alternative crude oil sources. These
proposed actions raised novel antitrust issues, but our files indicate it was then
believed that these actions were necessary as a countervailing force to the producer
government cartel with which the oil companies Were confronted, and that these
actions would more likely have a beneficial than an adverse effect on U.S. foreign
commerce. It is important to recall that the stated intent of these proposed arrange-
ments was to maintain oil priceS at lower levels than would exist if the OPEC
nations could negotiate with the companies one-by-one; increasing the terms
required for settlement with each negotiation.
Subsequent to the original 1971 Business Review letter, various elements of the
agreements continued to operate, and the companies from time to time advised
the Department of State and the Justice Department on events which werO
occurring. The companies also requested that the original Business Review be
supplemented to clear subsequent conduct. In light of subsequent developments,
the Division authoriSed a pumbet of additional, supplementary Business Review
letters. Your Subcommittoi, of course, has copies of all of those letters.
In October, 1973, OPEC announced that it wished to reopen all the matters
agreed to in 1971 and 1972, and it summoned the oil companies to a bargaining
session in Vienna. The companies requested that the Department conhrm that
the previously issued Business Review clearances would also be applicable to this
new round of joint bargaining in Vienna. The companies again stressed the impor~
tanee of acting quickly, since prenaration for the Vienna conference was scheduled
to begin almost immediately. The Division decided that the matter was of such
importance that it should be reexamined as thoroughly as poss~hle in the time
available, rather than merely relyIng on the fact that in thq past, Business Review
letters had been granted in similar circumstances, Accordingly, we requested that
knowledgeable officials of 14 oil companies who had been and were participating
in OPEC negotiations or the sharing agreement coipe to the Antitrust Division
and be interviewed separately concCrning the Competitive effects of their previous
joint conduct and their reasonS for believing that fnture cooperation among them
was necessary and would benefit American consumers.
PAGENO="0052"
48
I might say that, in these interviews, all of the companies represented that
they believed joint bargaining had achieved better results, at least in terms of
holding off price increases for some period of time, than would have been achieved
if each company had negotiated alone from the outset. And, all companies ex-
pressed the view that the sharing agreement had helped in strengthening the hand
of the small companies with limited crude reserves. Besides conducting these
interviews over a two-day period in Washington, we dispatched two attorneys to
New York to examine, to the greatest degree possible under the time constraints
we had, the minutes and cable traffic of the oil company joint bargaining com-
mittee-known as the London Policy Group. We also requested production from
Exxon Corporation of all top management documents relating to joint bargaining
with OPEC. These documents were produced, and analyzed by our staff.
One major purpose of our 1973 review was to determine whether the oil com-
panies had gone beyond the Business Review clearance by discussing topics such
as domestic competition in the U.S. or downstream prices on oil affected by the
OPEC bargaining. A second major focus of our review-both in our questioning
and document search-was to determine whether the companies had bargained at
arm's length with OPEC, had obtained a less costly settlement than would have
occurred had they bargained separately, and had acted in a way which was as
fair and helpful to the smaller oil companies as to the major firms.
On the basis of this investigation, and in light of a thorough analysis of the
relevant legal precedents undertaken by our Foreign Commerce Section, we con-
cluded that it was appropriate to extend the earlier Business Review clearance to
apply to the 1973 bargaining at Vienna. Nevertheless, the 1973 Business RevieW
letter contained a careful statement concerning some of the limits on the clearance
being granted. The letter, which I signed, stated:
We feel it necessary to emphasize, however, that we view such intimate
cooperation among high executives of competing oil companies concerning
crucial factors involving cost and supply as potentially raising serious anti-
trust dangers. Accordingly, we view this as an area which we must subject
to constant review and reevaluation. Thus, it is likely that we will request
extensive additional documentation of the lack of adverse antitrust conse-
quences. Moreover, it should not be assumed that this letter authorizes any
joint activity going beyond the subject matter of the Vienna negotiations,
or provides any assurance that the Antitrust Division will grant similar
Business Reviews in the future.
Lastly, let me stress that our non-disapproval is in no way initended to
sanction or authorize any joint oil company action which tends to reduce the
supply of petroleum to the United States, such as joint agreements with
OPEC concerning production levels of refinery construction, or joint agree-
ments among oil companies to halt production or cease lifting oil in any
country, to boycott oil from any country, or to chase so-called "hot oil."
Because of the importance of the international petroleum industry and of the
issue of how to deal with cartels composed of producer goverments, we have
continued to monitor activities under the Business Review letters for joint
bargaining with OPEC. Our current thinking has led us to consider whether
cOnditions since 1971 have now so changed in the Middle East as to warrant a
different approach. We are now involved in an inquiry to determine whether the
letters were based on facts which are substantially changed. It is also our feeling
that, in light of this inquiry, clearances contained in our letters should not be
relied upon to justify future conduct by the companies.
Current issues we are now studying are twofold: First, the subject matter of
the bargaining has evolved from issues of royalties (a buyer-seller or government-
taxpayer relationship) to ones of government participation, involving buy-back
arrangements and other problems of distribution. The increasing amount of
governmental ownership of the oil has transformed the OPEC countries into
actual or potential competitors of the oil companies, thus making joint discussions
among them more cartel-like in nature than merely buyer to seller or govern-
ment to taxpayer. Second, our continuing study of the records of the ~London
Policy Group indicates that what was to be an ad hoc organization has become a
quasi-permanent institution for oil company cooperation, and that the discussions
and studies within it tend to approach sensitive competitive areas of supply,
cost, demand, control of downstream distribution and possible exclusion of
independents by means of exclusive buy-back arrangements.
All this is not to say that the original Business Review letters are somehow
withdrawn, that granting of the original Business Review clearances was a mis-
take, that we are now prepared to conclude that the oil companies are behaving
PAGENO="0053"
49
improperly or illegally, or that there is any legal reason why their present conduct
must end. We are simply taking the position that the possibility of changed cir-
cumstances has made the advice contained in the Business Review clearances
granted to date inapplicable as to future conduct.
I would like to conclude my prepared testimony by discussing our ongOing
efforts to preserve and enhance competition in the petroleum industry. At the
outset I should say that the Federal Trade Commission, under our liaison proce-
dures, has issued a complaint against Exxon and other major oil companies. This
is a massive case, which could ultimately involve structural relief. Because both
agencies try not to duplicate efforts and waste limited resources, this case tends to
preempt much of the domestic antitrust field. Nevertheless, we in the Department
have not simply been sitting on our hands.
In testimon~r a few months ago I announced the creation within the Antitrust
Division of an Energy Unit. Let me amplify w1i~t was intended and what has been
done. Six attorneys and two economists, a number of them previously familiar
with energy issues, are presently assigned to the Unit. More will be added. The
Unit's initial task is to investigate whether the recent oil shortage or oil price rise
were caused or accompanied by any antitrust violations in the domestic or foreign
commerce of the United States To be frank, I must state that although the Unit
began with numerous complaints and issues to investigate, there was no area in
which we then had strong reason to believe an antitrust violation wa~ probable
rather than merely possible. Since its formation, the Unit has concentrated on
learning what information is available either in the Government or from other
public sources, narrowing the issues to the most relevant and significant ones, and
selecting the methods of investigation thought to be most appropriate and effec-
tive. One phase of the investigation will involve an examination of how the major
Middle Eastern joint ventures have been operated and what their effects have
been, Portions of the investigation are now underway, and we hope to complete
the first full phase of the investigation within a year.
As I have indicated in several speeches during the past year, I believe that
~" this Subcommittee's exploration of the historical background involving inter-
national oil serves a useful purpose. I think it will serve to bring to the attention
of the public, the relationship of the oil companies, this government and the
governments of the oil producing nations. As advocates for the free market system,
we would prefer to see the development of effective buyer and seller competition
in the oil business with a minimum of government interference or cartel activity
on either side. Absent this, however, we believe that the United States Govern-
ment should take a more active role to insure protection for the interests of
consumers as well as the producing companies.
Mr. BLUM. Mr. I~auper, our record shows the antitrust division
of the Justice Department has issued six business review letters
which, allowed the oil industry to set up a joint group to negotiate
with the OPEC nations. Is that accurate?
Mr. KAUPEE. Well, I am not sure the precise number is six. I think
that is accurate. The only part of that statement I would question,
is that the Department "allowed" them to do it. They can do it
whether they have a business review letter from us or whether t~iey
do not. We do not ere~te any kind of exemption.
Mr. BLUM. As witnesses described the group, it included a number
of regular committees and subcommittees that dealt with a very wide
range of industry issues. When those issues could not be resolved the
group held "meetings of the chiefs," as they referred to them.
Given that degree of company cooperation and the enormity of the
impact of their joint actions on the United States, what steps did the
Department of Justice take to be certain that the public, interest was
being protected and the law was being obeyed when these men were
meeting?
DEFINITIO1~ OF BUSINESS REvIEw LETTERS
Mr. KAUPER. Let me be clear, first of all, that we understand what
the business review letter is. It is simply a statement that, given what
they have pre~ented to us as their plan of action on those facts, we
PAGENO="0054"
50
do not intend to sue. Now, we are not normally in the business of
being a regulatory agency, we are a law enforcement agency~ We have
monitored ~nd have ~h~d ~per~ochc reports from tl~em. We have not
had lawyers attending their meetings. We are n~v in the process, as
I thmk my statement indicates, of cva~luating a good deal of docu-
me~itati~n made avaUabfe in ~ounectiçm with a numb~r of those
meetings ~nd of. assessing the currency of the business review letters
themselves.
The statement indicates that insofar as we are ~ow conducting
further investigations, and because the issues have moved to some
degree from what they. igin&~1y were at the time the business review
letters were issued, thØ ki~Mir ~view, the letters themselves no longer
can be relied upoh. Phat~Is, the facts are sufficiently different, the
issues are sufficiently ~ that it ~o~ild not be appropriate to
rely entirely on those letters at the present time.
They were given, as I think you know, for specific negotiations, and
I think there was no intention on our part to set up some kind of
quasi-sovereign grom~p which was going to continue over a long period
of time discussing a wide variety of issnes.
We are monitoring those documents now but I think it should be
understood that we have never peretived our role as being one of a
regulatbry agency. We have no such authority.
Mr. B~uM. I was not describing the Department of Justice as a
regulatory agency. I am talking about deciding whether or no~ the
law was being violated.
The better part of the international oil industry was in regular
conference. It seems to me at least that someone from the Antitrust
Division should have been finding nut what was happening in that
conference.
Our testimony. indicates that the first time you began to read that
cable traffic-by you, I mean the Antitrust Division-and began to
ask questions, was January 1974, after our hearings were announced.
Why did it take 3 years?
DELAY IN ANTITRUST DIVISION INVESTIGATION
Mr. KAUPEn. I think you have to peep in mind t1~at the particular
negotiations as to which the letter was issued were entered into in
1971. I think you know from your hearings the circumstances under
which that letter was issu~ed. Immediate negotiations were about to
commence. I think it is probably fair to say that the business review
letter was issued primarily as a matter of principle, that is, given the
fact that the negotiations were commencing, the view of the Division
was at that time that joint negotiations of the issues raised in that
particular negotiation were not something we were going to challenge.
Now, that being the case, and as you also recall, the agreements
were arrived at in connection with those 1971 negotiations, I thinit it
probably is fair to say that we did not regularly monitor thereafter.
We had a letter which basically said we are going to not sue on a
certain set of circumstances. The companies were well aware there
were bounds beyond which they could not go. But I think we would~
have to say we did not regularly monitor that traffic.
PAGENO="0055"
Now, the issue then again arose, as you recall, in the fall of 197~
when a new deir~and was ~na&~' by OPEC, and a new business review
request. At that time we monitored a good t~eal of activity. I think it
is 1~rue, however, again in the timefr~me which we had, we did not
monitor that cable traflic at th~t time.
We are now monitoring it, as I think you are aware.
M!r. BLuM. Why did you not deem it important enough to monitor
or get into?
`1 here were ~fi~e separate occasions when the conipatues came back
~nd said, "Look, we are doing more." Why didn~t someone go and
look?
M~r. KAUPmi. You must keep in mind once again what the issues
were as they were presented ~from `business review to business review.
One, for ~xanipie, contemplated a 1-~e~r extensien of the sharing
agreement. That was the specific ssue which was before us. In each.
case we were dealing With ~a specific question ~Which was presented
to us.
`Now I suppose one can say, and `I think all of us in that crisis have
perhaps learned something from hi~dsight, that perhaps that should
have been more closely monitored bn our part as it was going along..
I am not so sanguine as to think that perhaps it shon!d not have'
been, but at the same time, we were dealing with specific issues, that
were in large part issues not so much of fact as of a legal principle,
that is, the principle of joint negotiations.
Now, there is also obviously a question as ~to whether they were
negotiating over things not covered by the business review letter,
and that now is a matter obviously of considerable concern. As the
institutions seem to have become somewhat more permanent, par-
ticularly, I `think-
Mr. BLUM. I take it `by what you have said that the Antitrust Di-~
vision is now looking at the full structure of the London Policy Com~
mittee, all of its various subcommittees and the works of those
subcommittees, in an effort to determine whether the activities were
within the bounds of the law?
Mr. KAUPER. Yes.
CLASSIFICATION OF BUSINESS REVIEW DOCUMENTS
Mr. BLUM. When these business review letters were first issued,
t~e Jutire Thpartrnent and the State Department went to great
pains to keep them and the underlying documents from both Congress
and the public. As recently a~ ~ihnmary 1974 1 believe ~ou wrote to
Senator I~Iar1 of the Antitrust ~`ubcom'rnittee sa' jug thut the under-
lying material conki not be turned over, to the Atititrn~t Subcomrnit-
tee ; is that correct? You cited reu~oi~ ol na tiona I ~erurli v, I beii~ cc.
j\4 kAurEn. ~es, sir; some ok tlic (ioeuu1e~us were el~s~hen. I
think I should add, liowevet, that there were brictings of a uunber
of Mlembeis of the Congics~ Ironi time to time, in~ludn~ members of
the Antitrust. Subeomtnittcc, on the issoe:~ that were raised ~ the
bushiess review letters. Lint u, we (.InI ~ot fail to inform Ilusi ~f I he
ex~stcnee of the letters. The documents 1 hemselves were
We `were advised by the State Depart ment there were ser~uitc re~aoiis
for doing so.
PAGENO="0056"
52
cert~
id ha~re to ag
PAGENO="0057"
~53
Senator CHURCH; So the theory apparently of the Department in
such cases, apart from the very practical consideration the Department
has to comply- with Presidential orders, I suppose, is that there is
some inherent power in the Presidency to waive the law when the
President makes the determination that it is in the national interest
`to do so?
Mr. KAUPER. Well, I suppose that is the conceivable possibility in
some circumstances.
Another possibility is that there may be two statutes that appear tp
conflict and somebody has to resolve which one is applicable. But in
~many of these circumstances we are dealing with the kind of violation,
if it is a violation, that is not what we would refer to as a per se type of
violation. There is an element of discretion involved as to whether to
bring the case. For example, if I can give you just an illustration Qf the
kind of thing where it seems to me it is purely within antitrust policy
to Consider that sort of issue. There is the sort of circumstance where
because a foreign government is involved and the advice received from
the State Department or some other appropriate agency is that if
certain action is taken by the Antitrust Division it will provoke a
governmental response the effect of which may be not only to undo
what the Justice Department is trying to do but competitively make
it worse. That kind of circumstance could arise and it seems to me
considerations of such concerns is entirely within the province of the
antitrust laws themselves. Similarly, on the question-"Is there
effective relief to be obtained should we bring this action?"-I think it
is appropriate to take that sort of consideration into account.
Senator CHURCH. Sure. Any enforcement agency, whether it is the
Justice Department or whether it is a prosecuting attorney's office, has
to exercise a `certain measure of discretion in determining what actions
to bring. I am aware of that.
In 1950, though, or thereabouts, the Justice Departihent did make
a determination to bring an antitrust suit against the big oil companies
based npon the thesis that the companies were in violation of the anti-
trust laws did it not?
Mr. KAUPER. That is correct.
Senator CHURCH. And so that element of discretion was exercised~
and in the opinion of the Justice Department at that time the anti-
trust laws were being violated and, as we know from our previous
testimony, this suit was changed from a criminal suit to a civil suit
and then it was watered down to the point of being in effect called off..
Is that true? That was done on orders from on high?
Mr. KAUPER. Yes, I think that is quite accurate. I would not
contest those facts.
Senator CHURCH. The facts bear that out. We have already dis-
closed those facts.
WHAT IS BEING DONE TO POLICE NEW NEGOTIATIONs?
So I would like to bring us up to date. It is true that the general
picture is changing very rapidly in the Middle East and it is hard
to know from day to day what the shape of it is going to be. I would.
not think in these cfrcumstances that the Deiiartment could suddenly
PAGENO="0058"
M
get a fix on thjs thtuatio~i butT d~o thitik thM~ the i t&i~o~k1ng ~rr~aige~
ments be~twE~en the rtutj~or cornp~tthe~ tli~tt We 1~~e di~io~ed in the
~oürse of these hearings, ~vhieh p~rsisted foi1owin~ the ~bitr~dofrm~rnt
of the antittu~t suit, and ih tac~t were extehdCd still further, ~nd f~he
~rery real pos~ib~1i~ty that these inte hn~kthg~ arr~ngek~iertt~ ~wffl
perhaps in a new form, maybe, that the gover~iment's con~rft ~~iii
tnke owners~hi~p~ 6f the fad e~ in their re~ec%i~e ceuntries, bui~ then
we already see developing bi~y-back agreements itbich may ~ety w~fI
preserve the substance o~t this aTr~g~ment, ~M~h clearly eb.ables
the major companies lo e~ntrol the marketing ~f inoet of the e~nth~.
NoW, what is the Jnst+ce Dep~rtn~ent d~*~g, pre~ent1Yy iii thm~i~thrM~
this si~tuat~ a~ ~*Jiat ~cti~n tnigh'~ be takët~ td p~c*&nt th~ er~atidh
of a ne~* and e~n Ct~geF th~o~r on the paft of the~e big e~M~
panies h~ the aftermath of ~his changing sitnation that is h*
~ft4~*~j7~?
Mr. RAtJ~~. WeAl, We are eondiictmg~ at the n~.onent~-~-yoo i~ieed
the *ord mordtoring-We are eondu'etint~ a b~oader i~stitihn
than :1 think tb~ Word monitoring v~enM sngge~t, beeattee the w~Fd
monitoring si~ggests to mc We are ~!ooking ipl~ ~t the jthtt ne~etM-
~tioti issue.
Senator CWt~ncm Yes, tell a~ What yen are doing.
Mr. KAT1~n. The hnrestigation is broader than that. I de n~t
1cran~t, Senator, in o~en hearing to go into too much ~einii a~ to *hat
are looking at but obviousi~r, We are looking at a ~a±iet~r of r~eA~-
tionships between the oil cothp~i'ies, Whether they a~ré th tI4~ fb!~~M ~f
existing refatiomiships or whether they are in the form of What One
might project the outcome of thin very fast-moi~iug situation c6uTd be.
This is a rn~tter of me4or concern with us now and we ~ft, I
think it is probably fthr t~ say~ With eonCefn o~rer the jOiirl negetia-
tons, but it has become apparent, I think, to e~etybodSr that We
~tre dealing with issues someWhat larger thah that.
That investigation is ongoing now, we have ~ m~th~beF of personnel
involved in it, and hopefully, we will begin to get so~tie fairly good
fix on some of this within the not too distant future. Eut ~s you huve
suggested yourself, this is a situation which is changing a4most daily
airrd~ with the oil-producing countries themselves taking en ownership
interest, we are obviously now having to focus on the iMpaCt that
uray have n~on the e~isting relationshi~s of the oil companies. That
also m and of itself would include the issue of buy-backs, wInch is a
matter of ~onsidrrable concern, for the reacon I think which you your-
self suggested.
Mr. Th~ui~r. I would like to pirk up again with the document declassi-
fication problem, if I may, because the issue r~eeds some further
Tesolution.
We had testimony here, and we released documents iii the Course of
these hearings that showed the safet~r net agreements and associated
documents were not classified until April 2~, i97~, which \* at Some time
nfter Ralph Nader had filed suit under the Freedom of Informa$on
Act to force their disclosure.
Did anybody in the Department of i~tstiçe call the State 1~epart-
~ment and ask that they be classified to prevent disclosure?
Mr. KAnPER. Did we ask them?
Mr. BLUM. Yes.
PAGENO="0059"
Mr. ~ That suit has gone on for Sô~iiO tii~e and my recollec-
lion is that, as you know, we were the ones who classified the d~cu~
ments. This was done in discussion ~vith the State Department.
Who initiated that discussiou i~ am not quite sure I can r~con~truct.
We had asserted defenses to the productioh of those docu~ments in the
suit and it was felt that because, among other reasoAs, we were in
fact asserting security interests that it was appropriate on the advice
of the State Department to classify them, I do not know that I can say
that we initiated it or they initiated.
Mr. BL~M. in other worde, you cannot answer that yes OT no?
Mr. K~u~R. I do not think at the moment I really can without
going back and trying to reconstruct what occurred.
Mr. Bi~uM. You said in a ~pecch before the antitrust section of the
Michigan bar in February 1974, on energy matters, that history telLs
us `restraints of trade which develop in relationships born in a crisis
tend to endure long after the crisis each. Given the degree to whIch this
industry has been working together, even before the 1971 negotiations,
what do you propose to do to thsnu~atit1o this "London Policy Group"
structure when the crisis ends? Is anyone on notice that the atrrange~.
meats andy the intercompany contact must be terminated?
DISMANTLIN~i INDUSTRY GROUPS WILL BE DIFFICULT
Mr. I~AUPER. I think you are asking what seems to me is the kind of
question which I was attempting to direct some attention to because
it is not always clear that after the fact you can effectively dismantle
a given structure. The disruption and what you get when you are all
done may not he a significant enough improvement to justify the
expenditure of resources that would do it, ~articulariy if there are
significant forces in the market working changes in any event.
The point I was trying to make, I think, was exactly that; namely,
that structures are extremely di~fflcuit to undo and while it has been
relatively common to make short-run decisio~ based on short-run
crises, such decisions are often made without any reali~ation of what
their stru~ctural consequences may be and that such consequences may
be impossible to undo later. I
Mr. BLUM. You are saying then, given what ha~ been put together,
even assuming you were to sue successfully, relief might be very
difficult to achieve?
Mr. KAUrER. Ycs~ sir; I think one tends to find that companies
do not voluntarily restructure themselves. We have litigation of that
sort going on now, not in this industry, but I think you can appreciate
what the problem is. It is a very difficult thing to do and to do with
the assurance that when you arc all done you have substantially in1~
proved the situation.
Mr. BLU.i~i. Our records show that the Aramco chiefs have met a
number of times in August and September of 1973 to discuss how to
handle buy-back negotiations, Rave they sought business review letter
~clearance On this subject?
Mr. K~UPER~ Are you talking about spec~flcahiy Aramco?
Mr. BLUM. Yes.
Mr. KAUPER. Not to my knowledge.
Mr. BLTIM. Were you aware that these meetings were taking place?
PAGENO="0060"
56
Mr. KAUPER. I do not think I was aware that there were specifically
meetings of Aramco.
Mr. BLrmr. These are the presidents of the four Aramco shareholders,
Texaco, Standard of California, Mobil, Exxon.
Mr. KAUPER. I assume that is who you mean.
Mr. BLUM. Has the Department made any effort to find out what is
happening? I assume since you did not know about the meetings you
could not have.
Mr. KAUPER. Well, this is obviously part of what is involved in any
investigation that is going on. One has to keep in mind when you are
t~lldng about a joint venture, as such, one has to assume that the
joint venturers meet, from time to time.
Mr. BLUM. Let me get very explicit about this. What is under dis-
cussion is the price of buy-back oil, that is, what these companies will
jointly pay the Saudi Arab Government for the oil they take. The
terms of reference they are using are the market price and percentages
of the market priced
I wonder if you could explain for our record, how the presidents of
the four largest American oil companies can meet and discuss the
market price of oil and percentages of it for joint buy-back purchases
and not violate the Sherman Act?
BUY-BACK NEGOTIATIONS ARE IN A JOINT VENTURE CONTEXT
Mr. KAUPER. Well, I think you have to keep in mind you are
talking about in the context of a joint venture.
Now, you may take a position that the joint venture itself is a legal
problem, but there is surely inherent in the notion of a joint venture
the idea that certain of the joint venturers can meet to discuss the
business of the joint venture.
Now, if that discussion carries over into what are our prices going
to be in the United States, how are we going to market oil which we
otherwise have in various parts of the world, that clearly does not fall
within my rationale. Ypu are getting to a point you are talking plain
old-fashioned prk~e-fixing. But there surely is inherent in the notion
of the joint venture the right of the joint venturers to discuss the
business of the joint venture.
Mr. LEVINSON. Perhaps to put it in specific focus in your statement
you lay out the criteria by which one should judge joint ventures.
Have you evaluated the joint ventures in the Middle East in terms
of these criteria, or are you inhibited in any way from going back to
reassess whether or not these joint ventures and the way in which
they operate, the offtake rules, the production limitations, which
are inherent, and the rulemaking within the joint venture framework
constitute antitrust violations?
Are you inhibited in any way by the existing consent decrees?
Mr. KAUPER. I think the answer to that is no.
Mr. LEVINSON. That is the answer to my question.
Have you assessed or are you in the process of assessing those joint
ventures in terms of the joint venture criteria in your statement?
Mr. KAUPER. I think we are assessing a number of these relation-
ships including to some degree the joint ventures.
Let me add to that.
PAGENO="0061"
57
There is a difference between looking at the formation of a joint
venture and the time frame in which it was formed, on the one hand
and the effects which joint ventures may have viewed at a much later
point in time when there are interrelationships between them or
where you are talking about what may be a monopolization kind of
situation. The formation of a joint venture-looking at it at the time
in which those joint ventures came into being-in light of these
criteria, poses quite a different issue, it seems to me, than if you look
at them today and say who controls how much. After all these joint
ventures came into bei)ng at different times, there were difi~erent needs
f or risk capital by the oil companies, they had different commitments
at different times.
So I think probably what would be the more accurate statement is
that we are looking at the effect of them now rather than the question
of their initial formation.
Mr. LEvINsoN. In other words, in effect, 20 years after the for-
mation ~f the Iranian. consortium, the Department no~W feels it is
appropriate to review the effects of whatever may have been the
rationale for their formation at their inception. Is that a fair statement?
Mr. KATJPER. I think that is a fair statement.
Mr. BLUM. Our understanding is that in the course of the buy-back
negotiations, in more than one situation, one member of the joint
venture has suggested, "I will go it alone because I as an individual
company will be able to get a larger market share and because I do
not want to be tied to the percentage of the joint venture that I had."
Does this not in itself raise serious questions about the effect ef the
joint venture. Doesn't it put the issue of whether the joint venture
is the appropriate vehicle for buyback negotiations?
Mr. KAUPER. Well, I suppose it raises a question whether it is in
the interest of the companies themselves to try to adhere to a joint
venture approach. To a degree that seems to me to be a business
decision.
Now, I think what you are suggesting, if I c~n carry it the next
step, is that it may suggest that it is not the business of the joint
venture at all.
Now I do not really want to speculate on what the facts might
show as to whether that is so or whether it is not, but I think I
understand the rationale of your question to be that even assumin
there is a right of joint venture to engage in certain conduct wit
respect to the joint venture, if in fact it is not a joint venture interest,
then perhaps it simply is a collateral side agreement.
Mr. BLUM. As I understand it, the rationale for the joint bargaining
which was allowed by the business review letters and other subsequent
joint activity, was that by joint action the companies could get
bargaining leverage.
We have had repeated testimony and I think you heard some of it
this morning, that the bargaining leverage of the companies has been
very seriously eroded to the point where they have very little left.
Does not that now destroy the rationale that was behind the granting
of the business review letter?
PAGENO="0062"
RATLONALE FOR B~SINE~S REVIEW LETTER US GONE
Mr. L~u~n, I think this is obviously one of the circumstances w&
are referring to in the written statement which I have submitted, that
is, whether we are now at a point where we are no longer talicing levcr~
age. There may not be any leverage to be applied any more, we may
simply be in the setting of unilateral demand made by the OPEC
countries, in which case there really is to a degree, I suppose, a con-
siderably lesser rationale.
Now, it may be that there is leverage still possible thvou~h joint
negotiations on some particular issues which may arise. That is one of
the items which I think we have to look at. But certainly the suggestion
has been not only from the testimony this morning but from other'
testimony I have read that has been submitted to this committee,
that perhaps the notion of leverage through joint bargaining simply
does not exist, that we are now in a position of simply having unilateral
demands and having to respond to them, and that is all there is to it
Mr. BLUM. One witness, Mr. Rooney, testified that he thought it
worked in reverse. That is to say, by joining together, each company
was assured that if it pvc in it would not be stuck out there alone.,
Everyone else would give in as well, and the price increase would be.
passed through to the customers.
Mr. li~Aiw~R. Yes.
Mr. BLUM. Is this one of the effects that was considered?
Mr. MIAUPER. This is a possibility and I suppose more of a possibility
now than it was then, I think, however, that the testimony before this
committee and our own assessment of this situation in terms of the
joint bargaining tended to indicate that at least for some period of
time it may have forestalled more rapid increases, and that there was
a period of time in which there was in fact some leverage which came
through the fact of joint negotiations.
Now, whether historically if we get a little far away from it and look
back at it we conclude that that was in fact the ~ase, I do not know
that we really can say; but I think one also would have to say that
even if there was up particular leverage which they were in. fact able to
bring about, it is not clear to me that that necessarily would mean there
is an antitrust violation. That is, in one sense, even if the joint bar-
gaining was ineffective and simply ended up with a price that the
unified OPEC nations would have imposed anyway, it is a little difficult
to say the joint bargaining has itself caused any restraint on price
activities. It may have been a neutral effect but it may not have caused
any harm.
Senator CUUEcR. I personally have found no fault with the Depart-
m,ent'~ decision to grant these business review letters at the time they
were granted because of the predicament which the major companies
found themselves faced with OPEC, an organization of producing
countries bargaining collectively for those governments. The im-
portance of establishing a common front on the part of the companies,
I think, was a need probably to proceed that way. But what really
concerns me is an arrangement growing out of the present flux that
reestablishes all of these devices by which the major companies have
effectively squelched competition always, of course, in the name of
free enterprise, but the limited role that has been left to competition
PAGENO="0063"
59
in the eu i~a4nstry, hig oil, ~s so eo~spicuous that I would hope that th&
Department wopid c efnUy review any arrangements and vigorously
enforce the ~titrust laws if they exe found to be violated.
Mr. L~ur~n. I think that is what we are atte~ptiug t~ do now,
Se~iator. I think the wriitten statement which I have submItted indi~
cates why we h~ve some concerp. now about the business review letters.
I thinlç it should be understood we are not withdrawing them, we are
not s~yh~g what the companies have done was illegal, but rather we
are simply saying we have reached a point where there are different
circumstajices and indoed there are different issnes now being made the
subject pf negotiations and that these letters really do not apply to
that new set ~f circumstances.
In addition, we do have an opgoing investigation, and again in those
circumstances while that is going on I think just as a matter of fairness
the industry oi~ght to know that. But clearly we are looking at a broad
range of new issues~ issues which conic about throug~ p~rtieipatipn,
issues relating to buy-backs, and whether or not we are go.ihg to simply
go back into what we have had before, which is obviously of consider-
able concern.
Senator CuuRdH. If there was any overriding foreign policy reason
for setting aside the antitrust suit in the fifties, those ~ea~ons have
long sliwe been rendered obsolete by events. The same set of considera-
ti~is no longer apply t~ the American j~oJicy in the Middle East and~
therefore, the Department of Jnstice may find that it will not be
blocked by a v~gorons en~orcenIent o~ the antitrust laws should the
facts call for it in the future. I think that if the companies were put on
notice to this effect it would be altogether constructive. They them-.
selves would keep that in mind a~ they mal~e and enter into the ar-
rangements with the producing countries and thus might avoid in-
frictions of the antitrust law that could bring about another ~uit
against them.
Mr. KAIJPER. Oh, I think that is quite true, Senator, and I think
this is obviously one of the reasons for indicating to them that we are
examining some of these relationships, quite clearly.
~`ORMAL PnOCEDIJRE FOR NATIONAL SECtR1TY EXEMPTiONS
Mr. BLUM. Mr. Kauper, in colloquy with Senator Church you
indicated that the national security question was a difficult one to
resolve, that there were conflicts from time to time, between the
interests of the State Department and the interests of the Justice
Department, and the discussion went on to say that there was no
specific national security exemption of the antitrust lawg.
If the ~ntitrust laws are to be set aside for national security reasons,
is n~t the proper thing to do for you to come to Congress and say,
"Look, we must have exemption here," in a formal proceeding so that
people are on notice that there is a way of resolving it and a formal
way of doing it? In the past, as one reads the record, the way it has
been done is by a telephone call. In the case of some of these incidents,
a National Security Council resolution was used, but typically a tele-
phone call from someone in State to someone at Justice and a rather
informal procedure in which the documents then are removed from
both public scrutiny and congressional scrutiny has prevailed.
PAGENO="0064"
60
Would you not favor some kind of formal procedure with perhaps
notice or with a procedure for notification to Congress?
Mr. KAUPER. That might be desirable. I am a little reluctant to see
us somehow proliferating exemptions to the antitrust laws in any
formal sense, but I think it obviously could be desirable that the
Congress be notified that this sort of action has been taken.
Mr. BLUM. The problem, of coui'se, is we have had proliferating
exemptions but without the benefit of either legislation or notification.
If we are going to have them we probably should have the legislation
and notificatiou so as to at least follow some reasonable form.
Mr. KAUPER. Do not misunderstand me. My general belief is if
one is going to have exemptions from the antitrust laws they ought
to be in a statute. I have said that many times before, and I think it
is as applicable here as anywhere else. On the other hand, I think
one has to be a little leery about describing this as though it was
necessarily some form of exemption. There are places where security
considerations are brought to bear when one is not talking about
exemption from the antitrust law but rather simply plugging a factor
of foreign policy into a judgment as to whether a business is engaging
in a reasonable course of conduct or whether it is not. I think that the
documents that this committee has accumulated and released with
respect to the conduct of 1953-54 would tend to show it was an
override judgment. I think that is clear. But I think there is also an
area in which the foreign policy concern simply goes to the issue of
is this unreasonable conduct, and that, as you know, is built by
history at least into the language of the statute.
Mr. BLUM. Well, now, tiave you made this kind of judgment with
respect to international or multinational corporations in other in-
dustries as well? Is this a frequent policy issue?
Mr. KAUPER. You mean the foreign policy consideration?
Mr. BLUM. Yes.
Mr. KAUPER. Not that I arri aware of.
Mr. BLUM. How about a remedy for some of this difficulty we are
faced with in the petroleum industry that would call for spinning off
of some of the joint ventures? A suit which would bring divestiture or
spinoff of some of the producing joint ventures in the Middle East,
perhaps following the theories that were used in the General Motors
case, section 7 might be appropriate because these joint ventures were
after all, in many cases the results of acquisition.
Mr. KAUPER. Well, here again, you may be getting back into a test
of some degree of the legality of these ventures and their formation
which poses quite different issues than where we are at the present
time. They did nqt after all arise simultaneously, they arose over a
period of time, with different capital coming in. It is possible, of course,
to think in terms of spinning them off, dividing them up. That poses
some rather difficult issues since to some degree these also reflect
judgments by the host countries as to how they want to deal and you
are into a concession relationship with a host country that may make
a~ny kind of effective relief of that sort very, very difficult to obtain.
One has to keep in mind here that you are also dealing with another
party to the transaction, a party which is a sovereign nation, and that
makes questions of antitrust relief in the domestic courts of the United
States rather difficult.
PAGENO="0065"
61
Senator CHURCh. I think that though in theory the propositionr that
Mr. Blum has suggested to you is supportable in practice~ I eaiino't
imagine~ how the executive branch could say in a case like the antitrust
case that, although it was the view of the Justice Department that the
laws of the country were being violated, .the matter was being set aside
because of considerations ~f higher c&noern. I mean to formally notify
the Congress that the law was being disregarded would~invite a hor-
net's nest of protests and I just do not see how as a practical matter
you could proceed in this way.
Mr. KAUPER. F think it would be extremely difficult, Mr. Chairman.
Senator CHURCH.' Still it is very irritating for us to find out many
years after. the fact what happened behind closed doors and until this
subcommittee brought the fact to light very little ~~as known pub~
licly ~bout whatever happened to the antitrust action against the big
oil companies.
Mr. KAUPER.~ Well, I ~think, Mr~ Ohairman, bringing to, light some
of the material by your subcommittee probably informed all of us
about something of what had happened, too.
Senator CHURCH. That is right.
VERTICAL INTEGRATION IN THE PETROLEUM INDUSTRY
Mr. BLUM. We have in the course of these hearings de1~el9ped a con~
siderable amount o~ material on the ipipact of vertical integratiofl in
the petroleum industry, that is~ the effect on the marketplace of having
producersof crude also be in the business of transporting, refining, and
m~trketing, and there is considerable suggestion that people who are
not in the business of producing crude are at a serious competitive
disadvantage.
Is this one of the considerations that. you are taking into account
in the course of this inveatigation? ~re you considering looking at
breaking up the vertical integration of this industry as a possible
remedy?
Mr. EAUPER. I think you have to keep in mind-and I have to
be a l~tt1~ careful because I do not want to be in the position of com-
menting on a sister agency's proceedings-but as I recall, there ~vas
dialogue this morning with Senator Case on this issue as well, that
the Federal Trade Commission, of course, has a proceeding against a
number of the major oil companies in which vertical integration is a
part of the complaint.
I do not think it would be appropriate 1~or me to comment on that
particular proceeding other than to say that because it is ongoing and
because of our normal liaison procedures with the Federal Trade
Commission we are not directly involved in the question `as you
presented it, that is, should we take steps to divest or whatever would
be necessary to break tip that vertical relationship. That does not
mean it is an irrelevant fact to assess the impact of some of these
other arrangements, it is a competitive fact of life and obviously has
to be understood in order to fully analyze some of these other arrange-
ments.
But I think on the question of vertical integration so far as it might
be a major focus of antitrust inquiry at the moment, that is before
the Federal Trade Commission now.
45-426--75--5
PAGENO="0066"
62
Mr. LEVINSQN. What happens if the Federal Trade Commission
budget is cut by $1 million? Mr. Whitten's subcommittee is apparently
going to cut it, we understand. That $1 million would in e~Fect,
eliminate that special oil group they have formed. Does that mean a~
long as FTC is charged with this issue you will step aside and leave it
to them, but if they are undercut by bUdgetary considerations that
you ~wi1l step back into the issue?
Mr. i(AuPER. Well,I do not know that we have crossed that bridge
with the Federal Trade Commission. I think that cut would be an
unfortunate event. I am not altogether sure whether the impact of the
cut would be felt on that particular proceeding or on the broader
energy study which Congress has in effect ttsked the Federal Trade
Commission to keep going.
If th~ Commission were to reach a point where it said we no longer
can proceed with this then I suppose `there is a question whether, at
that point, we should step in and see what we can do,
Mr. LEVINSON. The reason 1 asked that is that I guess th~ part that
really disturbs us is the sense that the Aiititrust Division of the Justice
Department is not in the forefront in insuring that the antitrust laws
are an effective vehicle for enforcing the competition policy of the
Government.
Let me refer to an article which appeared in the London Economist
of May 4, 1974, in which after Mr. Jamieson, head of Exxon, had given
a press conference in London, they state that:
There are still some nagging questions to ask Mr. Jamieson. The German Cartel
Office alone of the industry's world critics seems'to have fastened onto the main
one. Last year, supplies tightened even befOre `the oil embargo gave them another
squeeze but did the resulting price rises reflect these niarket forces alone, or d~d
concerted action by the companies come into the picture, too? The companies
nianaged to assert their oil supplies delivery quite effectively during the embargo.
Who can be atsured they acted `independently on prices? As the German Cartel
Office has ~iso discovered, no' one country on its own can get to the bottom of this.
My `question is two-fold. One, why is it that the German Cartel
Office has to be in the forefront? Why is not the U.S. Government in
the forefront through the Antitrust Division and, two, what efforts
are now being made or will be made in the future to coordinate with
offices like the German Cartel Office to insure a coordinated approach
rather than a fragmented approach on the part of governments?
FEDERAL TRADE COMMISSION ACTiViTY SHOULD BE CONSiDERED
Mr. KAUPER. I think so far as the Antitrust Division and its
activity, it is probably not accurate to judge the Government's
response in antitrust terms based solely upon what the Antitrust
Division does. We have the Federal Trade Commission which is in-
volved in a great deal of this activity. This Congress has itself re-
quested them to play a very major role in the whole question of energy,
and we are very much concerned that we do nothing to impede that
vei~y important case which they have pending.
That does not mean we are not looking at questions of whether there
may be criminal violations involving hardcore collusion, but I think
one has to recognize that we have two agencies that are in\rolved, not
just one.
Now, insofar as the relationship with other cartel offices, we have
had discussions with the German Cartel Office, we will be having more.
PAGENO="0067"
63
We have periodic discussions with the cartel office of the European
Economic Community and that has included some discussions of /
petroleum. Those presumably are going to continue.
I think in assessing, however, the role of the German Cartel Office
one has to keep in mind the Germans have quite a different statutory
scheme than we do and they can deal with what they refer to, as abuse
of economic power, which in their judgment, includes certain price
conduct which may not be conspiratorial, it may be unilateral in
circumstances where we cannot act. They have quite a. different
scheme and quite a different way of going at the thing.
I think you are quite right that the German Cartel Office's ultimate
bottom line was that there is not much any individual country, at least
so far as a country the size of West Germany, is able to do about this.
As I recall, I think that is a fair statement of what their conclusion
was.
Senator CHURCH. Senator Case.
Senator CASE. One of the things that is very intriguing to me is the
question of how we can acquire adequate information from the
executive branch as to what it is doing without writing a statute which
requires it, and also. at least by implication, validating that action.
There will be a decision to prosecute, to delay prosecution,. to take
other action in relation to the national security or a particular security
issue which may be active at that particular moment. I am just asking
you as a lawyer, would it not b~ possible to require information as to
all matters of that kind in some fashion without the same statute
authorizing it?
Mr. KAUPER. You are talking, I gather, about simply. supplying
information to the Congress?
Senator CASE. Yes; and making it public generally, too, as far as
that goes.
Mr. ,KAUPER. Well, I think that obviously one answer to. part of
this is greater openness in the operations 91 the place like. the ~nti~
trust Division generally.
There was reference to the suit, for example, that Mr. Nader
brought. Prior to that time, although we did not finalize it until
after the suit, we were moving in the direction of greater openness.
We have now amended our rules, for example, to provide the Business
Review Letters be made public, so that if we either grant or deny a
letter that is a matter of public knowledge. This, it seems to me, is a..
very desirable way of proceeding and it not only tolls the Congress, it
tolls the public as well.
Nov, if we were into a national security matter, a real national
security issue, then I suppose there might be some reason not to
advise the public and it would be necessary to find some way to. notify
the Congress. Whether any such issues are likely to arise I do not know..
But in explaining why there is a national security issue, there could be
some problem in terms of how much information is made public. But
I would suppose it is possible to work some kind of system of notifica~
tion without saying that we have built into the statute some whole
new exemption, if that is what your question is. .
Senator çAS~. I think it applies to the question of antitrust laws
and other actions, too. S~ometimes if the national security is deeply
involved eiiou~h I would say the President has to break the law and
hope that he will be supported by the peopie afterward. President
PAGENO="0068"
64
Lincoln did this in the matter of a number of actions that he took,
though quite contrary to the Constitution, and other Presidents have
done this, too. This does not make his actions lawful, at leest iiot in
the sense that there is something you have said ahead ef time he can
do, but I think if you have inherent powers this is the kind of inherent
power he has. It really is not a power at all, it iS an obligation to
take a chance.
Mr. KAUPER. I think that is exactly right.
Senator CHURcH. Only to be exercised in the extremities.
Senator CAs~. Only to be exercised iA effect, to get away with it.
Mr. KAUPER. Yes, sir.
Senator CASE. But knowledge is also important here.
NATIONAL SECUEITt GOES TO "REASONABLENESS" OF CONDUCT
Mr. KAUPER. I think, Senator, we would probably all agree, and
maybe it is the most extreme example that one could never envision,
but if one can imagine a' Go~~ernment law enforcCment action in. cir-'
eümstances where the effect of filing suit might be war, I take it we
would probably all agree that we would opt for nnt filing the Go~-
ernment antitrust actioi~. I suppo~e that perhaps is the fnrthest
extreme.'
"Then, it is a question `of degree in terms of what you mean by a
~ecurity ~tiéstion, and whether you are' really talking about overn~iding
a straight antitrust judgment.
Now, in terms of when you report, you have a rather difficult issue
there because `it is nOt very common that you `simply arrive at a
judgment that there is a clear violation of the `antitrust laws, or any
other law, fcir that%ia'tter, and because of a' security reason you are
~not going to enforce it. In most antitrust questions foreign `policy
considerations-to the extent that they ever do arise, and it is very
unusual really-are one factot in deciding whether the conduct is it~
self unnecessary, unreasonable, and, therefore, in violation' Of the
statute. It is not a question of override. `I think, hOwever, as I indi-
cated to the chairman, that the documents that were put out with
respect to the oil cartel case, do tend to indicate at least a belief that
what was being done was an override.' I think it actually was reported
in those terms.
Mr. BLUM. Perhaps it was a little less formal than that override,
but we did have testimony from former Attorney General Mitchell
that he received a phone call from U. Alexis Johnson at the State
Department with respect to the Business Review Letter issued in
January 1971 stressing the urgency of the situation `and the need for
immediate approval. Perhaps that is less of a directive but it has an
effect on the weighing and balancing of the law and actual needs of
national security.
Mr. KAUPER. Yes, I suppose n.ne can say that in that sort of cir-
cumstance that simply having a statement we need this by thus and
thus a date is simply a view of another sister agency which one takes
into account or does not take into account depending on how he views
the information that he needs. I am not sure I view the phone call that
says the interest of X department is as follows as constituting some
kind of an overriding force any more than to agree that I would not
view' it any differently than if I got a similar call from a Member of
the Senate.
PAGENO="0069"
Mr. BLUM. Former Attorney, General Mitchell viewed it that way
and that iswb at he iudica~ted in his testimony. I1~' took `it very, very
seriously.
Mr. I~AUP~R~. Of, cpurse, obviously, there becomes a point when
precisely that is what may happen.
Mr. LEVIN50N. Your real test will come in contrary circumstances
really, when if you conclude that you have serious issues in connection
with Saudi Arabia and the activities of the four Aramco partners that
you want to push fnrther as to whether that will be alleged to interfere
with, delicate negotiations with Saudi Arabia now takimr place over
the political arrangements between the two countries aria whether a
vigorous antjtrust action of whatever nature interferes with that.
That is the context really, in which the national security political
cousid~ration really comes up.
Mr. KAUP~R. Yes, sir.
Mr. LEVINSON, The concern is whether antitrust in the international
envirCn.ment, ~f it is subject to national security and international
political considerations, given the history that we have seen, can
really be effective. rrhat is the test and that is what one has to ask,
and if it cannot afford these overriding considerations then one has
to ask what afternatives do we turn to?
INCREASED COORDINATION DESIRABLE
Mr. KAUPEE. That is right. That is a~ fair enough question. I am
not totally sure I can an~swer in terms of whether or not at a given
monieui~, with a given proposed action or som~tbing ~14ch is being
contemplated, there ~re such security or political r~sons that that
course is not followed. If that is the case, and cer1~airdy there is some
indication, of that sort of judgment having heen made in the past,
thentliequest~on i~ how then do ~ e ~t~y to deal with it?,
On~, of the problems, of course, `is that the actions of. a single govern~
ment may themselves provoke a kind of security problem whereas
actions by ..~ ~iumber would not and, therefore~ one of the.answers may
lie in the form of increased coordination among the enforcement.
agencies of a number of different countries where there is now a much
stronger unity of purpose among a whole series of nations rather
than one nation coIning in unilaterally and in the eyes of many being
disruptive. As this committee, of course, is worrying with the problem
of multinationals, this is one of th~ questio±is, it seems to me, which
is now. being discussed as to whether we need some kind of increased
coordination or some kind of convention which ha~ a broader base
than a single, country for enfor~ement purposes.
Mr. BLTJM. Do you have a legislative proposal `with i~espect to the
exchange of information among antitrust authorities?
Mr. KAUPER. We do not at the moment, no.
Mr. BLUM. Would you want to develop one for us, because this is an
area very much of interest to the subcommittee and one we would be
anxious to consider.
Mr. KAUPER., I think that prior to the submission of any such
legislation, and I do not mean to suggest that it is inappropriate, we
have bad discussions with some other countries, their enforcement
officials, about, this problem, and I think that is the spadework that
really has to be done first in order so that we all can understand what
the restraints are on each other.
PAGENO="0070"
66
~Mr. BI~tM. Is that spadework underway?
Mr. KAu~rn~. Them have been- some discus~ions and there are going
to be some more, yes.
Mr. BLUM. It would be very helpful if you could inform us of the
outcome of those discussions?
Mr. KAUPER. We would be happy to.
Mr. BLUM. So at an appropriate point legistation could be drawn?
Mr. KAu~ER. Yes.
* Mr. BLUM. `The question was raised about whether it is appropriate
to use antitrust internationally-what happens to a domestic com-
petitor who is left behind if there has been an override or weighing and
balancing in which national security has meant no antitrust enforce-
ment internationally. Of course, that do~s not happen to the domestic
competitor, and what you get is an uneven situation where some
people in the marketplace obey the law and some people do not.
Mr. KAUPER. If you are assuming an override situation I suppose
that is true, yes.
Mr. BLu~u. Is that one of the factors you take into account?
Mr. KAUPER. Yes. I think obviously one has to concern himself
with whether either enforcement action or a lack of it is handicapping
a particular group of competitors or indeed a particular significant
competitor.
Mr. BLUM. One final area that involves the tax laws.
TAX LAWS AND COMPETITION
The foreign tax credit gives an enormous competitive advantage to
people who keep their refineries and produce their oil outside of the
United States.
Has the Antitrust Division attempted to study that kind of com-
petitive impact on domestic rofiuiers or even factor in the question of
competition policy to the Internal Revenue Service and relevant
committees of Congress?
Mr. KAUPEE. I am not sure I could say that we have on that
specific question.
Mr. BLImI. Should you not be doing that because of the dimensions
of the problem?
Mr. KATJPER. You may very well be right. We do spend a fair
amount of time with other departments and agencies trying to con-
vince them that competition policy is not simply the province of those
who enforce the antitrust laws. Indeed, I think there are a good many
departments which are fully cognizant of that and which do concern
themselves with competition and that has got to be part of the answer
some of these problems in the international arena as well as domestic.
Other Government programs, other Government policies, have to
take into account competition as well.
`On the particular one you suggest, I suppose, perhaps we ought to
have some immediate concern with that problem. We are not, however
tax experts in any sense of the word.
Mr. BLUM. Indeed. But I suggest the co~ucern is immediate, the
dimensions in terms of the amount of money involved is very large,
and there is pendipg legislation, an array of legislation on the subject
and it will probably be very helpful if you put some effort into that~
PAGENO="0071"
67
Finally, the Internal Revenue Service has for sometime been en-
gaged in attempting to audit oil company tran~fer prices and I wonder
if there has been any exchange of information between the Internal
Revenue Service and the Antitrust Division on this question~ par~
ticularly with respect to what constitutes a price and whether there is a
market, which seems to be the problem that perplexes IRS. I RS is
confronted with a situation where the companies tell them there is no
market in crude oil, we sell it all to ourselves. Obviously, the question
of whether there is a market is one that has been involved in investi-
gating the buy-backs. Is there any communication between the two
agencies?
Mr. KATJPER. I am not sure there has been communication on that
particular issue. 1 do not know that we have received any inquiry
from them or been particularly plugged into their decision on whether
there is or is not a real market. I cannot say we have had any direct
contact with them on it.
Mr. BLim~. Finally, is your staff equipped to handle these questions?
Is it adequate?
Mr. KAUPER. Well, that is always a question of judgment and de-
gree, I suppose. I think my answer to that would have to be that we
are going to have to add staff to the unit as this goes along. That will
within any normal kind of resource allocation mean taking resources
ofT of something else and in that sense I suppose I would have to say
no, not totally adequate.
On the other hand, there are other matters of lesser consequence
froni whom we can take people or from whom we can take new pe~ple,
people who are coming in and put them on this kind of matter a~
opposed to something else. I am not sure that the consequences would
be disastrous.
Mr~ BtuM. Given the dimensions of this industry, its impact on the
economy, is not there really a need for some permanent expertise in
the Antitrust Division on oil?
Mr. KAUPER. Yes, sir.
Mr. BLUM. And is it not fact that you ha~re not really had that?
Mr. KAUPER. We have lost a good part of it, as I think you know,
and are now trying to rebuild it. That is indeed part of what we are
now trying to accomplish.
Mr. BLUM, Is there any legislative remedy that you feel is required
to give you a strong~er hand in solving some of the problems we have
just discussed?
Mr. KALYPER. Well, I think that probably the immediate legisla-
tive needs are more procedural than substantive. We have pending,
for example, before the Congress at the present time a proposal to
increase our authority with respect to the use of the so-called Civil
Investigative Demand, which is one of our primary information-
gathering devices in terms of compelling the production of ihforma-.
tion, at least in situations where there is no immediate criminal conse-
quence involved and where we could not appropriately use the grand
jury. We view that as a very important piece of legislation.
Mr. BLUM. Then, in addition to the Federal Energy Office, the
Antitrust Division is having data access problems. Perhaps we should
include you in the access legislation.
PAGENO="0072"
68~
Mr. KAUPER. I do not want to be misunderstood on this. The Civil
Investigative Demand legislation has nothing particular to do with
this industry. It would broaden our enforcement powers in. terms of
any investigation. I do not know that I would ntean to suggest from
that we have peculiar problems of information in this industry7 and I
do nOt think I would want that connotation put on it. I do not think
we have problems with this industry that are too much greater than
we have with any other.
Mr. BLTJM. Is there any other legislative suggestion?
Mr. KAJPER. I think this is the major item we have pending here
at the moment.
Now we have also sought some other things which I think re~illy do
not bear very directly on the problem that we are discussing today.
Mrs. LEwIs. Senator Case asked me to ask a few questions. He was
a little curious about some of the testimony that John MeOloy gave
in response to some of his questions on February 6. McCIoy said, and
I ani~ quoting now from the transcript: "We had several business
review letters. I was anxious to get as many as I could. Several times
they said don't bother us any more, we can't be giving you. business
review letters every time we take a step." That is the end, of Mr.
McCloy's statement.
Was it in fact ,a business review letter that Mr. McCloy wanted, do
you know?
NEGOTIATIONS FOR BUSINESS REVIEW LETTERS
Mr. KAUFER~ Well, he certainly has sought business review letters;
yes: There is some question, I think, whether at the time of ~the first
business review h~tter whether he specifically waflted something in the
form of a business review letter. 1 was not with the Division at that
tuiTe, but I think, as I recall, I think perhaps that he actually wanted
it, ,ii~;tbe form of a business review letter as such. Certainiy~ pa later
occasions there have been requests for such letters~
Mrs. LEWIS. Having gotten one, he knew what lie wanted~ to ask
for? , ,
Mr. KAUPER Well, I ,~uppose you could look at it that way.';
Mrs., Luwis. I ask~d because thei~e wa~ a certain amount of negotia-
tion going on between the Justice Departrnent'and the State Depart-
ment and Mr. MeCloyas to exactly what the quid pro quo was, was
there ITet?
Mr. KAUPER. At what point in time are we talking about?.
Mrs. LEWIS. At various points. Let Us take the period during the
Tehran trip negotiations, the first day.
1\4r. KAUPER. You are talking about 1971?
Mrs. L~WIS. 1971, yes.
"Mr. KAUPER. Well, whether there were a certain degree of negotia-
tions I am not quite sure. Again, I am a little handicapped because I
have to base it on what others have said, not having been around at
that time. I suppose it could be characterized as that iii terms of
meetings between staff personnel, Mr. McCloy, some of the oil people,
in terms of what it was they really wanted, and what it was they really
proposed to do, among other things.
You have to keep in mind that the companies were suddenly con-
fronted with a demand by OPEC to appear. The Justice Department
was confronted with a request from them and things proceeded on a
PAGENO="0073"
69
kind of hurry-up basis. I think that is quite clear. Whether you char-
acterize it as negotiation or discussion or whatever, that fact was
brought forth pretty clearly.
Mrs. LEwIs. According to the testimony of Ambassador Akins, on
October ii, he implied in his testimony that the Justice Department
could have had someone present at the London policy group meeting
but the Justice Department chose not to make this request.
Does that jibe at all with anything you niight have been told?
Mr. KAUPER. I think that is probably an accurate stater~ent.
Mrs. LEwis. Do you regret now that this request waS not made?
Mr. KAuPER. No; I do not think so. Let me put it in terms of even
going back to the days when I was in practice and 1 had instructions
to keep clients out of trouble at trade association meetings. Every-
body always knew that if a lawyer wqre present there would be no
discussion of things that were outside of the bounds anyway. If there
were going to be such discussions they would occur somewhere else. It
has never seemed to me that the presence of a Division lawyer at a
given meeting is any assurance at all that there is nothing going on, it
simply means that that particular meeting at which he is in attend-
ance at is not a meeting at which other items ave. discussed, if there is
a propensity to 4iscuss such items anywhere.
Mrs. LEwIs. Does your skepticism extend also to the twice-daily
reports that you received indirectly from Mr. Mcaoy as to what was
going on and what was not going on?
Mr. KATJPER. I suppose, sure, it is possible one does ~iot get full
reports or, that Mr. McCioy does not get full reports. But I would
hasten to add that I have no basis whatsoever ~n terms of the reports
to question his good faith if dealing with us. At the moment I have
absolutely none.
I think one always has to recognize if a group of businessmen,
whatever the industry, have come to a conclusion that they want to
fix prices or allocate markets they normally do not do it in the pres-
ence of lawyer, nor do they keep mihutes of it, nor do they file reports
of it.
Mrs. LEwis. We have not yet printed the Libyan Producers
Agreement but courtesy of a Weekly Oil Journal we have got a good
copy of it and this is the agreement of January 15, 1971, section 2,
subpart (e), and it essentially says "If a party cannot get Libyans
crude because of the Government of Libya restrictions, other suppliers
shall be obligated to provide the preexisting european and We~tern
Hemisphere customer commitments only." That is to say Persian
Gulf backup crude, to use the lingo, could be available bnt only to
the extent of preexisting market share of the independent producer in
Western Europe and the Western Hemisphere.
Does that not seem to have a certain bearing on restraint of trade
within the Western Hemisphere like the United States?
BACKUP CLAUSE NOT A MARKET DIVISION
Mr. KAtJPER. Well I suppose your suggestion is that in and of itself
a formof marketing differentialis saying we will hold a certain marl~et
share; whether or not one can legitimately read what is essentially a
backup agreement among them, which is designed after all, to hold
the kind of status quo as in and of itself some form of market division?
PAGENO="0074"
70
I do not think I would read it that way. It seems to me if you have a
situation where the question is how much call do you have for, call
it backup oil or whatever you want, obviously there has to be some
concept of what that commitment is, and to put it in terms of their
existing relationships it seems to me is hardly surprising and I do not
know in and of itself that that carries any connotation that it is out
of bounds.
Mrs. LEwIS. We have been given to understand one reason Japan
is not included in this sort of freeze that subpart (e) is talking
about is that it was feared that an attempt might be made by the
independents to penetrate the Japanese market to a greater extent
than hitherto, if their crude sources were from the Persian Gulf rather
than from Libya. Does that seem to you to make any sense?
Mr. KATJPER, I am not altogether sure I am followino~.
Mr. LEwis. Backup oil comes from a different geographic location, is
more accessible to Japan, and the argument seems to be that if they
were getting their backup crude from the Persian Gulf they might be
tempted to try to catch the very much more profitable Japanese
market, so they did not include Japan in order to keep the inde-
pendents from having a go at it.
Mr. KAUPER. Well, here again, keep in mind the context in which
you have this. You have it in the cOntext of an agrOement among these
companies to supply a portion of what I assume is their oil in what is
also viewed as a kind of emergency situation.
Now, if one assumes that ~therè Was some merit to the idea of a
sharing agreement, then it seems one also has to recognize that
companies are presumably not going to enter into a sharing agreement
if the effect of it is going tQ be that they are in a sense going to take
away customers of their own.
I have some real difficult~r with viewing that as an unreasonable
restraint in and of itself.
Mrs. LEwis. I appreciate that.
In his testimony on January 31, Mr. Rooney of Bunker Hunt said
before the sharing agreement was signed the companies were obliged
by their fear of competition to be tough in their negotiations with the
Libyans, they were afraid that if tF~eir competitors got a better deal on
price or participation theit oil would become too expensive. Then he
said, "When you go into business you always worry about what your
competitor is doing. If you can pass it on they can pass it on. And
having the same terms of reference you kind of eliminate the psy-
chological fear of being able to pass it on~" I am quoting this, "because
you are in the same boat. This was a fallout of the safety net."
It seems to me to imply the safety net agreement helped reduce
price competition between all of the participants. This is the way I
read what Mr. Rooney was trying to say.
JOINT POSITION WORKS BOTH WAYS
Mr. KAUPER. I am not sure I would read it that way. I think what he
was suggesting, perhaps because of the presence of the agreement the
stance taken by individual companies was not as strong as it might
otherwise have been, There obviously is considerable debate over what
the effect of such an arrangement may be, that is, did it strengthen the
PAGENO="0075"
71
hand of the cothpanies in terms of their bar~ai~iing, knowing that if
they took a hard position and were cut back there would be oil avail-
able to them. It certainly would not be unreasonable to assume that
that would strengthen their hand, Or did it, by saying you will not be
subject to some l~ind of competitive pressures, in essence say to them,
well, don't worry about it, because in a way we are all in the same
situation.
I think the feeling in the Division at that time was that this would
strengthen the hand in terms of dealing with the Libyans and that in
addition, it provided some protection to some of the smaller companies
who were peculiarly dependent on Libyan crude.
Mrs. LEwis. Mr. Rooney was from one of the smaller indekendents,
peculiarly independent.
Mr. KAUPER. Yes.
Mrs. LEwIs. And his reading of it was rather different than yours.
Mr. KAIJPER. Yes, and I must say that in our discussions that we
have had with a number of these companies, including Bunker Hunt,
their feeling at the time was that they thought this was a good idea,
that it would strengthen their hand. Now, it may not have worked
the way they anticipated, but the idea-there is some precedent-for
example, in the United States the airline agreement, I think somebody
referred to it here this morning, is the same basic kind of idea. More-
over, I think it ought to be understood that there is nothing in that
agreement that wo~ild have precluded any company from cutting its
own deal. Indeed, certainly the history of the Libyan neg.otiatiQns
would indicate that some of them did.
Mrs. LEwIs. I want to quote Mr. Rooney one more time. He talked
about the independents having to start something called, I'm quoting
again "a leapfrog committee". The independents were afraid when
the negotiations were split between the Persian Gulf states and Libya,
the majors negotiating with the Persian Gulf countries might get a
l~etter deal than the independents in Libya and they feared again for
their share of the markeL Mr. ~ooney testified that he told the majors
in the London policy group meeting "You are selling us down the
river" when it was decided the negotiations would be split. Is it not
your view that the decision to divide the negotiations between the
Libyans and the ind~endents and majors on the one hand and Persian
Gulf producers and the majors on the other, had the anticompetitive
consequences that Mr. Rooney seemed to feel it did?
Mr. KAUPER. Well, I do not think one can conclude that. There has
been a good deal of talk about that decision to split the negotiations
not so much in terms of whether it worked to the detriment of a
particular group of producers as opposed to another but whether it
weakened the hand of the oil companies in toto.
That was a judgment, it seemed to me, that was a business judgment
or alternatively perhaps a judgment imposed by somebody else, but
certainly not, it seems to me, an antitrust judgment.
Mrs. LEwIs. You do not think that the Business Review Letter
somehow required that negotiations be unified?
Mr. KAUPER. No, 1 do not think there is anything in the Business
Review Letter that required that
Mrs I EWIS So ~ ou do not think somehow the Business Review
Letter did not apply to the negotiations once they were split?
PAGENO="0076"
72
Mr. KAUPER. No; it seems to me that that was within the context
of the Business Review Letter.
Mrs. LEWIS. Thank you.
VIGOROUS ANTITRUST ENFORCEMENT NECESSARY
Senator CHURCH. I have no further questions. I do want to make
this comment. I think that it ought to be the responsibility of the
Department to vigorously enforce the antitrust laws, and judging
from what our hearings have revealed, I cannot think of an industry
that needs a more thorough or penetrating review when it come~ to
the antitFust laws of this country than the oil industry, and I should
think that this would have top priority within the Department,
Now, if in the future there comes a time wI~en the Department is
again sidetracked by `the President, or a decision of the State Depart-
ment, taken in the name of the national interest or the security
interests of this country, I would hope that the Congress could be
informed so that we might reviewt~he matter and participate in some
fashion.
The way this whole scet~e is `opening up again, ~he Department of
Justice is challenged to look at the new arrangements with great care
and to try nnd inject ~ larger measure of competition into the activities
of the big oil companies, it should either do that or give up the effort.
Perhaps we `have long Since lost the fight against monopoly in this
country. Giant combinations see~a to grow and to dominate the
economy as never before d~spit~ our antitrust laws~ Possibly the
Congress should rewrite these laws in ways that would make them
more effective, but the Department has a very central role to play
in all of this and I hope very much that you will play it.
Mr. KAUPER. We will try.
Senator CHURCH. If there are no further questions, thank you very
much for your testimony.
The hearings will resume at 10 a.m, tomorrow morning.
[Whereupon, at 3:50 p.m., the hearings~ were recessed, to reconvene
at 10 a.m., Thursday, June 6, 1974,]
PAGENO="0077"
MULTINATIONAL PETROLEUM COMPANIES AND
FOREmN POLICY
THIfl~SDAY, JUNE 6, 1974'
UNrr~r STATES SENATE,
Sum~oMMITTEE ON MULTINATIONAL CoRroEATro~S,
OF THE COMMITTEE ON FOREIGN RE~IoNs,
Was? gt'o12~, D.C.
The subcommittee met, pursuant to recess, at 10:05 a.in., in room
4221, Dirksen Senate Office Building, Senator Frank Church [chair-
man of the subcommittee] presiding.
Present: Senators Church and Case.
Senator Cntmcu. The hearing will come to order.
SWEARING OF WITNESS
Mr. Tavoulareas, I wonder if you would stand and take the oath,
please?
Do you swear that `all of the testimony you are about to give will be
the truth, the whole truth and nothing but the truth, so help you God?
Mr. TAVOULAREAS. Yes, sir.
Senator Cnui~oru. I note you have a prepared statement. Would you
like to read it at this time ~
TESTIMONY OP WILLIAM P. TAV~ULAREAS, PRESIDENT, M0~IL
OIL CORP., NEW YORK, N~Y.; ACCOMPANIED BY GEORGE A. BUR-
BELL, GENERAL COUNSEL, MOBTL OIL CORP.
Mr. TAVOTJLAREAS. Yes, Senator, I have a prepared statement and I
give you a choice of whether you want me to read the entire statement
or whether you would rather me put the statement in the record and
read excerpts from the statement.
Senator CHURCH. I would prefer that you take the latter course, if
that is acceptable to you, because of the time considerations.
Mr. TAVOIJLAREAS. It certainly is.
My name is William P. Tavoulareas. I am president, and a director,
of Mobil Oil Corp. I have spent almost my entire business career with
Mobil.
PERFORMANCE OF PETROLEUM INDUSTRY POST-WORLD WAR II
I start with the proposition that the performance in tb~ post-World
War II era by the international petroleum industry of its function of'
meeting the Free World's petroleum ~ecd~ with. abundapt ~uppli,es. at,
(73)
PAGENO="0078"
74
st~abl~ and moderate prices must be judged excellent by any reasonable
standard.
The industry managed to carry on this international `business on a
commercial basis and achieve the record I have described through
three wars in the Middle East, the Korean war, and the Vietnam war.
OPEC DEMANDS
Commencing in 1970, certain members of OPEC, and then OPEC
itself, became more aggressive in their demands for alteration in the
terms of existing arrangements. These negotiations were conducted in
an atmosphere of threats of unilateral action if the companies did not
submit to their demands. In addition, the demands of certain of the
OPEC countries began to have definite political overtones. Even in
this period~ however, the industry in the various negotiations starting
in 1971 demonstrated an ability to continue to negotiate and operate
on a commercial basis. It was only in the fall of 1973, coincident with
the outbreak of the fourth Arab-Israeli war, that the Middle Eastern
producing countries took united ~nd unilateral action which brought
on the first unmanageable crisis of supply in the Free World since
World War II.
It was political, rather than commercial actions which intervened
in the relations between the producing countries and their customers.
These political decisions eventually induced the unprecedented uni -
lateral, nearly fourfOld, increase in the cost of oil.
PRIVATE OIL .COMPANY APPEOACH VEIWUS GOVERNMENT APPROACH
Considering this record, the private oil company approach has
much to recommend it over the alternative of government-to-
government confrontation. If the matter of oil supply becomes a
government-to-government matter, commercial problems inevitably
become political problems. Private oil companies tend to insulate or
reduce political problems.
In this connection it has been asserted in testimony before this com-
mittee that the negqtiations which were carried On from 1971 until
1973 with the `OPEC countries were disastrous. I thoroughly disagree
with this appraisaL These negotiations actually were quite successful.
EFFECTS OF 1973 ARAB-ISRAEL CONFLICT
By and large, the negotiated agreements between the oil companies
and the producing governments resulted in the flow of oil at reason-
able prices. `Coincident with the outbreak of the Arab-Israeli conflict
in 1973 the Middle Eastern producing countries took the matter of
supply and price into their own hands. The basic facts are well known
to you.
If the war had not intervened the supply picture would not have
been critical and posted prices would not, in my opinion, have reached
$11.65 in the Persian Gulf.
Much has been made in these hearings of the handling, or `what at
least some members of the subcommittee seem to regard as the mis-
handling, of the so-called Oil Cartel case.
PAGENO="0079"
75 -
COMPETITIVENESS OP THE INDUSTRY
I would like to address myself to the conclu~ion your chairman has
drawn from this episode in a letter of April 11, 1974 addressed to
John J. McCIIoy to which Mr. Mc'Cloy has now, I understand,
responded. In that letter the chairman deplored the failure of the U.S.
Government to pursue the Cartel case to a successful conclusion which
would have, in his words, "injected competition into the industry." He
stated, and I quote, that if such a course had been followed:
our country would find itself in less dire straits today in the area of
energy supply.
an industry more Infused with multiplicity and pluralism would [not]
have built s~ little space capacity for the day oi~ reckonii~g with OPEC.
Judged by any reasonable criteria, the record shows that the indus-
try has been highly competitive. You have had ample testimony dem-
onstrating that point.
JOINT VENTURES AND THE CARTEL CASE
There is no logic in the suggestion that if the joint producing
ventures in the Middle East had been broken up as a result of the
Cartel case this would somehow have improved the bargaining posi-
tion of the industry in dealing with the Middle East Governments
in the 1970's.
Consider the bargaining position. The pattern of oil development in
Libya comes closer to the type of situation which is apparently thought
preferable. There were many small separate concessions and many
independent companies with interests in the country. What did this
do to the industry's bargaining position? Far from strengthening that
bargaining position, not only was the industry weakest in Libya hut
it was the Libyan Government which, in the summer of 1970, took
advantage of this condition of pluralism to start the chain of events
which eventually led to the complete unilateral action of OPEC in
October 1973.
There is, furthermore, no support of any kind that I am aware of
for the proposition that the result of the joint producing arrange~
ments which existed in the Middle East was inadequate spare capacity
to meet any demand reasonably to be anticipated~
FREE WORLD CAPACITY/FREE WORLD DEMAND
You have received a statement from Mr. George Piercy of Exxon
detailing their estimates as to available Free World capacity in rela-
tion to Free World demand. Those figures indicate a consistent excess
producing capacity in the Free World even to this day.
The conclusion I draw from these figures i~ that the petrolenm
shortage which had begun to emerge in 1973 but whIch actually
became a crisis only as a result of the war-induced embargo was not
the result of any failure of the industry in estimating demand. Rather;
it was the result of their failure accurately to predict the impact of
unilateral and unanticipated governmental action on the actual avail-
ability of planned capacity.
PAGENO="0080"
COMPANY RISES
Nor did the existence of the joint producing interests in the Middle
East in any material way prevent other companies from entering the
area t~n~I securing valuable additional concessions.
I suggest to you that the reason there are&t more American corn-
panies in the Middle ~East with developed reserves today has nothing
to do with the joint ventures there. Rather, it is the result of the
unwillingness of companies to take the risks involved, particularly
those who had no assured outlets abroad for any production they
might find. Stated another way, it is the result of conscious, negative
investment decisions by many substantial American oil companies.
It has nothing to do with whether or not Aram~o, IPC, or the Iranian
Consortium is a joint venture.
ROYALTY AS INCOME TAX
Let me comment on one other matter which has been touched upon
in these hearings.
It has been stated that that decision resulted in the conversion of a
royalty into an income tax. The fact is that no royalty was, or ever
has been, converted in Saudi Arabia to an income tax. A royalty was
paid prior to 1950 and has been paid continuously since that date to
the Saudi Arab Government.
It has also been suggested that the result of these foreign-tax-credit
pI'ovisions is that taxes paid in Saudi Arabia can somehow reduce
U.S. income taxes to be paid on income attributable to operations in
the United States. This was not the case in 1950 and has never been
the case since. Let me repeat that statement. The foreign tax credit has
never reduced U.S. income tax on income derived from operations in
the United States.
Finally, there is no basis of which I am aware for the suggeStion
that this decision created an incentive for U.S. oil companies to invest
in prQducing ventures outside the United States, rather than within
the United States. The fact is that if a company were to choose
between a foreign area and the United States solely on the basis of the
amount of taxes to be paid on a given exploration venture the clear
choice would have to favor investment in the United States. This is
so because the total taxes paid on a foreign venture would always be
at least equal to those paid in the United States and could be greater.
In recent years taxes on foreign exploration ventures have been
greater in every case of which I am aware.
OVERSEAS EXPLORATION
The actual reason for exploration overseas has been very simple.
First, the oil potential overseas was very great. Since World War II
the oil industry's foreign discoveries have amounted to more than 10
times total U.S. reserves at any one point in time.
Second, there has been limited prospective acreage available for
exploration in the United States and, particularly in recent years,
significant environmental restraints.
As a matter of information, Mobil's capital expenditures on explo-
ration and production have, notwithstanding these facts, been con-
sistently greater in the United States than abroad.
PAGENO="0081"
77
TTIE FOREIGN TAX CREDIT
Elsewhere in the Congress proposals have been, made to abolish or
mo~1ify the application of the foreign tax credit to the oil and gas
producing operations of U.S.-based companies. Most developed coun-
tries of the world exempt foreign-source income from taxation, or
allow a credit for foreign taxes paid.
For example, many countries; such as Canada, Germany, United
Kingdom, Mexico, and Japan, aliow a foreign tax credit for foreig~i
taxes paid. The Netherlands, France, and Italy', on the other hand,
follow a system of "territoriality" under which any foreign-source
earnings which have borne a foreign tax may be repatriated, without
any further tax.
For existing production such action would simply create a cost dis-
advantage for U.S~~based companies, and therefore, a tendency to
higher prices for petroleum in international trade. Of considerably
more importance is the fact that in the all-important race., for new
concessions it would make the U.S,-based companies less attractive as
c~ricession holders to the foreign country govern,ments than their for-
eign based competitors~
At a time when the United States faces a period in which it will be
a substantial importer of petroleum, elimination of the foreign, tax
credit for petroleum producing operations would seem clearly not to
be in the interests of the United States.
If, through tax policy and other controls, you disable our U.S. com-
panies from competing with their foreign counterparts and' make them
economically unattractive as concession holders to. foreign govern-
ments, they will tend to disappear from the international scene.
