Memorandum of William L. Fugate for Files on the Settlement on the International Petroleum Cartel Case, April 12, 1957

From: Burton I. Kaufman, The Oil Cartel Case: A Documentary Study of Antitrust Activity in the Cold War Era (Westport, CT: Greenwood Press, 1978), pp. 171-77.

SOURCE: Department of Justice File, 60-57-140.

On April 4, 1957 at 10:00 A.M., Attorney General Brownell, Judge Hansen, Mr. Bicks and myself met in the Attorney General's office with Mr. Eugene Holman, Chairman of the Board of Standard Oil Company (N.J.) and with Mr. Monaghan, General Counsel of Jersey, and Mr. David Shepard, a Director of Jersey, to discuss possible Consent Decree negotiations in the International Oil Cartel case (U. S. v. Standard Oil Company (NJ.), Civil No. 86-27, S.D.N.Y.).

Attorney General Brownell stated that he and Mr. Holman were both of the opinion that a settlement of the Oil Cartel case would be in the public interest. He pointed out the national defense considerations relating to the case and said that in view of the Middle East situation and in view of the mutual interest in Government-industry cooperation in the Middle East and in other foreign areas with respect to oil, he thought that every effort should be made to effect a satisfactory settlement of this case. Mr. Holman stated his agreement that the case should be settled if at all possible, and that Jersey would be glad to enter Consent Decree negotiations.

The Jersey officials stated that they wished to confer with us separately on this matter apart from the other defendants and we agreed that this was not inconsistent with any commitments to the other defendants. It was pointed out, however, that at our last conference with counsel for all defendants, each had agreed that it would consider the matter of a Consent Decree and would inform us some time prior to or during the week of May 20, 1957, that their company either was not interested in entering into Consent Decree negotiations or that it would submit to the Government in writing points for the Government's consideration with respect to a possible Consent Decree. Judge Hansen reviewed the conferences which we had with defendants on this matter including the fact that all defendants had agreed to do as much as they could with respect to producing the documents requested and complying with the Interrogatories during a sixty-day extension given them for the purpose of considering whether they were interested in Consent Decree negotiations.

Attorney General Brownell mentioned the position of the Government with respect to breaking up joint production arrangements abroad and said that in view of the national defense aspects of this question the Government was not pressing for any divestiture of such companies and this would also apply to the present joint pipelines abroad. He mentioned that we had concluded that marketing abroad with respect to petroleum did have a direct and substantial effect on United States commerce. In connection with the latter point, I referred to statements by Jersey officials and by officials of other oil companies that oil is a world-wide business. Mr. Shepard agreed that this was the thinking of Jersey.

It was decided that actual Consent Decree negotiations could be best carried on at a Staff level and Mr. Holman said that he had come down to get the negotiations started and to introduce his people to the Attorney General. Attorney General Brownell said that he appreciated their cooperation, and that he hoped that the negotiations on a possible decree would go forward at once and be carried on steadily rather than, for example, on a once a month conference basis.

Following the conference in the Attorney General's office, Judge Hansen, Mr. Bicks, Mr. Whittinghill and myself, together with Mr. Monaghan and Mr. Shepard, met in Judge Hansen's office for a continuation of the conference. After preliminary statements with respect to the Government's position and the position of Jersey, respectively, concerning the merits of the case and the fact that a decree would state that no admission was made by Jersey of any violation of the Antitrust laws, it was decided that the best procedure would be to discuss the eight points previously suggested by the Government as a possible basis for settlement. Most of the following discussion was carried on while Judge Hansen was present but as he had to attend a luncheon meeting, part of the discussion was carried on after he had gone.

With respect to the first point, a general injunction against price fixing and division of foreign markets, Mr. Monaghan and Mr. Shepard stated that this was the policy of Jersey and that they presently did not enter into any restrictive agreements abroad, except as might be dictated by foreign governments. In connection with the question of the requirement of a foreign government, the Jersey officials stated that sometimes custom in foreign countries might have the same effect actually as a requirement to do a certain act. For example, sometimes a government official might say to the companies: here is a problem which we would like for the oil companies to get together and solve. In reply to this and to the added assertion that there was a dual standard with respect to American companies and foreign companies operating abroad, it was pointed out that this was a situation which existed under the Antitrust laws if it did in fact exist. We stated that the only exception to the Sherman Act which we could find in the decisions of the Supreme Court was that of the requirement of a foreign government, and we would make no exception in a decree which was not made in the law itself.

