ustxtxb_obs_1974_05_24_50_00017-00000_000.pdf

Net Income After Texas as Percent of Stockholder Equity Company 1970 1971 1972 1973 Exxon 12 12.6 12.5 18.8 Mobil 10.6 11.2 11.2 15.5 Texaco 13.1 13.4 12.4 9.8 Gulf 10.4 10.2 8.2 14.6 9.8 10.4 10.5 15.3 Shell 8.7 8.7 8.9 11 9.3 9.6 9.9 12.9 ARCO 7.4 6.9 6.6 .8.8 comes about, it would, according to Heller and Perry,’ increase the presently anticipated inflation in 1974 by about 55 percent. We should then see the oil companies enrich themselves, \(while thus billion, even after paying the Nixon excise taxes on price increases if such are indeed imposed. When it is considered that the consumer price index advanced nearly 9 percent in 1973, against the administration’s projection of a 3 percent rise, and that the inflationary rate over the last several months would indicate an annual increase at about 10 percent \(Heller and Perry project 51/2 percent plus an additional 3 imposition of these inordinately high prices of crude petroleum must be viewed as cruel exactions, indeed. The “oil factor” in inflation does not just reflect the 50 percent now anticipated as the increase in the price of gasoline from last summer to this one. The price of steel includes a 17 percent energy component. Agriculture consumes about 3.0 percent of the fuel consumption in the U.S. Thus, agricultural commodities and products made of steel, as well as nearly all other goods and services, will reflect this “oil factor.” WE MUST roll back oil prices if this most undesirable inflation is to be avoided. But let us first see how they have rolled forward. During the 10 years after 1962 the price of crude petroleum hovered around $3 per barrel, and oil companies earned income on investment at an average of about 11.5 percent during that period. But the price of oil rose enormously in 1973, as is shown by monthly average prices below: 1973 Domestic Crude Prices January $3.40 February 3.40 March 3.41 April 3.47 May 3.62 June 3.78 July 3.79 August 3.86 September 4.27 October 4.49 November 4.73 December 6.31 The Federal Energy Office has held only “old oil” 2 \(which constitute about 71 but even this oil was permitted to advance in the fall and winter of 1973 as follows: September 4.18 1 See study “The U.S. Economic Outlook for 1974,” prepared for National City Bank of Minneapolis, January 1974. Walter W. Heller was former Chairman of the Council of Economic Advisers and George L. Perry is a fellow at Brookings Institution. October 4.11 November 4.25 December 5.25 New oil is not subject to price control, and it has advanced as follows: 1973 September $ 5.12 October 5.62 November 6.17 December 9.51 19 74 January 10.35 This has brought the average price of all oil sold to $6.75 on January 1, 1974. I am proposing legislation to roll that high price back to the price prevailing on Nov. 1, 1973 for old oil to an average of $4.25 per barrel. But my proposal would provide a margin of increase above this level for new oil generally. New oil was at an average price on Nov. 1, 1973 of $6.17 and the rollback is to the actual price in each category on Nov. 1, 1973. As will be seen later, my proposal would not limit the price on new oil produced by “independents” \(those who produce two tenths of one percent or less of U.S. crude oil and lease condensate production reasons for this will be pointed out later. It will be noted that under my proposal the rollback would be to a time when the average price of domestic crude’ oil was about $4.73. Would such figure permit exploration that would bring in new sources of supply? Oil men and petroleum councils have said that it would. The $4.73 figure, an average price of both old and new oil, is higher than that which the National Petroleum Council or the Independent Petroleum Association of America said in 1972 would be adequate to assure the United States one hundred percent self-sufficiency by 1980. IN JULY 1972 Business Week quoted John G. McLean, chairman of Continental Oil Company, to the effect 2Old oil is the volume of crude produced by a well, not exceeding that volume produced in 1972. Presently if a well produces more crude than it produced in 1972, the excess is “new oil” and is not subject to price controls. that, if domestic crude prices should rise to $4 a barrel \(from the then average of $3.40 tertiary recovery would be economical. On Oct. 24, 1973 when the average price of crude was about $4.50 John E. Swearingen, chairman of the Standard Oil Co. of Indiana, thought this enough to provide “additional incentives and additional funds for intensified exploration for new supplies of oil and gas.” “Our company,” he said, “has embarked upon the most extensive exploration and development program in its history with particular emphasis on the U.S.” As foi increased drilling for new oil the price would be governed by the actual price in the field which, as we have seen, averaged on Nov. 1, 1973, $6.17. At this time the Petroleum Independent, published by ‘the Independent Petroleum Association of America, in its November 1973 issue, quoted a Houston producer-geologist as saying: “There’s no doubt that prospects are for increased drilling. Everybody I know is planning on it. With new oil prices from $5.30 to $6.00 per barrel, there’s incentive now to go looking for oil.” But the most telling point in favor of the proposition that a rollback of domestic oil prices on old oil \(and on new oil of the enough capital to permit exploration and development of additional resources is the profit picture of the eight largest domestic Even more significant is the increase in profits realized by these companies in the third quarter of 1973 over their profits for the third quarter in 1972. This is directly pertinent because they were enjoying returns from prices in that quarter at less than the rate permitted under my proposed rollback. For the third quarter, oil prices were considerably lower than would be permitted under my proposal. Yet note the very substantial increase in profits in the case of each of the companies. I believe it is desirable to leave open an area of oil pricing to permit profitable exploration and recovery of the really hard-to-get and high priced new oil. To do so would answer the last argument that May 24, 1974 17