VIABLE ALTERNATIVES
In the near term are there any viable substitutes for the handling
of oil matters through industry-producing government negotiations?
Some have suggested that the role of the oil companies be displaced by
direct government negotiations. The arrangement has a certain emo-
tional appeal; however, the examples of direct government negotia-
tions do not give us confidence that this solution would be a satisfac-
tory one. The past records of govei~nment-to-government negotiations
are full of examples of political decisions which have overridden the
oil supply consideration. I submit, `for example, that private com-
panies are likely to do more to protect the public's interest in keeping
costs down than governments wilL
Unless a proper political atmosphere is constantly maintained, a
consuming country government cannot assume that an arrangement
which it negotiates with a producing country will, in fact, be stable
merely because both parties to the arrangement are governments. The
experience of the French with the Algerian oil agreements illustrates
perfectly the fragility of sovereign-to-sovereign agreements incorpo-
rated in larger political settlements.
There is one other very practical problem with any government-to-
government solution. That is, the comp1e~ity of international trade in
petroleum. There are well over 100 countries in the free world which
import petroleum and almost 100 which also export petroleum. It is an
understatement to say that trade in petroleum is multilateral. Saudi
45-426---75-6
PAGENO="0082"
78
Arabia exports go to about 60 countries. Which nation on the import-
ing side is going to he authorized to negotiate for all? Or are all the
importers going to try to sit down and negotiate jointly with Saudi
Arabia? If it's not a joint negotiation, the government-to-government
solution is going to result in bilateral barter arrangements of the kind
France has made, or attempted to make in recent months. Barter
arrangements inevitably tend to Balkanize world trade and, in this
case, to support the presently high price level of crude oil in the Mid-
dle East. But if it is to be a government-to-government solution it
must be one or the other. The first presents imffiense practical diffi-
culties, while the second is clearly undesirable.
If direct negotiation by governments is not the solution, what
improvements can be suggested in the present system? Clearly, it must
be recognized that any action which excludes U.S.-based corporations
will not similarly impede the operation of foreign-based companies or
their government sponsored counterparts.
Instead, the U.S. Government can ~iay a very positive role in creat-
ing the atmosphere necessary to insure the stability of commercial
arrangements in world trade. It must be emphasized to the producing
countries that their emergence as major forces in international mone-
tary and trade channels carries with it a share of the responsibility for
the stability of these international systems.
CRITICISM OP TIlE G0VE1~NMENT
Considerable criticism has been leveled at the conduct of the U.S.
Government's relationships with the American oil companies. It seems
appropriate that the relationship be better defined in the foreign area.
Foreign consumer governments have long expected that our foreign
competitors keep them informed on producing-country negotiations.
We, for our part, have always assumed an obligatio~i to keep the U.S.
Government informed.
The U.S. Government has the right and the obligation to inform
itself as to these important negotiations, and to take whatever diplo-
matic steps it considers appropriate in connection with them.
In short, international trade in oil badly needs stability. Since the
producing country governments, are sovereign and not subject to a
superior law, it is necessary for the consuming coulitries to persuade
them that their best interests will be served through the maintenance
of stable conditions in which commercial commitments can be freely
made and relied upon.
So long as we are dependent for energy upon imported oil there is
no way oil companies can stop upheaval caused by wars. Oil companies
neither make wars nor haVe the ability to stop them. Potential disrup-
t~on of oil supply, however, can be reduced by continuing the policy
of 50 years of e~icouraging U.S. companies to establish a presence in as
many different producing areas around the world as possible and
encouraging exploration for oil there.
I am pessimistic about the ability of the United States to achieve
energy self-sufficiency by 1980.
But we must get on with the job. We are fortunate that certain of
the producing countries have been willing to increase production. We
are doubly fortunate that they are willing to promise further increases
PAGENO="0083"
79
even though they have no practical way to use all the income generated
from present production. We can't expect them to continue this policy
while we do noththg at home to solve the problem.
TITE NEED FOE OOOFERATIo~
To summarize, there is a need for more cooperation and understand-
ing between industry and Government. Much of the problem this time
was caused, by the suddenness with which the shortage came on. There
was inadequate time, inadequate avenues of communication to explain
what was happening, and an atmosphere of mistrust and suspicion
which, unfortunatehr. still exists. Better understanding between gov-
ernment and the industry would cer~ain1y ameliorate these problems.
But the positive role of the Government in petroleum matters should
continue to be political, while that of the companies should be com-
mercial with better coordination between the two.
Thank you.
[Mr. Tavoulareas prepared statement follows :J
PREPAEEn STATEnUrNT OF WILLIAM P. TAVOULAREAS, PRRSIDEN~r OF MOBIL OIL Conr.
Mr. Chairman, members of the multinational subcommittee, my name is WiL'
11am P. Tavoulareas. I am president, and a director, of Mobil Oil Corporation.
I have spent almost my entire business career with Mobil,
You have invited me here today to testify regarding the future shape of the
international oil industry, I appreciate the opportunity the Subcommittee has
provided to make this opehing statement. I would like to start by cónnnenting on
various aspects of, the international petroleum industry which have been touched
upon by the Subcommittee in its earlier hearings.
I start with the proposition that the Performance in the post-World War IT
era by the international petroleum industry of its function of meeting the Free
World's petroleum needs with abundant snpplies at stable and moderate prices
must be judged excellent by any reasonable standard. During the period in which
the Industry was in a position to deal with matters of exploration, production,
transportation and price on a Predominantly commercial, as disting'uis1~e4 from
a political, basis, supply was plentiful; prices were moderate, and in the decade
of the Sixties indeed were steadily declining; and demand never &rceeded supply.
The Industry managed to carry on this international business on a commercial
basis and achieve the record I have described through three wars in the Middle
East, `the Korean War, and the Vietnam War,
Commencing in 1970, certain members of OPEC, and then OPEC itself, became
more aggressive in their demands for alteration in the terms of existing arrange-
ments. These negotiations were conducted in an atmosphere of threats of uni-
lateral action if the companies did not submit to their demands, In addition, the
demands of certain of the OPEC countries began .to have definite political over-
tones, Even in this period, however, the industry in the various negotiations
starting in 1971 demonstrated an ability to continue to negotiate and operate on
a commercial basis. It was opiy in the fall of 197~, coincident with the outbreak
of the fourth Arab-Israeli war, that the Middle Eastern producing countries took
united and unilateral action ~hich brought on the first `unmanageable crsis of
supply in the Free World since World War II,
I believe this record is highly instructive for the future, The only time the
international petroleum `Industry has been unable to perform its function since
World War II was that period which followed the political decisions to which I
have referred. These were decisions made for reasons which had little or nothing
to do with the oil Industry or its performance. It was political, rather than com-
mercial actions which intervened in the relations between the Producing coun-
tries and their customers, These political decisions eventually induced the
unprecedented unilateral, nearly fourfold, increase in the `cost of oil.
A~s one thinks about the future of International petroleum supply these basic
facts are worth pondering. Considering this record, the private oil company
approach has much to recommend it over the alternative of government-to~
PAGENO="0084"
government confrontation. If the~ matter of oil supply bec~mes a governinent~to~
governmeiit matter, commercia' problems inevitably become political problems.
Private oil companies tend to insulate or reçluce political probIem~, they are
highly competitive and their re~1ations with the producing countries have been
based on commercial and economic functions. For example, in 1~7O the then new
government o~ Libya could not tolerate a U.S. Government presence in the form
of Wheelus Air Force Base, but Libya has to this day tolerated the presence of
U.S-based oil companies. Diplomatic relations with the United `States were sev-
ered by Egypt in 1967 but this did not interfere with the subseqttent entry and
opera~on of private U.S. petroleum interests in Egypt. Private oil cOmpanies
managed to hang oEm in Indoilesia dttrlng the Sukarno regime so that when a
change came in 1966 they were well established and ready to expand their opera-
tions~ Iraq severed diplo~natic relations with the United States in 1967 and has
maintained a militant anti-U.S. stand ever since. Nevertheless, it permitted the
interest of two U'. S.-based oil eoinpaldes to continue in certain producing areas
until 1973 when political consi4eration~, a~cented by the October war, Intervened.
That private oil companies can operate under many circumstances where gov-
ernments may not be permitted to do s~ has apparently been time judgment of
those responsible officials, of our Governmeat who have given thought to this
matter over a period of almost half a century. I say this because I believe every
administration since that of Woodrow Wilson has, as an incident of its foreign
policy, fostered and encouraged' the presence of U.S. private companies in the
large oil producing areas of the world. I submit that this policy has consistently
been In the interest of the Un~ted'States, the ~c,onsumer, an'4 the Free World.
In this connection it has been asserted in testimony before this Committee that
the negotiations which were carried on from 1971 until 1973 with the OPEC
countries were disastrouS. I thoroughly disagree with this appraisal. These nego~
tiati'ons actually were quite successftt'l. Although governments were constantly
seeking a larger government "take" from the production of oil, unrelated political
events played a sign'lftcant part In encouraging OPEC to abrogate the agreements.
Even in the face of these developmer~ts, the oil companies were able to moderate
demands and to operate without any signIficant increase in price.
By anti large, the negotiated agreements between the oil companies and the
producing governments resulted in the flow of oil at reasonable prices. Coincident
with the outbreak of the Arab-Israeli conflict in 1973 the Middle Eastern pro-
ducing countries took the matter of supply and' price into their own hands. The
basic facts are well known to you. Posted prices on which government "take"
is determined had been essentially stable for the twenty-year period ending in
1970, while the market prices had declined as, `Incidentally, did the profits of the
companies. Under the Teheran Agreement, posted price for Arab Light, a repre-
sentative crude, had risen to what now appears to have been a very modest
amount, namely $3.01 per barrel, on October 1, 1973. But since that time, as a
result of unilateral actions by OPEC and the outbreak of the war, posted price
for that crude has reached $11.65. In this regard, it is significant that Saudi
Arabia, the largest producer, has continued its efforts to lower posted prices
within `OPEC. `So I submit that the' 1971 negotIations cannot be deemed a disaster.
If the war had not intervened the supply picture would not have been critical
and posted prices would not, in `my opinion, have reached $11.65 in the Persian
Gulf.
Much has been made in these heEmrings of the handling, or what at least some
members `of the Subcommittee seem to regard as the mis-handling, of the so-called
Oil Cartel case. It seems odd that such weight should attach to the complaint by
obviously disappointed staff lawyers in the Antitrust Division of the Department
of Justice that a criminal case was not pressed b~ the Government over 20 years
ago. That decision was considered carefully by highly placed, responsible officials
of the Government. A civil case was brought instead but not even these civil
charges were proven in Court. I say were not proven because even the civil case
was never brought to trial'. It was eventually dismissed as to Mobil and it was
either dismissed or, in effect, settled as to the other `defendants. I `don't believe
any useful purpose is now served by going back into this past history but, cer-
tainly, if it `has any bearing on tod~my's issueS all of' the facts should be presented
and the full record of the Government's motivation and conduct disclosed.
I would like, however, to address myself to the conclusion your `Chairman has
drawn from this episode in a letter of April 11, 1974 addressed t.ø John J. MeCloy
to which Mr. McCloy has now, I understand, responded. In that letter the Chair-
man deplored the failure of the United States Government to pursue the Carte~
PAGENO="0085"
case to a sticces~fu1 conclusion which would have~ in his wortls, "injected cnm-
petition into the industry" He stated, and I quote, that if such a course had been
followed:
1. ". . . our country would find itself in less dire straits today in the area of
energy supply."
2. "Vigorous price competition such as the, kind Libya encouraged during the
1960's, if widely spread throughout the industry would have denied the Persian
Gu1i~ sheikdoms their financial cushions. . .
3. ". . . an industry more infused with multiplicity and pluralism would [not]
have built so little spare capacity for the day of reckoning with OPEC."
In the ilr~t place, these are puzzling and, to some degree, quite contradictory
statements. Judged by any reasonable criteria, the record shows that the indus-
try has been highly competitive. You have had ample testimony demonstrating
that point. Indeed, so much low-cost petroleum was made available to the Free
World that until recently alternative energy sources were uneconomic and there-
fore not stimulated. On the basis of this record, I don't see bow it can be main-
tained that more competitive conditions would have led to the development pf
greater spare production capacity. If it is suggested that lower prices could have
been brought about, would this not have produced greater dissatisfaction on the
part of the producing countries? Would not OPEC have been galvanized into
more drastic action at an even earlier date? Actually, OPEC owes its formation
to reductiOns in posted price which took place in 1959 and 1960.
in the second place, there is p0 logic in `the suggestion `that if the joth~t
producing ventures in the Middle East had been broken up as a result of the
Cri~rteZ case this would somehow have improved the bargaining position of the
industry in dealing with the Middle East Governments in the 1970's because there
would have been more producing capacity in the Middle East. These are con-
clusions supported by no evidence of which I am aware and are contradicted by
much of which I am.
Consider `the baagainlng position. The pattern of oil development in Libya
comes closer to the type of `sitpation which is apparently thought preferable.
There were many small separate concessions and many independent companies
with interests in `the country. What did this do to the industry's bargaining
position? Far from strengthening that bargaining posi'ti'on~ not only was the
industry weakest in Li1~ya but it was the Libyan Government which, in the
summer of 1970, took advantage of this condition of pluralism to start the dhain
of events which even'tuaUy led to the complete unilateral action of OPEC in
October, 1973. Libya picked out the independent company they believed was least
able to resist and applied maximum pressure to it.
This assertion is, furthermore, inconsistent with the criticism leveled at the
industry for failing ha early 1971 `to insist that there be single over-all negotia-
tions between all of the OPEC countries, including Libya, on the `one hand, and
all of the companies, on the other hand. How can it be argued that pluralism, on
the one hand would have provided a better bargaining position and, at the
same time, that `the Government is to be criticized for not insisting that the
industry hang together during the course of the negotiations?
There is, furthermore, no support `of any kind that I am aware of for the
proposition that the result of the joint producing arrangements which existed in
the Middle East was inadequate spare capacity `to meet `any demand reasonably
to he an'ticipated~ You have beard testimony and you haye gathered extensive
figures indicating the relationship of capacity and production in the two key
~ountries, `Saudi Arabia and Iran. It has been made clear that, the way these
arrangements `operated capacity in excess of the total estimated demand of the
o~takers was consistently and regularly installed In `the case of Are mco, as a
matter of regular practice, that. excess was 20%. in. `the. case of Iran, excess
capacity to the extent of 10% `of aggregate demand was regularly in~t'alled~ Iii
the ease of `the `other joip.t veirtures in the Middle East in which Mobil is a
participant, capacity is installed on the basis of the aggregate `requirements of
the participants in `the venture.
You have received a statement from Mr. George Piercy of Exxon .det~iling
their estimates as `to available Free World capacity in rel~tioJn to Free World
demand. Those figures' indicate a consisteo~t excess producing capacity in the
Free World even to this day and demonstrate that the problem is not a' failure of
the indu~try to install adequate capacity. "Rather, it is the actions `of govern-
ments which have prevented the pse of available capacity that `ha's caused the
shortage.
PAGENO="0086"
82
You are aware from that testimony that Free World demand for petroleum is
hovering near the 50,000,OQQ barrels per day mark. Let me provide you with e
partial list of capacity which had been installed by the industry and which,
because of political actiOn of one kind or another, has not been available to it:
Barrels per day
Libya Between 1, 000, 00k) and 2, 000, 000
l(uwait About 1, 200, 000
Abu P1mb! ~~__ About 300, 000
If we were to include the Alaska Pipeline plus delays in offshore production and
environmental restrictions, It would add from 2 to 2.5 million barrels per day.
These constraints total over 6,000,000 barrels a day, or about 12% of total Free
World demand. The industry might reasonably have anticipated that this capacity
would be available at this time.
The conclusions I draw from these figures is that the petroleum shortage
which had begun to emerge in 1973 but which actually beCame a crisis only as a
result of the war-Induced embargo was not the result of any failure of the
industry in estimating demand. Rather, it was the result of their failure accu-
rately to predict the impact of unilateral and unanticipated governmental action
on the actual availability of planned capacity. For example, they did not foresee
that a small group of environmentalists could delay the construction of the
Alaskan pipeline for five years. They did not foresee and predict the supply
embargoes or the substantial unilateral increases in price in October and Decem-
ber, 1973. They, ot course, did not foresee the new outbreak of hostilities In
October, 1973. However, they did predict, to the point of almost being obnoxious,
that if real efforts were not made to ease the Arab-Israeli conflict the Arabs would
eventually use oil as a weapon. These predictions were largely disregarded and
usually considered unjustified or self-serving.
Nor did the existence of the joint producing interests in the Middle East in
any material way prevent other companies from entering the area and securing
valuable ~c1ditional concessions. In the 1950's and 1960,'s vast areas, originally
held under Concessions by joint-interest groups~ were surrendered. These, and
areas never before covered by concession interests, were open to companies of all
nations to come in and explore. Many `did. 1~or example, by 1970 Aramco held less
than 14% of the total area of Saudi Arabia under its concession, while in Iran
the Consortium held less than 12% of the total area of Iran, As a matter of fact,
in the period since 1960 no less than 147 new concession have been granted by the
Middle East countries, Including Libya and Egypt, to' no less than 113 different
companies.
Bear in mind that up until well `after World War II the United States was
more `than self-sufficient In oil. Pew American companies could be found who were
willing to take `the huge risks involved overseas. The United States Government
tried to interest ut least a dosen companies to take up interests in IPIJ but only
fire were willing to do so. Furthermore, three `of these had dropped ~ut before
commercial production began in the mid-1930's, leaving only Exxon `and Mobil.
As late as 1954 there was at least one large American company which felt it was
too risky even `to buy int'o the established `reserves of the Iranian Consortium.
I suggest to you that the reason `there aren't more American companies in the
Middle East with developed `reserves today has* nothing `to do with the joint
ventures there. Rather, it is the result of the unwillingness of companies to `take
`the risks involved, particularly those who bad no `assured outlets abroad for
any production they might find. Stated another way, it is the result of conscious,
negative investthen't `decisions by many substantial American oil companies. It
has nothing to do with whether or not Aramee, IPO, or the Iranian Consortium is
a joint venture. For example, you might `ask `Standard of Indiana wh~ they sold
wha't is now Creole Petroleum `to Exxon back in 1930, or why they declined in
1954 `to take a piece Of `the Iranian Consortium. Even `my own eom'nany turned
town the opportunity to acquire a larger share of Aramco immediately after
World War II. This decision was made because of the `risks involved and because
`of lack of outlets for the crude oil.
Under the foregoing circumstances I fail to see any basis on which the failure
of the United States 20 years ago to pursue the Cartel case niore vigorously than
it, in fact, did can be argued to be the cause of inadequate Spare producing
capacity in the year 1974. Nor is It a failure on the part of the industry accurately
to forecast demand. If there has been any failure on the part of the industry, it
is its failure to predict `the political events which have deprived it of the use of
planned capacity it had every reason `to belleyc would be available.
PAGENO="0087"
83
Let me eomment Oil one other matter which 1ia~ been touched upon in these
hearings. That is the matter o~ the adoption by the ~Saudi Arab Gove~nrnent in
1950 of an income tax, My cornrnen1s relate to two aspects of this ineident. The
first is that there seems to be a substantial misconception as to what happened
at that thee and what its consequence for the companies was. In addition, an
implication seems to have appeared that this decision somehow created an
incentive on the part of oil companies to invest in oil exploration ventures outside
the United States rather than within the United States.
It has been stated that that decision resulted in the conversion of a royalty into
an income tax. The fact is that no royalty was, or ever has been, converted in
Saudi Arabia to an income tax. A royalty was paid prior to 1950 and has been
paid continuously since that date to the Saudi Arab Government. Furthermore,
it has always been treated as a deduction, not as a tax credit, for the purpose of
calculating U.S. income tax liability. All that happened in 1950 was that Saudi
Arabia did what almost every developed western country bad already done,
namely, to adopt an income tax. It was also following the precedent of `Vènezuëla,
one of the major oil-producing competitors of Saudi Arabia. Saudi Arabia could
not afford to adopt a tax structure which would put its oil at a competitive
disadvantage with Venezuela, which, at that time, was Its major competitor for
European outlets. Once the income tax was adopted, the income tax paid to the
Saudi Arab Government became creditable against the U.S. tax liability of the
producing company `with respect to Income earned in Saudi Arabia as a resfll't of
provisions of the Internal Revenue Code which had been around since 1918 and
which in one form or another appear in the tax laws of the other principal
industrialized countries of the world.
It has also been suggested that the result of these foreign-tax-credit provisions
is that taxes paid in Saudi Arabia can somehow reduce U.S. income~taxes to he
paid on Income attributable to operations in the United Sta'tes. This was not the
case in 1950 and h~s never been `the case since. Let me rep~at that statement.
The foreign tax credit bus never reduced U.S. income tax on income derived from
operations in the United States.
Finally, there is no basis of which I am aware for the suggestion that `this
decision cr~ated an incentive for U.S. oil companies to invest in producing
ventures outside the United States, rather than within `the United States. The
fact is that if a company were `to choose `between a foreign area and the United
States solely on the basis of the amount of `taxes to be paid on a given explora-
tion venture the clear choice would have to favor investment in the United
States. This is so because the total taxes paid on a foreign vefittire wotild always
be at least equal to those paid in the United States and could be greater. In
recent years taxes on foreign exploration ventures have been greater in every
case of which I am aware.
The actual reason for exploration overseas has been very simple. First, the oil
potential overseas was very great. Since Wprld War TI `the oil industry's foreign
discoveries have amounted `to more than ten times total U.S. reserves at any
one point ~n tipie. Second, there has beqn limited prospective acreage available
for exploration in the United States and, particularly In recent years, significant
environmental restraints.
As a matter of information, Mobil's capital expenditures on exploration and
production have, notwithstanding these facts, been consistently greater In the
tinited States than abroad.
ElsewhOre in `the `Congress proposals have been made to abolish or modify the
application of the foreign tax credit to the oil and gas producing operations of
United States-based companies. Most developed countries of the world exempt
foreign-source income from `taxation, or allow a credit for foreign taxes paid.'
For example, many countries, such as Canada, Germany, United Kinadom,
Mexico and Japan, allow a foreign tax credit for foreigh `taxes paid. The Nether-
lands, France and Italy, on the other band, follow a system of "territoriality"
under which any foreign-source earnings which have borne a foreign tax may
be repatriated without any further tax.'
1 The Foreign Paz Credjt and the U.S. Oil Industry, p. ~i (~tay 1974), Petroleuth In-
dustry Research Foundation. Inc., 122 E. 42nd St.. N.Y., NY., 10017. U.S. Stake in World
Tr~de & Tnvest~enf. p. 45. Nat'l AaSn. ~ ~fftr~. (j972).
`New Proposals for Taxing Foreign Income, pp. 11 and 1.~, Nat'l Assn. of Mftrs. (1972).
PAGENO="0088"
84
Thus, the amount of home-country taxes pa~ by Royal Dutch Shell to The
Netherlands and the U.K., jy BP to the U.K., by CFP to France, by ENI to Ttaly,
and by various Japanese producing companies to Japan, would not increase if
the US. enacted legislation to change the credit for foreign income taxes to
a deduction. Only the taxes of the competing U.S. companies wOuld increase.
Thus, on each dollar of profits from foreign sources before hon~e-country tax,
these foreign competitors would retain $1.00 after all taxes, while their U.S.
counterparts would be required to pay a U.S. tax of 48~ and would retain only
52~l after all taxes.
For existing production such action would simply create a cost disadvantage
for United States-based companies, and therefore, a tendency to higher prices
for petroleum in international trade. Of considerably more importance is the
fact that in the all-important race for new concessions it would make the U.S.-
based companies less attractive as concession holders to the foreign country
governments than their foreign based competitors. Because of the effect of
home-country taxes~ the economics of the U.S. producer would be s:uch that be
could not afford to offer as favorable treatment to the hos~ country as could his
European or Japanese-based competitors, because they ~vill continue to enjoy the
full benefit of a foreign tax credit. The eminent tax scholar, Stanley S. 5urrey,
then Assistant Secretary of the Treasury for Tax Policy, in testimony in the
late 1969's at hearings before the Senate Foreign Relations Committee with
respect to the proposed U.S.-Brazil income tax treaty, reiterated a fundamental
and international accepted premise regarding the foreign tax credit:
"American investment would not proceeçl at all wi~thout the foreigp tax credit
because then, as the Chairman pointed out, two taxes would be in posed and the
overall burden of two taxes would be so great that international investment [by
U.S. companies] would practically cease."
At a time wher~ the United States faces a period in which it will be a substantial
importer of petroleum, elimination of the foreign tax credit for petroleum prq-
~1ueing operations would seem clearly not `to be in the interests of the United
States.
My comments have made it obvious that I believe the long-term interest of the
United States lies in strengthening rather than weakening the U,S.-base~ inter-
national oil eompaI~ies. Weakening these companies i~, in fact, a kind of neè-
isolationism. If, through tax policy and other controls, you disgble our U.S.
co~panies from competing with their foreign counterparts and make them eco-
nomically unattractive as concession holders to foreign governments, they will
tend to disappear from the international scene.
This Committee would already have experienced one of the effects of such
neo-isolationism, The Senate has recently sought information from Aramco
shareholders regarding the technical capability of the oil fields in Saudi Arabia
to continue present production levels, as well as eventually to reach 20,000~000
barrels per day. Flow would you expect to get that information if U.S. companies
were not in Saudi Arabia? As a matter of fact, Saudi Arabia has been more
cooperative than most sovereigns in permitting information to be given to the
U.S. Government. In passing, I might also say that if you are concerned about
the technical capability of a country with from 165 to 250 billion barrels of
proved reserves to sustain production of 20,000,000 barrels per day, you should he
downright alarmed about the ability of the United States, with reserves of 30
to 35 billion barrels, to sustain production of 10,000,000 barrels per day.
Now, let me comment more specifically on the future. And let me focus first on
the very near term. I believe the best policy for the United States to follow is
a modernization and improvement of the one it has followed for th~ last fifty
years. Thi~ is doing what it can to foster the presence `of ~LS-based companies
in the principal producing areas of the world, Its further objective should be
to bring about the depoliticization of oil as rapidly as possibl~ Indeed, I believe
this is the only sensible alternative the United `States has for the near term
because in that near term it is dependent upon oil for its energy needs and
there is no reasonable possibility of meeting that need except by imported oil.
Hearings before the Committee on Foreigp RelatIons, U.S. Senate, 90th Congress, Iflrst
Session, on the Tax Convention with Brazil, Executive Journal (1967), pp. 19-20. Profes-
cor Surrey reaffirmed his view that the foreign tax credit should be retained, in an appear-
ance before the Ways and Means Committee of the House of Hepresettatives in connection
with tax reform, February 5, 1973.
PAGENO="0089"
8~
The obvious first step in attempting to restore a degree of normalcy to the
h~teraationa1 petroleum busi~iess ~ the bringing abQut pf some settlement fti
the Middle East One would hope Secretary of State J~tissinger and the Adminis~
tration will continue their record of ~ueçess jn the preliminary but all-Lmportant
steps which have already been taken in this direction. Only thrOugh such a settle-
ment will it be possible for the n~atter `of oil to be treated by the producing
countries again as a commercial, as distinct from a political matter..
Assuming, through the form of some kind of political settlement, some
semblance of a return to normalcy can be brought about, some people. may still
question whether there are viable alternatives to the pattern of ~iegotiation of
oil matters which has developed in the past ~ew years, It is necessary to. examine
alternatives available to uS as we approach the problem of trying to develop a
viable syste~ for the future.
In the near term are there any viable substitutes for the handling of oil matters
through industry-producing governn~ent negotiations? Some have suggested that
the role of the oil companies be dispiaced by direct government negotiations. The'
arrangement has a certain emotional appeal; however, the examples of direct
government negotiations do not give us confidence `that this sol'utiop would be
a satisfactory one. The past records of government-to-government negotiations are
full of examples of political decisions which have overridden the oil supply con-
sideration. I `submit, for `example, `that private companies are likely to do more
to protect the public's interest in keeping costs down than governments will.
Unless .a proper political atmosphere is constantly maintained, a, consuming
country government cannot assume that an arrangement which it negotiates with
a prod~icing country will, in fact, be stable merely because both parties to the
arrangemeiTit are governments. The exp~rien'ee of the French with the .Algerian
oU agreements .illustrates perfectly `the fragility `of sovereign-to-sovereign agree-
inents jncorpora'ted in larger po'li~jcal settlements. .
A gpvernment. pego'tiated arrange~ent Is vulnerable to, a weakness which is
not present with private negotiation's, When political difficulties arise, it is often
impossible to' keep `them from interfering with the commercial funeti9~ With the
private, ccunpapies `t'his is,n'9t the ç~ase. Indeed~ Aramco has been able, to continue
operating in Saudi Arabia during `the period ~ben exports from lSaudi Arabia tc~
the United States were totally emba~goe4. ` . ` . . .~.
There is one, qthei~ very practical problem with any govern~en't4o~go~etnm'efl't
solution.. That is~ the eo~plexi'ty of international trade' in petroleum. There are
well ovei~one hundred countries i~ the Free World which import petroleum and
almost one hundred which also expert petroleum. It is an understatement to
s~y tbp~ trade `in petroleum `is ~nultiiateral. ~audi Arabian,exports go to about
sixty countries. Which nation on `the importing side is going to be authorized to
negotiate for all? Or are all `the importers going to try to sit down and negotiate
jointly with Saudi Arabia? If `it's not a jQint negotiation, tI~e gov~rnmenhto-
government solution is going to result in bilateral barter arrangements of the
kind France has made, or attempted to make in recent months. Barter arrange-
ments inevitably `tend `to l3alkanize world `trade `and, in this case, to `support the'
presently high price level of crude oil in the Middle East. But it it is to he `a
government-to-government `solution it must be one or the `other, The first presents
immense `practical difficulties, while the seeopd is clearly undesirable.
If direct negotiation by governments is n'ot the solution, what imp~oyemeflts
can be suggested in the present system? Clearly, it must be recognized that any
action which excludes U.S-based corporations `will not `similarly impede the
operation of foreign-based companies or their government sponsored counter,-
parts. Consequently, the best approach for the United States to adop't is to thake
use `of the U.S. companies as a means of ensuring the fair `treatment of American
interests around the world without at `the same time di~crimina:ting against the
interests of other countries. We `are not suggesting `that the U.'S. oil companies
become political instruments of `the United `States Government. In that event
they would be subject `to all of `the problems we have ju'~t mentioned in connection
with a government agency.
Instead, the United States Government can play a very positive role in creating
the atmosnh'ere necessgry to ensure the stability `of commercial arrane~emen'ts in
world trade. It must be emphasized to the producin\g countries that `their emer-
gence as major forces in `international monetary `and trade channel's carries with
it' a share of the responsibility for the stability of these international systems.
PAGENO="0090"
86
The prothicing c&initries will e~pect that the nffijor con~um1ng countries and
~oinpanies will assist them in the orderly investment of their foreign exchange
rOserves, and in the development of their internatioba,I trade. As they proceed
to realize this goal, they wlll~bécome aware of the need for fiscal stability to
protect the value of their trade and Investments.
Considerable criticism has been levelled at the conduct of the U.S. Govern-
ment's relationships with the American oil companies. It seems appropriate that
the relationship be bettor defined in the foreign area. Foreign consumer govern-
ments have long expected that our foreign competitors keep them informed on
producing-country negotiations. `~Ve, for our part, have always assumed an
obligation to keep the UM. Government informed. But the process of informing
the Government has been informal and necessarily confidential. Clearly, it is
not possible to conduct a negotiation on the front pages of the daily newspapers,
just as it Is not possible to conduct delicate foreign policy negotiations lb that
fashion. HOwever, the 15.5. Government has the right and the obligation to inform
itself as to these important negotiations, and to take whatever diplomatic steps
it considers appropriate in connection with them. In our judgment, the organiza-
tions which are entrusted with the conduct of our foreign policy should similarly
be entrusted with the government role in support of American access to foreign
oil.
In sort, the international trade in oil badly needs stabili'ty~ Since the producing
country-governments are sovereign and not subject to a superior law, It iS neces-
sary for the consuming countries to persuade them that their best interests will
be served through the maintenance of stable conditions jn which commercial
commitments can be freely made ~nd relied upon. In such a stable framework the
oil industry is clearly capable of meeting the needs of the consuming nations of
the world; and the record of the industry gives us confidence to make tba~t fore-
cast. If we do not have stable conditions, neither the companies nor the con-
suming countries will be able to enjoy reliable supplies at reasonable prices.
I can sum up my views on this matter by quoting from an interview with one
of the world's foremost historian, Arnold Toynbee. The editors of Forbes maga-
zine recently asked Mr. Toynbee for his views on multinational cooperation. This,
in part, is what Mr. Toynbee had to say:
"What I see is that the multinational corporation fills a vacuum. There is ~n
increasing tnisfit between the fact of global economic life and the ~ol1tical
organization of the world, in 140 local, So-called sovereign states. They aren't
really sovereign because they are dependent upon the rest of the world for raw
materials, and sometimes for food itself, in order to live. But they are as sovereign
aS they can contrive to he. Most of the ecopomic troubles of the world are due
to this misfit between the antiquated political setup of local states and the
real, global economic setup.
"Multinational corporations precisely bridge this gap."
For the longer term is there any way to avoid the energy crisis we experienced
as a result of the Middle East War last fall? Ctui Project Independence succeed
in making the United States self sufficient by 1~80? Is a national oil company
some kind of panacea? Is some other energy source capable of rapid development?
So long as we are dependent for energy upon imported oil there is no way oil
companies can stop unheaval cause by wars. Oil companies neither make wars nor
have the ability to stop them. Potential disruption of oil supply, however, can
he reduced again by continuing the policy of 50 years of encouraging U.S. com-
panies to establish a presence in as many different producing areas around the
world as possible and encouraging exploration for oil there.
I am pessimistic about the ability of the United States to achieve energy self-
sufficiency by 1980. There seems to me little possibility of a resolution of the
fundamentfil dilemmas between environmental considerations and resource de-
velopment within the next year or two. Such resolution, together with the estab-
lishment of priorities In resource development, would he absolutely essential to
any hope of success because of the tremendous lead time~ involved in the kinds
of resource development required. Indeed, It is already too late, in my opinion.
But we must get on with the job. We are fortunate that certain of the pro-
ducin~ countries have heen willing to Increase nroduction. We are doubly fortu-
nate that they are wlllinr to promise further increases even though they have
no practical way to use all the income generated from present production, We
Forbes magazIne, Apr. 15, 1974.
PAGENO="0091"
87
can~t expect them to continue tub policy while We do nothing at home to solve
t1~e problem. Tl~ere are alrea4y voices hein~ raisec~ in th~se countries in opposi-
tion even to present production levels.
A national oil company of the kind p~o~osed would, in my jiidgment, be a
hindrance rather than a help. It can~t be used as h standard to judge the per~
formance Of pth~ate oil companiCs If it is to operate by different rules. If it
won't pay the same taxes, if it will be able to borrow ~noney on government
credit, and is to be given 20% of the most promising acreage free in future
lease sales, how can it be used as a measuring stick? Furtherniore, the efficiency
record of government oil companies has not been impressive. I-low will it speed a
solution to the self-sufficiency problem to put 20% of the most lrospe~tive aereage
in the hands of a new and untried entity which must start from scratch in
creating an organization and efficient systems of operation? The answer is, in
my opinion, that it will do just `the reverse and slow a solution to the petroleum
sël~-sufficiency problem of the United States.
To summarize, there is a need for more cooperation and understanding between
`indhstry and government. Much of the problem this `time was caused by the
suddenness with which the shortage came on. There was inadequate time, made-
qtrate avenues of communication to explain what was happening, and an atmo-
sphere of mistrust and suspicion which, unfortunately, still exists. Better under-
standing between government and the industry would certainly ameliorate these
problems. But the positive role of the government in petroleum matters should
continue to be political, while that of the companies should be commercial with
better coordination between the two.
Now I'd be happy to try `to answer your questions.
Senator CHURCH. Thank you very much for sunmarizing your
statement and the full text of the statement will appear in the record
~s though read.
ATTITUDES OP TEE OIL COMPANIES
My impression, Mr. Tavoulareas, is that everything is changing in
oil except the attitude of our oil con~panies. You have takeil up each
of a number of suggestions that have been made an4 opposed all of
them, and I take it from my perusal of your statement that your
position is that nothing should be done that would change present
law or policy.
Is that correct?
Mr. TAVOULAREAS. No, I wouldn't say that is correct.
Senator CHURCh. What changes in present law and policy are you
p~repared to advocate?
Mr. TAVOtIAREAS. I would like to before I answer that go back over
a period of stability that existed from World War II up to 1973 and
find out why we had stability during that period.
Senator CHURCH. We are familiar with that period1 we have looked
into it very thoroughly, and with the changes that brought on this
rapid escalation of petroleum prices. So that I would appreciate it
if you could respond to my question.
Mr. TAVOULAEEAS. I intend to.
NEED FOE POLICY CHANGES
Senator CIIUECTI. What changes in present' policy or present law
do you think advisable in light of the current problem that we face?
Mr. TAVOT~LAREAS. Well. I knew you were familiar with the post
World War II record of oil and I was going to p~it a background for
my suggestion.
PAGENO="0092"
88
During the period prior to 1970 we had surplus and we had lack of
politiôai involvement. Today we have a lot ~f political involvement
and we have a shortage. What we ought to be working toward is a
better. political atmosphere and we aught to be working toward trying
to restore the balance of supply and demand and we ought to be dorng
everything to encourage increased exploration around the world. IL
just cannot see myself that if we assume shortage, and, thus we assume
lack of leverage on the part of the oil companies, why anybody else
would have more leverage.
THE COMPANIES' LOSS OF POWEU
Senator CHURCh. It has been admitted to us by highly placed exec-
utives of the oil companies that whatever leverage the companies once
had has really disappeared and exists no longer.
Mr. TAVOITLAREAS. Well-
Senator Cinmon. FU~thermQr~, it is hard for us to see what incen-
tive oil companies really have any more to insist upon lower prices.
When you combine these two things together, I don't see what ease
is left for the proposition that under existing circumstances the corn~
panics need no backup from Government.
I haven't personally proposed that the companies be displaced by
government but it .seein~ tO me that if: it~ `is true~ as `the oil executives
themselves have admitted, that their leverage has all but disappeared
then we are facing a new and different ~ituati~n' in which the Govern-
ment rnigh~ play a construptive role in backing up the oil companies
in the hope that ~e could ~cure from the `Arab and the Other oil-
produein~ gOyer~1menth more satisfactory agreemeftts upon futnre
prices foi crude oil
Mr. TAVOITLAREA~. Thete *ere `~hre~ ti~ereñt' poiiits'you were mak~
ing. `Let me ~nake it very clear we a~e not satisfied with pi~esent condi-
tions. They have to be called unsatisfactory by any standard. `However,
these events which have happened. over the 3-month Period at the
end of 1973, tliey ~rO `irer~r ~seriOiis, ~ ,oecurren'cés, Now~ we must
addres~ ourselves to a ~ay to try to irnp~o~e otir position.
All I am saying is. I have heard the proposals made and in eaèh
case I am convinced thatthosc ~ropo~als will make no improvement.
Senator CHURCH. Well, then, what *oiild you have to propose?
Mr. TAv0uLAREA5. The second thing you said which I would like
to comrn~ent on is we don't c~ire about increased costs. That is unt'rue~
1 have heard it said many times. `I ju~t can say it is untrue. I will be
glad to elaborate to the extent you want me to elaborate.
Senator CHITImCH, Let us just assume, I don't want to* argue that
proposition, that the oil companies genuinely desire to bring prices
down, even though this is a highly profitable period. Let's say in the
overall estimate of the industry it would be advisable in the long term
to bring prices down. I am willing for the sake of argument to make
that concession t~ you. Even so, it is hard for me to see what real
leverage the companies have any more with the governments because
th~ situation today is utterly different from what it was in the earlier
period.
PAGENO="0093"
Mr. TAV0ULAE~AS. Now, what I gue'ss we ar~ both looking for is
how w~ get a better negotiatiug posture and you certainly get one by
recreating the situation where we have leverage. I cannot believe that
p'utting the Government on the scene and assuming, if you continue
to have shortages, and we con~tinue t~ try to divide up the same pies
that exi~t in the Middle East and ii~directly discoui~age exploration
throughout the world, will be an improvement.
If I thought it was an improvement believe me I would say to you
let's do it, because what am I in the business fOr? I am in the business
to try to'get crude to supply my ships, my refineries, and my market.
If I thought what you were proposing would do that, and I couldn't
do, it, I would certainly be for it.' I am tryir~g to say, inmy opinion, I
don't think it would be better. As a matter of fact, I think it could
be ~wOrse, and I can enume~rate why I think it could be wth~se.
Senator CntRCH. Let's getour facts straight.
First of ali~ I haven't proposed that the Government move into the
oil business or undertake to compete with the oil companie~, and cer-
tainly I have no interest at all in any `Government role that would
tend to discourage iiierease'd productiOn.
`What I am concerned about is that we get a little mOre' muscle in
our negotiating posture.
It is obvious that the Government of the United States has a good
deal of leverdge ~left with the Arab governments. The role we play
in the political situation, which you yourself say has eome to' nsurp
the scene in the Middle East, the role of `our Government' in those
ongoing negotiations has been a~ver~ critical one.
We are being asked to support a very snbsta~itiai new aid program
in the Middle East, so the Government' of the. United States hasn't
last all leverage in that area. I am afraid tiiat the companies have.
Mr. TAVOULAREAS. I guess- `
SenatOr Cnuncm It' `doesn't follow it ~s a practical `proposition for
you to say that the' Governm~rit should play no `role when your com-
panies have in effect admitted that they have'no'le~erage left.
What you are really saying, it `seems to me, is'th'row ourselves upon
the mercy of the Arab governments but for `heaven's sake keep the
American Government out of it.
Mr. TAVOULAREAS. Any backup that yOu can give to our negotiatiOns
we endorse, but in order to define that backup we have to have a
proposition.
I was addressing myself to the propositions I have heard put for-
ward, the propositions I understood were put forward. We wish we
had had more backup from the American Govei~nment in the last few
years. With that generality I agree.
THE PEA'S PROPOSAL
Senator CHURCH. Let's move on because I would like to get to the
point that these questions are leading up to.
If that is so, then why don't you address yourself to the proposal
that I have made?
Just yesterday Mr. Sawhill was here. He strikes me as having been
a very responsible Federal official. He has tried very hard to manage
PAGENO="0094"
90
a difficult assignment. He testified that he would favor the enactment
of a law that would guarantee the Federal Government full and timely
a~cess to all information relating to the negotiations between the
companies and the producing governments so that the Federal Gov-
ernment would not only be advised of these negotiations as they pro-
ceed but could in turn advise the companies. Second, he said that he
would favor inclusion of a provision in such a law that would require
the Federal Government to approve any final settlement between the
companies and the foreign governments relating to oil prices.
Now, what would be. your position with respect to that kind of a
law?
Mr. TAVOULAREAS. With the first part of it I have no problem,
access to information, consultation, no problem on those. Let's examine
for a moment what approval would mean. Let's take some examples.
No. 1, we have a new Tehran negotiation. You can make a reasonable
case for government being very closely involved and would like to have
some kind of say in the final negotiation.
Let's now take the other extreme, and auction off crude. Let's take
a spot sale. What would it mean ?~ For example, Mobil was going to bid
in a MiddleEast auction for 1 million barrels, of which I anticipated
bringing 200,000 barrels to the ITnited States and 800,000 abro~zd,
Would you contemplate approving.that kind of deal?
Senator CHURCH. No, I ~ for a momex~t contemplate that.
An auction sale of that kind is a free market sale. What I am referring
to are contracts, long-term ëontracts of the kind that the oil companies
have entered into in the 1~ast and which no doubt the Arab govern-
ments would be wanting in the future, establishing a new price for oil
that could have an im~nense impact on the economy of. the United
States. Fuel prices, as you know, are the principal element fueling
the present inflation.
Now, what I would suggest is a law. that would not only require full
disclosure of with respect `to negotiations leading up to such. con-
tracts, but also would require government approval.
Let me suggest one ~reason why I should think this might prove
helpful to the companies, companies that now admit they have lost
their leverage.
If you were in a position, for example, to say to Arab governments
that you cannot enter into a long-term contract because your own
government won't permit it, I should think that would strengthen your
bargaining position with the Arab governments.
Mr. TAVOULAREAS. My guess-~-
Senator CHURCH. If you are in a position where you cannot say
that, then you are pretty much going to have to accept the terms that
they insist upon.
Mr. TAVOULAIiRAS. Well, let me comment.
~ou keep repeating one point. You keep on saying we have lost
our leverage. We certainly have lost our leverage in price negotiations.
I don't thi.nk the TJ.S. Governm~ent will get that leverage back until
we get out of the period of shortages.
Senator CASE. Until what?
Mr. TAVOULARE~S. UntIl we get out of th~ period of shortages, until
we get to a period where we again have a siippl.y and demand balance..
PAGENO="0095"
91
I don't know how anyone gets b~k the leverage or until OPEC cartel
breaks up. The government will be no better off in the price negotia.-
tions than we are. Let's remetuber the kind of leverage we continue to
have that you don't have-may I finish one point. We have been told
and the Saudi Arabian minister has said time and time again we need
and want the Americancompanies here. We need their technical `know-
how, we need their markets. That is a form of leverage.
What do they need ~from the U~S~ Government? We are only talking
about leverage. I don't understand it.
Let me address myself further to your statement that-
Senator CHtTRCII. I can't accept those propositions.
Mr. TAVOULAREAS. I understan:d.
"THE POLITICAL WAR CAUSED TIlE SHORTAG~S"
Senator CHuRcH. We have a Saudi Arabia delegation here in Wash-
ington right now negotiating with the Government.
Furthermore, it `seems to me' to be fundamentally contradi~tory to
say on the one hand that the present price is due to a shortage, and
then to say in your statement that the present price is the direct result
of a political conflict emanating from the war between the Arab gov-
ernments and Israel.
Obviously that was the thing that resulted in prices increasing
between 400 and `500 percent.
`Mr. TAVOULAREAS. Completely consistent.
Senator CHuRcH. It was a political price.
Mr. TAVOULAREAS. The political war caused the shortages. If you
read my statement itery closely, we say that as a result of the political
war and political events we had a boycott, therefore', we had a shortage.
There is nothing inconsistent with those statements.
Senator CHURCH, If the boycott caused the shortage then it ~an be
quickly corrected with the lifting of the boycott. I don't see that the
problem is really one of shortage. There isn't really a shortage of oil
supplies against present needs. We have been told by many witnesses
there is no serious shortage of that character at the present time. The
price is a political price; it has been imposed for political reasons.
Therefore, it seems to me that the Government might have some 1ev-
era~e in bringing that price down.
Mr. TAVOULAREAS. You said that you did not want government in-
volvement in short-term deals or in auction. You said you wanted
them involved in long-term deals.
Are you saying you predict long-term surpluses?
Senator CIIuRcH. No, what I am saying is this. In the past the
companies ha~ve entered into relatively long-term agreements with the
Arab governments with respect to price. Those agreements have not
been kept, they have been quickly broken. In fact, our testimony shows
that the last agreement, the Tehran agreement, was in the process bf
being broken and prices were going u~ prior to the war and your
companies have been put on notice that you could expect substantial
additional increases in price.
Nevertheless, whether or not they h~tve been kept, you have entered
into these relatively long-terth ~greemeiits and you have negotiated
them with the Arab governments.
PAGENO="0096"
Now, I do&t know what the future will hold if the past is any
measure of the future. It is entirely possible you will be in new nego-
tiation~ of that kind.
What I am sayino' is that you may find your own bargaining posi-
tion strengthened ~F the Government were able to back up the com-
panies anti bring additional leverage to bear on the oil production
governments.
NEGOTIA~INO FOR TEE COMPANIES
Mr. TAVOTJLAREAS. Let me go back to the basic statement.
You said it would be a protectiou for us to be able to say we need
a home government approval. I suk&it it will be just the opposite.
We used to send out to negotiate with these people the operating heads
of the operating c?uipanies in the area. In the case of Aramco it is
a profitmaker; in the case of other companies it is a nonprofitmaker.
They quickly said we want to talk to the people who can make deci-
sions and sign. We finally sent higher and higher levels a~id they said
if you can't ifegotiate you can't ~igii, don't come out here.
Now, if we go out there ~and say we Ameriban compaities can't
sign but the Frenèh and the German and Japanese company can sign,
I assure you~ Senator, in my opinion it will be a very short period of
time where the Government of Saudi Arabia will say we don't nego-
tiate. We can negotiate a deal ~s good asthe Government cane If there
is no surplus neither one is going to negotiate a good deal.
Senator CHURCH. I take it then you would disagree with Dr. Sav~hill
that giving the Government a backup role, the right of final approval,
with respect to these agreements, would not be helpful?
Mr~ P~AVOULAUE~AS. Well, letm~ say this~ I did not hear,,what Dr. Saw-
hill said. I did not readthe testimony. I read somereports in the news-
papers and they were tw~ different u~eports.~ I would be surprised if
Dr. Sawhtfl said the only way ho thinks we caa operate is for him~ to
have final appro~val authority. I would have thought Dr. Sawhill was
very happy with what is going on. We keep him fully informed. We
keep the State Department informed.
Senator ChURCH. I would suggest that you read the testimony. We
will mak~ it available to you, the full record, so that you can judge on
the basis of his own testimony as to what he had to say;
Mr. TAVOULAREAS. If he said, as you say, that it will improve the
negotiating position for us to be able to say that we can't sign a deal
until we get U.S. Government approval, whatever that might mean
and, I don't know what it means, then I must say I disagree with him.
I think that will weaken the negotiating position.
THE INDUSTRY~S OBJECTIONS
Senator CHURCH. You said earlier, having expressed the industry's
objection to all suggestions that have been made, that you had some
suggestions of your own to make.
Could you tell us what those are?
Mr. TAVOTJLAREAS. Well, I have not opposed all suggestions. There
have been some suggestions that we have more consultation. I agree
with that. There have been sugge~tions that government try to work
much more in the political field. I agree with that, I have heard sug-
PAGENO="0097"
93
gestions made we ought to tr~ to get the whole atmosphere back on a
commercial basis. I agree with those things. So I don't think I have
disagreed with everything I have heard. I tried to address myself just
to the things that I disagreed with.
Senator Cirniron. Yes.
But those proposals with which you disagree are the proposals that
would change existing law and present practice.
Do you have any proposals to make of your own?
Mr. TAVOTXLAirEAS. Yes, sir.
Senator CHtrnoii. I would like to get them on the record because
we want to get industry's proposals along with those that have been
made by the critics,
Mr. TAVOIJLAREAS. Senator, I am sure we are both sitting down
together in a period of frustration, confusion and trying to do what
is right for the American people and the world and I am not against
government for government's sake. I think that is silly indeed.
If the Government could improve the situation I will endorse it
and say I am for it.
I just say some of the proposals I have heard I don't think will not
be either workable or acceptable to the Government of Saudi Arabia,
that is my point.
I jotted down last night, the things I think would improve this
situation and maybe after a period of time if this doesn't do the job we
have to look at something else.
I would like to have greatly increased consultation between the
Government and the companies with the understanding that we both
have a role to play. Many of the propositions I have heard: "Well,
the government ought to play a bigger role, but how do we secure our
input? We can't get you fellows together because there are antitrust
problems."
If we asked an oil company man to do so we will have the Hill coming
down on top of our heads. I think that is a very foolish result. Here
we are, people with knowledge being told if we ask for your advice it
will be the most horrible thing for the American people. I say, there
should be consultation where both of us have a role to play.
DEV~LO~tENT OF ~EW ENEirGY SUPPLIES
We ought to pass laws of the United States that will increase the
possibility of developjug new energy supplies quickly. We are going
through a period of. talk, talk, talk and no action.
Senator Ciiuiroi~.; What changes dq you thin1~ should be made t~iat
would encourage increased domestic production?
Mr. T~voVLAREAs. Well, wh~n it i~ ~Jl overt apparently the two
sides of the equation seem to be environment versus supplies, There
is no doubt we have the energy resource base. More than one report
says America has the energy resource base. We are only talking about
the constraints we put.on ourselves.
When you speal~ of constraint, almost every case becomes environ-
mental. I say that . someone is going to have to make the decision as
to which has priority in each case.
I can give you some specific proposais. I will be very happy to do
it or tell you in generalities.
45-426-75-7
PAGENO="0098"
94
If you ask me what I would do I will tell you what I would do in
this area.
Senator CHURCH. Your idea for the country is to stimulate new-
Mr. TAVOULAREAS. Supply sources.
Senator CHURCH. For energy b~i relaxing the environmental con-
straints. Does that sum up the general position?
Mr. TAVOULAREAS. Well, I think we can do the job without a lot of
harm to the environment. That is why I don't want to endorse that.
Other people don't think we can do the job. When we decide there
is a possible harm to the environment someone has to make the dcci-
~sion whether the supply source or the environment is more important.
This is clearly a decision for government, not a decision for companies.
So I think we ought to work on increasing the supply source in the
United States.
I have heard a lot of people, oh, no, let's only concentrate on curtail-
ing demand. Well, I think then you have taken the options away from
the American people because the curtainment of demand is a decision
in which the American people don't get what they want and we
haven't the supply base to make up the difference. You have really
made a decision.
Senator CHURCH. You mean by that you are against a conservation
program that is voluntary in character?
Mr. TAVOULAREAS. No, no, I am for conservation.
Our problem is we have to define conservation. Some people would
say conservation means 1,000 percent assurance that not one blade of
grass is spoiled. Well, someone has to define what we mean but make
it very clear. We believe in conservation; we believe in the environ-
mental protection.
The next thing I would do is to say is that in the conduct of our
foreign policy, we should recognize the important role of the oil
exporting countries. I think in the past we haven't quite recognized
the importance of the role they play. I didn't say have it dominate
the foreign policy, I merely said, recognize the role.
Next I would encourage increased exploration by American com-
panies in the world to bring supply and demand in balance. Almost
every suggestion I have heard is a suggestion of who can do better
in splitting up the present pie. Splitting up the present pie doesn't
make one more barrel of additional reserves. And to the extent you
tell companies we are going to take that away from you, you ai~e going
to encourag~ it to be taken away. This discourages exploration else-
where. Recognize the, fact that we cannot expect cduntrie~ like Saudi
Arabia to consistently increase production which they don't need while
we do nothing here at hometo help ourselves.
Consult with other consuming countries to foster a spirit of coopera-
tion rather than competition, not with the idea of confrontatiOn with
the producing countries.
In this regard I don't think we can ask other countries to do more
than we are doing ourselves. For example, we see certain coi~ntries
in the Common Market setting goals on nuclear development by the
year 1985. which we in the United States are not willin~ to do ou~-
selves. I think we ought to examine this very carefully. Some people
~ay don't build nuclear plants. In thy opinion I say build them. That
is another way of creating surplus supplies in oil.
PAGENO="0099"
95
Those are the things I would do, Senator, in order to improve the
posture of the companies and the Government in the month and years
to come.
Senator CHURCH. It seems to me that some of these proposals are
pushing an open door. I don't know of any serious deterrent now to
expanded exploration and development in this country. The price con-
trols have been modified in order to encourage the production of new
oil.
We were told yesterday by Dr. Sawhill the number of new wells
being dug is up 30 percent. We are bringing in the Alaskan oil. We
are encouraging new oil exploration off the coasts on the Continental
Shelf. We are in the process of adopting here in the Congress a multi~
billion dollar research program to make the country more self-sufficient
by stimulating the production of coal, cleaning up coal, substituting~
it for petroleum, getting on with an accelerated atomic program for
nuclear reactors. The Government will soon begin an expanded pro-
gram in other alternative sources for fuel. The shale production is
beginning in Colorado. Geothermal exploration is going on in the
West. If we want to stimulate domestic production and make ourselves
more ~e1f-~ufficient it seems to me we are doing all of these things
flow or will soon be doing them on a very, very large scale.
Mr. TAVOULAREAS. I think these are more things which you hope
the U.S. Government is starting to do rather than things that are being
done.
You said we are building the Alaskan pipeline. Not 1 foot of line
has been laid.
Senator ChURCH. The law has been passed, the clearance is there,
it is going forward as fast now as the engineers can put it together.
Mr. TAVOULAREAS. No; we need over 100 permits to build that line.
Not one of them-
Senator CHURCH. Is there anything further Congress can do about
that? I wish you would let us know. We have done everything in our
power.
You speak of fair and reasonable standards. Let's apply one. By any
fair and reasonable standard we are engaged now in a gigantic effort,
I think, to achieve a larger measure of self-sufficiency.
Mr. TAVOULAREAS. Let me give you some examples.
Senator CHURCH. I am not saying that every obstacle has been re-
moved but I am saying the general thrust is clearly in that directiou.
Mr. TAVOULAREAS. iiming is all important, Senator. We have some
acreage on the Atlantic coast that has some good geology. People tallç
~bout leasing that in 1976 or 1977.. I hardly think that is moving fast
enoi~g~. We have some acreage offshore Alaska. 1!Ve have some acreage
ini~h~ SantaBarhara Channel.That is not going up. We had ~~/2 years
of d~lay on the Alaskan pipeline.
We talk about shale. We are a long way, The people who have bid
recently on shale no* have to go through extended envirOnmental
Impact studies and can be held up for 3 or 4 years until legislation
on enviroi~mental impact st~teipents come out of Congress.
So while you sa~i you have done some things, you have also done
other things which impede us.
PAGENO="0100"
96
Senator CHURCH1 I think the only con~ideratiou isn't ~acçelerating'
production. We have to balance that, as you youi~se1f have said. We
have to have reasonable measures to protect the environment itself..
I am really saying I am not disagreeing with many ~f your recom-
mendations, but it seems to me we are engaged in doing that as best
we can, keeping other considerations also in mind.
We have had testimony before this subcommittee by a number o~
witnesses who have said we ought to alter the tax laws because the
present tax laws have created great incentive for investment abroad.
You have taken issue with that.
Other experts have laid a rather persuasi~re case before us. Obvi-
ously any tax system that creates incentive for additional investment'
abroad is not one that is calculated to promote self -sufficiency at home.
I. take it that you believe there should be no changes in the tax laws
as they affect the oil industry?
Mr. TAVOULAREAS. Can I just make one more comment about your
first statement?
Senator Crnmcu. Yes.
Mr. TAVOULAREAS, My problem is that we don't appear to ~iderstand'
the importance of timing and the leadtimes necessary. I talked to a
coal expert, and I am no expert in coal, and I have talked to nuclear
experts. They say the time period has moved from 5 or 6 years up to
8 or 10 years. So when we say we are moving, we are moving at a
snail's pace. If we move at a snail's pace I don't think this is accom-
plishing the job.
THE PURPOSES OP THE POREIG~ TAX CREDIT
Let me ~nove over to foreign tax credit. `This unfortunately I think
has been one of the most confused subjects I have ever heard discussed
~ith much more mist~oncep.tion than I have heard in my life about
what a law wassupposed to do.
The foreign tax credit was supposed to avoid double taxation. We
haye, foreign tax laws in.every major country around the wotld, and'
in, ~a,~idition to foreign tax laws we have certain companies which give
additional encouragements.
Now, if you put an American company in a position h~ a produci~ng
oountry s~ that the American company has to pay more taxes than a
competitor, we will slowly put that A~iieri~an co~npan,y at a competi~
tive disadvantage. For example, i~ the Saudi~ Arabian G~vernm'ent
charges today a $7 tax and rcyalty o~i eq~uity ofl a~ci a b~gher take on
buy ba~k oil and a I~rench or Gerip~n cornpany ;p~ys nq addit~onal
tax, or as a matter, of fact, are given incei~tive~ to explov~, and an
American conipany has to pay an açlditional tax becans~ it `4oesn't
get foreign tax credit, we are only talking. about the time when ~t~ie
American comp:anies are no longer competitive. S
Then afl of the control you are looking, for that you are trying to
get over the American companies will all be gon~ because we are
going to see the greatest proliferation we ever saw ~f foreign countries
ai4ta~ haven cowitries getting into this business. It is going t~ defeat.
You said your objective is to get Governmen,t thore `involved. How
do von get involved? By helping a French compaiiy in Saudi Arabia
and a Panamanian company in Saudi Arabia. ` S
PAGENO="0101"
97
Senator' CHURCH. Most, if not all, of these foreign countries have
:a large measure of Governthe'nt importation tax, such as British Petro~
leum, and i~ is true of most European companies I know aboui; so
;they are hot purely private companies to begin with. They have got
~the Gçr~rernment rather deeply involved. I don't propose any similar
arrangement in this country. My proposal, it seems to me, has been a
~very moderate' one, that being the Government should give our own
nompanies as much backing as possible in connection with their nego.
tiations with the Arab go~ternments.
Mr. rfAV0ULAREAS. I will accept that. /
Senator CHURCH. The problem that I have with the tax question is
`simply this: I can understand it might be devastating all of a sudden
to eliminate all foreign tax credits. You find yourself in a radically
different position. And the dislocation that that could bring on could
be fairly serious.
On the other hand, our income tax laws are so filled with loopholes
and tax havens of ~arious kinds that we discovered in the Congress
some `years ago that a great many people, very wealthy people, were
getting by without `paying any tax~ at all. It wasn't that they were
`illegal, they simply had expert advice of the kind that `enabled them
to take advantage of these loopholes and taX havens in some way as
`to eliminate their tax to the Federal Government.
We sought to correct that by writing into `the law a minimum tax.
It said if you can take advantage of all of these loopholes and tax
havens in such `a way as to eliminate your tax, legally, you neverthe-
less ~wil1 have a minimum tax you must pay, because no person, and
I think it follows no industry, should be permitted a free ride in a
society such, as ours.
I have concluded from the evidence that has been presented to this
`subcommittee that a similar approach cOuld well be taken with respect
`to foreign tax credits and foreign investments by large multinational
norporations. If through the tax credits and various other concessions
~that are made it ends up that the industry pays little or nothing, then
there ought to be a minimum that the industry pays in any case.
In fact, I do intend to introduce `a bill that would impose a mini~
mum tax requirement.
What I am getting at, is that our figures, and they are your figures.
which I think are accurate, show that the major American-owned
oil companies, after taking into consideration both the foreign `and the
~doihestic operations `of these companies, paid very little to the Federal
Government in `taxes.
In 1972, Texaco paid 1.7 percent of its net profit in taxes to the
Federal Government. Mobil paid 1.3 percent; Gulf, i.2 percent; SocaL
`2..~ nercent; and Exxon, ~.5 percent.
Now, the figures are borne out over the 196~ to 1971 period. Tre-
`mendoiis oil companies with profits that ~re calculated in the billions
are flaying nothing more than token taxes to the Federal Government.
`This is a situation that I think the industry itself would want to
`see corrected since we expect other businesses to pay 48 percent in
`ta~s on their profits.
Mr. TAv0ULARRAS, I would like to respond to that.
PAGENO="0102"
98
You have covered a number of subjects. 1 wish I had time to make
my own charts, it might show the figures ~a little difterent. Let me say
one principle. You hav~ given the inference from that report, because
we are talking about foreign tax credit, that if we didn't have it,
if we didn't have foreign tax credit we would have paid more U.S.
income taxes. if we ha~ no foreign operations we wouid pay no addi-
tional U.S. income taxes. We have to remember that. ii we had no
foreign operations we pay no additional U.S. tax. Those tax flgui~es
should be related to Ti .S. income not to foreign income, in no way
does the foreign tax credit reduce 11.5. income taxes on U.S. income
made in the United States.
Senator CHURCH. I understand that. But you also understand that
if you didn't have this foreign income tax credit your taxes on yonr
overall profits to the U.S. Government would be greatly enlarged.
Mr. lAVOULAREAS. Yes. I understand that if I thdn't have a toreign
tax credit I wouldn't be in business.
Senator CHURcI-I. We keep passing like two ships in the night. I have
already said that I would think that the elimination of the foreign
tax credit would do very great injury to the companies because you
built your whole operation on the basis of such credit and I have
suggested instead we have some kind of minimun~ tax which would
put you in the same position as other citizens, individual citizens of
the country, who because of the various tax concessions and sanctuaries
they can take advantage of under the law end up paying little or
nothing.
We impose on them a minimum tax. We say in any caseyou must
make that much of a contribution to the support of your Government
and your country and your society.
Mr. TAVOULAREAS. When you take U.S. citizens, in effect, all operat-
ing within the U.S. sphere and put the same kind of tax burden on
them, that is a reasonably fair thing to do.
As a matter of fact, since all my income is practically from salary,
I didn't mind seeing a minimum tax on people who didn't pay tax.
We are talking about putting a tax on operations which must compete
in the world.
Now, whether you put a minimum tax of 10 percent or eliminate
the foreign tax credit, you are saying, well; I woh't do the horrible;
I will do what is a little horrible. If you can get all of the countries
in the world to say, "I will put the same minimum tax and pñjust my
tax laws the same way," then we will have no impediment. To 1~he
extent we have a tax that other countries don't have, I will tell you
we are going to slowly be put out of business.
Senator CHURCH. All right.
THE AMERICAN COMPETITIVE DISADVANTAGE ABROAD
Yesterday I suggested to Dr. Sawhill that this subcommittee staff in
its contacts with other representatives of the oil industry and also
governmental representatives of other coufltries, other consuming
countries, have had pointed out to them that the same argument is
being made by the European countries which say you must not tax
us for foreign earnings because that would put us in a competitive
disadvantage with the American companies.
So obviously the argument is made on both sides of the street.
PAGENO="0103"
99
Mr. TAVOULAREAS. Sure.
Senator CHURCH. T~ suggested that it might be advisable for the
consuming country governments to get together on a tax conVention
that would impose a reasonable tax but one that would not have the
effect of putting any one company at an economic disadvantage with
another.
Mr. TAvOULAREAS. Well, if you make the proposition that says I want
a minimum tax provided all of the industrialized countries and tax
haven countries of the world do the same thing. I have no objection.
SCnator CHURCH. Well, I think this should be an objective of Ameri-
can foreign policy. We are now apparently establishing, attempting to
establish, some rapport with other consuming countries that are faced
with the same problem we are, and I think this minimum tax approach
is one that the industry could live with and it would be, as you say,
what was your phrase?
Mr. TAVOULAREAS. Pregnant.
Senator CHURCH. That is better.
Mr. TAVOLTLAREAS. A little bit of a disaster.
Senator CHURCH. I think it would be injecting a little bit of fair-
ness into the general tax picture that would really serve the long-term
interests of the oil industry.
Mr. TAvOULAREAS. Well, let me say this. I think if we were all equally
taxed by our home governments around the world, including havens,
because otherwise you are going to i~ake havens increase, it would be
one situation.
Let's assume you get all of the consuming countries of the world
to adopt this, which I have some question about. Let's think about the
reaction of the Middle East governments.
Recently I was in certain Middle East countries aiid they were taik~~
ing about excess profits taxes the U.S. Government was thinking about
putting on oil companies. They unfortunately had it all mixed up.
They thought the U.S. Government was talking about excess profits
on foreign income rather than domestic income, and I tried to
straighten them out, Other parts of OPEC, whether they understood,
are going to put excess profits taxes on and two countries told me
I can assure you that if your U.S. Government says this oil is very
high priced and it adds more taxes to the burden, then we will match
that tax for tax. This is what they told me. I think you have to bear
~liat in mind when you are proposing this kind of tax.
ARAB PROFITS
Senator `CHURCH. Well, from all that I have seen and heard I think
the Arab governments, far from being appeaseable on the question of
price, have determined that their highjacked prices can be made to
stick in the Western World and now they are reaping the harvest,
$50 billion in surplus revenues.
THE ShORTAGE AND THE EMBARGO
Mr. TAVOULAREAS. Because of a shortage, not surplus,
Senator CIrnnChT. Well, I don't know whether it is shortage. I don't
think that there is a shortage of supply. We haven't any facts to bear
out there is any present shortage of supply in the world.
PAGENO="0104"
100
Mr. TAVOTJLAREAS. Senator-
Senator Ciiuiwn. That is with respect to the oil that is in the ground
and available.
You say the shortage was brought on by the embargo and that is
true, it created a shortage, but the embargo was imposed for political
reasons and now it has been lifted.
Mr. TAVOULAREAS. Let me say this.
If you follow it very closely~ in Cairo last week the Ministers met
again and they saw some temporary surpluses in the world of oil
supply, and having seen some temporary surplus of wrnrid supply,
and that is wl~at you are addressing yourself to, and I am personally
happy there are some surpluses, the proposal was made by one of the
countries that if this surplus creates an effect on price let'a all agree
to cut back our production. Every country except one voted for that.
So I think to count on surplus is at least tricky, ~t least unwise,
because they are telling you they will make no surplus. In the ease
of Kuwait, they put oil up for sale, for au~tion. You said befbre it is
a free market. If it really is a free market, I wouldn't mind so muth.
They didn't get the price they liked and pulled it off. It is not really
a free market.
Senator CHURCH. But if that were the general way of sale they
would really finally have to come to terms with that market. They
could hold the oil for a time, if it had a competitive condition exist-
ing among the oil producing companies and a really free market as
far as the sale of oil was concerned. You don't have that~
Mr. TAVOULAREAS. I wish.
Senator CrnTRCH. You have an OPEC which is a cartel by the pro-
ducing governments. You have a lot of factors that operate against
you.
Mr. TAVOULAREAS. We understand that.
Senator Cimneli. furthermore, we now have a US. f~reign aid
program advocated that will take further pressure off these govern-
ments to generate their own resources.
Mr. TAVOtTLAREAS. You are going to get surplus in my mind by
developing more uncontrolled production, or if for some reason cer-
tain countries decide t~ey are not sure they want to be with some
of these extreme demands of all of the OPEC countries, this Is where
we ought to direct our attention.
Senator CHUncH. Senator ease will be here in a few minutes. I don't
think I have further questions, but Senator Case may have some.
Before I ask you to step down I would like to give him that
opportunity.
While we are waiting, Mr. Blum has some questions he would like
to put to you.
MOBIL AS A CRtDE SHORT COMPANY
Mr. Br.UM. Mr. Tavoulareas, traditionally Mobil has been considered
a crude short company.
Would you elaborate a bit on that description and why it is applied
to the company?
Mr. TAVOULAREAS. Well, I think ~t started off with our position in
the tTnited States. We have reUnery capacity and markets, let's say,
approximately. double our crude production.
PAGENO="0105"
101
That is not unlike many companies, because we have many, many
more companies in crude production than we have in ~refining iii the
United States. There are a certain few companies, almost totally sel~
sufficient, there are some more than self-sufficient, but they have ~
refineries. We start off in the United States calling Mobil a crude short
company. As we move outside of the United States we would like t~
have more crude. However, over the years we have developed rnarket~
and refineries about equal to what we thought our availability would
be. Now that availability only came from our own concessions, in some
cases from long term very favorable purchase contracts, so in our
foreign operations I wouldn't call us crude short.
Would we like to have more crude? Of co irse we would. Because we
could build bigger markets.
THE OFFTAKE RULES AND ARAMOO
Mr. BLU3I. It is our information in the course of your dealing over
the years with Aramco you have consistently pressed for relaxation
of the offtake rules to enable your company to buy Aramco oi.I at a
favorable price and Mobil has been a leader in this; is that right?
Mr. TAVOULAREAS. That is right.
Mr. BLUM. And that several times on several occasions you have had
the price of oil, over lift oil, as it is called, decrease so you could take
more. Would this be because you did not want to be limited to a 10
percent share of the total oil coming out of the ground of Aramco?
Mr. TAVOULAREAS. We were never limited to 10 percent share of
the oil.
Mr. BLUM. At reasonab'e low cost.
Mr. TAVOULAREAS. At a price that we thought we could market the
oil. There is no doubt about it, I think all this proves to me~ is there
is severe competition even in joint interest ventures.
Mr. BLUM. What was your leverage in the Ararnco agreements in
getting the arrangements changed?
In other words, if I had 30 percent of that. and I saw you coming
along saying give me very inexpensive oil, why would I agree with
you to give you it?
* Mr. TAVOULAREAS. You finally drew two conclusions, One, I could
probably get the oil at a cheaper price than the present arrangement
and you would rather see the production dedicated to Saudi Arabia
in that case.
Mr. ELUM. In other words, it is a way of moving crude, it is a way
of selling more oil, if you don't get the oil you will go somewhere else
ai~id get it.
Mr. TAVOULAREAS. This actuaflv proved why Aramco was so suecess-
fuul, it had four companies sell its crude, having all of the facilities
of four companies available.
Mr. BLUM. It is our understandin~r that there are buy-back nego-
tiations under way now and we are talking about that right now.
How i5 that going to be handled. whether or not we are going to
work with four companies handling the buy-backs.
How will that be handled among the four companies? Will you be
Iiin~ted to a 10 percent share of buy-back oil?
PAGENO="0106"
102
Mr. TAVOuLAREAS. Well, the government has 25-75 right now. I am
sure the government will get more than 25-75 very soon, what with the
Kuwait settlement. We have to assume that Arabia will have at least
the same deal as Kuwait.
Now, let's look at the bacl~ground of these negotiations. We are
really taking a snap shot in time in a very fast changing structure.
The government said we want to participate in the concessions and
us part of that participation the government said we would like to
have you dispose of all of your oil and we were very happy to dispose
of some of the oil because we have built markets.
These negotiations on buy-back have been really part and parcel
o~f the participation negotiations and as long as that remains I think
the buy-back negotiations are a part of the participation negotiations~
Now, over and above that oil vastly increasing quantities of oil have
become available to the government itself. On that we feel ourselves
completely free to negotiate on our own.
Mr. BLUM. Is that now a matter of discussion among the Aramco
partners or are you negotiating freely to buy oil from the Saudi Arab
Government?
Mr. TAYOTJLAREAS. We haven't got a settlement on exactly what our
new deal is. I wish we could get a settlement.
Mr. BI2uM. At various meetings you have held of the Aramco chiefs
in August, and later, was discussion of how these buy-back arrange-
inents were going to work a subject and were you pressing then for
opening up of the availability of that buy-back oil?
Mr. TAVOULAREAS. Well, we have a joint venture. We have to define
what we mean by the scope. To the extent of whatever we are talking
ubout comes within the scope of the joint \renture, we felt our~selves
morally and legally bound to negotiate within the framework. Where
we feel that what we are talking about might be outside of the scope,
we might find ourselves free to go our own way. There are many times,
I must say, during the negotiations where companies make all kinds
of statements like husbands and wives make all kinds of statements
between themselves. Don~t confuse those negotiating tactics with
substance.
Mr. LEvIwsoN. `The issue is, aren't we reaching a point where the
structure is changing sufficiently so that we ought to really consider
whether the previous arrangements make any sense? I refer specifi-
cally to the fact as participation oil increases, does it make sense any
loneer for the four companies to negotiate jointly for preferred access?
Why not cut everybody loose and see who can make the best deal?
That is the issue.
YAMANi'S VIEWS ON NATIONALIZATION
T mentioned to you in the October 1972 interview Sheik Yamani
said ho was opposed to the nationalization because it would lead to
price cutting and bickering among the producing countries.
Why isn't it in our interest to do everything to force that situation
where producing countries are competing among themselves with a
multiplicity-
Mr. TAVOULAREAS. I think it goes back to the type of questioning
we were discussing with Senator `Church.
PAGENO="0107"
103
We have had a very, very competitive oil industry up through 1973.
I think anybody by any standard would have to say it is very
competitive.
Then the period of shortage comes in. Now, you are asking during
this period of shortage do you think whether one company negotiates
Or five would be better.
In my opinion, as long as there is shortage, the governments will
insist upon getting the highest price anybody offers. It could work
the opposite of what you are saying. It could work the opposite. In
time of surplus, what you are saying may make sense; it can't during
a period of shortage.
Mr.~ LEvIN50N. We are trying to look today beyond the future struc-
ture essentially and the question was directed toward that. We are
looking further than next year or the next 6 months.
Mr. TAVOULAREAS. I think you don't really have to work on changing
the structure; it is being changed automatically. These governments
are insisting upon having more and more oil available in their own
right. Now, we don't have to speculate as to whether this is going to
mean higher or lower prices; we are going to find out. Unfortunately,
a couple of examples we have didn't work out very well. We saw, in
the case of Iran, the oil was available to everybody and some people
bid as high as $22. In the case of Kuwait, they didn't get the price they
wanted and $)ulled it off the market.
