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Standard Oil would be given its opportunity to crush out all competition and seize the California fields.263
263 That the pipe line is the basis of the Standard Oil monopoly was not disputed. The Interstate Commerce Commission in its report to Congress on "Railroad Discriminations and Monopolies in Coal and Oil" (January 28, 1907), says:
"At the basis of the monopoly of the Standard Oil Company in the production and distribution of petroleum products rests the pipe line. The refineries of the Standard are located in various parts of the country-upon the Atlantic seaboard, in the interior near the oil fields of Pennsylvania and Ohio, at Chicago, at Kansas City, and at various other points. These refineries are all connected with the principal oil fields and with each other by a network of pipe lines. It is possible for the Standard to-day to pump oil from a well in Indian Territory to its refinery at Jersey City.
"The expense of pumping oil is very much less than the cost of transporting it by rail. It was said that the actual cost of pumping a barrel of oil 100 miles was about 2 cents, and while this must vary with different conditions the estimate seems to be sufficiently high on the average. The cost to the Standard of transporting a barrel of oil from the Kansas field to the Atlantic seaboard would not be much, if any, above 30 cents.
"The advantages which the possession of these pipe lines give to the Standard are apparent upon the surface. The refineries of the independent producer who, as a rule, has no pipe line of any considerable extent, and who generally depends upon that of the Standard for his supply of crude material, are located for the most part near the source of the crude supply. Upon the other hand, the Standard locates its refineries near the great centers of distribution. The refinery at Sugar Creek, to which reference has been made, is an illustration. Independent refineries at interior Kansas points find it very difficult to dispose of their residuum-which we have designated as fuel oil-to advantage, owing to the fact that the freight rate to the point of consumption is almost as much as the value of that kind of oil. Upon the other hand, the Standard has at the very doors of its refinery a market at a favorable price for a large part of this by-product, a thing of itself of enormous advantage.
"The distribution of the refined product can be better made from a center of distribution like Kansas City or Chicago than from some noncompetitive point, even though no special rates or unusual facilities are accorded.
"The possession of these pipe lines enables the Standard to absolutely control the price of crude petroleum and to determine, therefore, the price which its competitor in a given locality shall pay. At the present time it is said that the Standard is tanking 35,000 barrels a day of crude oil in Kansas and Indian Territory. The total production is estimated at 75,000, of which perhaps 15,000 is refined. The price paid for this oil is very much lower than that paid in Pennsylvania or in the Ohio and Indiana fields. The quality of the oil is not as good as the Pennsylvania, but seems to be fully equal to the Ohio and Indiana. The Standard can, therefore, by pumping this oil to its refineries at Chicago or Cleveland or New York obtain its crude petroleum very much cheaper than its competitor, for it can fix the price which its competitor must pay in these territories and can then obtain the supply for its own refineries largely from some other field where it has established a much lower price. When ready to do so, it can reverse the process.'
For the California oil fields to fall into the hands of monopoly would, it was recognized, be a calamity. The 1913 Legislature was called upon to avert that possibility. And probably not ten men in the Legislature were in a position to know of the conditions in the oil fields which had brought the disputing groups of oil men to the State capital.
But one thing about the fields the dullest could comprehend, namely, that independent oil men had been forced to cap their wells because they were unable to get their oil to market, although the capacity of the pipe lines out of the fields was declared to be greater than the present production.
At the time the Legislature was in session there were four great oil companies occupying the California field: (1) The Standard Oil Company; (2) The Associated Oil Company, owned by the Southern Pacific; (3) The General Petroleum Company, of which Eugene de Sabla was president, and (4) the Union Oil Company.
Out of the mid-California oil fields six pipe lines, each controlled by some one of the four companies, run to points of shipping and consumption. Of these six lines, two, terminating at San Francisco Bay, were at the time of the hearing, owned by the Standard Oil Company; two, also terminating at San Francisco Bay, by the Associated Oil Company; one, terminating at Los Angeles, by the General Petroleum Company; one, terminating at Port Harford, by the Union Oil Company.
Up to October, 1912, the independent oil producers found sale for their oil with the Standard, which at least gave them a market. But in October, 1912, the Standard gave notice that it would purchase no more
oil below 18 gravity. As sixty-five per cent. of the oil produced in the mid-California fields is below 18 gravity, the effect of this notice was to bar more than half the output of the fields from possible transportation to market, through the Standard's lines.