As to point number two, breaking up of joint marketing companies, including Stan-Vac, Caltex and the Gulf-Shell arrangement, the Jersey officials did not argue the point but wanted to know exactly what we had in mind. We briefly discussed the legal aspect of two competitors combining to market their products, and stated that wherever there were joint marketing arrangements between any of the five companies, we were asking that these companies be separated, leaving the manner of separation for discussion according to the defendant's suggestions.

Concerning our suggestion that there be a prohibition on exchanges among defendants and the two principal foreign co-conspirators, British Petroleum and Shell, we pointed to the overall arrangements among these seven companies for an exchange of crude and products and to the vast bulk of exchanges between these companies, saying that this gave the companies owning foreign oil an added advantage in addition to their ownership, this advantage being their ability to draw on each other for oil at any time and any place that they desired. We pointed out that companies desiring to buy foreign oil without any other oil to exchange were thus placed at a great disadvantage. The Jersey officials stated that so far as they knew they do not have any overall exchange arrangements such as those we had mentioned in 1938 and 1939. They indicated, however, that they thought exchange arrangements were ahnost essential to their business since it gave them added flexibility in all parts of the world. We mentioned statements in the documents we have concerning the principle of keeping excess oil off the market in order to stabilize the price of oil in foreign markets. They admitted that they still adhered to the principle of keeping excess oil off the market, although they said that this was in Jersey's own interest. Our contention is that the mass exchanges which now go on make this principle of keeping excess oil off the market one which is accomplished through joint action, even apart from the other conspiratorial aspects charged in our Complaint.

Mr. Shepard wanted to know whether or not we were concerned with exchanges on an overall world-wide basis or whether we were concerned with respect to particular exchanges. We indicated that the cause of our concern was the world-wide practice of exchanges, but that of course any relief proposal would have to take into account individual exchanges. The Jersey officials argued that exchanges resulted in more competition since they made oil available to each party in all parts of the world and therefore a company without any oil is enabled to compete in a market in which it could not otherwise compete. We questioned whether or not there was really any competition when one company was dependent upon its competitor for its supply, also considering that each one was supplying the other in other markets. Our position is that each company should compete with its own oil and its own resources rather than to depend upon the oil and resources of its competitors.

We stated that sales on a nondiscriminatory basis would be allowed among the defendants and British Petroleum and Shell. With respect to reciprocal sales, we said that this would be taken care of by our suggestion of a first option to independents of oil which would otherwise be sold to one of the seven companies. In the absence of this option arrangement we would have suggested that reciprocal sales also be prohibited, i. e., sales each made on condition of the other.

With respect to exchanges and also with respect to the other points, the Jersey officials took the position that this would handicap them in competition with Shell and British Petroleum. In this connection, we mentioned the fact that the American companies held more resources and were more powerful than their two foreign competitors, British Petroleum and Shell, and in a competitive fight should be well able to hold their own. We made the point that exchanges permitted each of the defendants to compete with outsiders on the basis of the oil which all seven competitors have. This undoubtedly is a great disadvantage to any other companies wishing to break into foreign markets.

We discussed the price provisions as a whole, point four, providing for nondiscrimination in sales of crude and products to other oil companies, point six, providing for an injunction against the use of a delivered pricing system, and point seven, a direction that defendants sell their crude and refined products on an actual f.o.b. basis at points of production. The Jersey officials stated that their price policies conformed to these suggestions but that they did not wish to agree to something for an indefinite period which they might not wish to follow in the future. They made the contention that Jersey is now using an actual f.o.b. pricing system and not a delivered pricing system, although they did state that the delivered price of course made a difference in the posted price. All of the evidence that we have indicates the contrary, i.e., that Jersey is actually using a delivered pricing system as the other defendants do, based on the U. S. Gulf price. In answer to our question the Jersey officials said that they would not inquire of a purchaser who picked up the oil at a production point where he planned to deliver it. Of course, if, as we have been told by other defendants, the f.o.b. price in the Middle East really has no meaning, it may be so high that, and we were also told this by Cities Service, no independent would even attempt to purchase any of this oil.