So those two examples that we had didn't work the way that you
are hoping. There is no doubt in my mind, however, we are going to
get closer as we get down the road to what you are suggesting.
TIlE ARABS RESTRUCTURE
Mr. BLUM. Mr. Tavoulareas, you said that the Arab governments are
restructuring. The restructuring we have had under discussion ~s going
on the meetings of the Aramco chiefs and you are restructuring not
company-government arrangement - by intercompany arrangements.
I am wondering if this shouldn't be something the U.S. Government
should participate in ~
Mr. TAVOULAREAS. Will you explain it a little more?
Mr. BLUM. The question is the scope of the joint venture. rrhe ques-
tion is whether you have access as an independent coinpa~ly or you
will go independently and buy back oil that is not an issue between
you and the Saudis, that is an issue among the partners. My question is,
shouldn't the U.S. Government be particinating in this kind of basic
restructuring of a partnership that controls roughly 20 percent of the
free world supply ~
Mr. TAVOULAREAS. Well, we have to define scope and different type
scope changes. Within the scone of the joint venture, we use all of
the negotiating tactics possible in order to get our negotiating position
put on the table. We had a discussion on this toint back in my office
about the disaster or the fact the companies didn't stick together in
Libya and now I am hearing a proposition it would b~ much better
for the world if you companies didn't stick together. I get puzzled by
the 180-degree switch.
PAGENO="0108"
104
Mr. BLUM. I am not asking the rightness or wrongness of the action..
I am asking the question about Government participation in the fun-
damental restructuring or redefinition that is going on, and I am say-
ing not that it is right, wrong, or otherwise in how you are doing it,,
but that should the U.S. Government be involved and active and,
know in detail what is at stake in these meetings yt~u are holding to
decide what is and what isn't included in Arameo.
Mr. TAVOULAREAS. Let me tell you this: There is no time ii~ history
that I know of where the U.S. Government was interested in some-
thing and we didn't tell' them. As~ a matter of fact, I think we have'
always been forthcoming. If some people say we are not, we ought to
correct that. There is no doubt about that at all. We have dealt wt1~
the State Department, more recently FEO [Federal Energy Office],.
and we heard something else. We checked with the State Department
and told them what was going on. We called FEO and Simon's office.
It would affect each of these people. If there is someone else in the
Government you want us to talk to, I would be happy to know who
that is. We have been doing what you are talking about.
Mr. BLUM. Is the FEO or Mr. Sawhiil's office aware of these re-
structuring negotiations? `Yesterday we asked the Justice Department
about it and they weren't aware. Have you informed them?
We are talking about Aramco, we are talking about August, we are~
talking about September, we are talking about participation.
Mr. `TAVOULAREAS. Well, if you are talking about the restructuring
going On and the participation, the U.S. Government has been fully
aware. If you are talking about buy-back oil, you are talking about
two subjects.
Mr. BLUM. The buy-back aspect.
Mr. TAVOULAREAS. Mr. Sawhill is fully aware.
Mr. BLUM. He is?
Mr. TAVOULAREAS. He is aware as much as I am. That is all I can.
tell you. I know I have had conversations with him very recently.
Mr. LEVINSON. To put the question in its bluntest terms, four vice
presidents of Aramco, which are the shareholder partners, were meet-
ing yesterday, or Tuesday, I guess it was, with Yainani in Geneva.
or Vienna.
Mr. TAVOULAREAS. Geneva.
THE ROLE OF THE U.S. GOVERNMENT IN NEGOTIATIONS
Mr. LEVINSON. Th~ question is what kind of consultation takes
place and with whom with U.S. Government officials as to what posi-
tion the companies are taking and what Yainani and the Saudis are
after? Was this related to the fact that the Saudi de1e~ati*on is here'
now for the purpose of negotiating some kind of umbrella agreement?
Does one part of the U.S. Government know what the other part
of the U.S. Government is doing and how you fit into it?
Mr. TAVOULAREAS, I can't answer whether one part of the Govern-~
ment knows about the other part of `Government. I have a hard time
trying to run a company to say nothing of trying to run the Govern-
ment. In terms of their awareness, let me tell you all I know.
Mr. LEVINSON. Did they check in before they met?
PAGENO="0109"
105
Mr. TAVOtTLAREAS. I know of one company at least that had a dis-
cussion with the State Department before this meeting. Let me tell
you what I know about it and I d~n't know everythmg~
I haven't got a report. The boys came back and I have been in
Washington getting ready for this meeting. All we were told is Dr.
Yamani would like to meet you people in Geneva and we had all
kinds of conjecture as to what he wanted to talk aboi~it, I will get a
report when I get back a~ to what was discussed. I can't behe~e that
anything fundamental happened or otherwise I think I would have
been told.
We have members of the Aramco board, the Gpvernment is a paftner,
the Government is a partner 25 percent. These tour vice presidents
you are talking about are board members. Are you suggesting that
when the Saudi partners want to have a meeting and I say I can't
have a meeting, I have to consult?
Mr. LEVINSON. You know very well that there is a whole course of
dealing over the past 2 years on this very issue. The question of whether
four companies will continue to have a preferentia' access to Saudi
oil and on whatterms is the kind of long-term arrangement that Saw-
hill was talking about yesterday and Senator Church was concerned
about in terms of talk about the future structure of oil. That is nOt
an abstraction; it is what are you going to negotiate with the Saudis
over, that is, the structure of the buy-back arrangements.
A good part of the Saudi oil gets into the world markets. Our only
point, and it was Sawhill's as well yesterday, is what are the points at
which the U.S. Government ought to have a role, what the role ought
to b~ what is the consultative process, is there to be an approval process
and, if so, at what stage? We have just focused on that. It is a concrete
example of bringing this question of consultation and approval down
to some concrete points rather than vague generalities.
Mr. TAVOULAEEAS. On consultation we have complete agreement in
principle. If it is not worked out mechanically right we will work on
how we can improve that kind of consultation. I agree it is needed.
Let's talk about approval. I have a grave pi~obiem. I have a tre-
mendous problem. If I thought for a moment that approval is a thing
that would help our bargaining position, maybe I would endorse it.
From what I heard it will only hurt our bargaining position.
Mr. LEvn~soN: I am not talking about your bargaining position:
I am talking about the long-term interests of the United States.
Mr. T~VOULAT~EAS. Tha1~ is what I am talking about.
Mr. tEVINsoN. That mtiy not be the same in every case consistent
with yours.
Mr. TAVOULAREAS. You are wrong. If we don't serve the interests of
our customers we will not last. We understand that. We have always
understood it. We have been in existence for over a hundred years
because we believe we have served the interests of the people we serve.
Any time we get to a situation where we doji't serve the interest of
people we serve we won't be in business no matter what the document
says.
Mr. LEvINSON. As a general proposition that may be right.
Mr. TAVOULAREAS. I am talking about any specific instance and we
~cvill talk about it.
PAGENO="0110"
106
Mr. LEVINSON. I have given you one instance. All we are trying to
do is locate the points at which the contact between the companies
take place. What are the nature of the contacts. Is it just to inform?
Does the U.S. Government feel it has a substantive contribution to
make and assessment, independent assessment aside from yrn~r own
desirability of terms of the free market negotiations, and if it does,
who makes that decision within the U.S. Government and how do you
determine it?
Mr. TAVOULAREAS. We have talked since some of j~hese others; we
went back to the people we contacted and said is there anything at
all wrong in what w.e are doing in terms of consultation? We had
absolutely no complaints. Now, in terms of how U.S. Government
coordinates, really, I can't do that.
I will tell you one example where I get concerned, I gave it to you
in my office. If the Federal Energy Office says we want to be the ones
who say this is the price at which you can import to the United States,
I think they have that right, I don't question it. They may or may
not be right, bift that is their decision. Someone ought to tell us the
Internal Revenue will accept the same price. I don't see how we can be
~in a position at all of being told by FEO $9.50 is right and 4 years
from now heur that the Internal Revenue couldn't care less what the
FEO says; that is not right.
THE PRICE TRANSPARENCY
~r. LEv~NsoN~ The problem is even more general than that. In the
rçce,~it Erus~els meeting of the energy action group yo~i had the observa-
qi~ by the German Government they are concerned about wha~t they
c~1~ed price transparency. They couldn't understand how the com-
panies could tell the U.S. Congress their high profitability was due
to the European operation and at the same time show margins or
profits in the European operation. They said to the U.S. representa-
tives there we have to have international consultation; it is not only
a problem within the U.S. Government but it is a problem among the
consuming nations. And there is no question it is a problem.
What we `ire after is where do the companies fit into this process?
Mr. TAVOULAREAS. Let me comment on transfer prices. I went down
myself to see Sawhill 3 months ago and put on a piece of paper and
gavejiim a chart which showed all of the combinations of government
take and every equity ownership and what various transfer prices will
yield to us in profit. So we have disclosed all that to the Government.
And I gave exactly the same thing to the German Government. I was
there about 2 months ago.
TERMS OF REFERENCE FOR NEGOTIATIONS
Mr. BLUM. One `final question along this line.
How would you feel about a proposal that would force you to check
terms of reference that are given to a negotiating team before the nego-
tiating team in fact receives them rather than a final signoff and.
approval of terms of preference? You do this all the time, The chiefs
met and said this is what the negotiating posture should be.
PAGENO="0111"
107
Mr. TAVOrLAREAS. I have no objection to showing terms of reference
except we found `out to our own chagrin that almost every tune we
extended the terms of reference they appeared in th~ newspapers
around the world before the Arabs saw them or OPEC saw them~
Let me tell you this has happened to us time and time again. In one
case they had a whole copy of it.
Now, I guess if you fellows can convince us and say to us we can
assure you there will be absolutely no leaks to the press in the world
before we negotiate, but I don't think, I haven't had that ±aith and
I don't think you can give us that.
Mr. BLUM, You are saying the problem of sharing terms of iefer~
ence with government is government immediately leaks it
Mr. TAVOtLAREAS. I didn't say that.
Mr. BLU~r, Or there is a danger?
Mr. TAVOULAREAS, `There is the danger.
Now, we told governments-U.S. and foreign governments-that
the area in terms of terrain and where we were going and at one time,,
as a matter of fact, the companies wondered if we shouldn't dig deeper
and we were told by `certain consuming countries at that level we think
keepiiig the supply flowing is much more important than a few more
cents a barrel.
INVALIDITY OF TEJIRAN AGREEMENT
Mr. LEvINs0N. Your statement is a very comprehensive statement
and you address the whole panorama of things, dealing with past and
present and future.
If I could just run through this very quickly with you, we won't
trouble you any more.
You state at page 4 of your statement that under the Tehran agree-
ment, posted price of Arabian light on October 1, 1973 was $3.01.
On page 5 of your statement you state without the October 1973
ArabJsraeli war the supply picture would not have been critical, and
posted prices would not have reached $11.65.
Isn't it true Sheik Yamani put you on notice as early as August 1973
that the Tehran agreement was finished and threatened that OPEC
would double the posted price in `October to $6.02? Isn't that a fact?
Mr. TAVOULAREAS. That is a fact.
Mr. LEVINSON. And lie also, in August and September, threatened
to cut back production for a variety of reasons, did he not?
Mr. TAVOULAREAS. Yes; can I comment there?
Mr. LEv[NsoN. Of course.
Mr. `TAVOULAREAS. If you would list the threats that we gOt from
various governments at various times and assume they are all accom-
plishments. the prices, we wouldn't have been in there 10 years and the
pnce wouldn't he $11,
Mr. LEVINSON. I understand. All I am ~ddressing is the fact in your
statement you seek to create the impression up through the October
w~ir volT essentially had a stable situation and the import of the two
quesdons J asked you is essentially to illustrate the fact that it wa~
indeed hh~hlv unstable at that point `and the Tehran agreement was
shaky and falling apart.
Mr. TAv0ULAREAS, Let me give you an example.
PAGENO="0112"
108
When the Tehran agreemeflt came along the governments were
asking approximately three times mOre than we finally settled on.
If you want to quote at that time isn't it a fact they told you it is
going to go three times and we sat down and negotiated and we
finally didn't agree on thr~e times. They certainly told us before the
October war we are going to, get way more. The fact remains the
October war intervened and they moved unilaterally.
Mr. LEvIN50N. They told you they were going to move unilaterally
without the October war?
Mr. TAVOTJLAREAS. No, they told us they were going to move unilater-
ally in 1971.
Mr. LEVINSON. Before the Octobet' war, Yamani told you the Teh-
ran agreement was finished, we are going to double the price. You know
it. I know it.
Mr. TAVOULAREAS. He told us many things that didn't happen.
Mr. LEVINSON. On page 5 df your statement you refer to much has
been made in these hearings as to the handling of this case, and you
attribute your difficulties to an effected or disappointed, staff lawyers in
the Department of Justice. Yesterday we heard testimony from Mr.
Kauper, present Assistant Attorney General of the Antitrust Division
andhe said:
For example, it appears that the large joint venture in Iran known as the
Iranian Consortium was created with the encouragement and involvement of
the U.S. Government In order to insure the stability of a relatively pro-Western
governthefl't in that country. Because of that l~volvement, the National Security
Council acting with the concurrence of the President in 1954 adopted a resolution,
which was made known to the Justice Department, that the Antitrust Division
should make no effort to challenge or dismantle major oil company joint ventures
in the Middle East.
`Thus the Department never squarely confronted the legality or
illegality of the joint venture arrangement in the Middle East.
Mr. Kauper in his statement in his testimony stated that this was
for overriding reasons of national security.
`That is just to clarify the fact, to amplify a point of your own
statement and clarify the interpretation of what happened.
Mr. TAVOULAREAS. Well, I haven't read Kauper's statement. I under-
stand lie made it clear joint ventures are legal.
Mr. LEVINSON. All I am saying is that he said `that they were con-
strained by the National Security Council from confronting that issue
with respect to joint ventures in the Middle East.
Mr. TAVOULAREAS. Constrained at that time. I don't know. I thought
he said yesterday joint ventures are legal. I am talking about what
he said yesterday. Let's not worry about what he said, the Govern-
ment said in 1948.
THE MOBIL BONUS AND PROFIT
Mr. LEVINSON. Mr. Tavoulareas, your company recently paid a bonus
of 1 month's salary to all of its employees. A recent article in the New
York Times noted the major oil companies have won nearly every
objective they have sought in recent years. Either Government or the
marketplace has made possible one controversial development after
another: approval of the Alaskan oil, oil pipe rollback of environment
timetable, et cetera.
PAGENO="0113"
109
in what way h~s Mobil Oil Co. suffered as a consequence of the
energy crisis?
Mr. TAVOTJLAREAS. Well, let me say I don't know what objectives
we have won that we have gotten. I wanted an Alaskan pipeline by
the year 1973. Not 1 mile or it h~s yet been built. I didn't want the
environmental standards on such a very strict timetable as has been
~adopt.ed. We have got them. We don't want shortages-we have short-
ages. I don't want a stock price of ~40 a share~ I have a stock price of
$40 a share. I don't want to be threatened with punitive legislation but
we are being threatened with punitive legislation. I don't know what
~objective we have achieved.
Mr. LEvIN50N. You had a 66-percent increase in first quarter profits
of 1974 over 1973.
Mr. TAVOtLAREAS. Let~s talk about that a moment. You have to
understand bookkeeping profits. We have put out a long release. I
think it would be well if I explain it. We show an earnings increase
in the first quarter of this year over last year. More than 100 percent
of the earning increase has to do with liquidation of low-cost inven-
tories. Let~s understand what that means. It means our inventories
on the books at, say, $4 a barrel and we were able to sell those inven-
tories for $9 or $10 a barrel. We had to replace those inventories with
$10 a barrel crude. We lost mouey.
Mr. LEvIN50N. You are not going to sell that inventory at a lower
price-the replacement for inventory. In other words, you ~re not
taking a loss on your replacement, are you?
Mr. TAVOLTLAREA5. I have to hold inventories to do business which
rre more than two times greater than the last time. I have to borrow
the money and have to pay the interest on it. Do I Ii I~e high cost
inventory too-
Senator CASE. May I ask you as a matter of interest what do your
footnotes to your income statement show in this regard? Do they call
attention to the fact that the profit is an unusual profit?
Mr. TAVOULAREAS. Yes.
Senator CASE. And because of the reason that you give?
Mr. TAVOULAREAS. Yes, sn.
Senator CASE. As against the first quarter of 1973?
Mr. TAVOULAREAS. We put out a long public release which described
~this in great detail.
Senator CASE. You have done a number of those?
Mr. TAvOULAREAS. Yes, we have.
Senator CASE. Discussing the Congress and-
Mr. TAVOULAREAS. Yes, we have.
Senator CASE. It is a very fine thing. We can all benefit by the kind
~of thing that you are going through now-
Mr. TAVOULAREAS. We appreciat~ that.
Senator CASE [continuing]. And you are putting us through. (lo
ahead.
Have you got the balance sheet there, your 3 month's statement
~there?
Mr. TAVOTJLAREAS. No. Do any of our people have it there?
Senator CASE. Will you put it in the record, whatever you sent out?
45-426-75-8
PAGENO="0114"
110
Mr. TAVOULAREAS. We will put in the record both our earnings;
release explanation for last year as well as the first quarter of this
year. Be very happy to do that, Senator.
[The information referred to is in the Subcommittee files.]
Senator CASE. Since we got on this matter of discussions in the news-
papers, you have been very active in dealing with the public in matters~
of charging us, that is to say, the Government, with not anticipating
the shortage-energy shortage-and have held the industry up as a
shining example of foreknowledge.
I wish you would go into that a little bit because I remember a
statement by Gulf not more than a year or so ago which said there is~
no possibility of any shortage.
Mr. TAVOULAREAS. I don't know what Gulf said.
Senator CASE. And I just don't remember in the past that you have
been recalling to us iii public indicating that you have been riding
right and we have been inefficient. I don't doubt we have been
inefficient.
PETROLEUM PRICES-UNITED STATES VERSUS ELSEWHERE
Mr. TAvOULAItEAS. I think we all have to share the blame,
Senator CASE. I would like to speculate with you a little bit. I have
always been interested in the way in which prices for petroleum in
this country have been so much lower than the rest of the world-
petroleum products including gasoline. I wondered how it happened
and whether it has contributed to our complacency about the limited
supply of petroleum products and has made us neglect other sources
of ene~gy and developed to the point where that is the real problem
we face: reliance on a single energy source, and to what extent has;
the complicated structure of the oil industry contributed to that, not
in a matter of anybody being the devil in this thing, but people are
going to do what they can do in business, and they have done it.
NaEurally, business urges its own point of view, whicli has included,
in effect, monopoly of production and control in the few hands of wise
men able to know what is best.
1 wondered if they have known what was best. This can be twisted
around and I hope you will take full advantage of the possibility to
sound as if I was complaining that the oil industry had produced
gasoline at low prices in the United States for a dozen yeais or more.
Tsn?t that a fact except it was artificially done at the expense of not
only the world outside of the lJnited States but also at the e~pense
of the succeeding generations of Americans for the benefit of people
currently.
I do suggest it hasn't been the wisest policy in the world and I wish.
you would sort of comment about this because it is perfectly ohviou~,,
it seems to me, even the enormous supplies in the Middle East are
exhaustible, in fact~ and at the rate of acceleration of energy con-
sumnption are going to be exhausted within your. lifetime and miiie~
and that our chief concern overriding everything else ought to he to
develop other possible sources.
Mr. TAVOULAREAS. Well, you are asking me to comment on a number
of things and I will try to comment on them as we go along.
PAGENO="0115"
111
On the first, I do not mean to complain, I will explain, on the use
of the *ord monopoly that has been used many times, but we have
figures, for example, which shows concentration of the four largest
companies in various industries in the United States, for example, in
the petroleum refining, the first four largest companies have 33 percent
of the market. In producing, some of these figures are much less
because we have many more people in producing operations in the
United States than we have in the refining.
Senator CASE, When I said that, that was a loose expression, I did
not mean to make it an accusatory one, but God knows you have been
working like everything in order to maintain a position where you
did not control the whole world, but you had a kind of leverage
through what you did control. It was an important element for which
you have taken rightful credit in the stabilization of the industry.
Mr. TAVOULAREAS, Well, we always looked and tried to find the oil
we needed for our markets, and that is all our objective has ever been.
In terms of the warnings we have given about shortages, I think I
would like to send you-for the record-some speeches we have made
in this regard.
IThe information referred to is' in the Subcommittee files.]
Senator CAsE. I wish you could dig them up. I had a magazine pass'
my desk the other day which quoted Mobil Oil oi~ the question of your
campaign and the rest of the public to show how good you had been
and how terrible we were in the matter of predictions to what was
coming. This was a rather cute little thipg which, in effect, somebody
from your company said this is a lot of nonsense, we have plenty of
supplies.
Mr. TAvOULAREAS. I am going to get to that. Let me say one of the
things I regret about the frustrations we are all finding during this
period, we are all becoming adversaries one against each other, and it
could be much better if we could work together and try to solve the
problem. There is no question about that and sometimes when we--
Senator CASE. President Johnson used to talk about that.
Mr. TAVOULAREAS leontinuingi. Sometimes we talk about Govern-
ment. It is not fair. We do not like to be talked about as the industry,
we like to be talked about as Mobil. We do not think we are the
industry, we think there are some things that make u~ di'fferei~t. I am
sure you feel the same way about your part of Government.
I can think of a few warningS. I remember as long ago as the import
hearings when people were `talking about keeping the, con~trols on and
limiting oil to the United States. Mobil made a suggestion we do the
onpos~te; since our oil reserves were getting more exhausted than the
oil, reserves around the world, we ought to depend more in time of
peace on foreign oil so we have potential in reserves in time of war.
We proposed a `formula which was adopted by the railroad-Texas
Railroad Commission. I can certainly send you the formula. In terms
of shortage of re~oiii'ces, Senator, there have been two recent reports
that say very clearly we have no shortage of resource base. The only
shortages we have are the shortages that we put on by our own con~
straints. So I think in terms of resource base, whether it is oil or coal
or shale or nuclear, I do not think we should get in. We are in the oil
business. But I think more important is the people of the United
PAGENO="0116"
112
States have no shortage of resource base. The question is developing
that resource base.
In terms of exhaustible supplies of oil, there is no doubt but that
there must be a finite end of oil supplies. I think-and our geologist
tells me-we are very far from that end point. The question is we
need to be allowed to drill irt places in the United States wheFe we
have not drilled before and we need to drill around the world in many
places we have not drilled. Let us hope we find other resources as large
as the Middle East.
Neve~the1ess, if there is an exhaustible supply of oil, then our coun-
try ought to start developing, quickly, coal and nuclear and other
sources. I was not talking in terms of only dependence on oil.
Senator CASE. Especially is it not true we should not be fully
dependent on oil controlled by other sovereign states.
Mr. TAVOTJLAREAS. Well, let me make ~ comment about that. I said
it before in my speech. I think we are lucky at this time in the history
we have a country like Saudi Arabia that is willing to expand its
production and tell you I will expand my production for a few years
hence, but the thing that Saudi Arabia is going to continue to expand
its production, exhaust its reserves, take back money which it has no
need for, is a very foolish way to depend on our policy.
Senator CASE. I do not see how any sane person could disagree with
that proposition.
Mr. TAVOULAREAS. So I think it is important to understand objec-
tives of Saudi Arabia. Here is what they tell me. Why should we con-
tinue to raise production if you fellows do nothing about solving your
problem yourselves? We have almost no answer to that one. Now in
terms of price. You said why have you always noticed the prices were
lower in the United States than abroad, and for that purpose I am
going to take the gasoline price which is the price we all know much
more about. We had a situation for years when we were talking about
35 to 40 cents for gasoline, and I am talking about 20 years, while in
most foreign countries we were talking about the price of 50 cer~ts a
gallon and above. The main difference between those two prices was
home governixient taxes. There was cheaper foreign oil available, let
us say, in the $2-a-barrel range as compared to $3 a barrel for the
domestic crude. That would have made 2 `cents a gallon difference, but
beyond the major difference was local home government taxes on gaso-
line. This is one of the things that Middle East governments say. You
talk about my price of $7 a barrel or my price of $10 a barrel. Your
Government charges you now almost as high as a dollar a gallon tax
on gasoline.
Senator CASE. Say this is to what countries?
Mr. TAVOTJLAREAS. Well, many countries. As an example in a coun-
try like Greece, the price of gasoline is $2.25 a gallon. A great part of
that is tax.
Senator CASE. How would that translate into price per barrel?
Mr. TAVOULAREAS. Well, if it were a dolh~r a gallon it is $42. Half
a dollar would be $21 per barrel-almost all countries have half a
dollar. So they say do not talk about me raising the price to the con-
sumer. I do not agree with them. I think one is a tax within the coun-
try and the other is a tax which affects international commerce. There
is quite a difference between them. But this is the claim they make.
PAGENO="0117"
118
That is the main reason for the difference all through the years. In
Europe for many years with the small roads and thinking of cars as a
luxury, they always had a high price for gasoline which automatically
produced small cars. We had cheap energy here, we produ~ed bigger
roads and bigger ears. Now, as we see energy costs going up, we are
going to go back to smaller cars. I think the trend is already well on
its way.
There is no doubt you can claim that to some extent the people have
gotten spoiled by the low cost of energy, particularly in gas, for
example. In the case of gas, a premium fuel, the U.S. Government has
controlled the price of gas over many years. The basic problem with
the gas Oontrol is they say we give you cost plus, is that not fair ~
Well, if we could replace those reserves at the same price it would be
fair. But if we cannot replace those gas reserves at the same price it is
not fair. That is basically the fallacy with it.
Nevertheless, it created abnormal demand on a premium fuel and
we now have a very, very serious shortage of gas in the United States.
Senator CASE. This policy of low-cost petroleum products, especially
gasoline, it has been a policy, of course, approved by the industry, but
also implemented by government, and in your judgment, the govern-
ment share was controlling.
Is it a fact that the higher price in Europe, for instance, the fringe
areas like `Greece, Germany, Britain, and France, has been entirely due
to the difference in governmental taxes ~
Mr. TAVOULAREAS. No. In other words, certainly up till last October,
I would say the major reason has been taxes on gasoline. Since last
October, however, they have suffered a four-fold increase in the price
of their crude oil.
Sentor CASE. Of course, in these countries is it not true that there
has not been free market of gasoline, it has been gasoline has been
controlled in effect, by oil companies controlled by their governments ~
Mr. TAVOULAREAS. Well, almost every country differs. There are cer-
tain countries, for example, which have price controls on gasoline and
have had them for many years. Certain countries have a policy of a
price control. For example, France still yields a good profit. Another
country may have much more strihgent price controls, and Germany
has no price controls. In Italy for some time we actually were selling
at a loss because of government controls, All that did was encourage
companies like BP and Shell to remove themselves from Italy. The
Italian Government is quite worried and has come to each one of the
American companies and said, "I hope you will not remove yourself."
The net result was tremendous losses and the two companies obviously
decided they could not take losses. This changes from country to
country.
SAUDI PRODUCTION AND POTENTIAL
Senator CASE. Then, we will have some questions for the record if
you do not mind.
Mr. TAVOULAREAS. Yes, sir.
Mr. LEvIN50N, At page 16 of your statement-
Mr. TAVOULAREA5. 16?
PAGENO="0118"
114
Mr. LEVINS0N. Yes. You refer to the subcommittee inquiry into the
actual potential Sauth production. Given the fact that the U.S. Got-
ernment is now in the process of negotiating with the Saudis on this
overall arrangement to which I previously alluded, do you contend
that it is unreasonable of the Government to seek and learn as much
as possible about the situation with respect to the actual potential
production in Saudi Arabia?
Mr. TAvOTJLAREAS. Let me say this. I did not read this section but
perhaps I should refer to what we are talking about so everyone under-
stands it. What we were saying is this: We have heard the Senate has
been inquiring into the ability of Saudi Arabia to continue its present
production and, of course, to increase production up to 20 million
barrels in the future. I imagine some people in government would say
the reason we believe that is legitimate is because some people are say-
ing Saudi Arabia is a country we can depend upon, especially if we
better know what its reserve potential is.
Mr. LEvINsoN. Does that seem to be a-
Mr. TAvOULAREAS. Let me finish for a moment.
rfhat does not seem unreasonable, Here we have a situation where
Saudi Arabia has announced 165 billion barrels of reserves. Aramco
has reserves in the ground and almost every geologist will say that is
a conservative figure as to what its potential is, 165 billion. It has
produced 8.5 million barrels a day and ~omeone says I have concern
as to whether those reserves can produce this number and higher num-
bers. All I say here is if you are really concerned we ought to put
some of our concern to the United States *here we only have maybe
30 to 35 billion barrels of oil and produce 10 million barrels a day.
it is hard for me to understand the great concern.
Now, beyond that, almost everything I have heard is that I am not
sure the American companies should continue to operate in Saudi
Arabia or they are not useful any more. How long do we think we are
going to have access to information if those companies are not operat-
lug there? How long do you think the Saudi Arabian Government is
going to permit our Government to `say I want all details about every-
thing you have in your country? How would we feel if some of these
governments caine over and said I want to know this and this and
this about you?
Mr. LEvINsoN. The only question which was elicited by your com-
mentary, is the information upon which the U.S. Government makes
policy, where it gets its information and reliability of it and the rea-
sonableness of its getting such information. I just wanted to elicit the
concurrence that you would have that it is not unreasonable for
govermnent to be concerned.
Mr. TAVOULAREAS. I do not think it is unreasonable, I think you
had better be careful in how you get the information. I think it is
legitimate.
Mr. LEvINsoN. In your statement you elaborated on the background
of the foreign tax credit, which has been a subject of considerable
discussion. As Senator Church said, he i5 introducing some legis-
lation on that. So this is relevant and important in terms of getting
the proper background.
All that happened in 1950 was Saudi Arabia did what almost every
developed Western country had already done, namely, to adopt an
income tax. That is not quite the way we understand it from Mr.
PAGENO="0119"
115
MeCloy, who wrote a letter on January 11, 1967 to the Secretary of
State, Dean Rusk, which dealt with Internal Revenue Service audit
of the international petroleum companies and giving the Department
his opinion this audit was inadvisable. IEEe gave a fairly concise descrip-
tion of the background, somewhat at variance from your own, and,
therefore, I would like to simply read it and have you comment to
~determine whether it is accurate or not.
TAXES AND ROYALTIES
Quoting from McCloy's letter, he said:
I believe that the Department of State has a particular respousibility to make
~known to the Treasury Department the implications of its proposed attack on
~crude oil prices, because the present system of providing substantial revenues
to the oil producing countries of the Middle East by means of a combination of
royalties and of local income taxes on the producing companies (creditable under
U.S. tax law) was recommended to the oil companies and to the foreign govern-
ments involved by the Department of State and the Tteasury Department.
These departments recognized that it was in the national interest of the United
States to keep such nations stable and friendly to the United States and thereby
ensure American access to the vast reserves there located. If the oil companies
did not provide the necessary revenues by paying substantial taxes to producing
countries, large amounts of direct foreign aid might well be required.
In other words, the Saudi Arabian Government just did not enact
an income tax like other industrialized countries, the origin of this
lies in a State Department and rr~reasury decision to encourage the
enactment of such legislation.
Mr. TAVOULAREAS. Let me say I do not think there is anything incon-
sistent in what you read and what we ~aid. All we said was the Saudi
A~rabian Government enacted an income tax like all other countries
did. All you are saying is the Treasury Department told them they
should enact an income tax. Was it wrong for them to enact an income
tax?
Mr. LEVINSON. Let me add in terms of where the original derived
from, Was it initiated by the Department of State? You are right,
it may not be inconsistent, but it is an elaboration of where it derived
from.
I would like to make the letter part of the record.
Senator CASE [presiding]. No objection, it may be done.
IThe letter referred to follows:]
MILBANK, ITADLEY & McCLoy,
Jan'uary 11, 1967.
To: Da~x Rusir.
I would like to draw to your attention certain aspects of the audit now in
process of the income tax returns of American international oil companies for
the years 1959 through 1965 which I believe seriously threaten not only the
interest of the United States in foreign oil production and reserves but also the
~delicate diplomatic relationships of this country with the oil producting coun-
tries which the Department of State has built over the last several decades.
I do so, because it appears to me that inadequate consideration has been given
to various by-products of the contemplated attack on the international crude oil
price structure which in my opinion could be fal~ more serious in their effects
than purely revenue aspects of the malter.
Briefly, the IRS has indicated to the international oil industry that it is con-
sidering disregarding for United States tax purposes the price~ at which crude
oil is sold from the oil producing countries on the ground that such prices are,
~n its opinion, too high. I hardly need remind you that the governments of the
PAGENO="0120"
116
oil producing natiens in Latin America, North Africa and the Middle East would'
react most strongly to even a suggestion by a branch of the U.S. Government
that the prices which they receive for crude are too high. Of course, you will
recall the intense resentment caused, particularly in Venezuela, when the 1IT.S.~
imposed its import quota program In 1959 because this foreclosure of the U.S.
market contributed to a weakening of foreign oil prices.
I believe that the Department of State has a particular responsibiIit~ to make
known to the Treasury Department the implications of its proposed attack on
crude oil prices, because the present system of providing substantial revenues'
to the oil prdducing countries of the Middle East by means of a combination of'
royalties and of local income taxes on the producing companies (creditable under
U.S. tax law) was recommended to the oil companies and to the foreign govern~
ments involved by the Department of State and the Treasury Department. These
departments recognized that it was in the national interest of the United States
to keep such nations stable and friendly to the United States and thereby ensure
American access to the vast oil reserves there located. If the oil companies did
not provide the necessary revenues by paying substantial taxes to producing
countries, large amounts of direct foreign aid might well be required.
For example, in 1950, after Aramco had resisted for nearly four years intense
pressures by the Saudi Arabian Government to relinquish its contractual rights
to tax exemption in Saudi Arabia, the Department of State took the positio~,
when consulted by Aramco, that a 50-5Q income tax arrangement, based on the
pattern previously established in Venezuela, appeared to be to the advantage of
all concerned. Aramco thereupon did submit to Saudi Arabian income taxes'
which approximated 50% of its net operating income. Similar income taxes were
imposed on oil conipanies by Iraq and Kuwait shortly thereafter.
Following the nationalization of the Iranian oil industry in 1951, Mobil Oil
Corporation, Standard Oil of California and three other American oil companies'
were advised by the then Secretary of State of a determination by the National
Security Council that it was in the security interests of the United States that
they participate in a consortium for the reopening of the Iranian oil industry
on terms within the framework of a Proposed Iran Consortium Plan, which was
submitted to the oil companies by the United States Government. The consortium
arrangement which closely followed the Proposed Plan, was accepted by the
companies and enacted by the Iranian legislature. It provided for a 50% income
tax obligation similar to those in Saudi Arabia, Iraq and Kuwait. In the cases
of Saudi Arabia and Iran, the Treasury Department issued rulings holding
that such taxes were creditable against U.S. taxes.
It continues to be in the national interest of the United States to maintain
stable friendly governments in control of the vast oil reserves of the Middle
East and if such goals are not achieved by means of the present system they
will have to be paid for by foreign aid apprOpriations or other means.
Because of the extreme importance of this whole matter to the national interest~
I am enclosing a memo prepared by Mobil and Socal, whom I represent, which
considers in greater detail the important questions of policy which the audit
necessarily raises. I also enclose a study by the Chase Manhattan Bank entitled
"Balance of Payments of the Petroleum Industry." The companies are prepar~
lag briefs on the legal questions, which will be submitted to the Treasury Depart~
ment in the near future, and which will be furnished to you on request. I may
say here, however, that I believe that the tax law provides ample scope for the
Treasury Department to take the fundamental considerations of national interest
and fairness to the companies into account in exercising its statutory discretion.
As is pointed out in this memorandum, the balance of payments position of
the could be substantially affected by a reduction in the prices at which
oil is sold abroad by American companies. Coming at a time when the balance
of payments situation is still a matter of deep concern, I suggest that any action
to reduce what has been a major favorable factor would not he in our national
interest.
~The memo is, of course, a highly confidential document. and I am rure it
will be treated as such. I strongly commend it to your careful attention hecau~
I believe it essential that Treasury, in exercising its statutory discretion, be
made fully aware of the interests of the Department of State in the matter.
J'OHN J. MOCLOY.
PAGENO="0121"
117
RISKS IN IRANIAN CONSORTIUM
Mr. LEvINSON. In terms of elarifying the reco~d, you have noted in
your statement that the companies invested in the Middle East because
of their assessment of risks, at least with respect to the Iranian con-
sortium. I would like to read one excerpt of a letter from 1-lerbert
IHoover, Jr., to then Senator Lyndon Johnson, dated September 28,
1955, in which he states:
So far as I know, there were no agreements in conneetioh with arrangements
for the resumption of production of oil in Iran bearing on the importation of
oil into the United States. It is my understanding that the original selection of
participants in those arrangements was made on the basis that they were engaged
in the production and marketing of Near East oil throughout the world, and
could and would absorb the Iranian production without unsettling world
markets.
The only point of that being that at least with respect to the
Iranian consortium criteria, according to Hoover, did not seem to be
the willingness of the companies to invest, but the fact that they had
other markets and could get the oil back without. That is the end.
Mr. TAVOULAREAS. Could I comment on that?
Mr. LEVINSON. Yes.
Mr. TAvOTJLAREAS. You made an observation-
Senator CASE. It might be well at that point to insert in the record
the full text of the letter from Mr. Hoover to Senator Johnson, and
also the letter from Johnson to the State Department, Mr. Dulles, to
which that was a reply.
[The letters referred to follow:]
`SEPTEMBEn 28, 1955.
Hon. LYNDON B. JoHNsoN,
U.~S. senate.
DuAR SENATOR JOHNsON: In your letter of `September 9 to the Secretary you
raised certain questions cpncerning the operations of the Iranian Oil Consortium
and the importation of Iranian oil into the United States. Mr, A. P. King, Jr.,
President, Texas Independent Producers & Royalty Owners Association, has
written me a letter on the same subject.
[So far as I know there were no agreements in connection with arrangements
for the resumption ot production of oil in Iran bearing on the importation of oil
into the United States. It is my understanding that the original selection of
participants in those arrangements was made on the basis that they were engaged
in the production and marketing of Near East oil throughout the world, and
could and would absorb the Iranian production without unsettling world
markets.]
As you are aware the matter of imports of foreign oil into the United States
has for some time been, and continues to be, the subject of attention by the
Executive and the Congress. The matter is under active study at this time by
Arthur S. Flemming, Director of Defense Mobilization, who recently directed
the attached letter to the principal American companies engaged in the importa-
tion of foreign oil into the United States.
I am sure that in his consideration of the matter Dr. Flemming will take fully
into account the effect of oil imports upon the position of domestic independents
in supplying domestic oil requirements.
Sincerely yours,
HERBERT HoovER, Jr.,
Acting secretary.
PAGENO="0122"
118
U.S. SENATE,
OFFICE OF THE DEMOCRATIC LEADER
Washington, D.C., 5epternber 9, 19~i5.
Hon. J~Ox~N FOSTER DULLES,
R~eoretary of I5tate,
Washington, D.C.
DEAR Mn. SEcRETARY: It is of vital importance to the domestic oil producing
industry that the consortium to handle the return of Iranian oil to world ma~kets~
not result in further increases in already heavy imports of oil into the United
States.
Oil producers in Texas are raising the question as to whether there has been
any v&olatiçn~ of agreements-written, spoken or implied-by the companies
authorized to e~igage in the consortium. It has been their understanding, and
mine, that care was to be taken to see that this oil did not serve to jeopardize the
position of American independents in supplying domestic requirements. Are
assurances to this effect still to be considered valid?
It is reported that several independent members of the Iranian consortium
have exchanged theIr shares of Abadan refined products for Persian Gulf crude,
the explanation for the trade being that the crude can be imported into the
United States at a tariff considerably below the tariff for refined products.
I am sure you will understand that these developments are causing considerS
able concern among the domestic oil producers of my Stale and other states.
Your comments are urgently invited.
Yours sincerely,
LYNDON 13. JOHNSON.
Mr. TAVOU~REAS. You did refer in my office to a `etter along these
lines and I received the letter this morning for the first time. I guess
the key words you must be referring to is without unsettling world
markets. This is a letter written by Herbert Hoover to Senator John-
son. In the process of picking the companies, we were not involved.
This is the first time I ever saw this letter, aiid ever knew anyone ever
made that statement.
Now, you say this may be inconsistent with the fact that there were
risks involved. There were very real risks involved in 1954, so much
so that one major company would not go in on the deal. There is noth-
ing inconsistent. Maybe it is only elaboration.
Mr. LrwINsoN. I think the record is now complete.
Senator CHURCH. I want to thank you very much for your testi-
mony this morning and we apologize for the fact I had to be absent
during part of it and may have to absent myself again. There is
another comffiittee dealing with legislation that relates to my State
and to my region of the Pacific Northwest with a very important mat-
ter bejore it and I have had to divide my time.
Mr. TAVOULAREAS. I want, to thank you very much for allowing me
to appear.
Senator Crnmtcxi. Mr. Collado, we will ask you to be sworn.
Do you swear that all the testimony you are about to give will be the
truth, the whole truth, and nothing but the truth, so help you, God?
Mr. COLIJADO. I do.
TESTIMONY OP EMILIO G. COLLADO, DIRECTOR AND EXECUTIVE
VICE PRESIDENT, EXXON CORP.
Senator CHURCH. Thank you. You have a prepared statement. How
do you wish to proceed?
Mr. COLLADO. What I thought I would do is give you some high-
lights of the prepared statement and not go through the whole docu-
PAGENO="0123"
119
ment. You have it. It is not very long but it is longer than I think you
would like me to read in full.
Senator CHURCH. Very well. Your prepared statement will be
included in the record.
Mr. COLLADO. My name is Emilio G. Collado. I am a director and
executive vice president of the Exxon Corp., and I appreciate this
opportunity to present to the committee my views on the subjects
requested by the Chairman. In particular, I shall attempt to identify
the roles of governments and companies that, in my view, will best
accomplish the basic energy supply goal, namely, adequately and eco-
nomically meeting future energy needs with the maximum security of
supply.
These subjects and these relationships~ as I think you know, Senator,
have for a long time been of great interest to me, and I have approached
them not only from the corporate point of view but at other times
and places from both the governmental and in some cases international
relations points of view.
Senator CASE. We are aware of that. That is one reason why we
have looked forward to your testimony.
Mr. COLLADO. Thank you very much.
FOuE0ASTING ENERGY NEEDS
Any forecasting is perilous. But forecasting in an environment as
uncertain as today's international oil market is hazardous in the
extreme. It is helpful, in thinking about the future, to recall some of
the developments of the past which have brought us to where we are
today. I believe lhat it is important, first, to understand that the
energy problem which confronts us is not just a short-term, emergency
phenomenon. It is true that the political events of the past few years,
and in particular the outbreak of the Israeli-Egyptian war in October
of 1973, resulted in drastic shortages of oil and sharp increases in
price. But judged from a longer range standpoint, our situation is a
product of age-old forces of supply and demand.
ENVIRONMENTAL CONTROLS VERSUS SUPPLY AND DEMAND
For some time, there have been signs that all was not well in energy
demand-supply relationships. Environmental goals, good in them-
selves, have increased the need for energy and retarded its develop-
ment; the production of coal has lagged; nuclear construction is
seriously behind schedule; reserves of natural gas have been depleted
by unwise regulation. Meanwhile, the demand for energy has increased.
relentlessly, and oil has had to fill the gap created by th.e shortfall
in other energy forms. Until recently, this presented no difficulty, as
new discoveries of oil exceeded consumption. But, now, the disturbing
fact is that new discoveries of oil are barely keeping up with con-
sumption, and the prospect is that they will soon be overtaken. All
these considerations emerged ~e1l before the oil embargo and the pro-
duction cutbacks of recent months. What they suggest is that in think-
ing about the future, we must address the basic, continuing problem-
not just the manifestation of the moment.
PAGENO="0124"
120
What recent events have done is. to dramatize the problem. Changes
which were expected to occur gradually over a period of years sud-
denly were forced upon us within the space o~ months. For two
decades, the real price of Middle East oil had been drifting downward
due to new supplies being developed and to vigorous competition in
the international industry. But, today, because of steps taken by OPEC
governments, Middle East crude oil prices are four times what they
were as recently as October of last year. Crude prices elsewhere, except
where controlled, have tended to move in step. The fact i~ that although
the structure of the industry remains strongly competitive, as can be
seen by developments in the product market, the pricing of crude oil
is now largely determined by governments. The resulting price in~
creases, combined with the inconvenience of shortage and the use of
oil as a political weapon, have brought nervousness and distress to
the world's consumers.
More recently, the situation has improved. But the long run lesson
is clear. The United States and other countries must proceed with all
reasonable haste to expand and diversify the energy base.
THE ROLES OF dOVERNMENTS AND COMPANIES
Both governments and private companies will have their roles to
play. In my judgment~ the principal objective of the U.S. Government
should be the restoration, to the fullest extent possible, of a workable
environment within which the oil and other energy industries can use
their skills, imagination, resources, and facilities to meet energy needs.
Since the energy issue is fundamentally intern~tional in nature,
working effectively with other countries should form a large part of
policy. A specific example would be the attainment of intergovern-
mental agreements against the contingency of future, major disrup-
tions in oil supply. More generally, it should be government's goal to
achieve a broad relaxation of international tensions. If the world's
institutions are to function effectively, there must be a basic under-
standing among nations on the international rules. This should be a
natural quest for governments, consumers, and producers alike. I
believe that the history of the post-World War IT period demonstrates
the vital contributions which private international companies can make
in an environment of enlightened international relations.
As I see the interests of different groups of nations today, the oil
producing countries want to establish themselves as an important
factor in the modern world through wise and profitable use of their
resources. The consuming countries seek assured supplies of raw mate-
rials at reasonable prices. These interests are reconcilable.
But. if they are to be reconciled~it is imperative that Government
as well as industry have a hard-headed view of what is possible. We
in the United States should proceed on the assumption that this
country will need a steady and substantial flow of imported `oil well
beyond 1980. In return, we and other consuming countries can offer
assured access to Western technology, management technit~ues, and the
capital goods which are essential to the development of producing
country economies.
Senator CASE. Would you not add agricultural products to that?
PAGENO="0125"
121
Mr. `COLLADO. There is a food problem here but I did not choose
in a short statement to get into it. A great deal of what I am talking
about here' applies in considerable measure if not equally to other
materials, minerals, foodstuffs and other agricultural products. It is
not limited to oil. I just happened today, Senator, to limit myself to oil.
Senator CASE. Thank you.
Because the United States is not only a consuming country, it is
also a producer of natural resources, that is, food.
Mr. COLLADO. This pattern should assure satisfactory' rewards to
both sides.
THE ECONOMICS OF INThRNATIONAL OIL
A second set of facts which the Government must clearly under-
stand concerns the true economics of international oil markets. Failure
to do so could lead to decisions which might soothe the emotions of
the moment but which would impede progress toward long-run goals.
There has, in particular, been a lot of misinformation, accepted as
fact, about oil company profits on Middle East crude oil. It is widely
stated that the companies are making about $4 per barrel. This figure
is apparently arrived at by subtracting the royalties and taxes paid by
companies on owned oil production, from the so-called posted price
of Middle East crude. The economics of our own operations indicate
that the actual profit number is a small fraction of this difference.
We have not been selling at posted prices. We have sold to both
affiliated and nonaffiliated customers at prices that, in our judgment,
have been consistent with competitive market conditions. These prices
have been significantly lower than posted prices. The result is that,
overall, Exxon's Middle East and African crude profit has been con-
siderably less than 50 cents per barrel, not $4 per barrel. It should be
understood, also, that total company profit margins are mueh more
responsive to competitive pressures than are payments to producing
governments. The impact of easier supply conditions is already evi-
dent in international markets. It is, therefore, a cause for concern
that OPEC countries are currently spealçing of the need for further
increases in their revenues, Based on our economics, any increase would
almost certainly have to be reflected in higher costs of the consumer.
One far-reaching aspect of the higher costs of oil which govern-
ments must be concerned about is the balance-of-payments problem.
This is a difficult prob~em, but iu principle, I believe it can be handled.
What must be done is to find ~ way to accommodate the very large
investmeiits which will arise as an offset to oil flows, while avoiding
the i~isks of sudden, massive tr~insfers of funds.
One way to moderate the balance-of-payments problem as well as
the impact of high prices for euergy is to promote increased efficiency
in the use of energy. The operation of the market will contribute sub-
stanti~liy to this~ end. A governmentally spo~isored "conservation
ethic" should be promoted. Appropriate tax policy and support for
greater efficiency in energy-using devices would help. `So, too, would
~eisible policies cm mass trai~ispDrtation,
PAGENO="0126"
122
OTHER ENERGY SUPPLIES
Senator CHURCH. You do place very important emphasis upon the
importance of conservation.
Mr. COLLADO. Yes, sir.
Finally, it should be a major concern of government to foster the
development of new energy supplies from indigenous sources. This
suggestion applies particularly to the United States, which is fortunate
to possess large, untested areas that are prospective for discoveries of
conventional oil and gas, as well as extensive reserves of coal and oil
shale. The role of the U.S. Government should be to serve as a catalyst
to the efforts of private companies to expand in these new directions.
Accelerated leasing of Federal acreage, particularly in off-shore areas,
resolution of environmental conflicts that impact on resource develop-
ment, support of industry research into new energy processes--these
are some of the things which government can usefully do.
AVOIDING PRICE CONTROLS AND TAX INCREAS~ES
Two related negative policies which should be avoided are long-term
price controls and punitive tax increases. The more extreme tax pro~
posals, particularly the removal of the foreign tax credit, would drive
U.S. companies from the international scene. One cannot help wonder-
ing if the supporters of these proposals are fully aware of the impli-
cations. Congress appears to be caught between an urge to punish the
oil companies and a desire to get on with improving the energy out-
look. These may not be completely compatible urges.
PE1iTfORMANCE OF THE OIL COMPANIES
Mr. Chaii~man, the international oil companies have performec~
and, with the. proper support, will continue to perform two primary
functions. These are, first, the efficient operation of international
logistics and marketing networks; and second, the expansion of energy
supply. The changes which have recently occurred in the industry do
not lessen the need for these functions. Indeed, they are more needed
than ever.
The networks of facilities which the private companies have created
smce World War II are vital to the world's energy trade. If they did
not exist, they would have to be created. But more than just the facil-
ities is involved; it is the accumulated experience, technology, mana-
gerial know-how, and planning competence which make the system
work. The operations and decjsions are of such complexity and inter-
natiorial scope that it does not make sense that they could be easily
assumed by the nonexperienced. All this is to s~y that the transporta~
tion, supply allocation, refining, aiid marketing activities of the com-
panies comprise a vital economic functiop. And no other ecoflomic
entity is as well equipped to do the job as the private international
oil companies. .
With respect to the expansion of energy supplies, there is much
which the companies can do, and which they will do with the neces-
sary Government support. I would urge this committee, as well as
others in Congress who are concerned about energy matters, to reflect
on the magnitude of the task before us.
PAGENO="0127"
123
FUTURE NEEDS AND PLANS
Assuming a moderated rate of energy consumption in the United
States of oniy 3 percent (that is, one-third below the historical rate of
4.6 percent), we would need half a million new oil and gas wells in this
country over the next 15 years. We would need more than 60 new oil
refineries and an equal number of plants for oil shale and for majdng
synthetic oil and gas from coal. We would need more than 30 new
nuclear plants each year by the middle 1980's, or a new plant every 2
weeks, We would need more than 140 new coal mines, including a
large number of small, deep mines as well as high-capacity surface
mines. And even after all this, we would still have to import large
amounts of energy. Faced with such tasks, we need, all of us, to keep
clearly in mind what our goal is, and what is likely to bring it about.
Mr. Chairman, I should like to conclude by mentioning some of the
things which Exxon and its affiliates plan to do in the next several
years.
In your letter you asked me to do that and this is a very brief
version.
We recently announced a $16 billion spending program for the
1974-77 period. Escalation is maldng that seem small. Some of the
key projects included in that program are:
1. A share in the Alaskan pipeline and in development of the
Prudhoe Bay field.
2. A share in an Athabasca tar sands processing plant in Alberta,
3. Four new coal mines for power generation, with others under
consideration.
4. Construction of a large coal gasification pilot plant, de~ign of a
coal liquefaction pilot plant and further research in the basic tech-
nologies relevant to these processes.
5. Uranium exploration and mines, research in enrichment tech-
nologiesand in the nuclear fuel recovery cycle.
6. A major refinery expans;ion in the United `States.
Above all, the company is committed to a worldwide exploration
and development program designed to increase supplies of conven-
tional oil and gas in the United States, the North Sea, Canada, and
in diversified locations throughout the less developed world. Half of
the entire $16 billion program is devoted to exploration and develop-
ment. However, as I have indicated, punitive taxation, price controls,
limited leasing of acreage, and other restraints could cripple our
efforts. I hope that this will not be the case.
Thank'you, Mr.Chairman..
[Mr. Collado's prepared statement follows;]
PREPARED STATEMENT or EMILI0 G. COLLADO, DIRECTOn AND EXECUTIVE VICE
PRESIDENT, EXXON CORP.
My name is EmiIio G. Collado. I am a Director and Executive Vice President
of the Exxon Corporation. E~~on representatives, as you know, have p~r1~cipated
t~ctiveIy in the study being carried on by your Cothmlttee.. We believe, as do you,
that an understanding of the role of the multinational ~ how it
is changing with the times, is vital to intelhgent legislatiye ~1ecis~o~s,,
I, therefore, appreciate this opportunity to present to the Qomnnttq~ our views
on the subjects requested b~ th~ Chairman! the future of the ~nterna~iona1 oil
industry~ alt~rnatlve energy iii~vestm~rits and th~ 1hIp1I~atidns of these for U.S.
foreign policy. In particular, I shall attempt to identify the respective roles of
PAGENO="0128"
124
governments and companies that, in our view, will best accomplish the basie
energy supply goal, namely adequately and economically meeting future energy
needs with the maximum feasible security of supply. These are matters whieh
have been of special interest to me for many years, anc~ I believe that my expe~
rienees in government, in international affairs and in the academic world, as
well as in the oil bUsiness, give me some qualification to address them~
Gentlemen, any forecasting is peyllous. But forecasting in an environment as
uncertain as today's international oil market is hazardous in the extreme. It is
helpful, in thinking about the future; to recall some of the developments of the
past years and months which have brought us to where we are today. I believe
that it is important, first, to understand that the energy problem which con-
fronts us is not just a short-term, emergency phenomenon. It is true that the
political events of the past few years, and in particular the outbreak of the
Israeli-Egyptian War in October of 1973, resulted in drastic shortages of oil
snd sharp increases in price. But, judged frOm a longer range standpoint, our
situation is a product of age old forces of supply and demand.
For some time, there have been signs that all was not well it~ energy demand-
supply relationships. Environmental goals, good in them~elves, have increased
the need for energy and retarded Its development; the production of coal has
lagged; nuclear construction is seriouSly behind schedule; reserves of natural
gas have been depleted by unwise regulation. Meanwhile, the demand for energy
has increased relentlessly, and oil has had to fill the gap created by the shortfall
In other energy sources. Until recently, this presented no difficiilty, as new dis-~
coveries of oil exceeded consumption. But, now, the disturbing fact is that new
discoverieS are barely keeping up with consumption, and the prospect is that
they will soon be overtaken. Reserves of oil are still very large and there is
more to be found, but increasingly it has become clear that oil alone cannot be
counted on to meet the expanding energy needs of the world. All these consid-
erations emerged well before the oil embargo and the production cutbacks of
recent months. What they su.ggest is that in thinking about the future we must
address the basic, continuing probleth-not alone the manifestation of the
moment.
What recei~t events have done is to dramatize the problem. Although in many
parts of the world the oil industry continues to function pretty much as it haS
in the past, actions taken by OPEC have transformed the industry in the member
countries and substantially affected its economics everywhere. The shock pre-
sented by these developments came because changes, which were expected to occur
gradually over a period of years, suddenly were forced upon us within the space
of months.
The speed of change was of an order of magnitude greater than industry and
customers had known bOfore, and Its dir~etion was different. For two decedes,
the real price of Middle East oil had been drifting downward due to new supplies
being brought on aiid to vigorous competition in the international industry. But
today, because of Steps taken by OPEC governments, Middle Eastern crude oil
4~rices ~re four times what they were aS recently as October of last year. Crude
prices elsewhere, except wh~re controlled, have tended to move in step. The fact
is that ~a1though the structure `of the industry remains strongly competitive, as
can be seen by developments in the produCt tnarket the pricing of crude oil is
now large~y determined ~by governments. The resulting price increaseS, combined
with the ineonvurilmice of ~shdrtage and the USk~ of' oil as a political weapon, have
brought nervousness and distress to the world~s consumers.
More recently, the situation has improved. Hostilitips ~n~the Middle East have
abated; oil is flowing once again at prewar levets; t~re are indications `that
supply and demand, tempor~tri1'y at least, are in rottghbalance at tnday~s~~roduct
prices. But tQday's prices remain much higher than before and security of supply
continues uncertain. Some producing countries have indicated that they will con-
tinue to hold production doss~n becan~e they believe rapid depletion is not in their
interests. The long-run lesson is clear. The U.S. and other countries must proceed
with all reasonable haste to expand and diversify the energy base.
In `the years ahead, the U.S. and other consuming governments, either through
greater attention to energy policy or through direct involvement, will be major
factors in shaping the fhture of the oil business and of ~nergy companies gen-
erally. Their objective should be the restçratlon, to the fullest extent possible,
of a workable environment within which the oil and other energy industries can
use their' skills, imagInationS, resources and facilities to meet energy needs.
PAGENO="0129"
125
There is a temptation in times of stress to think first of modifying laws, impos-
ing regulations, seeking culprits. But `to develop and exploit sources of energy
requires above all a, good workitig environment, political and economic, in which
those with experience and know-how can operate.
Since the energy issue is fundamentally international in natpre, however much
we may be tempted these days to think in nationalistic terms, working effectively
with other countries should be a major goal of U.S. policy. An example is the
question of how countries should work together to allocate oil supplies in times
of major emergency. Our own view is that this is a responsibility of govern-
ments, and we `would hope that a standby inter-governmental agreement could
be reached against the contingency of major disruptions In the future.
Ranking even higher on the government's pi4ority list should be a general
relaxation of international tensions. The current effort to resolve major political
issues in the Middle East is fundamental in this connection, and its success `to
date is most encouraging. [f the world is to progress, if its institutions are to
function effectively, there must be a basic irnderetanding among nations on the
international `rules. In particular, there must be a' wide acceptance of fair deal-
ing in international trade. This should be a flatutal quest for governments, con-
sumers and producers alike, and its importance `has never been greater. The
history of the post-World War II period demonstrates the routrihutions which
private international companies can make in an environment of enlightened
international relations. These contributions were `of `major importance to the
economic recovery and `progress of the F~ree World as well as to its security.
As we interpret the views of the producing countries, their primary interest
is in establishing themselves as an important factor in the modern world through
the wise and profitable use of their resources, including the development and
diversification of their economies. The interests of the consuming countries lie
in assured supplies of raw materials at `reas'~nable prices. We believ,e that these
interests are reconcilable. For both sets of countries, there is advantage in
progress toward international monetary stability. For both, the long-run bene1lt~
from having a viable international system will outweigh the victories of tempo-
rary bargaining strength.
[f such results are to be achieved, `it is imperative that government as well as
industry have a hard-headed view of what is possible. For our part, we in the
United States should proceed on the assumption that this country almost cer-
tainly wil' not be self-sufficient in energy by 1980. A steady and substantial flow
of imported oil will be vital to the U.S., as well as other consuming countries,
well beyond that `date. [n return for a continuing flow of oil at reasonable prices,
the consuming countries can provide in exchange assured access to Western
technology, management techniques and the capital goods which are essential
to the development of producing country economies. This pattern, applied on a
realistic basis, could assure rewards to both sides.
A second set of facts which the government `must clearly understand concerns
the true economics of international oil markets. There has been considerable talk
of oil company profits in the order of $4.00/B on sales of Middle East crude.
This figure is apparently arrived at by substracting the royalties and taxes paid
by companies on owned oil production, from the so-called posted price of Middle
East crude. The economics of our own operations indicate that the actual pro~t
number is a small fraction of this difference.
,Et~on sells crude oil to both affiliated and non-affiliated customers at prices
that, in our best judgment, are consistent with competitive market conditions.
rrhese prices `are significantly lower than posted prices. On the other side of the
ledger, we have to pay producing governments not only royalties and taxes on
our own production, but also buy-back prices for oil accruing to the governments
under the terms of participation agreements, While these buy-back oil prices are
still being negotiated in most instances, it is almost certain that they will result
in a significant `added payment burden to both the oil companies and the oil
consumer. The upshot of this is that, overall, Exvon's Middle East and African
crude profit is considerably less than 50~/B, not $4.00/B.
Moreover, total company profit margins are much more responsive to com-
petitive pressures than are payments to producing governments. The impa~t of
somewhat easier supply conditions is already evident in international markets.
It is, therefore, a cause for concern that the OPEC countries are currently
speaking of the need for further increases in their revenues. Although to some
extent OPEC justifies its demand on grounds of keeping up with world inflation,
45-4'26--75---9
PAGENO="0130"
126
primarily its argument appears to be that the higher payment can be extracted
from allegedly high èompany crude profits without affecting the consumer. Infact,
based on Exxon economics, an increase would a1mo~t certainly have to be reflected
in higher costs to the consumer.
One far-reaching aspect of the higher costs of oil which governments must be
concerned about is the balance-of-payments problem. Much has been written about
this. Unquestionably, it is serious. The International financial markets are not
accustomed to handling the massive amounts of money which will be involved.
Much government and financial ingenuity will be required. In the ease of the
lesser-developed, resource-poor countries, the financial drain could be ruinous.
But in principle, I ielieve the problem can be handled. Above a level defined by
the capacity of oil exporting countries to absorb exports from consuming coun-
tries, an OPEC decisionto produce more oil is th~fact a decision to invest more
abroad. Conversely, greater consumption in the consuming area amounts to a
decision by one or more consuming eountties to accept more investment by OPEC.
What must be done is to find a way to accommodate these investments while
avoiding the risks of sudden, massive transfers of funds. Unquestionably, accom-
modation would be easier if the Industrialized countries of the world were to
find ways of curbing their inflatlons; i~ør it is fear of depreciating currency values
which underlies much of the problem~
One `way to moderate the balan~e-of-paymentS problem as well as the impact
of high prices ~for energy is tepromote increased efficiency in the use of energy.
The operation of the tharket Mn cbntri1~ute substantially to this end. But addi-
tional steps can be taken. Agovernifletitally spon~ored "conservation ethic" could
be promoted. Appropriate tax policy a~d support for greater efficiency in energy-
using devices would help. So, too, would sensible policies on mass transportation.
~inally,it should be a majOr concern of government to foster the developmeOt
of new energy supplies from 4ndlgetious sources. Even If the measures already
discussed were to result in a reasonably assured flow of 1nt~rnational suppltes
during the next decade, consuming countries would need to accelerate the pro-
duction of domestic energy. This suggestion applies particularly to the U. S~,
which is fortunate to possess large, untested areas that are prospective tor dis-
coveries of conventional oil and gas, as well as extensive reserves of coal and
oil ~bal'e.
Exxon supports a diligent effort to return to a reasonable degree of energy
self-sufficiency. Our own plans, In addition to major efforts `in oil and gas, call
for steady expansion of coal and nuclear resources. Additionally, we are doing
research in other energy areas, including greater efficiency in the conversion
and storage of energy.
The role of the U.S. Govertiment should be to serve as a catalyst to the
efforts of private companies to expand in these new directions. `Accelerated
leasing of federal acreage, particularl~ in off-shore areas, resolution of environ-
mental conflicts that impact on resource development,' support of industry
research Into new energy processes-~--these are some of the things which govern-
ment can usefully do.
`Two related negative policies rcvhich should be avoided are long-term price
controls and punitive tax Increases. flopefully, the U.S. will move away from
energy price controls as soon aS possible. The outlook on tax legislation is less
bright. The more extreme proposals, particularly the removal of the foreign tax
credit, would drive U.S. cortiPanies from the internatiOnal scene. They could no
longer compete with foreign companies. One can't help wondering if the sup-
pOrters of these proposals are fully aware Of the implications. Congress appears
to be caught between an urge to punish the oil companies and a desire to get on
with improving the energy outlook.
Let me quickly restate the government actions which I have recommended.
Governments should seek:
L A proper environment foi~ business.
2~ Emergency supply agreements among nations.
3. Relaxation of international tensions.
4. A realistic assessment of the facts.
5. International monetary stability.
6. Greater efficiency in energy use.
7. Development of indigenous energy sources.
8. AvoIdance of punitire tax measures.
If these steps are taken, I am convinced that the nation's energy prospects
will be improved. A more precise articulation of government~s role would be
helpful, but given the uncertainties of the situation, this is as difficult for me
PAGENO="0131"
as 1 imagine it is for you. ~s I 1~tve already said, in my view the key is e~ta'b~
lishing the right environment withjn which t1~e i~1ustry can work, Thereai~ter,
to the extent possible, competitive forces should be allOwed to work their disci-
pline, with the oil companies continuing their role as effective and flexible sup-
pliers `of energy~
The international oil companies have performed 4nd, with the prOper support,
will continue to perform two primary functions. These are, first, the efficient
operation of international logistics and marketing netwØrks and, second, the
expansion of energy supply. The changes which have recently occurred in the
industry do uot les~eu the need for these functions. Indeed, `they are more needed
than ever.
The networks of facilities which the private companies have `created since
World Way II are vital to the world's energy trade. Without them, there would
be no hope of delive~i~g products to the consumer at anything like a reasonable
price.' if they didn't exist, they would have to be created. But more than ,~ust
the facilities is involved; it is the acc1~nmlated'experienee, ~hnology~ man~tgeri'a~
know~how a~d planning competence which make ~he system work., The operations
and~ decisions `are of such complexity, and international scope that it doemi't
make sense that they could `be easily assumed by the non-expe~icneed. All tills m
to say that the transportation, supply allocation, refining and~marketjng activities
of the cQmpanles comprise a vital economic function. And no other economic
~ntity Is as well equipped to do the job a~ tile private international oil companies.
Whether circumstances will permit them to function as effectively as they
would like is another matte~. A specific concern shared by most oil companies
today is the adequacy of crude supplies. The investment requirements for mod-
ern relln,ing facilIties are so enormous that any company must be concerned
about making investments without some `asSurance that the crude feed Will be
forthcoming. For the ~ompanies, therefore; making arrabgements to secure ertidO
supplies on a stable and continuing basis has top priority.
It has been suggested that `there is no, need for the companies to do this, tb~t
inter-government~~ arrangements to secure crude oil would work ~jtist as well,
and perhaps better. I do not share this belief. There could he no prescription
more likely to politicize `the world's oil trade. Private companies have often
shown an ability to continue operations when governments are no longer civil
toWard one another.
Adequacy and security of supplies will depend ultimately on the second of the
oil company functions mentioned above: the expansion of energy supplies. There
is `much which the companies can do here, and Which they `will do with the
necessary government support. 1 would urge this Committee, as well as others
in Congress who are concerned about energy matters, to reflect on the magnitude
of the task before us. The amount of oil and gas which we need to find~ th~
expansion of effort intb new energy forms which will be required is trudy huge.
Assuming a moderated rate `of energy Consumption in the U.S. of only 3%
(i.e., one-third below the historical rate of 4.6%); we would need half-a-million
new oil and gas we1l~ `in this country `over the next fifteen years. To put this into
perspective, there are some 650,000 produCtive wells in eidstence today. We
would need more than 60 new oil refineries to supply 11.5. r~qulrement~. We
would need an equal number' of plants for `oil shale and for making synthetic
`oil and gas from coal. We would `need more than 30 new nuclear plants each year
by the mic~4le 1980's, or a new plant every two weeks. We would ,need `more than
140 new coal `thines, including a large number `of small, deep mines as well as
high-capacity surface mines. And even after all this, `we would Still have to
impoi~t largeamounts of energy, `
Faced with ~uch tasks, we need, all of us, to keep clearly in mind what on~-
goal is, an4 what is likely t~ bring it about. F'~r many years to come, the prin-
cipal involvement of the oil companies Will continue to be with' oil, and gas from
conventional Sources, ailcl in this thPy will need the ftilI support of their govern-
ment. But increasingly, they will need to do other thjpgs. There `are tbo~e who
worry about oil companie~ ~nves,tjng in `other energy forms. To my thinking the
best efforts of every energy company, oil and otherwise,. will he needed if we
are to work our way out oi~ our energy problem. The oil companies have techniCal
uompetence, managerial e~perlence and a desjre t'o get on with the job. These
can be valuable assets in a time of need.
CONOi~VDTNG COMMENTS
Mr. Chairman, I should like to conclude by mentioning some of the things
which Exxon and its affiliates plan to do in the next several years. We recently
PAGENO="0132"
128
announced a $l~ billion dollar spending program for the 1974-4077 period. Some
of the key projeCts included in that progra~m are:
1. A share in the Alaskan pipeline and in development Of the Prudhoe Bay
Field.
2. A share in an Athabasca tar sands processing plant in Alberta.
3. Four new coal mines for power generation, with others under consideration.
4. ConstructiOfl of a large coal gasification pilot plant, design of a ~oal licine-
faction pilot plant and further research in the basic technologies relevant ts
these processeS.
5. UraniUm exploration and mines, research in enrichment technologies and
in the nuclear fuel recovery cycle.
6. A major refinery expansion in the United States.
Above all, the Company is committed to a worldwide exploration and develop-
ment program designed to Increase supplies of conventional oil and gas in the
United States, the North Sea, Canada, alid in diversified l~c.atiOflS th~ongbout
the less developed world. ~lalf of the entire $l~ billion program is devoted to
exploration and development. However, as I have Indicated, punitive taxation,
price controls, limited leasing of acreage, and other restraints c~Uld cripple our
~fforts. I hope that this will not be the ~ase~
Thank you, ~Ir. ~f~bairmafl.
Senator Q~mnoH. Thank you very much, Mr. Collado, for your
~tatemertt.
~~XON'S ALTh1~NATtVB ~iN1IRG~ PLANS
`~n the latter part of that statement in which you summarize the
future inve~tinent plans of Exxon, would it be accurate to say that
you are reaching outside of oil into other forms of energy? You men-
tion the four new coal mines for power generation in whiCh the corn-
pany is advancing with others under consideration.
To what extent does this future commitment envision Exxon becoth-
ing what you might call a general energy company rather than an
oil company?
Mr. COLLAD0. Well, we view it as our goal to move in whatever direc-
ti~n~ we find what I would call feasible investment opportunities,
opportunity to do something about the eikergy siWation.
This is not a very new thing for us.
On the other hand, if you look at our total operations, the oil and
gas part of ofir total operations still is the overwhelming part of our
business. We do have one of the most modern, if not the most modern,
coal mines in the country in Illinois, now servicing the power com-
pany in Chicago, and we have been in uranium mining for some time.
We have in recent years entered the business of producing rods for
refueling nucle9ir power plants, and ~ have made rather rapid very
attractive progress in that area. This is ~till a very, very small part of
our total business.
Extraction of oil from tar sands and shale and conversion of coal
into gaS and Iiauids. of couise, are old things with us. We have been
doing research in this and participated in this for many, many years
and our initial steps in the coal industry probably were more from
the point of view of acquiring reserves for this purpose than for coal
~for direct burning. Ohanging times have made it attractive for us
to go in the coal business as coal miners and not merely to use coal
as raw material for conversion into gas and liquids, and so we are a
little bit in all of these things.
But if you look at our total business, we are mainly in the conven-
4ional oil and gas business but in an increasingly large number of places
PAGENO="0133"
129
and in increasingly harsh environments such asthe north and the deep
offshore.
FREE ENTERPRISE IN ENERGY FIELD
Senator CHURCh. Well, this broadening involvement on the whole
energy front seems to be characteristic of all of the~ major oil com-
panies. I can understand the reasons for it and I would think that
prudent planning on your part would require that you diversify t~
some degree.
However, from the Government's side, from the standpoint of pub-
lic po~icy, I am concerned that we keep competition vigorous in fuel
supplies and we avoid having various sources of fuel all brought
under the control of single companies. I am not at all sure that the
present laws properly protect against that kind of conglomerate
monopoly developing on fuel.
What view do you have with respect to this? I am a free enterpriser.
I guess, an old-fashioned one who lIkes to believe competition is the
best regulator of the marketplace. I want to see it kept very much in
the picture where energy is concerned in the future.
Mr. COLLADO. Well, I am glad you have said that, Mr. Chairman.
I have been aware of your views in this matter and they are very simi-
lar to my own. Frankly, I believe the only way we really get the maxi-
mum progress and achieve what I would call proper goals of people-
I am not talking proper goals of our company, I am talking about
people generally-is by as great a competitive market as is possible.
I think you have to unleash the abilities of individuals. You have got
to have the Government lay down the ground rules, and frankly, I
think ttfter laying dOwn the ground rules if the Government avoids
intervention in the details of how the ground rules are carried out,
that is the kind of situation we need to achieve. I guess I am a little
old fashioned in that respect, but I like to remain old fashioned.
The competitive market is certainly part of the old-fashioned phi-
losophy and I certainly agree with you. I think one o~ the reasons why
we go into these fields is because we are a compauy that is looking for
profitable investments in order to get an attractive return for our
shareholders and we are not particularly limited i.n what we go into,
more limited by ideas and by men to carry them put than we are by
anything else, and I hope it stays that way.
I think we can do the job there and, frankly, these are areas that
need ~to be developed and I suspect our moving into them has added
competition.
Certainly there are more people in some of the businesses I have
just mentioned because of our having gone into them than before they
went Into them. I think we make a strong additional competitor in
those businesses and I do not think it is in any way moving toward
monopoly. Quite the contrary, I think we are moving toward
a broader participation of powerful competitors in each of these busi-
nesses. I quite agree with you; I would not want to have a different
situation.
Senator CHURCH. Senator Case.
Senator CASE. Just a couple of questions in addition to those that
may be asked for the record.
Senator CRunch. I wonder before you put the first question if I may
be excused now because I have to go back and touch base again in my
PAGENO="0134"
130
other committee. I apologize. After you are finished, Senator, we will
recess until 2 o'clock this afternoon.
OIL COMI'ANY PROI'ITS
Senator CASE. ~J:obil Oil's rise in first-quarter profits was explained
on the basis of a sale of low-cost inventories at current prices which
were higher. Do you explain your increase in the first-quarter profits
on that basis, too?
Mr. COLLADO. We also made `a rather detailed statement of out t~arn-
jugs when we released them and we have the statement that was
given out. If you want it I can give you that. We have it here.
In our case the earnings went up, the exact percentage was 89 per-
cent, and the increase was attributable to a number of certain things.
We had in the first place an extremely large increase in our chemical
earnings. The chemical business as compared with as recently as 18
months or 2 years ago has been revolutionized, and our earnings ni
that industry are not unique with our company. Qther companies in
the chemical industry have done very, very well,
Senator CASE. This is increase in quantity, that is to say, not just
in price?
Mr. CoLL~&io. Both. Our chemical plants~are absolutely full all over
the world and they arc doing a very profitable business, I did not
mention that. when I was talking about our expansiQil because I was
only talking about the energy industry. But this piece of our business
Is doing extremely well. :
Secondly, we have a situation which is cOmpli~ated to describe bt~t
we do have some earnings that' ~i1l result from currency .tr~u~slation
into the dollar from other cu~rencjes of the, countries in which ~
operate. We haye some refieetio~is, of this in our ~cpunts and these
can be quite sizeabie.
In addition, to `that, we did havp some invento~y profits. They were
by no means the tpta.l arnount ~f the ii~crease in our earnings.
Senator `CASE. How ñ~uch was tha~n percentage?
Mr. COLLADO. I fo~g~t. 1 thi~iak it was, $80 willion~ Our earnifigs in
the first quarter were $705 million, which is ~about a $200, million
increase over first quarter of .1973, and $8Q million wquld have been
40 percent of the increase. `Theia'jn `~çldition to that, there is just no
questthn we.had a little more money in the United States because in
t~eceinber the price control authorities increased the ceilings on crude
oil and a little of that was reflected in our U.S. earnings ulthough
quite frankly; because of the w~y the product prices are controlled
there is a real lag. and we did not get much of that passthrough in the
first quarter. But these, I think, are most of the elements of ~ur earn-
ings increase.
