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Our members, along with the nation's independent dealers, are the “nonbranded independent marketers and branded independent marketers" whose "competitive viability" DOE's regulatory scheme was, in part, set up to “preserve." (Emergency Petroleum Allocation Act, Sec. 4(b) (1) (D). They understand that these very regulations, so vitally needed during the embargo, are responsible for the market dislocations which we now suffer. NOJC has, in fact, consistently pushed for the deregulation of gasoline prices and supply and believes this is the only real solution to our present and future supply needs.

But the question before us today is not deregulation. It is Shell's request for permission to alleviate a short-term product shortfall by better sharing of the available product between Shell's jobbers, the dealers they supply, and Shell's directly supplied dealers.

WOJC cannot predict the exact effect of this exception on its members because "proprietory” information in the Shell filing has been deleted. But we are accustomed to addressing issues without facts, and this lack of information is only a minor annoyance.

Even without the necessary numbers, the statements in the Shell filing, that while its direct dealers have grown "on an even and planned basis” its jobbers demand has "skyrocketed", clearly indicate which segment of the industry will be doing the sharing of product to help alleviate this temporary shortfall.' Simply stated, Shell's jobbers and their dealers as a class will, if this exception is granted, give up some of their products to Shell's direct dealers.

Surprisingly enough the bulk of NOJC's Shell members are willing to make this sacrifice. Their fairmindedness, however, is ameliorated by fears that this action may become a precedent for future deviations from the allocation regulations by Shell and other suppliers which would wreck further havoc on our already precarious allocation system. For this reason, and for the reasons I will enumerate momentarily, NOTC grudgingly supports Shell's exception application; but only if it is clearly understood that no extension shall be considered and no trend shall be started.

The choosing of a base period obviously impacts everyone. The proper forum for such a choice is, therefore, a rulemaking with full public involvement and appropriate notice and comment procedures. Refiners must not be able to use the Office of Hearings and Appeals to circumvent this statement by its Notice of Proposed Rulemaking in April of 1977 (42 Federal Register 20826).

NOJC's testimony and that of most of the other witnesses at those hearings convinced the agency to abandon that plan. Much of this opposition was predicated on allegations of refiner activity to force unnatural changes in marketing. Numerous lawsuits alleging such activities are currently pending in the federal courts. In fact, while Shell was filing this exception to “more equitably ap. portion the supply shortfall among gasoline customers”, four New Jersey dealers were filing a lawsuit alleging that Shell forced them to board up their bays, go gasoline only, and sell many more gallons. Another allegation of refiner manipuation of supply liftings has been made by Texaco jobbers in California.

These jobbers allege that Texaco's drastic cut of the jobber's margin was designed to and has had the effect of drastically reducing jobber gasoline liftings. (M.A.P. v. Shell).

These and other allegations must be fully examined before any changes in the base period are made.

In sum, while we would grudingly support this exception request, we question the wisdom, fairness, and legality of such an exception and guarantee that NOJC will strenuously object to any broadening of its terms or widening of its effects.

HYPOTHETICAL EFFECTS OF SHELL EXCEPTION REQUEST
Assume:
Shell sells 50% of its gasoline to jobbers and 50% to direct dealers;
Shell sold 100 million gallons of gasoline in December of 1972;
Dealers and Jobbers have grown apace (40% 1972–1977) ;

Jobbers have received base period allocation adjustments for their growth while dealers have not;

2

1 See hypothetical example, attachment 1. 2 See attachment 2.

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The allocation fraction under the regulations would be:

90 percent of 50 for dealers or.. 90 percent of 70 for jobbers or..

45 63

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PREPARED STATEMENT OF THOMAS V. PATTON, PRESIDENT, NATIONAL OIL

JOBBERS COUNCIL

PREFACE

The National Oil Jobbers Council is a federation of 42 state and regional trade associations representing thousands of independent small business petroleum marketers. Members include gasoline and diesel fuel wholesalers, commissioned distributors of gasoline, gasoline reseller-retailers and a large number of retail fuel oil dealers. Members also wholesale or retail many other petroleum products, including kerosene, LP gas, aviation fuels and motor oils as well as residual fuel oil. Together our members market approximately 75 percent of the home heating oils and 25 percent of the gasoline sold in America under either their own private brand or the trademark of their supplier.

