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LETTER OF SUBMITTAL AND SUMMARY AND CONCLUSIONS OF THE REPORT OF THE us. FEDERAL TRADE COMMISSION ON PIPE-LINE TRANSPORTATION OF PETROLEUM FEBRUARY 28, 1916 "WASHINGTON GOVERNMENT PRINTING OFFICE 1916 LETTER OF SUBMITTAL. FEDERAL TRADE COMMISSION, Washington, February 28, 1916. To the PRESIDENT OF THE SENATE OF THE UNITED STATES. SIR: This report, which deals with pipe-line transportation in the Mid-Continent field, is made in response to a resolution of the Senate (S. Res. No. 109, 63d Cong., 1st Sess.) and deals with a part of the subject matter of that resolution, the investigation of other matters not having been completed. By a subsequent resolution the Senate directed an inquiry to be made by the Interstate Commerce Commis- sion, which involved in part the subject of pipe-line transportation. The Interstate Commerce Commission has begun an investigation of the Eastern pipe lines and, therefore, they are not covered by the investigation of the Federal Trade Commission, nor considered in the present report. Five large interstate pipe-line systems tap the great Mid-Continent oil field, which lies chiefly in Oklahoma and Kansas. The report shows the amount of the investment in such pipe lines, the cost of carrying oil by pipe lines, the profits of the oil companies operating them, the charges and other conditions imposed on the carrying of oil for other shippers, the excess of such charges over the actual cost of carriage, the profits which would accrue to the pipe-line companies if such charges were paid on their own oil, and various other matters which show the true situation and the significance of the present conditions of pipe-line transportation. The five large interstate pipe-line systems discussed in this report— all of which start from the Mid-Continent field—are as follows: (1) the Prairie (Standard) system, running northeast to Illinois and Indiana; (2) the Oklahoma-Louisiana (Standard) system, running southeast to Baton Rouge in Louisiana; (3) the Magnolia system, running south to Beaumont and other points in Texas; (4) the Gulf system, running south to Port Arthur and other points; and (5) the Texas system, running south to Port Arthur and other points. The last two systems also reach oil pools in Texas and in Louisiana not comprised in the Mid-Continent field. NATURE OF PIPE LINES. Since pipe lines were first introduced about 50 years ago they have demonstrated their superior efficiency and economy as a means of III IV - LETTER OF SUBIMITTAL. carrying crude oil from the wells to the refinery, so that they have largely superseded other methods of transporting oil. The steel pipes for conveying the oil are laid near the surface of the ground, and the main lines are generally 8 inches in diameter. The oil is forced through the pipes by means of pumps operated by steam or internal combus- tion engines, these pumps being generally located about 40 miles apart along the line. Owing to the comparative cheapness of this method of transportation the general practice is to locate the refinery in the large consuming regions rather than near the wells in order to reduce as much as possible the freight charges on the shipment of refined products to the various places of consumption. Consequently, the larger pipe-line systems are hundreds of miles in length. FIPE LINES COMMON CARRIER.S. The pipe lines, therefore, present transportation problems similar to the railroads. Congress has imposed upon the pipe-line companies the obligations of common carriers and has wisely placed them under the supervision of the Interstate Commerce Commission for the purpose of assuring that the charges and facilities for transportation shall be reasonable and that there shall be no discrimination between shippers. This law was passed in 1906, but its validity was disputed and the question was not settled until 1914, when the Supreme Court in the Pipe-Line Cases (234 U. S., 548) upheld the law. Up to 1915, however, there was very little use made of pipe lines as common carriers for various reasons, among which are the high rates and the requirement of excessively large minimum ship- ments of oil which the pipe-line companies have established for such services. The Interstate Commerce Commission has not yet de- termined what rates and requirements are reasonable because as already noted it is at present making an investigation of the subject of pipe-line transportation in the eastern fields. IMPORTANCE OF THIS REPORT ON PIPE-LINE COSTS AND RATES. This report gives the results of the first accurate investigation of the investment in pipe-line operations, and the costs of operating them. It is well known to all who are familiar with the oil industry that the pipe lines are as fundamental a factor for the oil industry as the railroads are for agriculture. There is no possibility therefore of any satisfactory solution of the problems affecting the oil industry as long as the common-carrier service of pipe lines is not performed under reasonable and equitable terms. Furthermore, the statement may be ventured that if these problems are once correctly solved, the other problems of the oil industry will present not only less difficulty but also less danger. LETTER OF SUBIMITTAL. V * DOMINANT POSITION OF THE MID-CONTINENT FIELD. The dominant position of the Mid-Continent field in the oil industry makes the facts developed in this report of vital importance to the entire country. The pools of this large oil field in 1914 produced 97,995,400 barrels of crude oil, or more than one-third of the total production of the United States. If the California oil, which is of lower grade, is excluded, the proportion was about 60 per cent of the total. A large part of this vast production is transported eastward by pipe line to numerous refineries in Illinois, Indiana, Ohio, Penn- sylvania, Maryland, New Jersey, and New York. The large annual shipments to refineries located in these States supplement the Sup- plies which they secure locally and come in direct competition with the production obtained from the oil fields east of the Mississippi River. The shipments of Mid-Continent crude oil by pipe line to refineries east of the Mississippi River in 1914 were almost 60 per cent of the total production east of the Mississippi. In addition, the pipe-line systems operating in the Mid-Continent field supply large refineries in Missouri, Kansas, Oklahoma, Texas, and Louisiana, and deliver large quantities to Baton Rouge, La., and Gulf ports for coast- wise and export shipments by water. PIPIE-LINE INVESTIMIENT COMPARATIVELY SECURE. The large fixed investment in pipe-lines, as shown by the books of the companies, corresponds closely with the actual construction cost of such property. The net investment (after deducting deprecia- tion) in the pipe-line property of the five large interstate systems operating in the Mid-Continent field was $43,857,000 in 1913. Although the increase in investment has been rapid, the exten- sion of lines and the increase in pipe line carrying capacities have followed the development in crude-oil production. The great pro- ductivity of the Mid-Continent oil field during the last 10 years, the extensive proven area of this field, and the conservative pipe- line building policy of the large companies have rendered their investments comparatively secure. The oil-producing territory in Kansas and northeastern Oklahoma alone covers an area of about 175 miles from north to south and 75 miles from east to west, and includes more than 150 producing pools, and new pools are being opened up every year. Although particular wells, and even partic- ular pools, are often quickly