Senator CASE. Well, it is a terrible position to be in, to apologize
for it.
Mr. COLLADO. It used to be I was proud of our earnings and I still
am, because in my opinion, we are just about now getting to the lower
level of what is an adequate return `on investment, and without this
I. would not be very happy as investment and financial officer of the
company. With any return on investment much lower than this, I
would be quite depressed. And I do not think there is anything out of
PAGENO="0135"
131
~rder about the earnings. I think they are pretty good. I hope they get
a little better, and I am afraid they will not.
Senator CASE. I am not asking you to make any predictions at all.
Mr. COLLAnO. I do not predict earnings. That is one thing in this
world I do not try to do.
REPORTING INCOME AND BALANCE OP PAYMENTS
Senator CASE. The Department of Commerce has published a revi-
sion of the U.S. balance of payments for the several years since 1966.
This publication, I understand, is going to correct a major reporting
problem which has resulted in overstating the income that we have
gotten from our multinational corporations, by as much as a half
billion dollars ~i year.
I am not making any accusations at all, I am just trying to get your
comments on whatever the factual situation is.
It apparently is true that the oil companies for tax reasons have
operated outside of the United States through American corporate
and branch entities which lose money to get the advantage of the
depletion rate on wells that are located oi~tside of the United States.
That the companies report their dividends from ownership of com-
panies like Aramco, including sums which never have come to this
country.
Apparently the income, figures are overstated because they do not
include trading losses which for legal and tax purposes were taken by.
domestic corporations. I understand thal~ these unreported outflows
have been inCluded in errors and omission entries, in the balauce-o~-
payments statements. . .
Apparently the, total excess stated outflow~ for oil ~oIppanies has
beenrather large.. In 1973 I think it was sqmetl~ing like $11/2 billion.
Earlier in 1970 the benefits to the U.S. balance of payw~nts from over-
all multinational invç~tment appears to have $een overstated $1½
1~i~Ilion a year. ,
It is estimated tba~ the total multinational-corporation-generated
balance of payments as pi~blisbe4 by the rin~nce `çommitte~ a iear
ago indicates that the inflow to the IJnit~4 States was $5~8 billion.
`that is a very substantial eçntribution to the b~dar~ce o1~ payments,.
and certainly to the extent .that it is sound aIlci solid is a matter multi-
national corporations can poini to ,w~th a~ good deal ~f pride.
Mr. COLLADO. Could I say something on this?
Senator CASE. If we have an error in things, it kind of shakes your
confidence in your own ability to justify these adval4tages against
what many people have claimed to be disadvantages of multinational
operations. And I would like you to comment in general.
Mr. COLLADO. I would Jike to talk about this. I am not informed of
the exact revision. I would like to talk a little about this subject. In
the first place, I have, should I say, observed and attempted to work
in the field of the balance of payments and in particular in the returns
of foreign investment of the United States and more particularly of
our own company, and we have been encountering great conceptual
problems in doing this just as the Government found out when it
attempted to control capital exports during the period when the Office
of Foreign Direct Investment was operating.
PAGENO="0136"
132
But, nevertheless, there is general agreement on broad concepts even
though how you apply them has never b~en resolved, and probably is
not about to be resolved.
We have made very careful analysis within our own company; and,
of course, during the period of controls which were instituted in the
end of 1968, and only lifted a few months ago, we were required to
make very complete reports. We have been making much less com-
plete reports since 1934 or 1935. When I was in the Treasury Depart-
ment at that time the then Secretary of the Treasury ordered regular
reports of foreign investors, and they have been made ever since. 1-low-
ever, the point I would like to make is that I have very good infOrma-
tion on our company and IL really do not have any special sources of
information on any other companies, but I have observed the Corn-,
merce Department estimates, and I have gone down and talked With
the estimatorS both there and over at the Federal Reserve Board and
at the Monetary Fund. There are lots of people working in this field,
hut I have very, very little confidence in the figures that have come out.
There have been years when the figures we submitted on earnings
which were presumably included in the compilation were as high as
30 percent of the total record earnings, not only of oil companies but
of all foreign investments of the United States. I have never believed
those figures.
Senator CAsE. You mean they were overstated in the Department?
Mr. COLLADO. They were understated. I have thought that the total
earnings for all companies were much bigger than the official figures
stated by the Department of Commerce because I cannot believe our
earnings are 30 percent of the total earnings of all foreign invest-
ments made by all companies in the United States. To me this is utterly
ridiculous. I want to say I am glad they are going to revise the figures,
but they are going to have to go to another set of figures, in which I
will probably not have much confidence.
Senator CASE. flave you any explanation for this?
Mr. COLLADO. I have an explanation for the particular phenomena
I think that you are talking about. But not being aware of exactly
what the information or the sourcet c~irn~ot be sure. This is something
else that has been fully reported on and is fully understood at least
by the people in Treasury and the OFDI [Office of 1~oreigu Direct
Investment] organization that was charged with doing this and it
certainly should have been by the Commerce Department because we
have made this thing very clear.
It is related to a discussion which I think you may have had in
earlier hearings about the situation particularly of Aramco, but it is
a'so in some degree true in other circumstances. That is that at least
for purposes of direct investment control, rather artificial definitions
of what constituted the foreign investor and what constituted the
affiliated investment were laid down, and because of those rules, in
my opinion, the income from certain oil activities was overstated in
the external accounts and perhaps understated in the internal accounts.
They put earnings into the foreign piece of the operations, and then
put losses into the domestic piece. This is what happened. The com-
panies had to acqnire oil almost entirely on the basis of the concession
terms dictated by the countries in which they operated. They had to
acquire oil at the so-called posted price and then they turned around
and sold it in the market for what they could get, which in the sixties
was considerably lower than the posted price. There is no secret about
PAGENO="0137"
1a3
this. The i~icome. ta~c reti~irns clearly set it out, The returns that we
submitted to the OFDI clearly set it out. And we used to go down
and point out that their very formula, on the basis of which we were
entitled to foreign investment quotas, put one number in and left the
other number out, and we went down and explained this to them and
pointed out that this was a quirk of the fine print. That is why I am
a little leary when people say we are going to have a law, I want to
see the fine print in the law and not just a one sentence explanation.
Senator CASE. There is no charge of fraud or anything like that.
Mr. COLLADO. There is no qecret about this, it has been known to
numbers of people. Whether in fact that affected the way the Com-
merce Department put out the numbers I have no way of knowing.
Senator CASE. Apparently it is true.
Mr. COLLADO. I think that is what is behind this.
Senator CASE. It has affected it to the standpoint of about a 20-
percent error roughly, over these years and that is the thing that
bothers us.
Mr. COLLADQ. I would question the number that they were changing.
Changing number "A" by a billion and a half dollars does not im-
press me much because I suspect number "A" was a billion and a half
dollars off for other reasons.
Could I say something about that chart which I have been looking
at with something less than appreciation for about 2 hours, or would
you prefer that I not speak to that chart?
Senator CASE. Please go ahead. We want information,
Mr. COLLADO. If I were a professor and a student brought that chart
in, he would get a D because the data as well as tha headings are com-
pletely misleading.
Senator CASE. By the chart, I think for the record it should be
stated that there is a cardboard panel in the back of us here prepared
by our staff entitled, U.S. Taxes Paid by United States Based Major
Oil Companies, and it should be included in the record so that the
comments will be intelligible to those who have to read it.
[The chart referred to ~`ollows:]
US TAXES PAID BY US-BASED
MAJOR OIL COMPANIES
1972
Company
Net Income
Before Taxes
Percent Paid
tn US Taxes
Exxon
$3.700 billion
6.5%
Texaco
1.376 billion
1.7%
Mobil
1.344 billion
1.3%
Gulf
1.009 billion
1.2%
SoCal
0.941 billion
2.05%
Company
Net Income
Before Taxes
Percent Paid
in US Taxes
Exxon
$19653 billion
7.3%
Texaco
8.702 billion
2.6%
Mobil
6.388 billion
6.1%
Gulf
7.856 billiQn
4.7%
SoCal
5.186 billion
2.7%
PAGENO="0138"
134
Mr. LE~tNS0N. I may be mistaken, but I do believe we obtained tha~t
from Business International. I will check that.
Mr. C0LLAD0. That does not change my view.
Senator CASE. Let the record show what the facts are.
Mr. COLLADO. In the first place, I presume it relates only to Federal
income taxes, but the words "income ~ do not appear anywhere
on that chart. I assume that is what it refers to but it does not say so.
Senator CASE. It does not show the last line of the company, what is
that?
Mr. COLLADO. I cannot see that. My vision stops between Mobil and
Gulf aDd the carafe gets mqst of Gulf. I only talk about Exxon because
I see that up there.
I happen to have in front of me the 1973 figures for Exxon, but I do
not happen to have those fOr 1972. The 1973 figures are bigger. I would
like to s~y something about' it. In 1973 the corporation paid taxes and
other duties to all countries in the world in the: amount of $10,608
million. Of that, income taxes totaled $3,752 million; excise taxes
tolalèd $2,298' million, ~tnd other taxes were $4,558 million. That in-
cluded irhport duties, it included what we call sO~verance taxes and
Sthte takes and all kind of taxes.
Senator `CASE. ~t this point Mr. Blum has `a question that he wanted
to a~k you ~bou~ thd f1gii±e'ai~d I wanted a shOrt oith too. But I Want
to ask you when you `say takes' and dutie~, that includes, I a~sume,
royalties?
Ro~L~I1~5 AND oflinu PA~M~tTS
Mr. COLLADO. No. I was going to say that, it does not include' roy-
alties. Duties are import duties, customs duties.
Mr. LEVIN50N. Payments to producing countries?
Mr. COLLADO. Payment~ to the producing countries but not~ of
royalties.
Mr. BLUM. Do those numbers include payments to the consuming
countries and to the government of Saudi Arabia?
Mr. COLLADO. `Those which are under the category of income tax.
We can come back to that. I know what you are going to say. It does
not include royalties. ` ` "
Senator CASE. `Designated as such?
Mr. COLLADO. It does not.
Senator `CASE, So we know what we are talking about.
Mr. COLLADO. It does not include royalties, period. Royalties are
stated in mostPersian `Gulf countriç~s as ~ percent or 4 shillings per
ton gold. They, are stated and they are paid and they are not in this
number. Venezuelan royalties are 162/s percent and based on a some-
what strange pricing formula which make them much higher. That
is not included ifl these nuihbers.
Senator `CASE. That kind of payment which after a discussion in
our State Departi~nt and at the highest level of our Government
which was `allowed to be increased and charged by these foreign coun-
trieq which is called taxes~ where do they come into the picture?
Mr. COLLADO. Any tax that is accented by the Internal Revenue Serv-
ice as an income tax is included in this.
Senator CASE. That is all we want to know.
PAGENO="0139"
135
Mr. C0LLAD0. I will come back to the other points. That was not
what I was talking about. I would like to point out that in 1973 the
earnings in the United States before tax were $1,326 million. That i~
from the domestic operation of oil, gas, chemicals, and other activities.
We had income taxes of $417 million. That is 31.4 percent. That is
by all accounts just exactly what the tax laws of the United States
would say a mature oil operation would pay because 48 percent is the
statutory rate. The actual rate paid by most manufacturing com-
panies is around 40 to 41 percent because of all the things you are
familiar with, accelerated depreciation, investment credits, and all
these things, which are not loopholes, which are things very carefully
legislated by yourself and your colleagues, and in the case of oil there
is another roughiy~ 10 percent differential as a result of the applica-
tion of the depletion allowance~ the 22 percent depletion allowance.
Now, therefore, our effective; tax rate in the United States was 31.4
percent, which is an appropriate tax payment for earnings on income
in the United States, and we do not. in any wa~y feel that we are get-
ting a benefit that is held back from ~ome other l~ind of a person.
We ha4 tothi worldwide income taxes of $3.7 billion Of Which $3.3
billion were foreign ~nd that tax rate came out to be 68.4 percent.
In my opinion, that is a very high tax rate and one I resent having
to pay. We do everything possible to keep that ~umb~r down.
Senator CASE. Broadly sp6aking, would ~ou say that those taxes,
those foreign taxes, could, you a~~ly them ais cost of goods purchased?
Mr. C0LLAD0. No.
Senator CASE, You could not do that?
~[r. COLLADO. They are proper income taxes.
Senator CAsE. If you do that--
Mr. COLLADO. I we~it into that at some length in the Ways and
Means Committee a few weeks ago and I think I have given the staff
reference to the testimony in which I went into this subject. I would
take the position that it depends country by country. Each country
has its own form of income tax. No two of them are identical. In fact,
they are quite different.
On the other hand, this Government and other governments and ~
host of academics and professionals interested in taxes have spent the
last 20 or 30 years wandering around the world haying conferences
on harmonization of tax laws and we have edi~icathd everybody in the
world, including ourselves, how this is done. So I do not think there
was any special effort made to educate one particular country. There
h&ve been Latin American tax meetings and all of the assistant secre-
taries of the treasury and intern~d revenue servi~e staff from. ever~r
country have been meeting for years and years. The literature on this
subject is almost as big as thc literature on.multinat~onal corporations.
In any event, the point I would make is that we have in our tax
returns, and this is fully known in the tax writing comniittee~, and by
their staffs, we have taken the position that we accept for credit, the
stated income tax on the portion of the income that results from what
we call the realized price or the transfer price, and we exclude from
our claim for ~oreign tax credit, the portion of the income tax that is
assessed on a plus differential between the realized price and the
posted or reference price established by the producing governments.
PAGENO="0140"
136
~Each country has a different name for it. So we have not ever asked.
~for tax credit based on this excess and I think that is as far as I would
like to go in deciding whether a tax is a tax or is something else. AIEI
I know is it comes out of our hide and ultimately out of the consumer's
hide. Unless the cOnsumer puts the money into the front end of the
company nothing goes out anywhere else.
Senator CASE. how are you able to allocate to your satisfaction your
`earnings from domestic and from foreign production?
Mr. COLLADO. How do we allocate?
Senator CASE. Are you able to?
Air. COLLADO. Oh, yes, very easily.
Senator CASE. You do not have any problem with that?
Mr. COLLADO. No. And our figures, I happen to have the annual
report here. It is all clearly laid out and this is not a problem.
TAXES PAID TO THE SAUDI GOVERNMENT
Mr. BI1UM. If I may, Mr. Collado, I would like to pursue a point
which I asked about before, whether in the total tax bill the amount
that you pay the Government of Saudi Arabia is included. I believe
you said, yes.
Mr. COLLADO. Well, let me be a little careful about this. It is
included but it is included a little differently. We have in recent years
gone into a new method of accounting. I have got Mr. LeGrange here.
Maybe he had better answer the question. But we have gone into the
method of accounting that would take in our equity share of com-
panies like Aramco, which is the source of our income from Saudi
Arabia. So that we do include in our items in the income statement
the proportion of Aramco.
In earlier days we did not do it that way. We handled Aramco as
~n investment and only put the dividend in, As you know, this is a
subject that the accountants have been discussing for years.
Mr. BLUM. Of course, if you did just include dividends, von would
report that net after tax and t~ie numbers that you would be able to
show in the balance sheet would show in your total tax burden would
be considerably smaller. Am I correct?
Mr. COLLADO. If we did-
Mr. BLUM. If you took dividends from Aramco that Aramco's pav-
ing the tax you would be showing a much smaller number worldwide
for total tax paid.
Mr. COLLADO. Somewhat smaller. If you are going to start doing
ratios there is going to be a brand new phenomenon and that is as our
ownership interest in these operations declines in the future the per-
centage of tax that we pay will go down and the cost of purchase of
raw materials will go up, because when we buy back from a govern-
ment we do not pay any taxes. We only pay taxes on equity.
Mr. BLUM Well, I just wanted to stress that point because I believe
there was a meeting of the accounthnts or the four Aramco comp-
trollers of the four Aramco shareholders to discuss this very point
which your comnany thought for public relations it would be most
effective to include those taxes, taxes paid, in the annual report.
PAGENO="0141"
137
Mr. Uoij~u~o. I do not believe that was the basis on which this dis~
cusslon took place. I can ask the accountants. T do not knew what they
were talking about. I know in myown case it is very simple. Wedecided
to go in for what is known ~s equity accounting because this is now
the modei~n practice, and if you do that the taxes automatically get
put in because they are part of it and you cannot escape it. There is no
motivation other than to have a better representation of the total
accounts and this is in full accord with all of the principlese~tablished
by the accounting principles board which get sanctioned by SEC
[Securities and Exchange Commission] usage. Exxon does not claim
credit on its Federal income tax return for those taxes paid by
Aramco.
Mr. BLITM. Only one final question and that is why is it that Exxon
has not ever included the earnings, dividend or value of its holdings in
Aramco in its filings with the Security and Exchange Commission in
its report? How do you disclose your dividend flows and the amount.
of your equity investment in Aramco?
Mr. COLLADO. We have certainly given the SEC everything they have
asked for in the 10K. I will have to ask Mr. LeGrange.
Mr. BLUM. I am asking whether Exxon has disclosed its dividend
flow from Aramco and the amount of dollars from Aramco in the
SEC. I believe it has not.
Mr. LEGRANGE. The dollar investment in Aramco is disclosed and
the net income we received, which is the net of dividend less the loss
we sustain, is also in the 10K.
Mr. BLUM. Thank you. I have no further questions.
THE FUTURE OF !flTE OIL INDUSTRY
Senator CASE. The only other question I have is a very general
one about the future and about how in the future you think it would
bc best for negotiations with producing countries to be conducted,
whether on roughly the same pattern of negotiations as in the past,
or whether since the conditions are so different, and we must assume
will continue to be so different, there had better be something more
of a government*to~governm~nt relationship rather than an operation
in which the private companies did the negotiating with government.
Mr. COLLADO. Well, Senator, this is a subject I have given a great
deal of thought to.
Senator CASE. Of course, that is why we want to hear from you.
* Mr. COLLADO. It is not a subject on which I find it easy to give a
very precise formula. This is a very difficult area.
In the first place, our experience over the last several years has not
been very encouraging as to the support or the action that our own
Government or other consuming governments are likely to give or
take. I am always an optimist and I hope it can get better, but it has
not been very good. We witnessed it last fall and winter when the
problem of embargo hit and the governments were completely unable,
and in my opinioil, more or less unwilling to do anything about mdi-
eating how the oil should be allocated. I have thought that the big
problem we have is how to construct a better international trade and
investment world, In my opinion, one tenet of such a world would be
PAGENO="0142"
138
that the people do not withhold exports of vital things for noneco-
nomic reasons. The United States itself has been guilt3r of doing this
and I do not tl~iink it was a very good idea and it fortunately did not
last very long. There has to be some rhyme or reason to what you do.
Now, the problem we have confronted in the energy situation is a
very simple economic one. If one were sitting in an academic hail
somewhere remote from contact with this and looked at the presenta-
tions that have been made by my con~pany, and by many, many other
people, academics as well as corporate people, Government people,
about the outlook for the oil and eiiergy situation, it was absolutely
clear to everybody. We pointed out in 1969, at the time of the Shtiltz
Commission and it has been pointed out innumerable times and places
by different people, and made absolutely clear that the one thing that
was developing was a very great dependence on Eastern Hemisphere
sources of oil to make up the energy balance in;this country. Nobody
said that the oil did not exist, they just said we are getting very, very
heavily dependent on overseas supplies.
Back in 1958 there wiis congressional trade legislation in force that
contained national security clauses. President Eisenhower ordered
an oil import quota system established to protect the national security.
By 1968-69 the administration of such controls was in question `and
the Shultz Commission was set up to review this matter. I think the
Shultz Commission in the area of definition and cfiteria for n~tiona1
security wrote a magnificent report.
U.S. DEPENJ~ENCE ON IMPORTS
We hate been pointing out for years that this country was
going to have a situation with very heavy dependence on imports.
We have it today and we are going `to have' it f~r many years.
Now, the fact of that the speed r~p of `demand, pThs the, lack of
finding of new reserves' in massive `quantities in pi~c~s outside of the
Persian Gulf' has meant that the Persian Gulf `countries, they were
blessed with very, very large reserves became a key' source. When you
have very, very large reserves, when you have' demand pushing on
consumption, the situation can arise where one or two or three cOun~
tries, perhaps even only one country, has the `throttle that can be
turned on and off.
When a person is in that position he is what is known in economic
terms as a~ monopolist. He does not even have to be in a cartel, he is
a monopolist, one man boss of the show. `This was obviously `coming
up. What we have been `saying throughout is that it is important to
get that monopolist or his associates, junior monopolists, into a world
trading picture in which they do not use that economic power.
U.S. PRIORITIES VIS-A-V15 OIL
Now, the political aspects of it were superimposed but the Arab
nations already had the economic power. Under those' circumstances,
the `Government of the United States has a trem~ndously important
role because only it can in the first place estimate among all of the
problems that the United States has, what is the importance or priority
to be assigned to this problem. I' think this is a terribly important
PAGENO="0143"
139
problem because I work at,, this, ~ll day lqn~, b~t, ~ was, in the State
Department for many years and I know that there are 48 other prob-
lems and the people who work on those think they are just as im-
portant. This one is pretty important. I would not say it Is ~he most
important.
The point I am trying to make is that the `Government of the United
States has a complete acrOss-the-board international relationship to
maintain with many, many countries, including the ones that are in
this position to control this particular product.
The Government of the United States has got to .bring to bear all
of the elements of its abilities and wisdom and it has got some trading
points.
We as companies have some trading points too. We have not given
up by a long shot. We have `the internation~l 1ogi~tics system. Some-
one may take it away from us but we have it today. We have the
expertise. No government oil company ever found a major oil find.
No one in Government ever drilled at 3,000 ~feet of ~fater. Np1~ody in the
Government can deal with the problems `of the North, the transporta-
tion. You have to have the people who know about these things. Maybe
some day governments will get all of the expertise and we will be
pushed out. But we have it today.
I heard Mr. Tavoulareas say that the very gov~rnmenW that we are
having these very' difficult relations with do not, want us to leave.
They cannot run these things without us. Thider these c~rcumsthnces
I think the Government of th~ United Stat~s has to support i~s, it has
t~ ,do everything possible in the broad field. The' Government ö~ the
TJnited. States is working on ~the monet~ary problem~ ~ very good part
of the difficulty we aie havin~ i~ .t~e monetary p,r~~lem.
As was said earlier, if you just want the consnmers to have e~eap
gasoline all you have to do is take off the don~estic excise tax., Foreign
increase in price is a small percer~tage `of the total price of your gasoline
and `$10 a barrel is 25 cents a gallo~. .
Senator CASE. $10 a barrel is 25 `cent~ a gallon?
Mr. COLLADO. I think I am right. Did I do the a~ithmetic right?
Divide 10 by 40. A' little less, 42 gallons in the barrel.
`Senator CASE. What is the cost to the gas station ~
Mr. COLLADO. A relatively small transportation cost, relatively small
refining cost, and most of the rest of it goes to Government.
Senator CASE. Say it is a quarter. How much would 10 cents more
be for all the other costs?
COSTS OF TIlE DEALER
Mr COLLADO About 10 cents and the rest of it goes to the dealer
We are not usually the dealer The dealer is outside of our normal
scope
Senator CASE The dealer pays 35 cents ~ Is that what the dealer
pays~
Mr COLLADO Roughly, I guess I could get you the numbers The
average Exxon price to dealers is in the range of 30 to 33 cents per
gallon depending on grade
Senator CASE So if he charges 55 cents he is making 20 cents a
gallon ~
PAGENO="0144"
140
Mr. COLLADO. No, he is paying about 12 cents tax, depending on the
State.
Senator CASE. There is where the tax comes. So it is onl~r 12 cents out
of 55.
Mr. COLLADO. When we talk about the $2 a gallon price in certain
other countries, $1.50 of it is taxes. In Italy the taxes are very high.
Senator CASE. We are talking about things here.
Mr. COLLADO. I am talking across the board. Getting back to the
U.S. problem-I would think the United States has a perfectly appro-
priate role and one that frankly, we have urged that they exercise in
some degree, by setting up this broad framework. But I must say
there have been plenty of times when the Government did not want to
f ace up to saying whether A or B was the right thing to do.
Now, I started to say when we got off on the other point that the
Secretary of the Treasury and his deputies are spending a great deal
of time on reconstructing the international monetary system. If you
get the international monetary system reconstructed a good deal of the
problem we are talking about is much easier to confront and they are
working at it.
They have also made a very strong point of what they think is toO
high about the present price of oil. They have been making speech
after speech on this subject. This is not a new thing.
Mr. LEVINSON. Just one thing. There is something that is a little
bit disturbing in what you say. On the one hand, you tell tis Govern-
ment has an obligation to support you, you feel they are generally
doing that to provide the framework. Now, does that not really come
back down to the case of Aramco that the 115, Government is supposed
to establish this framework, which in effect has the consequence of pri-
marily benefiting four major oil companies as long as this exclusive
Ararnco agreement exists?
Mr. COLLAD0. I think that statement is sheer nonsense. The Govern-
ment of the United States has got to establish a framework in which
producing countries and consuming countries can have decent inter-
national trade. Who benefits from that primarily is consumers who
have an assured supply, but the companies, what the companies make
is a relatively modest return on investment and quite appropriate
and all this business of preferential access is baseless. We have pref-
erential access to some wells in Santa Barbara because we bid a fat
price for them and figured out how to drill in deep water and we get
preferential access when we earn it by our ability to run something.
We do not get preferential access due to some backroom manipulation
or devious arrangements. We made the investments in a very risky
period. We were asked to make these investments, We made the
investments.
NEGOTIATIONS WITH THE SAUDIS
Mr. LEVINSON. In the process of negotiating with the Saudi team,
and the U.S. Government is in the process of negotiating with the
Saudi team right this very minute as far as we know, there seems to
be some major political 1mph~ations and financial consequences The
only question I put to you is when the Government does that, for the
ostensible purpose of assuring this country and its allies of `i secure
PAGENO="0145"
141
source of oil at a reasonable price, does it not assume some other obli-
gation withrespect to which companieshave access to that?
Mr. COLLADO. No. ii think the anSwer is no, I do 4ot think so.
Mr. L~vINsoN. Thank you.
Mr. CoiLADo, The second thing I would say is we welcome the Gov-
ernment of the United States sitting down with the Government of
Saudi Arabia. I am really not well informed as to what they ale talk-
ing about. The press releases are very general. If they can in fact
make a nice viable comfortable arrangement between nations that will
benefit not only United States and Saudi Arabia but presumably lots
of other cOuntries, this is exactly what we are saying we want to have
done. We have completely informed the Government of the United
States of anything we kn~w about the progress of the circumstances in
which we do business in these countries. People keep talking we are
in the negotiation of buy back. From the records that I get of what
has been going on in the last few months I kind of smile because when
I i~egotiate I usually know what I am doing, but when I am just being
told we are not about to take up subject or subject B----
Senator CASE. When you are told by the producing countries?
Mr. CoLk&Do. Yes, we are not negotiating buy-backs.
Senator CASE. This is----
Mr. COLLADO. We have kept the State Department and other agen~-
cies of the United States very fully informed. In fact, sometimes I
think we spend so ranch time informing them they are getting bored
hearing from us. The fact of the matter is the full discussion before
this famous meeting of last Tuesday took place last week and they
knew everything we knew, and probably more because they have
ambassadors who get information that we do not have.
OIL ALLOOAPION DUEING TIlE E3~EAEGO
Senator GASE. This is a parochial question, and is quite unrelated
to anything else.
Mr. Oou~no. Go right ahead.
Senator CASE. I wonder why New Jersey had a lonsy supply of
gasoline during the February shortage when Exxon is a Jersey com-
pany, it has the refineries there in Bayonne, and why we got such a
terrible deal.
Mr. COLLADO. The allocation by States was not done by the com-
panies, as you know.
Senator CASE. No, I do not know that. My suspicion is that the
companies gave the statement to the energy office and the so-called
allocation by the energy office was simple mathematics adding up what
the companies told the energy office they were going to put in.
Mr. C0LLAD0. No; actually what happened was, and this is part of
the very detailed operation of our domestic company which is handled
from our houston base, and I am not personally the one who deals
with this. I know about it in broad generalities but not in day-to-day
details. As I understand it, the whole system was based on a historical
1972 statistic and each dealer was given ~ percent of what he had
in 1972.
Senator CASE. Not over the country as a whole?
45-426---75------1O
PAGENO="0146"
14~,
Mr. COLLADO. Yes, sir.
Senator CASE. In New Jersey we got about ~3 percent and in other
States they got 100 afid 100 plus of that figure.
Mr. COLLADO. Well, not in our own com~p~ny, I am sure that was
not the case. We did whathver the man dOwn the street told us to do.
We did not have any leeway in this and we did not exercise any leeway.
Senator CASE. Then I am ju~t trying to find ~ut~whO is responsible
because New Jersey had a terribly bad deal.
Mr. COLLADO. I ~an only tell you I live in Nassau County and we
did, too.
Senator CASE. When there is a shortage it is intolorab.le, and it should
be evenly divided. Would yonagreC with that ~?
Mr. COtLADO. I think the s~rstem, for all kinds ~f reasons which it
took 6 months to figure out, did not work~ very'weli and that is the
trouble with emergency systems; by the tim~ the immediate emergehcy
is over you begin to figure~ out how to run the system.
Senator CASE. Yesterday Mr~ Sawhill testified there ~were no ~ig-
nificant diversion to the United St~tes o~f other than Arab oil durtug
the embargo. Do you agree with that ~
Mr. COLLADO. That there were not o~ there were
Mr. LEyINSON. There were not. He said there were no signifie~tnt
diversions.
Mr. COLLADO. I cannot spe~k bb~loi~siy, again~ for other conipanies..
I know in our own case it was quite cie~r. that~ in the first place, we
have a lot of eêntra~tuai arrangements~ We cannot alter our conr
traótual arrangements tOo quickly. Wedid tlir~e Uiings. Ones we~ofl1~
plied with all o~ the producing eoi~intries embar~oes as they order~
and we had no alternati~e berau~e otherw~is~ tJ~e~ epnsequences wpnl4
have been much more severe, and that was made abundantly clear to
us by the officials of those countries who told iis~ :what would happen
if we did not follow their quota systems. That set a basic problem
because whe~e the embargoes wer~ put in~ any cust~mary plans were
disrupted.
Second, we respected all of our contractual obligations in the world,
using force maj~ure equitable reductions. Clearly when we lost a very
large fraction of our total worldwide oil we in a sense failed to comply
with all of our contractual obligations. Then, finally, we distributed
the crude oil to our affiliated companies on as equitable ha~is as we
could and this entailed very large adjustments *ithin Europe but very
small impacts on the United States. We did not bring any more here.
We brought virtually as much as we had before. One month we took a
couple of cargoes elsewhere. The net impact on the major trade move-
ments was quite small but the big readjustment frankly, was among
the countries of Europe where we had to do a major reallocation given
the imnact of the embargoes and how it changed some of our flows.
Actually, this is a job that in my opinion~ should have been done by
Government and Government failed to do it.
Mr. LEVINSON. Our Government had been in touch with you about
this ~
Mr. COLTJADO. We were in touch with them but they were not in
touch with us.
Mr. LEVINSON. They did not give you any instructions?
PAGENO="0147"
T43
Mr. OOLLADO. Not a bit. They knew what we were `doing and they
presumably hoped that the problem' would go away soon. I do Ziot
know what the Government hoped, I Only' know what they sakL
BENEFITS TO THE UNItED STAThS FROM THE OIL COMrANIE$
Mr. LEVIN50N. What benefit dpes the United States get from the
fact that international oil companies are based here? You do not have
to answer that.
Mr. C0LLAD0. If they were not based herp.
Mr. LEVINSON. We would not exist, I suppose, in the form in
which-
Mr. COLLADO. They would not exist in the form they do. Although
we had a little colloquy earlier about. the balance of, payments, our
company bring~ back well ovei~' ~ billion dollars a year in earnings
and I think that is probably worth something in the United States
and we bring it back,' too. Beyond that we certainly provide a lot of
employment. We provide a lot of capital goods, exports from the
t~nited States. We do all kinds of things~ W~ also procure and move
around the world a lot of oil and I am not' so sure that `would be so
easy to do if we did not have an establishment abroad. This is before
oU~ going into the market and bidding up on an `auction. b~is. ,J do iiot
think we would be anywhere near as effeptive as we are under the
present arrangement. ` ` ` `
Mr. LEvINS0N. Did you eVer have any' feeling, of uneasiness at being
subject to the kind~of international co~itrols. that internationa~istatus
involves? Do you have any feeling about this?
Mr. C0LLAD0.I have. `
Mr. LEvINso~.'Ey loyalty to the United States?
Mr. CottAno. Between'my 27 years in this cOmpany and very happy
and I hope fruitful ones, and m~r 13 or "14 years befOre that in. thq
Oo~ernment of the United `States,' I have worked all sides of the
problem and thought about it for a ~rery long time. There are poten-'
`tial conflicts inevitably in anything you `do in life but there is no
reason why you have to find yourself in a position where you do things
that are morally incorrect. `You can always find a proper attitude to
`take and you have to act this way. But you say am I evcr uneasy?
I am uneasy practically all the time. I was uneasy this morning when
I was coming down here in the car. I am going to be uneasy this
afternoon. I have a difficult appointment at 2 :30, if I can make it.
Mr. LEVINSON. If I do not let you go you are not going to have lunch
~nd I will not either.
Mr. COLLADO. You have different degrees of uneasiness. This is a
good business and an interesting one and a more fascinating one than
ever and it has difficult problems. We have been talking up at the
United Nations with the group of so-called eminent persons that are
studying multinational corporations. That is a fine title. Around the
hails of the United Nations they are called the College of `Cardinals.
It does not matter what you call"them, in any case, they have devoted
a great deal of time to exactly this problem.
PAGENO="0148"
l~4
You can list on paper that would fill up this table the potential
confIiet~ of interest. Ray Vernon has written book after book on the
potential conflicts of ±rit~rest. I tell Ray if he comes around and talks
to me I will give him three additional chapters. But the point is we
have been abli~ to operath for 100 years internationally and the number
of major problems to which we had no solution were not so very many.
We have got. a very difficult situation right now and I cannot tell
you how it is going to be resolved but I am sure of one thing, if we
have as little general progress among the consuming nations from
1974 to 1979 as we had from 1969 tO 1974, there are going to be cold
nights.
Mr. LEvIN50N. Among the consuming nations ~
Mr~ C0LLADO That is right.
Mr. LicviN~oN. Well, I do not have any aBswer to this question.
Mr. ~COLLAD0. I am an optimi~t. Things will get better and I agree
with Senator Church, the Government, after what I consider a com-
plete paralysis, has begun to move and hopefully it will move faster
and better. We had almost no acreage put up for leasing for 4 or 5
years. You cannot d~rill if you do not have a piece of real estate to drill
on. Leasing is very important. They are beginning to put it out. We
spent a lot of money a few days ago down in the gulf. We have put
out, I think, $600 million since last December in bids on 11.5. acreage
but this was not happening ~n 1969~ 1970, or 1971. At the same time,
you know what happened to nuclear powerp~ants. In Japan they can
build one in4 years. In thiscountry it takes 10 years.
Mr. L~vIwsoN. Of course, in Japan they are up to here in pollution,
too.
Mr. COLLADO. I just came back especially for this hearing and I am
telling you it is not very pleasant, but the. fact is there has to be an
intermediate course. This is the proper role of government to balanc~e.
These hard deeisions are not corporate decisions.
Mr. LEVTNSON. I think they are decisions that everybody has to con-
tribute his share on and on that note, I guess if there are no other
questions or anything further you would like to say or your counsel,
we will adjourn.
[\~\Thereupon, at 1 :30 p.m., the hearing w~s recessed, to reconvene at
2:30 p.m., this same day.]
[Subsequent to the hearing, the foflowin~ information was received
in response to questions submitted by Senator Church to Atlantic
Richfield `Co.:]
kmnnrlc RICHFIELD COMPANY,
Washington, DC,, June 18, 1974.
Hon. FRANK CnnncH,
TJ.k~I, Senate,
Washington, D.C.
DEAR SENATOII Onuncu: In answer to your inquiry concerning the following
issues under consideration by your ~oreign Relations Subcommittee, we will
answer numbers 1 and 2 together by addressing number 2, the broaçler issue,
first then proceed to the remainder:
1. Possible increase in Department of State budget to collect data for future
neqot~ations with Middle East countries;
2. U.S. government negotiation involvement:
Atlantic Richfield Company believes the proper role for the federal govern-
ment in negotiations between oil companies and Middle Eastern producing
governments should be one of support and influence behind the scenes, rather
PAGENO="0149"
~i45
tliaii one of dire~t neg~itiation. Thils, the U.S. government ~1iou1d act i~i support
of the efforts of American companies to resist unilateral breaclLes O~ the terms
of their concessions or other forms of petroleum rights in foreign countries. fl-ic
U.S. government should be a "behind-the~scenes" advisor to American negotiators,
with the implicit improvement in company negotiating power that this implies.
The freedom of producing governments tO raise prices may be limited in the
short run by political considerations. Demand responses to higher prices are
beginning to suggest that over the longer run price will be limited by the
availability and cost of alternative coal and nuclear energy in the U.S. and
Western Europe, and the needs of some producing governments for revenues for
domestic operating expenditures and economic development. Thus the United
Scates government should take no action which would, over the longer term,
prevent price-limiting forces from operating, but rather create conditions which
would stimulate such market forces. This includes Project Independence, and
strong support and encouragement of friendly countries' efforts to expand their
domestic energy supplies.
The history of agreements with Middle Eastern oil producing countries has
been one of continued violation whenever it is in the interests of the supplying
signatory. On the other hand, our tradition has made us reluctant to violate
business agreements simply because they have become less favorable to us.
Long-term agreements at current high prices, would likely be honored longer
after they became onerous to the U.S. than after they became unsatisfactory
to producing countries. Thus we should avoid entering into them, and discourage
friendly consuming countries from entering into them.
One function of the U.S. government, in an advisory role, could be to unify
the approach by U.S. oil companies to producing governments, particularly if
direct cooperation between U.S. companies is Inhibited by the Justice Depart-
ment. Even more importantly, a single policy focus should be provided to insure
that the various cabinet departments pursue a consistent, coordinated policy
toward producing countries. Such a policy should be directly and overtly related
to producing country posture in petroleum supply negotiations. In particular,
the policies of State, Defense, and Agriculture should be coordinated, and track
with PEA determination of domestic supply, demand and pride considerations.
As far as State Department budget increases for data, we believe that the
present data collection activities of Interior, Commerce and PEA should not
be duplicated and that data for advice to negotiations should come to the State
Department from oil companies on an "individual issue" basis. Thus we do
ii.ot support additional funds for data collection by State, although we believe
it would be reasonable to provide a limited number of professional analytic posi-
tions to analyze available data in the above context.
3. Revisions to U.S1. ta.s laws:
Atlantic Richfield Company concurs in the views stated by the American
Petroleum Institute concerning the Oil and Gas Energy `Tax Act of 1974, as
reported by the Committee on Ways and Means and as proposed for amend-
ment by Representatives William `Green (D-Pa.) and Charles Vanik (D-Ohio).
Foreign Taa' Credit
HR. 14462 as reported by the Committee on Ways and Means, would abolish
the per-country limitation method with respect to oil and gas extraction activi-
ties and require oil and gas companies, in applying the overall limitation method,
to fragment and separately determine the foreign tax credit limitation on indi-
vidual segments of their total foreign operations with a special 52.8% limitation
being applied to determine the creditable amount of foreign taxes Imposed on
producing operations.
Representative Vanik has announced hi~ intention to propose an amendment
to HR. 14462, which would eliminate the foreign tax credit a~ it applies to
oil and gas extraction operations and reclassify such tax payments as deductible
business expense. In addition to the proposed changes affecting the foreign
tax credit, current legislative proposals would elhninate the allowance fOr
percentage depletion with respect to foreign operations, and terminate the option
to currently deduct intangible drilling and development costs incurred in foreign
operations. -
The adoption by the tTnited States of any of the changes described above, will
have the effect of rendering U.S.' companies and their affiliates incapable of
sOcces~fully competing against the nationals of other industrialized nations to
PAGENO="0150"
146
acquire and develop mineral resources needed by the United States from diverse
locations throughout the world. In such an event the U.S. will become increas-
ingly dependent upon foreign owned companies, including companies owned by
foreign governments, for supplies to meet our energy requirements.
4. Desirability of ea~elusivity ia"buy back" of crude fro~n producing countries
by a few Awerican~ oil coinpaimier:
Since the U. S. government cannot dictate contract terms to producing country
governments, Atlantic Richfield Company interprets this question as one of
diversion of buy-back crude at the border, through allocation or some other
method. We do not support such an approach. Such a strategy, or a self-imposed
prohibition by the U.S. oil companies, reduces incentives for these U.S. corn-
panics' overseas exploration and thus could result in a loss of business to com-
petitor countries and their, oil companies. We therefore urge the continuing
support of such exclusivity, which we believe also stimulates competition
between U.S. oil companies in see~i~g new supply areas overseas.
5. A Strategic Reserve:
The best resei-ve is a strong~ functioning domestic industry. Government
aims should be first and foremost to foster that, including whatever support
may be needed for economic and secu~ity reasons for coal, shale, and oil
exploration in remaining offshore, areas.
In terms of emergency strategic reserves~ Atlantic Richfield Company believes
that domestic consumption needs in the short and mi~dle term require full
development of present and potential suppl~e~~ rather ~ban diveçsion of doreestic
output to reserves. But w~ also helteva that the potential may exist in Naval
Petroleum Reserve 4 (NPIt4) Jo provide emergency, ~ack-up. We therefore
urge the expl~ratjon of th1~ reserve to characterize the potential for such
emergency supply'. Shon1~l mgjor quantities of petroleum be .jdentified, we urge
that the potential of, NPR 4 then he made manifest. thropgh the government-
supported installation ~of extraction and transportation facilities that would
make it possible to "turn on" ~iPR 4 should `such national security conditions
aS a supply, emergency warrant It. This could provide a real countervalllpg force
to a potential embargo.
Respectively submitted,
PHIL D. IjELrxTG.
AFTflR~'OON SESSION
Sena~Or Cnunctj, The'1~ariñg will come to order.,
Our witness this afternoon is Julius Katz, the Acting Assistant
Secretary of State for Economic and Business Affairs.
Mr. Katz, would you stand and be sworn, please?
Do you sweai~ that all the testimony you are about to give ~i1l be
the truth, the whole truth ~ncl nothing but the truth, so help you God?
TESTIMONY OF HON. JULIUS KATZ, ACTING ASSISTANT SECRETARY
OF STATE `FOR ECONOMIC AND BUSINESS AFFAIRS
Mr. KATZ. ~ sir.
Senator Curmoli, Pp ybu have a prepared statement? Would you
like to go forward with your statement trnd then there will be
questions?
Mr. `KATZ. Thank you,' Mr. Chairman.
I welcome the opportunity given me to testify today before the
Subcomm~ttee on Multinational Corporations regarding the biter-
national petroleum industry.
- `The `future role of the industry is an element of one of the most
important i~ues confronting our Nation regarding the future supply
of energy. There Is wid~e recognition in this country and abroad of
time need to move in the shortest time possible to increase the depend-
ability, of energy resources. The period of transition to expanded
PAGENO="0151"
147
production of conventional resources and to new forms of energy
could be a di11~Icult ones with serious implications for the political and
economic stability of the world. In these circumstances it is proper
that the executive branch and the Congress examine together the
role played by industry and Government respectively and consider
the role to be played by Government and industry in the future with
respect to the continued supply of our energy requirements.
t.5. POLICY ON INTERNATIONAL OIL
Remedies for the existing situation-
As requested ~ you, Mr. Ch~irrnau, I will concentrate today on
evolving U.S. policy to deal with the international energy problem.
The basic goal of our policie~ is to insure adequate and secure energy
~upplies at prices that contribute to re~tsonaMe growth and to. an
iMproved environment in a~1 the nations of our interdependent wo~id.
J~ ~ursuit of this goal we are now engao~ed in ~A~ree initiatives. inter-
nation~Jly, we are maidng a major e~f~rt to develop a scheme for
~ooperation among coi~suming countries. ~&t the same time, we are
seeldug impro~êment of, our relations with producing countries. A~t
te b,ase of our internat~oial. programs, ~o~rever, are the efforts at
home thrdugh Project iud~pen~,oi~ce to increase our ~eIf-relian~e
tl~roughi great~r Proth~ctión and ir~iprove4 ~onseryation practipes..
These three endeavois, involvwg o~ir domestic po~icies, and our activi
tie~ abroad with consurnei~ and producers, are interrelated and are
ciosely coordinated.
For much of the past year, our concern wa~ with the adequac~i o~ Qil
supply to meet our own requirements and that of the world econ~my.
Tl~is remains a concern ovçr the long term, but it has been over-
shadowe~ by a more immediate problem created by the fourfold in-
crease in crude oil prices of last year. These price increases posh ~
serious challenge to the world economy. All oil importing countries
face an adverse impact on their general price structures, balance çf
payments, industrie~l output, and employment levels. The situation of
the poorer countries is particularly acute. The additiohal cost of th~ir
energy imports will exceed the official development ~issistance they are
now receiving, and threatens to reverse their eeonornic gains in recent
years. Some o~ the oil exporting countries, too, will find their develop-
me~t aspiratidns eroded a~ high 0il prices feed global inflation. In
today's interdependent world, no, country, even one self-sufficient in
oil, could escape the effects of general economic and political u~-
stability.
Baked on this asse~srnent and the conviction that concerted inter-
national action was ~ssentia1, the, President took the initiative in in-
~iting the world's ~3 largest energy donsumers to attend the Wash-
ington Energy COr~ferençe in February of thi~ year. Twelve of the
in+ited nations agreed to work to develop a cooperative program to
deal with the problem. Intensive work has followed, centered in a body
called the Energy Coordinating Group. Four meetings of the group
have taken place and a further meeting is scheduled for the middle
of this month. )Vhile I cannot today forecast the conclusions which
are likely to be reached, I can say that solid progress has been achieved
in developing a consensus on measures to be taken internationally.
PAGENO="0152"
148
Working groups have produced proposals for cooperation in the
related areas of conservation and demand restraint, accelerated de-
velopment of conventional energy resources and measures. to deal with
supply interruptions. The Energy Coordinating Group is also seeking
to develop cooperative programs in the fields of energy research and
development and in uranium enrichment. The group is following
closely and coordinating views regarding the financial implications of
the energy problem being discussed in the various international finan-
cial institutions. The coordinating group has considered in some depth
the possibility of joint consumer/producer meetings and has discussed
a number of the issues which could be raised in such meetings.
Finally, the group is also considering the role of the international
oil companies. The sense of urgency and serious purpose displayed
by the governments participating in the Energy Coordinating Group
reflects a deep commitment to bring to a successful conclusion the
work begun at the Washington Energy Conference.
* Secretary Kissinger personally has carried our message of inter-
national cooperation to Latin America. Our views have been made
known to interested governments in all continents. The responses we
have received have been on the whole positive and we are encouraged
to press ahead. At the recent UNGA [United Nations General Assem-
bly] special session on raw materials and development we and other
consumer countries had the opportunity to make known our views and
to initiate a dialogue between producer and consumer countries which
we expect will continue.
While ~e are working to develop multilateral programs of coopera-
tion, we are proceeding to improve our bilateral relations with oil
exporting countries. We have indicated our willingness to expand and
give more concrete expression to cooperation in the fields of economic
relations, including technological and industrial development, and
defense relations with the world's largest producer outside the United
States, Saudi Arabia. As you know, Mr. Chairman, talks are going on
today and tomorrow in Washington between Ministers of the Gov-
ernment of Saudi Arabia, led by Prince Fahd, and American officials,
led by Secretary Kissinger.
Let me state clearly and unequivocally that these discussions are not
directed toward seeking bilateral oil deals. What we are seeking are
ways of increasing cooperation across a broad spectrum of relations
with Saudi Arabia in the belief that in so doing our mutual interests
and those of the rest of the world will be served. We are prepared to
increase cooperation with other oil producing countries where there is
mutual benefit. We regard these efforts as fully consistent with the
multilateral cooperation agreed to at the ~Washihgton Energy Con-
ference and now being developed by the Energy Coordinating Group.
The importance of Proiect Independence to our international oil
policy does not require elaboration. The successful implementation of
a balanced program of greater self-reliance will contribute substan-
tially to our nation~il security. For this reason the Department of State
endorses fully the ~ôals of Project Independence and is cooperating
with other agencies in its development.
PAGENO="0153"
140
ROLE or THE PEPARTMENT OF STATE
You have asked me to outline the role of the Department of State
in future negotiations on petroleum matters and to assess the coordina~
tion of energy policy within the administration, Secretary Kissinger
~nd the Department have played a leading role in developing and
carrying out the initiatives to improve cooperation with consuming
and prbducing nations. As I stated, we are also contributing to the
development of Project Independence. In all of these efforts there is
a high degree of cooperation among various agencies of the executive
branch.
Overall leadership of our international efforts is provided by Sec-
retary Kissinger. Details are coordinated within the Department of
State and the National Security CotinciL In addition, there has been
active participation by officials of the Federal Energy Office, the Treas-
ury, Interior, and Commerce Departments. The AEC [Atomic Energy
Commission] and EPA [Environmental Protection Agency] are also
intimately involved. The problem has been much less one of coordina-
tion than of the complex nature of the issues involved. The Department
of State will necessarily continue to play a major role as we move
toward the goals we have established.
THE ROLE OF TIlE COMPANII~S
One of the most striking characteristics of the situation in which we
find ourselves is the major change which has taken place in the role
of the major international oil companies. Over a relatively brief pe-
riod, the companies have lost or appear to be losing a number of the
elements of the pre-em~nent position they have occupied in the world
oil industry.
The g~o~rernments of the prodi~cing countries have taken advantage
of a basic shift in the world supply/demand balance for oil and have
assumed virtually complete control oVer both the level of production
and prices. The equity holdings of the companies in the Middle East
are diminishing to what now appears 40 percent or less. Thus,, the
companies appear to be moving increasingly toward a relationship
with the producing countries in which they are engaged primarily in
exploration and production services.
This shift in decisionmaking power from the companies to the pro-
ducing country governments has called into question some of the basic
assumptions underlying consumer government oil policies. Given the
fact that the companies do not presently determine the level of pro-
duction or of price, consumer governments are questioning whether
they can rely on the major companies as the sole suppliers of oil. At
the same. time, the apparent disparity between rising oil prices and
increased company profits has sparked demands for more Government
control over the operations of the companies, or at a minimum, more
public knowledge of these operations.
We are now actively considering~ this question of the role of the
companies in the Energy Coordinating Group. In cooperation with
the other group members, we have tried to assess the future role of the
companies and are in t\ie process of making recommendations as to
PAGENO="0154"
150
the type of action or actions which might be taken. The `United States
has expressed its willingness to cooperation with the other ECG
countries in the exchange of information on the operations of the
companies which will be used to assess the equity of allocation and
pricing policies.
The diminished role of the companies has, not surprisingly, led
various consuming country governments to rais~ the issue of the extent
to which they should now become directly involved in the oil industry.
It seems inevitable that consumer gover~iments should and will be-
come more directly involved in the oil industry. The problem is to
define what this role should be.
The ultimate character of the relationship between the companies
and the producing governments~ i~ still not clear. The situation con-
tinues to evolve, and we should be very careful about taking actions
which might adversely influence its outcome. F~r example, I think it
is likely that market conditions could again develoj~ so that companies
might regain some of their former bargaining power over the price
at *hich they will buy oil from the produce~s.
At the same time, the oil companies ~contiijue to provide essential
s~rvices in finding, p~oducing, shipping, rethuing, and distributing
oil. These are services which we and all other countries will continue
to require for the foreseeable future. We should take care that we do
not unnecessarily impede the companies ~bility to provide such es-
sent~ial services~ To do so could have seri~u~ adverse irn~act on our
~ future energy supplies, ~nd because of jthe eorftinulng importance
of the international Q'l industry,. the ~nei~g~i supplies of the larg~
wQrld market, S~iuiilarly, we shbuld b~ ca~eful not to reduce that c0ni-
petition which exists among the roalor cQmpanies This competition
operates to the beuieftt of the con~umer, and it should be~ preserved.
I do not think we should b~ under ar~y illusioi~s that d,ii~ect ne~otia-
tion~ between consumer and pr~oduocr ~oyernment~ o~i the terms under
which oil would be supplied might not create at least as many prob
lems as they would solve The eo~'upanies have served and continue to
serve a yery useful rble as ~ bultei betweer~ govei~nments, and to a,
large extent help to insulate the oil mari~et from ptirely j?dl1~Ical
consideration~.,
A more fundamental question arises from the faet that the tnited
States is still committec~ to a market economy. It `may be true th~t the
oil market operates imperfectly. But we should be very careful iii
taking ahy actiou which might fundamenta~ly alter the present market
orieflthtion of the oil industry. A market economy ~riay not be perfect,
but~ like democracy, it seems preferable to the alternatiyes. A situation
in which governments are negotiating directly on price and supply
might permanently preclude any reduction in price brought about by
the market forces of supply and demand. We should not now lOck our-
selves into a system which forecloses the possibility of benefiting from
a shift in the supply/demand balance and lower prices.
That concludes my statement.
Mr. LiWINSON. Senator Church asked me to receSs for a few minutes
until he can get back, There is a vote on.
[A recess was taken.]
PAGENO="0155"
151
Senator CASE [presiding]. Mr. Katz, I am sure that Senator Church
will be back shortly from the vote. I think he would like me to start
again and in the interest of time, for all of us including yourself, I
shall be very happy to.
You finished your statement, I understand?
Mr. KATZ. Yes, sir, I did.
Senator CASE. I read your statement during our lunch. I think neces-
sarily it is in pretty general terms which, of course, is understandable~
but I wonder if you could tell us rather more specifically just wha
our position is now, what assurances have we given to our European
friends, for example, and Japan~ about what we will do in the way of
sharing if there is another squeeze.
SEARING OIL SUPPLIES
Mr. KATZ. Well, I think ~he statement that is most pertinent is the
statement which was made by Secretary Kissinger at the opening of
the Washington Energy Conference on 1~ehruary U of this year, and
if I ~an recall it, I think that what he said was that as a part of an
overall arrangement on energy we would be willing to share oil sUp-
plies in emergencies if other countries with indigenous oil supplies
were prepared to do the same.
What we have been doing actually since that time has been to develop
a program dealing with emergencies, havii~ig in mind npt merely the
sharing of oil, but other measures that would be take4 to ,de~l with
emergencies of any kind.
Senator CASE. Do you have ~ current pàsiti9n on thi~ ~
Mr. KATZ. Yes, sir, our current pbsition is to ~ry to develop a pro-
gram. Let m~ ,expl~in. We do no~ haye in uiind an arr~thgernent ~li~ch
merely involves the transfer Q~ ~o~1 from ~ 4Uiiited, St~te~ to o±her
countries in the event of an ~mer.gency. What ~ are ~e~k~ng is an
a~rrangement among a nunl~r of ~owiti~i~s WhIch iuvoJye~ ~ iiumb~
of elements to deal with an em~rge4cy.
Allocation of oil would be. one elem~nt of thi~ progi~m.
This is a subject which has been considered fri the OECD ~Organiza-
tion of Economic Cooperation, and. Development] ~s, well a~ in the
~nergy Coordinating Group. It is g9iñg oh ~1multaneously witksOthe
overlap of countries. , , . , , . .
Senator CASE. ITa~e you got any~vhere? ,
Mr. KATZ. Yes, we are making very good~progress. We do not hav~
a final result at this point but are still: in the developing process.
Senator CASE. This is not limited to the allocation of petroleum but
it includes it?
Mr. KATZ. Yes.
Senator CASE. Does it include, for example, individual countries
production being part of the pie, ourS and others?
Mr. KATZ. Yes, in our conceptiou it would involve supplies of oil
which are on hand and which will be developed including stocks. It
would include conservation measures, production, and oIl available
in trade.
PAGENO="0156"
152
POSITION OF ATOMIC ENERGY COMMISSION
Senator CASE. There was a meeting of the energy group in Brussels
of which I have heard some comment about Dixie Lee Ray's position.
I wish you would comment on what she said. There was a suggestion
there was an ambiguity introduced in the U.S. position by that.
Mr. KATZ. I am sorry, Senator, I cannot identify that. I do not know
what the context is.
Senator CASE. Is this the first time you have heard of it?
Mr. KATZ. Well, I do not understand specifically what statement is
being referred to and what the ambiguity was. It has not been in
connection with this subject.
Senator CASE. Has not?
Mr. KATZ. It has not been in connection with the subject of dealmg
with emergencies. To my knowledge, she has made no statement on
that subject.
Senator CASE. Have you heard any discussions at all of Mrs. Ray's
appearance at Brussels?
Mr. KATZ. Well, I was present when she was present and I have
been present at all of the meetings she has attended, I believe two
meetings in Brussels.
Senator CASE. You do know in general what went on and the re-
actions there may have been to her appearance?
Mr. KATZ. I am not aware that there were any reactions. I am aware
that she was there. I was there at the same time. She made a statement.
Apparently, Senator, there is a suggestion of something, that was
controversial. I am not aware of anything that led to any controyersy
or any particular ambiguity,
Senator CASE. Well, this is very important, it seems to me. The sug-
gestion was that something Mrs. Ray had said or the totality of her
statement had detracted from the Secretary's former statement.
Mr. KATZ. On the contrary. I am not aware of anything that Dr.
Ray said that detracted from anything Secretary Kissinger said or
anything that had caused any reaction other than a favorable
reaction.
Senator CASE. I am not making a charge. I am trying to find this
out. People tell us things in general terms. We have to try and pursue
the matter as best we can. I have nothing further to tell you than
that~
Mr. KATZ. I am sorry, I just cannot-
Senator CASE. If you were theie, and it is not a great group and
there was some interest among m~mbers and discussion among repre-
sentatives of different governments, presumably you would have heard
something.
Mr. KATZ. Yes, I would expect that I would have.
Senator CASE, And you are not aware of anything else that Mrs. Ray
may have said apart from the Brussels meeting on this subject that
would suggest she did not fully support the positjon of the Secretary?
Mr. KATZ. No, sir.
Senator C~ ~E. You are not aware of any such thing?
Mr. KATZ. No, sir, I am not.
Senator CASE. Or of any other agency in our Government?
PAGENO="0157"
153
Mr. K~rz. No, sir. I mean on an every day basis obviously, there
are differences in details in--
Senator CASE. O~ course.
Mr. KATZ [continuing]. In approach. But nothing that I would
characterize as being a rn~jor difference m approach or policy.
Senator CASE. As far as the Department itself is concerned, and the
Secretary is concerned, he has not backed off?
Mr. KATZ. No, sir. We continue to regard the subject of interna-
tional cooperation' in energy and the specifics of the Washington En-
ergy Conference intiative as one highly important to which we have
devoted a great deal of time and resources.
Senator `CASE. The man who was here this morning testifying for-
TAXATION OF TIlE OIL COMPANIES
Mr. KATZ. You must mean Mr. Tavoulareas. lie was here this
morning.
Senator CASE. Mr. Tavoulareas seems to feel that the U.S. oil com-
panies can live with a 10~percent minimum tax on their international
profits if it applies to foreign based oil companies too. Is there any
project under discussion or either with other governments or within
our own that you know about on a possible international tax treaty
with other consumer countries to coordinate fax policies?
Mr. KATZ. Not to my knowledge, Senator. It is possible that tho
officials of the Treasury Department have consulted with other govern-
ments about tax matters hilt if they are, I am not aware of them.
The question of taxation has not arisen in our conversatiáns on energy
except very recently, that is, within the past 10 days or so, in con-
nection with the reports that OPEC is considering raising the tax rate.
`That comes about, in part, because of a recommendation from a coin-
mittee of OPEC which has referred to discussions in `consuming coun-
tries about raising taxes. The statement has been made that, if there
are excess profits and if they are to be taken, they would prefer to
have them themselves rather than go to consuming countries. `There
has not been discussion in the Energy Coordinating Group or else-
where that I am aware of, of a tax treaty among consuming countries.
Senator CASE. I was wondering whether this might not be some-
thing at least that might be explored. I do not know if it would be
useful or not but there is quite a variance between our tax rates and
other consuming countries~ tax rates which might have some bearing
upon an equitable sharing, for example.
I just wonder if that might not be explored usefully.
Mr. KATZ. I think it certainly could be and I suspect it will be now
that the question is raised.
Senator CASE. Has anybody raised that point, that is, taxation on
the oil companies, any of the other countries in this connection?
Mr. KATZ. No; not in any specific way. Not in the course of our
discussions.
Senator CASE. If it occurred to the producing c9untries maybe it is
a little something to be grabbed here, I would think maybe some of
the consuming countries might have done that too in light of the rather
large increase at least for the short term.
PAGENO="0158"
154
* Mr. KATZ. Of course. There has been discussion in a great many
countries, in a number of consuming countries with particular refer-
ence to recent reports of profit levels. This, I think, has stimulated
interest in the producing countries in raising taxes. What I am saying
is that the issue of tax levels, particularly tax levels in consuming
countries, has not been raised in any group meeting of consuming
countries in relation to the oil industry of which I am aware.
Senator CASE. Put it around this way maybe. `This is what I am
really trying to get at; not just the question of `taxation. Is there among
the other consuming countries ~ny concern about the continuation of
the whole international oil industry operation?
Mr. KA~Z. Well, `as I in~licatèd hi `i~iy statemënt;Senator, there are
a number of concerns that have been voiced.
Senator CASE. You we~e not ve~r specific.
Mr. KATZ~ Well, perhaps not, althot~gh what I was perhaps imply-
ing rather than expressing explicitly was that the change that h~s
taken pJa~e in the roJe of the companies in producing areas has giveii
rise to cth'responding, questioi~s and issues about their role in consum-
iug countries. For example, they are losing their equity interests in
producing, countries and access to production, somp of these new
arrangements provide that the producing countrie~ themselves will be
marketing considerable quantities of oil. How then can consum~n~
countries be assured of meeting their supply req~uir,ements? So the
question of security of supply has arisen and that is one of the issues.
The other one is price, particularly in the face o~ the enormous price
increases that have taken place in the last y~ar which have not been
negotiated between companies and producing governments but have
been imposed by the producing governments. The question has arisen
that if the companies are not dealing with price should consuming
governments be dealing with the producing governments? This is an
issue that we have discussed in the `Coordinating Group.
Particularly in connection with the possibility of a meeting between
consumers and producers. Is price something that we should sepk
to negotiate. Now there are different views on that, frankly.
WI~[AT IS THE STATE DEPARTMENT'S POSITION?
Senator CHURCH [presiding], Mr~ Katz, I do not mean to be disre-
spectful of the Department, but I must say that this statement the'
Department `ha~ presented through you remthcls me of a penitent at a
confession. There just is nothing in it,, It would bp, refreshing if the~
Department has' no policy, just to come up and say so. I really do not
think you have got' a `poliCy and' there Is nothing in this statement
you have madp that would lea~1 me to be~ieve Otherwise.' You say there'
are various questions being examined and various consultations going'
or~, That is about it. I am concerned. We have had hearing after hears
lug for the' whole of the past year, much of our tithe has been examin-
ing the role of the oil companies in the Middle East, and all of the
testimony tends to. bear out the `same conclusion: that, this is nothing
new in the State Department, the State Department has never had
any petroleum policy and has abdicated the responsibility for devel-
oping one to the big oil companies through the years.
PAGENO="0159"
1~5
Now, if that is going to continue to be the policy of the State De-
partment in the face of the present shambles, well, let us say it, and put
it on the record. Then, at least we will know where we stand.
I think, however, it would not be a very prudent position for the
Department to take since the companies themselves have admitted they
have lost all of their clout, they have no further leverage, and since
oil prices are the largest single factor in this runaway inflation. Some-
where in this Government there has got to be a policy.
We had Dr. John Sawhill here and he is groping for a policy. We
asked him if he thought the Congress could supply some additional
legislative authority, if that is what is lacking, and then we made
~ome suggestions. Ille agreed that one good thing would be to supply
legislative authority requiring the oil companies to keep the Federal
Government fully and completely advised on ongoing negotiations and
permit the Government to take part in those negotiations, at least be
thle to play an advisory role. Second, be said he would favor including
in such `a bill authority for the Federal Government to approve, that
is, require the approval of any settlement on oil prices by the Federal
Government before the agreements between the oil companies wnd
these various forei~i governments could take effect.
Now, are you prepared to say how the State Department would view
a bill of this kind in the light of Dr. Sawhill's endorsement?
Dpes the State Department have `a position on this proposal?'
TuE STATE DEPARPMENP'S t'otaor
Mr. KATZ. `Mr. Chairman, may I first state that I regret that you
did not find my statement satisfactory or responsive to your concerns.
I would like to respectfully say, however, that I do not agree with
your statement that we do not have a policy. Now, you may not agree
with our policy but we do have a policy.
Senator CHURCh. What is it? We have had 11 pages of presenta-
tion which `does not even give us a hint of what it is. So if you have a
policy, what is it?
`Mr. KATZ. Well, I thought I spelled it out. But if what you mean
by `a policy is our determining prices or determining precisely what
private companies do in relation to the oil business, that is not our
policy. `Our policy is to influence price levels, which we think ate too
high, through `a combination of conservation or demand restraint and
increasing production. We think that the remedy to prices is not a
price agreement or price controls, but influencing' the supply and
demand balance and letting that take place in the'marketplace.
You may not agree with that policy but that is-~--~-
Senator CHURCH. I do not foilow~ ~what yon are saying. Where do
ypu propose to increase production? `Over here? Is t'hat the policy?
Mr. KATZ. We would like to see it increased here because our domes-
tiC policy is to increase our self~sufficieney. We Wduld like to see pro-
duction of energy-oil in particular, but all forms Of energy-ex-
panded everywhere. The price level is affected by what happens in
the international market and we would `like to see the world balance
shift in a more favo~rable direction.
PAGENO="0160"
156
Senator (~rn5RcH. This portrays, it seems to me, a lack of familiarity
on the part of the State Department with the oil picture. It has been
endemic through the years. We have had all kinds of expert testimony
up here for months now to the effect that there is not a shortage today
in the world supply, that the shortage was created p~lit'ically for
political reasons, an embargo was imposed for political reasons, the
price went up 500 percent in less than a year for political reasons.
None of this is related to the economics of oil at all.
Mr. KATZ. I do not agree with that.
Senator CHURCH. You do not agree with it. You are putting yourself
iii a position contrary to the best expert testimojiy we ean get.
Mr. KATZ. I do not think, Senator, with all respect, that that is a
correct reading of testimony that I am aware of.
We have had a situation for several years with very rapidly growing
demand for energy, largely in the tinited States. Our own jemancl,
growth of demand has been very rapid in recent years and it has been
rapid in the world as a whole and we have not had the increases in
supply required to deal with this1
If I may explain.
Senator CHURCH. Our growth of demand has gone up 30 percent
because of the shortage that has develop~d on the scene, is that your
position?
`Mr. KATZ. May I explain, I would like to carry this through. We
have seen the situation coming for several years and there have been
a number of people, and people inthe State Department have been in
the forefront, pointing out the growing problem that we were facing.
We, have seen what has happened to the price `of oil in the last several
years. We have seen the ability of producers ~n the margin, not so
marginal, but some of the smaller producers-~-to upset agreements
arrived at with governments. This culminated in a situation with the
outbreak of the war last fall and an embargo coming on top of that
situation-of panic in the world with people paying unbelievable
prices up to $22 a barrel for oil, `and against that background a general
increase in the price level.
This is not a situation which arose suddenly last October. It has
been developing over a period of years. It is not going to be remedied
in the space of 1, 2, or 8 months or even 1, 2, or 3 years. it requires
a basic change in energy policy in this country and in the policies of
other countries around the world.
We do have a policy and the policy is directed toward meeting this
basic imbalance in supply and demand, and this supply/demand `bah
ance will be the primary determinant of prices, whether the Go~tern-
ment negotiates price agreements with producing governments or
whether international oil companies do that.
Senator CASE. Is that not a factor? Is that not an impossible ap-
proa'ch to this situation?
Mr. KATZ, Yes, it is, and it is a view that some people hold. The
view is that if we as `a government together with other governments
sat down with OPEC, we could work out an agreement on prices.
Senator CASE. May I just make my question a little hroader~ please?
It not a question of prices, it is a question of how much are we
going to be subject to a holdup or blackmail trying to affect our
PAGENO="0161"
157
domestic policy or international policy in other matters, our position
with regard to Israel, for example, specifically, but on the broad ques-
tion of whether this country is not without resources either if it wants
to use them.
Have you any comment on the possibility of our use of our enormous
resources in such a matter as this-and I wish you would talk about
that rather specifically. I am not urging now that we hold back wheat
and corn and agricultural produces from the rest of the world until we
get a fair shaie here; but is it not possible that we do it?
Mr. KATZ. There are a nuniber of possibilities. I have never thought
that kind of approach would particularly work unless it included all
of the consuming countries of the world against all of the producing
countries of the world. Even then, it probably will not work because
of the producers indigenous resources, their ability to tighten belts
or because of leakages in the system. The fact of the matter is that
the world needs considerable volumes of oil at the present time, some
45 to 50 million barrels per day which goes into world trade. We
found in the recent crisis that we could do with less with more or less
inconvenience. We are finding, at present high prices, that we are
doing with less than we thought we could a year ago. The point is
that general confrontations of this kind are not the way to solve the
problem. The way, in our view, to solve the problem is to change the
balance. We have to do something about our growth of demand and
get that nnder control and do something about our own indigenous
production which has considerable potential.
EFFECTS OF THE OOTOEER WAR
Senator CHIJROJi. With respect to that balance, D~would like to get
back to dome of the testimony we have had just within the last few
days on this question. We had two of the chief executives of the oil
companies in here this morning. One of them, Mr. Coilado, said it is
true the political events of the past few years have, in particular the
outbreak of the Israeli-Egyptian war of October 1973, resulted in
drastic shortage of oil and sharp increases in price.
And his colleague, Mr. Tavoulareas, said:
It was only In the fall of 1973, coincident with the outbreak of the fourth
Arab-Israeli war, that the Middle Eastern producing countries took united and
unilateral aCtion which brought on the first unmanageable crisis in the supply
in the free world since World War II.
We had just recently a letter from Mr. McCloy, who represents all
of these big companies-and this must be the most important client
that any lawyer ever had-and he is speaking for all of the members
of the committee, and in spite of attempts to obscure it, the fact is it
was the October war of 1973 and the immediate events and policies
leading up to it which, by triggering embargoes, cutbacks, and price
escalation by the producing countries, became the direct and proxi-
mate cause of the recent and continuing scarcity of oil supply to the
Middle East and North Africa and at greatly inflated prices.
Mr. KATZ. That is not inconsistent with what I said.
Senator CHURCH I find it very inconsistent with the ~ hole thi ust
and general tone of your argument
4d-426- 7--11
PAGENO="0162"
1ö8
Mr. KATZ. Well, it is not, Mr. Chairman.
Senator CHURCh. The character of this crisis has had everything
to do with the present price.
Mr. KATZ. I think there is no question that the war and the events
which surrounded and followed the war had a-
Senator Ciiuncn. Surely.
Mr. KATZ ~[continuing]. Worsened this problem by several-
Senator CHtmCH. It created it.
Mr. KATZ. It did not create it, it worsened it.
Senator CHURCH. I beg your pardon. I would say create. If you
look at the mathematics it is true that the price was going up prior to
the war. We pointed that out in this committee. The producing coun-
tries were leaning very heavily on the companies and pushing the
price upward, but when you compare what the price was before the
war and' what the price became afterward in a 4-month period, you
can see 400 percent is an entirely different baligame and that
political-
Mr. KATZ. Almost 200 of that came before the war.
Senator CHURCH. The price-
Mr. KATZ. It was a doubling of price.
Senator CHURCH. The increase in price was directly connect~d with
the events immediately preceding and following the war.
Mr. KATZ. There was a 100-percent increase. There was a doubling
of price in October at the time the war broke out, but the demand for
the increase was made almost simultaneously with the outbreak of
hostilities at a meeting in Vienna. In December there was another
doubling of price.
WHAT ROLE SHOUT~D GOVERNMENT' PLAT?
Senator CHURCH. Yes. The point is that the tremendous escalation
in price took place in the period that immediately preceded and fol-
lowed the war, imposition of the embargo. All of this was political in
character, it is not a result of the economics of oil. The present price
is not really related to the economics of oil. None of the testimony
bears this out. So I think the State Department has to take that view
of it, too, and the question that I want to ask, I get back to the question
you have not answered, is the earlier one that I put to you-and the
same One I put to Dr. 5awhill. If the companies say they have no clout
any longer, is there a role for the Government to play?
Dr. Sawhill said yes. He thought we needed legislation that would
give the Government a role to play in the negotiations, an advisory
role, and also would require governmental approval of any long-term
contract that is entered into between the companies and these foreign
governments.
Now, my question to you. Do you disagree with Dr. Sawhill in his
position or does the State Department have a position in connection
with this policy that you say you have formulated? Answer that
question.
GOVERNMENT APPROVAL OP PRICES
Mr. KATZ. We have not specifically addressed the issue of approval
of prices. I can see many reasons why we would not want to be in a
position of approving prices. We have had some recent experience in
PAGENO="0163"
159
that in Government and in this country. I do not think it was alto-
gether a happy experience. Now, we can put a ceiling on oil prices. We
can put a ceiling on the import price. We have a ceiling on domestic
production today. At least for some large part of our domestic pro.
duction. Incremental production is decontrolled but old productior~
continues to be controlled. We can put a ceiling price on imports but
that will not necessarily insure that we are going to get any oil.
Senator CHURCH. I understand that and I do not mean by my ques-
tion to imply that the Government approval should relate to price
alone. It may not even take price into account. But there are other
things in an agreement that will affect the national interest about
which the Government might want to take a very firm position and
as it is now, of course, the Government simply is not involved; this
is left to the companies and the other foreign governments. We have
sort of a practice of leaving these things to these big multinational
companies.
If there was any merit to that practice in the past, it seems to me it
would have evaporated as of the present because the companies them-
selves admit that they have no further leverage with these govern-
ments and it is clear that at least to a very substantive degree the
present price is politically established.
So that being the case, it seems to me we have to review old policies
and think anew about our new situation.
Mr. KATZ. I thirtl~ that is absolutely right. The fact that companies
are not in a position to negotiate prices at the pres~nt time most cer-
tainly leads to the question of whether governments should assume
this role. It is a question which has been raised not only in this country
hut in other countries as well, as I have indicated.
The answer, however, as I have also indicated, is less clear and that
is not to say that We do fiot have a policy. Our policy at this point is
not to do that. It is not our policy at this point to ilegOtiate prices
intergovernmentally because we do not know at that point that we
bring to the bargaining table more than what the companies do.
Senator CASE. `There are many things you could bring to the bar-
gaining table. I suggested some of them before. I am not urging them
but I am throwing them into the pot. Another thing might be an agree-
ment with all consuming countries, the big ones, that none of them~
would pay more than a certain price.
Mr. KATZ. That is an approach but I do not think it is one that we~
have considered to be feasible or negotiable. We can certainly as a~
Government bring to bear instruments of national power, some that
you indicated, Senator, and there are some others, too.
Senator CASE. You are faced with national power on the other side.
This is not a normal bargaining situation. It may not be very strong
but so long as this country is not prepared to march in with the
Marines or anything else and take over these properties and the rest
of the Western wOrld is not, then they have got just as much national
power in the operation as anything in the world.
POWER OF MONOPOLY
Mr. KATZ. There is monopoly power or at least a large element of
oligopolistic power on the other, or there are elements of that power
PAGENO="0164"
160
on the other side arid they are saying well, if you want our oil you can
have it at this price.
Now, surely we can attempt to deal with that and say well, either
we will not take your oil at that price, but that has other consequences,
or we can invoke other policies, but it is our view that that is not a
useful way to proceed.
Senator CASE. It obviously is not necessarily useful to have half a
dozen small countries accumulate hundreds of billions of dollars that
they cannot spend usefully and which are ruining other countries and
reducing the world economy to a shambles and including the monetary
system of the world either, and I just wonder whether the time may
not come when these unacceptable or unattractive and untraditional
kinds of approaches may not have to be used in the situation which is
in itself without precedent.
