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The Federal Tender Board set up a staff of examiners to check applications for tenders, to examine the books and records of refiners and pipe lines, and to make physical checks of the petroleum and petroleum products leaving the field. It set up an accounting staff, which maintained an effective accounting check on all operations in the field. Certificates of clearance, or tenders, were approved by the Federal Tender Board when the petroleum or petroleum products were shown on the basis of the applicant's reports, the accounting record, and the specific examination of examiners to have been produced in accordance with the quotas established by the Railroad Commission of Texas.
The Federal Tender Board functioned effectively until January 7, 1935, when the Supreme Court overruled the Circuit Court of Appeals in the Panama and Amazon cases and declared section 9 (c) invalid on the grounds of improper delegation of legislative power. The Board ceased functioning, and the litigation pending against it was dismissed. Movements of hot oil increased immediately. Additional State legislation authorizing the State to require certificates of clearance for petroleum products as well as for crude petroleum moving in intrastate and interstate commerce, had been passed. However, State authority law alone still failed adequately to meet the situation and commerce in hot oil steadily increased. On February 22, 1935, the Connally law was passed by the Congress, eliminating the defects found by the Court in section 9 (c) by specifically prohibiting interstate or foreign commerce in hot oil. Federal Tender Board No. 1 was established under this law on March 1, 1935, and shortly thereafter Federal Petroleum Agency No. 1 was set up under the same law to perform the administrative and investigative functions in connection with the applications for approved tenders filed with Federal Tender Board No. 1. The Federal tender system has functioned effectively since that time and has prevented any substantial movement in interstate commerce of hot oil or gasoline out of east Texas. This activity not only tended to check overproduction of crude petroleum but assisted in stabilizing the interstate refinery markets at a time when the intrastate Texas markets were thoroughly demoralized. Several attempts to enjoin the activities of the Board have been attempted without success.
During the summer and fall of 1934 wholesale prices for petroleum products were below parity with the current prices for crude petroleum, which presented a particularly serious problem to the nonintegrated refiner. Several plans were projected by the industry to solve the difficulty, which was aggravated considerably by the excessive amount of hot oil and interstate movements of hot gasoline in interstate commerce. The planning and coordination committee proposed a form of contract designed to remove distress stocks in east Texas from the market. The form of contract was approved on June 23, 1934, and during the months of July and August gasoline in east Texas was purchased under this form of contract, to which the Administrator was a party and which provided that the sellers would not process "hot oil." This program proved insufficient, and a new form of contract for the purchase of current output was approved. But the production of gasoline from " hot oil" continued, stocks of gasoline mounted, wholesale prices for gasoline remained below parity with crude-oil prices, and in the early fall of 1934 the industry approached a serious collapse of the wholesale market. The planning and coordination committee appointed a program committee, which proposed a broad plan for the purchase of surplus gasoline with the purpose of also preventing illegal production of crude oil and providing a method of orderly marketing. The excessive amount of overproduction in Texas made the initiation of this program futile, and it was never put into operation. In October the Federal Tender Board was created in east Texas to enforce section 9 (c). Conditions immediately improved as a result, and from then forward the improvement continued, except for the period between the invalidation of section 9 (c) on January 7, 1935, and the enactment into new legislation of the principle of the Tender Board in the Connally Act on February 22, 1935. The operations of the Tender Board, of the production provisions of the code and refinery amendment, and of the stabilization committee of the planning and coordination committee with the cooperation of the Petroleum Administrative Board, brought the desired parity between the wholesale price of gasoline and crude oil in the spring of 1935. The work of the stabilization committee contributed very largely to the elimination of excessive marketing abuses which tended to keep the retail markets in an unsettled and unstable condition.
One of the difficult marketing problems of the year revolved around the question of price differentials as between different types of marketers. The stabilization committee, authorized by the Administrator in July 1934, was successful in resolving many localized conflicts and in compromising issues which had brought on drastic price wars to the injury of many marketers caught in between the warring factions. Before the end of the winter markets generally throughout the midcontinent and eastern areas were fairly stable, and at the time of the invalidation of the code at the beginning of the high-consuming season, the industry as a whole had reached stability in markets, an even balance between production and demand in the case of both crude and gasoline, had achieved the best statistical position in many years, and entered upon a prosperous summer which has, in fact, proved to be the highest-consuming season in the history of the oil industry. Production was under control throughout the Nation with some minor exceptions, the wholesale price of gasoline was in parity with the current price of crude, the refinery amendment had brought a balance between the manufacture of gasoline and the needs of the Nation therefor, the Connally Act had succeeded, as the original Tender Board had previously succeeded, in protecting interstate commerce from "hot oil" or gasoline, and markets were generally stable.
One of the important marketing decisions made by the Administrator under the code was that of March 4, 1935, under rule 19 of article V, known as the "lease and agency decision." The Administrator in this decision permitted the cancelation of all lease and agency agreements on 30 days' notice and prohibited exclusive conditions in the sale of lubricating oil. The question of whether or not exclusive dealing contracts violated the antitrust laws was referred to the Federal Trade Commission for determination.