exhausted, experience has shown that this is not true of a large oil field as a whole. A number of large oil fields have been developed in the United States and in foreign coun- tries and most of these fields have either been operated with a large production for several decades, or have not yet apparently reached their maximum production. While some of them are not producing VI LETTER OF SUBMITTAL. the maximum quantity at the present time, all of them are still large producers. Furthermore, it is evident that the pipe-line companies in the Mid-Continent field anticipate a large production over a con- siderable period of time because the average depreciation charge which they make against their gross investment is less than 5 per cent per annum. IOW COST OF PIPE-LINE TRANSPORTATION. Pipe-line transportation is the most economical means of shipping crude oil. In the Mid-Continent field the local gathering cost, i. e., the cost of piping the oil from the wells to the trunk pipe line gen- erally ranges from 3 to 5% cents per barrel. The cost of main or trunk line transportation depends largely, of course, on the length of the line, but the aggregate volume of the shipments is a factor of vital importance. Oil was piped from the Cushing pool in Oklahoma to the vicinity of Chicago—a distance of nearly 700 miles—at a cost of about 11 cents per barrel (including depreciation). From the same pool to the Gulf of Mexico—a distance of nearly 500 miles— the lowest cost of any company was about 16 cents per barrel. STANDARD'S ADVANTAGEOUS POSITION. Of the five large pipe-line systems operating in this field, two belong to the Standard Oil group and a third is controlled by Standard Oil capitalists. While the Standard Oil interests have in this field some lines which show relatively high costs, nevertheless their chief line run- ning northeast to the vicinity of Chicago excels all others in capacity and in the extent to which that capacity is used. This line shows the lowest costs. This favorable situation is partly due to the fact that there is no other line running to points east of the Mississippi. As all the connecting trunk pipe-lines between this river and the Appa- lachian Mountains are controlled by the Standard Oil group and inde- pendent refineries are small and scattered, other pipe-line concerns in the Mid-Continent field have not attempted to run their lines to the East, but instead have built them to the Gulf of Mexico. For this reason the Standard refineries in the East are able to obtain Mid- Continent oil at a great advantage over competing refineries located in the principal consuming districts. PROFITS OF PIPE-LINE COMPANIES. The net earnings, before deducting bond interest, of the com- panies which operate the five pipe-line systems in the Mid-Continent field have been 19.33 per cent on the net investment for the three-year period, 1911 to 1913. These net earnings, however, do not show what they earned from pipe-line operations, because in most cases these companies are also engaged in other branches of the oil busi- LETTER OF SUBMITTAL. VII ness, such as producing, refining and marketing, and their pipe lines are operated merely as departments of this integrated form of business. These companies generally treat their earnings as though they arose entirely from merchandising oil, because they have not yet, to any significant extent, performed the duty of common carriers. The law, as already stated, imposes on them the obligation to act as common carriers in interstate commerce, and they have filed tariffs with the Interstate Commerce Commission giving their rates for carry- ing crude oil and other terms of shipment. It is desirable, there- fore, to show what these rates signify by comparing them with the costs of transporting oil by pipe line and by computing what their earnings on their net investments would be if all of their own oil which is transported were charged the rates at which they offer to carry oil for the public. LARGE MARGIN BETWEEN PIPE-LINE COSTS AND RATES. In comparing costs of pipe-line transportation and pipe-line rates it is desirable to show not only what the operating cost is for such service but also what such cost plus a fair return on the investment would amount to, because the investment involved is an important factor in the consideration of rates. Taking for illustration only trunk-line transportation, a few typical cases may be cited here. The trunk-line tariff rate from the Cushing pool in Oklahoma to Whiting Ind., in the vicinity of Chicago, is 42 cents per barrel of oil, the trunk- line cost of transportation (including depreciation) was, as already stated, about 11 cents, and this cost plus 6 per cent interest on net investment was about 14} cents to Griffith, Ind., (11 miles from Whiting). For one of the lines to Port Arthur on the Gulf of Mexico the trunk-line tariff rate was 40 cents, the trunk-line cost about 16 cents, and cost plus 6 per cent interest 20 cents. COMPUTED EARNINGS ON THE BASIS OF PIPE-LINE RATEs. - As already stated, the significance of these pipe-line rates is best appreciated by showing the rate of return on investment which would be obtained if all the oil shipped by the interests owning the pipe line were charged the tariff rates at which the pipe line offers to take the oil of other shippers. Taking all these five pipe-line systems together the net investment aggregated $43,857,000 in 1913; the cost of transportation by pipe line, including depreciation on investment, $10,624,000; and the gross receipts which would have been obtained if the tariff rates had been charged on all the oil carried, $28,837,000. On this basis the net earnings would have been $18,213,000 and the rate of return on the net investment 41.5 per cent. The variation in net earnings for the five different systems VIII LETTER OF SUBMITTAL. would have been considerable, ranging from 14 per cent for the Magnolia system to about 62 per cent for the Prairie system running northeast. REQUIREMENTS REGARDING MINIMUM SHIPMENTS. Apart from the rates imposed by the pipe line companies, the condi- tions made regarding the minimum quantity of oil which will be accepted for a shipment are such that the small oil producer or refiner is virtually precluded from using this method of transporta- tion. The Prairie Pipe Line Co. (Standard) makes the minimum shipment 100,000 barrels; certain other pipe-line concerns require at least 25,000 barrels. It is evident, therefore, that a minimum require- ment of 100,000 barrels is not necessary. But a minimum require- ment of 25,000 barrels would appear to be excessive. The oil is usually accepted for shipment, not with the obligation to deliver the identical oil shipped, but merely the same quantity minus a small percentage for loss in transit. A pipe line company in receiving oil in its pipe line for its own account is regularly taking the oil in com- paratively small quantities from the settling tanks of producers, which generally have a capacity of from 250 to 500 barrels, directly into the pipe-line system, while its trunk lines are ordinarily pumping it continuously. Furthermore, the pipe lines are making deliveries of oil at different stations in small quantities which frequently do not exceed 500 barrels. Provided no greater quan- tities were being offered than the pipe line could handle, it would appear that the burden of proof is on the pipe line company to show whether there is any technical or commercial reason for refusing to handle such comparatively small shipments where the delivery of the specific oil shipment is not obligatory. The really difficult problem for pipe lines acting as common carriers would appear to arise