Mr. KATZ. That may well be but we think we have a better way
and we think---
Senator CASE. That is what we are trying to dig out
Mr. KATZ. OK, that is what I have been trying to say. We think
we can affect the supply/demand balance in the short term and in the
immediate term and in the longer term by the domestic policies that
we pursue in conjunction with the policies pursued by other major
importing countries. We think we can also do it in our general rela-
tions with producing countries, and I will say that in the immediate
situation ahead we see the possibility that there can be some softening
of the prices and some reversal of the present situation.
NEW PROGRAM FOR SAUDIS
Senator Cutrncrr. Well, I notice that in the paper here just recently
we have been told we are getting all kinds of new programs going
for Saudi Arabia.
"United States has agreed to reequip and begin training Saudi
Arabia's most politically and fastest growing military force, the Na-
tional Guard.
"Saudis to get U.S. arms. United States and Saudis act to develop
multiple ties. United States and Saudi Arabia to strengthen economic
and military cooperation."
Everything is going on in the way of opening up new aid programs
with these countries. I am certain that the arms sales and so on will
involve concessional terms.
It seems to me the State Department is not a bit hesitant in laying
on these programs and yet extremely hesitant even to suggest that
something might be done in return in obtaining a price of oil.
Y~u say that is not the policy and you do not think it would be
productive ~?
Mr. KATZ. I want to be clear on this. It is not our policy to enter
into, at this point, at least, to seek to enter into a price agreement.
That is not to say that we have not raised the question of prices. We
have made it very clear that we consider the present level of world
oil prices to be much too high with very serious consequences for the
world's economy.
Mr. LEVINSON. Is there not an air of unreality about all of this ~
Here you have a high level Saudi delegation, lunching at the White
PAGENO="0165"
161
House, a working group, and you are telling us on page 6 of your
statement-let me state clearly and unequivocally-these discussions
are not directed toward seeking bilateral oil deals, we are just intei-
ested in deepening our relationship with Saudi Arabia. We are not
interested in deepening our relationship, with the Saudis because they
have a lot of sand but because they have a lot of oil.
Is it not totally unrealistic to consider this in some antiseptic way?
These deals with the Saudis are related to the fact they have the oil
and we want it for ourselves and for our allies.
Now, what is wrong with admitting that there is an explicit linkage?
Mr. KATZ. There are a lot of things that I would regard as being
unreal, but I do not find that situation being at all unreal. I think it
is the real world. It is clearly in our interests for all kinds of reasons
having to do with oil and energy policy, having to do with political
stability in the Middle Eastern area and military stability as well, for
us to expand and deepen our relations with Saudi Arabia.
What I wanted to make clear in my statement is that we are not
entering into an oil for arms or oil for industrial equipment or an oil
barter deal. That is not our policy. We think that would be had policy.
We have objected to it when other countries have done it and we see
no point in doing it ourselves.
Senator CASE. It is very difficult to argue with someone who is so
darn decent about matters like this. Maybe I take it what you are
saying, partly, things like this you do not talk about except in terms
that are acceptable to world sensibilities and the sensibilities of the
people you are dealing with. Actually, you use whatever methods are
appropriate to the circumstances. We will leave it at that. I will be
satisfied for the time being so long as we continue to get results and
do not have entirely a one-way street.
I cannot imagine countries of Europe getting together with us on
an agreement not to pay more than a couple dollars a barrel. Once
they began to get cold those governments would be out of office. Some-
body who came along and said I will deal with Faisal directly if we
get your oil would be the next government. This is perfectly under-
standable in the real world, too. I am sure it is one reason why France,
for instance, would not go along with any kind of a joint operation
that we tried to get going here. Jobert would not sign on February 12.
He was thinking about this.
DEALING EFFECTIVELY WITH OPEC
All I think what Senator Church and I are saying-Senator Church
is always more rough than I am-P-that the people of this country also
are not going to consider our Government is dealing effectively with
the situation with the tools that we have that are not also used and
that other sources are not being employed. If we are going to have an
economw war, in that economic war and sensibilities are proper and
reasonable, dealings are proper~ especially by the big guy against the
little guy, we are not necessaHly the big guy in a situation like this
unless we employ or are willing to employ the resources which we
have, and I do not mean in a rough way, I just mean a down-to-earth
kind of way. In the short term I am sure there is enough oil to go
PAGENO="0166"
1~2
around but in the lopg term there is not, and. if all the energy sources
w~ have now are going to be adequate to take care of the e~pedentia1
rise in dei~iand, ~e have to get going On that~ There sire ma~ny things
but i do want to emphasi~e that the people must haye confidence
in a government as thoroughly aware of interests of the conntry are as
well as the interests of internati~nal politics thaybe and that they are
being taken care of. Otherwise, we will ~ot be able to itiaintain a
Govei~nment in this country eithci'.
Mr. KATZ, Surely.
Senator CASE. If there are tio other 4uestions, I have to go, but if I
may leave you to the tender mercies of these gentlemen with the assur-
ance that you may quit anytime you want to because you have no obli~
gation to he here unless a Member of the Senate is here. I do have to
leave and Senator Church a~ked me to close the hearings except fo~
questions the staff may have.
AGREEMENT AMONG CONSUMING NAT~ONS
Mr. LEVINSON. There are two subjects, Mr. Katz. (1) Mr. Collado
emphasized again and again when he testified this morning and said,
Exxon felt that it was the function of governments to allocate in the
purchase and not the function of the companies. The fact is that the
companies had forced the allocation function, with the consequence of
failure, to have government deal with this issue if we have another
oil embargo and Sheik Yamani said that is a possibility. In the event
political events do not move consistently with Saudi Arabian desires,
will we be in a position to have an agreement among governments
or will we still be dependent upon the companies as allocators?
Mr. KATZ, Well, it is our objective to have a policy, to have an
international arrangement which would not leave tbis task in the hands
of comnames~
Mr. LEvIN5ON. You do not now have such an agreement within
the energy action group?
Mr. KATZ. No.
Mr. LEVINSON. Do you have any idea when you are likely to have
an agreement?
Mr. KATZ. I cai~not predict that precisely. This will depend on the
evolution of the general program.
Mr. LEVTNSON. Now, since the companies did perform this function,
have you made, or has the State Department made any effort to deter-
mine, and acc9rding to what criteria, decisions as to who gets what
and how much?
Mr. KATZ. Well, I do nOt know that the companies perform that
functidn in the se~ise of an international function. They perform it,
I assunie they perform it in tei~ms of their o~rn cothpanv inter~st,
Mr. LRVIN~o~T. Do we know how thu~h oil was diverted to the United
States, if any. during the embargo period?
Mr. KATZ. I could not tell you right now. I think Dr. Sawhill
~spoke to this yesterday and I prefer to leave the answer-
Mr. LEvIN50N. He said there wa~ no diversion. Do you agree with
that?
Mr. KATZ. I prefer to leave this to Dr. Sawhiii.
PAGENO="0167"
163
Mr. LEVINSON, No significant diversion?
Mr. KATZ. He~has the statistics and he can judge th~t bet~ter than
I can.
Mr. LEvINSON. He stated that they were in the process o~ g~ting
such statistics.
Mr. KATZ. I have no independent statistics,
Mr. LEVINSON. So the State Department has not made any attempt
to get such statistics?
Mr. KATZ. The Federal Energy Office is. the-
Mr. LEVINSON. Mandated to carry that?
Mr. KATZ. Yes. We are not seeking to duplicate t~t function.
Mr~ LEVINSON. Thank you.
I think Mr. Blum has a few questions and then we will close.
TILE APQ
Mr. BI~txM. Our record shows that during the 1960's when the oil
companies had very serious disputes with the Shah of Iran the State
Department knew the essential facts as to how the APQ [Averaged
Programmed Quantity] worked, This is the formula for overlifting in
Iran, and further, the record shows in 1971 during the negotiation, the
Department had no access and did not even ask to see the company
cable traffic with respect to the negotiations in which it became
embroiled.
how can the Department make policy without access to that kind of
information as a mattei' of right?
Mr. KATZ. I do not think it is necessary for us to have access tO the
cable traffic, so long as we know what the contents of the negotiations
are. I cannot speak to the situation in the 1960's, it was before my time.
I would not agree that we did not know what was. going on in 1970
and 1971.
LEGISLATION REQUIREMENTS OF STATE DEPARTMENT
Mr. BLUM. Would the Department have any objection to legislation
which would grant an Ambassador on the scene access to such cable
traffic?
Mr. KATZ. I do not know what on the scene means.
Mr. BLIJM. The Ambassador in Iran, ~he Ambassador to Saudi
Arabia.
Mr. KATZ. No; I obviously w~uld not object to hai~ing that author-
ity.~ I dQ not feel particularly deprived hi not having it now so long
as I feel confident about the facts. I, do not ~el that I need to se~ every
single company telegram to know that.
DOCUMENTS RELATING.. TO UNITFD STATES~IRAQI ~EL~LO~SHIPt:
Mr BLUM Now, to shift for a minute The subcoi~nmittee recelvQd ~
number of recently declassified documeuts frçm the Depaitpith~rt of
State relating to United S~ates-Traq. ~elationsb:ips. Amói~g, the ~ocu-
ments was a~ memorandum. from the legal advi~ory~ dated Octçber 24,
1964, saying that there was ~o legal iustificatidn ~or the~Departmeut
PAGENO="0168"
164
working to keep independent American companies from bidding for
concessions in Iraq. Yet, for 7 years it was Department policy to pre-
vent independent companies and companies of other nationalities
from enteiing Iraq. Why was this done?
Mr. KATZ. I cannot answer that. I am not familiar with the docu-
ments. I am not familiar with the events and I had no prior knowledge
that you would be raising that question.
Mr. Br~uM. French hostility to the United States on energy matters
can in part, we believe, be traced to the history of the French interest
in the Mideast concession. The French perception is they were fore-
closed from participation in important concessions as the result of a
United States, British, and Dutch company combination. Is not the
U.S. Government now paying the price for the performance of the
U.S. companies?
Mr. KATZ. Since I cannot comment on the premises of your question
I would rather not comment on the conclusion.
Mrs. LEWIS. First of all, do U.S. oil companies have the State De-
partment's backing in their current buy-back negotiations with the
Saudi Arabian Government?
Mr. KATZ. I am not aware that there are negotiations going on at
this particular moment.
Mrs. LEwis. Well, currently used in the general sense.
Mr. KATZ. There are no negotiations going on at this precise
moment and--
ARAMOO NEGOTL~TIflNS
Mr. LEVINSON. During the past year did the companies, the Aramco
partners, have periodic negotiations broken off from time to time and
resumed from time to time, over this issue? I think the thrust of the
question is. do you feel that you are adecmately informed as to the
content and terms of reference and perimeters within which the com-
panies are negotiating? Is it the Denartment's policy to seek to give
guidance or eive an opinion as to what constitutes from the point of
view of the U.S. national interest acceptable or unacceptable perim-
eters?
Mr. KATZ. Well, I think on the first point, Yes. I feel that I am
adequately informed. No, we do not seek to give guidance except
where there is a problem or impasse. We might express a judgment in
a particular case but we do not as a matter of courSe pass on those
negotiations. We do not approve them. We feel that we need to be in-
formed about them and I feel that we are informed about them.
Mr. BI~uM. What is the purpose of being informed? It is very
puzz1in~ if in fact the purpose is not to come to some kind of jud~menf.
Mr. KATZ. It may be that we will want to express a judgment and I
am aware-
Mr. Bttmr. These negotiations do involve increasing the major vol-
umes which in turn have an important impact upon price.
Mr. KATZ. And we may very well in the course of those negotiations
wish to express a point of view. That has not arisen so far.
Mrs. LEWIS. In effect these negotiations involved the latent power
that Senator Case was talking about of the TTnited States which is
brought to bear very indirectly through the oil companies.
PAGENO="0169"
165
Mr. KATZ. What they have involved so far in the case of Aramcois,
I think, as you know, an agreement to transfer 25 percent of the equity
of the Saudi Government with buy-back, I think, of 20 percent of that.
So 5 percent of the oil at this point is going to the Saudi Government.
rihe question has not arisen in that case. In case of Kuwait, the agree-
ment has been to go to 60 percent. No agreement has been reached on
the prices of the buy-back oil. We are following that very closely.
NEGOTIATIONS WITH THE OPEC COUNTRIES
Mrs. LEwIs. Just for our records, according to his testimony, Mr.
McCloy met with Under Secretary of State Johnson on January 7,
1971, and with whom he discussed the proposal for unified negotiations
with the OPEC countries. Did you then get a call on January 25, 1971,
from Mr. McCloy; that is, you personally
Mr. KATZ. I cannot tell you from my memory whether that particu-
lar date-
Mrs. LEWIS. Could you provide an answer to that question for the
record?
Mr. KATZ. Did I get a call on that date?
Mrs. LEWIS. Yes.
Mr. KATZ. All right.
Mrs. LEWIS. And, specifically, did the call tell you that a decision
had been made to divide the negotiations between `Tehran and Tripbli,
the two groups in the Persian Gulf?
Mr. KATZ. Yes; I do recall a conversation like that. I cannot fix
the precise date.
Mrs. LEWIS. We would appreciate it if you could respond to that
question for the record and specifically tell us whether he suggested
that yOu make a Call to the Justice Department in order to get anti-
trust clearance of the decision to split the negotiations.
[The information referred to follows:]
My records `indicate `that I received a telephone call from Mr. McCIoy on
January 25, 1971. As I testifled on June 6, it is my recollectjon that Mr. MeCloy
informed me of the decision of the companies to proceed with negotiations with
the Persian Gulf producers and to seek parallel negotiation with Libya. Mr.
MeCloy suggested that I inform the Justice Department of this development. I
have no record or recollection that Mr. McCloy asked me to get "anti-trust
clearance". In our view the decision to proceed to negotiate with `the Persian
Gulf was consistent with the basic premise `of Justice Department business review
letter whether or not Libya was a party `to `the negotiations. Thus the question
of seeking further review by the Department of Jus'tice would not have arisen
and to the best of my recollection did not arise. It did seem appropriate, however,
that Justice be advised immediately `of `the decision of the companies to proceed
to negotiate without Libya. Justice was so advised.
Mr. KATZ. I would have to go back and look at the record on that
but I would doubt very much that he would have put the question
in that way and I cannot recall that he ever asked to have me get
antitrust clearance because I do not think there is a question of anti-
trust clearance. I think it might have been a question of informing
the Department of Justice and that might have been very appropriate
and I would have agreed to.
Mr. LEVINSON. The cable record of this was released in the course
of the hearings. If you have any difficulty we will be happy to make
that available.
PAGENO="0170"
166
Mr. KATZ. I think I have seen Mr. MeCloy's record on this and I
have no difference with that but I do not think it was in terms of
getting the Department of Justice clearance, that is not what the
cable said.
Mr. LEVINSON. What I was going to suggest is that you look at the
exact terms of the cable and verify that independently with your
record.
Mr. KATZ. All right.
THE STATE DEPARTMENT AND PUBLIC INTEREST
Mr. BLUM. We have heard yesterday from the Department of Justice
which explained it `was not their function to be the w~tchdog in
terins of protecting the public interest in these negotiations.
Exactly who should protect the public interest? Who should he
minding the store ~ When these negotiations are going on, and they
are going on abroad with your people supposedly monitoring, should
not the State* Department be minding the store?
Mr. KATZ. You say supposedly your people monitoring them. I do
not know.
Mr. BLTJM. Yes; the State Department. You said the State Depart-
ment is kept closely informed and advised.
Mr. KATZ. Yes.
Mr. BLUM. Should not the State Department be the agency to pro-
tect the public interest to see what is negotiated has something to do,
with benefits to the average citizen of the United States, consumers,
as well as to the company?
Mr. KATZ. That depends on what your criteria are for making that
kind of judgment. I `do not think we are in a position or in the busi-
ness of making judgments on questions such as price except in par-
~icuiar circumstances or where there is an opportunity to exert
influence. On that and questions of equity interest or other kinds of
arrangements or questions of compensation we make rough kinds of
judgments, but we are not in the position to judge that a particular
transaction or the details of a particular transaction are or are not
in the public interest. We do not have that kind of mandate. We do
not have that kind of authority. We do not have that kind of govern-
ment, We do not have that kind of economic system. You may not
like that but that is' the way it is.
Mr. BLUM. You are most explicit on that point.
Mr. LEVINSON. It is not a question of whether we like it or not, it
is a question of probing the perimeters, what is the proper role of the
Government.
Mr. KATZ. That is fair enough.
Mr. LEVINSON. Mr. Katz, thank you on behalf of the subcommittee
whose members are not here.
Mr. KATZ. Thank. you.
`Mr. `LEVINSON. Thank you very much.
[Whereupon, at 4:15 p.m., the subcommittee was adjourned, subject
to the call of the Chair.]
PAGENO="0171"
MULTINATIONAL PETROLEUM COMPANIES AND
FO1tEIGN POLICY
THU1tSDA3~, JuLY 25, 1974
TJNImD STATES SENATE,
SuncoMMIT~rEE ON MULTINATIONAL CORPORATIONS
OP TIlE COMMITTEE o~ FOREIGN RELATIONS,
Wa$hi~gton, D.C.
The subcommittee met, pursuant to recess, at 10 a.m., in room 4~21,
Dirksen Senate Office Euildin~, Senator Frank Church [chairman of
the subcommittee] presiding~
Present: Senators Church, Muskie, and Case.
Senator CHUROIr. The hearing will please come to order.
We have two witnesses this morning. Each has a lot to say. So we
had better get started right on time.
Our first witness is Professor Robert B. Stobaugh, who is chairman
of the Harvard Business School Energy Project, of Harvard Uni-
versity.
SWEARING OP WITNESS
Professor, we take only sworn testimony in these hearings.
Do you swear that what you are about to testify to in these pro-
ceedings will be the truth, the whole truth~ and `nothing but the truth,
so help you God?
Mr. STOEAtTGH. I do,
Senator CHUROII. We are pleased to welcome you this morning,
Professor.
You have a prepared statement which I understand you are going to
summarize. The whole statement will appear in the record as though
read in full.
Mr. STOBAUGH. Yes.
TESTIMONY OP PROP~ ROBERT B. STOBAUGH, CHAIRMAN, HAR-
VARD BUSINESS SCHOOL ENERGY PROJECT, HARVARD UNIVER~
SITY, CAMBRIDGE, MASS.
Mr. STOBATJGH. Part of my opening statement will include some
material that is not spelled out in my written statement. I do this to
give an overview of the subject so as to put some of the actions detailed
in my written statement into perspective.
Senator Cmn~oH. Proceed the way you think best.
Mr. STo~AUGIL Thank you.
(167) ,
PAGENO="0172"
168
ALTERNATIVE METHODS TO THE EMBARGO
When the embargo and cutback were declared last October, there
were three different alternative methods for solving the problem. One
was for the governments of the major consuming countries to get to-
gether and agree on some type of sharing or allocation process. There
were a lot of discussions in the OECD, but there was a failure of the
major consuming nations to agree to a method.
To illustrate some of the complexities involved, at one end of the
spectrum was the Japanese, who wanted the oil to be shared on the
basis of overall energy needs of the entire economy. At the other end
of the spectrum was the United States, who wanted oil to be shared
on the basis of imports. And since we had a lot of domestic oil pro-
duction then, of course, we would have come out relatively well if we
had reached agreement to share on the basis of imports.
In the middle were some of the European countries which tried to
resolve this big difference. The French, for example, made proposals
that the oil be shared on the basis of the needs of certain key sectors
of the economy. That proposal created a problem because transporta-
tion, fpr example, was a very large uSer in the United States; whereas
I understand that the French were proposing that transportation
requirements be given a low priority receiving about half share in
terms of allocations.
So, as a result of these differences in needs of different countries,
the countries could not agree on how to do it. Hence, that left two
other methods to solve the problem. One would have been for the U.S.
companies to have been forced to pool their available oil under the
Defense Production Act, and then it would have been administered by
an emergency petroleum supply committee. I do not think the com-
panics were too keen on that because it would have made a lot of
their own data public.
The third solution was for the companies to do it individually, and
of course, that is what happened.
Mv own judgment is, and I think that this judgment is shared by a
number of the executives of the major oil companies-I understand
that Mr. Piercy stated this to you and I know Mr. Geoffrey Chandler
of Shell has stated the same thing-it is a government function to
allocate a scarce resource during a crisis. But that is my own oninion,
so I think that the governments did not meet their responsibilities
during this time.
ALLOCATION OF OIL DURING CRISIS
Senator CHURCH. What you are saying, Professor, is that the con-
sumer governments were unable to agree to a formula for the alloca-
tion of available oil during the period of the crisis, they have agreed
to no formula since that time?
Mr. STOBAUGH. Yes.
Senator CHURCH. On the other hand, the producing governments
have long since managed to form an effective and unified front through
the formation of the OPEC arrangement? That means that the indus-
trial nations of the Western World, the nrincipai consumers of p~tro-
leum, are in disarray, while the producing governments are working
efficiently together.
PAGENO="0173"
169
Isthat a fair summation of the current situation?
Mr. STOBAUGH. Yes; I think that is a good summation of it.
Of course, the producing governments have some differences be-
tween them, but basically they are cooperating and working together
and doing it effectively, whereas the consuming governments are not.
That left this vacuum and still leaves a vacuum for the oil com-
panies to occupy that position of power. It is as Mr. Tavoulareas said,
the multinational companies moved into the power vacuum, they were
the only ones there to do it.
When they moved in there, that did not mean that they did not have
pressures on them; they had a lot of pressures on them from different
countries.
The producing governments were able to exert the most effective
pressure because the companies have large networks of tankers, refin-
eries, marketing outlets, and need crude oil to run them, and the pro-
ducing governments were more or less unified and, therefore, exerted
pressure which the companies succumbed to. Whereas there was pres-
sure from the consuming nations, there were so many pressures from
so many different nations, what the companies did was attempt to keep
each of the consuming nations more or less happy, but without suc-
cumbing exactly to what each consuming nation said.
In the first place, they did not have enough oil to do whatever the
consuming nations said. There was pressure within the companies, too,
because I am pretty sure that a subsidiary manager of a major oil
company located in a consuming country would be exerting pressure
on headquarters to get his fair share of allocation or to get as much as
possible. So the management of these companies were subjected to a
lot of pressure both from without and within the firm.
Senator `CHtmcu. Let me ask this question.
THE EMBARGO AND ROLE OF THE OIL COMPANIES
Given the situation, an embargo imposed by the Arab governments
against the United States, a shortage from the oil supply available to
the Western governments to form a united front dealing with the
crisis, and the producing governments working effectively together,
what would have happened if the oil companies had not been there,
and had not filled that vacuum?
For example, the Arab governments had embargoed not only the
United States, but the Netherlands as welL The Netherlands, being a
small country, would have been hard put to secure its fair share of the
oil available had it been left to the consumer governments to decide
upon a formula, assuming they could have reached one.
Yet I am told that the ambiguity of the situation with the oil com-
panies filling the vacuum and working it out in a Byzantine way
resulted in the Netherlands receiving sufficient oil throughout the
whole period Qf the embargo.
Mr. STOBAUGH. Yes, that is my impression.
Before the embargo, the Netherlands was dependent 71 percent on
Arab oil. Once the embargo took effect, as far as I can find out, and
I do not hive statistics because the Netherlands still has not published
any statistics for that period, as far as I can find out the Netherlands
suffered no more than its European neighbors. Even the European
PAGENO="0174"
170
neighbors who were on the top priority list to receive Arab oil seemed
to suffer about as much as the Netherlands did.
So there was certainly non-Arab oil being produced and delivered
to the Netherlands. I do not know the source of that, but we have some
data to suggest it might be Nigerian since the United States received
less Nigerian oil during the embargo than it had before, and I would
guess some Iranian oil went there, since the Japanese received less
Iranian oil during the crisis.
Senator CHURCH. Well, would it, be fair to say-and if it is not I
know you will say so, because I am quite uncertain about all of this-
that the oil companies, in taking care of the needs of the Netherlands,
frustrated the Arab objective of embargoing the Netherlands; that is
to say, they managed to give effective protection to the Netherlands
despite the efforts of the Arab governments to embargo that country,
but that they carried out the embargo rather faithfully with respect
to its application to the United States?
Mr. STOBAUGH. Yes.
In terms of the Net~herlands, they frustrated the intent of the
embargo even though, as far as I can tell, they lived up to the letter of
the embargo, but certainly they frustrated the intent.
Senator CHURCH. That is what I mean.
Mr. STOBAUGH. Whether the Arabs knew that they were frustrating
the intent, I do not know. I would guess they probably did know. And
I do not know what would haye happened if the Arabs had told Shell
or Exxon or some big company, not to take non-Arab oil and deliver
it to the Netherlands. I do not know what would have happened then.
But I think it would have increased the probability of some n'iajor
international confrontation.
In terms of the United States, the figutes I have, show that there
was relatively little diversion, in fact very small diversion of oil to the
United States, even though there were some increases of Iranian oil
to the United States. We do not. know whether this came out of in-
creased Iranian production or whether it was diversion from another
customer. But overall, the United States lost a little of non-Arab oil.
During the height f the embargo we had less non-Arab oil than we
had before the embargo.
Senator CHURCH. Beading from page 3 of your statement, you bear
this out by saying:
It appears that the United States on the average through the crisis lost a
slightly larger proportion of its oil supply than did the rest of the world. The
United States during its four worst months was down an average of 6.1 percent
from September, whereas the rest of the world during its worst fo~ir months was
down only 3.4 percent from September.
Mr. SPOBAUGH. That is correct.
Senator CHURCH. It would seem. to follow then, arid also on page 3
in the previous paragraph, you say:
By l~ebruary, when the United States suppl~r was at its lowest mait, the rest
of the world had a greater supply than in September.
Mr. STORAUGIT. Yes, that is correct.
Senator CHURCH. That would then support the conclusion that the
international oil companies faithfully executed the embargo against
thern United States, although they managed to finesse the matter in
taking care of the needs of the Netherlands ~
PAGENO="0175"
171
Naturally, it would be easier to do that than to do the same for the
United States. I recognize the difference, the disparity.
Mr. STOBAIJGH. In both quantity of cut-back and volume of oil
needed, but I think that isn't a sound conclusion because not only did
the United States lose a greater proportion of its total oil supply and
a greater portion of its total energy than the average for the rest of
the world, the United States actually lost non-Arab oil during the
embargo period.
In other words, at the height of the embargo, we were getting fewer
barrels per day of non-Arab oil than we were before the embargo.
Senator MUSKIE. The figures Senator Church has pulled out
of your statement indicate the embargo had an effect upon the
United States that it did not have upon other countries, but how far
short of the Arab goal did the impact on the United States fall?
Mr. S~rOBAtTGIt. As far as I can see, what the Arabs wanted to happen
to the United States happened; that is, Arab oil was essentially cut
off. Before the embargo we were importing 1.2 million barrels a day
of Arab crude oil. During February we only imported 19,000 barrels
a day. In other words, we lost 98 percent of all of the Arab crude oil
that was supposed to come in. We have not yet analyzed the sources
of U.S. rroduct imports.
Senator MusKIE. But the net figure was 6.1 percent down; is that
right?
Mr. ST0EAtIGH. Yes, and that is an average for all oil imiiorts, both
crude and products, for a number of months. At the height, which was
February, we lost 7.4- percent of our oil, and January, 6.9 percent, and
then March, we started back up, we only lost 5.3 percent.
Senator MuSKIE. Those percentage figures, even the highest one, is
not sufficient to account for the total cut-off of the Arab oil imports,
is it?
Mr. STOBAuGH. I believe it is.
Senator MusKIE. Is it?
Mr. STOBAUGH. Well, according to the best data I have it is.
Senator Cnuacu. On page 4 of your statement lies the answer to
Senator Muskie's question. This is where you say-
U.S. crude oil imports were reduced by some 30 percent between August and
September 1973 at the height of the shortage. More than 98 percent of the Arab
oil that the U.S. had been receiving was lost. Imports of Arab oil dropped from
1,200,000 barrels a `day In August and September down to only 19,000 barrels a
day during January-~February. Total supplies of non-Arab oil dropped very
slightly, about 2 percent.
So any embargo that is 98 percent effective is a pretty successful
embargo.
Mr. STOBAUOH. Yes, and the unknown factor in this picture is the
difficulty in tracing product imports that come from different refineries
that are not in Arab lands to know whether or not they were using
Arab oil, and we have not had neither the data nor the time to trace
product import. But the crude oil number shows very dramatically the
effect of the embargo and I had done a piece earlier in the year in the
Wall Street Journal in which I mentioned the capability of switching
of non-Arab oil to the United States, If you take the case of Iran, for
example, Iran was producing around 6 million barrels a day and we
were importing about `200,000 barrels a day before the embargo-nt th~
PAGENO="0176"
172
height of the embargo we were importing a little over 400.000 barrels
a day. So we increased Iranian imports about 200,000 barrels a day up
to this level of 400~000, which is still a very small percentage of overall
Iranian production. So that there was an enormous potential for
switching non-Arab oil to the United States that did not happen.
DIVERSION OF NONARAB OIL TO THE U.S.
Mr. LEVTNSON. Do you have an opinion as to why it did not happen?
In other words, it did not happen because the companies feared politi-
cal retaliation from the Arabs, or because other markets were more
profitable, such as the Japanese and German markets?
I believe that there have been some stories to the effect that indeed,
West Germany had a glut of oil along about February or Mardi,
Mr. SPOBATJGH. This goes to~ the heart of what these companies are
doing, and when you look at their time horizon they plan to be around
for a long time, 25, 50 years, indefinitely. They have a very long plan-
ning horizon and the big companies tend not to be short-term profit
maximizers because they know if they make a -fast buck this year then
they are going to be subjected to much more governmental pressure i.n
the future years. So as much as I can tell I believe they attempted to
allocate oil in a general way to all markets as a percentage of the
demand in that market.
Now, their allocation was not perfect because presumably they did
not get together and decide exactly which company was going to
deliver where. They were allocating individually. But the net result
appears to me comes out pretty close to the statement that Geoffrey
Chandler of Shell said, that the industry attempted to allocate oil to
all markets as a percentage of demand.
From what we can tell on price data, there were several deliveries
made to the United States in which crude oil was supplied to the
United States at a lower price than could be obtained elsewhere. I
would guess there were some deliveries to the United States where they
got the highest price that could be obtained. We are limited on price
data because we are working with aggregates and the only way we will
find out for sure the decision rules used by the companies would be to
get data on individual companies on their product movements and on
their profit margins, and until we get that it will be difficult to say
exactly which group of companies did what.
Senator CHURcH. Is that data available?
Mr. STOBAUGH. The data are available only within each individual
company. The data are not available to me or to the public or to the
Government right now. Each company has its own pieces of data used
for planning but nobody else has them.
DATA FROM FEO
Senator CHURCH. This committee has asked the Federal Energy
Office to supply us with this data, operating on the assumption that the
Federal Energy Office can obtain it, and Mr. Sawhill has promised
that he will deliver it to the committee as soon as he has it in his own
possession. I do t-iot know what problems will be entailed between the
Federal Energy Office and the companies in acquiring data.
PAGENO="0177"
173
Senator MtJsKIE. Do ynu conclude that the embargo against the
United States would not have worked unless the companies had made
it work?
Mr. STOBAUGH, Well, I think the Arab embargo would have worked
because the Arabs have such large oil reserves and such large pro-
duction no company, either United States or foreign, would want to
take a chance of not being allowed ever to buy Arab oil again.
Senator MU5KIE. For that reason they made it work?
Mr. STOBAUGH. Yes; that is the reason they made it work.
Now, for the non-Arab oil, the fact that not more came into the
United States, you have to say, well, what would the situation in the
world have been if we did not have the major oil companies?
Senator CHURCH. Well, I should think that if the administration
were prudent, it would want to acquire all of the data possible concern-
ing the ways the companies allocated oil during the period of the crisis,
because we may be faced with another embargo.
I noticed that the Saudi Arabian Oil Minister as has been reported
in the press, took the occasion of Secretary Simon's recent visit to
Saudi Arabia to warn him that the Arab States are ready to reim-
pose their oil embargo unless the United States i~nanages to squeeze
more territorial concessions out of the Israelis.
I think it is very clear that it is a prospective happening that we
have got to prepare for. Given the success of the last embargo, it is
entirely possible that the Arab governments will choose to impose
another embargo. Meanwhile, we had better find out all we can and
prepare ourselves for that eventuality.
Mr. STOBAUGH. I think that is correct.
THE OIL COMPANIES AS AGENTS FOR ARAB GOVERNMENTS
Senator MUSKIE. That is the reason for my question. For the reason
you have stated, the oil companies became the agents of the Arab gov-
ernments in enforcing embargoes, is that not so?
Mr. STOBAUGH. That is correct.
Senator MUSKIE. Is there any reason to believe that if there is a
new arrangement with ownership in the Arab governments, and the
companies acting as their marketers, that the same agency relation-
ship will not exist?
Mr. STOBAUGH. No; I would assume it will exist.
Senator MUSKIE. Now, if that kind of arrangement does exist, if
that is that kind of agency, then both with respect to the supply and
price, the companies will be representing their Arab clients; is that
not so?
Mr. STOBAUGH. The companies will be doing what the Arab pro-
ducers tell them in terms of where they can deliver crude oil and
products made-
Senator MUSKIE. That is effective agency, as I read it, not as a
lawyer but as practical terms, and it seems to m~ that poses the
problem what substitute arrangements can we make to make sure that
the interests of American consumers and the American people are also
represented. At the moment there are none.
45-426-7~-----i2
PAGENO="0178"
174
Mr. STOBAtrGIT. Well, if you look at the picture from the position
of the oil companies, here on the one hand they have a very strong
group of nations, that they are going to have to depend on for decades
for crude oil, putting explicit pressure on them. On the other hand they
have a lot of diffuse pressure from the consuming governments and
essentially no pressure from the government of the nation in which
they are headquartered, so naturally they are going to react to this
strong pressure.
Senator MU5KIE. I understand the pressure that moves them to
pursue their own self-interest. I do not quarrel with their pursuing
their own self-interest. But the question I am raising is whether it
makes sense for us as a country and as a people representing con-
sumers to put control of the situation in the hands of these companies
who are pursuing their own self-interest for whatever laudable motives
they may raise?
Mr. STOBAUGH. If you go back to some of their past history, the
companies were doing this world allocation function when they were
allocating production allotments to the Middle East countries. So
they in effect had a very strong bargaining position with the pro-
ducers and more or less determined which ones could produce. They
did it partially economically and partially for long-term political
survival with them.
Now, then, the pressure has turned and they are still doing the
same role; that is, allocating the scarce resource, but they are trying
to keep each of the consuming countries somewhat happy by spread-
ing the available resource without having anyone hurt too greatly. I
would guess they would say that they might very well be doing the
United States a favor by not bringing all of the oil back to the United
States and having the Europeans or Japanese or others take a very
large suffering, for example.
Senator CHURCH. Your testimony bears out what other testimony
we have received clearly shows, and that is that during the last energy
crisis the American-owned companies not only faithfully executed the
orders of the Arab governments, but thought themselves to be virtually
hostages of these governments.
We are often told that it is to our national advantage that these
great multinational companies are American owned. If this is so, what
leverage could this give us in coping with a new embargo should one
occur, or is there any leverage here at all that the U.S. Government
t~ould utilize to make certain that we get as much oil as possible to
meet our needs?
THE ROLE OF THE U.S. GOVERNMENT DURING THE EMBARGO
Mr. STOBAUGII. I think that if a new embargo happened and a cut-
back happened the companies would be no match for the Arab govern-
ments. That is quite clear. And if pressure is to be put on the Arab
governments it would have to be from about the only source of power
in the world that can do it, and that is the U.S. Government.
If you want to solve the problem without putting pressure on the
Arab governments, then I think we would have to ask how would we
like to see the oil allocated. We have the potential power to tell the
PAGENO="0179"
175
companies that are headquartered here to bring back a certain spread
quantity of oil to the United States. It is not clear to me that we would
ever use that power. I doubt that we would use it.
As I understand it, the U.S. Government did not attempt to use it
in the last embargo. As I mentioned in my statement, according to
Dr. Sawhiil, he told the companies to bring back as much as possible
but then said but more or less treat everybody equitably. And that was
about as strong a statement as was given to the U.S.-headquarte.red
companies.
Senator Cmjncn. We have had testimony that the U.S. Government
during the crisis actually did not ask the companies to do anything,
just left them on their own to make their decisions as they saw fit.
Mr. STOBAUGH. Weli~ I would-
Senator CHURCH. Well, from a realistic standpoint, would it not
follow that if our own Government had directed the companies to
allocate a sufficient supply of oil to the United States to avoid a short-
age here, and the companies had undertaken to abide by that instruc-
tion, the Arab governments would have retaliated by further reducing
the supply of oil made available to the American companies?
Mr. STOBAUGH. They might have, and it is difficult to make a con-
jecture on which I would have much confidence because I judge that
the Arabs were frightened themselves during the embargo and that
one of the reasons that they did not reduce the production further is,
and they said they were going to~ was because of the fear of damage to
some of the western economies. If we had brought back more oil here
and the European economy had been hurting more than it did I do not
know what the Arab action would have been.
Senator MUSKIE. It has been suggested that the companies could not
have implemented the Arab policy as effectively if the companies had
not been integrated, that is, if the producing function had been sepa-
rated from the distribution and marketing function.
Do you believe that to be so? Is that a valid conclusion?
Mr. STo~AUGH. Well, you would have to say what would the situation
be if they were not integrated? If you take Saudi Arabia, for ex-
ample, there are only four companies operating there, or four owners
of Aramco. It is clear that it is easier to have an embargo be in effect
when you only have four companies to deal with than if you had many
companies to deal with, But if for one alternative, they were selling oil
to 100 companies and all the tankers were independently owned and
each tanker bought oil, it would certainly, have been harder for the
Saudi Arabians to enforce the embargo.
On the other hand, if they are dealing with relatively few companies
who own tanker fleets and then took them to the refineries, I would
expect that there would be pressure on the tankers picking up oil to
only take it to refineries where they said they were going to take it,
otherwise they may never be allowed to stop in the Arab countries
again.
Senator MUSKIE. What you are saying is, with integrated companies
the pressure was put on the principal if you broke it up, the pressure
then would shift to the tanker companies. Is that what you are saying?
Mr. STOBAUGH. Yes.
Senator MU5KIE. So that finding a way to break up the integrated
structure of the companies `would not solve the problem?
PAGENO="0180"
176
Mr. S~POBAI1GH. Well, on this particular problem it would make it a
little harder for the Arabs, if you divested, say, production from tank-
ers, but it would still be possible for them to do it.
Mr. LEVINSON. Does it not really come down to the fact in the
absence of a united front among the consuming countries, where they
have got a plan and are willing to pool and confront the Arabs with a
unified approach, that we are going to continue to be vulnerable be-
cause our agents are vulnerable; that is, the companies?
Mr. STOBAUGH. I think that is right, that until the consumer gov-
ernments get together in one way or another, the producing govern-
ments are going to have the upper hand, and that is clear.
Mrs. LEWIS. Have we not missed the chance to create that kind of
unity among the consumer governments?
Mr. STOBATJGII. Well, I understand we are making attempts right
now to bring consuming governments together. Whether we will be
successful I do not know. But we certainly had a golden opportunity
to bring the consumer governments together some time ago when it was
a lot cheaper to stockpile oil in Europe, and that had been suggested,
especially to the Europeans, but they showed no great indication of
stockpiling oil to help them bargain with the oil-producing nations.
Even today I see no great urgency on anyone's part to move forward
with some kind of emergency stockpiling and pooling arrangement.
But I think that should be the No. 1 priority of the consuming
governments.
Senator CHURCH. Well, all of the momentum has gone out of the
effort to bring the consuming governments together, has it not?
Senator MUSKIE. Will we have to borrow the money from the Arabs
to do it?
Mr. STOBAUGH. It seems like we are putting our emphasis more on
how to borrow the money back than how to get the prices down.
Let me say both within Europe and within the United States there
are a lot of powerful interests that are interested in higher energy
prices and I believe that one of the reasons the Europeans never moved
forward that much on stockpile was because they have the coal interests
and atomic energy interests and others that have a healthier situation
if oil prices go up. So I think that the consumer is probably the least
represented group of people in any of the societies. You have a lot of
special interests that are more represented, so I do not think there has
ever been any big urgency on any government's part to beat down
oil prices.
Senator MUSKI-E. You had not been listening to the debate on the
Senate floor. The consumer is overrepresented.
Mr. STOBAUGH. I judge that if we did not have these severe balance-
of-payments problems that we would not be as concerned as we are
now about high oil prices. In other words, if we could find a way to
pay for them I do not think there would be too many governments
worried about them.
POSSIBLE SOLUTIONS
Senator MUSKIE. Have you worked out in your own mind a blue~
print for action to change this situation and give us a fairer chance
in influencing the flow of oil, the production of oil and the price of oil?
Mr. STOBAUGnJ, Well, I think that, first, let me say I do not have a
simple answer.
PAGENO="0181"
177
Senator MU5KIE. You have company.
Mr. STOBAUGII. But let me tell you some of the directions that I think
would be needed to take to reach a better solution. One is getting to-
gether consuming governments in terms of pooling their oil reserves
so that they will be in a much better position in terms of any future
slowdown.
The second thing I think I would do is to attempt to force the oil-
producing nations to put their oil up for bid in one way or the other,
because oil prices have begun to soften from time to time now because
there is more oil being produced than there is consumption. From what
I understand, very shortly the inventory storage is going to be full
and somebody is going to have to cut back production.
Well, I read this week where the Kuwait Governtuent says they are
not going to put any more oil up for bid because that is dangerous,
it might lower the price. They are just going to announce that certain
price and then any company that wants it can come and take it, and
if they do not take it at that price they will close down production.
So I think we ought to free up the market and get bidding into it.
Senator CHtmcH. To do that is going to take a great deal more of
governmental intervention on the part of our own Government than
has occurred up to now, because all of our testimony in the past seems
to bear out the fact that the companies themselves are less interested
in the reduction of price than they are in an assurance of their arrange-
ments for supply, and they will bargain away the price for a continued
assurance of those arrangements any time. In fact, that has already
happened in Kuwait, where once again the companies are breaking the
line-one company leading the way. And once again the consumer is
going to get gouged.
You have already said that the consumer is the least represented
element in any Western society and the vested interests largely domi-
nate. I agree with that. But if something is not done about this price.
its impact upon the Western economy could very well bring about
disastrous consequences. We are beginning to see the effects of this
today. We must recognize that the era has changed, when the Iranian
Government is loaning the British Government $1.2 billion to bolster
its faltering economy. We aie going to have a foreign aid program
in reverse. We must recognize time has changed when one-fourth of
Krupp is purchased by the Shah of Iran. I do not know whether
that is to give him greater assurances of future arms supply or just
what. But it certainly is significant. We are living in a brand new
world and, of course, we have not awakened to that fact. Perhaps
we will not until that world falls in on us.
Mr. STOBAUGU. I think that is right, that the United States will end
up being the biggest borrower of any nation because we have the
capacity to take their funds. So we will end up owing more than any
other nation.
LONG-TERM SUPPLY CONTRACTS
Mr. LEvIN50N. To put a specific on your general recommendation
about trying to free and turn this into a spot market one way or
another, would you support a proposal to prohibit long-term supply
contracts between U.S.-based companies and OPEC countries, except
with specific approval of the FEA Administrator or some other gov-
ernmental authority?
PAGENO="0182"
178
Mr. STOBAUGIT. I think that I would support some kind ef proposal
where the U.S. Government would place sonic type of ceiling on what
the price could be or that approval of the U.S. Government had to be
obtained before the company could agree, and I think that way the
company might have more bargaining strength when it bargained
with a producing nation, because the company could say, "if we sign
too high a price we are going to have big political turmoil back home
and we cannot do it. We m~y not get approval."
Mr. LEvINsoN. That authority does not presently exist ~
Mr. STOBAUGH. I do not know whether it does or not.
Senator CrnmcH. It does not.
SOLUTIONS
Mr. STOBAUGII. But I think that is the third point I wanted to men-
tion in answer to Senator Muskie's question awhile ago.
The third part of any solution is that the U.S. Government is going
to have to use some of its political strength because the companies are
no match for the Arab governmen~5. As far as that matter, hardly
any one of the consuming nations are too. Once you get into how the
U.S. Government can use its political strength, I do not know. On the
one hand, people make a case that if the U.S. Government puts too
much political pressure on our allies, such as Saudi Arabia and Iran,
they may be overthrown and more radical elements may take over and
we will be worse off. I do not know enough about the politics to make an
accurate predictioft as to how much pressure and in what forms we
could put on the producing nations. But I think that if we could en-
courage Saudi Arabia in some way or another to continue to step up
production and to sell it to a number of companies that wanted to buy
it, I think we would see lower oil prices and a healthier world economy.
One of the things that brought about the upset that we are going
through now is the very sharpness of the rise. If it had been a gradual
rise over a 20-~year period of time the world economy would have been
able to adjust to it, but coming so sharply we have major economic
problems in virtually every modern industrial society now,
Mr. LevINsoN. Do you consider that it is any kind of solution to get
the Saudi Arabians to buy $10 billion of U.S. Treasury securities?
Mr. STOBAUGH. Well, I guess I would have to ask what would happen
if we did not get them to buy that? If the alternative were shutting
dowh production because they did not have any place to invest their
money, and if we could not keep them from shutting down production,
that would be worse than getting them to buy $10 billion in Treasury
bills. If the alternative is we could get them to keep producing and
take a lowem price and, therefore, have less surplus funds, then that
would be a better solution, and I just do not know how much political
power we can use effectively with the Saudi Arabians. That is the
key, because they have the major excess surplus production capability.
They are producing around 9 or 9½ million barrels a day, something in
that range. They can go up to 11 million barrels in a fairly short time,
in a year. They can go up to 20 million barrels a day over a period
of a few years, and that is an enormous amount of potential excess
production capacity. So they certainly have the power to have a major
impact on world oil prices.
PAGENO="0183"
179
Senator MUsIUE. How long could they sustain 20 million barrels a
day?
Mr. STOBAUCH. I do not know how many years but it would be
many, many years.
Senator MU5KIE. Into a time when you and I will not be ,around
to worry about it?
Mr. STOBAUGH. I would be dead before they had to stop 20 million
barrels a day production.
STRATEGIC STORAGE
Senator CHURCH. What you are saying surely underscores the impor-
tance, does it not, of moving ahead in a very determined way to
secure as large a measure of national self-sufficiency in our energy
supply as we can?
Mr. STOBAUGH. Broadly stated, I would agree with that statement,
but I think it can be a mix of domestic energy supply and strategic
storage. I do not think we have given enough thought to the question
of strategic storage and frankly-
Senator CHURCH. How much would you have to store in order for
it to be really a meaningful factor in the event of another embargo?
Mr. STOBATJGH. Pardon?
Senator CHURCH. How thuch would you have to store for it to be a
factor o.f much influence in the case of another embargo?
Mr. STOBAUGIT. Well, we are relatively better off than, say, the
Europeans and Japanese because we have so much domestic produc-
tion. We could probably have a plan that we could cut back imports
and cut back consumption some-and consumption is now being cut
back because of higher prices. We could have a plan where consumption
is reduced a little and all we would have to do is have a strategic
storage to make up for a certain portion of our imports. It is not like
having to have 6 rnonth~' supply of all of our consumption. So I have
not calculated exactly how much we would have to have under certain
conditions but I think that storage could he part of the mix.
Senator CHURCH. Is any effort now being made to dramatically in-
crease our storage capacity?
Mr. STOBAUGH. I know of none. The work that I know of on Project
independence is moving mnch more toward domestic productive capac-
ity in a lot of areas. Some of the plans, frankly, scare me. I heard a
plan the other day for shale oil production that would take away a
lot of water from the farmers in the West and-
Senator CHURCII. If you think that scares you, it terrifies me, espe-
cially because the only part of the West that has any water that could
he diverted happens to be my part, the Northwest in general and Idaho
in particular.
Mr~ STOBAUGH. We might be given a choice of taking water away
from the farmers and doing what they are talking about, "exporting
far~ing~~ out of Colorado and those States because the farmers would
have to leave or have strategic storage. I would rather go toward a
strategm storage situation. I think that is the kind of sophisticated
trade-off we need to make, and I do not know that they are being
done now, but I would hope they would begin to be considering it.
PAGENO="0184"
180
Senator CHURCH. Yes. If you want another civil war, I will tell
you the best way to get it is to start an effort to seize and divert water
supplies.
Senator MU5KIE. It would be a big help for the Maine potato
growers.
VERTICAL INTEGRATION
Senator CHURCH. Just one other area to cover here that I do not
think we have covered in our questions so far.
You have had considerable experience wQrking in the refinery end
of the oil business. Would you describe your feeiings with regard to
the pros and cons of-I was going to say integration of the industry-
but I believe we have covered that.
Mr. STOBAUGH. Let me mention one other point. We talked about
vertical integration in terms of what happens during a crisis and how
easy or hard it is to effect an embargo. There are a lot of other questions
on vertical integration that come up. One is whether or not it gives com-
panies economic power and, therefore, produces monopoly profits, and
it think certainly during a crisis time it might. During normal times
the answer is less clear. But on the benefit side of vertical integration
you have a more efficient network of operations if you can have a
refinery designed explicitly for a crude source and then that refinery
is also designed for the market outlets of the company. You get a
specialized refinery that will not cost as much to build as would a
more generalized refinery which would run on a lot of different crude
oils, That kind of cuts--
Senator CHURCH. Have not the big oil companies begun to build
specialized refineries because of cost factors and then found themselves
in a less flexible position to deal with international events?
Mr. STOBAUGH. That is right. In order to achieve economies of
operation they did build the specialized refineries so normal times cost
and prices would be lower than they would otherwise. During an
emergency, they lost their flexibility; the companies are making these
kinds of decisions.
SUBSTITUTES FOR OIL
Senator CHURCH. I do not know whether you are prepared to answer
this question or whether it falls within your range of specialty. To
what extent would it be possible for us to substitute coal for oil, given
our very large supply of coal in this country, and thus substantially
reduce our dependency on foreign oil?
Mr. STOBAUGH. 1 think there are very large possibilities there. In
fact, I think that coal is the single source with the most potential that
will do us any good for quite a long while. I think that the economies
are such that we can pay a lot of money to do a first-class job of re-
claiming land for strip mining and still have coal very economical
compared with alternative sources. I think that is a potential bright
spot.
Senator CHURCH. I would think so, too, and I agree especially with
what you said about reclaiming the land afterward, doing the neces-
sary conservation work rather than viewing this oil and energy crisis
as an excuse for abandoning our concern about a cleaner environment,
which seems to be the tendency and even the easy assumption that
PAGENO="0185"
181
people are making, and beating a retreat in this general effort, I
should think the logic of the situation would be just the opposite. The
higher prices imposed by foreign governments has enabled us to pro-
ceed with a larger mining of coal and do so in an environmentally
acceptable way. The economics of it will work out for us now, where-
as before they might not have worked out. It seems to me so obvious
that the opposite conclusion that most people have reached, and that is
being pushed on us by industry is in fact the valid one.
Mr. STOBATJGH. I would not reduce environmental or pollution con-
straints at all. I would enforce them. And from what I can see, the
much higher prices now means we can do a lot better job of cleaning
lip. The reason coal lost markets during the past couple of decades is
because of the very, relatively very low oil prices. Now that oil prices
have gone up so much we can afford to do a lot more cleaning up of
coal, and a lot more reclamation of the land. Shipping charges, which
used to be relatively high, now do not seem so high at all. So I think
we have money to do things that should be done in terms of environ-
mental and general pollution control.
Senator CIrnRcH. Now, on the side of conservation, looking again
toward a greater measure of self-sufficiency, if we just wade in against
Detroit and began to build sensible automobiles in this country, would
that not have a very large effect on the consumption of gasoline? For
instance, if we built cars that would average 24 or 26 miles to the gal-
lon because they are smaller cars, rather than 6,000-pound 350-horse-
power, 7 percent efficiency, 7-miles-to-the-gallon automobiles, that we
are so attached to?
Mr. STOBATTOII. No question about that. Since our gasoline consump-
tion is over 6 million barrels a day it is by far the largest single item,
and if we could reduce that quite a bit certainly it would help.
Senator CHtTRCIT. W~ll, do you think the market forces will bring
this about or do you think some kind of forthright governmental
action will be required?
Mr. STOBATJGH. Market forces have helped, but I think we will have
to have higher prices than we do now on the gasoline question in order
to bring gasoline consumption closer to the standards that you are
talking about.
But I think there are other things that could be done in terms of a
combination of governmental action and market forces, such as, for
example, on parking in central cities I would guess that the cars that
go in there probably are not paying their fair share as far as pollution
and space and similar items. So I think there are a lot of other actions
that would be moving in the direction of charging people for full
value, including damage to the environment. Putting in that kind of a
system would help the market forces work. If you take something like
the depletion allowance, for example, if we got rid of that, I would
judge that that would make oil prices higher and gasoline prices
higher because I think that there is a good case to be made that the
depletion allowance is a concession or a subsidy of the consumer. So
eliminating the depletion allowance would help reduce consumption.
Senator Ciruiici~r. Well, I am not going to pursue this further be-
cause we get into the psychology on that kind of thing. I ~just wonder
whether the price factor is all that determined whether the free market
really can be relied upon to produce these results or whether gasoline
PAGENO="0186"
182
is something like steak-people have got to have it once they becOme
accustOmed to it, regardless of the price. Here people cannot traffic any
way but by automobile, since we have built our society in this fashion.
Do ~ou think price is going to:be that much of a factor in determining
our consumption or in changing the habits of automobile manufac-
turers ~ I do not knOw. I suppose this is a question that cannot be
answered definitively by anyOne right noW, I would think it would
take more direct Government action than simply to rely on the v~aries
of the marketplace.
Mr. STOB.UTGH. The marketplace, particularly on automobile and
gasoline consumption, will take quite awhile to do because one of the
ways it will have an effect-and let us say if gas were $1 a gallon-
would be that people would gradually, and some of them quickly,
begin to buy smaller ears. But we still ha~re these big cars on the road
and it would take a number of years to work through the car stock.
So especially in gasoline, the short-run price elasticity is very low
compared with longer term; but longer term I think it would have an
important effect0
Senator Cnu~cH. Thank you very much, professor. Ycur testimony
will be very helpful to us.
[Mr. Stobaugh's prepared statement follows:]
PREPARED STATEMENT OF ROBERT B. STOBAUGH, PRoFESSoR OF BUSINESS ADMINIS-
TRATION, HARVARD UNIVERSITY GRADUATE ScHooL or BUSINESS ADMINISTRATION
Mr. Chairman and Members of the Subcommittee: I have been asked to discuss
the costs and benefits to the United States of the foreign operations of U.S. oil
companies, especially the five so-called "majors" that are headquartered in the
United States-~Exxon, Mobil, Texaco, Standard of California and Gulf, I was
requested to focus specifically on the role of the~e companieS during the recent
crisis lasting from October 1973 through March 1974, which was caused by the
cutback of Arab oil production and the Arab embargo on shipments to certain
countries including the United States.
My research assistant, Mr. Howard I~ailes, and I have obtained statistics
from a number of governments, statistics which are publicly available, and have
nrtalyze~i them to determine n~hat happened to the fIo~ts of oil during this crisis.
We have combined these with press reports and my knowledge of the industry
in order to judge what criteria the companies used to arrive at their decisions
which resulted in these flows.
We made some comparisons between the U.S. supply position and that
of the rest of the world in the aggregate. We obtained detailed information on
only five countries-the United States, Japan~ West Germany, the United King-
dom, and France.
We, have four main conclusions about what happened in those crisis mopths:
(I) The United States seems to have lost a greater proportion of its total oil
suppl.V and~ of its total energy suoply than the aver~ige for the rest of the world.
By total oil supply I mean supplies from all sources, including dOmestic, and all
kinds of petroleum products, not just crude oil.
(2) For tke ot~ier four major consuming countries that we studied, we were
unable to estahlish the exact percentage losses because we did not have the figures
on imp~rts of reth~ed products for any country except the United Staten Bitt, as
well as we can determine from our analysis of the ~taf a that we da ha re. and
from press reports, the consuming countries of the wOrld did not ~eeul to differ
very widely in the degree of their losses. Our results seem somewhat consistent
with the statement made by a Royal `Dutch/Shell executive that thq industry
allocated oil to all markets as a percentage of deñ~and.~
1 Gc'o~rey Ci~andIer, "The Changing Shape of the World 011 Industry," PetroTeu~a Reviett',
iune 1974.
PAGENO="0187"
183
(3) There were so~te diversioscis of crude oil from the normal destinations, but
very little was diverted into the United States. V.5. imports of Iranian oil were
increased by about 200,000 barrels a day, but this might not have represented a
diversion from other destinations bechuse Iranian production increased more
than this amount.
(4) In some cases, but not always, crude oil was supplied to nations, including
the United States, at a lower price than could have been obtained elsewhere.
Thus, some, but not all, of our examples are consistent with Dr. Sawhill's state-
ment of June 5 to you that the oil companies made shipments into the United
States that they might have more profitably sold elsewhere.
I will present some of the statistics that support our conclusions, will indicate
our ideas as to why these patterns resulted, and then will discuss the issues
related to the broad question of the costs and benefits that the United States
incurs through the foreign operations of the five U.S. majors.
In September 1973, the United States had available 17.6 million barrels of oil
daily (including both crude oil and refined products, domestic output and
imports). This daily average increased slightly during October and November.
But as the effect of the Arab cutbacks began to be felt, the supply dropped
sharply in December and continued to drop through February, when the bottom
was hit-at a level of 16.3 million barrels a day, about 7.4 percent below the
September level (Table 1). This drop was due~ almost entirely to the drop in
imports. U.S. production remained almost level.
TABLE 1-U.S. SHARE OF OIL AVAILABLE TO CONSUMING NATIONS, SEPTEMBER 1973 THROUGH FEBRUARY 1974
[Millions of barrels daily and percentsj
1973
1974
September October November December January February March
1. Oil available to world ` 58. 3 59. 2 57. 7 54. 8 55 4 57. 2 58. 0
2. Oil available to United States (see
lines 6-9 below) 17. 6 17. 7 18. 3 16. 8 16. 4 16. 3 16. 6
3. Change in oil available to linited
States (percent of September) 4. 6 +4. 0 -4. 6 `-6.9 -7. 4 -5. 3
4. Oil available to rest of world (including
Communist states) 40. 7 41. 5 39. 4 38. 0 39. 0 40. 9 41. 4
5. Change in oil available to rest of world
(percent of September) +2.0 -3. 2 -6. 7 -4. 2 +. 5 +1. 7
6. U.S. production of crude oil ° 9. 1 9. 1 9. 1 9. 1 9. 1 9. 0
7. U.S. productionofnaturalgasliquids5 1.7 1.7 1.7 1.7 1.7 1.7
8. U.S. crude imports 4 3. 8 4. 0 4. 1 3. 0 2. 9 2. 9 ~
9. U.S. product imports 5 2. 9 2. 8 0 3, 4 3. 0 2. 7 2. 7
0 Includes monthly crude oil production figures, obtained from various issues of `Oil and Gas Journal" and U.S. natural
gas liquids production (see note 5). Lagged by 1 month on assumption that production in countries other than major export-
ing countries was the same each month and that it taint an average of 1 month to transport oil from producting nation to
consuming nation.
Various issues of "Oil and Gas Journal."
The variations from month to month are quite small, with the yearly average hovering around 1,740,000 barrels daily;
thus, 1,700,000 daily was assumed for each mouth in this analysis. Source: Bureau of Mines as reported in Federal Energy
Office, "Monthly Energy Indicators," May 1974, p. 19.
4 U.S. De~artmeet of Commerce, "Imports Commodity by Country," monthly, various issues, and news release CB 74-83,
Apr. 8, 1974. This source was not available for March figure and data from the Federal Energy Office are not consistent with
this source. Therefore, March was estimated by taking the increase in imports from February to March as reported by Fed-
eral Energy Office, "Monthly Energy Indicators," and adding it to the February imports reported abpye.
Estimated from graph presented in Federal Energy Office, "Monthly Energy Indicators," May 1973, p. 18, Basic data
are from Bureau of Mines through January 1974 and American Petroleum Institute after that.
This increase from October to November 1973 seems unusually high; however, the November import figurfa seem
more normal if compared with earlier months judging by seasonal trends in 1972; see Federal Energy Office, op. cit.~ p. 18.
The rest of the world, being generally closer to Arab sources of supply, began
to feel the cutback quicker than the United States. Their low point was reached
in December, at a level 6.7 percent below their September level. By February,
when the U.S. supply was at its lowest mark, the rest of the world had a greater
supply than in September.
It appears that the United States on the average through the crisis lost ~
larger pr~portion of its oil supply than did the rest of the world. The United
States, during its four worst months, was down an average of 6.1 percent from
September, whereas the rest of the world, during its four worst months, was down
only 3.4 percent from September (Table 2).
PAGENO="0188"
184
TABLE2.-CHANGE (N ENERGYSUPPLIES OFG1LAND TOTAL ENERGY, UNITEDSTATES VERSUS REST OFTHE WORLD
NOVEMBER 1973 THROUGH MARCH 1974
[Percentage of supply
in September 19731
Oil supply
Total energy s
~Jnited
States°
upply 1
Rest of
world
United
States
Rest of
world
During worst morths~
Average during worst Z mo
Averageduringworst3 me
Average during worst 4 mo
-7. 4
-7. 3
-6.5
-6. 1
-6. 7
-5. 5
-4.7
-3. 4
-3. 5
-3. 4
-3.1
-2. 9
-3. 3
-2. 7
-2.3
-1. 7
1 Includes oil, natural gas, solid fuels, water power, and nuclear.
2 Calculatedori baxis that oil provides 47.2 percent of total energy in UnitectStátes and 49.0 percent in rest of World (1973
averages as calculated from OP Statistical Review of the World Industry 1973," p. 16.)
Source: Calculated from data in table 1.
But oil snpplies are only part of the world's energy. If we assume that the
other supplies of energy did not change, then the United States loss of energy
was 3.5 percent during the worst month. After we correct for the fact that the
United States is slightly less dependent on oil for energy than the rest of the
world, the United States still seems to have lost a slightly greater share of its
total energy supply than did the rest of the world.
All the losses given so far are based on changes from September 1973. A more
significant measure of the losses would be a comnarison between projected supply
and actual supply. This method shows that U.S. supply in February was about
20 percent below that projected prior to the crisis. I do not have similar compari-
sons for other countries.
With this overall picture, there was some activity involving oil diversions.
Because of linilted time, we focused our analysis on the imports of crude oil,
which in the aggregate were much greater worldwide than imports of refined
products.
U.S. crude oil imports were reduced by some 30 percent between August-
September 1973 and the height of the shortage, January-February 1974 (Table
3). More than 98 percent of the Arab oil that the U.S. bad been receiving was
lost-imports of Arab oil dropped from 1,200,000 barrels a day in August-
September down to only ~9,000 a day during January-February. Total supplies
of non-Arab oil dropped very slightly, about 2 percent.
TABLE 3.-U.S. IMPORTS OF CRUDE OIL BY COUNTRY OF ORIG1N, AUGUST-SEPTEMBER 1973 AND JANUARY-
FEBRUARY 1974
[Thousands of barrels dailyj
.
Country of origin
August-
September
1973
January-
February
1974
Difference
Total
Total, Arab States
Total, non-Arab States
Vene2uela
Canada
Nigeria
Angola
Iran
4,114
1,203
2, 911
633
1082
524
59
229
2,885
19
2,866
493
960
462
1 47
430
-1,229
-1, 884
-45
-140
-122
-62
-12
201
Indonesia
Ecuador
Bolivia
Mexico
237
60
0
12
275
90
11
116
38
30
11
4
Trinidad
All other non.Arab2
64
11
1 65
117
1
6
1 SubstantiaH~ higher volumes ware received from~ these countries in December than in January~February, as follows:
Angola 62, Mexico 27, Trinidad 90, Netherlands AntilleS 21.
2 Includes Netherlands Antilles which was zero in August-September and in January-February, but higher in December
(see footnote 1).
Source: U.S. Deoartment of Commerce, "Imports Commodity by Country," monthly, various iSsues, and news releas
CB 74-83, Apr. 8, 1974.
PAGENO="0189"
185
But if we push the analysis one layer deeper, we find that substantial cuts
were made in U.S. imports of crude oil from some non~Arab suppliers, principally
Venezuela, Canada and Nigeria. We believe that Venezuelan oil was diverted
away from the United States so that the Venezuelan government could provide
more oil to other Latin American countries; 2 the Canadians reduced exports to
the United States in order to make up for reduced supplies of Arab oil received
by Canada.3 We have no data as to where the Nigerian oil was diverted but
speculate that it might have been to the Netherlauds, which, prior to the embargo,
was dependent primarily on Arab oil.
These cuts in imports of non-Arab oil into the United States were almost offset
by increased imports from non-Arab sources, primarily from Iran, and to a lesser
extent from Indonesia, Ecuador and several other countries in the Western
Hemisphere. Imports of Iranian crude oil were almost doubled, increasing by
201,000 barrels a day.
The increased imports to the United States from Iran and Indonesia might not
have represented diversions from other countries because production in Iran and
Indonesia was increased after the embargo started by an amount greater than
the increase in U.S. imports (Table 4). Between September and December 1973,
production in non-Arab nations was increased by .9 million barrels a day (from
38.4 to 39.3) compared with the largest cut in Arab production of 5.0 million
barrels daily (from 20.8 in September to 158 in November, rising to 16.1 in
December).
TABLE 4.-WORLD CRUDE OIL PRODUCTION, FEBRUARY 1973 AND FROM AUGUST 1973 THROUGH MARCH
1974
(Millions of barrels cIaily~
1973
Janu-
ary
1974
Febru-
ary
March
FObru-
ary
Aqgust
Sop-
tamber
Ooto-
ber
No-
vember
De-
camber
Non-Arab States:
United States 11. 0
Canada 1.8
Venezuela - - - 3. 3
Other Western Hemisphere 1. 8
Western Europe 4
Iran 5.8
Indonesia 1.2
Nigeria 1.9
Other Non-Arab 1. 4
Communist States 9. 1
Arab states:
Libya - 2.3
Algeria 1.1
Morocco, Tunisia, United Arab
Republic,Syria .4
Iraq 2.0
Kuwait 3.3
Saudi Arabia 7.2
Abe Dhabi 1.4
Bahrain, Dubai, Qatar, Oman 1. 2
Arab total 18.9
Non-Arab total 37. 3
World total 56. 2
111. 9
1.8
3. 4
1. 7
.4
5.7
1.4
2.1
1. 4
9. 5
10. 8
1.7
3. 4
1.~8
.4
5.8
L3
2.1
1. 4
9. 7
10,8
1.8
3.4
1. 8
.4
6.0
1.4
2.2
1. 1
9. 8
10. 8
1.8
3.4
1. 8
.4
6.0
L4
2.2
1.4
9. 8
10.8
1.8
3. 3
1, 9
.3
6.1
1.4
2.3
1. 5
10. 1
10. 8
1.8
3. 3
1 8
3
6.1
1.5
2.2
1. 5
10. 2
10. 7
1.8
3.2
1. 9
.4
6,2
1.4
2.2
1. 6
10. 1
10. 7
1.9
3. 2
1. 8
.4
6.1
1.4
2.3
1. 5
10.2
2.1
1.1
.4
2.1
3.0
8.4
1.3
1. 2
2.3
1.1
.4
2.2
3. 5
8.6
1.4
1. 3
2.4
1.1
.2
1.8
3. 1
7.8
1.3
1. 2
1.8
.9
.1
1.9
2.6
6.3
1.2
1. 0
1.8
.9
.1
2.1
2. 5
6.6
1.0
1. 0
2.0
1.0
.2
1.8
2.8
7.5
1.2
1. 1
1.9
1.0
.2
1.8
2.8
7.8
1.3
1. 1
1.9
1.0
.3
1.8
2. 8
8.1
1.5
1. 1
19.6
38. 5
58. 1
208
38.4
59. 2
18.8
38. 9
57. 7
15.8
39, 0
54. 8
16.1
39. 3
55. 4
17.6
39. 6
57. 2
17.9
39. 5
57. 4
18.5
39. 5
58. 0
Source: "Oil and Gas Journal", various issues, modified by addition of 1,700,000 barrels daily of natural gas liquids
in the United States (see table 1, footnote c).
In our analysis of the oil supplies of the other four major consuming countries,
we found that using September 1973 as a base was misleading, primarily because
of unusually low imports into the United Kingdom in this period. Therefore we
based our analysis on the average supply for January through September 1973.
Because we did not have statistics on product imports from Japan, West Germany,
the United Kingdom, and France, and because December is the last month for
which any import statistics presently are available on the United Kingdom and
France, our analysis is quite incomplete.
2 Petrolewm Intellioence Weekly (i.e. P1W), Jan. 14, 1974, p. 12.
~ P1W, Nov. 12, 1973, p. 9.
PAGENO="0190"
186
But with these caveats, it appears that Japan w~is slightly better off than the
United States, Which in turn was somewhat better off tl~an West Germany, the
United KingdQm, and France (Table ~). As with the United States, a comp~ri-
son of projected supply with actual supply would be more significant than other
comparisons and would show a greater loss for Japan, because its oil consumption
had been growing more rapidly than that of the other countries.
TABLE 5-ESTIMATED SUPPLIES OF CRUDE OIL AND TOTAL ENERGY, SELECTED COUNTRIES, NOVEMBER 1973
THROUGH FEBRUARY 1974
[Percentage of January--September 1973 averagej
Crude oil
Energy 1
1973
1974
1973
1974
Novem-
Decem-
Jan-
Fob-
Novem-
Decem-
Jan-
Feb-
ber
ber
uary
ruary
ber
ber
udry
ruary
UnitedStates3
Japan
West Germany
United Kingdom
France
+4.0
+2.4
+3. 4
+6. 2
+14.2
-4.2
+4.7
-11. 1
-12. 5
-~16.5
-4.9
-9.0
-6. 4
(3)
(8)
-5.1
+2.0
13. 2
(3)
(3)
+1.9
+1.9
+2. 0
+3. 2
+10.3
-2.0
+3.4
-6. 5
-6. 5
12.0
-2.3
-7.2
-3. 4
(~)
(3)
-2.4
+1.6
-7. 7
(3)
(3)
1 Assumes following importance of oil in total energy supply and assumes shortfalls in imports of products in same
percentage as for crude oil based on data in BP Statistical Review of the World Oil Industry 1973, p. 16.)
2 includes production of natural gas liquids in oil supply.
3 Not available.
Note: imports of products are believed to be much greater for United States and West Germany than for other countries
on the list.
Source: National statistics of each country.
We attempted to determine the extent to which prices in various nations
affected the supply of imj2orted oil to those nations. The rapid changes in the
the price of oil by the producing nations obscures some of the possible price
effects because of differeuc6s in the time it takes to `ship oil from a given produc-
ing country to various consuming countries. iranian oil provides an example. In
February, Iranian crude oil was imported into the United States at $7.55 a barrel,
compared with $8.61 in West Germany and $9.73 in Japan (Table 6). The higher
price of oil to Japan may have been caused by shipments to the United States
and West Germany - of a greater portion of oil exported from Iran prior to the
large price increase of January 1 than in shipments to Japan.
PAGENO="0191"
TABLE 6.-QUANTITIES AND PRICES OF IMPORTS OF CRUDE OIL, SELECTED COUNTRIES, DECEMBER 1973 THROUGH FEBRUARY 1974
IThousands of barrels per day of imports and dollars per barrelj
December 1973
January 1974
February 1974
United
West
West
Kingdom
United States
Japan
Germany United
States Japan
Germany United
States Japan
West
Germany
Indonesia:
Thousand barrels per day 217 736 203 720 355 782
Dollars per barrel 5. 21 6. 46 6. 42 7. 49 9. 09 11. 68
rap:
Thousand barrels per day 145 217 1575 397 437 1249 352 422 1240 254
Dollars per barrel 4. 97 4. 41 4. 41 5. 21 5.00 5. 19 6. 48 7. 55 9. 73 8. 61
Nigeria:
Thousandi barrels perday 191 474 159 256 4711 22 261 454 25 216
Dollars per barrel 7. 24 6. 77 7. 77 7. 23 9. 71 8. 69 9. 74 11. 86 14. 70 11. 71
Angola: -
Thousand barrels per day 62 19 77 23
Dollars per barrel 5.41 11.99 12.89 7.84
Ecuador:
Thousand barrels per day_ -- - 56 - -90 90
Dollars per barrel 6. 58 ---- 8. 70 11 56
Venezuela:
Thousand barrels per day 87 627 7 57 559 13 18 421 18 22 ~
Dollars per barrel 5. 14 5.03 6. 70 5. 38 7.23 892 7. 81 10. 30 9. 37 9.39 "~
Trinidad:
Thousand barrels per day 90 76 56
Dollars per barrel 5 98 9. 94 12.90
Canada: -
Thousand barrels per day 725 9(37 951
Dollars per barrel - 4. 98 6.61
Foreign currencies converted to U.S. dollars by following factors:
United
Japan, Kingdom, Germany
- divide by: multiply by: divide by,
December 1973 280.0 2. 32 2. 7
January 1974 299.0 2.7
Februaryl974 ~-- 287.6 2.7
Note: France published no price data for year 1973, Britain, no data for 1974; exchange rate for Gernias- mark assumed to be same in January and February as in December.
Source: National statistics of each country.
PAGENO="0192"
190
to friendly consumers and apparently also to controlling the destination of ship-
ments from refineries using Arab oiL
The strength of tim producing nations, especially those with large `Oil produC-
tion, is not surprising. Since an assured supply of crude oil is needed to keep an
oil company's vast network of facilitieS operating, those nations Which provide
a company with an important share of Its crude oil s~1pplies naturally have a
large influence. Thus, it ~was prCdirtable that Mr. Jungers, the Aramco chief
executive, would take qu1~ action `to reduce his company's production In `Saudi
Arabia as soon as he heard thC ~tng's message on the radio ~that production
would be e~it.~ Saudi Arabia provided on the average' over one-third of the world-
wide production of Ara~nco'~ parents (Exxon, Mobil, Texaco and Standard of
California) and an even greater share of their reserves. Similarly, Gulf is heavily
dependent on one country-Kuwait-for its crude oil supplies.19
But yet in spite of obeying the producing nations' Orders, the companins Still
managed to negate the apparent intent of the orders-~whieh was to punish some
nations and reward others. For in the end, there is no evldenöe that the nations
deemed to be "friendly" by the Arabs got a larger share of available oil than the
"unfriendly" ones. I would gUess that the Arabs knew that the diversion of oil
would take placeS I do not know what would have happened if all Arab countries
had ordered all 011 firms operating In their territory not to divert any oil, either
Arab or non-Arab; but I presume the Arabs realized that this would have
increased the probability of an international confrontation between nations.
The top managements of the `oil companies were' able to cope with the eon-
*straints and pressures through the use of giant computer facilities. These corn-
putOrs take Into account the capabilities and constraints inherent to the system,
such as availability of tankers, quality of crude oil, the capacity and processiI~g
capabilities of refineries and the ability to swap products with other firms. Also,
the computer programs consider any constraints specified by management, such
as providjng a specified amOunt of products to each country. The comj~uter theU
Indicates to: management how-~-within these constraints-available crude oil
should be allocated to maximize the profit for the firm. Management is thus ~able
to try out various policies with the computer. They then pick the desired policy
and relay the message to the layers of managers that operate the worldwide
facilities.
I do not know what criteria these companies used to allocate their available
petroleum -supplies, but the aggregate data for the countries that We studied
seem to be generally consistent with the statement of Geoffrey Chandler of Royal
Dutch/Shell: "The allocation of oil as a percentage of demand to all markets
appeared to be the most equitable and practicable course of action in the circum~
stances. Indeed it was the only defensible course if governments were not collec-
tively to agree on any alternative preferred system. For the companies, even
if this seemed the only way to avoid inviting their own destruction, it was ~
no means the most economically attractive. ~ 20
For the sake of a discussion of the costs and benefits associated with. the
foreign operations of the U.S. companies, I assume that in Mr. Chandler's state-
ment his description of allocating oil is an accurate one, although data from
individual firms would be necessary to confirm this.
