fixing. Any conservation that might have resulted is purely incidental if not accidental.

I have pointed out the above control measures to show you how the profits of the major oil companies have been fortified over and above their profits from pipe lines and tank-ship transportation. They control the pipe lines and practically all of the tank ships, and their profits therefrom are tremendous. I will refer to pipe lines in more detail later.

In addition to the control features mentioned, the integrated oil companies combined and conspirted together to pick up any possible supply of gasoline that might interfere with their fixing of the refinery or crude-oil markets at levels to suit themselves. Sixteen major oil companies and thirty of their officers were found guilty of conspiracy to violate the antitrust laws of the United States by a jury of their peers at Madison, Wis., over a year ago (U. S. v. Standard Oil Co. (Indiana) et al., No. 11365, criminal). The conviction was on the charge of pool buying and raising the price of gasoline to marketers and consumers. The Government attorneys estimated that this gigantic conspiracy profited the conspirators some 70 million dollars. In another case, involving indictment for illegal agreements fixing jobber margins (U. S. v. Socony-Vacuum Oil Co., Inc., et al, No. 11364, criminal) 13 major oil companies and 11 of their officers pleaded Nolo Contendere, which in the words of the Department of Justice amounts "virtually to pleas of guilty." They were assessed fines of $360,000 and $25,000 court costs.

I will attempt to show you that the major oil companies have made profits in their over-all operations and yet lost money in marketing. Costs of marketing by major oil companies wherever revealed have shown figures way in excess of the margin allowed to independent oil jobbers. The investigation in Michigan in 1935 and a previous survey in Cleveland, Ohio, in 1934, as well as some of their own documents, bear out this point. For several years the major oil companies have been allowing their commission agents as much or more than the margin allowed independent oil jobbers. And in the case of a commission agent the petroleum products are carried on consignment in the tanks of the company, so that the agent has none of the normal overhead carried by a jobber. In fact, the evidence seems to indicate that the major oil companies have encouraged independent jobbers to become commission agents as a way out of their troubles. Those who took this route, however, found that their plant was leased for a fixed term of years, while their employment contract had a cancelation clause.

Integrated oil companies have operated their marketing outlets at a loss for a number of years. This may be hard to understand, but it is no doubt their desire to control the entire integrated function from the drilling of the well to the sale of the finished product to the consumer. Once the independent jobber is eliminated you can well imagine that absorption of marketing losses by major oil companies will cease.

In a prospectus of the Texas Corporation dated February 5, 1937, the following statement appears on page 77:

While both domestic and foreign marketing operations, considered as departments, have shown losses in each of the years 1930 to 1935. the marketing operations of the corporation's subsidiaries are, in my opinion, as good or

better than average good practice in the industry. Costs of marketing are low and the marketing departments, both domestic and foreign, have performed well their primary function of providing assured outlet for the products of the corporation's subsidaries and thus permitting them to operate broadly in the other branches of the oil industry.

In a prospectus of the Pure Oil Co., dated August 30, 1937, there appears on page 10 the following admission:

Under conditions exiting in recent years, marketing operations, considered as a separate and distinct activity, without regard to earnings from collateral operations, and based upon the acquisition of refined products by the marketing divisions and subsidaries at no allowance from published wholesale market prices, show substantial losses with the result that the company's consolidated net earnings have been substantially less than they would have been had it been possible for the company to sell its crude-oil production as such at posted prices or as refined products at full wholesale market prices.

In the above instance, if the Pure Oil Co. had not lost money in marketing, they would have had a larger net income upon which to pay taxes and also to pay dividends. Larger dividends would have meant larger income-tax payments from the individual stockholders. Then, too, if oil marketing were left to stand on its own, the independent companies and individuals operating therein would quite likely have net profits upon which to pay taxes to pay dividends.