when the shipments offered exceed the capacity of the line, and in that case some equitable rule would have to be determined for apportion- ing shipments. In making such apportionment it is obvious that no preference should be given to the oil belonging to the pipe line com- pany or to concerns affiliated with it. As many refineries use less than 200,000 barrels of crude oil annually, it is evident that high minimum shipment requirements, such as those noted above, may alone often prevent the utilization of pipe lines as common carriers. JNDEPENDENTS CAN NOT USE RAILROADS IN PLACE OF PIPE LINES. Furthermore, there is no opportunity to get cheap transportation by other means, because the railroad tariffs are higher still. Thus, from the Cushing pool in Oklahoma to Kansas City the railroad tariff is equal to about 37 cents per barrel, which is about 9 cents greater LETTER OF SUBIMITTAL. IX than the pipe-line rate; to Whiting, Ind., the railroad tariff is equal to 62 cents, which is 20 cents greater than the pipe-line rate; while to New York and other north Atlantic seaboard points the railroad tariff is $1.40, or 70 cents greater than the pipe-line tariffs. Hence the small oil producer in the Mid-Continent field or the small refiner located at a considerable distance therefrom can not afford to ship Mid- Continent oil by rail in competition with concerns which can ship their oil through their own pipe lines or through those controlled by the same interests. PIPE-LINE RATES A LARGE. FACTOR IN PRICES. Another important consideration in the problem of pipe-line trans- portation is that the pipe-line tariff rates are an important factor in delivered prices. Thus, the posted prices of ordinary Mid-Continent crude oil during the year 1915 ranged from $0.40 to $1.20 per barrel at the wells. To the near-by refinery at Neodesha, Kans., the pipe-line rate was 20 cents, or from 163 to 50 per cent of the price at the wells during 1915, but to Whiting it was 42 cents, or from 30 to 100 per cent of these prices, and to New York it was 70 cents, or from 58 to 175 per cent. Where the transportation charges form such large pro- portions of the delivered price of a product an excessive rate is of much more serious consequence than where it is a small percentage, no matter how unreasonable it may be. SMALL CONCERN'S CAIN NOT EUILD PIE’E LINES. It is evident from the preceding statements that the charge for the transportation of oil is a vital factor in this business, and that the railroad rates are so high in comparison with the pipe-line rates that railroad shipment is not generally practicable. It is therefore obvious that if the pipe-line rates and minimum shipments are not on a rea- sonable basis those oil concerns which do not have pipe lines are placed at a great disadvantage. Such a concern can never become an important factor in the indus- try. The cheapness of pipe-line transportation has enabled the large companies owning comprehensive pipe-line systems to choose strategic locations for their refineries near seaports and the larger distributing centers of the country, while small concerns dependent on rail ship- ments have been forced to build their plants near the oil fields. The cost of pipe-line construction is so great that small concerns can not build lines to the large consuming and distributing markets. The average cost of building and equipping an 8-inch pipe line based on the cost of constructing about 2,200 miles of 8-inch lines by six different companies is approximately $9,000 per mile. An operator in the Cushing pool who desired to deliver his crude oil by pipe line to the Gulf coast would require about 500 miles of pipe line, which 11673—16—2 X LETTER OF SUBMITTAL. would involve a fixed investment of at least $4,500,000, while such a line from the Cushing pool to Chicago would cost over $6,000,000, and to the Atlantic seaboard, in the vicinity of New York City, the cost would be about $13,500,000. - NECESSITY AND EFFECT OF LOWER PIPE-LINE RATES. The conclusion is evident that the prosperity, and perhaps even the existence of many small concerns depend on lower pipe-line rates and reasonable minimum shipments. Whether the general level of prices for refined products would be reduced thereby would depend chiefly on the prices of crude oil, which under conditions of free competition would be determined by supply and demand. Competition, however, would be promoted thereby, and it would naturally be oxpected that prices would be made more even and equitable not only as respects the crude oil prices in the Mid-Continent and Appalachian fields, but also as respects the prices of the refined products in different parts of the country. Respectfully submitted. - Joseph E. DAVIES, Chairman. EDWARD N. HURLEY, Vice Chairman. WILLIAM J. HARRIs. WILL H. PARRY. GEORGE RUBLEE. REPORT OF FEDERAL TRADE COMMISSION ON PIPE-IINE TRANSPORTATION OF PETROLEUM, SUMIMARY AND CONCLUSIONS. This report treats of the transportation of crude oil by the five large interstate pipe-line systems tapping the Mid-Continent field, which includes the oil-producing pools of Kansas, Oklahoma, northern Texas, and northern Louisiana. It is made in response to a reso- lution of the Senate (S. Res. No. 109, 63d Cong., 1st Sess.) and deals with a part of the subject matter of this resolution, the investigation of other matters not having been completed. This report is also re- sponsive, in part, to another resolution of the Senate (S. Res. No. 457, 63d Cong., 2d Sess.). Subsequent to the passage of the first of these resolutions the Senate directed an inquiry to be made by the Interstate Commerce Commission, which involved, in part, the sub- ject of pipe-line transportation. This investigation by the Federal Trade Commission was partially completed before the Senate directed the Interstate Commerce Commission to make its inquiry. In order to avoid as far as possible any duplication of work, a mutual ar- rangement was made by the two commissions whereby the Federal Trade Commission completed its investigation of the large interstate pipe-line systems operating in the Mid-Continent field and the Inter- state Commerce Commission began an investigation of the pipe-line systems operating east of the Mississippi River. These large castern pipe-line systems were therefore not covered by the investigation of the Federal Trade Commission and are not considered in this report. This report shows the total investment of the companies, which operate these five large interstate systems, their total carnings, their investment in pipelines, the cost of transporting crude oil by pipe lines, the charges and regulations imposed by them on the carrying of oil for other shippers, the excess of such charges over the actual cost of transporting crude oil through pipe lines, the earnings which would be realized by the pipe-line companies if such charges were paid on all oil shipped by them, and other phases of the present conditions of pipe-line transportation. It deals primarily with the pipe-line transportation of crude oil from the Mid-Continent field to refineries or to connecting pipe lines. Some of the crude oil from this field goes south to refineries in Texas and Louisiana, Some to refineries nearer the oil fields, especially to such points as Neodesha, Kans.; Sugar Creek, Mo.; Woodriver, Ill.; and some to Griffith, Ind., - l 2 PIPE-LINE TRANSPORTATION OF PETROLEUM. where large quantities of crude oil are annually transferred to con- necting eastern pipe lines, which either deliver it to the refinery at Whiting, Ind., or transport it to refineries in Ohio, Pennsylvania, Maryland, New Jersey, and New York. The cost of pipe-line transportation of crude