To do a proper cost/benefit analysis, one needs to know what would be the
situation If these five U.S.-based firms did not exist, and it is difficult to know
the answer to this conjecture. I assume however that If legislation were adopted
to harm the U.S. oil firms operating abroad, then a variety of foreign-owned
entities would fill the gap-private companies, such as Royal Dutch/Shells as
well as many cothpanies which would be owned by the governments of both
producing nationS and consuming nations.
What costs to the United States exist because of the foreign operations of
U.S. firms?
These firms use the U.S. name and flag, and some critics claim that U.S.
foreign policy at times has been negatively affected and that part of our
military expenditures abroad are to protect U.S. economic interests. As you well
know, these complaints are directly against U.s, multinational enterprises in
general, not just the oil companies. I am not sure how one p1ace~ a value on
this "cost" to the United States.
~ Fort une, February 1974, p. 58.
19 1973 Annual Reports of the Major Oil Companies.
20 Geoffrey Chandler, "The Changing Shape of the Oil Industry," Petroleum Review,
~une 1974.
PAGENO="0193"
191
Another cost sometimes attributed ~to the foreign operations of U.S. companies
Is the export of capital. The assertion is made that those opei~ationS reduce the
amount of investment within th~ United States. Ilowever, the U.S. Tarth~ Com-
m1~siofl, in its study of niuitthatlonal enterp1~i~eS, dis~gr~es with such a con-
clusion because U.S. monetary ~Olicy~ is so much mere dominant in affecting
U.S. investment than the amount of funds involved in U~S. foreign direct invest-
memt.n The Tariff Commission study is consistent with those econometric studies
which conclude that demand fQr goods rather than supply of funds is the major
determinant of investment in the United States.~ This 4uestiofl has not been
studied specifically for the oil industry, but I would guess that the amount of
oil Investment abroad is much less important than other factors in determining
oil investment at home. The major detei~miflants, I think, are the market for
petroleum and the degree of prob~bili~y that exploration will be successful.
}Iowever, if investment abroad does detract from investment In the United
States, then the fl.5. economy (In~luding tax revenues) suffers accordingly.
Several benefits can be named. The foreign operations of the U.S. companieS
create a number of well-paid jobs in t1~e United States, These are in headquarters
an4 In research and development within the o~1 firms-also in the managemE~nt,
laboratories and factories o~ the supplying industries. u.s. stockholders of the
parent companies pay taxes on the diridends they receive because of the foreign
earnings. But both the jobs and taxeS are small compared with the size of the
overall U.S. economy.
r2he U.S. balance of payments also benefits from oil operatioi$ abroad. The net
benefit ranged from $40Q million to $1.3 billion in the years 1966_72.23 Eat these
numbers are small compared with over $100 billion In U.S. expOrts this year.
The major benefit is lik~ly to be the role played by these firms In the interna-
tional oil industry. During nOrmal times they are ethci~ent in the operation of
their worldwide networks. During a time of severe shortages, the United States
could have a mere asSured supply of oil than if It were depending solely on oil
companies bead0~aartered abroad. flat It is unlikely that the United States will
receive a much greater proportion of Its needs than other nations, unless th~
U.S. government gives a direct order to the U.S. companies to allocate oil QU
this basis. As for that, the U.S. government's actions are likely to be restricted
by considerations similar to tliose during the recent crisis. Still, the fact that
U.S. companies control an Important ~hare of the world's oil could give the
United States more power in attempting to arrange an International sharing
agreement f~r usO in an emel~geflcY.
The issues are complex and the supply of oil important. Thus, we should
ensure that if legislation reduces the foreign activities of the U.S. oil companies,
including the majors, then something is available in their place to meet U.S.
needs.
One implication is that foreign taxation should be treated as a multilateral
question, perhaps through the O~CD countries. In th1~ way perhaps all foreign
direct investors, Including non-oil as we'l as oil firms, could be taxed by their
home governments on a comparable basis. I think that the U~S. gqvernmeiit should
take the ipitlattsre in bring aboi~t sudi an agreement.
Another area for action hy the U.S. government, aitd again this does not solely
apply to oft firms, is to~ investigat& joint ventures to determine whether they
violate U.S. antitrust laws.
Thank you for the invitation to testify. I will be bapp~ to try to answer any
of your questions.
Senato~ Qinmoii. Our next witness i~ Prof. John M. Blair, of the
Departñaent of Economics, tJ'n~versity of South Florida.
Please stand and be sworn.
~ U.S. Tariff CommisSion, The l~tultlnat1O'ia1 Corporation and the World Thlonomy
(WaShington, U.S. ~everflmønt ~rlnting office, 1973), p. 649.
~ See Dale W. rorgensofl and Calvin D.. Siebert, "A Comparison of Alternate Theories, of
Corporate Investment Behavior," The Asseriocsn Eoo4ioW4O Review (September 1968),
pp. 6S1-712.
~ t'relithin~try r5vlsêd figures prepared for publication In gurvey of Current Business)
J~Iie 1974.
PAGENO="0194"
192
SWEARING OF WITNESS
Do you swear that everything you are about to testify to in this
proceeding will be the truth, the whole truth, and nothing but the
truth, so help you God?
TESTIMONY OP PROP. jOHN M. BLAIR, DEPARTMENT OP ECoNØ~icS,
UNIVERSITY OP SOUTH PLORIDA, TAMPA, EllA.
Mr. BLAIR. To the best of my knowledge.
Mr. Chairman, If am here in response ~o your letter of invitation of
May 13. Before I begin my testimony, I woñld like to make one brief
comment.
Your letter referred to my long experience as a petroleum expert
beginning with my authorship of the staff report to the Federal Trade
Commission on the Int9rnational Petroleum Cartel. While I directed
the preparation of that report, wrote part of it, and edited it, there
were others who were very actively involved in its prej~aration. I
would like to have the record indicate that much of the original writ-
ing was done by Mr. RQy Prewitt, who came to the Comilnission from
Cornell and became on~ of the world's most knowledgeable economic
authorities, I believe, on the petroleum industry. Unfortunately, he
died last year shortly after retiring.. Another person who made a
major contribution was Mr. J. W. Adams, also deceased. Mr. Adams
was with the Federal Trade Commission from nearly the time of its
original inception in 1914. These two men, plus a young economist by
the name of Meyer Alpert, must share in whatever credit attaches to
the preparation in the preparation of that report. At this point, I
would also like to express my appreciation for the technical assistance
given me in the preparation of growth rates in this statement by Prof.
George Steinke, and Mr. Tom Thomas of the University of South
Florida.
Senator CHuI~dn. Thank you very much.
HISTORY OF PETROLEUM INDUSTRy
Mr. IE3LAIR. In the history of concentrated industries, the usual
sequence has been a progression from market control through collusion,
conspiracy, and cartels to the nonprice competition of oligopolis-
tic interdependence. Under this interpretation; the coming together
of major oil companies and their entering into formal cartel agree-
ments such as the Achnacarry and Red Line agreements, would be
seen as forms of conduct of an earlier and cruder day which, in all
probability, have given way to more modern and sophisticated means
of market control. To determine whether the old cartel agreements (or
some more modern var~nts thereof) are only relics of a forgotten past
would require a new investigation similar to that which underlay the
FTC Staff Report of 1952 on The International Petroleum Cartel,
conducted by an agency, or congressional committee, with the manda-
tory powers, the determination, the resources, and the time necessary
to obtain and analyze the underlying documents. But if such docu-
PAGENO="0195"
193
ments were unearthed, their existence would come as something of a
surprise.
rrhis analysis therefore assumes the absence of meetings or agree-
ments to fix prices, divide up markets, awl in other ways directly
eliminate competition. But, on the other hand, it does not assume that
in a rapidly growing industry such as international oil noncompetitive
behavior will result from oligopoly alone. There must in addition be
other factors at work. Most of this analysis will be concerned with
these øther factors.
From a broad historical point of view, the period beginning in the
late 1920's and extending somewhat beyond the end of World War II
could be thought of as the cartel era in international oil. Most of the
postwar era might properly be regarded as the period of oligopolistic
interdependence. And, in light of very recent developments, we could
now be entering into a third phase-an era of bilateral monopoly, with
the producing countries acting as sellers awl the companies as buyers,
possessing, however, the exclusive right to purchase.
Senator CUTJROII. This development is the very one that our previous
witness expressed grave concern about, is it not?
Mr. BLAIR. In my judgment, it will be a change more of form than
substance. I base that only upon the limited and fragmentary informa-
tion that has appeared in the trade press and elsewhere concerning
these new arrangements. But if the companies which in the past have
held the concessions are to be given the exclusive right to purchase,
*they will then be able to control the supply, which is the heart of the
control of price.
Senator CnURcIT. Yes; j~ist the way that they used to be able to do it,
Mr. BLAIR. And still do in many parts of the world.
Senator CITURCIT. Tinder their elaborate-
Mr. BLAIR. Concession agreements.
Senator CHURCIL Interlocking arrangemelTits?
Mr. BLAIR. Yes, sir, which I shall get to.
CONCENThAPION IN INTE1TiNATIONAL OIL
The fundamental requirement for market control by noncollusive
means is of course a concentrated industrial structure. For many years
it has been an accepted tenet of economic thinking that the behavior
of prices, profits, and output will differ from that expected under
classical-and neoclassical-theory where the industry is oligopolistic;
that is, a major share of its output is accounted for by a small number
of it~ leading, and usually large, firms. As can be seen below, this is
the structural form of international oil:
{The information referred to follows:].
CONCENTRATION RATIOS OF WORLD CRUDE OIL PRODUCTION, 19721
[In percentj
Mideast
OPEC
countries
United
States
Free world
supply
4 largest companies
7 largest companies
64.4
90.9
52.9
77. 2
30. 3
39. 1
48. 3
70. 0
1 Source: Subcommittee on Multinational Corporations, Hen
rings, pt. 4, p. 68.
PAGENO="0196"
104
Mr. BLAm. If economists had to select one figure as representing
the point at which oligopoly begins, there would probably be a con-
sensus that it is in the neighborhood Of control by the top four com-
panies of around half the output. In recent years this judgment has
been corroborated by a number of empirical studies finding that above
a 50-percent concentration ratio-that is, control by the four largest
companies of 50 percent or more of the industry's output-the behayior
of prices, profits and margins does in fact differ noticeably from that
at decidedly. lower levels of concentration. By this standard, the inter-
national oil industry would clearly qualify as oligopolistic. Inciden-
tally, the lower concentration ratios shown for the United ~t~tes
understate the effective control of the' market si,nce the private meatis
of control have beeti supplemented by governmental intervention-
"market demand" prorationing and the' imj~ort quota-which, as de-
mand has now come to exceed capacity, have become unnecessary.
Senator CASE. What does the market demand in quotations `mean?
Mr. BLAIR. Sir, a distinction is drawn between that restriction\ of
output whicli is required ir~ order to preserve the. gas pressures and
thus conserve the supply `of oil which nature has deposited in the
grpund and the further limitation pu production, ,referred to as
"market demand" prorationing, which is imposed simply to maintain
or enhance the price.
Senator CASE. Thank you.
Mr. BLAIR. In the hearings of tl~e Subcqmmittee on &ntitrust and
Monopoly, the commissioner of conservation of the State of Louisiana
testified, if my memory iscorrect, around 1969 that the amount of pro-
duction in Louisiana that was shut in simply to maintain the price,
after all requirements of physical ~ had been met, was
approximately 1 million barrels a day. 1~his would give you some idea
of the extent to which production has been r~straiuied..,
Senator CASE. That compared to' wha~t figure of actual production
allowed in Louisiana?
Mr. BLAIR. Something in the neighbo~hqoc1, for the State of Louisi-
an~ of approximately one-third of what they could produce without
doin'g harm to the resex~v~irs was withheld, for the' market dern~nd
purposes.1 ` ` ` , .
To return to the international scene, five of the seven international
majors are American firms, and `two are British-Dutch, The U.S. firms
are in turn made up of two segm~nts: Subsidiaries of the old Standard
Oil Trust (Exxon, Mobil, and Sooai), and "non-Standard" niajors,
Texaco and Gulf, which obtained eoncessions in areas from which the
original Middle East operators had been e~ectively excluded by the
I~ed Line agreement.
The 1972 market shares of the seven companies are shown below in
accordance with these company groupings.
See 9ist Cong., 1st sess., Senate Subcommittee on Antitrust and Monopoly, hearings ~n
Government Intervention in the Market Mechanism: The Petroleum Industry, pt. 2, 1969,
p. i4.
PAGENO="0197"
195
[The informatioil referred to follows :j
CON~CENTFIATION OF FREE WORLD CRUDE OIL PRODUCTION, 1972 BY COMPANY GROUPS I
tIn per~entj
Mideast
OPEC
countries Un
ited States
F~ee world
su~pIy
Exxon, Mobil, and SoCaI__..
Gulf and Texaco
BP and Shell
Total
39.8
18. 7
32. 4
30.5
19. 0
27.7
18.7
13. 9
6. 5
28.3
17. 7
24, 0
90.9
77.2
39.1
70.6
1 Source: Derived from Subcommittee on Multinational Corporations, He
arings~ pt. 4, p. 68.
Mr. BLAIR. The 3 "Standard" companies alone produced nearly
two-fifths of the Mideast output and almost a third of the OPEC
total; that is the total produced by the 11 countries that are members
of the Organization of Petroleum Exporting Countries. The five
American companies, it can be seen, accounted for nearly three-fifths
of production in the Mideast and nearly half in all OPEC countries.
The British-Dutch companies accounted for just under a third of the
Mideast output and more than a quarter of the OPEC total.2 The
coutrol of the market indicated by these impressive market shares has
been further strengthened by joint ownership of oil-producing com-
panies and other interlocking relationships.
COMMON ASSUMPTIONS' OI~ GflOWTIT RATE
In addition to a concentrated structure, the achievement of noncom-
petitive behavior in a rapidly growing industry also requires the shar-
ing of a common point of view concerning the rate at wh'ich the indus-
try should expand. Differing assumptioni~ on the desired growth rate
would lead to differing expansion plans and thus to the danger of an
oversupply, defined by industry spokesmen as `the coming on to: the
market of a supply in excess of demand at the existing price. Referring
to conditions during the 1960's, Subcommittee Counsel Henry asked
Howard W. Page, senior vice president of Exxon, "Was your ma~jor
problem having more oil than you could market at acceptable prices?"
Page responded by saying, "That was one `of'the problems we had, yes~
along with the rest ,of the industry." Page's response to a similar
question by Senator Percy was to the same effect. The Senator asked,
"If you had been using the production capacity up to the fullest exteht,
obviously it would have driven prices down considerably," to which
Page replied, ~`h * ~ I mean if we had used any one to capacity, then
we would have to shut the other buck.. There was no place to go with
2 Eleven countries are members of the Or~anizatlon of ~etro1eum Exporting Countries:
six in the Mideast (Saudi Arabia, Iran, 1~uwait, traq, Abti flbabi, and Qatar); three in
Africa (Libya, Nigeria, and Algeria); one in South America (Venezuela), and one in the
Far East (Indonesia). In ~ ptoduction lxx these countries totaled 26,782,00& barrels a
day, which represented 86.6 percent of the world p~odu~tion of 30,860,000 barrels a day,
outside the United States, Canada, the Soviet Uniop, China, and the East European Com-
munist countries. The remaining 4,12;8,00e barrels a day were widely dispersed among
some 2 dozen other countries in relatively small ,qi~antities, a substantial proportion of
which was produced by subsidiaries or affiliates of the seven international majors.
Hearings before the Senate Subcommittee on Multinational Corporations, Mar. "28, 1974,
pt. 7.
PAGENO="0198"
196
it. You can't dump it in the sea. There is a law against it." ~ In other
words, any expansion from one source that woñld cause overall supply
to grow at an unduly rapid rate must be compensated for by a coi're~
spoi~ding decrease somewhere else. George T. Piercy, also a senior vice
president of Exxon, stated, "Well, I think that if some capacity was
brought on anywhere else in the world, as Mr. Page has said, it is like
a balloon and you brought it on one place-you push it in one place,
something has to give somewhere else because the fact that oil was
brought in here or there does not in any way mean there is any more
consurnption.~
One way of dealing with the problem is not to develop new sources
in the first place. Page recounted the dismay occasioned by the dis-
covery of a potential new source of supply, Oman:
Just at this time, the producing department brought in their geo~ogist who
bad just come back from Oman, and be stated, "1 am sure there i~ a 10 billion
oil field there ;" and I said, "Well, then, I am absolutely sure we don't want to
go into it, and that settles it." I might put ~some money in it if I was sure we
weren't going to get some oil, but not if we are going `to get oil because we are
liable to lose the Aranico concession, `our share of the Aramco concession, any~
way, if we were going to back up any further on it ~y going into new areas.°
Senator CASE. May I interrupt to ask, in substance you agree with
the proposition that there is only so much demand and that if they
had produced more than that figure, whatever it was, they would have
had to dump it into the sea?
In other words, they had to close down somewhere because the world
could only absorb a certain amount of petroleum? Is that true?
Mr. BLAIR. I read the transcript, I have seen-~---
Senator CASE. I would like your opinion, not what somebody else
said.
Mr. BLAIR. You have raised that question before.
Senator CASE. Did I?
Mr. BLAIR. According to the transcript.
Senator CASE. I thought I did. It has been in my mind.
Mr. BLAIR. Obviously it has.
Senator CASE. It is nice to see you again.
Mr. BLAIR. Thank you, sir.
I happen to think that overproduction is necessary and desirable.
In fact, it is essential if we are going to have a weeding out of those
producers who are not sufficiently efficient, to cope with the lower price
resulting from an expansion of supply in excess of the existing
demand.
I own a farm in southern Maryland. I sell two crops that have
traditionally not been supported by Government price supports.
Senator CASE. What is that?
Mr. BLAIR. Maryland tobacco, and cattle.
Senator CASE. Government price supports-
Mr. BLAIR. Not on tobacco, We Marylanders reject it.
Senator CASE. You mean you do not come in with-
Mr. BLAIR. Not in Maryland. And at times there has been over-
production. That overproduction has eliminated farmers whose pro-
duction was too small, as well as those whose production was too large
4 11)1(1.
~ Ibid.
~ Ibid.
PAGENO="0199"
11~7
for efficient operations. To a very large extent the great efficiency of
American agriculture is due to the fact that the normal operation of
competitive forces, which at times can be quite cruel, eliminates those
producers whose costs are above price when the market is depressed.
Senator CASE. I am very glad to get your views again, to have them
restated. I realize that the old believers in the free economy of our
youth are still adhering to the ancient ways. But I asked you about
oil. I was not talking about agriculture.
Is there something different about oil?
The point is made to us often that after a certain slack is met or
eliminated, there is not anything to do with oil except dump it or shut
off a well. If the ships are not there you cannot keep on producing, and
the ships will not be there, if there is no place to put it when it comes
to its destination.
Mr. BLAIR. In a competitive market-and the oil industry at times
it has been quite competitive in different parts of the world when too
much was produced, the inefficient producers were retired from the
market, sometimes permanently. There is no reason why-
Senator CIrnRdn. In this situation, does this not mean that the most
expensive oil just shuts in?
Mr. BLAIR. Absolutely.
Senator CHURCH. So if you get an oligopolistic industry, that
through its agreements is able to control supply, then they are able to
maintain a price that sustains all elements of the industry, inefficient
parts as well as the more efficient parts. Is that not the way it happens?
Mr. BLAIR. Yes, sir, Moreover in the oil industry the discipline of the
market is further weakened by the fact that, being fully integrated,
the major companies can more or less apportion their profit and their
cost to that stage which happens to be of greatest benefit to them. In
the past that has been the production level because of the tax features.
Tt is at the stage of production that a flim derives the greatest benefit
from percentage depletion, expensing intangible drilling costs and
foreign tax credits. The whole structure of the oil industry is quite
different from what would have evolved without the special taz bene-
fits granted to the industry by the TJ.S. Congress.
Senator CASE. Suppose we had that oil drop jo its lowest possible
level, I do not know how far-I am trying to find out whether the old
completely free system would have worked in this thing and worked
as well as what we had.
If, prices had dropped, would that have been ~ good thing? Would
it have been a good thing to have even less coal produced, less research
into other resourceS, if possible energy resources? God knows we had
little enough and would we not have become more completely depend-
ent upon these Arab countries, for instance, if We had done that?
I wonder if that would have been a good idea. We are dependent
enough as it is, but not quite as completely as if petroleum had gone
down to half the price.
Mr. BLAIR. Senator, I do not think that what has takOn place in the
oil industry cotild under any circumstances have been much worse.
in fact, we have had the worst of ~l1 possible worlds.
Senator CASE. I wonder if that is a faIr thing. Our prices for Oil
on the whole have been les~ than anywhere else in the world over the
last ~5 year~.
Mr. BLAIR. No, sir.
PAGENO="0200"
198
Senator CASE. Where else have they been cheaper?
Mr. B~&rn. Europe and Japan.
Senator CASE. You meanS because you çtre not taking rnto account
the taxes?
Mr. BLAIR. No, I am taking into account the taxes. I am referring
to the effect of the import quota. We had at the behest of the oil
industry an import quota in the t~nited States which was put into
effect on a mandatory basis in 1959 and remained in effect until 197Q.
Under that import quota, American buyers, including American chem-
ical companies, had to pay at least $1.25 more for a barrel of oil than
their competitors in Europe or Japan or any place else in the world,
Senator CASE. We have bigger cars. We would have had even bigger
cars than we have had. We have much more complete reliance upon
petroleuni than anywhere else in the world because of the low price.
II just wonder whether, much as I yearn for the same kind of thing
you yearn for, the old days, I just wonder whether they are possible,
that is all, and whether they would produce the things we want.
Are we not really turning now to more o± a world in which each
country is going to try and within itself decide what its size should
he and the allocation of its resources? Are we not forced to do that in
the face of the nationalism in other countries?
Mr. BLAIR. Senator Case, there are always objections that can be
made to the operation of the competitive market. The competitive
market subjects enterprises to a very hard form ~f discipline. It has,
however, certain important advantages that no other form of public
policy possesses; not oniy does it bring about a price which is economi-
cally desirable, that is, it calls forth the supply needed to meet the
existing level of demand, but-and this is often overlooked-it exerts
a1 constant down~vard pressure on costs. Under public utility regula-
tion the rates of a piiblie utility may be set in such a way as to yield
only a fair or reasonable markup above cost, but there is no way of
seeing to it that the utility constantly reduces cos~ and keeps abreast
of new technological developments. Only competition provides that
incredibly valuable discipline.
A further function performed by competition-no other form of
public policy provides, a reward to the enterprise that introduces
an innovation, a new technology, or product that either exploits a
demand that had not beep tapped before or results in a reduction in
cost. `One of the great problems in the Soviet economy has been the
lack of such incentives operating within state enterprises. Their tech-
nological backwardness, which they are now acknowledging, is n~t
the result of an inadequate supply of trained engineers and techni-
cians~ In fact, they turn out a greater number of engineers than the
Western Wprld, than the United States each year. The problem is
that their new idea~ their new concepts, that would contribute to indus-
trial progress are not received. There is no place for them. Rather than
trying something new, which might interfere with production,. the
plant managers seek to achieve their production norms by relying
up9n the existing and older technologies. That is the fundamental
reason why the economies of~ the Communist countries are lagging
increasingly behind the Western World.
Senator CAsE. Well, now, take agriculture, not Maryland tobacco or
some of these fancy little jobs, but the broad basic crops. We have
never had a free agriculture in my adult life in this-country, or yours,
PAGENO="0201"
199
and yetwe have achieved enormous prodictivity, and I wonder if this
is something that really could be applied across the board any more?
You are generally regarded as a populist. It i~ a good thing; and
a Brandeis man, and that is a good thing. But I ~wonder if there is i~ot
an inconsistency, I know you-~-I am not saying~ even suggesting that
you suggest that labor unions ought to be abolished because the labor
market has interfered with their operation. You certainly do not sug-
gest that ëontrols on banking ought to be abolished because the banks
otherwise could operate more effectively in dealing with money and
whit not if they were not regulated.
What you are really saying, within certain limits, free enterprise is
most desirable, and I agree with you.
Is it not a question of where we place the limits? You want low-
interest rates. To that end you are not going to permit the rich banker
to charge what the traffic will bear. Is that not tru~?
Mr. BLAIR. I would like to think of myself as an economist.
Senator CASE. Sure.
Mr. BLAIR. Economists have to relate their own personal philosophies
to the realities of the real world, otherwise they are more or less
whistling in the wind.
Senator CASE. What a man believes is what he is. That ancient Greek
doctrine is really true.
Mr. BLAIR. Unhappily, what I believe is not what the world is.
Senator CHURCH. That may get us back to oil. [Laughter.]
Mr. BLAIR. I enjoyed the colloquy very much.
Senator CHURCH. I listened with fascination and it seemed to me
that the point toward which you were homing in, perhaps, had to do
with who does the regulating. If there is one thing we have not in
international oil today, it is a free market. The whole structure has
been built on an entirely different principle, and today it is not only
the oligopoly that exists with the major oil companies controlling so
large a part of the tothJ production, but it is overlaid by the fact that
the Arab governments themselves have imposed prices for oil that have
nothing to do with the cost of production, nothing to do with the
market. They are political prices that have been imposed for entirely
different reasons.
We do not have the element of a free market h~re at all with which
to deal.
Now, im that ~ituatjon, what are we.to do? Are we to leave It to the
companies to ~ontrol or attempt to control production and price by
making new deals with the Arab governments, changing the form but
not the substance of the old arrangemonts~ or are we to nndertake
through Government action steps that might have some chance to
change this arrangement?
I think the real question we are faced with, is not the ideal of a free
market operating without obstruction of governments or without ob-
struction of oligopoly, but an existing situation that is quite different
How do we cope with it?
Mr. BLAIR. Mr. Chairman, I do have some suggestions as to pubfic~
policy which I get to toward the end of my statement. I would be
very unhappy to have to paraphrase what I have carefully writtem
out.
Senator CHURCH. All right.
PAGENO="0202"
200
Mr. BLAIR. And introduce it before presenting the analysis on which
it is based.
Senator CirnRcIT. Go ahead with your presentation.
Mr. BLAIR. Thank you, sir.
IL am introducing that ca~reat only with respect to recommendations
on public policy. I would be glad to talk about anything else when..
ever you care to interrupt.
Senator CHURCH. Yes.
A STABLE GROWTH IN SUPPLY
Mr. BLAIR. The achievement of a consensus among rival oligopolists
on a desired growth rate would, of course, be greatly facilitated if the
rate were assumed to be relatively stable over an extended period of
time. In the Mideast, Africa, and similar environs, a leadtime of
several years is usually required between a decision to make a sub-
stantial expansion in productive capacity and the installation of the
production, storage, and transportation facilities necessary to bring it
onstream. And the leadtime becomes even longer if new refining
capacity is required. T5nder such circumstances, widely varying as~
sumptions from 1 year to the next as to the rate of increase in supply
would make it difficult, if not impossible, for each oligopolist to plan
for precisely that increase in his output which would maintain his
share of the market but not produce an oversupply.
Whether simply a means of implementing mutual interdependence
or the product of collusive agreement, worked petroleum supply has
exhibited a remarkably stable annual growth rate, as reflected in the
output of the leading producing countries-outside North America
and the Communist bloc. This is revealed in chart 1 which shows for
1950-72 the yearly average increase in aggregate output of the 11
members of OPEC-Saudi Arabia, Iran, Kuwait, Iraq, Abu Dhabi,
Qatar, Venezuela, Libya, Nigeria, Algeria, and Indonesia.7
The compound growth rate and a measure of the "closeness of fit"
have been computed by-
(a) plotting the actual increase in aggregate output;
(b) fitting a regression line to these observations;
(o) determining therefrom the compound rate of increase in
output-the "average growth rate"-and
(d) measuring the deviations between the I~egression line and
the actual observations, thereby indicating by a coefficient of
determination (R2) the extent to which the actual increases are
"explained" by the estimated growth rate.
This chart, like the others used in this analysis, has been drafted on
semilogarithrnic paper by means of which a given percentage change
occupies the same vertical distance anywhere on the chart.
[Chart 1 referred to follows:]
~ In 1972 all but 1 produced at least 500,000 barrels; t~heexcéption; Abu Dhabi, pro-
duced 474,000 barrels and exhibited an astonishing annual growth rate of 36 percent.
PAGENO="0203"
201
CHART 1
CRUDE OIL PRODUCTION
ACTUAL vs. ESTIMATED CR0 mR RATE, 1950-12
M~s./BbtJD.
Mr. BLAIR. For the 11 countries as a group, the average annual per-
centage increase in output during 1950-62-the "estimated" growth
rate-works out to be 9.55 percent. The measure of the closeness of
fit of the regression line to the actual observations-the coefficient of
determination or R square-is an astonishing 99.9 percent. In other
words, an assumption that oil production would increase at an average
SUF./BbI./Yr.
10
5.
4
(9.55%)
13.70
10.96
8.32
5.48
2.74
~1
52 54 56 58 60 62 64 66 68 70 72
(SOURCE: DERIVED FROM ORGANIZATION OF
PETROLEUM EXPORTING COUNTRIES, STATISTICAL BULLETINS.)
PAGENO="0204"
202
annual rate of 9.55 percent explains all but one-tenth of 1 percent of
the actual change.
Mrs. LEwIs. I am a little bit puzzled. What is the estimate? Is the
estimate that you are comparing using the regression analysis 9.55
times or estimates made by the oil companies themselves?
Mr. BLAIR. No, Mrs. Lewis; the term "estimate" is used in ref ~rring
to the growth rate, which has been estimated by fitting a linear trend
by least squares to the logarithms of the data. It is a standard sta-
tistical technique.
Mrs. LEwIs. You are testing our own 9.55 force growth rate hypoth-
esis, not the estimates made by the oil company?
Mr. BLAIR. The 9.55 is simply the result of the application of this
orthodox statistical technique. As a matter of fact, for practic~illy
the same period, Exxon, as I point out, arrived at exactly the same
growth rate for the same area.
Senator CHURCh. What you tell us in the chart, which is an astonish-
ing straight line-
Mr. BLAIR. Yes, sir.
Senator CHURCH [continuing]. Is that the actual growth rate came
within 99.9 percent of the estimated growth rate, right?
Mr. BLAIR. I would put it somewhat differently.
Senator CHURCII. Which you would have expected?
Mr. BLAIR. The assumption that the supply would increase at an
annual rate of 9.55 percent-the rate yielded, by this statistical tech-
nique-would explain all but one-tenth of 1~ percent of the actual
change.
Senator CHURCH. Of the result that you obtained by observing the
actual increase that did take place?
Mr. BLAIR. Yes.
Senator CHURCH. Does not this chart show then that astonishing
amount of control exercised by the industry over growth?
Mr. BLAIR. It is particularly astonishing in view of the widely
diverse movements of its separate components. If each of the produc-
ing' countries had been increasing its output at about the same rate,
the steady rise in overall supply could be explained as merely the sum
total of the behavior of the individual countries. But this explanation
obviously falls if the different sources of supply have been expanding
at widely varying rates and, even more strikingly, if some have been
characterized by actual declines. That such has been the pattern of
the international oil industry is apparent from chart 2 which shows
for 1950-73 the yearly change in total production for each of the nine
leading producing countries. The international supply picture is re-
vealed as a composite of long-sustained steady increases-Saudi Arabia
and Iran-of much slower rates of increase--Venezuela, Kuwait, and
Iraq-of precipitous rises-Libya until 1970, Nigeria, Abu Dhabi,
Indonesia-and of occasional pronounced declines-Iran in 1951-54;
Iraq in 1957, 1967, and 1972; Nigeria in 1968; and Venezuela and
Libya since 1970. Somehow the major oil companies have been able
to orchestrate these and other aberrations into a smooth and uninter-
rupted upward trend in overall supply.
PAGENO="0205"
[Chart 2 referred to follows:]
203
VENEZUELA
SAUDI ARABIA
IRAN
NII~ERIA
1NbON~SIA
KUWAIT
AIIU DHANI
LIBYA
IRAQ
1950 52 54 56 58 60 62
(SOURCE: DER1VED FROM ORGANIZATION OF
PETROLEUM EXPORTING COUNTRiES STATISTICAL EULLETINS.)
Senator CHURCH. In other words, you take the Sources?
Mr. BLAIR. Yes, sir.
Senator Ciirmcii. In chart 2?
Mr. BLAIR. Yes, sir.
Senator Cirmwn. The various sources of oil worldwide are very
uneven, some growing rapidly, some less rapidly, and some actually
falling off from time to time. You would expect if the oil industry
did not exercise a tremendous control over all sources, over supply,
and had not positioned itself to orchestrate things to its own interest-
CHARI2
PRODUCTION OF CRUDE OIL
9 LEADING PRODUCING COUNTRIEs 1950-73
PAGENO="0206"
204
that is, to control things-that these widely deviating sources of
supply would result in a widely deviating rate of industry, overall
industry growth. Yet, your overall industry growth is practically a
straight line.
Mr. BLAIR. Absolutely.
Senator Cirnacii. Thus indicating a remarkable degree of control
and coordination worldwide?
Mr. BLAIR. Moreover, this control can be continued under the bi-
lateral monopoly arrangement that seems to be in the works for the
future if the concession-owing companies are given the exclusive right
to purchase oil from the selling countries.
Senator Crnrnoii. Yes. `The buy-back agreements will preserve in
substance what the oil companies have previonsly enjoyed?
Mr. BLAIR. If you will look at chart 2, you will see that between 1952
and 1954, Iraq production went simply off the chart. That~ of course,
was a period immediately following the nationalization of the oil
industry under Premier Mossadegh. Yet if you look back to chart 1
instead of the observations falling below and to the right of the trend
line, which one would expect on the basis of the elimination of what
was then one of the world's largest sources of supply, there is virtually
no deviation whatever in the growth of actual production/as compared
to the increase that would have been anticipated on the basis of the
growth rate.
Similarly, if one looks at chart 2, and focuses upon the Libyan pro-
duction, one can see that during the middle and latter sixties, Libyan
production was rising almost vertically. Had there not been compen-
sating reductions in supply made elsewhere, actually they were made
in the Mideast, the observation would have fallen above and to the
left of the regression line. Yet the adjustments were made with such
care and precision that the observations representing actual produc-
tion continued to fall on the regression line.
Senator CASE. May I ask a question for a moment?
Would these charts have looked any different if you had a coin-
pletely free market?
Mr. BLAIR. I would hope so.
Senator CASE. Now, I wonder. The rea son that some countries went
down, like Iran, well, they took over, that was shut off, that was a
political job, I take it?
I mean Iraq.
Mr. Br~&In. It was Iran that nationalized the oil industry under
Premier Mossadegh, after which the companies boycotted the oil from
Iran on the very logical grounds that since no compensation had been
paid, such oil remained their property.
Senator CASE. I mean really would not the first chart, is not all that
shows is that the oil that is produced is consumed? Is that not all that
shows?
And would you not have deviations always adding up to that fact in
the oil industry the same as you would in agriculture, except that you
can store stuff a little while, a couple of years, maybe, as far as
products go.
Are you really showing anything more than demand has equaled
supply, because you do not produce unless there is someplace to put it,
which means demand?
PAGENO="0207"
205
Mr. BLAIR. Senator Case, I would venture two answers to that
question. First, as I will indicate shortly, the oil companies have sub-
stantially underestimated the level of demand, which is one of the
real causes of our present problems. One cannot take actual production
as being indicative of what demand is and certainly not what demand
would have been under alternative prices.
Second, I would anticipate that in any competitive industry there
would be substar~tial deviations around the~trend line both below and
above it as different countries and different companies produce less
than the demand called for and, alternatively, as they produce more.
When they produce more, those companies and countries whose costs
were above the lower price prevailing as a consequence of the over-
production, would disappear. The discipline of the market would be
operating, leaving only those firms which were sufficiently efficient to
meet that lower price.
Now, Mr. Chairman, on this question of efficiency--
Senator CHURCH. So, as I understand the answer to Senator Case's
question, which is a very important one, you are saying that if there
had been a free market and real competition operating in oil-these,
and a lot of companies operating without interlocking agreements
that enabled them to orchestrate the production from other sources
when they needed to make up for shutoffs and that kind of thing-
chart 1 would to a far greater extent reflect the variations that are
shown in chart 2?
Mr. BLAIR. I believe it would be absolutely impossible for chart 1 to
reflect an absence of deviations to the extent indicated by that chart
under the condition of anything approaching a free market. Mr. Chair-
man, this suggests an ability to orchestrate different sources of supply
which, as I said before, is astonishing.
Senator CASE. No matter how it is made up, would it not always end
up the same way? That is all I am talking about.
Mr. BLAIR. Going back again to the two-part answer to your ques-
tion, insofar as meeting total demand is concerned, the total supply
that would be produced under competition would be somewhat greater
because, as oil company officials have before this committee, this very
subcommittee acknowledged, they have underestimated the demand.
Therefore, if their production under competitive conditions reflected
actual demand, their production would have been greater.
Senator CASE. Yes; but that should not make any difference in
chart 1, would it?
Mr. BLAIR. It would mean the growth in supply would have been
more rapid than the 9.55 percent shown by the growth rate.
Senator CASE. The growth in supply?
Mr. BLAIR. Yes, sir; if the increase in actual supply is as close as
is shown here, to the estimated growth rate, and the growth rate in
turn has resulted in an inadequate supply with respect to demand, that
is, demand has been in excess of supply, then it logically follows, as
day follows night, that the actual production would have been con-
siderably, or would have been greater under competition than is shown
on chart 1.
Senator CASE. But your line on chart 1 would still be the same, I
think.
Mr. BLAIR. The line, no, the line I think would go-
45-426-75-14
PAGENO="0208"
206
Senator CASE. What would it look like?
Mr. BLAIR. The line would be more ~harply inclined up to the left.
Senator CASE. It cannot go much ~harpe~.
.1 am not questioning that there have been effOrts at cor~trol or
whether control has existed. All I am saying ~is that particular tl4ng
I do not think proves much more than the oil that is produced is
consumed.
Mr. MEISSNEE. Is it not true that the line would have to be straight?
YOu ~re fitting at least squares to the pattern of observations. It is not
the slope of the line but the fit that interests us. There would be a sig-
nificant deviation of the dots or of the actual observations off that line,
therefore dropping your R-sq~uare fit?
Mr. BLAIR. Absolutely. The B square, as you say, would be lower
because the deviations would be greater. Also, the slope of the line
would b~ more inclined.
Senator Cnuiwn. Splendid. Let us proceed.
THE 1JNDERESTIMAPI0N OF DEMAND
Mr. BLAIR.' Not only have the international majors been able to secure
a remarkable stability in the growth rate of supply; they have also
underestimated demand, as is usually the case where an industry se-
cures the power to adjust supply to its own demand forecasts. The
penalt3r of producing too much, that is, a lower price resulting in de-
creased revenues on all sales, is far greater than the loss from producing
too little; that is, a failure to Secure revenues on just these sales that
are foregone because of supply. Moreover, forecasts are generally eon-
structed on the basis of past relationships between a product's use and
measures reflecting demand (for example, GNP, per capiti~ income,
population trends, et cetera). What this technique does not, and cani~ot,
adequately allow for is the discovery of new uses for a product which,
in the case of petroleum, have followed one upon the other in a bewil-
dering procession, both as fuel (for example for powerplants) and as
materials (for example plastics, synthetic fibers, fiberglass, and most
recently graphite fibers). Nor, incidentally, can this technique accu-
rately allow for the effect On demand of a price cha~nge *hen its extent,
as in 1973, is well beyond the range of recorded experiences.
`The tendency of the international oil companies to underestimate
demand is illustrated in table 1, which shows for selected years, the
modifications made over time by Aramco and Exxon in their forecasts.
Mrs. LRwTs. A. weaker analysis of some material provided by Stand-
ard Oil of California, where it appeared that they nearly always pin-
pointed worldwide demand to within less than one~tenth of 1 percent
of what it subsequently turned out to be, does that conflict with what
you found in the Exxon data?
Mr. BLAIR. The Aramco and Exxon data I think would conflict with
the finding as you summarize it. Of course, as one moves closer to the
year for which the forecast is made, the forecasts have a general
PAGENO="0209"
207
tendency of becoming somewhat thOre accurate.
Mrs. LRwis. ~ ~was using 3 years in advance.
Mr. BLAIR. Well-
Mrs. LEwIs. If you wish to examine that data, we want to make it
available. I think it should be put into the record.
Mr. BLUM, Mr. Chairman, in addition, if we put that in the record,
there is some material we received from the Gulf Oil Corp. which
absolutely substantiates what Dr. Blair is saying. It shows industry
predictions over a period of 10 years being substantially understated,
and the Gulf analysis is an effort to explain why.
I ask that that be made part of the record, too.
[The information referred to follows:]
GULF OIL CORPORATION, WORLD PETROLEUM SUPPLY AND DEMAND, MARCH 1970
PETROLEUM DEMAND FORECASTS-HISTORICAL COMPARISONS
As will be observed o~a the graph immediate'y following, our forecasts of
petroleum demthd, historically, have been conservative. For example, in 1960,
forecast free world demand for 1970 was 28.5 million B/fl; we now expect that
during 1970, the free world will consume over 39 million B/fl-or 40% more
than was estimated ten years ago. Even as recently as 1968, demand estimates for
1970 fell short of what now is needed by some 3 million B/fl-or 8%.
And down the line-to 1980, and beyond-successive demand forecasts show
even more pronounced divergencies from their predecessors.
One's first question in observing this trend is: "Well, why not grind in a
`counter-conservatism' factor based on history ?" Indeed, if such were done-as Is
illustrated by the dotted line connecting historical demand points~ and projecting
at the same incremental rate of change-we see that before too long, the demai~d
for petroleum reaches an unrealistically high level, This is somewhat analogous
to those population studies which augur that unless something soon is done, every
square foot of the earth's surface will harbor a living human being by year X. We
know this won't happen; however, we don't know where it will stop either.
It is evident, then, that an inflection-or, a leveling-of the petroleum demand
curve must occur witl4n the ~iext few years. Cognizance of one important factor
in the recent energy history of the free world suggests that this change in shape
of the demand curve will occur fairly soon. This is the "replacement factor." In
past years, one ~f the reasons that demand for oil grew far in excess of expecta-
tions was that petroleum derived energy in Western Europe and Japan replaced
much energy previously generated by coal. Accordingly, the demand for oil grew
at a greater rate than did that for total energy. We now feel that-throughout
the next fifteen years-the substitution of petroleum for coal will be much less
significant than it was in prior years. Our current forecast assumes that growth
in petroleum demand will be more closely in line With growth in total energy
demand.
In spite of the above assumption that the "replacement factor" will not be as
important in future years, it is possible that even these 1970 demand forecasts
are conservative; history certainly justifies this suspicion. `tinfortunately, we
cannot determine in what areas of product supply or geography any conservatism
lies. If, once again, our estimates of future free world oil demand prove low,
then a strain on productive capacity may* be appioached before 1980. As it is,
coordination of the 1970 demand forecast to existing and speculative oil supplies
suggests that demand will tax supply by the early 1980's.
PAGENO="0210"
208
MILLIONS BID
A HISTORY OF
FREE WORLD PETROLEUM DEMAND FORECASTS
Mr. MmssNEn. Would there not be a point here also in terms of how
international oil supply figures are developed. Gç~nerally, don't you
have a tabling process? In the Iranian consortium you have a group of
companies that table their estimates of desired output, that is the com-
panies have instructed their delegations to table certain supply
requests out of the consortium. Each company makes these estimates
based on their total worldwide demand projections and supply pro-
jections. So anything that comes out of that consortium in terms of
decisionmaking is a group decision that will most likely average a
large group of projections rather than run on one company's
projection.
There also seems to be a tendency, as shown in our study of the
APQ system, to restrict supply rather than to get oversupply out of a
given consortium. This too would also fit in with your hypothesis.
Mr. Bi~iu. Does your observation require comment? I believe I
would agree with the import of what you have said.
Senator CHURCH. That being the case, let us proceed, because we are
beginning to run out of time and we still have a considerable state-
ment to make here.
I think we should refrain from questions to give the professor the
opportunity to finish his statement first.
Mr. BLAIR. The forecasts by Aramco- -designated in the table by
"A"-relate to Saudi Arabia and are in terms of thousands of barrels
a day; those by Exxon-designated by "E"-relate to the entire Mid-
east and are in terms of annual growth rates.8
S The Aramco forecasts are as of the fall of the year; those for Exxon are projections
made each year covering a span of 4 or 8 years.
PAGENO="0211"
~0o
In 1971 Aramco estimated that its 1975 production would total only
8,290,000 barrels a day; a year later it had revised its 1975 forecast
upward to 9,300,000 barrels, and in 1973 the forecast was again raised
to 11,260,000 barrels per clay, an increase of 35.8 percent in only 3
years.
In 1969 Exxon estimated that by 1975 demand for Eastern Hemi-
sphere crude would be rising at an annual rate of 7.2 percent; 3 years
later its 1975 estimate was 10 percent. The last year before the com-
panies obviously began to adjust their Mideast forecasts downward to
make room for an expected continuation of the rapid increase in
Libyan production was 1966. In 1963 Aramco had estimated that i~s
1966 produotion would total 1,955,000 barrels per day; only 2 yeats
later the forecast was revised upward by a quarter to 2,445,000 barrels
per day. But the most egregious error in estimate is represented by
Exxon's forecast for 1966.
In 1960 it had estimated that by that year demand for Mideast ci~ude
would be rising at an annual rate of only 2.6 percent. The forecast was
steadily revised upward until by 1966 it had been raised to 7.3 percent,
nearly a threefold increase in 6 years.
[Table 1 referred to follows:]
TABLE 1.-MODIFICATIONS OF FORECASTS OF CRUDE OIL PRODUCTION ARAMCO (SAUDI ARABIA) AND EXXON
(MIDDLE EAST)
1975
1966
Aramco
Aramco
(thousand
barrels
Exxon
(thousand
barrels
Exxon
Date of forecast per day)
(percent)
per day)
(percent)
1973 11260
1972? 9,300 10.0
1971 8,290
1970
1969 17.2
1966 2,445 7.3
1964 2, 120 6. 1
1963 1,955 5.9
1962 (2)
1961 (2) 5.0
1960 - (a) 2.6
1 Eastern hemidphere crude demand.
2 Not available.
Sturces: Araruvco-"Historical Report 1963-73, "exhibit A, submission by company. Exton-Campiled from forecasts
of "Free Fdr~ign Supplies', spbmission b~ company.
Mr. BLAIR. Although qualified by a variety of explanations, oil
industry spokesmen have conceded that demand has been under-
estimated. flesponding to persistent questioning, Piercy of Exxon
acknowledged:
We did underestimate energy demands. That shortfall was reflected in oil.
That, coupled with a loss of ability to produce in two or three nations which we
have already mentioned has resulted in this all-out tight situation that we have
today.~°
° As was truO of otluet fore~attb teach' duvin~ the lactter 1960's, Exnotu's estimate for
Mideast crude was biased downward (4,2 percent) on the, basis of the assumption that
Libyasi outpi~ut would continue the rapid rate of Increase manifested duRIng most of the
1960's. By ~97O it bad b~connu~ ~vldept that this was an un~ealistlc assumption.
1O Hearings before the Senate Subcomrr4ttee on MuItlnat1~na1 Corporations, Mar. 28, 1974,
pt. 7.
PAGENO="0212"
210
oLIO0PoLIST~C INTERDEPENDENCE
Despite .a concentrated industry structure and a con$ensus on the
growth rate, noncompetitive behavior could still not be achieved unless
each oligopolist could depend on the others to avoid undertaking
expansions that would significautly increase their shares of the mar-
ket. What is involved here is an extension of a psychological consid-
eration inescapably inherent in the structure of oligopolistic
industries, In the classic formulation by :Edward H. Chaniberlain:
If each seeks his maximum profit rationally and intelligibly, he will realize
that when there are only two or a few sellers his own move has a considerable
effect upon his competitors, and that this makes it idle tq suppose that they will
accept without retaliation the losses he forces upon them. Since the result of a
cut by anyone iS inevitably to decrease his own profits, no one will, ttnd although
the sellers are independent, the equilibrimn result is the same as though there
were a monopolistic agreement between them.1'
In a competitive industry this psychological awareness is absent
because each seller recognizes tha1~ his share of the market is so small
that nothing he can do will affect his rivals. It is also absent in a
monopoly since, by definition, there are no competitors to be concerned
with. But in an oligopoly each of the leading producers ha~ a sufficient
share of the market to make him acutely conscious of the injurious
consequences on himself of reactions by his rivals to any competitive
move that he might initiate. Observing that the term "oligopoly" is
"altogether appropriate" to the oil industry, Paul I-I. Frankel notes
that in addition to militating against the occurrence of price compe-
tition, oligopoly has other consequences:
Where there are only a few competitors, it is much easier for them tO band
together in order to fix and maintain prices and, if appropriate, to agree on
market shares for each of them, than either course would be if a great number
of competitors were involved. Furthermore the chosen few can in certain cirCtim-
stances act in parallel even in the absence of explicit agreements to that effect.n
Imperfect competition theory was developed against the economic
setting of the Great Depression. At the time price resistance to
depressed economic conditions was widely regarded as a contributing
cause of underconsumption. Hence it is understandable that this new
contribution to theory was focused on short-term price behavior. Since
World War II the conduct of large companies in oil and Ethç~r indus-
tries raises the further question of whether the same type of psycho-
logical considerations would also apply to an e~pansion of capacity
that in time would make a price reduction inevitable. In other words~
would an oligopolist abstain frd~m expanding his capacity because of
his expectation that his expansion would be matched by his rivals,
thereby creating a futurd supply in exceSs of what the market could
absorb at the then existent price. Certainly, the aggressive expansion
by a rival would induce ah oligopolist to expand his capacitysimpiy to
maintain his share of the market, even though he fully reáoghizes th~
consequences of what he is doing ofl overall supply. Only if each ohi~op-
olist is confident that the expansion plans of his rivals will do no more
than roughly maintain their established market shares can he reason-
ably be expected to limit hi~ own expansion, How, short of c~o1lüsive
agreements, is such a state of confidence to be achieved?
~1 Edward H. Chemberlain, Tire Theory of Monopolistic CompetItion, 5th ed., Harvard
University Press, 1940, p. 48 ~emphas1s added].
1~ H. Frankel, Mrttei: Oil irnd Power Politics, Frederick A. Praeger, 1960, p. 82.
PAGENO="0213"
211
INFORMATION ON RIVALS' PLANS
In world oil a number of sources of information are available on
the basis of which each of the seven international majors should be
able to arrive at a fairly accurate judgment of his rivals' plans. One
is knowledge of the growth rates of the principal producing countries.
Obviously, the steadier the growth rate, the greater its reliability as
a means of predicting a `country's probable future production and
thus of the supplies going to its concession-owning companies. For
example, with i~iearly two-fifths of total OPEC production Iran and
Saudi Arabia have exhibited extremely stable growth rates. The
assumption that supply froni these sources would continue to expand
at their historical rates would not have been seriously in error.
CONTROL THROUGH JOINT VENTURE
As it has evolved in oil, the jointly owned operating company has
not only provided a means of implementing a jointly held concession
but, for a given country, puts the power of implementation into the
hands of fewer than half of the seven majors. This is apparent from
table 2 which shows for 1971 the cumulative percentages of output
and equity ownership of leading `OPEC countries accounted for by
companies among the international majors.13
[Table 2 referred to follows:]
~ Where t~e distribution o1~ a country's production Is c1o~e to, but slightly less than,
the distribution of equity ownership in an operating company enjoying a monopoly or near
monopoly, the difference is usually accounted for by a relatively small amount of oil
produced by a government or national company or by a minor concession holder. In
Venezuela, there is no dominant jointly owned operating company. Where, as ip Abu Dhabl
and Indonesia, there is more than one jointly owned eperating company, the distribution
of equity ownership is shown only tor the largest.
PAGENO="0214"
TABLE 2.-7 OPEC COUNTRiES: CUMULATiVE PERCENTAGES OF PRODUCTION ANO EQUITY OWNERSHIP, 1971, BY COMPANIES AMONG THE 7 INTERNATIONAL MAJORS
[In percenti
Nuinberof
companies
Arabia
-________________
Production Ownership
Kuwait
Production Ownership
Iraq
Production
Ownership
Abu Dhabi
Production Ownership
Indonesia
~-
Production Ownership
Nigeria
Production Ownership 1
Venezuela
-
Production Ownership'
:~
,
I
2
28
57
30
60
54
92
50
100
24
48
24
48
41
56
24
48
40 50
80 100
36
72
47
76
3
85
90
72
72
63
60
90
82
t
94
100
70
72
95
85
1 No dominant joint venture. Source: Derived from Organization of Pctroleum Exporting Countries, statistical bulletin.
PAGENO="0215"
213
Of the five countries with a dominant joint venture, majority stock
control was attained in 1971 by only two companies in Saudi Arabia,
Kuwait, and Indonesia and by three in Iraq andAbu Phabi (the two
leading firms holding 48 percent). In terms of productibn more than
half of the output was accounted for by only two firms in all but one of
the countries, the exception being Iraq.'4
Because so much of each country's output is produced by SQ few of
the majors, none of the oligopolists need be particularly concerned
tht~t any of the countries will be the source of a price-weakening sur-
plus produced by independents. What is more important, none need be
greatly concerned that any of the countries will be the source of such
a surplus produced by any of the other majors, since its increased
profits resulting from greater production in a given country would
probably be more than offset by reduced profits in the other countries
in which i~t also operates. The extra dimension introduced by the joint
venture into imperfect competition theory is an awareness by each
oligopolist of the probable consequences on all of his areas of pro-
duction of a competitive move he might initiate in any one of them.
Senator CUTJRCH. Oligopolists have to get together then.
Mr. BLAIR. They may not have to get together in the usual legal
sense, Mr. Chairman, but correctly anticipate each other's reactions
to their actions and govern their actions ~ccording1y.
Senator CHURCH. Yes. And they have to, if that requires working
out some machinery, find legal ways to do it.
Mr. BLAIR. Or over time they could have learned enough about each
other's reaction to make unnecessary the use of machinery which
might have been neCessary in the past.
Mi~. SLUM. Mr~ Chairman, the subcommittee has received a number
of documents from the files of the Arabian-American Oil Co. which
deal with the provisional Middle East industry growth rate calculated
every year in accordance with the 1964 intercompany agreement.'~
This arrived subsequent to Dr~ Blair's statement. I wonder if we might
make this part of the record at this point and ask him to look `at that
and perhaps comment on it for the record.. I think it would be useful
to have that.
Mr. BLAIR. May I submit my comments?
Mr. BLUM. Certainly.
Senator CirnRC~-I. We will make this an appendix to the record,
together with the professor's comments on it.
Mr. BLAIR. Thank you, sir.
*See Part 8, Hearings before the Subcommittee on Multinational Corporations. 93rd
Congi-ess, 2nd SessIon,
n Not included in table 2 Is Iran whose output is determined by a complicated procedure.
The owners annually submit to the consortium their "nominations" representing the
quantity they would like to lift from Iran. After being listed In descending order, the total
to be produced (the ~PQ or "Averaged Programmed Quantity") is the "program figure of
the participants whose liftings fell at or above a cumulative total of 70 percent of equity
percentages." By limiting their "nominations" the 15.8. companies have reduced the total
to which the 70 percent figure 15 applied. Between 1957 and 1973 Exxon's nominations have
put it below the APQ In 14 of the 17 years: Socal's has put it below the APQ In 15:
and Texaco was below in all ~7. Up to the amount represented by their equity i~hare of
the APQ the participating companies tecelve oil at "tax-paid-cost" or about two-thirds
of the posted price. But for any excess they had to pay the full posted price, later modified
to a `halfway' price (the tax-paid-cost and the posted price), and still later to a
quarter-way' price. Neither of the two would be considered "economically attractive'
since as compared to a market price of about $L30. a "halfway" price for Iranian light
woi~ked out to around $1.49 and a "quatter-way" price to $1.30. (Senate Subcommittee on
Multinational Corporations, prepared statement b~ E. L. Shafer, Mar. 28, 1974, pi, `7.)
PAGENO="0216"
214
ADJUSTING ~OR ABERRATIONS
~Mr. BLAIR. `The ability of the oil companies to maintain a smooth
and steady rate of increase in overall supply despite extreme changes
in important supplying countries can be illustratOd, on the one hand,
by the loss of output resulting from Ira&s nationalization of Anglo-
Iranian's properties and, on the other, by the rapid emergence of
Libya as an important source of supply. As can be seen from chart 1,
neither the former, which affected supply during 1951-54, nor the
latter, which became important during 1965-70, had any discernible
effect on the growth rate of overall supply.
After several years of fruitless negotiations with the Anglo-Iranian
Oil Co., the Iranian Government on May 1, 1951, nationalized the
industry under the leadership of its Prime Mthister, Dr. Mossadegh.
The last straw was the discovery by the Iranians that the companies
had offered better terms to other Mideast producing countries, notably
Aramco's 50-50 profit-sharing agreement with Saudi Arabia. But
unhappiness with oil revenues was not the only cause of dissatisfaction.
According to Mikdashi, "a crucial factor, no~ yet amenable to eco-
nomic analysis~ was Persian dissatisfaction with the predominance of
a major British interest (viz AIOC) in the country. Dr. Mossadegh
himself acknowledged the importance of this social-political factor."
The oil companies promptly reacted by imposing a collective boy-
cott on Iranian oil: Prospective buyers were informed that legal
action would be taken against them on th~ grounds that without a
compensation agreement the oil was still the property of Anglo-
Iranian. "The embargo * * * -was verjr effecti~ve due to the cooperation
of the-eight major oil companies * * ~. Th~s oinbargohad, as intended,
a p*nitive effect on Persia eeondmy." i5
Oil exports dropped from over $400- million in 1950 to less than
$1.9 million in the ~-year period from J~uly 1951 to August 1953.
Little difficulty was experienced in making up the deficit with oil
from Arab countries:
Oil was available-even to MOd-in abundance in ne~g~hbOring ~ountries, and
world surplus production ca~city of crude oil was estimated- then at about
1.5 million barrels per day pressing from outlets.'~
As can be seen from chart 2, unusually sharp in~reasès between 1~51
and 1955 were registered by Kuwait and Iraq, while the production
of Saudi Arabia was alsO aocelerated~ above Ith long-term trend. If
between 1951 and 1955 Iranian production had held at its 1950 level,
the net loss, after deductb~g 290 million barrels actually produced,
would have totaled 910 million barrels. Some 800 million barrels would
have been made up by the expansion a~bove what would appear to
be the long-term growth rates of Kuwait, 300- n~illion; Iraq, 200
million; and Saudi Arabia, 300 million. Miscellaneous increases from
smalle~ -Middle East countries, for example, Q'ata~, would -have corn-
pletely closed the gap. In Mikdashi's words, Anglo-Iranian's total
production "was substantially replaced by the end of 1954 with oil
produced by subsidiAries from outside Persia)' -
~ Ibid
"ibid.
"ibid.
PAGENO="0217"
215
An aberration in the opposition direction was the rapid emergence
in the 1960's of Libya as a large-scale producer. Like the virtual dis-
appearance of Iranian output ih the previous decade, compensatory
changes in production were made to offset the sudden appearance of
this sizable increment. In this case the adjustment process was facili-
tated by the inveterate tendency of the companies to underestimate
demauci. Had it not been for this fact the Libyan expansion, in the
words of an internal Exxon document, would have caused the growth
in Middle East output to have been "inordinately low." Under those
circumstances the document observed,
No known method of allocating the available growth is likely to simultaneously
satisfy each of the four major established concessions; i.e., Iraq, Iran, Kuwait,
and Saudi Arabia,18
From the very outset `Exxon emphasized that `the anticipated rapid
growth in Libyan production would necessitate curtailments in the
J~4äddle East. The company's 1961 forecast noted:
t~uring the middle of th~ 1960-48 forecast period, the advent of large-scale
production in Libya and increases in Sahara and other supply sources may restrict
the growth of Middle East outlets.19
Libytni crude oil and NGL production is expected tO increase dramatically in
the next years, achieving a leirel of 3.~ million barrels per day by 1971. This level
i~ sufficient to make Libya the foremost, producing country in the Eastern
~Icmispbere in 1971, displacIng Iran to second place and Saudi Arabia to third.
In cOntrast with historical ownership patterns' in North Africa and the Middle
East, the bulk of the new increments of production will be produced by companies
considered "newcomers" to the international oil trade without established captive
outlets and without a significant stake in the Middle East. Since Libyan `oil is
favorably situated with respect to the major lihiropean markets and has desirable
low sulfur qualities, relatively little difllcultSr i~ capturing third party markets is
expected.~°
A similar pessimistic appraisal is to be found in an internal ~Iocu-
rnent of Standard Oil of California. I~ a memorandum o~ t~ecember
.G,, 1968, S. ~E. Watterson, assistant manager of its economics depart-
ment, warned:
* * * it will become exceedingly difficult, if not impossible, to ma1i~itain rela-
tively rapid growth i~i the high level producing countries of the Middle East and
still accommodate reasonable growth of crude production from new as well a~ old
fields in many other countries outside of the Middle East.~'
18 The dtimept quoted Is ExxOh's "Foyeca~t of Free World Supplies" for 1969. The
fojiowing analysis is based on these aninlal forecasts Cofitai5èd In Exxon's "Green Books."
Thhse "Forecasts" have been su~pl1ed to and made available' b~' the Senate Subcommittee
on i\fultthational Corporations.
`9 Et~on's 1960 Forecast had predicted a `reduction In the growth for Middle East
~roductlon from an actual rate of 10 nercent for 1960-68 to only 4.2 percent for 1968-75.
By 1968 the Increase In Libyan output bad become a cause for alarm, posing a real threat
to the majors' continued control of the market. Not Only had its growth rate been
vastly underesthnated, but the independents were proving to be far more Important than had
been anticipated.
20 The predicted peak `of Libyan output, 3.5 million barrels per day, turned out to be only
6 percent above the actual peak of 8.8 million reached In 1970.
21 Senate Subcommittee on Multipational Corporations: Memorandum from S. B. Watter-
son, assistant manager, economics department, to W. K. Morris manager of foreign opera-
tions staff, Standard Oil Co. of California, Dec. 6, 1968. In the memorandum, production
in 1969 was estimated on three bases: "A," that production would grow "at indicated
availability In most countries outside of the Middle East" (i.e., African countries) ; "B,"
that It would grow at a moderately lower rate In Africa with a corresponding Increase In
the Mideast; and "C," that It would rise at a "politically paiatabl&' rate In the Mideast,
with a corresponding decrease In Africa. Africa was estimated to have available capacity
which would permit a `3o'.9-percent rl~e over 1968, If the growth in the free world supply
were to remain relatively stable at 8 to 9 percent, such an increase would require a 2-percent
decrease In Mideast output. If the African potential were reduced by 10 nereent points,
Mideast output would rise but only to a rate of 4.9 percent. Obviously, "further adjust-
ments were necessary." `Under assumption "C," Middle East output was raised to an annual
growth rate of 6 to 7' percent, by further reducing estimated production in Africa. The
memo~-anr1uin notes that the activities under assumption "C" are those reported In the
Blue Book.
PAGENO="0218"
216
The heart of the problem ~ay in the fact that so much of the Libyan
output was in the hands of independents who had neither the incen-
tive to moderate their output nor the capability of offsetting it with
reductions elsewhere:
The downward revisions or adjustments of crude production in Libya and
Nigeria for 1969 were made on the assumption that major companies with large
interests in the Middle East would be required to moderate their liftings from
Libya and Nigeria in order to maintain politically palatable growth in their
liftings from the Middle East. Some companies, however, such as Occidental,
COntinental and others, without large interests in the Mid4le East, will be under
heavy pressure to expand production rapidly and, therefore, are not likely to
limit their Libyan liftings. Their Libyan oil will be competing vigorously with
the majors' oil from the Middle East and Africa.
Responding to questions based on this memorandum, G. L. Park-
hurst, former vice president of Socal, testified:
* * * we were going to have an awful time meeting the demands of the Irani-
ans and the Saudis * * * my only reaction was to tell the people who were
trying to move Saudi Arabia and Iranian crude oil, 4'Get to work even harder
than you have been working because we just can't let this thing happen." ~
In 1970, mirabile dictu, the problem which had given rise to such
deep concern within Exxon and Socal--and undoubtedly within the
other majors as well-was resolved. Libyan production, which bad
been growing rapidly, turned sharply downward, dropping from its
peak of 3,318 million barrels per day in 1970 to 2,761 in 1971, to 2,239
in 1972, and to only 2,100 in 1973. In it~ 1972 forecast Exxon promptly
revised its Middle East growth rate upward from 4.2 percent to the
historical rate of 10 percent. The effect of the Libyan reversal in tl~e
Mideast is apparent from chart 3 which eompai~es for the area~s f~our
principal producing countries their actual production with their esti-
mated growth rate for the period 1968-72. Between 1965 and 1970
actual production fell below the growth rate for 5 years in the case
of Saudi Arabia and Iran and 4 years in the case of I~uwait. After
Libyan production had turned downward in 1970, output in both Saudi
Arabia and Iran rose to levels above their historical growth rates.
That this did not take place in Iraq was probably the result of the
growing controversy between the companies and the Government.
[Chart 3 referred to follows:]
2i Hearings before the Senate Subcommittee on Multinational Corporations, Mar. ~8, 1974,
pt. 7. In a subsequent memorandum to the subcommittee, Mr. Parkhurst discounted the
value of his economist's forecast on the grounds that the predictions f~r 1973 bad been
in error. Ignored is the fact that the reason for error-the assumption of a continued
Libyan expansion-disapPeared after 1970.
PAGENO="0219"
217
CHART 3
CRUDE OIL PRODUCTION
ACTUAL vs. ESTIMATED GROWTH RATE, 19~8-12
2.74
2.47
2.19
1.92
1.64
1.37
1.10
.82
.55
.27
BiIs,fObI./V'
10
iRAN
SAUDI ARABIA
MiIs./RbhfD,
* 10.99
9.32
5.48
2,74
2.47
2.19
1.92
1.64
1.37
1.10
.82
.55
lcI.08
8.22
548
1958 60 62 64 66 68 70 72 1958 60 62 64 66 68
(SOURCE: DERIVED FROM ORGANIZATION OF
PETROLEUM EXPORTING COUNTRIES, STATISTICAL BULLETINS.)
PAGENO="0220"
218
THE INTERNATIONAL CONTROL MECHANISM
Mr. BLAIR. Over the years there has clevelopcd an intricate mecha-
nism of controlling international production wMdh, with certain
necessary difference~, bears a striking resemblance to the control mech-
anism long operative in ~the United States. In each, the initiating
action is a forecast of overall suppiy. Although termed a forecast of
demand, the forecast for the United States, prepared by the Bureau
of Mines, really measures supply to be produced and historically has
run somewhat below actual demand. An example was cited by a con-
gressiotial committee:
When the Bu~au of Mines through their montldy forecasts of demand, un~der-
estimated the demand by close to 2 percent for each of the years 194~ an~ 1947,
the ~spot shortages followed as night the day. The mechanism was wound too
tight.~
For the world oil trade outside the United States somewhat similar
forecasts, in the form of annual growth rates, are prepared by itiost,
if not all, of the seven international majors. And theyhave also tex~ded
to runsomewhat below actual demand. As Piercy of Exxon acknowl-
edged, "We did underestimate demand * * ~ 24
Forecasts are made for the "free world"-excluding the United
States, Canada and the Cogimunist countries-for the Eastern Hemis-
phere and, of greatest importance, for the Middle East. The growth
rate during T958~272 for the five principal Mideast countries averaged
9.91 percent a year, wliich incidentally, turns out tp be the idetitical
figure cited by Exxon in its 1970 forecast:
The region's (Mideast) oil production is forecast to average 9.3 percent per
year growth through 180, about the same as the 9.9 percent per year growth
since 19~0.
After determining the size of th~ pie, the next step is to divide it
up among the governmental bodies with jurisdiction over the oil pro-
ducir~g areas. In the United States this function has been performed
by the Interstate Oil Compact Commission at which representatives
of thi~u various oil-producing States agree on the amoutitto be procluceci
by each. In the world oil trade the function is perfot~med directly by
the seven majors which determine the rate at which oil is to be pro-
sluced in each of the oil-producing, countries. Since the latter i~50's
the piv~otal rate appears to have be4un that of Iran, `To bring Iranian
production back into the flow of supply an agreement in 1954 was nego-
tiated under which Iranian output after 3 years was to keep pace
with the "average growth rate" of the Mideast. Although no exact
rate was specified, the desire of the U.S. `Governm~ntto build up Iran
as a bastion against Communist influence was recogni.~ed by alL~5
It is, therefore, not surprjsin~ that of all the major producing coun-
tries, Iran during 1958-72 enjoyed the highest growth rate-12.46
percent a year, which, incidentally, happens to be almost exactly the
rate cited by Exxon. Iranian production * * * would expand 12.5
percent per year during 1967 and 1968, in accordance with agreements
~ 81st Cong., 1st sess., Senate Small Business Committee, final report, S. Rept. 25, p. 28.
~ Hearings before Senate Subcommittee on Multinational Corporations, Mar. 28, 1974.
pt. 7.
~ Mr. 0. L. Parkhurst, former vice president, Standard Oil of California testified:
"* * * in Iran the agreement sponsored by the U.S. Government in 1954 obligated the
participants in general terms to keep Iran's production rate up to the growth rate of the
area." (Hearings before the Subcommittee on Multinational Corporations, Mar. 28, 1974,
pt. 7.)
PAGENO="0221"
219
already made with the government.26 An annual growth rate of 12.46
percent for Iran is well above the rate for the Mideast as a whole-
10.24 percent-and~ among the long-establishç~d producing countries, is
approached only by the 11.49 percent rate of Saudi Arabia.
With a high growth rate established for Iran, the owners of Aramco
were faced with the necessity of maintaining a roughly comparable
rate for Saudi Arabia. To E~don, Socal, ~exaco, and MObil, the
Aramco concession was far more important tilun their partieipation
in the Iranian consortium. Emphasizing the necessity of maintaining
good relationships with King Ibn Saud, Page testified:
* * * If we hac~n~t played ball with him, we cottld haVe lost the Aramco conces-
sioti, which is not something fOr us to lose. It is the biggest concession in the
world, and we had 80 percent of It as against a concession one-quarter as big
in which we~ bad 7 percent. So you k~iow what you had better do in these eases.2'
Under the circum~tanees it is not surprising that production in
Saudi Arabia moved np almost in tandem with Iranian output. Agaifl,
deviations from the growth rate (11.49 percent) were few and far
between.
With output growing at such an extraordinary pace in both Iran
and Saudi Arabia, the `area'S existing "glut of productive capacity"-
to use Page's term-would soon have reached formidable proportions
had production in the other Mideast countries been allowed to ri~e
at anything like the same rates. But during 1958-72, the increase in
production of Iraq and Kuwait averaged only 5.12 percent and 5.93'
perernt, respectively, less than half the rates of Saudi `Arabia and
Iran and well below their own previous rates. Reflecting the rapid
expansion in Libya, in Iraq the growth rate fell from an average~of
8.11 pereent during 1958-64 to only 3.11 percent during 1965-70; in
Kuwait it declined from 11~98 percent to 4.45 percent.
According to Page, the' relatively slow growth rate in Iraq stemmed
from a dispute between the' oil companies and the Iraqi GovernmOnt.
Feeling that efforts to develop their country's oil resources had left
much to be desired, the Iraqi Government in 1961 enacted the so-
eall~d law 80 Of the 1~assim regime, restricting the concession held by
the Iraq Petroleum Co. to area~ in which it was then producing' and
foreclosing it from a number of extremely promising fields. But this,
controversy was `certainly not the only reason for the low rate of pro-
duction. In response to the question, "what would have happened"if
Iraq production had also surged during the 1960's," Page responded:
I admit we would `have been in one tough problem, and we would have had
to lower our liftings from the (-Iranian) ConsQrtlum down to the ininimrum we
could possibly take there and meet the agreement. Remeiuber we were tailing
more than agreement called fQr out of Iran, you seç, and we were tal~in~ an
equal amount, though, from, Saudi Arabia, we would have bad to cut back on
both of those and we would hare had to slow down on otir development of Libya,
which nobod~y wanted to do, but this was discussed at a time when people came
~ Exvon, Forecast otFr~e World $upplies, 1967.
27 Hearings before the SubCommittee on Multinational Corporations, Mar. 28, 1914, pt 7.-
As an example of the importance attached to the Aramco concession Page recIted the
circumstanceS under which Ibn Sand had given his approval to the resumptioli of
Iranian production: "~ * * this was discussed with the lOng In Sapdi Arabia, the id
lOng, Ibn Saud, and be was told that the Aramco partners Were being asked to go into
the (Iranian consortium), that as a result we would not be able to incfOase our liftings
appreciably for a while' in Aramco, and we were going in solely oil the basis that there
might be chaos `out in the area if we didn't, and would he agree with this and recognize
that we weren't doing this because we wanted more oil anywhere, beCause we had ade-
quate oil in the Aramco concession but we were doing it as a political matter at the
request of our Government. and he said, `Yes, but,' he said, `in no case should you lift
more than you are obligated to lift to satisfy the requirements of doing that job.'" (Ibid.)
PAGENO="0222"
220
to me and said, "Can you swallow this amount of oil?" and ~~0f course, with
Iraq down," the answer was, "Yes, I am going to have a lot of problems and some
tough problems, but I will "undertake to do it."
And I was successful, that is all I can say.~ But if Iraq bad come on, it would
have been that much harder.28
According to Exxon's yearly forecasts Kuwait has been used as ati
"evener" by n~eans of which actual Mideast output is brought into
balance with the supply called for by the overall growth rate. Thus,
"Kuwait production is estimated by difference after reviewing possible
company supply positions" (1963) and "Kuwait output is determined
to be the difference between Eastern Hemisphere demand and supplies
from all other sources" (1964). Quite apart frdm such major disturb-
ances as the Libyan expansion, the international oil companies are
constantly confronted with unexpected Orcurrences, such as unusually
mild-or severe-winters, interruptions in pipeline and tanker trans-
portation, delays and breakdowns in refinery operations and a multi-
tude of problems involved in trying to achieve a nice articulation of
suppiy with markets thousands of miles away. To prevent such inter-
ruptions from upsetting the smooth ~nd orderly increase in overall
supply, production in Kuwait has not infrequently been contracted
when supplies from other sources appeared excessive and expanded
when they seemed insufficient.29
The performance of this fun~tion can be seeu most clearly in chart 2
unlike the sthady undeviating upward trend~ of Iranian and Saudi
Arabian output increases in Kuwait's. output have been recurrently
interrupted by years of slow growth or actual declines.
In short, for countries producing some three-fifths of tctal OPEC
output the international majors would be provided with reasonably
accurate foreknowledge of their rival's supplies by assuming growth
rates of 10 percent for the Mideast in a whole, 11-12 percent for Iran
and Saudi Arabia and 5-6 . percent for Iraq and Kuwait. Countries
with slow growth rates are also unlikely to be the sources of unexpected
increases in supplies. During 1958-7~ Venezeulan production grew at
an average rate of only~ 2 percent and indeed, since 1970 has moved
noticeably downward. The addition of Venezuela and Qatar-~ivith a
growth rate of 7.95 percent-to the four Mideast countries brings to 73
percent the share of OPEC production which can be said to have been
readily predictable.
Two of the remaining OPEC countries-Nigeria and Abu Dhabi-
have registered spectacular growth rates-33.36 percent and 35.59
percent respectively-while production in a third, Indonesia has also
been moving up sharply since the midsixties. Two factors, however,
militate against the emergence of these countries as sources of unconr
trollable excess supply. For one thing, independent producers are
virtually nonexistent, accounting in 197~ for only 6 percent of the
production in Nigeria, 3 percent in Abu Dhabi and none in Indonesia.
Moreover, it would appear that companies bringing on new sources
28
~° In this connection it should be recalled that companies with influence in Kuwait's
production include not pnly the concession holders, Gulf, BP, but through long-term
contracts, Exxon and ShelL
PAGENO="0223"
221
of supply are expected to make more or less compensating reductions
in their liftings from other sources. T&ius, Exxon's 1964 forecast ob-
serves, "Major participants in the IPC group, the Iranian consortium,
amj Nigerian production, are also the major offtakers of Kuwait crude.