Gentlemen : NOJC opposes the proposed base period adjustments. We oppose the changes for many reasons, but mainly we are concerned with the poor timing of the proposal which we believe may well cause the currently non-existent shortages it is intended to deal with. Since there is no shortage now, and there appears to be no likelihood of one this summer the proposal appears both unwarranted and unwise.

This proposal is intended to increase the amount of surplus product by reducing the allocation of resellers who are selling to other resellers as “brokers". The rationale is that as supply becomes tight, shortages will occur in areas which have experienced significant growth since the last FEA growth adjustments because current base period volumes do not reflect current demand. By reducing some broker-jobber allocations and putting that surplus into the hands of the refiners, FEA hopes to avoid spot shortages which could leave the impression that controls are needed and thereby, prevent total decontrol this fall.

NOJC does not accept this logic. On the contrary we think changing the base period at the beginning of the summer driving season is itself likely to create shortages that will make decontrol unattainable. Right now jobber sales to other jobbers have evolved into a pattern which gets product to the public. This pattern may not be logically pleasing, but it works. There is no reason to expect refiners to do a better job. In fact, since refiners are not now supplying the marketers serving the fast growth markets, about which FEA professes concern, there is every reason to expect refiners to be initially unprepared to direct the new volumes where they are needed. Even one month of shortages caused by this confusion will end any chance of decontrol.

Moreover, the new surplus product will almost certainly not be routed through the jobbers who are buying it today; thus, insuring chaos. Jobber after jobber

tells us that their supplier has surplus gasoline, but these jobbers are not allowed to buy from their supplier. Instead they are forced to purchase it from brokerjobbers often buying from the same supplier. Refiners either ignore or avoid Section 211.10(g) (5), which requires apportionment of a fixed percentage of surplus product to branded independent marketers and a separate fixed percentage to nonbranded independent marketers, so that when the base period is moved forward, the refiners will not be obligated to sell more gasoline to their base period customers. FEA's proposal fits perfectly into this pattern of behavior, and the floating base period feature all but assures that surplus product will never again go to the independent branded and non-branded base period customers. Refiners will continue to retain flexibility by "laundering' as much of it as possible through brokers who will disappear when shortages recur or when the refiner is ready to use the volume in his own direct salary operated outlets.

The agency's market share data shows that there has been a net loss by the independent sector and a net gain by refiners. We believe the reason for this is obvious. FEA consistently refuses to grant marketer requests for additional allocations from unwilling suppliers. Refiners however, have no such problem. They are more than willing to supply their own direct operations. Independent's margins have also been drastically cut. This is because the allocation system insulates refiners from price competition by making their marketers hostages not customers.

The proposal, ironically enough, seeks comment on whether or not the 1972 base floor should be eliminated entirely citing, “a significant number of purchasers are purchasing amounts of motor gasoline which are well below the level of 1972 adjusted or assigned base period uses, and in some cases are consistently purchasing no product at all from their base period suppliers.” Elimination of the 1972 base floor would remove this problem. It would however also remove the only remaining vehicle a marketer has to force his supplier to be competitive.

NOJC has other objections to the FEA proposal. First, if everyone were to be treated equally, refiners should be assigned a revised allocation base period volume on the same basis as jobbers and these refiners should be required to declare all product in excess of this volume as surplus subject to Section 211.10(g) (5). Refiners may object that this discourages the construction of additional refinery capacity, but if this rule is so unfair to refiners why apply it to jobbers whom FEA is statutorily mandated to protect as a class.

Second, FEA officials have said they can demonstrate that product is tied up in jobber channels, but the agency's market share data shows refiners, not jobbers, with an expanded share of the market. We would like to see these officials' proof. If jobber market share is up, and we doubt it is, it may be because jobbers take on dealers that refiners would no longer supply because of market withdrawals or low volume. Jobbers often buy these stations and can supply them only with surplus product purchased from brokers. Now refiners want the gasoline too, and when the jobbers are not able to buy surplus to supply the outlets, we, and not the refiners will be blamed. It is ridiculous to say there is not a market for this gasoline since it is being purchased by consumers who need it every bit as much as the consumer in “growth” areas.