oil is shown for the companies, which operate the following pipe-line systems: (1) The Prairie system, (2) the Oklahoma-Louisiana system, (3) the Gulf system, (4) the Texas system, and (5) the Magnolia system. The Prairie pipe-line system, a former Standard Oil subsidiary, delivers crude oil directly to three Standard Oil refineries and connects with eastern pipe lines belonging to the Standard Oil group which supply other Standard Oil refineries. The other four systems are operated in connection with refineries and transport their crude-oil supply through their own pipe lines, and, during the period covered by this report, their pipe-line shipments have been made almost exclu- sively to their own or to affiliated refineries. NATURE AND DEVELOPMENT OF PIPE LINES. The large pipe-line systems operating in the Mid-Continent field consist (1) of gathering-lines, (2) of lateral and main trunk lines, and (3) of gathering-line and trunk-line pumping stations. Steel pipes from 2 to 6inches in diameter are used for gathering lines. The smaller sizes are usually laid on the surface of the ground, while the 6-inch pipe is laid below the surface. The gathering lines receive the crude oil from the producers' settling tanks, from which it flows by gravity or is drawn by suction pumps into receiving tanks at the gathering stations. Steel pipes, generally 8 inches in diameter, are used for the lateral and main trunk lines. These pipes are almost always laid about 18inches below the surface of the ground. The crude oil is pumped from the receiving tanks at the gathering-line pumping stations by discharge pumps through the lateral lines to a trunk-line pumping station. These gathering-line pumping stations are located at convenient points in the producing pools. The trunk-line pumping stations are usually located about 40 miles apart and are equipped with powerful steam or internal-combustion pumping engines, which propel the crude oil through the pipes from station to station until it reaches its final destination. These powerful pumping engines operated by the five large pipe-line systems radiating out from the Mid-Continent field, aided by those of their eastern connections, are constantly propelling continuous streams of crude oil from this field to refineries from 500 to 1,500 miles distant. The first successful pipe line, 4 miles in length, was laid in the oil pools of western Pennsylvania in 1865, and in 1875 a 4-inch line, 60 miles long, was laid from these oil pools to Pittsburgh. Prior to 1876 crude oil was almost entirely refined in the neighborhood of the PIPE-LINE TRANSPORTATION OF PETROLEUM. 3 wells, but after this time refineries were located near large consum- ing markets, such as Cleveland, Pittsburgh, Buffalo, Baltimore, Phil- adelphia, and New York, and pipe lines were laid from the oil fields to these points. The development of pipe-line construction increased rapidly after 1876, and by 1892 there were numerous pipe lines, aggregating 3,000 miles in length, mostly 5 and 6 inches in diameter, connecting the oil pools of western Pennsylvania with refineries located in the larger cities of Ohio, Pennsylvania, Maryland, New Jersey, and New York. The economy of pipe-line transportation of crude oil had been thoroughly established long before crude oil was discovered in the Mid-Continent field. In 1903 and 1904, after a substantial produc- tion had been obtained in southeastern Kansas and northeastern Oklahoma,’ the development of a large pipe-line system in this field began. By the end of 1914 the trunk-line mileage of the five large interstate systems alone equaled about 4,320 miles of continuous line, while the total mileage of trunk lines operated by them was about 6,590 miles. One system—the Prairie pipe-line system—has from two to five parallel pipe lines from near Bartlesville, Okla., to Griffith, Ind., a distance of 619 miles, while The Texas Co.'s line from Bartles- ville, Okla., to Port Arthur, Tex., is 602 miles long; the Gulf system's trunk line between the same points is 508 miles in length; the Okla- homa-Louisiana system has a continuous line from Glenn Pool, in northeast Oklahoma, to Baton Rouge, La., 513 miles long, and the Magnolia system's line from the Healdton pool, in southern Okla- homa, to Sabine, Tex., is 479 miles long. These five systems have pipe line and pipe-line equipment sufficient to transport 240,000 bar- rels of crude oil daily, and are capable of transporting annually a quantity equal to 89 per cent of the 1914 production of the Mid- Continent field. During 1913 they received into their lines from the Mid-Continent field about 81,000,000 barrels of crude oil; this quantity was equal to almost one-third of the total marketed crude- oil production of the United States for that year. PIPE LINES ARE NOW COMMON CARRIER.S. The decision of the Supreme Court of the United States, rendered June 22, 1914, in United States v. Ohio Oil Co. et al., in what are known as “The Pipe Line Cases,” held all pipe lines engaged in transporting oil in interstate commerce to be common carriers under the jurisdiction of, and subject to, regulations prescribed by the Interstate Commerce Commission, in accordance with the act to regulate commerce, as amended June 29, 1906 (the Hepburn Act), relating to common carriers in interstate commerce. Prior to this decision the Prairie Oil & Gas Co. had refused to act as a common 1234 U. S., 548. 4 PIPE-LINE TRANSPORTATION OF PETROLEUMI. carrier. However, soon after this decision this company issued pipe-line tariffs in conjunction with connecting lines for shipments to refineries east of the Mississippi River, and on February 1, 1915, the Prairie Pipe Line Co. was organized to own and operate the pipe-line property, while the Prairie Oil & Gas Co. retained the producing and storage property. Although both The Texas Co. and the Gulf pipe-line system issued tariffs naming rates for pipe-line transportation soon after the passage of the Hepburn Act, in 1906, no interstate common- carrier business was done by any of the companies operating in the Mid-Continent field prior to June 22, 1914. The Oklahoma Pipe Line Co. always acted as a common carrier for intrastate shipments under the Oklahoma State law; however, before June 22, 1914, the Prairie Oil & Gas Co. was the only shipper over its lines. PRINCIPAL FACTS DEVELOPED IN THIS REPORT. The salient points developed in this report and the principal facts and conclusions of public interest are as follows: 1. The dominant position of the Mid-Continent field makes the facts developed in this report of vital importance to the entire country. 2. The fixed investment in pipe lines is extensive and corresponds closely with the actual cost of such property. 3. Pipe-line construction in the Mid-Continent field has followed, instead of preceded, crude-oil production, and such investment is comparatively secure. 4. There is a large difference between the cost of pipe-line trans- portation, which is very low, and pipe-line tariff rates, while the independent shipper can nôt use railroads instead because their rates are still higher. 5. The pipe-line companies require large minimum shipments, which makes it impracticable for small producers or refiners to ship crude oil by pipe line. - 6. The price of the crude oil delivered at the refineries is to a large extent made up of the transportation charge. 7. The cost of pipe-line construction is so great that small concerns can not build lines from the Mid-Continent field to the large consum- ing and distributing markets. 8. Lower pipe-line rates and smaller minimum shipments are necessary to enable small concerns to compete with large refineries affiliated with pipe-line companies. 