Therefore, to the extent the former fails to achieve offtake estimates,
Kuwait would acquire most of the alternative outlet." And the forecast
for 1967 states, "the downward revision for Persian Gulf production
is primarily reflected in Kuwait's outlet and to a minor extent in Iraq's.
Kuwait's growth would be retarded bec~iuse major offtakers of that
crude are developing new production in Africa and elsewhere."
Senator ChURCH. There is a vote on in the Senate and I must re-
spond to it, but I will be back as quickly as I can. You continue with
your testimony. I will read the part.
Mr. BLAIR. Thank you.
There remain only the two North African countries, Libya and
Algeria. Accounting together for only one-eighth of OPEC output;
their days as international oil's principal area of uncertainty appear
to be over.
In the United States the control mechanism has been implemented
by the force of law. Production by individual wells in excess of their
"allowables" is in violation of State law; shipments in interstate con~-
merce of oil produced in excess of those allowables is in violation of
Federal law. And the apportionment of total supply among the various
oil-producing States is, by statute, exempt from the antitrust law~.
But, except for a few restrictions made in the name of "conservation,"
the control mechanism outside the United States operates without the
force of law. What makes it operational is not the legal power of some
international authority-which does not exist-but the recognition by
each oligopolist that his self-interest is best promoted by limiting his
expansion to the extent and in the manner delineated above and by his
expectation that the other oligopolists will be guided by the same con-
siderations and act in the same manner.
It should be clear that the seven international majors have succeeded
to a remarkable degree in limiting to a predetermined rate the growth
of overall supply. Essential to the achievement of this result must be
the attainment of a second objective, that is, preventing significant
changes in market shares, since pronounced gains by any one of the
oligopolists would inevitably lead to defensive expansions by the
others, thereby causing total supply to exceed the predetermined
growth rate. How stable has the pattern of market shares proved
to be?
As can be seen from table 3, the trend in the concentration ratio for
the seven companies as a group has been remarkably stable. Over the
5-year period, 1968-72, their share' of total OPEC output changed by
less than I percentage point, the proportion moving narrowly within
the range of a high of 79 percent and a low of 77.1 percent. In view of
the many dramatic changes that have taken place within the interna-
tional oil industry during recent years, complete stability in market
shares among the individual companies is hardly to be expected, and
indeed noticeable changes were registered by Exxon and Gulf-de-
creases-and by BP and Socal-increases.
[Table S referred to follows:]
4~S-426-75-i5
PAGENO="0224"
222
TABLE 3.-CHANGES IN SHARES OF PRODUCTION OF OPEC COUNTRIES BY COMPANIES, 1967-7~
(In percentj
,
7
corn-
Other
corn
Exxon Mobil SoCal Texaco Gulf BP Shell panies
panies'
1972 15. 1 5. 5 9. 8 10. 0 9. 0 16. 9 10. 8 77. 1 11.0
1971 15. 9 5. 4 8. 7 9. 0 9. 9 17. 7 12. 4 79. 0 12, 6
1970 16. 8 5. 3 8. 1 8. 5 9. 7 16. 7 12. 4 77. 5 15. 4
1969 17. 8 5. 2 7. 9 8. 5 10. 1 15. 9 12. 0 77. 4 15. 4
19~38 19. 2 5. 4 7. 7 8. 4 11. 1 14. 4 11. 7 77. 9 15. a
1 Exclusive of CFP and government-owned and nationalized companies.
Source: Organization of Petroleum Exporting Countries, Annual Statistical Bulletins.
Yet, the principal explanation for such changes as did occur
appears to lie not so much in the expected gains and losses aris-
ing from the normal rivalry of firms competing with each other in the
market as in the widely varying growth rates of the different countries
in which the different firms happened to hold concessions. This is ap-
parent from charts 4a and 4b which show for each of the seven-and
for "other companies"-their crude oil production during 196i-~ in
OPEC countries responsible for most of their foreign output.3°
[Charts 4a and 4b referred to follow:]
~° The charts show for each company its production In any OPEC country which ira
any year during 1967-72 acccounted for more than 200,000 barrels per day of the corn-
pany's outputs.
PAGENO="0225"
2~
VBNESIJELA
SAUDI ARABIA
IRAN
.
.~fRAQ
SAUDI ARABIA
IRAN ~..-
.,IRAO
CHART 4a
PRODUCTION OF CRUDE OIL BY MAJOR COMPANIES 1967-72
MiI./BbL/d
10. EXXON MOBIL
9.
S.
7.
6~
1'
9.
.7.
.6
5.
.4.
.2.
10/.1
9.
7.
6
5.
4.
3.
2~
.9
.8
.7
.6
.5
.4
.3
.2
SOCAL
SAUDI ARABIA
INDOIJESIA,,'~ ~
TEXACO
SAUDI ARABIA
NOON
~ .,.~-.
~ IR~tJ~~
.1
1907, 68 69 70 71 ~72 1967 68 6~S 70 71 72
(SOURCE: DERIVED FROM ORGANIZATION OF
P~TRQLEUM EXPORTING COUNTRIES, STATISTICAL ESULLET~NS.)
PAGENO="0226"
224
CHART 4b
(SOURCE: DERIVED FROM ORGANIZATION OF
PETROLEUM EXPORTING COUNTRIES STATISTICAL BULLETINS.)
Mr. BLAIR. The decline in 1~xxon~s share of OPJ~C production is in
a sense a cost of the farfiung nature of its operations. It was theleading
producer in countries which for one reason or another have chosen to
reduce their rate of production, to nationalize the properties of conces-
sion holders, or both. Above-average increases registered by Exxon in
PRODUCTiON OF CRUDE OIL BY MAJOR COMPANIES 1967-72
BRITISH PETROLEUM
1967 68
69 70 71 72 1967 68 U9 70 71 72
PAGENO="0227"
225
Saudi Arabia and Iran were more than offset by below-average per-
formance in Venezuela, Libya, and Iraq. In recent years the Govern-
ment of Venezuela has been following a deliberate policy of
restrictionism to conserve its resources; ~` the Government of Libya
restricted output in an effort to increase its revenues and the Govern-
ment of Iraq nationalized the Iraq Petroleum Co., of which Exxon was
part owner. The loss by Gulf was also due to an exogenous factor but
of a different character. Most of Gulf's foreign output consists of
Kuwait crude which, because of its high sulfur content, has encoun-
tered environmental resistance in Western markets.
In contrast, the improvements ip~ market share registered by Socal-
as well as the lesser gain by Texaco-are traceable to the simple fact
that nearly all of their foreign 1roduction comes from nations enjoy-
ing rapid growth rates-Saudi Arabia, Iran, and Indonesia. Produc-
tion in the first two also benefited Mobil, but the. loss in Iraq prevente4l
Mobil from increasing its share of the OPEC total. Responsible for the
improvement in BP's market share were its gains in Iran-where it
has an equity ownership of 40 percent-and the even more precipitous
rises in the newer producing countries of Nigeria and Abu IDhabi.
Thus, had it not been for factors exogenous to the relationship of the
companies with each other, the changes in market shares, limited
though they were, would have been virtually nonexistent, which, of
course, is to be expected of the "live and let live" policies of a tight and
mature oligopoly.
The exception was Libya where, earlier, concessions had deliberately
been granted to independence who were not important producers else-
where. Thus, an important increment to supply fell into the hands of
firms willing and anxious to secure a "market position" even, if neces-
sary, through price competition. The growing strength of the Libyan
independents during the latter 1960's can be seen in the grid of chart
4b showing foreign output of "other companies," which are in effect,
the independents. In 1970, however, the growing strength of the in-
dependent was reversed. Restrictions by the Libyan Government and
nationalization in Algeria combined to reduce the output of "other
companies" from 3,573,000 barrels per day in 1970 to 2,253,000 in 1972
and their share of OPEC production to 2,253,000 in 1972 and their
share of OPEC production from 15.4 percent to 11.0 percent. Thus far,
one effect of the drive toward nationalization would appear to be the
removal of a troublesome thorn from the side of the majors.
RESTRICTIONISM AND TIlE ANTITEUST LAWS
Given a concentrated industry structure (without troublesome mav-
ericks), a consensus among the oligopolists as to a desired growth rate
for th~ industry and a forbearance from undertaking expansions that
would either cause supply to exceed that growth rate or make signifi-
cant inroads on a rival's market share, it would appear that output can
be restricted (and price thereby enhanced) just as effectively through
oligopolistic interdependence as through cartels or other overt forms
of collusion. By its very nature, control of the market through oligop-
oly need not leave behind any direct evidence of meetings, agreements,
~ See P. It. Ocleil in The Large International Firm Developing Countries by Edith
Penrose, George Allen and Uuwln, Ltd., 1968, ch. XL
PAGENO="0228"
226
or similar conspiratoriai conduct that would indicate a pei~ se viohition
of the antitrust laws. Accordingly, it is not surprising that officials of
the major oil companies apparently labor under no misgivings that
anything they have done might contravene the U.S. antitrust laws.
Piercy of Exxon . has insisted~ "We are not `a cartel in any way. We
are not a monopoly.""
Objecting to what he "sensed" as a. "feeling" that the inquiry has
~`rnonopoly ov~rtones, oligopoly and so forth," and that "this antitruSt
thing permeates a lot of our problems," Pierey offered to have the sub-
committee enlightened by "the company attorneys who have been in~
volved" in the old cartel case." Yet, as the electrical machinery cases
so vividly demonstrate, the advice of lawyers and the wishes of man-
agement are not necessarily one and the s~ime thing. In 1966 Or, Paul
~Frankel wrote:
Although under the spell of U.S. antitrust policies, the official party line of
International oil conipanies since the Second World War has been one of studied
abhorrence of "collusion" with their competitors, there has persisted within their
ranks a school of thought which recognizes the advantages of a concerted policy.
Significantly enough, these tendencies were prevalent on the operational levels
rather than at the top where the warnings of company lawyers tended to outweigh
the ens Cu coeur of the businessman.84
Piercy's protestations of innocence are apparently based on the im-
pression that the antitrust laws proscribe recorded meetings and
signed agreements but countenance everything else. Such an interpre-
tation ignores a substantial body of antitrust law developed by the
antitrust agencies and the courts over a long period of time. Although
largely ignored in recent years, the doctrine of conscious parallelism
has never been overturned and must still be regarded as the law of the
land. While brought to its highest state of development in cases in-
volving the conscious following by individual producers of delivered
price systems, there is no reason why the doctrine should not also be
applicable to the conscious limitation by individual producers of their
expansion to the extent and in the manner described above.
It has been long recognized that express proof of agreement is not
required to establish a violation of section 1 of the Sherman Act, to
say nothing of section 5 of the Federal Trade Commission Act. In the
well-known Interstate Circuit case the Supreme Court held:
Acceptance by competitors, without previous agreement, of an invitation to
participate in a plan, the necessary consequences of which, if carried out, is
restraint of interstate commerce, is sufficient to establish an unlawful conspiracy
under the Sherman Act.'8
The high watermark in the development of the law against parallel-
ism was a decision by the Supreme Court upholding the order by the
Federal Trade Commission in the Rigid Steel Conduit ease.
I would like to point out that former Commissioner Everett Mac-
Intyre, who is in the room this morning, was in charge of the investi-
gation and trial of that case.
Manufacturers of rigid-steel conduit were charged with engaging in
unfair methods of competition in violation of section 5 of the Federal
82 HearIngs before the Subcommittee en Multinational Corporations, March 28, 1974,
pt.7.
84Paui H. Frankel, Mattel. Oil and Power Politics, Frederick A. Praeger, 1966, p. 134.
~ Interstate Circuit, Inc. v. United States (306 U.S.. 208 j930), at 222.
PAGENO="0229"
227
Trade Commission Act. Specifi~ally, the Commission's complaint
charged violation of th~ law on two counts-cotrnt 1, that the respond-
ents had conspired to u~e a delivered-price system of pricitig and,
Qount 2, that the respondent~ had independently followed a common
course of conduct, each with the knowledge that the others did like-
`wise. Under the latter the Commission held that fOr any seller indi-
vidually to quote prices under a facing point system with the knowl-
edge that his rivals wei~e doing the same and with the result that such
practices eliminated competition among them is itself an unfair method
of competition in violation of section 5 of the Federal Trade Commis-
sion Act. The Supreme Court split four to four on the issue, thus sus-
taming the decision of the Seventh Circuit Court of Appeals on May
12, 1948, upholding the Commission.36
Had Justice Minton participated in the decision, it undoubtedly
would have been five to four, since he had previously been a member
of the seventh circuit court and joined in its decision on that case.
In the context of the international oil industry, the question would
be whether it is lawful for competing sellers, individually but with the
knowledge that their competitors are doing likewise, to plan their ex-
pansion in terms of the same industry growth rate; to limit their ex-
pansion to the end that supply does not exceed that growth rate nor
make inroads on their competitors' market shares; and to offset expan-
sions in some areas, which otherwise might cause the growth rate to
be exceeded, with compensating reductions elsewhere.
Legal scholars~ of whom I am certainly not one, may quickly dis-
miss this suggestion. But it should be remembered that in enacting the
antitrust laws Congress deliberately used broad phraseology. Recog-
nizing that when it came to devising new and better means of suppress-
ing competition, "the inventiveness of the mind of man knows no
bounds," the congressional purpose was to frame a body of law that
could be kept an courant with changing business practices and condi-
tions, If through failure of enforcement the law on conscious parallel-
ism is permitted to remain in a state of innocuous desuetude, the
congressional purpose will be frustrated, and the antitrust laws will
sink into oblivion to which they have been consigned by critics of both
The right and the left.
Mr. BLTJM. The subcommittee has received from the Department of
State, which has declassified it, an annex. to the petroleum cartel report
on which you wor1~ed, and that annex has been classified secret for
many years, since the report was first written. The annex deals with
the activities of the American companies in Iraq.
I would like that made part of the record at this point and I would
lil~e to ask you, if you remember that annex and what its signifi-
~cance was,*
Mr. BLAIR. May I take a look at it?
IDociiment handed to the witness for his inspection.]
Mr. BLAIR. In connection with whatever I have to say about this
`annex, it should be remembered that the report appeared in 1952,
which is some 22 years ago. My memory may be quite imperfect. This
does appear to be the annex that was deleted at the request, as I re-
call, of the State Department, and possibly the Central Intelligence
`°i68 Fed. 2 at 175
*See Spheommittee on Multthational Corporations Committee Print entitled, "The Inter-
national Petroleum Cartel, The Iranian Con8ortium and U.S. National Security," Febru-
utry 21, 1974.
PAGENO="0230"
228
Agency. The subject with which it was concerned donsisted of activi-
ties by the Iraq Petroleum Co. which, as you know, is owned by the
major oils, by five major oil companies and Mr. Gulbenkian to delay
production in Iraq and to keep knowledge of this from the Iraqi
Government. The State Department, as I recall, made at the time a
persuasive argument that the appearance of such information would
be detrimental to the maintenance of good relationships between the
U.S. Government and the Government of Iraq. I would have liked to
have seen this annex appear in the Commission's report. However, its
importance should not be exaggerated. It consists of only some six
pages. As a matter of fact, it has been corroborated recently by a state-
ment put into the record of your hearings by Senator Muskie, who, on
March 28, 19'74, introduced into the record extracts from what he
referred to as "this intelligence report dated February 1967," a part of
which was as follows:
There is every evidence millions of barrels of oil will be found in the new
concessions. Some of these new oil reservoirs have been discovered previously
by IPO but they were not exploited because of the distance to available trans-
portation, the heavy expense of building new pipelines and the fact that IPO
has had a surplus of oil in its fields that are already served by existing pipe-
lines. The files either proved that IPC had drilled and found wi]dcat wells that
would have produced 50,000 barrels of oil per day, the firm plugged these wells
and did not classify them at all because the availability of such information
would have made the company's bargaining position with Iraq more troublesome.
Many of these areas had been returned to the government and some of the
petroleum concession conflicts between government and IPO.
Mr. BLuxr. The essential point is that the companies were interested
in withholding new discoveries because they were afraid they might
have to produce those discoveries, leading to a surplus of oil. This was
one part of the control mechanism.
I take it the reason to agree to deprecate the importance of those
pages is it was simply one part of the larger scheme of things at the
time, the very important thing was getting the cartel report itself
published, not whether you had all of the full detail.
Mr. BLAIR. Further, I would add that any reasonable man who
studied the facts set forth in the report would not have been particu-
larly surprised by the practices detailed in these particular pages.
Their removal did not in my judgment seriously vitiate the importance
and substance of the report.
Mr. BLUM. You mentioned conscience parailelisms, the kind of con-
science parallel being illegal under the antitrust law, that is peculiarly
the province of the Federal Trade Commission. It is the Federal Trade
Commission Act we are discussing, section 5, and as we have heard
from representatives of the Justice Department, the allocation of anti-
trust responsibility~has been to give the international aspect of oil to
the Denartment of Justice and the domestic aspect to the Federal
Trade Commission.
Does that strike you as being proper or a proper way to do the
allocation in view of what the legal authority is?
Mr. BI~IR. In my judgment this is an artificial separation which
really tends to make effective enforcement all but impossible particu-
PAGENO="0231"
22~
l~rly since the eliminatiim of th~ im~port quota. :Eoreign supplies are
becoming increasingly ithportant in U.S. coPsumption.
Furthermore, the Federal Trade Commission Act contains in one
of the subsections of section 6 a specific grant of authority authorizing
the Federal Tradte Commission to obtain information relating to the
activities of U~S. firms engaged in foreign commer~e.
Mr. &t~M. And this apparently has not been done to any great de-
gree, certainly not in th~ oil industry.
Mr. BLAIR. Yes. I might add there, Mr. Blum, that in its report
issued on concentration a year and a half ago, the Commission listed its
activities in the field of peh~oleum over a long period of years. For
some reason it failed to mention the staff report to the Federal Trade
Commission on the International Petroleum C~irtel.
Mr. BLUM. Is it possible that wa~ because it was finally published
by the Small Business Committee?
Mr. BLAIR. Possibly, but this would hardly explain its failure to
make any reference ~whatever to a report that, after all, was prepared
at the Commission hv the Commission's staff.
Mr. BLUM. Earlier you talked about the patterns of behavior of the
Middle East winding up being the same even though the formal
change, if companies got exclusive right to buy crude oil, that is what
we have been talking about here as buy-back oil, and we now have a
situation in Kuwait where a large American company, Gulf, has bid
a very high price for the exclusive rights to oil at a time when the
market shows that there is a glut, there is actually a surplus.
Why would a buyer pay more than the market might demand in a
circumstance like that? What is his motivation and what might be
done to change that situation?
Mr. BLAIR. There is as you know, a widespread and common misap-
prehension that in dealing with the oil-producing countries the com-
panies have been in the role of buyers-that their posture has been more
or less analogous to that of, say, Sears, Roebuck in purchasing tires to
be sold under the Allstate label from the various tire manufacturers. As
a purchaser, Sears seeks to obtain the best quality of tire possible at the
lowest possible price. That has not been the position of the major oil
companies in dealing with the producing countries of the world. They
have not been buyers, but holders of concessions. The rewards to them-
selves are a function of the quantity and the price obtained for the
product. In other words, the higher the price, the greater their profit.
It is not merely that they have not been buyers, it is that their incen-
tive has been the reverse. Instead of trying to secure lower prices, their
revenues have been enhanced by securing a higher price. As long as
this situation continues any hope that the oil companies will operate
as monopsonistic buyers utilizing their monopoly power to obtain price
concessions which in turn can result in lower prices to consumers is, of
course, nothing more than wishful thinking.
Mr. Bi4imi. And this all stems from the fact that the companies have
tied up the crude. If fr~any buyers could go for that crude, rather than
just a very few buyers, this kind of situation wouldn't obtain. Is that
correct?
Mr. BLAIR. It is difficult to speculate about what might happen in
the future under the circumstance you have outlined. However, it
would be my expectation that if a given oil-producing country were to
PAGENO="0232"
230
welcome and entertain solicitations from any and all buyers, we w~ulct.
be presented with something approaching the market of cornpetitive~
theory. If demands in relation to supply were strong, the price would
be bid up. At other times if there were a glut, as you mentioned exists~
at the present time, the price would fall. Consequently, one of the essen-
tial steps to the establishment of anything approaching cornpetitive~
conditions in international oil would be the proffering of oil by the~
oil-producing countries to any buyers that were interested in~
securing it.
Mr. BLUM. Let. me put that another way. If the major companies lose
control of supply, they lose the ability to pass along whatever cost in-
creases they incur to the customers, and, therefore, lost that situation
in which the incentives are to pay a higher price. In fact, they are then
forced into a market discipline situation where the incentives reverse.
Is that another way of putting it?
Mr. BLAIR. Yes. But attempts to control what they pass along are
fruitless since as concession holders it is virtually impossible `to effec-
tively police the price at which an integrated oil.company transfers its'
oil from, say, the production stage to the refining stage, and then from
refining to mariteting. The companies have substantial control over
where they allocate their overhead costs. The price at each of these
stages thus becomes largely a function of their own decisions as to the
locus of the allocation of their overhead costs. If something like a free
market or true market were established in the sale of oil, the companies'
then would be.securing oil at an objective out of pocket cost figure. This'
would make the control of margins at least theoretically possible.
Mr. LEVINSON. There is one further thing which, subject to Senator'
Church's concurrence, that I would like to get in to the record in con-V
nection with this question of benefits to the United States and the rol&
played by the oil eompanies; this relates to the balance-of-payments
statistics and margin of error which has now been retrospectively ap-
plied to the Commerce Department estimates `of the amOunt `of `benefit'
that the United States derives in balance-of-payments terms from the'
companies. ` `,
[The information referred to `above is retained in the sub~omniittee
files.,] ` ,
[Whereupon, at 12:50 p.m., the subcommittee recessed,' `subject to
the call of the' Chair.] ,
PAGENO="0233"
MULTINATIONAL PETROLEUM COMPANIES AND
FOREIGN POLICY
(Briefing by Hon. William E. Simon, Secretary of the Treasury]
1~ONDA~ AUGUST 12, 1~74
TJNITED STATES. SENATE,
SUBCOMMITTEE ~N MuLTINA~rIoNAI~ Con~on~&TIoNs
o~ TIlE COMMITTEE ON FOREIGN RELATIONS,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:10 a,m., in room
4221, Dirl~sen Senate Office Building, Senator Frank Church [ehair~
man of the subcommittee] presiding.
Present: Senators Church,, Fuibright, Sparkman, and Symington.
Senator F1J~BRIGIIT. The committee will come to order.
We are very pleased this morning to welcome our new Secretary
of the Treasury, the Honorable William Simon, who has recently, as
we all know, taken a trip to the Middl,e East.
On behalf of Senator Church, the chairman of the subcorpmi~te~,
we welcome you, Mr. Simon, ~ñd yoti have a prepared statement
you wish to presei~it ~
STATEMENT 0]? HO~'T. WILLIAIVJ E. `ST1VtOI'~T, `SECflETARY OP TE~
TREASURY; ACCOMPANIED BY GERALD L. PARSlEY, ASSISTANT
SECRETARY OP TRE TREASURY
Secretary SiMoN~ Ye~, sir, I do.
Senator ]?ULBRIGnT. Will you proceed, please, sir?
Secretary SIMON. Thank you.
Mr. Chairman and members of the subcommittee, I am delighted
to have the opportunity to be here today to discuss my recent trip
to the Middle East and Europe.
As part of the discussiOn, I, think it is important to focus on how
th~ United States aud world economies wi~Il be afl~ected by increased
capital flOws totbe oil exporting countries.
In additiOn, I w~ll brieñ~ discuss the price of oil and the current
supply.
Tho purpose of my trip was to continue our recent diplomatic
efl~orts to achieve a durable and lasting peace in the Mideast. I believe
that peace and economic progress are interrelated issues. Without
peace, we cannot have economic progress. With economic progress,
however, we can minimize the possibility of renewed hostilities.
(231)
PAGENO="0234"
232
Fortunately, the diplomatic efforts of the President and Secretary
Xissinger in recent months have established a fran~ework for peace
and stability in the Middle East that hasn't existed for three decades
~nd President Ford intends to pursue this policy in the months ahead.
After my own meetings, I'm optimistic that we can help Middle
Ea~ ~ä~hnj~ri~ str~gtkth~ ~iiir ~~1io~nié$ and achiè+e needed indus-
trialization and development, which, in turn, will contribute greatly
to the cause of peace.
Before outlining the highlights of each of my visits, it would be
~iseful to ~I~ai~i. the background of Jio*~ the trip devel~ped. Prince
Fahd of Saudi Arabia visited the United States in early June, and
at that time we established a ~ftint Snndi-U,S. Economic Commission.
This was a major step in establishing closer economic relations between
the United States and Saudi Arabia-and we agreed to have working
groups meet in Saudi Arabia in July. Subsequently_when the Presi-
dent visited Egypt and Israel and suggested that I visit those coun-
tries-we thought it would be useful to go to all three Mideast coui~-
tries and to open the working group sessions in Saudi Arabia.
Euwait was the final stop on the Mideast portion of our trip-and
:offered us an opportunity to bring the first high-level U.S. delegation
to a country which has increasingly occupied a critical role not just in
energy affairs, but world economic affairs as well. The balance of our
~trip was thwoted to continuing our economic consultations with finance
~tninisters and other leaders in Germany, Italy, France, and England.
As I'll des~ribe in detail, all of our meetings, whether they were
with heads ô1~ state, finance ministers, petroleum ministers, central
bankers, or members of the private sector, were based on mutual con-
cerlis: Striving for political stability and economic stability * * * and
our shared pursuit for peace and economic prosperity.
In order to make this a little bit shorter, Mr. Chairman, I will high-
light the various portions of my testimony.
EGTPr
The specifics of our visit in Egypt consisted of: the establishment
of our joint economic relations, the reaffirmation of the OPEC agree-
ment, meetings of the working groups and five subcommittees that
cover investment and industrialized foreign trade, agriculture, and
~f course, tht~ Suez C~inal Reconstruc~tion and Development.
Egypt's e~onomy is in a state cif deterioration due to the fact that
it has been totally controlled for the last 20 years and our e1~ort~ to
~assist them in liberalizing their economy is consistent with what Pres-
ident Sadat and Deputy Prime Minister Hegazi goals to attract for-
eign investment and help them get back on their economic feet again.
Ther~ is much we can do to assist not only in the h&rd aid areas, such
as the $250 million that we have requested for appropriations~ assist~
ance under th~ Public Law 480 program for agriculture, the Export-
Import Bank, as well as the Wbrld Bank, but also in what I call the
soft side of the assistance area, as well as the technical, ~coflomic and
financial expertise that we can bring to this country as well as the
encouragement we can give to our private sector by explaining the
new Egyptian investment law which will act as an incentive to attract
investment.
PAGENO="0235"
2~3~
I~i~A1~L
After my talI~s in Egypt~ I visited: Israel ~or 11/2 days of intensive
consultations with the Pviin~ Minister and key members of the. Israeli
Cabinet. We moved in a deliberate fashion to find ways to assist Israel
m attracting investment and to expand trade with our country. We
established a Joint United States-Israel Committee on Trade and In-
vestment, co-chaired by Israeli Finance Minister Rubbinowitz.and my~
self, and the establishment of four subcommittees dealing with invest~
ment, trade, raw materials, as well as research and development.
rfhe Finance Minister is going to visit us in the tinited States for
the first meeting of the Joint Committee in early November.
We also agreed to explore ways to establish a joint United States~-
Israeli Economic Council consisting of private U.S. businessmen and
Israeli private business and government representatives.
SAUDI ARABIA
The visit to Saudi Arabia, which followed the talks in Egypt and
Israel, was part of our continuing effort to establish a closer economic
relationship with this country. The trip followed the President's Juu~
meeting in that country as well as Prince Fahd's visit in Washington
in June.
We established the Joint Saudi-United States Economic Commission
and the Joint Working Groups to deal with the specific areas of
industrialization, manpower and education, science and technology,
and agriculture.
At the outset, it is important to point out that Saudi Arabia's
growing accumulation of monetary reserves-which today exceed their
ability to absorb them domestically-has confronted them with a two~
part challenge:
First, how can they spend their resources at home in such a way a~
to diversify their economy and industrialize their country, so that
their reliance on oil income can be diminished? Make no mistake about
it, the Saudis are looking beyond the day of oil primacy.
Second, how can they invest their funds abroad in a fashion that
will maximize profit without creating unwieldy and unwanted pr~s-
sures on the world monetary system?
During the visit, w~ held inten~e and broad-ranging discussions not
only on Saudi Arabia's economic goals but alsQ on their investment
objectives as well. The subject of oil prices of course came up in every
conversation~
We outlined a proposal for investment in U.S. Treasury Special
Issues, and began an initial discussion of the advantages both countries
would share in negotiating a tax treaty.
Further, we discussed the impact of world oil prices on the devel-
oped and less developed countries. The Saudis clearly recogmze the
effects of high oil prices and have been working toward achieving
more reasonable prices. In this regard I believe it's important, to note
that during our visit, Oil Minister Sheik Alimed Zaki Yamani an-
nounced the Saudis' intention to hold an oil auction in August. The
amount of oil to. be auctioned is, at this point, uncertain, but we
received assurances that the bid price will be accepted.
PAGENO="0236"
234
Finally, we opened the initial meeting of the Joint Working Group
ou.Industrjalizatioii, This group and the group focusing on Manpower
and Education met for a week after I left. These groups had repre-
sentation from Our Departments of State, Commerce, Labor, TIEW,
and AID. Assistant Treasury Secretary Gerald L. Parsky remained
behind to coOrdinate both groups.
My statement for the reco~'d discuss~ in greater specifics of the
Satidi statistical and industrial information regarding the Saudi
economy as well as the other areas that were established in the soft
assistance, and technical expertise that we will prOvide them.
KUWAIT
Following our stop in Saudi Arabia, we made a brief visit to Kuwait.
Our meetings there were especially significant from a number of
viewpoints.
First, they marked the first visit of a high-level delegation to this
critical oil-producing country which, in the last decade, has come to
occupy a position of growing importance in the world community.
Second, I had extensive and quite frank discussions with Kuwait's
Minister of Oil and Finance Abdul Rahman Atiqi regarding the price
of oil. There are still considerable differences of opinion on this subject,
however, our dialog was most constructive dialog and opened the way
for future discussions.
Third, we had an opportunity to discuss the Kuwaitis investment
objectives, as well as their willingness to assist not only developing
Arab countries, but countries throughout the world through such vehi-
cles as the Kuwait Fund. The Kuwaitis were most interested in re-
ceiving as much information as possible regarding the Treasury special
issues. rrhey recognized that the U.S. capital market is the most liquid
and stable in the world economic community and were interested in
the unique opportunities special issues made available to the large-
scale investor.
With respect to energy issues, I think it was especially significant
that they asked that we send our Treasury energy experts to give them
a thorough briefing on the econometric studies which support our view
that lower oil prices are not only in the interCsts of the consuming
nations but the producing nations as well.
These meetings took place within days after my departure from
Kuwait, and Minister Atiqi asked that we continue such discussions
in the future.
In regard to Kuwait, you have asked what discussions the US.
Government had in relation to the agreement recently reached by the
Gulf Oil Corp., to purchase a substantial amount of oil from Kuwait.
We learned in early July that an agreement with respect to such ~
purchase was under discussion between Gulf and the Kuwaiti au-
thorities in the aftermath of the Kuwait's decision not to accept lower
bids in an auction which had recently been held. We then held a num~
her of discussions with the Gulf officials to make known to them our
judgment that there is today a surplus of worldwide production rela-
tive to current demand and that therefore, there would be, strong
downward pressure on oil prices. We also pointed out that, while we
are cognizant of the threats of various producers to cut their levels~
PAGENO="0237"
235
~Of present production in an attempt to sustain the present high price
levels, in our judgment such high prices are not in the interest of either
-the oil producers or the consumers.
We were aware that only a fraction of the oil being discussed by
~Gulf was likely to be shipped to the United States, since the bulk
would be used in overseas operations. However, we were also aware of
-the significant precedent the proposed agreement might have in other
areas.
We do not know all of the reasons for Gulf's decision, but it is my
-understanding that among the factors taken into account was the
~company's interest in insuring against unfavorable treatment in the
future of Gulf's equity interest in the Kuwait Oil Co. Gulf receives
oil from Kuwait as a result of a ~0-percent interest in the Kuwait Oil
Co.-which, as a result of prior agreements, owned 60 percent by the
Government of Kuwait.
The oil received by Gulf as a result of its equity ownership is pur-
chased at a lower effective cost. Further, I understand that Gulf was
concerned about their ability to participate in future purchases of the
oil being sold by the Government of Kuwait from the Government's
`~share of the Kuwait Oil Co. It is important to consider very care-
fully the Government's role in such matters.
In my judgment, it is proper for our Government to provide ad-
vice to U.S. companies. But I do not believe the decisionmaking re-
~sponsibili1~y on the operation of their foreign trading activities and
their foreign investment should be assumed by the U.S. Government.
In addition, the U.S. Government should exercise and does exercise
-control over the conditions under which any foreign oil-whether pro-
duced in U.S.-owned operations abroad or not-is permitted to enter
into the United States. For example, we have in effect today a sys-
-tern of oil import fees which provide a measure of incentive for U.S.
consumers to rely on domestic production as compared to foreign pro-
-duction.
Further, we are giving continuing attention to such laws and reg-
ulations which influence the degree to which the United States be-
~coines dependent on foreign sources of supply.
Such an approach is part of our desire to establish an integrated
~energy policy while allowing individual companies to maintain re-
sponsibility for their business operations.
STTh!MAR~~ OP OIL POLIOY views
Before discussing the European part of the trip, I thinl~ it would
be appropriate to summarize certain other oil policy issues that cer-
tainly were underlying my visits in the Mideast.
I am sure that men~bers of this subcommittee are well aware of the
viewpoint I have expressed about the present surplus and future de-
*chnrng price of oil. But I would like to add to the overview, I have
-already given publicly.
At various times during my talks, I stressed the fact that cutbacks
in production, even apart from the political and security implications
for the producers, would turn out to be economically harmful to the
producers for three reasons. In the first place, the price effects of
~such cutbacks would inevitably lead to such further intensification of
PAGENO="0238"
236
research and investment relating tp alt~rnat~ve sources of energy and
to alternatives to energy use that 1~he effect, would be to reduce tl~e
total value which the exporters would receive~for their oU over the life
of theit producing fields.
Cutbacks might bring a higher price for a short period, but they
would bring a more than offsetting reduction in revenues for a long
time thereafter-in view of lhe importers increased commitment to
alternatives.
In the second place, maintenance of present costs of export oil-
even with no increase-would threaten severe economic-and, in some
cases, political damage to a large number of consuming countries to
an extent which could result in damaging backlash on the producers
as well.
In the third place, our Treasury studies of supply and demand elas-
ticity indicate that reductions in demand need not be very great to
reduce the total size of the oil market significantly.
Reductions in demand due to present prices coupled with increases
in competing supplies will result in a steady reduction in OPEC's
market. Thus, Treasury studies show that for a wide range of plau-
sible demand and supply elasticities, recent price increases, if main-
tained, will cost OPEC a sizable fraction of its sales.
I sensed real concern in Saudi Arabia and Kuwait about these ques-
tions.
Both governments have requested that we continue our discussions
of energy issues and, in particular, they are interested in our esti-
mates on the projected U.S. needs for oil from the oil-producing coun-
tries.
In conjunction with some of the discussions in the Middle East
on the responsibility of oil producers to aid lesser developed nations,
I would like to provide the subcommittee with the following examples
of constructive actions taken by the OPEC countries. And there fol-
lows the illustrations of the special facility in the International Mone-
tary Fund, expansion of the Kuwaiti fund from $600 million to over
$3.2 or $3 billion, Iran's direct bilateral project assistance in Vene-
zuela's recent loan to the World Bank, and other specific examples.
Most' producing nations reco.gnize the responsibility that they have to
accept a major portion of the burden, the economic problems that have
been created in the oil-consuming countries throughout the world.
EnnorE
After my discussions in the Mideast, I was pleased to have the op-
portunity to meet with a number of European leaders.
In my view, a close acquaintance, and frequent and informal con-
versations with those responsible for economic~ and financial policy
abroad are more than a useful tradition-they are an essential part
of our management of an increasingly complex world economy. There
is no substitute for a face-to-face discussion of the ~current problems
`our nations face domestically as well as internationally.
On this occasion, I particularly welcomed the chance to meet Minis-
~er Fourcade in France and Minister Colombo in Italy, since both
had missed the Committee of Twenty Meeting in Washington in June
*beeau~e of the pressing domestic matters.
PAGENO="0239"
~237
This subcommittee hasnin its ~reviOus hearings touched on the prob-
lems of recycling oil money, and I will offer some comments on that
situation in light o~f my taik~ in Europe. Many of our discussions in
Euro~e were cbnc~ntrated on~ the probleths of financiug oil surpluses
and de~Oits and the ability of private financial markets to handle the
anticipa1i~d vast flows of funds.
Let me make clear at the outset that there was general recognition
that the private markets face Si serio~is challenge. There will be strains
in the face of this; challenge. But no one was talking about impend-
ing failure of financial markets generally or of the monetary sys-
tem. Nor was there worry that oil moneys will be capriciously shifted
from one market to another thereby disrupting the foreign exchange
and financial markets.
All of our experience confirws that the financial authorities of the
Arab countries intend to manage their oil revenues in a conservative
and responsible manner.
The problems of recycling oil revenues do not arise from this source,
They derive rather from the very large magnitudes involved and the
abrupt adjustments required to handle such magnitudes. OPEC oil
revenues are presently running at an annual rate of some $100 billion.
That is on the basis of present oil prices, and subject to a great many
uncertainties. Some of these revenues are spent on imports and other
current consumption, and the balance is available for investments and
loans and so on.
There are uncertainties, here, too, but again it is convenient to think
in terms of perhaps some 60 percent of total OPEC oil revenues avail-
able for investment in one form or another-roughly $60 billion at
the present annual rate. By any standards, this represents a lot of
money to be recycled.
I should caution very strongly, however, against extrapolating these
figures into the future. You kno~v already my views about oil prices.
In addition, there are estimates which suggest that the OPEC coun-
tries may be able to make rapid strides toward expanding their im-
ports and spending their oil revenues. Given these prospects, there
is in my view no basis for some of the extreme projections of OPEC
investments exceeding the trillion dollar level within a decade or so.
But no one sI~ould ignore the potential difficulties facing both the
private financial markets and governments in dealing with the large
capital flows expected this year. That is the matter which we discussed
in Europe.
As far as the private markets were concerned, we were careful to
approach this question quite apart from the difficulties of a few in-
dividual banks which have overextended themselves in trading pri-
marily in the forward exchange markets, but clearly some of these
institutions si~iply got in overtheir heads.
Apart from thes~e cases, we observed that the private financial sys-
tem was doing a remarkable job of handling very large expanded
operations.
The financial intermediaries are~of course, adjusting their practices
in the face of changed circumstances, in particular proving themselves
unwilling to pay the same rates for short maturity deposits they can-
not easily use as for longer term deposits they can relend prudently.
4~-426-75--i6
PAGENO="0240"
238
They are also becoming more active as brokers, arranging direct
placements. And the lenders are exploring other channels for their
funds, thus easing the pressures on the financial intermediaries.
I refer here not only to the talks we have been having with Middle
Eastern financial authorities about possible purchases of U S special
securities but also about such developments as the recently announced
Iranian advances to France and the United Kingdom, and their in
vestment in the Krupp concern in Germany.
It is true, of course, that world capital markets are very large even
in comparison to prospective OPEC oil moneys. To take the U.S.
market alone, U.S. corporate assets are estimated at well in excess of
$2 trillion, and equity and debt securities outstanding at the end of
last year amounted to some $1.8 trillion. Even the relatively young
"Euro currency" market had at the end of last year, before the new
oil prices had much impact on capital flows, grown to over $150 bil-
lion. Today, that market probably approaches $200 billion.
As for the role of governments in facilitating the flow of money
through private markets and d~rectiy in the recycling process., the first
responsibility of governments is to maintain those economic and
financial conditions conducive to sound economic activity.
In the present circumstances, this means firm policies to deal with
inflation and the avoidance of sharp turns in policies. I can see nothing
but trouble if we yield to inflation.
A second area of governmental responsibility involves the surveil-
lance and supervision of banking practices.
Cases of faulty management in the foreign exchange dealings of
some banks, for example, suggest it is a time for careful attention by
super~ isory authorities to the practices of individual institutions
In my talks in Germany, I was interested to have an explanation of
the steps being taken there to obtain better control of bank activities.
Yet another role of governments, or more commonly, of central
banks, is that of assuring the smooth functioning of the financial sys-
tem as a whole.
The public authorities cannot be asi~ed to provide compensation for
the mistakes of management. They can properly be asked to see that
the solvency prpblems of one institution do not snowball into severe
liquidity problems for the entire system.
Beyond facilitating flows of funds through the private markets,
there is also a proper role for governments directly in the recycling
process.
Here I think first of the problems of the countries most seriously
affected by the oil price increases. Not surprisingly these are the poor-
est countries of the world. I am encouraged that the oil exporting
countries are beginning to recognize their responsibilities by expand-
ing their assistance, both directly and indirectly, to some of these
hardest hit countries. But there remains an urgent need to organize
the necessary assistance for some countries where action by the oil
exporters and reallocations within existing programs do not bring
these problems to a manageable level.
Progress toward that end was initiated at the June meeting of the
Ministers of the Committee of 20 when it was agreed that a new De-
velopment Council would be established and that it would give prior-
ity attention to the problems of these most seriously affected countries.
PAGENO="0241"
239
That 0-20 meeting alsO agreed on another important step involving
governments in the recycling process, by establishing the special oil
facility in the International Monetary Fund that I mentioned earliei
Governments and central banks of the main countries have, in addi-
tion, an extensive network of swap arrangements developed first in the
1960's.
Although not appropriate for long-term financing of oil deficits,
they can serve usefully to assist in dealing with short-term pressures
in the exchange markets.
The responsibility of governments does not end with these steps.
In my conversations abroad, we were very keenly aware of the need
to follow closely developments in the markets and, if necessary, de-
velop new mechanisms to channel oil funds. We will be working on
contingency plans which will allow us to act quickly and positively
The breadth and diversity of U.S. capital markets suggest that we
will attract a substantial share of OPEC funds. My European col-
leagues expressed some concern, in fact that these flows to the United
~States would exceed levels needed to finance our increased oil bills.
Although they recognized there was no evidence that such excessive
inflows to the United States were in fact occurring they were interested
in what our reaction would be.
Our reaction to this potential problem is already a matter of record.
Earlier this year we removed our `capital controls and opened our
`markets to foreign borrowers again on the basis prevailing before im~
`position of restraints over a decade ago.
Under these circumstances, should there be substantial investments
in U.S. Government securities, this would reduce our official borrowing
from domestic sources and free resources for lending abroad. We have
offered OPEC nations an opportunity to place a portion of their funds
in special U.S. Government securities, and there is deep interest on
their part in such placements.
But this is a matter of convenience, not an attempt to attract exces-
sive investments here.
No special inducements are offered-merely the opportunity of gov-
~ernment-to-government transactions which enable the investor to trans~
act very large sums without influencing the market against himself.
It is a facility we would offer-and have offered-a number of foreign
nations holding very large dollar balances.
To a large extent, I returned from my meetings in the Middle East
and Europe reassured that a firm basis exists for dealing with the criti-
cal problems of the day in a cooperative framework.
We have put the mechanisms in place that will enhance economic
development and at the same time establish closer relationships with
these countries.
Strengthening their economies is in the best interest of the entire
world. I believe we have taken the necessary first steps in that effort
and now we must work together to implement these initiatives.
I am confident that we have the will and the resources to succeed
in this critical task.
Senator CHURCH. Thank you very much, Mr. Secretary, for your
~statement. I apologize for my tardiness. I had a little problem wIth a
reluctant automobile on the way back from the seashore this morning
and I arrived a little late. I am sorry about that.
PAGENO="0242"
24O~
THE ECONOMIOS OF OIL~
Let me start by saying th4 ii~ the co~irse pf th~ hearings ~qf this
subcommittee into the role of the international oil companies, one
fact has stQod out above all other~; that is, th~ fact tb~at the present
price of oil has nothing to do with the economics of oil.
We had testimony that the actual~eost ~f raising a barrel of oil in
the Middle East is around 25 cents n barrel, Th~ posted price estab-
lished by the government is $11.65 a barrel. There is rio question that
it is plainly written in the history of events that the price that has
presently been imposed on the Western world is a political price and
that being the ease, I question seriously whether ordinary principles
of economics which assume a free market are really relevant in this
situation.
We may all be guilty of continuing to underestimate the effect of
these hijack prices on the economics of the Western world, but I think
we do that at our peril.
Oil prices are the singlemost important factor fueling the present
inflation. Oil prices have turned the balance of payments of every
Western country from a surplus to a deficit.
It seems to me that unless we deal very forthrightly with oil prices,
we cannot claim seriously to have any kind of anti-inflationary pro-
gram at all. We are just beginning to understand the potential in-
volved ifl the reinvestment of these bloated profits from the sale of
oil in the Western world.
The other day I noticed that the Iranian Government had pur-
chased a quarter of Krupp in Germany. That is the first purchase,
one-fourth of Krupp, of the Krupp subsidiary, and is a very signifi-
cant investment in German industry.
The Iranian Government, reversing what has been the traditional
role of the rich West extending help to the underdeveloped countries
of the world, has now loaned $1,200 million to the United Kingdom,
what surely must be a new page in the histories of the world. And the
banks in Europe and even here in the United States are expressing
anxiety over the effifeet of short-term deposits of this magnitude being
loaned to their own governments on a long-term basis and subjecting
the banks to the jeopardy of a possible collapse if these deposits were
suddenly withdrawn.
These are just the opening glimpses, I think, of the serious trouble
that we face in attempting to adjust prices that have been elevated
500 percent by the Arab Governments.
Now, given the political character of these prices, what makes you
believe that they are going to come down of their own accord ~
secretary S~MON. Let me make a comment or two, Mr. Chairman,
on what you said.
I agree with you 100 percent that the present oil problem is much
more a political problem than it is an economic one because the market
is not being allowed to function today when a group of nations who
own 67 percent of this critical resource arbitrarily set a price which
they can maintain for a period.
The response of the consuming world to these high prices has been
a significant reduction in demand.
PAGENO="0243"
241
Today~we can se~e' ~i sifrplus of ~il~ our estimates, slightly in excess
of 2 Muon barrels a day, which is quite sigiñfic~ant.
The~ sWrag~ taAks arefullallover the world at pres~it and if p11~o-
di~ctio~ remained ~t this level it would create downward pressures on
priCes, ahd that 1s probably the mOst impoitant thin~ I ~aid.
SehatOrCHtEC~L M~y I ask you about that ~
I think it is the mo~t importhnt thing you have said, and I think
we should inquire into it furth~.
Do you think that the Arab Governments aDè susceptible to this
dOwnward presSure ?# Normally in a free m~rkCt, the surplus of oil
that suddenly has appeared would have that effect on price, bnt just
within the past few days the Gñlf Oil Company, if my infotmatioñ is
correct, has agreed to pay a still higher price to Kuwait fot buy-back
oil, a price that breaks the line and probably is more likely to lead,
if past history is any guide to the future, to a general increase in the
price level as the other companieS :fatll in place. That has been true in
the past. I do not see why it should not be true now.
Secretary S~tMoN. They are still averaging their own participation
oil with the higher priced oil from the countries which e~ects a reduc-
tion in the delivery price here as long as they continue to own 40 per-
cent of the çil that comes out of the ground, but that is obviously a
temporary thing, too, Mr. Chairman. But one thing-you made a com-
ment, I wanted to agree with what you said at the outset. In my fl-
nancial experience in banking and dealing with the markets and the
handling of these funds, I recognize that the lender of these funds
needs a stable liquid market, understanding the character of the lender
involved here. They are extremely conservative and, as I said in my
testimony, responsible investors who wish to diversify their invest-
ments throughout the world and invest in a broad range of equity,
fixed incomes, and real estate type investments. It is clearly in their
best interests to work with the other countries in the world to make
sure that these investments do no disrupt the financial system.
There has been much said about strains and we are going to have
strains. I have recognized this from the beginning, and again in my
testimony I pointed out what we can do to assist the strains in the
marketplace. But I think the point that you brought up, which I have
been harping on for a long time, our problem is not the recycling of the
funds and the reflows, it is very basic, it is in the oil prices, and that
is where we move from the economic to the political.
In the market we are allowed to operate right now I could say with
certainty that the price would decline slightly because there is a
stirplus.
senator CHURCH. But the market won't be allowed to operate. That
has been the whole history of oil in the Middle East.
Secretary SIMoN. You asked me the question.
Senator CHURCH. This is what disturbs me so. I think that even if
the finances of these newly rich nations, now the richest of nations, are
conservatively managed, Sand I take your testimony as evidence that
they will be, it is the oil price that is the key. These countries havedis-
covered that they can make the price stick in Ithe Western World and
thus enrich themselves as xiever before, and given the dependency of
the Western World upon this oil, it seems to me that the ordinary laws
of economics cannot be expected to function.
PAGENO="0244"
/ 242
Secretary SIMoN. For a time, that is correct, Mr. Chairman.
Senator ORURCIr. Well, for how long a time?
Secretary SIMoN. Well~ I think everyone would have a diiferent
judgment on what the effect of additional supply coupled with the~
large reduction in demand as a result of these higher prices, will have~
in the future one could say with the activity that is going on world-
wide now: the exploration and new finds, the North Sea, the commence-
ment of our Trans-Alaska Pipeline and additional exploration there,.
and secondary and tertiary recovery; ~th~e is going to be even greater
pressures on declining prices at ~the end of this decade, but that is a~
long time to live with oil prices-~---
Senator CHURCh. That is precisely the point.
Secretary SIMON [continuing]. At this level.
BRINGINO DOWN PRICRS
Senator CHURCH. We are facing the prospect o:t living with these
~irtificially high prices for a relatively long period, and I am interested
in determining if we cannot adopt a nation~il policy that will give us
some measure of ho~ie that we can bring theseprices down. It seems to-
me that our policy of the past ha~ been one of governmental appli~a-
tion, oil companies have been given a free, hand: to negotiate prices an~T
contracts with these governments without our own governmental s~per-
vision and indeed with a considerable athount of governmental
indifference.
is that going tochange and in what way ~
Secretary SIMoN. Ca~ I comment on that? I think it will.
Let's put it this way: I think-it is changing.
First, you said are the Arab Governments sus~ptible to a reduction
in the oil prices? I cannot make a general statement yes or no. There
are certain governments that s~e the advantage of a loWer price. I
thjnk the -Saudis have been quite vocal in their public st~tethents atid
are willing to see; a lower price and wishing to see a lowè~ price of
-oil,- recogni~ing that With their ~rast ~reserves' in that country that
they wbuld like the ~urance for ~ long time ~f a stable market fOr
the on1~ e~mrno-dity in their co~ntry. They also recOg~iize th~t these
present prices -a~ cati~ing gFeat dtimage in the `world. Tlnfortunatehr
thjs is nbta comm~n judgment in the OPEC nations, but Sa~idiArabia
`does hive 95 percç~nt p~resen~ly of the world's proiren reserves. They~
have increased production. 1 believe they / will continue to increase
production, and hopefully bpeii tip The rest of their country for ~x-
ploration, which is going to bring a great deal of additional oil into
the world n~arkets. This is not a unanimous, opinion. There are others-
with shorter time span reserves of oil. /
The longer they can keep this price rigged, if you will, the better
it is going to- be as far as they are concerned.
THE ooVEnN~rENT's ROLE
Prior to my trip to the Mideast, I worked extremely close with
Secretary Kissinger in making sure that the economic policy, do-
mestic and international, was consistent with our foreign policy be-
cause the two are inextricably related.
PAGENO="0245"
243
I have met with Henry every day since my return from the Mich~ast
and I can say that we are in the process of developing a national
policy an this whole area, aricludmg what the role of the U.S. Govern~
ment will be in the future.
Senator CIIUROXI. Well, getting to that key point, the testimony
before this subcommittee has ~retty clearly established, in fact the
exe~utives of the big oil companies have themselves confessed that they
have very little leverage left when it comes to price. They were unable
to show us what incentive they had for bargaining, particularly in
view of the very large profits that have accrued to the oil companies
along with the governments from these higher price levels.
So the suggestion to us is that the Government of the United States
is going to have to play a role if we are going to protect the consumers
of this country, and if we are going to be serious about trying to
temper, the inflation. When Mr. Sawhill was before the subcommittee,
he stated that he did not presently have the authority to approve long-
term supply contracts between major oil companies and oil production
countries, and that he thought he ought to have such authority.
Furthermore, he said that he ~vould cobpèrate with the committee
in drafting appropriate legisl~tion. We have drafted a bill which.
would give the Government of the United States the authority not
only to give advice during the negotiating stages between these com-
panies and the foreign governments, but which would require the ap-
ptoval of the American Government before a contract could take
effect. What is your position on such a proposal ~
Secretary SIMON. I just saw this piece of legislation over th~ week-
end; Mr. Chairman, and this ~Eoes not reflect the overall administration
position on this at present. T think that the U.S. Government has tc~
play a ~stronger role in every area of the Mideast, whether it be the
oil pricing or other areas. We ha~'e been having meetings for many
months with Aramco and Gulf, but perhaps in a little mOre passive
fashion than we, should in the future. ~ut in the specific approving
of ~ rontract after the negotiatioiis hav~ been completed, I am not ~et
sure what that does for us. I would like to see the Government out
front in this area.
But does that put us out frQut or does that put us in the back seat
after the flCgotiations are over? Is it the Government's role to approve
each contract once it is made in a specific area ~ I think that we can
do more good by perhaps being out in front and working with the
oil companies.
We do not have the expertise, really, in Government, the techr~ical
expertise to deal in an awful lot of these negotiations, but w~ ean deal'
with expertise in what is best for our national security, redefined
ec%nornicaliy as well as militarily.
Senator CHURCH, Well, this bill I should think would contemplate
putting the Government out front.
It doesn't simply ~require governmental approval of the contract,~
but it assumes close liaison between the Government and the com-
panies during the period of negotiation.
So while I agree with you that we should put the Government out~
front, I suggest that that is the purpose of this legislation.
PAGENO="0246"
244.
Your recent experience with -the Gulf case seen~s. to be very much
in point. Here you were in contact with the compaAy,- asT understand
it, but you -had no legal authOrity to~really ma~ke any decisions in the
case, and when the company decided to go. ahead and~ acc~pt a still
higher price, thus bTeaking- the price line~ there was i~othing you
could do about it.
Secretary SI~roN. `The option was clear, Mr. Ch~irman, either they
accepted this price or they did without the oil. It-was for a very short
peri-od of time. The contract runs to September, -at which point they
will again have negotiations for whateve1~ the next period is, probably
a very short periodof time. -
- TIlE SAUDI ARABIAN AUCTION
In the interim we will work as we discussed with the Saudi Arabian
Government on the oil auction that has been tentatively set for the
month of August.
I have not seen an official announcement that the auction is going
to take place, although as I said, Minister Yamani announced that
the auction would be held in August while I was over there.
Mr. LEVIN50N. There was a subsequent report in the Middle East
Economic Survey which reported the auction had been canceled by
Yamani.
Secretary SIMQN. I read that and 2 days before I read in the same
Middle East source that he was going to auction a million and a half
barrels a day. I am sort of waiting for an official announcement on
whether or not it is off. If so, why has it been postponed, has it been
canceled~ exactly what are the details? When I find out, I will cer-
tainly advise you.
Senator CrnntcH. Did Yamani tell you he was going to go to an auc~
tion or that the Saudi Arabian Government would consent to an
auction?
Secretary SmI0N. Yes, he did, Mr. Chairman, and after we discussed
- this in private conversation, he held a press conference and reiterated it.
Senator Crnm~on. And as far as you know he has not told you any-
thing to the contrary? -
Secretary SIMON. I have not heard officially that it is off, but I have
read reports that are disquieting.
ENDORSEMENT 0]? THE BILL
Senator CHURCIT. Well, -getting back once more to the question1 if
indeed you want the Government to get out in front to deal with this
problem, I catinot quite understand why you would not endorse what
Mr. Sawhill has endorsed in a legislative proposal that would give the
Government authority to act in the premises both during the negotia-
tions for new oil contracts and after the fact.
Secretary SIMON. There again, Mr. Chairman, I would like to have
the opportunity to study it and perhaps think of some alternatives
which might accomplish the same objective. I think we are both going
rn the samC direction in looking for the best role that the Government
can play ahd still maintain the free enterprise system that I think
has done our country so much good. But we are dealing with a particu-
lar problem here that takes some rethinking.
PAGENO="0247"
245
Senator CHURch. Yes. Thank you very much.
Senator Futhright.
Senator FIThJBRIGIIT. Thank you very much.
ECONOMICS AND POLITICS OF THE MIDDLE EAST
Mr. Secretary, I was very pleased with the initial part of your
st~itement, in particular, not that I am displeased with the rest of it,
the coupling of the economics of this situation in the Middle East and
the political aspects of it.
The origin of this tremendous increase in the price of oil grew out
of political activities, in effect war; did it not?
Secretary SIMoN. Yes.
Early increases started, sir, in 1971 and the big explosion came at the
end of 1973.
Senator FULBEIGHT. The big increase started in 1971?
Secretary SIMON. No; earlier smaller increases last year, it was about
four times, but it had already doubled between 1971 and 1973 so it has
gone up as the chairman said.
Senator FULBRIGHT. Do you think the first part, then, was politi-
cally inspired or was that the work of the economic forces?
Secretary SIMON. It was probably the working of economic forces,
but the increase was relatively small at that point and not-
Senator FULBRIOIIT. Were other things comparably going up, coal
and others?
Secretary SIMON. Yes; there was a general price rise.
Senator FULBRIGHT. It was not a political increase?
Secretary SnI0N. I don't believe so, no, sir.
Senator FULBRIGIIT. I am bothered about the distinction between
economic and political increase. Of course, it has been my observ~-
tion, either domestically or internationally, that nearly all profit-
making corporations charge whatever the market will bear, don't
they? Is that not generally true?
Secretary SIMON. I would say that that is the way the system works
worldwide, supply and demand, yes, sir.
Senator FULBRIGIIT. And it does here.
We do have these situations in which various commodities under
certain circumstances demand very large increases that have no rela-
tion to the cost of the commodity?
Secretary SIMON. That is correct.
Senator FULmUGIIT. Either from such lowly commodities as as-
pirin. I doubt that the ingredients for aspirin are more than
one-tenth of the actual marketplace. Most of that is advertising and
all sorts of things. That is true in many other things.
Coming back, what I like about your statement is the recognition
that this is directly related to the peace and stability in the Middle
East, ~nd unless we do get a political settlement of that conflict, it
is going to be extremely difficult to manage the economics, is it not?
Secretary SIMON. That is correct, sir.
Senator FULBRIGHT. So I do not think they can be disassociated.
I have a feeling that these arguments that this is purely political
could lead to political retaliation. They may not be relevant to the
exclusion of the conflict itself. And this is what I hope you and the
Secretary of State keep very much in mind.
PAGENO="0248"
246
I do not see that there i~ much prospect of a stable price structure
in oil so long as the conflict itself is not resolved. Is that correct?
Secretary SIMON. I would say that that~ is a prime ingredient, yes,
sir.
Senator Fur1muoiip. If it is not-
Secretary SIMON. Of course there is one other ino~redient where
it does become economic, and that i~ looking at the ä~esires of these
countries, looking beyond their day, as I said, of oil primacy and
what they wish to have in their country as far as industrialization
and diversification. They need the cooperation not only of the United
States, but ef many countries in the world in the area of manpower,
labor and resources and export. So it is in their best interests to
assist and cooperate in this.
Senator FULERIGHT. Sure it is.
Secretary SIMoN. But it is the politic~d aspects that override those,
I hasten to add.
Senator FULBRIGHT. Even making those successful is dependent on
the solution of the political problems.
Secretary SIMON. Yes, sir.
DEVELOPMENT OF OTHER RESOURCES
Senator FULBEIGH~. I think several things you mentioned are very
encouraging. I believe you referred to some cooperative group for the
development of utilization of their resources. There has been a great
deal of talk about the use of their surplus gas, for example, to change
it into fertilizer, which is very short all over the world, and that price
of the fertilizer has also gone up tremendously. But if they could
use that fertilizer or use aluminum, there is a great shortage of
aluminum-
Secretary SIMON. That is going to be going on not only in Saudi
Arabia which flares between 2 and 4 billion cubic feet of gas a day,
but in Kuwait, and Egypt, which is finding significant new reserves
each day. All of them are looking not only ~t fertilizers but also at
petrochemical plants.
Senator FULBRIGHT. This is what I mean; this is a very hopeful sign,
if you can pursue that. Those agreements involve large investments,
particularly by our own companies, and their money.
I know some of our aluminum companies and others are negotiating
now for fertilizer plants and aluminum companies. This seems to me
to be much more consistent with our long-term interests than the
approach of some kind of a political retaliation.
I do not think that would be effective. The economic approach that
you have suggested together with the approach of the Secretary in
solving the political war that is going on is about the most helpful
approach to it, and I think that should be ~pursued most vigorously. I
think above all the settlement of the war itself is important, and I hope
the Secretary will be able to resume his active participation in that
now that we have a new government. I think we can concentrate on
these problems. But. if the settlement is not solved, then these other
activities which will be much more expensive, such as conversioi~ of
coal. Even conservation here at home can be done. That does bring
into effect the economic pressures upon these political prices, doesn~t
~it?
PAGENO="0249"
247
`Secretary SIMON. Yes, sir, it does.
Senator FULBRIGHT. A very slight reduction in the waste of our
~energy here at home, such as reducing the mUeage of aUtomQblleS to
~55 miles an hour, or a few other things~ and improving' our buildings,
~and so on, can have a big effect upon it, because we are such big ç~on-
;sumers of oil. There are alternatives to political retaliation on the
Arab States, aren't there?
Secretary SIMoN. Yes, sir, but they take time.
Senator FULBRIGHT. We can control those if we have the will to do it.
Secretary SIi\iON. Yes, sir.
GOVERNMENT PARTICIPATION
Senator FtJLBRIGIIT. I am not clear what the Government can do.
The suggestion seems to be implicit that the Government step in and.
negotiate these contracts. I am not necessarily against government
participation. I am not sure how it works.
If you told Gulf Oil not to make a contract, would that really pro-
mote our objective or not, or would it simply make Gulf Oil go out of
business and somebody else pick it up?
`Secretary SIMON. That is correct, sir.
Senator FULBRIGHT. I don't know where this ends.
`]I1he Government intervention, at least partial intervention has usu
`adly not been successful. If you take it over all together and manage
it completely, there may be some possibility, though I find very few
examples of efficient government operation. There are some in some
countries, not particularly this country, but in others there have been.
But we have been going through this recently and subsidizing Lock-
heed, for example, or Penn Central. If we nationalize the railroads
that would make some sense to me because other countries have success-
fully done that. But to bail out inefficient management makes no sense
`at all to me. If we are going to have private enterprise and we reward
those who are inefficient, it seems to me to be self .-defeating.
Secretary SIMON. I agree with you.
U.S. ARMS SALES
Senator FIJLBRIGIIT. In the Middle East the consistency of our
objective of peace and settlement is quite understandable.
What really bothers me, is that at the same time we are going out of
our way to induce these countries to buy enormous amounts of arms.
The worst possible way they can use their resources is to buy mili-
tary hardware instead of fertilizer plants. But we are the biggest arms
salesmen in `the world and here is where I find a basic inconsistency
with the Government policy. You and the Secretary of State are doing
one thing and the Pentagon is doing another, and I must say I have
great difficulty reconciling those two. I am afraid that a policy of
emphasizing the sale of arms, because they are easy to do, relative to
building a fertilizer plant, seems to me to be very negative in the long
`term..
Secretary SIMON. I think basically we a~e doing both. We are going
~ahead with the building of all of the various plants, industrialization
and diversification of their countires, and at the same time they recog-
nize that they indeed are not terribly strong militarily, even though
they are going to be very strong financially.
PAGENO="0250"
248
Senator FtTLBRIGHT. They do not need to be strong if you get a
political settlement. They haven't been strong. And this is a very
worrisome aspect of it. The progress in the sale of arms being so
quick, it is far preceding the building of plants. I dQ not know 0± any
fertilizer plant that has gone up but we have already transferred
planes. They are already in being, and lots of them, They are always
easy to do, and quick.
Secretary SIMoN. And there are lots of countries in the world other
than the United States that supply them.
Senator FULBRIGHT. Sure there are. We are the biggest arms sales-
man, and others.
Secretary SIMON. And there are others that could be just as big as
we if we chose not to do it.
Senator FULBRIGHT. I would hope you could use your influence to
shift the emphasis from military hardware to fertilizer plants, if I may
use this as an example, of something useful to do.
Secretary SIMoN. We are, sir.
THE SAUDIS AND OIL PRICES
Senator FULBRIGHT. As for the political settlement, I am a little
worried about an attitude that seems to be very current here-that is
that there is something very evil about Saudis selling their oil at a
high price. They have never attacked anybody that I know of and
they seem fo have been made the butt of this whole thing as if there
is something intrinsically, inherently evil about what they have done.
They have not been the leader as far as pushing the price of oil up.
Conversely, they have been the ones who wish to have a more rea-
sonable price.
In Ecuador, they made it very plain publicly they would like to see
the price of oil brought down. Is that now true?
Secretary SIMON. I read that.
Senator FULBRTGHT. If there is anybody taking a strong stance for
higher price it is Iran; is it not?
Secretary SIMON. Yes, sir.
Senator FULERIGHT. And for quite a while.
I read an interview in one of the German papers, in which they say
the Shah thought the proper price for oil was $30 a barrel because it
was worth that in petrochemicals. Is that not true?
Secretary SIMON. I read that, sir.
Senator FULBRIGHT. Is that an accurate statement?
Secretary SIMON. Not in my judgment, sir.
Senator FULBRIGHT. Well, I mean accurate as to what was said?
Secretary SIMON. Yes, I believe it is, but I did not hear him say it.
Senator FULBRTGIIT. I read it in ~ Ge~man newspaper. The Shah
is a very capable man and lie sees this as an opportunity. I am bound
to say, even with regard to the Shah, that it is not unknown in this
country and others that people take advantage of an opportunity if
they are engaged in business.
Secretary SIMON. Yes, sir.
Seirntor FITLERIGHT. So this is not all that unusual and I am a little
apprehensive about attaching to this situation great moral and politi-
cal overtones which seem to imply that there is something inherently
PAGENO="0251"
249
evil. I think that is distracting us from the main objective, which is to
bring about a more cooperative atmosphere.
Secretary SIMoN. That is what we are attempting to do,
5enator FULBRIGHT. I think that is what your statement indicates.
Secretary SIMON. Yes, sir.
Senator FTJLBRIGIIT. And particularly the part of it with regard to
the political relationships in the area and the economics of it.
Secretary SIMoN. Yes, sir.
Senator FTJLBRIGHT. And they are really inseparable if we are to
do the job properly.
Secretary SIMoN. Yes, they are.
Senator FIJLBRIGHT. Thank you very much.
I think it is an excellent statement and I think your trip is very
hopeful we can move toward cooperation with these countries. Thank
you very much.
Senator CII1JBCH. Senator Case ~
Senator CASE. Thank you, Mr. Chairman.
Mr. Secretary, it is good to see you again.
Secretary SIMON. Thank you, Senator Case.
Senator CASE. There isn't any question about the importance of the
job you have been trying to do. We just want to have a little bit more
in the way of specific facts for an understanding.
SECRETARY SIMON'S NEGOTIATIONS ABROAD
In the first place, you would not think that-I am not being cap-
tious-take the top of page 5, the first half of your statement-you
speak out "we", "I"-who are "we" on this trIp? "We exchanged,
we discussed."
Secretary SIMoN. We brought an interagency team made up of
representatives from State and the Commerce Department, ~A1D, In-
terior and the various compollents that bring together economic and
financial assistance for th~ise countries, Senator.
Senator CASE. So that the "we" there, "we" exchanged comments,
"we" discussed the possibility, "we also discussed ways, not only did
"we" discuss-
Secretary Sm1:oN. That "we" is the Egyptians and us in the exchange
of documents, etcetera.
Senator CASE. Well, the point I am making, and this is worked out
in the latter part of your statement~ the distinction between the "we"
and "I."
There is a habit in some circumstances also of using the editorial or
in some cases royal "we," which is a bad habit to get into.
Secretary SIMON. Yes, sir.
Senator CASE. And that is all I am talking about.
I just wanted to b~ sure what "we" really meant here.
On top of page 5, "we" exchange documents. What documents did
you exchange, Mr. Secretary?
Secretary SIMoN. That involved th~ investment guartu'itee agree-
ment.
Egypt has seized about $71/~ million worth of various U.S. entities
and they agreed to start negotiating the claims against them, and until
they agreed to that, OPIO [Overseas Private Investment Corpora-
PAGENO="0252"
250
liion] ~vas tionoperabie in that country and their agreement to do this
and move toward negotiations for the settlement of these claims en-
.abled us to do this,
Senator CASE. Do you have copies of those documents with you?
Secretary SIMON. No, sir, but I can supply them to you.
Senator CAaE. I would think it would be well if you would.
Secretary SIMoN. I will supply them for the record.
Mr. PAESKY. The documents themselves were exchange of notes he-
tween the Se~retary and Egyptian officials but we will supply those for
the record. We are reactivating the old agreement that was in existence.
[The documents referred to follows:]
UNITED ARAB REPIJBLIC
INVESTMENT GUARANTIES
Agreement effected by e~vchange of note,~ signed at Cairo June 29, 1963;
entered into force June 29, 1963.
The American Ambassador to the Minister of Treasury and Planning of the tJnite~~
Arab Republic
CAIRO, June 29, 1963.
EXCELLENCY:
I have the honor to refer to conversations which have recently taken place-
between representatives of our two governments relating to investments in the-
United Arab Republic which further the development of the economic resources.
and productive capacities of the United Arab Republic and to guaranties of such
investments by the Government of the United States of America. I also have the
honor to confirm the following understandings reached as a result of those.
conversations:
1. The Government of the United States of America and the Government of the
United Arab Republic shall, upon the request of either Government, consult
concerning Investments in the United Arab Republic which the Government of
the United States of America may guaranty.
2. The Government of the United States of America shall not guaranty an
investment in the United Arab Republic unless the Government of the United
Arab Republic approves the activity to which the investment relates and agrees
that the Government of the United States of America may guaranty such
investment.
3. If an investor after exhausting all other channels of settlement or conversion
transfers to the Government of the United States of America pursuant to an
investment guaranty, (a) lawful currency, including credits thereof, of the
United Arab Republic, (b) any claims or rights which the investor has or may
have arising from the business activities of the investor in the United Arab
1~lepublic or from the events entitling the inyestor to payment under the invest-
ment guaranty, or (c) all or part of the interest of the investor in any property
(real or personal, tangible or Intangible) within the United Arab Republic,
the Government of the United Ar~tb Republic shall recognize such transfer as~
valid and effective, within the scope of the laws applicable In the United Arab
Republic.
4. Lawful currency of the United Arab Republic, including credits thereof,
which is acquired by the Government of the United states of America pursuant
to a transfer of currency or from the sale of property transferred under an
investment guaranty shall be accorded treatment by the Government of the
United Arab Republic with respect to exchange, repatriation or use thereof, not
less favorable than that accorded to funds of nationals of the United States of
America derived from activities similar to those in which the investor had been
engaged and in accordance with foreign. exchange regulations applicable in the
United Arab Republic. Such currency may in any event be used by the Govern-
ment of the United States of America for any of its erpenditures in the United~
Arab Republic.
PAGENO="0253"
251
5. Any dispute regarding the interpretation or application of the provisions
of this Agreement or any claim against the Government of the United Arab~
Republic, to which t1~e Government of the United States of.America may succeed
as tratisferee or which may arise from the events: causing payment under an
investment guaranty shall, upon the request of either Government be the subject:
of negotiations between the two Governments and shall be settled in such.
negotiations.
If within a period of three months after a request for negotiatious, the two~
governments are unable to settle any such dispute or claim by agreement, the
dispute or claim ~bal1 be referred upon the initiative of either government to
an arbitral tribunal for final and binding determinatiob. The arbitral tribunal
shall be made up for each case separately, with each government appointing one
arbitrator; these two arbitrators shall designate a president by common agree-
ment who shall be a citizen of a third state. The arbitrators shall be appointed~
within two months and the president within three months of the date of receipt
of either governments' request for arbitration.
If s~ithin the time specified either ~f the governments fails to designate its own
arbitrator, or if the third arbitrator is not agreed upon, they, in the absence ~f
any other agreement, shall request the President of the International Court of
Justh~e to make the necessary appointment by choosing the arbitrator or
arbitrators.
Upon receipt of a note from Your Excellency indicating that the foregoing
provisions are acceptable to the Government of the United Arab Republic, the
Government of the United States of America will consider that this note and.
your reply thereto constitute an Agreement between our two governments on thia
subject, the Agreement to enter into force on the date of 29 June 1963.
Accept, Excellency, the renewed assurances of my highest consitleration.
JOHN S. BADEAU
His Excellency
`ABD AL-MONIIEW AL-E:AISS0UNI,
Minister of Treasury and Planning
of the United Arab Republic,
Cario. ___________
The Minister of Treasury of the United Arab T~epublic to the American
Ambas~ador
UNITED ARAB REPUBLIC
MINISTER OF TREASURY
OFFICE OF THE MINISTER
CARlo, June 29, 1963.
ExCELLENCY
T have the honour to acknowledge the receipt of your note of June 29, 1963,
which reads as follows:
"I have the honor to refer to conversations which have recently taken place
between reptesentatives of our two governments relating to investments in the
UAR which further the development of the~ economic resources and productive
capacities of the UAR and to guaranties of such Investments by the Govern-
ment of the United States of America. I also have the honor to confirm the
following understandings reached as a result of those conversations:
"1. The Government of the United States of America and the Government
of the PAR shall, upon the request of either Government, Consult concerning
investments in the PAR which the Government of the United States of America
may guarantee.
"2~ The Government of the United States of America shall not guarantee an
investment in the UAR unless the Government of the IJAR approves the activity
to which the investment relates and agrees that the Government of the United
States of America may guarantee such Investment.
"~ If aul investor after e~cbaustihg all other channels of settlement or cOn-
ve~'sion, transfers to the Government of the United States of America pursuaht
to an investmetit guaranty, (a) lawful, currency, including credits thereof, of
PAGENO="0254"
252
the U.A.R., (b) any claims or rights which the investor has or niay have arising
from the business activities of the investor in the UAR or from the events en-
titling the investor to payment under the investment guaranty, or (c) all or part
of the interest of the investor in any property (real or personal, tangible or
intangible) within the U.A.R., the Government of the U.A.R. shall recognize
such transfer as valid and effective, within the scope of the la~vs applicable in
the UAR.
"4. Lawful currency of the United Arab Republic, including credits thereof,
which is acquired by the Government of the United States ~f Athericá pursuant
to a transfer of currency or from the sale of property transferred under an
investment guaranty shall be accorded treatment by the Government of the
United Arab Republic with respect to exchange, repatriation or use thereof,
not less favorable than that accorded to funds of nationals of the United States
of America derived from activities similar to those in which the investor had
been engaged and in accordance with foreign exchange regulations applicable
in the United Arab Republic. Such currency may in any event be used by the
Government of the United States of America for any of its expenditures in the
United Arab Republic.
"5. Any dispute regarding the interpretation or application of the provisions
of this agreement or any claim against the Government of the United Arab
Republic, to which the Government of the United States of America may suc-
ceed as transferee or which may arise from the events causing payment under
an investment guaranty shall, upon the request of either Government be the
subject of negotiations between the two Governments and shall be settled in such
negotiations.
"If within a period of three months after a request for negotiations, the two
governments are unable to settle any such dispute or claim by agreement, the
dispute or claim shall be referred upon the initiative of either government to
an arbitral tribunal for final and binding determination, The arbitral tribunal
shall be made up for each case separately, with each government appointing
one arbitrator; these two arbitrators shall designate a president by common
agreement who shall be a citizen of a third state. The arbitrators shall be
appointed within two months and the president Within three months of the date
of receipt of either governments' request for arbitration.
