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MEMORANDUM

To: Members of the Permanent Subcommittee on Investigations.
From: Henry M. Jackson, Chairman.

Subject: Military Procurement of Oil Products.

In late December of 1974 this Subcommittee learned that the military had reached an impasse with the major oil companies in contracting for its petroleum supplies for the following year, just days away. The oil companies refused to supply data to back up their prices and would not enter into contracts containing these clauses, and clauses requiring conformance to certain cost accounting standards. The military felt that it could not legally accept petroleum supplies without a contract even if offered by the oil companies.

Thus the uninterrupted flow of oil to the military and especially to strategic overseas bases was threatened.

The Subcommittee took an active role in trying to break this impasse and work out an accommodation between the parties. After I wrote the oil companies and urged them to meet their national responsibilities and enter into these critical contracts, a contract to continue to supply the Navy's "Operation Deepfreeze" in Antarctica with appropriate clauses requiring backup data and compliance with cost accounting standards was agreed upon.

Subsequently, other companies agreed to cooperate and began supplying additional data to the Defense Fuel Supply Center which the Center said established market prices against which Defense purchases could be measured. Because this meant that cost or pricing backup data need not be submitted by the oil companies I asked the General Accounting Office to examine if such exemptions were warranted. I am awaiting their report.

In the course of its activities Subcommittee staff began an intensive examination of military procurement practices and prices paid by the military for its oil products.

The Staff's findings are deeply disturbing. Defective Military oil purchasing practices have added millions of dollars to the cost of petroleum purchases. Others must also share the blame. The oil companies have not been forthright in their negotiations with Defense by constantly refusing to supply adequate backup data to contracting officers. The Federal Energy Administration, though asked by Defense whether prices charged were reasonable, failed to properly assist a government agency making such massive purchases. Indeed, FEA, by its own regulations governing the "pass through" of increased costs by the oil companies, may have provided justification for the companies' higher jet fuel charges for the military as compared to commercial airlines. The Defense Fuel Supply Center has informed us that after the Subcommittee began its investigation, prices previously offered by the oil

companies were reduced by $32 million and all necessary contracts signed. The Subcommittee, though pleased with any cost savings generated as a result of its activities, still finds the crucial question to be whether Defense is overpaying for its petroleum products. Accordingly, I have asked the General Accounting Office to make a thorough examination into procurement practices of DFSC to determine what is being done to eliminate defective procedures and practices. I have also asked the Federal Energy Administration to make a full and complete investigation into whether the major oil companies were and are presently loading a disproportionate amount of "pass through" charges to government contracts.

In closing, let me again thank Senator Charles H. Percy, the ranking minority member, and minority staff for their cooperation.

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