9. Reasonable and equitable conditions of shipment by pipe line would tend to a greater equality in the prices of Mid-Continent and Appalachian crude oil and in the prices of refined products in different markets. PIPE-LINE TRANSPORTATION OF PETROLEUM. * DOMINANT IPOSITION OF MID-CONTINENT FIELD. The great production of the Mid-Continent and Gulf coast fields and the large pipe-line shipments to refineries east of Woodriver, Ill., and Griffith, Ind., make the conclusions based on the facts developed in this report of vital importance to the entire country. The Mid- Continent field embraces the most productive oil-producing terri- tory east of the Rocky Mountains and yields approximately one- third of the total production of the United States. It includes all oil pools in Kansas, Oklahoma, northern Texas, and northern Louisiana. The total marketed production of the Mid-Continent field and the pro- portion of this production to the total marketed production of the United States during 1911–1914, was as follows: Production | Per cent of petroleum of total Year in the Mid- production Contincmt of United field.1 States. Barrels. 1911--------------------------------------------------------------------------- 66,595,477 30.21 1912--------------------------------------------------------------------------- 65,473,345 29.37 1913--------------------------------------------------------------------------- 84,920,225 34. 18 1914--------------------------------------------------------------------------- 97,995,400 36.81 1 United States Geological Survey, Petroleum in 1914, p. 905. In 1914 the marketed production of the Mid-Continent field was almost 37 per cent of the total for the United States, and, excluding the California production, which yields a smaller per cent of refined products, the Mid-Continent production was a little more than 59 per cent of the total. This report covers all the large interstate pipe lines transporting crude oil from both the Mid-Continent and Gulf fields, or, in other words, from all pools in Kansas, Oklahoma, Texas, and Louisiana. The total marketed production of these four States, 1911 to 1914, and the proportion of this production to the total production of the United States are shown in the statement following: Production of petroleum º Year, in the Mid: | dºić of º United &In Ol Cºld - fields.1 States. Barrels. 1911--------------------------------------------------------------------------- 77,595,350 35. 20 1912--------------------------------------------------------------------------- 74,018,363 | 33. 20 1913--------------------------------------------------------------------------- 93,462,719 37.62 1914--------------------------------------------------------------------------- 111,112,928 4.1. 81 i United States Geological Survey, Petroleum in 1914, p. 905. 6 PIPE-LINE TRANSPORTATION OF PETROLEUM. The production in the Mid-Continent and Gulf fields from 1911 to 1914 has equalled from about 33 to almost 42 per cent of the total production of the United States. If the California production is excluded, the Mid-Continent and Gulf production equals almost 67 per cent of the total in 1914. The importance of pipe-line transportation from the Mid-Continent field is further shown in the following statement, which presents a comparison between the total marketed production east of the Mis- sissippi River and the quantity of Mid-Continent crude oil trans- ferred to eastern pipe lines by the Prairie Oil & Gas Co. for delivery to refineries east of the Mississippi River and also to those east of Whiting, Ind., and Woodriver, Ill.: Total pipe- sº line ship- #; f & ments of S §§. S O Prºtºn | 6′iahoma | Per cent of **..., | Per cent of Yeal east of the crude oil easternºr. º.º.ºst|castern prº- Mississippi jºi...i j of Whiting, ... River. 2. $ Ind., an & east of Mis- Woodri sissippi OO #ver y River. g Barrels. Barrels. Barrels. 1911. -------------------------------- 61,298,034 | 18,255,222 29.78 || 8, 156,620 13.31 1912. -------------------------------- 59,865,730 24, 105,284 40.27 | 12, 174,249 20.34 1913. -------------------------------- 54,588,822 || 23,741,831 43.49 | 12,977,882 23.77 1914--------------------------------- 51,083,340 || 30,614,764 59.93 16,561,168 32.42 From 1911 to 1914 pipe-line shipments of Oklahoma crude oil to refineries east of the Mississippi River have steadily increased from about 18,000,000 barrels in 1911 to more than 30,000,000 barrels in 1914, or from about 30 per cent to almost 60 per cent of the total production east of the Mississippi River in those years. These large shipments supplement the supply obtained from the eastern oil fields, and thus come in direct competition with the crude oils produced east of the Mississippi. In addition to these large shipments by pipe line during the period 1913 to 1915, from about 3,500,000 to almost 6,000,000 barrels of crude oil from the Mid-Continent and Gulf fields are annually transferred at Baton Rouge, La., and Gulf ports to tank steamers for delivery to refineries located on the north Atlantic Seaboard. IPIPIE-LINE CONSTRUCTION BIAS FOLLOWED OIL PRODUCTION. The development of the large interstate pipe-line systems in the Mid-Continent field has followed the rapid development of crude-oil production. The practicability and economy of transporting crude oil by pipe lines had been amply demonstrated in the oil fields of Pennsylvania, Ohio, West Virginia, and contiguous States long be- fore the crude-oil production in the Mid-Continent field attained any PIPE–LINE TRANSPORTATION OF PETROLEUM. 7 particular importance. A small quantity of crude oil was obtained in Kansas in 1889 and in northeast Oklahoma in 1891. However, no pipe line was built until a substantial production had been de- veloped. The erection of a refinery at Neodesha, Kans., by the Standard Oil Co. of Kansas in 1897, was followed by the construction of pipe lines in 1903, generally of 6-inch size, for the transportation of crude oil. This was sufficient for a year, and then the marked in- crease in the production, beginning in 1904, forced the erection of storage tanks and the construction of larger pipe lines to conserve and handle the crude oil. The Prairie Oil & Gas Co., at that time a subsidiary of the Standard Oil Co. of New Jersey, began to erect stor- age tanks and to place crude oil in storage. This expedient quickly proved inadequate, however, and an 8-inch line was constructed to the Sugar Creek refinery of the Standard Oil Co. of Indiana, located near Kansas City, Mo., and the following year to Griffith, Ind., from which point the oil was pumped by the Indiana Pipe Line Co. to the refinery at Whiting, Ind., or transferred to other pipe lines extending to the Atlantic coast. . - The impelling force in this rapid development in the fixed invest- ment by the various companies was the desire to utilize the abundant production of oil in this new field. So pressing was this need that existing trunk lines were doubled, tripled, or even quadrupled. Pipe lines of larger diameter were used and additional storage tanks were erected until the Prairie Oil & Gas Co. was transporting more than 100,000 barrels per day from this field. Contemporaneously with this enormous development in Oklahoma, oil had been found in northern Louisiana in 1905–6, and somewhat later the Standard Oil Co. of Louisiana began operations in the Caddo field in Louisiana. A refinery was erected at Baton Rouge, La., on the Mississippi River, and an 8-inch pipe line was constructed in 1909–10 to the northwest corner of the State. Steps were also taken to render the Oklahoma oil available at Baton Rouge by the construction of connecting lines by the Prairie Oil & Gas Co. and the Oklahoma Pipe Line Co. through Arkansas and southeastern Oklahoma. Thus, the Standard interests had two outlets from the Mid-Continent field proper—one north- east through Missouri and Illinois to Griffith, Ind., near Chicago, where connection is made with other pipe lines belonging to the Standard Oil group running to the larger Ståndard eastern refin- eries, and the other southeast through Arkansas and Louisiana to Baton Rouge. The vast increase in the production of crude oil in northeastern Oklahoma from 1905 to 1907, particularly in the Glenn Pool, induced both the Gulf Pipe Line Co. (of Texas) and The Texas Co. to extend their pipe lines from southern Texas to the Glenn Pool in Oklahoma. Subsequently these companies extended their lines into practically all of the producing pools of northeastern Oklahoma. 