"If within the time specified either of the governments fails to designate Its
own arbitrator, or if the third arbitrator is not agreed upon, they, in the absence
of any other agreement, shall request the President of the International Court
of Justice to make the necessary appointment by choosing the arbitrator or
arbitrators.
"Upon receipt of a note from Your Excellency indicating that the foregoing
provisions are acceptable to the Government of the United Arab Republic, the
Government of the United States of America will consider that this note and
your reply thereto constitute an Agreement between our two governments on
this subject, the Agreement to enter into force on the date of 29 June 1963."
I have the honor to inform Your Excellency that the terms of the foregoing
note are acceptable to the Government of the United Arab Republic and that
the Government of the United Arab Republic consider Your Excellency's note
and the present reply as constituting an Agreement between our two Govern-
ments on this subject, the Agreement to enter into force on the date of this reply.
Accept, Excellency, the renewed assurance of my highest consideration.
A. KAISSOTINI
His Excellency
JoHN S. BADEAU,
Ambassador of the
United ~S'tates of America
Cario.
AMERICAN EMBASSY,
Cairo, Egypt, Jn~y 16, 1974,
ExCELLENCY
We have the honor to refer to the Agreement effected by exchange of notes
between our Governments on June 29, 1963 on the subject of investment guaran-
ties which are Issued by the Government of the United States of America.
The Government of the United States of America is pleased to advise that if
your Government agrees, the investment Incentive programs of the United States
of America which are the subject of the aforesaid Agreement and which are now
PAGENO="0255"
253
referred to as investment insurance and investment guaranties and are currently
administei~ed by the Overseas Private Investment Corporation, can be resumed
in connection with projects that are approved by the Arab Republic of Egypt.
The Government of the United States of America also agrees, if your Govern-
ment is willing, that when your Government or an agency thereof has entered
into a contract with a private United States finn for construction or other pro-
fessional services to a project sponsored by your Government, such a contract
shall be considered the approval and agreement required by paragraph two of the
exchange of notes dated June 29, 1963. In all other cases, individual project
approvals and agreements by your Government shall be requested.
We would appreciate receiving Your Excellency's confirmation that the fore-
going is acceptable to the Arab Republic of Egypt.
Accept Excellency, the renewed assurances of our highest consideration.
WILLIAM E. SIMoN.
HERMANN F'. EILT8.
His Excellency
MOIIAMMED ABDOL Aziz HEGAZI,
First Deputy Prime Minister of
the Arab Rcpublic of Egypt,
Cairo.
CAnio, EGYPT, July 16, 1974.
EXCELLENCY:
I have the honor to acknowledge receipt of your note of July 16 which reads
as follows:
"We have the honor to refer to the Agreement effected by exchange of notes
between our Governments on June 29, 1963 on the subject of Investment guaranties
which are issued b~ the Government of the United States of America.
The Government of the United States of America is pleased to advise that if
your Government agrees, the investment incentive programs of the United States
of America which are the subject of the aforesaid Agreement and which are now
~eferred to as investment insurance and investment guaranties and are currently
administered by the Overseas Private Investment Corporation, can be resumed in
connection with projects that are approved by the Arab Republic of Egypt.
The Government of the United States of America also agrees, if your Govern-
ment is willing, that when your Government or an agency thereof has entered into
a contract with a private United States firm for construction~er other professional
services to a project sponsored by your Government, such a contract shall be con-
sidered the approval and agreement required by paragraph two of the exchange of
notes dated June 29, 196& In all other cases, individual project approvals and
agreements by your Government shall be requested.
We would appreciate receiving Your Excellency's confirmation that the fore-
going is acceptable to the Arab Republic of Egypt."
I wish to confirm that the foregoing is acceptable to the Government of the
Arab Republic of Egypt.
Accept, Excellency, the' renewed assurances of my highest considerationS
A. M. HEGAZY.
His Excellency
Hu1IMANX PIiEDERIcK EILTS,
Ambassador of the United states
of America,
Cairo.
Senator CASE. In a sense this constituted an agreement between the
countries, did it not ~
Secretary SIMON. Thttt they will commence negotiations' on the set-
tlement of these claims, yes, sir.
Senator CASE. Well, I think in line with our new spirit of coopera-
tion, openness, these agreements' ought to be made available to the
Congress.
Secretary SIMoN. Yes, sir.
Senator CASE. And if there are matters which require action by the
Congress, we can decide that after we see them.
Secretary SIMoN. Yes, sir.
45-426----75--1 7
PAGENO="0256"
254
Senator CASE. On page 6, the third paragraph, you say you explored
additional ways in which we. can work together to attract private in-
vestment to Egypt, not just from the United States but from all parts
of the world, particularly investments made jointly with the benefit
of the U.S. technological contribution.
I do understand the matter of improving the investment climate
and attractiveness in Egypt by our technological help, and I would
like to come back to that again.
Here I would like to have an explanation about the application, if
any, of this guarantee program.
It is contemplated that the United States should guarantee a for-
eign investor in Egypt.
Secretary SIMON. No, sir, it is not.
Senator CASE. How would the activation of the guarantee program
work?
Secretary SIMoN. It is consistent with the nOtion that having a
strong econom.y and a broad ecQnomy in Egypt, taking advantage of
their highly skilled, literate educated peoples, that it is not just the
United States of America that is going to do this job in their country
alone, that there are otherS areas for investment, funds from Saudi
Arabia, as well as, many of the European coinmuiiities.
Well, how can this best be done?
As I said, in some of my informal comments at the beginning of
my statement this, morning, the Egyptian economy is in a stage of
deterioration due to 20 years of controls on their economy. How can
they liberalize their economy to attract investment, to give converti-
bility to foreign e~ç~hange in their country for the repatriation ~f
profits which had been forbidden, which is ~ `obvious ~remendons im-
pediment `to foreign investment? They have established free zones
and we worked with them' in the establishment of these free zones to
attract investment where investment from all over the world could
come in and build whatever the facility `would be and they `could
manage it with a great degree of freedom.
We can publiCize the new Egyptian investment law through our
normal Department of Commerce channels to American industry so
that we list the various investments that the Egyptians desire in their
country. We will then assist them in contacting the right people to
do this.
We discussed the Development Project Institute which would pro-
vide feasibility studies. It always sounds like a good idea to build a
petrochemical or fertilizer or perhaps even a steel plant.
Senator CASE. I understand that.
We do not disagree with any of that at all. It is most desirable, I
am sure.
My specific question is, what are we going to do to help them attract
private investment from the rest of the world? We are not then going
to guarantee those investments.
Secretary SIMoN. No, sir, we are not.
Senator CASE. We are not, I take it, doing anything about a tax
treaty to attract other investments, American investments?
Secretary SIMON. No, we are not.
PAGENO="0257"
255
S~i~o~ CA~sE. That comes down to No. ~, which is making known
the ateas in ~hie1i there are opportunities, and we are going to publi-
ci~e to the i~st of the world, not the United States, to the rest of the
~vorld the investment opportunities in Egypt. Is that what ~ou mean?
&eretaiy SrMON. The very fact we have a joint Development Proj-
ect Lnstitn±e that looks into the feasibility of various industries ~for
their country means that these studies would be made known, and
hi this fashioua It would be made known to the mest of the world, but
i~t would not be p.ublici~ing it to Germany or Saudi Arabia, we would
be j~ist assisting Egypt in doing it.
Senator CASE. I wanted to find out what we were going to do to help
them get toreign investment other than American investment in.
Egypt. I wi&ersthand the technological help, of course.
THE TAX TREATY
What about o~ top of page 7~ would ~QU give me the details of. the~
tax ti~aty which you di~cussed under subheading (3)?
Secretary SIMON. This work takes a long time. Obviously it ends.
up for Senate ratification, any tax treaty, but, tI~ere is one thing, one
problem with the tax treaty that .1 am told weiiad with Egypt in the.
past. Tliiere was a tax sparing provision and we explainel to them~.
at great length that this tax sparing ~vould not be part of a tax treaty,.
this would. be part of. the normal perfunctory treaty that removes:
impediment from the investors in the United States going to a foreigm
country. It would not be of an, extraordinary nature whatsoever.
This work is just commencing now. ,
Senator CASE. In other words, it is not contemplated to give tax
benejlts to American investors in-
Secretary SIMON. There will be, no tax sparing, which was as you
remember, Senator, a big hangup in the past.
That is correct, sir.
Senator CASE. What is the potential for investment in Egypt? In
what kind of things would a priyate investor, assuming political times
were good and all the rest of it, what is there in Egypt that would
attract private investors?
Secretary SIMON. I think there are two primary areas that they
are looking at right now. One is the Suez Canal reQpening and all the
money that they are going to need for collateral areas around it, such
as housing, to move all of the people who have been evacuated back
to the Suez Canal. They will need a massive housing program.
There are pages of projects for that free zone in the Suez Canal
looking ahead over the next 3 or 4 years, and it totals up in the area
of $5 billion, `
Another area that I found quite exciting in discussions with their
Petroleum Minister is the recent indication of new finds in petroleum
and natural gas in Egypt. It appears that they could be, producing a
million barrels of oil a day by 1980.
They are today producing close to 500,000 barrels a day and consum~
lug 220,000, if my memory serves me.
Senator CASE. On what date might they get a million barrels?
PAGENO="0258"
256
.Secretary SIMON. By 1980. They have signed 12 exploration con-
tracts already for new exploration wells to be. drilled this year and
they expect to sign between 25 and 50 more over the next year.
Senator CASE. What part of the cotintry is that?
Secretary SIMON. All over the country.
They have five zones in the country that they are exploring.
The. most productive have been offshore so far.
Senator CASL Now, tax treaty and other incentives, the top of page
~, that might stimulate private investment in Israel.
Could you give us some idea of what you have in mind.
Secretary: SIMoN. There again the other incentives primarily in-
volve removing the existing impediment to private investment because
of their totally controlled economy. .
Senator CASE. Are there things that inhibit American investment
in Israel now?
Secretary SIMON. In Egypt?
Senator CASE. We are talking about Israel, the top of page 9.
Secretary SmI0N. Tam sorry, I was still on Egypt,
1 think other incentives that might stimulate private investment in
Israel would be the Joint Council. Their businessmen and our business-
men are exploring ways to show the attractiveness of the investment
climate in Isra~l. We haire found these councils have worked very well
in the past and the fact that the Government presence is there ançl
interested in doing this in itself iS an encouragement to companies
to go to other countries.
Senator CASE. I am not against any of this. I just want to know
what we are talking about.
What about the tax treaty?
Secretary SIMON. That would be the same type instrument, no ta~
sparing a swë discussed with Egypt.
Senator CASE. Aren't our tax relations with Israel already in as
good a shape as they can be?
Secretary SIMON. There is no tax treaty, Senator Case.
Senator CASE. What does a tax treaty do that needs to be done?
* Secretary SThtoN. One major area is double taxation. It removes the
threat of double taxation which is consistent with international finan-
ciald~alIngs.
Senator CASE. That is a rather broad description. What does double
taxation mean?
* :SecpetaIy SIMON. You would be taxed in their country as well aS
in the other countries.
Senator CASE. You are going to put in some money, we will say
you are gOing to invest in Israeli business, you get dividends from
that. Does this mean that the dividends that are paid to you will not
be taxed in Israel and that you will get more money than the other
investors, for instance, in Israel?
Secretary SIMON. No, you would be treated on an equal basis in
Israel with the other investors in Israel, but you would not be subject
to the taxation at the 48-percent rate here, or whatever portion it is,
as well as the 48 percent that Israel might have, which, of course, would
take care of any profits you might-
PAGENO="0259"
257
S~enator CASE. Let's forget the corporate business. Let's say you,
my constituent from New Jersey, decided to put $5 million, if you are
wealthy, into an Israeli company. Now what kind of ta~ benefit would
you get~
Secretary SIMoN. Well, the tax benefit, I would pay taxes on profits
that are repatriated to this country but there again the only thing it
d~es-
Senator CASE. Wouldn't you pay American income taxes on the divi-
dends that are paid?
Secretary SIMoN. When they are repatriated to this country, yes,
I would. I would not, if on that $5 million I invested I made a profit
of a million and they wished to tax me at x percent. It would not be
subject to the taxes here in the United States simultaneously, until I
brought the money back to this country.
Senator CASE. But you would be then, so it is a matter of delaying
and not a matter of being taxed only once?
Secretary SIMoN. For taxes in 1 year that is correct.
Senator CASE. But you could go on and the idea is you could reinVest
this in Israel.
Secretary SIMON. Yes, sir.
Senator CASE. And expand your wealth enormously and your $5
million would become $50 million in 10 years without any ~Arnerican
tax.
Secretary SIMON. Of course-~-----
Senator CASE. When you die, which God knows we are not looking
forward to, there would be no tax at all on the $50 million?
Secretary SIMON. When it is repatriated to this country, there is a
tax on it, Senator.
Senator CASE. You have reinvested this money and now you have
shares in Israel, the Israel General Motors and Israel General Electric.
Secretary SIMON. I believe-I~ am not an expert in this foreign estate
tax area on what happens when one dies, but I will supply that for
the record. I think this estftte tax would enter into the assets held all
over the world.
Senator CASE. I am not an expert either but I just want to kfloW
what we are talking about when we talk about a tax treaty.
Secretary SIMON. I will supply for the record all of the specifics of
the standard tax treaty that we ar~ talking about.
Senator CASE. It wish yçu w~ould.
[The infor~nation referred to follows:]
~Hon. Fiwn~ O~arnca,
Ch/r*rnan, Subeommitt~?A3 on MijZti~vt'tOfldi (I'~rporatiOfls, Co n~ttce on Fore1~On
ReleUoias, U.S. Senate, Washington, DXI.
THE SECRETARY OF THE TREASUR~,
Washington, p.C., Septens7~ier 1~2, 19~4.
DEAR ~\in. CHAIRMAN: The follo~iug is my respor~se tp a questjon which Senat9r
Case requested at the August 12 bearing of the Subcomrni1~tee on Mttltinational
Corporations reg~rdipg the function of Income tax treaties.
Bilateral income ta~ treaties for the avoidance of double taxation serve several
important putpoaes
(1) Treaties reduce the prospect of loable taxation of international flows of
jucome by granting primary taxiEg authority to one taxing jurisdiction with the
other country gixing a tax credit or e~ceniptiofl i~or the same income. They permit
PAGENO="0260"
258~
the establishment of common definition of terms and of rules fo~r a~Thssrai4ing in~me
and e~pense~ for this purpose.
(2) With respect to business profits, treaties provide that ~ resident oi~ one
country may be taxed by the Other only to the extent that that r etent has made
a substantial economic penetration into that other country by virtue of maintain~-
ing a "permanent establishment" there.
(3) With respect to personal service Income, treaties generally provide tbat a
resident of one country who is temporarily present in the other for the purpose
of providing personal services, either in a dependent or independent capacity,
will not be subject to tax in the other country unless certain tests are met, gen-
erally including a physical presence there for at least 183 days during the taxable
year.
(4) Treaties provide for reduced rates of withholding tax on investment in-
come to avoid a heavier aggregate tax burden for residents of one country Invest-
ing in the other country than would obtain for such residents If they invested at
home.
(5) Treaties assure non-discriminatory treatment under the tax laws of one
country for residents of the other or for corporations of the first country owned
by residents of the other.
(6) Treaties authorize consultation and exchange of information beti~een the
tax authorities of the two countries both as to matters of tax evasion and to
prevent cases of double taxation.
These general principles are embodied in all of our income tax treaties. The
specthc provisions vary from treaty to treaty, as each treaty is separately negoti-
ated, taking into necount specific features of the tax laws of each country, and
economic relations between the two.
If I may be of further assistance to you, please let me know.
Sincerely yours,
WILLIAM E. SIMON.
SAUDI ARABIA'S MONETARY RESERVES
Senator CASE. Secretary Simon, down at the bottom of the page, the
heading of "Saudi Arabia," you make the statement that Saudi
Arabia's oil accumulation of monetary reserves today exceed their
ability to absorb them domestically.
This is, of course, the nut of the problem on this side, and the
other side is where are we going to get the money or the consuming
countries to pay these prices. That is really what we are talking
about.
Secretary SIMON. Yes, sir.
Senator CASE. I guess I will pass that for a moment with a com-
ment. If income exceeds their locaj capacity to absorb, maybe the
best thing for them to do is to either reduce prices that they are
charging or else reduce production so they can keep the oil in the
ground and have it for the future.
Secretary SIMoN. There are two other things they. can do, also.
One, obviously, is to invest, and the other i~ to aid the other countries
of the world that are being so severely a~ected by these oil price
increases.
Senator CASE. A number of questions in detail on this whole thing
which I will not take the time because of my suggestion for a reason-
able time limit on each;of us sharing the time period.
But broadly speaking, it looks to me as though all those things
that are proposed. and I am not criticizing von. I am just making this
comment, are nothing else but band-aids, the tiny possibility toward
even meeting the problem that could be handled by cutting these
prices, and I can't see how lending money to a poor country is going
PAGENO="0261"
259
to help that country. I really can't see it. What it needs is reduced
prices for petroleum that it must have and to ~ut it in further hock
to these producing countries or to the othei~ ~ountries is going to do
them no good at alL
I know you have said this privately to them. I know our Govern-
ment has made this point clear. I think we should shout it from the
housetops that all this business of these tiny funds that are being set
up by these countries out of enormous acchmuiation of monetary
reserves that are being extorted because of the temporary advantage,
which in the long run, as you point out is going to be no advantage
at all, and this is going to turn to ashes in their mouths, and they
should be made much more clear to the world than it has been, and
again I ani not talking about you, you understand this, and your
wOrk at it, but it is so clear this is what we ought to be shouting
about,
WHAT IS THE U.S. RECEIVING?
And this brings me to this point Are we getting anything except a
smile from these countries, these oil-producing countries, in exchange
for the enormously valuable technology that we are promising them,
the help in all kinds of scientific matterS, the help in educating their
young people, the seminars, this advice and what not? What are we
getting br it, what are they paying u~ for it, except as I said before,
a smile? And you know that I have said this before, I am getting to be
a tiresome old man, but know that old American song, "Sweet Alice
Ben Beau." It goes something like-remember-"Sweet Alice Ben
Beau, with hair so brown," or something like that, "she blushed with
delight if you gave her a smile and trembled with fear if you frowned."
Can we stop having any such attitude so that we are nOt going to
blush with delight when somebody smiles and we are not going to
tremble with fear when somebody frowns? I am not against detente. I
am just saying that this thing ought to be done on a parallel basis. We
do not give them all the technology that we have got in exchange for a
smile, and we do not invest in long-term projects in exchange for a
smile.
It seems to me that our emphasis ought to be almost on the single
thing, reduèe these prices. This will help the world. This will help the
poor countries and nothing else will. Everything else is going to con-
timie throwing things out of whack.
You suggest this year we are at the annual rate of an accumulation
of wealth by the Arab oil-producing countries, $100 billion; is that
correct?
Secretary SIMON. This year.
Senator CASE. What was the rate last year?
Secretary SIMoN. I would say it would be in the area of 30 to 40; but
I do not have-
Senator CASE. Roughly, 3 years ago, before this started; what was
the rate?
Secretary SIMoN. It would be 25 percent of that or less; 20 percent.
Senator CASE. Twenty?
Secretary SIMON. Because they have gone up between fourfold and
fivefold since 1971, Senator.
PAGENO="0262"
260
Senator CASE. $6 billion 3 years a~go and $35 billion last year and
$100 billion this year.
Now, where are the consuming countries getting ~this money?
Secretary SIMoN. Consuming countries are going to get the money,
as you say correctly, by borrowing it. That is what they have been do-
ing, Senator, and I agree with you. What happens ~s that we continue,
and we do this in lots of other areas, do less by attacking the results
instead of the causes of it. This is way I said in response to Mr. Fiil-
bright that the problem is not necessarily the aid, the borrowing, the
financial markets. aithough they are going to be problems, that is man-
ageable; but the oil prices are not manageable. We ought to be shout-
ing this from the rooftops because ii do not think anybody properly
assessed yet what the true damage, what the changes are going to be in
many countries in the world politically as well as economically, looking
a decade ahead if they were allowed to remain at this level.
WHAT CONCESSIONS HAS OPEC MADE ON PRICE?
Senator CHURCH. Could we get an answer to your question?
Senator CASE. The question is-you didn't mean to avoid it-
Senator Crnuicii. You haven't had a chance to answer it. I think it
is a really terribly important question. Senator Case was saying that
looking at all of the new offers of American aid and assistance, tech-
nology, sales of military equipment, and what have you, we are now
throwing out our largesse upon the Arab countries, the oil-producing
countries. What are we getting back for it?
Secretary SIMON. It is not a matter of~-
Senator CHTTRCII. What is the quid pro quo, what concession has been
made on price?
Secretary SIMON. We are really not throwing out our largesse. We
have made this arrangement with Saudi Arabia, period, and with
Saudis who are in our ç~mp, if you will, on reduction of oil price and
cooperation in this area.
Senator CTTURCII. There is $250 million for Egypt in the new aid
package. There is additional money for Jordan. There is money for
Syria. It seems to me that it is clear that our policy now has become
one of extending very substantial aid to these countries in one form or
another.
You have just had negotiations; you are helping them open up the
economy of Egypt; you have had negotiations with the Saudi Arabian
Governmeiit and others, and all looking toward a larger measure of
American cooperation. What did we get back for it?
Secretary SIMON. There again you have to take it country by coun-
try, We take Saudi Arabia, who believes as we do~ sincerely, that the
price, of oil should be reduced, that we should be dealing with a market
price of oil, not with the price that is established by a cartel.
Mr. LEVINSON. What are they going to do? Are they going to auction
or are they not going to auction? Are they going to buy $12 billion
worth of U.S. Government bonds?
Secretary SIMON. No. There again I am giving you my opinion.
On the second question, as far as buying $12 million worth of Gov-
ernment bonds, I would say absolutely not. People do not look at the
numbers very carefully when they make that suggestion, and there
PAGENO="0263"
261
again I have seen that amount appear in the newspapers. Everything
that appears in the newspapers is not always accurate. This year, Saudi
Arabia is going to get $25 billion from their oil revenues.
Senator SYMINOT0N. If this is going to be a general discussion, I
would like to get into it.
Senator CHURCH. I will get back when my time comes.
Senator CASE. I want to throw onES question in for the record. I
would like to know, did any of your discussion include any agreement
or suggestion of agreement that a foreign, that is to say, Middle East
investments in this country, and Middle East deposits in American
banks would not receive special treatment, wonid be sequestered or
what not?
Secretary SIMON. We absolutely did not. First, we never discussed
expropriation or anything like that. They will not receive special
treatment, no devaluation, backing or inflation backing or gold back-
ing or what have you. No, sir; they will buy the same special issue
Treasury securities that our institutions here in the United States,
and all other investors in the world do.
Senator CASE. Did they ask in the event of a future embargo their
funds on deposit in this country be blocked or sequestered?
Secretary SIMON, No, sir; they did not.
Senator CASE. It is a possibility, is it not?
Secretary SIMON. The subject of embargo in our conversations was
never brought up.
THE SAUDI AUCTION
Senator SvMINGTO*. Mr. Secretary, I want to sa~ I welcome you,
and I think our interest in military matters and diplomatic matters
are subordinated by the necessity for equal interest in economic mat-
ters. I hope that you will clarify some of these problems for us.
I haven't got many questions.
I was interested in page 10. You say there is gOing to be an auction-
maybe there won't be, but' m~vbe there will be-in Saudi Arabia. What
do you think would be the i'esuit of that auction? `Would there be a
price decrease? Is that the i'nrplicatio~n ~
Secretary SIMoN. Right now we `h~C~e a posted prh~e of $11.65 which
translates at 93 percent to be about $10.85 a barrel. The reáent auction
that was held in Kuwait resulted in much lower bids than the 93 per-
cent of posted price.
They' decided not to sell at that le~rel. Had they Sold, obviously there
would have been cheaper oil to the tune of 1,20Q,000 barrel's a day in
the hands of many oil marketei~s around the world and that would put
pressure on the price of oil.
The Saudi Arabian Oil Minister, ~t amani, has told us that he will
sell the oil at what I anticipate to be lower bids than the 93 percent
of posted price because of the surplus available and lack of storage
capacity in the world.
fiR EFFECTS OF THE AUCTION
Senator SYMINOTON. Then the answer would be that you expect the
auction to result in lower prices?
Secretary SIMON. Yes, sir.
PAGENO="0264"
262
Senator SYMINGTON. Thank you.
Do you think that would have a worldwide effect?
Secretary SIMoN. Not immediately, no. sir, because the majority of
the oil would be down at the 93 percent of posted price and this would
have to be a continuing process to bring the overall price down.
COMPETITION AND PROFITS IN OIL INDUSTRY
Senator SYMINGTON. There are two transcontinental or interconti-
nental airlines that the United States has competing against govern-
ment, as you know, and they tell us that because of the increase in the
price of oil they will go broke, unless they get some help from the
Government.
On page 17, you say:
In my judgment it is proper for our government to provide advice to U.S.
companies, but I do not believe decisionmaking responsibility on the operation of
their foreign trading activities and their foreign investments should be assume~I
by the U.S. Government.
I read a book called "Power Play," I am confident you have read it,
about the oil companies in the past.
Secretary SIMON. I have not.
Senator SYMINGTON, You haven't read it? Culminating with the so-
called agreement in Scotland between Standard of New Jersey and
British Petroleum and Shell, as I remember it, in the past the oil com-
panies ~iave had it pretty much their own way when it came to setting
price. I am wondering if there is any connection?
We do not have any oil in my State to speak of and I am wondering
if there is any connection when we have companies that stand or fail
on the price of oil that are competing against governments, if you see
what I am getting at.
For example, the excess profits; there has been a lot of talk about
a heavy addition of profits to the oil companies. Has there been any
relationship between that and the companies that are losing money
because Gf what they are forced to pay. for oil?
Secretary SIMON. We attempted in the allocation program, Senator,
to deal with the great problems of the airlines that fly internationally
and in an attempt to equalize the domestic and the bonded fuel. It is a
terribly difficult problem for many of them and we continue to work
on it. I met with the Eastern Airlines people last week.. Every time
you attempt to give an airline some assistance as far as their contracts
are concerned, you are obviously taking away from someone else. And
we go back to the initial problem of the oil price and how we get that
down and what are the politics that come first before the economics.
THE METZENBATJM LETThR
Senator SYMINOTON. Thank you.
Now, there has been a letter in the Senate sent to the leadership. and
they got a group of us together to talk it over. It was written by Sena-
tor Metzenbaum, and perhaps we can call it the Metzenbaum letter.
Last year we paid $25 billion for oil. This year we will pay $1O~
billion for oil.
Secretary SIMON. He means the world?
PAGENO="0265"
263
Senator SYMINOTON. Yes. And of that $80 billion they could only
absorb in improvements $20 billion, which would leave $60 billion that
they could invest. He said~ for example, in that $60 billion they could
control the 13 largest companies of the United States by controlling 51
percent of the stock. You and I both know that you don't need any-
thing like 51 percent to control a large corporation.
I am wondering if you have any apprehension about it. One other
figure he gave was the highest monetary reserve control this country
every had, which was in 1949, when it had 561/2 percent. Extrapolated,
he felt the oil companies would have 70 percent of the world monetary
reserves by 1980. That is roughly only 6 years from now.
On that basis, is there any apprehension on the part of the rllreasury
Department about the capacity, or possible capacity of these very
heavy dollar holding corporations and other currencies, too, to take
a major economic position in the U.S. economy which might result in
serious trouble, for example? We know often in our business as poli-
ticians, that corporations attempt to control p~Iitical policy. Would
you comment on that?
Secretary SIMoN. I 4~ould say that we share the coi~cern of this po-
tential and I discussed this. I discussed this in both SaudiArabia and
Kuwait, which were the two oil-producing countries which I visited.
Kuwait by far is one of the most sophisticated of the countries, They
have been buying equities in the United States for some time but they
have no intention of buying control, if you will, of major corporations
and putting all their eggs in one basket. They have to do several things.
And this holds true for both Saudi Arabia and Kuwait. They wish to
industrialize and diversify. They are going to need a great deal of this
money to accomplish this over the future. They will, at the same time,
be making investments in companies, whether it is cement, or steel,
that are going to be supplying them with all of the materials to do
the job in their country because that is good business.
Now, we have antitrust laws, we have Defense Department regula-
tions, we have the Securities and Exchange Commission, that sets up
regulations on foreign investment in this country, and perhaps we
ought to continue to take a look to make sure that we have sufficient
safeguards.
Our policy has always been one of encouraging free trade and com-
merce and giving people within the constraints of national security,
both military and economic in this country, the ability to invest here, if
that is what they wish.
EGYPT's NUCLEAR REACTOR
Senator SYMINGTON: Switching to another point which bears on
my final series of questions: We entered into a reactor agreement with
Egypt; as I understand it, in the not too distant future they could be
an exporter of oil. As a member of the Joint Atomic Committee we
figured that out that utilizing plutonium, which is automatically part
of the waste that you canliot get rid of when you have a fission re~
actor, they could make at least 200 Hiroshima bombs a year from the
deal as it was reported in the press. France, a~ you know, has not only
not signed the agreement; it has not even ratified the Noii-Prolifera-
tion Treaty.
PAGENO="0266"
264
r am wondering why it is necessary to give a nuclear reactor to
Egypt if they will soon be an exporter of oil?
Secretary SThEON. Actually ~this is consistent with reducing the
world demand for petroleum. This world has relied on oil and natural
gas for about 66 or 67 percent of its energy. And with the diversifica-
tion of electric generating facilities, all of the other sources that can
come on stream, it is a good idea for people to diversify for their own
interest.
The oil that they are going to be exporting is going to be important
in the petrochemical and fertilizer area and it is going to provide them
with foreign exchange that they need so badly in the future.
Senator SYMINOTON. Well, as you know, there are a good many
people who are worried, including some of our best scientists, about
the danger of nuclear proliferation.,
Secretary SIMON. Yes, sir.
Senator SYMINOTON. Do you feel that that danger is secondary to
the shortage in oil?
Secretary SIMON. Oh. no. I would consider that a primary concern.
Senator SYMINOTON. I am Ilot trying to ask a trick question. There
was a book put out, called "Curve in Binding Energy" in which the
author pointed out the danger incident, there being five members of
the Nuclear Club. By the time the book was printed, we know there
is a sixth. We know there is a country in South America working hard
to become the seventh. Inasmuch as you are giving them the way, the
means of making the material with which to make weapons, I was
wondering if that has been given consideration as we deal in these
reactors.
Secretary SIi~roN. It has, Senator, and I would say that is a primary
consideration, not a secondary one, to the energy portion of your
question. The adequate safeguards are going to have to be built intO
these agreements to make sure that it does not occur.
~*Senator SYMINOTON. I appreciate that.
And I think at some point we will have to get into the definition
of adequate safeguard because I am confident that the cOmpany that
made the arragements' did not realize very soon there will be an atomic
explosion.
Secretary SIMoN. Yes, sir.
INFLATION
Senator SYMINGTON. One other point that I would like to ask about.
Your problem really is, your greatest problem it would seem, is the
problem of inflation, and we have now double digit inflation.
As one who went through the 1932 depression, there are some things
that are `developing that are comparable to the problems in those
days. For example, failure of the bank in Austria, failure of the bank
in Germany, the Fed, which of course could not have been done, which
was set up putting over a billion dollars over in the New York Bank
and so forth. Have you got a policy you are going to announce, a
policy as our Secretary of the Treasury, to attempt to control this
inflation, and at least keep it out of the double digit aspect?
Secretary SIMON. Yes, sir, we most certainly are. We met with
President Ford on that subject 2 hours after he was sworn in last
week and I can assure you that that is No. 1 on his list.
PAGENO="0267"
265
Senator SYMINOT0N. It is No. 1 on his list?
Secretary SIMoN. On everybody's list.
Senator SYMINGTON. On your list, too?
Secretary SIMON. Yes, sir.
Senator SYMINGTON. Could you give us a rough idea what your
plans are?
Secretary SIMON. Well, of course, the rough ideas are pretty much
the fundamental ideas that have been talked about a great deal in the
past but have never been applied with any consistency at all, except
on a very temporary and sometimes very ad hoc basis. The fundamen-
tal thrust of my suggestion is in the Federal spending area. We have
been dominant in our presence in what we have been spending for
such a long period of time, that it has obviously contributed to the
upward pushing of prices because it creates greater demand. At the
same time, our borrowing to pay ~or the deficit financing has an up-
ward ratchet on interest rates. Today our presence is 62 percent of the
capital markets in the United States, U.S. Government and federally
sponsored agencies and we have to move back from that.
Senator SYMINGTON. `One more question.
I~CONOMIO PRIORITIES
Do you' think that the best way to move back is to curtail the bil-
lions that we are putting out of the country. We are very close to $100
billion in our military budget and we have been talking all morning
about our oil problems. `Or,' do you think we should curtail our social
programs here at home?
Secretary Sri~roN. Well, I think that in looking at the priorities of
the budget one can argue about that $305 billion and ~~here the spe-
cifics should be cut for a long time.
I must admit that ~reside~t Nikon made an awful lot of good points
to me personally on many occasions in talking about the risk of the
United States becoming a second-class power and reducing the defense
budget that has already been reduced 30 percent in actual dollars since
1960, so my bias is to look at other areas for cuts. ``
Senator SYMINGTON. I understand of the $305 billion, only around
$64 billion is controllable, you might say, beyond the law, so that you
can actually operate on it, and 70 `percent of that is military
expenditures.
In any case, would you comment for the record how you feel about
that?
Secretary SIMON. I have never used the termuncontrôIlable just be-
cause Congress has passed laws that legislate spending. I think that we
have to constantly relook at all of our priorities and that is why this
new budget mechanism that was signed into law a couple of weeks ago
is going to be so useful in getting a dialog between the executive and
legislative branches of government in looking at the whole picture and
seeing where this country should move in on niany areas before we con-
tinue to legislate incremental costs that are creating such a burden on
us financially as well as-
Senator SYMINOTON. Like veterans benefits and social security?
PAGENO="0268"
266
Secretary SIMON. I think that our social security and the welfare
programs have a tendency to overlap each other, perhaps in certain
areas they create a disincentive to work.
I think all of these things have to be looked at.
Senator SYMINGTON. You may come up with some suggestions to that
end.
Secretary SIMON. I think that what we would like to suggest and
what we will be suggesting is a dialog between the Congress and the
executive to discuss these areas and whatever else is practical, recogniz-
ing that, of course, we want to take care of the needy in this country
and the aged and the disadvantaged.
Is there a way, a better way, to skin a cat economically and
financially?
Senator SYMINGTON. Thank you.
Senator CHURCH. Senator Percy.
AGREEMENTS WITH EGYPT
Senator PERCY. Secretary Simon, I think it is quite apparent to all
of us that in this first testimony of a Cabinet official in the new Presi-
dent Ford's administration you could not have picked a more complex
subject, one that cuts across more lines and more areas than this. I will
be meeting-and I would like to put my question in a different way,
very much along the lines of those of Senators Case and Church and
Symington. I will be meeting on Wednesday with my agricultural
advisory board. They are hardheaded, 26 hardheaded practical farmers
in the Midwest chosen because of their outstanding success, their per-
ception of world problems and their capablity to relate these problems
to America. But first and foremost they are farmers.
I wish to try to picture how I am going to explain all of these ar-
rangements that you have made in the Middle east to them, because I
know I will get some questions on it. I am going to start out by saying
that you have two problems you are dealing with, President Sadat's
role in ending the war and then the price of oil. They are two separate
problems, somewhat interrelated, but we are on a two-track system in
a sense and you had to deal with both of those when you were out there.
How do you answer, let's say, a farmer from Illinois when he points
out all of these programs that you have developed with Egypt, even
given the President Sadat's magnificent role, when Egypt is an oil
producer of a sort-they produce a half million barrels a day. That is,
I understand, enough for 100 percent of their consumption and exports
of 250,000 barrels a day. So the oil price does not adversely affect them
domestically on their own needs and they still get the benefit of the
increase in price. This givLes them almost $900 million, maybe a billion
this year in their export revenues and they are increasing their produc-
tion to about double what they are now doing, a million barrels a day,
by 1980.
How do we justify to practical midwestern farmers who say to us,
now, with all of that money OPEC has got out there, $100 billion, $60
billion of which can be available for investment? How can I justify
developing a program for Egypt, which includes a possible program
of Public Law 480 sales of U.S. agricultural products to Egypt on the
basis of long-term loans on favorable terms, at reduced interest rates?
PAGENO="0269"
267
This is obviously very sensitive to the American consumer. I know you
have a good answer for it but how would you suggest I explain it to
this practical hardheaded farmer who says "how come?" How come we
would use the facilities of the Export-Import Bank to assist exports
to Egypt on long-term credit basis when that money comes from the
U.S. Treasury and guarantees. Furthermore, why work together and
qualify Egypt for the maximum in financial support in the World
Bank, International Monetary Fund, other official agencies, when all
that good money comes from the United States of America.
Secretary SIMON. First, Senator Percy, we are only interested in
helping them to the extent that we are helping them now. They are
interested in sincerely helping themselves to once again bring their
economy back from what I described as the advanced stage of
deterioration.
I consider the hard aid, if you will, that we have requested from
Congress, $250 million, as relatively small compared to their over-
all need for aid and in comparison to what they are getting from all
of the other countries in the world, recognizing that our prime objec-
tive is a durable and lasting peace in the Mideast.
EGYPTIAN SUPPORT ]~ROM ARAB SOURCES
Senator PERCY. Can you tell us how much support they are getting
from the Arab countries who have such large surplus amounts to
invest?
Secretary SIMON. When the Suez Canal closed in 1967, Saudi Arabia
and two other oil-producing countries signed the Kartoum agreement
with Egypt which compensated them for the revenues that had been
lost from the closure of the canal.
Egypt received from Saudi Arabai last year a loan over and above
the Kartoum agreement and an additional $250 or $300 million. King
Faisal was just there recently and I do not know what agreement
they reached on other aid. Although I would assume the Saudis will
give them even more help to put them back on their feet.
We have for years, as you well know, and I understand that it is a
controversial subject in this country, supplied many of the less for-
tunate nations in the world with Public Law 480 to help feed the world.
I think that it is a responsibility exercised with good conscience as
to ~vhat indeed we can supply the rest of the world and still take care
of our American people here at home. And that is what we are in the
process of exploring now.
While the Egyptian economy is in this terrible condition, we need
to help them bridge this gap, while they are doing all the things, re~
opening the Suez Canal, continuing the exploration and production
of oil and gas in their country and inducing other industries to come
in to regenerate their economy, they need help. I think it is a good
idea for all of the world to help them.
Senator PERCY. What I am wondering, though, is whether those
needs could come from countries that are close by, their neighbors.
They share so much in common. Why have those nations bought U.S.
securities? Isn't it possible to recycle the other way around and have
it go direct to Egypt and then have the Egyptians buy with dollars
food at world prices from wherever they want?
PAGENO="0270"
268
Secretary SIMoN. That is exactly what ~s going on right now. The
surplus of funds immediately is large enough for them to do, to per-
form both roles, Kuwait and Saudi Arabia in particular are doing
both, not only continuing an investment program but looking at what
their responsibilities are for direct aid to the other countries.
PROBLEMS OF TIlE DEVELOPING NATIONS
Senator PERCY. I will be in India later this summer if we go on
recess and I assume we will, talking with their Government, Mrs.
Ghandi and others about some of the common problems that the de-
veloping nations face.
How bad is the situation in countries like India, Pakistan, and
Bangladesh which are dependent upon OPEC oil and paying these
very high prices? What special concessions have been made to those
countries, and by whom, and are those special concessions at all ade-
quate for the kind of a situation that they face trying to industrialize
their nation? How can they do. so with oil prices four time what we
have been paying in the past?
Secretary SIMON. I think with countries such as India, the oil price
translates itself immediately to one of food and the very existence
of the people and their ability to buy food. I can supply for the rec-
ord the assistance that ilot only the United States but the World Bank
and the rest of the world have supplied to India in the form of aid.
Our current intentions are under study now because our agricultural
report cOmes out this afternoon, I believe, on what the harvest is
going to be.
[The information referred to follows:]
THE SECRETARY OF THE TREASURY,
Washington, D.C., September 12, 1974.
Hon. FRANK CHURCH,
Chairman, Subcommittee on MuUtnational Corporations, Committee on Foreign
Relations, U.S. Senate, Washington, D.C.
DEAR Mn. CHAIRMAN: The following is my response to questions which ~enator
Percy requested at the August 12 hearing of the Subcommittee on Multinational
Corporations regarding aid extended to India.
Since December 1971, U.S. military and bilateral development assistance to
India has been suspended. In PY 74, however, the U.S. provided $53M worth of
PL-480 Title II assistance and $29M in debt relief while other aid donor coun-
tries, e.g., the U.K., Canada, France, Germany, Japan and others provided $47M
in bilateral assistance and rescheduled $150 million of payments on India's debts
falling due. The World Bank and IDA also committed about $400 million in fresh
aid to India last year.
Including the U.S. share of multjlateral loans made to India through the
IBRD/IDA and Asian Development Bank, the total U.S. contribution to aid to
India last year amounts to $242 million, out of $1.1 billion from all western
nations and institutions. (See attached table for details.). India also received
assistance from Communist Bloc countries, most notably ~ loan of approximately
$191 million.
India has arranged with Iran and Iraq for concessional purchases of petroleum
products worth collectively about $250 million this year, an amount equivalent
to about one-third of India's oil requirements at 1973 prices. Loans from major
oil exporting nations for future oil deliveries plus other loans not tied to petro-
leum sales are in various stages of negotiation. The value of these loans is of the
magnitude Of over $1 billion spread over the next few years. Terms are generally
at 2M~ interest with 10 years maturity including 5 years grace.
PAGENO="0271"
269
Until the recent oil crisis, the GOT allowed only the USSR to assist in its
limited oil exploration program. I)uring the past six months, however, the GOT
has encouraged foreign oil exploration flrans to bid on the development of likely
off-shore deposits and two U.S. led oil groups have recently agreed to conduct
preliminary seismic operations in the Bay of Bengal, near the Bangladesh border.
Indian oil officials also Ijave stepped up their oWn exploration activities and in
recent months have sought help from the U.S. Federal Energy Administration in
obtaining faster delivery tune of oil rigs from 15.5. suppliers.
If T may h~ of further assistance to you, please let me know.
Sincerely yours,
WILLIAM E. SIMQN.
Enclosure,
FOREIGN AID AND DEBT COMMITMENTS TO INDIA, 1973-74
[In millions of dollarsj
Country
Approximate
Actual debt share of. mel-
Bilateral restheduled tilateral aid Total
United States
53 29 160 242
Develop loans -
Public Law 480 (II)
Canada
(0)
(53)
87 2 24 113
France
50 10 28 83
Germany
Japan
United Kingdom
Others
Total
Nonconsortium: U.S.S.R. (mainly wheat)
Other bloc
73 53 36 162
81 48 25 154
141 19 55 215
37 18 70 125
522 179 398 1,099
191
13 -
Senator PERCY. How-and this is in line with Senator Case's ques-
tion-can we at this time really champion the cause of the developing
n~itions and help them solve this problem in even a more dynamic way
than we have? Certainly you are in the best position to do that~
Many of us have been talking about the irreparable harm being done
to the third world by these unconscionably high oil prices.
Secretary SIMON. That is first and foremost. We have to work on
bringing the high price of oil down to manageable levels,
Senator PERCY. When you talk about bringing the price down, what
do you have in mind~ Secretary Simon? Are you able to say what is a
possible expectation or reasonable hope for bringing the price down
from the present level?
Secretary SIMON. I think a reasonable hope would be that we would
see no cutback in production by the oil producers who can indeed cut
back and bring supply and demand into equilibrium. I also hope that
in the near future we have a market price of oil rather than one that
is arbitrarily set by a cartel.
Senator PERCY. Of course that is the problem and that is-
Secretary SIMoN, That is we move in.
Senator PERCY. That is what Senator Fuibright is for, when you
have these kinds of margins, new sources of supply, quickly developed,
inOreased supplies will bring prices down as they seek merely to cover
their cost and get a reasonable return on investment. But here the oil-
producing countries arbitrarily, no matter what the production cost is,
set that price, so there is no free flow of the market. Are you looking
for auctioned oil to start to bring that price down?
45-426---75------1S
PAGENO="0272"
270
Secretary SIMoN. That i~ most definitely one of the mechanisms, but
it is not only the auction. I would put the production levels as the most
important criteria for continuing with the present surplus in the world
today and that is what I am working with the Secretary of State on-
a scenario to deal with this problem and other economic and foreign
policy considerations.
U.S. STRATEGY TOWARD OIL PRICES
Senator PERCY. Can you describe for us in Some greater detail what
the U.S. strategy toward oil prices actually is and report to us on the
working group of the Washington Energy Conference that was estab-
lished last February, as to what progress they have made? They have
come out with some sharing arrangements now, is that true?
Secretary SIMON. Yes.
Senator PERCY. If we get into a crisis again, they will share, which
would then help us give a little better bargaining position.
What other things can the group of consuming nations do to improve
our bargaining position?
Secretary SIMON. Senator, the agreements that were tentatively
proposal and now we are taking a look at it here and will be consulting
reached, and I stress "tentatively" because in many countries and in
this country as well the agreement will require ratification by the
amount of energy in this country and I think we could exercise more
conservation methods and I would be in favor of reintroducing some
with the Congress on the arrangements that were made, which will
certainly be extremely helpful.
I think in t'he areas of demand restraint, that while consumption is
down in response to the higher prices worldwide, consumption could
be cut more. As Senator Fulbright said, we use an extraordinary
of these measures. That is Bill Simon's personal opinion.
Congress and any other governments. We just came back from the last
meeting of the energy coordinating group in Brussels with the sharing
THE 55-MILE-PER-noUn SPEED LIMIT
Senator PERCY. You do fully support the 55-mile-per-hour limit?
Secretary SIMON. I most certainly do, not only from the point of
view of energy, but also because there has been a 25 percent reduction
in the loss of lives, which I think is more important than the
conservation.
THE IMPORTANCE OF SAUDI ARABIA AND IRAN
Senator PERCY. Is our strategy in the Middle East dependent then
to a great extent upon the cooperation of Saudi Arabia?
Secretary SIMON. Yes, I would say so. With Saudi Arabia owning
25 percent of the proven reserves, they are certainly the hub of the
wheel in this area.
* Senator PERCY. Could you comment on Iran? Any comment that
you wou]d like to make and if you prefer to make it in executive
session, we will accept that. But I wondered if you could comment on
your reason for not going to Iran and also what it was that caused you
PAGENO="0273"
271
to be piqued at Iran. Why is it that we are not, after having worked
very closely with Iran through the years on many programs and
having a close persona] relationship with their government, why are
we not relying and looking to Iran also in this situation? Is it just
strictly their attitude on oil prices that is totally inconsistent with our
objective to get oil prices down?
Secretary SIMoN. Let me put this in perspective: Iran is not alone
in feeling that these prices are reasonable. They felt, as most, I would
say, of the oil-producing nations felt, that they had been given their
oil away for many years and had not been compensated adequately,
so they feel that now they are getting adequate compensation on what
the replacement cost is, if you will. We have some economic judgments
that. are at variance with this point of view.
When my initial visit to the Middle East was initially set up as a
result of Prince Fahd's visit here in June and the establishment of the
joint working group. In July, the President and Secretary Kissinger
went to the Middle East and promised that the Secretary of the
Treasury would not be far behind. We decided with Secretary Kis-
singer that Kuwait should be on the stop because Henry had promised
that he would attempt to go to Kuwait. He was frankly going back
and forth so rapidly that he was unable to do it.
We considered Kuwait extremely important in this general area.
I had already set up meetings with my counterparts in Europe, in-
cluding Chancellor Schmidt, to discuss the economic and financial
aspects of the problem that had been created by high oil prices. When
I was queried on this subject, I was accused of leaving Iran off the
itinerary due to the fact that I could not get anywhere with them be-
cause the Shah was so intransigent on the issue of oil prices. I replied
something to the effect that "yes, indeed, he is a nut on that subject, and
so that is fine." We all know what was printed after that.
The fact of the matter is I went to 14 locations in 16 days and that
was about the extent of how long I could be away. There will be
trips to other countries in the Mideast, and an extension of the visits
we have taken, and Iran continues to be an advocate of higher oil prices
as do other countries as well in the OPEC cartel.
Senator Pi~ncv. What kind of a role would you like to see Iran play?
They are a very, very important element in the picture and have been
extraordinarily important to our position in that part o~ the world,
and will continue to be.
What would you like to see them do at this stage and what do you
think is reasonable to expect Iran to do in their own long-range
interest of world stability and peace?
Secretary SIMoN. I would hope that they would join together with
Saudi Arabia in working toward a lower price of oil.
Especially in view of what is in their economic self-interest to do
so on the assurance of a market as well as the understanding of what
these high oil prices are doing to some of the economies of the world,
not only the lesser developed nations, on which it is having a devastat-
ing effect, but also some of the more industrialized nations of the
world, and how indeed this is going to be compounded, looking into the
future. .
PAGENO="0274"
272
Senator PERCY. I would like to indicate that if you want to answer
the following question in executive session, you certainly may. It
would be helpful to the committee and the subcommittee if we knew
whether any secret agreements with Saudi Arabia, either verbally or
written understanding, had been entered into dealing with oil prices
and supplies.
Secretary SIMON. Absolutely not, Senator Percy.
THE EMERGENCY SHARING AGREEMENT
Senator PERCY. How does the recent negotiation of the Emergency
Sharing Agreement between the ifidustrialized nations affect our
bargaining position with the OPEC countries?
Do you think ~t has any material effect or is helpful in any way?
Secretary SThX0N. I think, the fact that, the oil-consuming nations of
the world recognize the critical importance of the overall energy issue.
Oil sharing is just one facet of it; it deals with the reintroduction of
an embargo, if you will, We are working on other and more important
areas in the cooperative agreements that we are moving toward in
the areas. of IR, & P., alternate sources of energy, conservation, and
demand restraint. I think all of the components of this consumer
country cooperative package are important.
THE PETRODOLLAR CRISIS
Senator PERCY. What role do you see in the petrodollar crisis for
the free market, U.S. Government, World Bank, International Mone-
tary Fund?
Secretary SIMON. I think they are all coming into play.
When we talk about the recycling of dollars, every one of those
institutions and other methods are being presently employed by the
producer nations both in the form of direct aid, direct industrial agree-
ments, between Iran, say, and France, Iran and Italy, with Iran lend-
ing a billion or two to the United Kingdom, and the oil-producing
countries subscribing in excess of $3 billion to the special facility in
the International Monetary Fund to deal with this problem. All of
these things come into play.
Senator PERCY. We have all been shaken, particularly the Europe-
ans, by the Herstatt situation. Do you feel that the present situation,
given the petrodollar adjustment, floating exchange rates and tight
money, portends grave trouble for the banking community in this
country `and the world? David `Rockefeller the `other day, I think, used
the word panic. He did this, I think, primarily because he simply
wanted to point out the pos~ibility, if prudent conservative banking
practices were not used, of banks becoming overextended in their at-
tempt to gain profits at the expense of perhaps soundness. I think that
warning on his part was well taken.
How do you as Secretary of the Treasury relate the current problem
we are talking about to the stability of the banking community in the
world and how bud or good do you see the situation? What advice
would you have to offer the banks?
Secretary SIMoN. I agree that there exists the possibility of great
strains in the financial markets and we have worked long and hard
since well before the Franklin National problems came into being. And
PAGENO="0275"
273
there again, I agree with Arthur Burns more than with any other
Goyernment official working on the problem. This was a prime subject
of concern during my conversations with the Finance Ministers
overseas.
Senator PERCY. How concerned are European governments?
Secretary SIMON. They believe we should take a more active role as
far as surveillance of these markets are concerned. They aren't as con-
cerned with the United States domestic situation because we do have
one of the most sophisticated regulatory systems in the ba~iking world
today.
rrhe Euromarket is a relatively new market and could experience
greater pains than others due to the consortium that are operating
in this market. I cannot relate the problems of the Franklin National
Bank and the Herstatt and the missing management that brought
about their problems. As I said in my testimony, they went over their
heads and overextended themselves in forward exchange. I would
thing this has cautioned and chastened much bank management in
this country on overextension and financial prudence.
COMMENTS ON THE FOREIGN OIL CONTRACTS BILL OF 1974
Senator PERCY. In a press conference of your very able Assistant
Secretary, Mr. Parsky, as related in the oilgram, Friday, August 2, it
indicated that you would come to this meeting on this basis: Treasury
Secretary Simon opposes any move to make agreements between oil
companies and producer nations subject to U.S. Government scrutiny
and `will go before the Senate Foreign Relations Subcommittee on
Multinational Corporations to say so.
As I interpreted your earlier comments to Senator Church's ques-
tion, that statement as it now stands is not exactly accurate.
Secretary SIMON. No, sir.
Senator PERCY. S~cretary Parsky, would you care to indicate
whether this is an accurate repetitionof your views, and then perhaps
either one of you could interpret. Yo~i do see, as I understand it, a
role-it is a question of whether it comes in after everything is set in
concrete or whether you come in ahead of time.
Secretary SIMON., Or even if it i~ a good idea to set something in
coiicr'ete, should we clearly define what this role of the U.S. Govern-
ment should be' in these negotiations. Does it require~ a statutory lan-
guage, Senator?
Mr. PARSKY. I was trying to emphasize, at that point, Senator, that
it was important for the Government to define its role in the process
under which the negotiations were taking place. The question was
raised as to whether or not contracts should be submitted to the Gov-
ernment for approval, and for scrutiny. Unless we understand exactly
what is taking place during the process of negotiation we really are
entering into th~ process after it has all been concluded. We ~lo not
have the expertise, I believe, in the Government to understand the
intricacies of foreign trading operations of these individual companies.
Senator CHnRCII. It is about time you get it, Mr. Secretary.
Mr. PARSKY. Pardon me?
Senator CHURCH. It is about time you get the expertise.
Mr. PARSKY. Well, what-
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274
WHAT ROLE FOR THE GOVERNMENT IN INTERNATIONAL OIL
Senator PERCY. It depends on how much expertise. I don't think
we should try to duplicate in the Government the whole sophisticated
system of the business community. We will never, with the kind of
turnpver we have, and, all of that, develop that kind of expertise. I
think on Senator Church's side of this argument, his legislation almost
accomplishes what you say yoi~ want, because I cannot imagine an oil
company entering into an agreement and binding themselves, when
they know the Government must agree, without saying ahead of time.
"How do you people in `Washington feel about this ?`~ What I am
worried about is the legislation. It makes us a partner to it. We assume
a degree of respQnsibility and I am not sure we should.
Is it possible, is it p~ractical, for us to look through every single
aspect of this agreement on antitrust, everything else? When we ap-
prove a contract, does that really give clearance for antitrust ahead of
time? Does it then say we made it with you? I would almost rather
the Government to be in a position to criticize if the agreement is not
in the national interest than to set some sort of guidelines which give
a U.S. stamp of approval.
I am concerned about having us sit there and be a third signator
on every contract between two parties. I would be very concerned about
our ability to do it and whether we should or not.
Mr. PARSKY. That was the reference.
Senator PERCY. I think we are all on the track of saying there
probably has to be some new relationship and role.
Secretary SIMON. Yes, sir.
Senator PERCY. And I think we have to bring into account what is
the most practical way that we can approach this problem and not
bog us down in things that make us almost immobile.
MOBIL OIL CO. PARTICIPATION IN MARCOR
Mentioning Mobil, I wonder if I could ask for your comment on
the capital flow situation, the recycling of these enormous profits of
oil companies today. Exxon, had profits over a billion and a half,
Te~xaco a billion, up 94, 95 percent. Mobil has now entered into an
agreement with MARCOR. They will provide the working capital
MARCOR needs for its expansion program. And as I understand it
from the MARCOR management they desperately need that working
capital. They might be restricted and Mobil has the capital to invest
for the future.
I haven't any idea whether it invades antitrust principles or laws
or not. But excluding that, is this in your judgment a way you can
recycle oil profits, domestic oil profits? Is this a way to put them back
in the economy? Is it in our national interest to take an objective open.
look at the situation like this?
Secretary SIMON. Well, I understand the concern and the natural
first reaction. I am going to be testifying before Senator McIntyre's
committee later this week on the subject of oil profits ~nd we have
been doing a study in the Treasury which is now completed on the
components of profitability in the oil industry, and how, indeed, they
made these major amounts of money with some editorial comments
from the Treasury Department on what we have proposed.
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275
Now with all of the suggestions that have emanated from Washing-
ton in the last 8 or 10 months since the embargo last October, about
nationalization of the oil companies, regulating them like public
utilities, and the other punitive comments that have been made, I
would suggest this gives great pause to people who are running some
of the major co'rporations in this country. They wonder as they look
ahead and plan for their corporation 10 years hence what they are
going to be allowed to do and what their obligation is to their share-
holders who have invested their savings in their companies. Is it wise
to begin to look to diversify their operations? Simultaneously, Mobil,
in particular, is I believe investing some $1,600 million over a short
period of time in exploration and development in this country, which
is by far the largest amount ever.
I must admit that that is v~hat the system has always been in this
country, that enabled people who wish to make investments in various
inaustries, ~ ssuming it conforms with the national security and anti-
trust laws. I do not know anything about the antitrust side of jt. If
that is all right, I see no reason philosophically to oppose that.
Senator Pr~no~. There is an emotional reaction to it. I do not think
we can let emotion get into it. From a practical standpoint does it
serve the interests of this country and the consumer? It may well
serve the interests of the consumer and our whole overall national
interest. Do you think the profits are too much? Are we taxing the
profits there? They have the money now.
Secretary SIMON. If they are honestly earned profits, they shoula
be allowed the investment. I have never been involved in the oil
industry in any way when I was back in my other world and I
attempt to look at the profitability of this industry from a purely cold
financial analysis point of view. That is what we are doing in the
breakdown of the profitability and extraordinary events of the last 2
years that brought this about and the majority of it is a one-time
happening. When one looks at the replacement costs for these inven-
tory profits that the oil companies have made, he finds a lot of this
money is going to have to be poured back in to continue to supply the
oil to the American consumer.
PROBLEMS WITH U.S. SECURITIES BEING HELD BY FOREIGN GOVERNMENTS
Senator PERCY. My last question is a short one.
We have had experience with West Germany loaning the U.S.
money. We worked out a part of our offset deals for NATO expenses
and it was a very good arrangement until the Bundesbank called the
notes one day. I happened to be in Germany at the time and asked the
Chancellor about it and he did not even know about it.
lie said the Bundesbank said it is a financial arrangement and they
needed the money and they called the notes suddenly, which werO due
and payable.
Is there any similar thing in these special U.S. Government se-
curities that you have discussed in the Middle East? Can you tell us
something about the interest cost that we would be paying~ the terms
of those loans and whether they are callable and on what sort of
notice?
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276
Secretary SIMON. Well, they have an option. They can buy the
special issues at the market. All our transactions are done at the
market. If they came in and said, "We wish to buy in the 7-year area,"
it is at that particular time the markets chose what the yield is in the
7~year area. They would receive the same interest rate that our in-
stitutions, the American people and foreign government indeed
receive.
They can keep these securities and subject themselves to fluctations
in the marketplace and sell them back to us sometime in the future
at the market price on the day they wish to sell, or they can sell them
to us in the Treasury bill area with 2 days' notice, in the note area
with 30 days' notice, and in the bond area, which is longer than 7 years,
60 days notice. If they* wish to do that they automatically, if it is
prior to maturity, move back to the interest rate that is existent on
that particular maturity on the day they sell it in the open market-
place. I repeat there is no devaluation guarantee or inflation-proofing
or gold backing on these securities. They are the same full-faith and
credit of the U.S. Government which allows them to invest their
funds in fixed income securities in the greatest credit worthy in-
lrestment the world has ever known, It gives them the benefit ob-
viously of avoiding a marketplace that cannot handle the size of the
investment that they have, A fixed capital market cannot handle the
$3 to $5 billion and this enables them to avoid the rise in price that
would occur when the oil countries anpeared in the onen marketplace.
Conversely when they wish to sell, the price would deline, so this
is to their best advantage to do that and at the same time gives them
the liquidity that they desire and indeed need.
Senator Piu~cy. I wish you well in your efforts to get oil prices down,
The alternative courses of action outlined as a result of these prices is
very, very difficult. It is a slippery slope that you are on. Thank you.
Senator CHURCH. Thank you.
U.S. PROGRAM INADEQUATE
Mr. Secretary, reflecting back upon the testimony this morning' and
the questions that have been put to you, I have to conclude with Sena-
tor Case that the only program that surfaces here is a ~`bànd-aid"
proposition.
The central question we have been asking and your principal con-
cern in goin~g to the Middle East had to do with bringing prices down,
or trying to get prices brought lown.
We have agreed that is the basic problem facing not only the United
States, but the rest of the Western W~r}d.
Secretary SIMON. That was not the purpose of my trip, Mr.
Chairman.
Senator CHURCH. Well, this was certainly something you had very
much in mind as you discussed the whole problem-
Secretary SIMON. Yes, sir.
Senator CHURCH [continuing]. With the various governments. And
it is that particular question with which we are dealing today, given
its inflationary impact, which I think is carrying us toward the brink.
I have to say that there is no more evidence that we are seeing it today
than in 1929-30. I hope that it does not come to that. But the dimensions
of the problem are very great indeed.
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277
This subcommittee has been looking into multinational corporations
for some time, as you know. We started our inquiry with `some interest-
ing figures. Economists caine here to tell u~ about the phenomenal
growth of the. multinational corporations. They pointed out to us that
American-owned rnuitinatipnal corporations in `25 years since the end
of the Second World War had invested $100 billion in foreign lands.
$107 billion, I believe, was the figure in a 25-year period, and they
all remarked upon this as a phenomenal outreach by American com-
panies in foreign investment that had revolutionized the economy of
the Western World.
In 2 years the Arab oil-producing governments of the Middle East
will have considerably more than that to invest in the Western World.
We are talkin.g about 2 years, not 25. All of this is a direct result of
this highly inflated price for oil.
Now I am not being moralistic about this. I cannot blame them for
getting all they can. I expect they would do that and it wasn't simply
the war in the Middle East that brought this on because the other oil-
producing governments, unconnected with the war in the Middle East,
such as Iran, Venezuela, Canada, immediately fell into line once the
new price had been established.
So here we are faced with this tremendous inflated price for oil,
and what have you suggested today in the way of reasonable expecta-
tions for bringing it down? Nothing, I gather, other than the develop-
ment of alternative sources which you have conceded will take a num-
ber of years, and possibly the effects of conservation, though I cannot
take any conservation programs seriously in this country wh~n we do
`not even address ourselves to l)etroit and the production of those gas-
guzzling monsters. I do not think that conservation is much more than
window trimming.
Even if we had adequate conservation, this `subcommittee has dis-
covered in its inquiry into oil that if anything does not operate when
it comes to determining the price of oil and the production of oil, it
is the free market. It has not operated before; it is not operating now.
And the big oil companies in their interlocking arrangements among
themselves and with their special concessions in the Middle East have
controlled both the price and production of oil for years.
Now they ar~ seeking in the ~ew situation to do the same, by enter-
ing into buy-back arrangements which will preserve their exclusive
right to `purchase the si~nie arrangements by the international oil cartel
with which this world has been plagued since the 1920's. They are now
beginning a new arrangement with the same old controls that they
have hadin the past. .
This committee has sought to find ways to break out of that bind.
Some of us on this committee have talked about the desirability of
auctioning oil and e~tabii~sbing a free market for oil in the world, of
breaking away from the old cartel `arr&~g~nien.t. Yet, Saudi Arabia,
which is the only Government `out there that seems at least to talk
about th.e' desirability of lower prices, has suggested that they would
auction oil. This suggestion has been obviously undercut by the new
4teal between Kuwait end Gulf, because this new deal and the old
pattern is establishing another line of higher prices and the other com-
panies are going to fall in that pattern. You are not going to have
auctions as long as this happens. The one chance we have of obtaining
PAGENO="0280"
278
lower oil through auctioning seems to me to be going down the drain.
I would conclude this by asking you this one question: Is there any-
thing in~the administration's program seeking lower oil prices that
does not lean upon long-term exclusions, such as improving alternative
sources for oil and lessening our dependence upOn these producing
governments, or the long-term effects of ~ conservation program in the
use of oil?
Is there anything besides that you have to offer this morning that
would give us reasonable hope that something can be done in the short
term to temper the high price of oil?
Secretary SIMON. Obviously everything yoti have' mentioned, and
I recognize this, is of a longer term n~ture to bringing on the alterna-
tive sources, the cooperation among the consumers as well as the pro-
ducers. I must admit that I do not think that our efforts in the eco-
nomic and financial side are a "band-aid" because they are assisting us
through a very difficult period, during the period of the reflow of
funds and the economic cooperation which is going to solidify our
reiatiohship in the future, but that does not deal with the problem of
oil prices.
Senator CHUnCH. Eight.
Secretary SIMON. It relates more to political considerations than it
does economic ones. As you and I fully agreed the market is not being
allowed to operate, when the prices are arbitrarily set, and that is why
I have been working with the Secretary of S~ate on this scenario. I
would be delighted to comment on it further in executive session,
Mr. Chairman.
Senator CITURCII. We will tomorrow, Mr. Secretary, I understand.
Secretary SIMON. One further thing, you mentioned the subject of
Kuwait's arrangements with Gulf. As you know, this only runs
through the end of September as far as the 94.8 percent agreement.
This in my judgment does not necessarily relate itself to the Saudi
auction and what Saudi Arabia will do with its own oil. It relates to
what Saudi Arabia will do as far as the agreement with ARAMCO
is concerned, because they are bound to negotiate at the same level 011
the ARAMCO portion of the oil, et cetera, but on the free oil that
Saudi Arabia owns they are not bound to that.
Senator CntrRcli. Well, I just feel that the pattern of the past is be-
ing repeated, and in the absence of a different sufficiently strong policy
on the part of the U.S. Government'this is bound to happen. The Gulf
price will now become the new price for all of the American conces-
sions in `the Middle East, and instead of having achieved a moderate
reduction in oil prices from these highly inflated levels, we will have
a still higher price.
All of this suggests to me that the u.S. `Goveriiment cannot any
longer afford to leave the matter of oil prices to the mt~jor oil com-
panies as we have done in the past.
We face a completely new revolutionary situation in oil. And if we
are to protect the national interest the Government must play a much
more central role.
I am told Mr. Sawhill's staff is coming up to meet with the sub-
committee on Wednesday, afternoon to suggest language changes.
We are trying to cooperate with him in developing some legislation.
PAGENO="0281"
279
He has indicated that he feels the need to have some authority in the
premises where negotiations with foreign governments are concerned
relating to the price of oil. I would invite you, too, or your staff, to
participate because it Is very important to secure as much help as we
can from you in giving us guidelines as to what kind of legislation
might be helpful. We stand ready to do that and we invite you to
offer that.
Secretary SIMoN. I would love to, Mr. Chairman, thaiik you.
Senator CHURCH. Thank you very much, Mr. Secretary.
Senator FTJLBIiIGIIT. If I could ask just one question: Talking about
the distinction between long and short term, is not the political settle-
ment of a conflict the most important thing that the Government could
bring about?
Secretary SmI0N. Yes, sir, it is.
Senator FULBEIGHT. Short term, the readjustment of the method of
pricing by the oil companies is not a short-term problem. That will
take a good deal of doing. If you organize a relationship between pri-
vate enteiprise and the Government on setting prices~ would it not be
a long-term problem?
Secretary SIMoN. Yes; it is.
Senator FULBRIGTIT. So it comes back to the thing that we do not like
to face up to and that is the solution to the war in the Middle East.
It is too difficult for us to face politically. Is that about right ?~
Secretary SIMoN. Well, I do not think that it is too difficult for us
to faee~ Senator. I think that Secretary Kissinger-
Senator FULBRIGHT. I didn't mean Secretary Kissinger, I mean the
Congress. You don't have to comment on that.
Thank you very much.
Senator Ciiuncii. Mr. Secretary, I believe that Senator Case had a
few questions he wanted to get answered.
The answers will be submitted for the record.
[The information referred to follows:]
SENATE COMMITTEE ON' FOREIGN RELATIONS,
SUBCOMMITTEE ON MULTINATIONAL CORPORATTQN,
October ~3, 1974.
Mr. THOMAS DUNCAN
Legislative Affairs Office, Department of the Treasury, Washington, D.C.
DEAR TOM: Following our conversation of October 22, I have enclosed some
iuestions as asked during Secretary Simon's testimony and in written form at
the hearing of August 12.
We are in receipt of a letter dated September 12 from Secretary Simon to
Chairman Church which, however, does not appear to respond completely to the
questions raised by senator Case.
As I see it, there are six areas in which Senator Case requested further
information:
Question 1. Senator Case wanted to know what documents were exchanged with
Egypt under the Investment Guarantee Agreement and requested copi~s of them,
as well as the exchange of notes between the Secretary and Egyptian officials~
Question ~. Senator Case requested information on the estate tax aspect of the
`double taxation agreement specifically with Israel and also under the standard
tax trea'ty.' He specifically wanted to know what the tax benefit to legatees iS
under such agreements.
Question 3. Senator Case wanted further details of the concessions regarding
interest rates that were granted to Saudi Arabia and other countries in order to
encourage them to purchase Treasury bills and a written question was submitted
asking for details as to the amount of subsidy this involved.
Did the agreement involve some guarantee against U.S. sequestering of funds
in the event of a future oil embargo?
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280
Question 4. Senator Case requested in writing further information on the U.S.!
Saudi Arabia joint commission, its membership and operations. He wants to know
how much this commission is authorized to spend and how this sum is to he
financed. What is the role of A.I.1D. and the Corps of Engineers in Saudi Arabia.
How is this financed and coordinated?
Question 5. The Senator requested information as to whether the Internal
Revenue Service is considering a request for foreign tax credit to be granted in
case of "buyback" oil agreements. Has any ruling been made? What was it? Is
it anticipated that there will be a ruling in the near future?
Question 6. Finally, can you give us details or the negotiations betwCen the U.S.
Government and Gulf Oil regarding their agreement to purchase "buyback" oil
from Kuwait at $10.95 per barrel and of Secretary Simon's role?
Sincerely,
VIVIAN Lvwis,
Senior Minority Staff Member,
Subcommittee on Multinational Corporations.
DEPARTMENT OF THE TREASURY,
Washington, D.C., December 30, 1974.
Ms. VIVIAN LEWIe,
Senior Minority Staff Member, Senate Committee on Foreign Relations, Subcommittee
on Multinational ~iorporations, U.S. Senate, Washington, D.C.
DEAR Ms. LEwIs: Per your request of October 23, 1974, I have enclosed addi-
tional information relating to Secretary Simon's testimony of August 12. The
questions posed by Senator Case come under my areas ofresponsibility and either
myself or my staff would be happy to further assist you anytime in the future.
Sincerely,
GERALD L. PARSKY.
Enclosure.
Answer 1. See pages 250-253 of this hearing record
Answer 2. The United States has not entered into a tax convention with Israel
for the avoidance of double taxation with respect to estates oE inheritances. In
November 1968 preliminary discussions were held in Jerusalem, but no drafts
were exchanged and no subsequent discussions were held. A treaty with Israel
relating to income taxes was signed on June 29, 1965. It was submitted to the
Senate for advice and consent to ratification on the same date, but the Senate has
never acted on that treaty. In any event, the treaty would have had no effect
upon estates.
We do not have a standard form of estate tax treaty, arid our usual income tax
treaty does not effect the taxation of decedent's estates or legatees with respect
to their inheritances. We have, however, concluded estate tax conventions with
numerous governments ine~uding Australia, Finland, France, Ireland, Nether-
lands and the United Kingdom.
*Our latest estate tax conventions reduce the prospect of double taxation of
property passing from a decedent to his heirs by granting primary taxing juris-
diction to the country of domicile of the decedent; generatly, the country of which
the decedent waS neither a citizen nor domiciliary taxes only real property and
business assets located in that country. In a manner similar to our income tax
treaties, these treaties also aid in tax administration.
Because the U.S. taxes a decedent's estate on the value of his Ostate ~rt death,
rather than taxing the Iegatiee on the value of his inheritance, estate kax conven-
tions do not directly benefit any individual legatee. However, to the~exterit that
they prevent an estate being taxed twice on the same assets they of course in-
crease the amount available for distribution and thus benefit the legatees.
Answer 3. During his trip to Saudi Arabia in July, Secretary Simon discussed
with officials of the Saudi Arabian government in general terms the possible pur-
chase of "speciat" Treasury obligations. These issues would be non-marketable,
but would be at market rates and maturities. Thus, there would be no element of
subsidy involved in any Saudi purchase of U.S. Treasury obligations. Our di's-
cussions did not touch upon a U.S. guarantee against sequestering of fu~ids in the
event of a future oil embargo.
Answer 4. The Joint Statement on Saudi Arabian-United States Cooperation,
which was signed in Washington on June 8, 1974 by Secretary Kissinger and
Prince Fahd, established the Joint Commission on Economic Cooperation. The
Joint Statement specified that the Commission will be headed by the Secretary
of the Treasury for the United States and by the Minister of State for Finance
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and National Economy for Saudi Arabia,. Four working groups were formed:
(1) industrialization, (2) manpower and education, (3) science and technology
and (4) agriculture. Assistant Secretary of the Treasury Gerald L. Parsky serves
as the executive secretary of the Commission and coordinates all of these working
groups. The Saudi government has named Dr. Soliman Solaim as its coordinator.
It has been agreed that USG experts provided to Saudi Arabia through the
Joint Commission will be on a fully reimbursable basis. A Technical Cooperation
Agreement which will formalize the reimbursable mechanism will be signed shortly.
All), along with representatives from other IJSG agencies, participates at the
working group level of the Joint Commission. AID has no indepedent programs in
Saudi Arabia. Tip to now the Corps of Engineers has assisted in the development
of military infrastructure in Saudi Arabia. For example, the Corps of Engineers
has participated in the construction of military installations and cantonments.
The Corps of Engineers has been requested to assist in the setting of standards for
industrial construction. This request is under consideration by the Department
of Defense.
The services of the Corps of Engineers are paid for by the Saudi Arabian Govern-
ment on a fully reimbursable basis and are coordinated by the Departments of
State and Defense.
Answer 5. We understand that the Internal Revenue Service has not received
any requests for a ruling and therefore, has not ruled on the question of the
avilability of the foreign tax credit in the case of taxpayers who have entered into
"buyback" oil agteements with producing countries, nor do they expect to rule
on this question in the uear future.
Answer 6. The Administration learned in early July that an agreement with
respect to such a purchase was under discussion by the Gulf/BP and the Kuwaiti
authorities in the aftermath of the decision by Kuwait not to accept lower bids
for its participation oil in an auction which had recently been held. U.S. Govern-
ment officials then held a number of discussions with Gulf representatives to make
known to them that it was the government's view that there was a surplus of
world wide production relative to current demand and that there was, therefore,
strong downward pressure on oil prices. The Treasury Department pointed out
that while we were cognizant of the threats of various producers to cut their
levels of production in an attempt to sustain high prices, in our view such prices
were not in the interests of either the oil producers or the consumers. At the same
time, we wCre aware that only a fraction of the oil being discussed by Gulf was
likely to be shipped to the U.S., since the bulk would be used in overseas opera-
tions, but we were also aware of the significant precedent that the proposed agree-
ment might have in other areas. We do not know all of the reasons for Gulf's
decisions but it is our understanding that among the factors taken into account
was the company's interest in insuring agaihst unfavorable treatment in the future
on its equity interest in the Kuwait Oil Company. Gulf receives oil from Kuwait
as a result of a 20 percent interest in the Kuwait Oil Company-which is, as a
result of prior agreements, owned 60 percent by the Government of Kuwait. The
oil is received by Gulf as a result of its equity ownership is at a lower effective
cost. Further, I understand that Gulf was concerned about being able to par-
ticipate in future purchases of the oil being sold by the Government of Kuwait
from the government's share of the Kuwait Oil Company.
Secretary SIMoN. rihank you very much.
I have another testimony this afternoon.
Senator CHURCH. Thank you very much.
[Whereupon, at 12:45 p.m., the subcommittee was adjourned sub-
ject to the call of the Chair.]
0
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