In the October 1937 issue of Fortune Magazine appears what is supposed to be a highly complimentary article on Gulf Oil, with photographs, maps, and charts to picture the growth of this company. From the standpoint of the independent jobber the activities of these large integral organizations are anything but consoling. Among other things, the article points out that—

In 1935, Gulf's 7,800 miles of pipe charged Gulf's refineries $16,000,000 for delivering to them 50,000,000 barrels of crude. Of this, $6,000,000, a fancy 37 percent, was profit * *.

*

And no wonder, between pipe lines and crude, that Gulf did not much care whether its 8 refineries and its 2,300 filling stations made any money or not. The "locked profits" in crude sufficed to explain Gulf's extraordinary prosperity to almost everyone's satisfaction.

In the June 1939 issue of Fortune Magazine will appear a similar story about Continental Oil. It recounts the growth of this company under Morgan management with Morgan money. Among other things, it recounts the building of the Great Lakes pipe line by Continental and five other companies, saying:

In building the line Continental and its five collaborators put up a total of $5,500,000. The Guaranty and other bankers supplied an additional $8,000,000, and with this $13,500,000 pledged, work was started. The project, when completed, cost $26,000,000-but half of this was financed out of earnings. Continental owns a 29-percent interest in Great Lakes Pipe Line Co.; and from 1933 to 1938, inclusive, it has received a total of over $8,000,000 in dividends. This is nearly one-fifth of Continental's net earnings in the period.

Then the article proceeds to go into the matter of losses in marketing, saying:

Those spectacular dividends, however, are subject to qualification. For in great measure they do not represent a straight "net" to Continental. They have been largely offset by losses suffered by its marketing division in expanding its operations in the Chicago and north central areas. Take, for example, 72-octane gasoline moving up to Chicago today. The wholesale price (tank-car price) per gallon of this gasoline at Ponca City is about 44 cents. Roughly, at this price the Ponca refinery transfers the gasoline to the company's marketing division, which then becomes responsible for its distribution. In the case of Chicago sales, the marketing division pays over to Great Lakes Pipe Line a 2.64-cent trans

portation toll at the Chicago end, either sells the gasoline to a jobber or handles the distribution all the way to the filling station. If the marketing division does the job, it must get a spread of 3 cents to cover maintenance of storage bulk plants, gasoline trucks, and for general expenses.

I might point out that the same company will contract with the jobber for a 2-cent margin in that midwestern area, while with its own marketing department 3 cent margin is insufficient.

Add

The gasoline now goes to the filling station at what is called the "tank-wagon" price, and the dealer wants a spread of at least 4 cents to make a profit. on 4 cents for taxes (1 to the Federal Government, and 3 to the State), and the retail price of gasoline ought to be about 181⁄2 cents if Continental's marketing department were to be entirely happy.

The fact is that regular gasoline is being retailed in Chicago at approximately 2 cents below that level-partly owing to a gasoline-station price war, fundamentally owing to the fact that the opening up of crude production in Illinois has tended to depress prices in the Chicago area. As a result Continental's merchandising department sacrifies part of its 3-cent margin and is losing on every gallon of gasoline going into Chicago. But part of that loss gets sluiced back to the company through Great Lakes Pipe Line dividends, and from Continental's point of view both loss and gain are purely bookkeeping. If Continental owned Great Lakes Pipe Line outright, it might operate it at cost. Whereupon there would be no pleasant profit item appearing on its books from ownership of the line, nor would there be a loss chalked up against its merchandisers. Over a period of years, Continental figures that dividends from the pipe line have about equaled "bookkeeping" losses of its marketing division. And its general policy has been to pull out of a territory where the total of pipeline (crude and gasoline), refining, and marketing operations do not at least break even.

This, of course, does not quiet the shrieks of the small midwest refiner who has no pine line to get him into Chicago. Nor does the policy of treating pipe lines, refineries, and marketing as one operation console the gasoline jobber. Where gasoline prices are falling, he is subject to precisely the same kind of a squeeze as is the marketing division of an integrated company, but he has no compensating income from refineries and pipe lines to make good his losses. Hence the continual agitation for the divorce of all pipe lines from the major companies.