11673–16—3 8 PIPE-LINE TRANSPORTATION OF PETROLEUM. Throughout the entire decade from 1904 to 1914, during which time the pipe-line companies greatly increased their pipe-line invest- ments, the production in northeastern Oklahoma has persistently pressed upon all the means of conserving the oil brought to the sur- face and the rapid increase in oil production has practically compelled the extension of the pipe-line systems. In addition to the rapid exten- sion of pipe lines by the large interstate systems, there has been ex- tensive building of small lines and storage facilities by the oil pro- ducers and local refining companies. ExTENSIVE INVESTMENT IN PIPE LINEs. The gross fixed investment in pipe-line property, as shown by the books of the several companies discussed in this report, corresponds closely with their actual expenditures in pipe-line construction. As a rule, the pipe-line companies have built their own pipe lines and equipment, thus eliminating any intermediate profit to a construction company. The gross fixed investment (no depreciation being de- ducted) in the five pipe-line systems, including storage, operating in Mid-Continent field is shown in the following statement: Gross investment, Dec. 31. Company. 1911 1912 1913 Prairie Oil & Gas Co.................. . . . . . . . . . . . . $29,703, 158.39 $30,190,050.06 $34,274, 586.02 Oklahoma Pipe Line Co.............. ------------ 1,761,268.99 1,912, 185.56 1,936,096.38 Standard Oil Co. of Louisiana.................... 2,721,879.41 3,012,020.90 4,406,608.82 Gulf Pipe Line Co. of Oklahoma.................. 4,477,095.82 4,469,475.98 4,713,683.02 Gulf Pipe Line Co. (of Texas) .................... 5,663,520.80 6,276,916.61 6,431,994.61 Gulf Refining Co. of Louisiana....................l.................. 458,963.47 639,813.75 The Texas Co.'..... ------------------------------ 14,635,944.84 15,228,256.32 15,874,624.72 Magnolia Petroleum Co. -------------------------- 1,770,296.23 4,919,731.76 5,286, 119.62 Total.-------------------------------------- 60,733,164.48 66,467,600.66 73,563,526.94 1 Years ending June 30, 1912, 1913, and 1914. The Magnolia Pipe Line Co.'s pipe line was not completed until March, 1914, and on December 31, 1914, its plant investment was $987,403.87. The Magnolia Petroleum Co.'s pipe-line investment was $5,804,978.82 on December 31, 1914. The total investment for the Magnolia system at the end of 1914 was $6,792,382.69. The amounts shown in this statement are taken directly from the records of the respective companies, and the details regarding the increases from year to year are given in the chapters relating to each company. Practically all of this investment has been made during the past decade and illustrates in a very striking manner the rapid development of the Mid-Continent field. Generally speaking, it may be said that the fixed investment has progressed propor- PIPE-LINE TRANSPORTATION OF PETROLEUM. 9 tionately with the production of crude oil in this territory. With some unimportant exceptions, all this investment was made directly by these companies, and the capitalization of these companies corre- sponds closely with the amount of money actually spent in develop- ing the property. Three of these systems were formed from pred- ecessor companies. - - The Prairie Oil & Gas Co. bought the Forest Oil Co. in 1900 for $300,000. The property consisted principally of producing wells in the State of Kansas. The developments in transportation facilities began in 1903 and have continued steadily as the oil field has been extended, until at the end of 1913 its pipe-line investment amounted to $34,274,586.02. The Magnolia pipe-line system originated in 1911. The pipe-line property transferred by the predecessor company consisted of gathering lines in the Corsicana and Henrietta pools and pipes lines connecting Beaumont and Sabine, Tex. The Magnolia Petroleum Co. took over the gathering lines and other pipe-line property for $1,150,728.63. Later extensions of the pipe line to the Electra pool in Texas and the Healdton pool in Oklahoma made the total pipe- line investment in the Magnolia system aggregate $6,792,382.69 at the end of 1914. The beginning of the Gulf Pipe Line Co.'s system is found in the J. M. Guffey Petroleum Co., which operated in the Spindletop pool near Beaumont, Tex., and had pipe-line connections with oil pools at Sour Lake, Batson, and Saratoga, extending from them to the Gulf coast at Port Arthur, Tex. At the time of the transfer to the suc- cessor company (1907), this pipe-line property was valued on the books at about $2,300,000; an appraisal, however, reduced this valu- ation to about $1,200,000. The Gulf Pipe Line Co.'s pipe-line invest- ment is now approximately $12,000,000; i. e., over $10,000,000 have been spent in the past eight years in developing this property. - In 1902 The Texas Co. laid its original 6-inch pipe line from the Spindletop pool, near Beaumont, to Port Arthur, a distance of about 20 miles. On April 30, 1903, its pipe-line investment amounted to $718,000. The more important subsequent extensions were made from 1907 to 1911, and include an 8-inch line, about 470 miles long, from the Humble pool, in Texas, to Glenn Pool, in Oklahoma; a lateral line, 160 miles in length, from the main line at Dallas, Tex., to the Electra pool in the Texas panhandle, and an 8-inch line, about 156 miles long, from the main line near Beaumont, Tex., northeast to the Texas-Louisiana State line at Logansport, Tex. On June 30, 1914, the pipe-line investment, including the storage investment, amounted to almost $16,000,000. The Oklahoma-Louisiana line from the Glenn Pool, in Oklahoma, to Baton Rouge, La., was owned and operated by three separate 10 - PIPE-LINE TRANSPORTATION OF PETROLEUM. companies, viz, the Oklahoma Pipe Line Co., the Prairie Oil & Gas. Co., and the Standard Oil Co. of Louisiana, and represented an invest- ment of about $5,000,000 in 1911, which has been increased rapidly in recent years. PIPE-LINE INVESTMENT COMPARATIVELY SECURE. The extensive proven area and great productivity of the Mid-Con- tinent oil field have greatly lessened the hazard of the pipe-line business. The oil-producing territory in Kansas and Oklahoma covers an area of about 175 miles north and south and 75 miles from east to west, with the center somewhere near Bartlesville, Okla., and includes more than 130 well-defined oil pools in Oklahoma alone. A network of gathering lines has been laid throughout this area, connecting the producing wells in the several pools with the trunk" lines of the oil-transportation companies. The pools embraced in this territory are not all equally productive, and the point of exhaus- tion has been quickly reached in some, while others have produced large quantities of oil for many years. The extensive proven pro- duction area in northeastern Oklahoma