Finally the other FEA alternatives are hardly more attractive. Obligating the broker-jobbers to supply every buyer again in the same month of the next year on'y makes captive customers of the buyers, insuring that the price of broker gasoline will raise. It also perpetuates an elaborate pattern which exists largely because of distortions created by the regulations. On the other hand, obligating the base period supplier to provide whatever a jobber purchases from any other source seems fair, except to the jobber who sold the product to the first jobber last year. This se'ler feels he has found a customer and therefore believes he is the one who should seek that customer again next year.

NOJC therefore believes that FEA should leave the base period exactly the way it is until the regulations are lifted completely this fall.

Senator METZENBAUM. How many dealers in your organization !

Mr. Cixo. About 100. I would like to make one short comment about what John O'Leary said about independent refiners. He said we need more independent refiners. Well, charts indicate clearly that many in. dependent refiners rely on the majors and the secondary majors for crude oil supply. You can have all of the independent refiners you want. If they don't have availability and accessibility to crude supply, they are still in deep trouble and will rely on pricing by the majors.

You have got to qualify that by saying (a), you have got to have crude supply available to the majors if they are going to be able to build their independent refineries, and also, Mr. O'Leary has failed to take into consideration the fact that the independent refiner has to have an independent marketplace. That has not been the case either.

Independent refiners often sell their products to majors. So the refinery that is going to be built has to have a supply on one end, a marketplace on the other end. Otherwise, its recommendation will be for nothing

The CHAIRMAN. The fundamental problem is the financing query. whether a bank will finance a refiner, independent or not, who does not have the oil supply, the crude supply. No. 1. Query whether he is going to do it, whether that company is going to play the role of creating a glut. We did not have time to go into those questions but I have serious reservations in my mind whether you can finance such a thing unless the Government guarantees such a loan.

a An independent refiner, in order to get the financing, it will have to demonstrate he has the market to get a return, which means there will be some price stability, and the role as indicated here today of the independent refiner was to really impart to add to the capacity; when it becomes over-capacity it is not an investment that most bankers would want to be involved in.

Thank you, gentlemen, we appreciate your testimony.
[Whereupon, at 1:50 p.m., the hearing was adjourned.]

APPENDIX

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

DEPARTMENT OF ENERGY,

Washington, D.O., January 24, 1979. Hon. HENRY M. JACKSON, Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington, D.O.

DEAR MR. CHAIRMAN : Enclosed are our responses to the questions transmitted to us with your letter of December 15, 1978. I hope that these replies are responsive to the Committee's needs. Some of the information in the enclosed lists is proprietary and highly confidential financial information and should not be disclosed. If I can be of further assistance to the Committee, please let me know. Sincerely,

JOHN F. O'LEARY,

Deputy Secretary. Enclosures.

Question 1. What additions or improvements in U.S. refinery capacity have taken place in 1978?

Answer. The following are the major capacity additions that were scheduled to be completed during 1978:

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Question 2. How have these alterations increased the ability of refineries to produce unleaded gasoline? Is this increase commensurate with the expected increase in the demand for unleaded gasoline, particularly high-octane unleaded gasoline?

Answer. All the additions to refinery capacity listed in the answer to question 1 have a direct effect on industry ability to produce gasoline, and the last four types of capacity additions provide capabilities needed to make the high, clearoctane components needed for unleaded gasoline. During 1978, unleaded gasoline demand is expected to average about one-third of the total gasoline demand. Even if total demand stayed constant, the increase of the unleaded share to 50 percent in 1980 would raise the demand for unleaded by 1.2 MMB/D in that year. But the numerical relationship, on an industry-wide basis, between unleaded gasoline demand changes and refining capacity improvement needed is difficult to express. Under the present refining industry configuration (including 1978 additions), the increasing demand for unleaded gasoline and, in particular, high-octane unleaded gasoline is being met with the help of EPA waivers from the 0.8 grams of lead standard. If 1980 demand falls on the high side of our forecasted range, there will not be sufficient capacity to make octane to satisfy all gasoline demand at its current quality. But changes in octane rating, or relief from the lead phasedown program could permit supply to equal high demand levels.

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