On March 20, 1939, Mr. Kirkland, attorney for the Standard Oil Co. of Indiana and their officers in the oil conspiracy case (Criminal No. 11,365) before Judge Stone in Federal Court at Madison, Wis., when the question of the Standard's profits had been discussed by Government counsel, argued that: (pp. 12.475 and 12,476 record):

Then they say, "Oh, well, the enormous income," and that is when the statement was made, or previous to that, about the profits of the Standard of Indiana, taken out of the daily press the other day. It is obvious why that statement was made. Not anybody connected with this case could make a statement of that kind and have any weight.

Your Honor's experience at the bar before you went on the bench, where you represented business corporations and partnerships, taught you that it is not the amount of money you make. It is the percentage it bears to the amount you have invested that shows whether you have a good business.

*

Well, I don't know, but I venture to say if the truth be known that the profit might be made from transportation, from producing, and from selling, the 2,000 other products that the Standard of Indiana makes from a barrel of crude.

I wish to call your attention to a chart appearing on page 26 of the December 1937 issue of World Petroleum, which chart was published in connection with an article by Paul Ryan on Can Marketing Produce More Profits? Also, to the figures used as the basis for Mr. Ryan's chart appearing on page 27 of the same publication. That is the chart on page 23 of World Petroleum which I hand you, Mr. Chairman.

Mr. HEALEY. Do you have another copy of this chart?
Mr. HADLICK. Yes; we submit that for the record.

Mr. HEALEY. It may be inserted in the record at this point.
(The chart referred to is as follows:)

COMPARISON OF NET PROFITS AND INVESTMENTS BY MAJOR DIVISIONS OF THE PETROLEUM INDUSTRY

REPRODUCED FROM "WORLD PETROLEUM" DECEMBER 1937, PAGE 26

Mr. HADLICK. And also, Mr. Chairman, the figures that are attached to the chart, which are from page 27, the same publication, and which, you might say, are the figures which bear out the chart. Mr. HEALEY. You have an extra copy of that?

Mr. HADLICK. Yes.

Mr. HEALEY. It may be inserted in the record, also.

(Said figures, entitled "Table 2," is as follows:)

TABLE 2.-Income of the petroleum industry by division and by years

1 Deficit. Data through courtesy of Young Management Corporation, New York: "Oil Attains Prosperity," Nov. 28, 1936.

This chart shows at first a white space indicating the investment of the whole industry; the black space side of it represents the profits of the whole industry; the next small white space represents the investment in the pipe-line division, and the large black the portion of profits therefrom. And next a white space showing investment in production and the large profits therefrom represented by the black line side of it. The final white space above the line will be found by itself. This represents the investment in both refining and marketing. Despite the fact that refining has at times been profitable, you will note an over-all tremendous loss in refining and marketing, as shown by the projection of the black lines below the zero level. This chart shows what we are up against: The using of profits from other branches of the oil industry to embarrass the independent oil marketer.

It is interesting to note that the author of the above article and chart, in conjunction with Mr. Edwin L. Kennedy, has published another article along the same line on page 28 of the April 1939 issue of World Petroleum. The same chart is reproduced on page 29. The title of the article, however, is "Will Companies Eliminate Marketing Losses Before Government Does?"

To answer the query of the Ryan-Kennedy article it is my view that the integrated oil companies do not intend to eliminate their losses in marketing until they have complete control of the marketing of petroleum products. At least since 1930, the major oil companies have been absorbing these marketing losses.

When the National Industrial Recovery Act was enacted, the oil industry met to draft codes. The independents insisted that a provision be placed in the code to protect them. After much argument the first draft of a code in June 1933 contained a rule 26 reading:

Inasmuch as there are firms and corporations in the petroleum industry who severally or through firms and corporations, owned or controlled, constitute and comprise a complete or integrated unit in such industry or produce and refine petroleum and market the products manufactured therefrom, it is therefore the declared policy of this industry that the business thereof shall be so conducted that the several branches of this industry, viz: Producing of petroleum, refining, and marketing of refined products, may be carried on upon a profitable basis and that no one or more of said branches shall obtain