alone makes the existing investment in pipe lines a reasonably secure one. In addition, the lines extending south tap pools in northern Texas and northern Louisiana, where other well-proven territories, producing large quan- tities of high-grade crude oil, cover considerable areas. Moreover, new pools are being brought in every year. Thus, the continuity of the production on a large scale is practically assured and the possi- bility of an early exhaustion of the territory is very improbable, thereby giving comparative security to the fixed investment in the transportation lines, stations, and storage tanks. Furthermore, the fact should be noted that these interstate pipe- line systems as they are now constituted have a rated capacity of about 80 per cent only of the total current marketed production of the Mid-Continent and Gulf fields. In addition to the marketed produc- tion large quantities of crude oil are at times placed in storage by the larger producers. Some of the surplus of the marketed production is used in local refineries and locally for fuel purposes; but there have been frequent periods in particular pools when the pipe-line companies were unable to purchase the output of all the producers at the current prices because they could not transport it. In Oklahoma the law required them in such cases to prorate their purchases among the producers. The pipe-line companies operating in the Mid-Continent field evidently anticipate a large production over a considerable period of time, because the average depreciation charge which they make against their gross investment is less than 5 per cent per annum. PIPE-LINE TRANSPORTATION OF PETROLEUM. 11 Although some oil wells, and even particular oil pools, are often quickly exhausted, this has not been generally true of large oil fields. A number of large oil fields have been developed in the United States and in foreign countries, and most of these fields have either yielded a large production for several decades or, in the case of newer fields, have apparently not yet reached their maximum production. The principal oil fields thus far developed in the United States are the Appalachian, the Lima-Indiana, the Illinois, California, the Gulf, and Mid-Continent. An annual marketed production of over 5,000,000 barrels was obtained in the Appalachian field in 1870, and there was a steady increase until the maximum of over 36,000,000 barrels was reached in 1900, since which time there has been a gradual decline to about 24,000,000 barrels in 1914. In the Lima-Indiana field the annual marketed production was over 4,500,000 barrels in 1887 and steadily increased until the maximum of almost 25,000,000 barrels was pro- duced in 1904; from 1904 to 1914 it decreased to a little over 5,000,000 barrels. In the Illinois field the annual marketed production was over 4,000,000 barrels in 1906, and reached its maximum of over 33,000,000 barrels two years later, from which time it has declined to about 22,000,000 barrels. In the Gulf field the annual marketed production was over 3,500,000 barrels in 1901 and increased to over 18,000,000 barrels in the following year; it reached its maximum of over 36,500,000 barrels in 1905, and in 1914 it was over 13,000,000 barrels, after a decline to about 8,500,000 barrels between these last two dates. The California annual marketed production has increased from a little over 4,000,000 barrels in 1900 to almost 100,000,000 barrels in 1914. The annual marketed production of the Mid- Continent field has increased rapidly from a little more than 6,000,000 barrels in 1904 to almost 98,000,000 in 1914. Neither the Mid- Continent nor the California production appears to have reached its maximum. The Lima-Indiana and the Illinois fields are not nearly so exten- sive in area as the Appalachian, Mid-Continent, or California fields. Furthermore, very large portions of these first two oil fields are owned by the Standard interests, and the competition in getting out the oil which exists in the larger fields is less conspicuous in these two. The more important oil fields in foreign countries are the Baku field in Russia, the Galician fields in Austria, the fields of Roumania, the Dutch East Indies, Burma, and Mexico. Except in Russia, none of the foreign oil fields is so productive as the larger fields of the United States, although some of them have been actively exploited for a considerable period. The European war interfered with the pro- duction of oil in some of the European fields in 1914, especially in 12 PIPE-LINE TRANSPORTATION OF PETROLEUM. { Galicia. In Mexico there is undoubtedly a great productive capacity, but development has been retarded by political conditions. The production of Baku was almost 5,000,000 barrels in 1881, and it increased steadily until the maximum of almost 81,000,000 bar- rels was reached in 1901; since 1901 its production has steadily de- creased to about 48,000,000 barrels in 1913 and to about 43,000,000 barrels in 1914. The production of the Galician field was over 2,000,000 barrels in 1896, and it attained its largest production of about 15,000,000 barrels in 1909, since which time it has decreased to about 8,000,000 barrels in 1913. In 1914 production was con- siderably interrupted by the war. The Roumanian production has increased from about 2,000,000 barrels in 1902 to 13,500,000 barrels in 1913. In 1900 the Dutch East Indies produced over 2,000,000 barrels, and in 1914 the production reached nearly 13,000,000 barrels. The Burma field in British India produced 2,500,000 barrels in 1903 and increased to about 8,000,000 barrels in 1913. On the whole, therefore, the historical evidence leads to the conclusion that a sudden exhaustion of large oil fields is highly improbable. LOW COST OF PIPIE-LINE TRANSPORTATION. Pipe-line transportation is the most economical means of shipping crude petroleum on land. The importance of transportation with respect to petroleum arises chiefly from the fact that crude oil, as well as most of its products, are low-priced commodities—i.e., they have a comparatively low value per unit of weight. Crude oil may be transported (1) by water in barges or tank vessels, (2) by railroads in barrels or tank cars, and (3) by pipe lines. The first method—water transportation—is cheap, but it is limited largely to coastwise and transoceanic movements of oil, although barges are used on the Mississippi River and on some other inland waters. This means of transportation has not been considered in this report. The second method of transporting petroleum and its products is by rail- road. Crude oil, owing to its great weight compared with its value, is usually charged a commodity rate, but fire risks and the necessity of using special kinds of cars for bulk shipment combine to make oil transportation by rail comparatively expensive. The cheapness of pipe-line transportation as compared with shipments by rail or other means of land transportation has long been recognized. For this reason most of the small refiners whose plants are located in or near the oil-producing pools have pipe lines from the oil wells to their refineries, even though the distance is only a few miles. PIPE-LINE TRANSPORTATION OF PETROLEUM. 13 The cost of transporting crude oil in 1913, based on the average gathering cost and the trunk-line cost, from the Cushing Pool and Glenn Pool in Oklahoma and Electra Pool in Texas to the important consuming markets supplied directly by the large interstate pipe- line companies, is shown in the following statement: Combined - Trunk-line || Gathering- | trunk and Shipping point.” Destination. Distance. cost per line cost gathering barrel. per barrel. cost per barrel. Miles. Čents. Cents. Cents. Cushing Pool.............. Neodesha, Kans.......... 117.01 2.64 3.99 6.63 Do-------------------- Sugar Creek, Mo.......... 260.66 4.94 3.99 8.93 Do-------------------- Woodriver, Ill............ 505. 