Despite the Jersey officials' contention that they do not now use a delivered pricing system, it was implicit in their statements that Jersey does actually use such a system. They mentioned the theory of Middle East crude, for example, meeting the competition of Venezuelan crude and stated that Venezuelan crude delivered to a particular market fixed the ceiling above which Middle East crude could not be priced. They admitted that this worked on the basis of meeting the price of, for example, Venezuelan crude, and that the theory was not based on any idea of cutting Middle East crude prices below that of Venezuelan crude in any foreign markets.

We explained what we meant by an actual f.o.b. price and stated that the price could, of course, be flexible and could be whatever Jersey desired to make it. However, we would insist that Jersey in sales to other companies would state what the f.o.b. price was and, in the case that Jersey delivered the oil for the purchaser that the proposed transportation charge would be stated as a separate item. We would also insist that the f.o.b. price not change with respect to the markets to which the oil would be delivered but would be independent of the transportation charges of delivery, and it would be the same regardless of where the oil might be delivered-it would be the same either for transport by Jersey or for transport by a purchaser. The price would be the same for an independent and for one of the big seven, and in this regard we pointed out the fact that there had been preferences in sales among the big seven on a regular basis. Of course, where there are exchanges of crude, this in itself makes for a preference, and we would insist in this regard that sales would be made on nondiscriminatory basis to purchasers regardless of whether or not they had any crude to exchange. The Jersey officials wished to consider entire price proposals.

We discussed our point number five, i.e., no disproportionate offtakes, and explained that this was the same idea as no exchanges, i.e., that each company should compete on the basis of the oil which it owned and should not be able to compete on the added basis of oil of its competitors. The Jersey officials said that there was some competition in this picture because each company in a joint production arrangement was trying to get out more oil than the other companies, realizing that whoever got the most use of the joint facilities would come out ahead. We questioned whether this was real competition and in any event this is arranged by a specific agreement. They admitted that in each joint production arrangement the production was geared to the requirements of the partners and that each partner nominated a certain amount of oil which it thought it would use for say the next five years.

Under this system it is almost necessary that each company discuss its requirements with the other companies since they have to arrive at a total production for all and each must either increase or trim its own requirements to accommodate those of the others. Our suggestion is that each company must take its proportionate share of the oil coming out of the ground. Of course, each company could sell oil to its partner if it was sold on a nondiscriminatory basis. In arguing against our suggestion for no disproportionate offtakes from joint concession arrangements, the Jersey officials advanced different theories with respect to the ownership of the oil. Thus at one time they suggested that the oil as it came out of the ground belonged to the Government. Another theory advanced was that each company was only out its own oil, no matter how much since the companies were tenants in common and each had a right to take out all the oil. The Jersey officials did not stand on these theories, how-
ever, and admitted that the offtakes were regulated by agreement among the partners and that generally speaking they did have to take into consideration proportionate shares.

We briefly mentioned our option to independents suggestion and the Jersey officials seemed to indicate that there might be practical difficulties with this. We stated that we were prepared to work out the details of the suggestion but thought that Jersey itself could do a better job than we if the principle was conceded. They agreed to consider all of our proposals and it was arranged that they would come back for further discussions of a consent decree with us on Thursday, April 11, 1957. Mr. Bicks suggested that they consider our proposals and see if they could draft something with our proposals in mind, saying that all of the proposals had been given careful consideration in the Department and were considered to be the minimum relief which the Government could accept in this case.

In the course of the discussions, it was brought out that both Jersey and Socony had purchased part of Atlantic Refining Company's European subsidiaries. We had previously had the information that while Atlantic had discussed the sale of these distributing subsidiaries with Jersey and Socony, they had not sold any to these two companies but had sold all of the subsidiaries to the British Petroleum Company, Ltd. It now appears that Jersey and Socony obtained part of the subsidiaries. In our motions to produce we have asked both Jersey and Socony for documents concerning these negotiations.

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