To obtain compliance with the Petroleum Code and to guarantee the independent refiner a crude supply and market for his products and to prevent the dumping of gasoline and price cutting on the Pacific coast, the Pacific coast petroleum agency and refiners' agreements were executed and approved by the Administrator on June 23, 1934, and subsequently were filed with the Federal court under a consent decree in California with the consent of the Department of Justice. The agency agreement, to which all major companies and their subsidiaries and two smaller companies were parties, provided for a guaranteed supply of crude to independent refiners, parties to the refiners' agreement, and a market for such products as the refiners were unable to sell in the retail market. The refiners agreed to limit runs to stills to a definite proportion of the business oi the area as determined by their past sales records. However, no limitation was placed upon sales. All refiners agreed to resale price maintenance to prevent price cutting by subsidiary or dealer accounts. There was no agreement as to prices, each refiner setting any price he desired. Every refiner agreed not to handle oil produced in excess of the allowables established under the Petroleum Code. In addition there were several provisions relating to marketing practices established at the request of independent refiners and provisions for general compliance with the terms of the Petroleum Code. The Administrator reserved the right to cancel the agreement at any time and appointed a representative on the board of governors of the agency established under the agency agreement to make definitive interpretations, to check the administration of the agreements, and to report to the Administrator on any monopolistic trends or inequities in the operation of the agreements.
As a direct result of these agreements one of the most disastrous and protracted price wars ever to occur on the Pacific coast was brought to an end. Furthermore, a simple and administratively effective device for securing compliance to production quotas was obtained; since signatory refiners were obligated not to deal with producers who violated the Petroleum Code, producers were compelled to comply with the code in order to find a market.
Illegal overproduction of crude oil was reduced to less than 2 percent, and even this amount was eliminated by temporary injunctions in effect at the time of the invalidation of the codes. Gasoline markets were stabilized and there were no serious price disturbances during the period of the agreement, with the exception of a price war in Arizona.
The benefits of these agreements were immediate. The independent refiners obtained a fair volume of business at a fair price either through direct outlets to consumers or to the agency created by the agency agreement. By the elimination of price wars the retail dealers obtained a fair margin and a fair volume. A group of dealers possessing a very large storage capacity lost gallonage; they were accustomed to fill up their storage during low-price periods and then to dump gasoline on the market during periods of comparative price stability, thereby causing price wars enabling them to refill at low prices. The average prices for the period of the agreements were lower than any 6-month period prior to the operation of the agreements.
Over the period of the operation of the agreements constant reports were made by representatives of the Administrator in California and the far Northwest on operations under these agreements and of the inequities resulting therefrom. Investigations disclosed that certain major companies were violating the letter and spirit of the agreements. The resale price maintenance prevented major companies from marketing through subsidiaries at a differential. This provision was specifically required by the Department of Justice as a condition of its consent to the modification of the consent decree. The major companies consented to the elimination of this differential but also insisted upon meeting all competition, thus eliminating the price differential of the independent refiners. Investigations of the operation of the agreements under these conditions resulted in a shifting of gallonage from the independent refiners to the major companies, necessitating the absorption through the agency of large quantities of gasoline processed by the independent refiners for which they had no other market. This resulted in an increased burden on parties to the agency agreement, bearing most heavily upon members who either suffered actual losses of gallonage or gained least in the absorption of the normal markets of the independent refiners. Furthermore, it decreased the flow of independent distributors and retail dealers who previously provided a market outlet for the gasoline processed by the independent refiners. The Petroleum Administration furnished the oil industry in California a detailed analysis of the problem, and at the time of the cancelation of the agreements because of the Supreme Court's decision negotiations were under way for revision of the agreements to secure compliance with all provisions of the code by the major companies and to make provision against the shifts in gallonage which occurred largely as a result of the elimination of differentials. Immediately after the Schechter decision, and the consequent suspension of the Petroleum Code and the cancelation of the Pacific coast agreements, the retail markets of California collapsed and have so remained. Crude-oil production control ceased with the code. Voluntary curtailment efforts failed to balance production with demand; enforcement of the State gas-oil ratio statute likewise failed to achieve a balance; production mounted; and as this summary is concluded the price of crude oil in California has broken sharply, August 29, 1935, 5 days after the adjournment of Congress, which was until the last considering Federal regulatory legislation designed, among other things, to achieve a balance between production and demand.
The most important court decisions were the following: On January 7, 1935, the Supreme Court held section 9 (c) of the National Industrial Recovery Act, commonly known as the "hot-oil Section ", invalid for the reason that it constituted an unlawful delegation of legislative power to the President. On February 22, 1935, the President approved the act of Congress known as the Connally Act, under which Congress itself prohibited the shipment in interstate and foreign commerce of hot oil or its products, framing the statute so as to meet the objections pointed out by the Supreme Court to section 9 (c). The decision of January 7, 1935, was in the cases known as the Panama Refining Co. and the Amazon Petroleum Corporation cases. Although it was hoped that these cases would also bring about a decision on the power of the Federal Government to control production as distinguished from interstate movements of illegal oil or its products, the Court found that the production-control question was not properly before it. When these cases were in the Circuit Court of Appeals for the Fifth Circuit that court held that the District Court of the United States for the Eastern District of Texas had erred in enjoining the enforcement of the production provisions of the code, that court assuming that the question was properly before it.
In the case of United States v. Wilshire Oil Co. et al. the District Court of the United States for the Southern District of Cali