The second, and only other, opportunity for the independents to market their oil was through the Independent Producers' Agency of California.
The agency is made up of some 150 independent oil producers. It is a co-operative, non-profit-making, mutual concern. The agency's president, at the time the 1913 Legislature was in session, was L. P. St. Clair.
This mutual organization had made the Union Oil Company its selling agent. The Union Oil Company with the Agency's executive committee was supposed to fix prices. But Timothy A. Spellacy, who was a member of the Agency and one of the executive committee, testified before the Senate Judiciary Committee that the executive committee had delegated to President St. Clair power to agree with the Union Oil Company as to price. Independent oil men, by becoming members of the Agency, while they had no voice in the fixing of the prices at which their products should be sold, were able, through the pipe line to Port Harford, controlled by the Union Oil Company, to get their oil to market. But the conditions demanded of the independent oil man to become a member of the Agency were such, that producers of the type of Spellacy refused to commit all their properties to the Agency's policy.
"Oil men who join the Agency," said Spellacy, when
discussing this phase of the situation before the Senate Judiciary Committee, "are required to deed their properties to the agency. They are required to give the agency absolute control over the selling of their oil, price-fixing and all, for a term of years. He who goes into the agency now, must put his oil out of his hands for seven years."
The close affiliation between the Standard Oil Company and the Southern Pacific Company, practically made the four pipe lines controlled by these companies Standard Oil lines. There remained the line of the General Petroleum Company and the line of the Union Oil Company.
The General Petroleum Company was, at the time the Legislature met, the unknown quantity in the situation. It had come into existence suddenly, with enormous backing, about the time the Standard Oil Company announced that it would no longer buy California oil under 18 gravity. Very openly, the charge was made at Sacramento that the General Petroleum Company was of the Standard Oil Company group.264 This
264 The Interstate Commerce Commission's report on "Railroad Discriminations and Monopolies in Coal and Oil," says of the methods employed by the Standard Oil Company to crush competition:
"(1.) The Standard Oil Company has repeatedly bought out its competitor and after becoming the owner of the competing company has continued to operate it under the old name, carrying the idea to the public that the company was still an independent operator and in actual competition with the Standard.
"(2.) It has used such independent companies as have become its own by purchase, and has sometimes organized independent companies, for the purpose of killing off competitors. The practice has been for the so-called independent company to reduce the price, frequently handling what are supposed to be different brands of oil, while the Standard maintained its rates. The operation of these fake independent concerns by the Standard has been one of the most effective means of destroying competition. "(3). It has habitually reduced the price against its competitor in a particular locality while maintaining its price at
brought five of the six pipe lines under suspicion of Standard Oil control. But one line remained, that controlled by the Union Oil Company.
But shortly before the Legislature convened, the Union Oil Company had given the General Petroleum Company an option on all its properties for $17,000,000, $500,000 of which had actually been paid. This practically carried along with it the Independent Producers' Agency, which had made the Union Oil Company its selling agent, and which was dependent upon the Union Oil Company's pipe line to get the oil of the independent producers, members of the agency, to market.
Such being the facts, independent oil men of the
other places where the business was not profitable to the competitor. When the competition was destroyed, it restored the former price, and often advanced that price.
"(4.) It has sold different brands at different prices from the same barrel. It would not be surprising if in the heat of competition subordinates of that company had at times resorted to practices of this kind, nor would such fact be especially worthy of mention. It is surprising that its responsible agents, and, in one case, a prominent official, should have approved and suggested such methods.
"(5.) It has paid the employees of independent companies for information as to the business of those competitors, and it has paid the employees of industrial companies to secure the adoption of its oil in preference to that of its competitors. The Standard, as already said, follows every barrel of independent oil to its destination. Its agents are instructed to secure the customers of its competitors at whatever sacrifice, and value of the agent is determined largely by his ability to do so.
"(6.) It has tampered with oil inspectors in different States. We do not think this evidence establishes corrupt conduct upon the part of any such inspector, but it does show carelessness and incompetence resulting in advantage to the Standard Oil Company. The laws of the several States, with respect to the inspection of oil, are singularly defective, and this has also been turned by the Standard to its profit.
"The only knowledge this Commission has of the competitive methods of the Standard Oil Company is derived from the evidence taken in this investigation. We have already said that this testimony was under oath, that the witnesses were subject to cross-examination by the attorneys of the Standard Oil Company, that that company was given permission to explain or rebut the facts shown.'