54 8.45 3.99 12.44 Do. ------------------- Griffith, Ind.............. 686.05 11.03 3.99 15,02 Do-------------------- West Dallas, Tex......... 265.31 9.72 5.08 14.80 Do-------------------- Fort Worth, Tex.......... 361.18 15.95 3.05 19.00 Do-------------------- Port Arthur, Tex......... 583.09 21.61 5.08 26. 69 Do--------------------|----- do-------------------- 492.03 15.97 | 3.05 19.02 Glenn Pool................ Baton Rouge, La......... 513. 60 22.03 3.99 26.02 Electra Pool............... Fort Worth, Tex......... 137.74 3.48 5.45 8.93 Do-------------------- West Dallas, Tex......... 159.33 5.96 3.58 9. 54 Do-------------------- Corsicana, Tex............ 211.30 5. 34 5.45 10. 79 Do-------------------- Beaumont, Tex........... 448.82 11.34 5.45 16. 79 Do-------------------- Port Arthur, Tex......... 477. 11 17.85 3.58 21. 43 Do-------------------- Sabine, Tex--------------- 479.36 19. 16 5.45 24.61 The costs shown above do not include any profit to the pipe-line com- panies, but they include a uniform depreciation on the gross invest- ment at the rate of 5 per cent per annum, which is slightly greater than the average depreciation charged by these companies on their investment. The trunk-line costs cover the transportation of the crude petroleum from the pumping stations designated by the pipe- line companies as receiving points to the destination. The gathering- line costs include the cost of collecting and transporting the crude oil from the settling tanks of the producers located at the wells to the trunk-line receiving stations. The combined trunk and gathering- line costs, therefore, cover the cost of piping the crude oil from the producers' settling tanks at the wells to its final destination, which is usually a refinery or terminal for water shipments. 14 PIPE-LINE TRANSPORTATION OF PETROLEUM. If 6 per cent interest on the net investment were added, the costs plus this interest on investment would be as follows: • Combined Trunk-line Gººg. trunk and bºus pººl, *.*.* Shipping point. Destination. Distance. 6 per 'cent P. f º barrel, plus on invest- | . 6 percent ment. ment On invest- - & º ment. e Miles. Cents. Cents. Cents. Cushing Pool. . . . . . . . . . . . . . Neodesha, Kans........... 117.01 3.25 4. 49 7. 74 Do-------------------- Sugar Creek, Mo..... ----. 260.66 6. 22 4.49 10. 71 D0-------------------- Woodriver, Ill............. 505. 54 10.82 4. 49 15.31 D0-------------------- Griffith, Ind. . . . . . . . . . . . . . 686.05 14.21 4. 49 18. 70 D0-------------------- West Dallas, Tex....... . . . . 265.31 12. 52 5. 79 18. 31 D0-------------------- Fort Worth, Tex.......... 361.18 20, 71 3. 50 24.21 D0-------------------- Port Arthur, Tex... . . . . . . 492.03 19.85 3, 50 23.35 Do--------------------|----- do--------------------- 583. 09 27.75 5. 79 33.54 Glenn Pool................ Baton Rouge, La.......... 513. 60 31. 91 4. 49 36. 40 Electra Pool............... Fort Worth, Tex... . . . . . . . . 137. 74 4.97 6. 22 11. 19 Po-------------------- West Dallas, Tex......... 159.33 7.64 4.04 11.68 Do-------------------- Corsicana, Tex... . . . . . . . . . 211. 30 7.63 6. 22 13.85 Do-------------------- Deaumont, Tex........... 448.82 16. 20 6. 22 22.42 Do-------------------- Port Arthur, Tex......... 477. 11 22.86 4.04 26.90 Do-------------------- Sabine, Tex....... -------- 479.36 25. 19 6. 22 31.41 ADVANTAGE OF LARGE-SCALE OPERATIONS. The lowest trunk-line costs per barrel for pipe-line transportation of crude oil are found in the most highly developed pipe-line system, the Prairie Oil & Gas Co. The lowest unit costs are obtained in that section of its lines which is operated at the largest per cent of capacity, pumping in one direction, with the distances between pumping stations such as to enable the line to be operated at full capacity under a safe working pressure. Its large lateral lines bring the oil from the principal oil-producing pools to the main trunk line. It has enlarged its pumping stations and paralleled its main trunk lines from the Oklahoma producing section to Griffith, Ind., by con- structing additional lines until at the present time there are from three to five lines between most of the pumping stations. This enables the company to pump from about 70,000 to 100,000 barrels of oil daily from these trunk-line stations, which is from three to five times greater than that of single-line pumping stations. A great saving is thus obtained in operating and general expenses, while the plant investment, particularly for pumping stations, is not increased in a corresponding degree. Although a pipe-line system may be of a size capable of the greatest efficiency, and may be operated at full capacity, if the business of the company is such that the pumpings are over short distances requiring a greater number of pumping stations, a high cost is incurred. An PIPE-LINE TRANSPORTATION OF PETROLEUM. 15 example of high cost per thousand barrel-mile is shown for the Beaumont division of the Magnolia Petroleum Co. In this division there are six pumping stations, the length of the line being only 30.54 miles. A comparison of the average distance between the the stations on this line, which is about 6 miles, and the average distance between stations on all of the 8-inch lines covered by this report, which is about 40 miles, shows the abnormal conditions under which this division is operated. The cost per thousand barrel-mile for the Beaumont division in 1913 was between six and seven times the normal cost for 8-inch lines. Estimates of the daily carrying capacity of the pipe lines were obtained from the engineering departments of the companies, and these estimates have been used by the Commission. On the basis of these estimates it was found that some of the lines were operated at nearly full estimated capacity, while others were operated at less than half estimated capacity. The Oklahoma Pipe Line Co. and the Arkansas division of the Prairie Oil & Gas Co. were both operated at less than half estimated capacity. The interest and depreciation on the investment in pipe lines constitute a large percentage of the expense of piping oil, and these charges are the same in absolute amount, irrespective of the fact that the line may be operating at a fraction of its capacity. Consequently these elements of cost are greatly increased per barrel of crude handled when pipe lines are operated far below their capacity. Even current operating expenses per barrel are also decidedly less when a pipe line is operated at its full capacity than when it runs at less than full capacity. STANDARD'S ADVANTAGEOUS PIPE-LINE CONNECTIONS. The advantage which the Standard Oil group derives from the exclusive use of the only trunk pipe-line system from the Mid- Continent field to the East would be largely removed if this pipe-line system became a common carrier in fact as well as in law. The im- portance of this advantage is shown (1) by the margin between pipe- line cost and railroad rates and (2) by the proportion which deliveries of the Prairie Oil & Gas Co. bear to the production of oil in fields nearer the eastern markets. During the period 1911–1914, the de- liveries of the Prairie Oil & Gas Co. at Griffith, Ind., and Woodriver, Ill., increased from 29.78 to 59.93 per cent of the total crude-oil pro- duction east of the Mississippi River. The importance of the cost of transportation from the Mid-Continent field is of particular sig- nificance in connection with the cost of manufacturing such refined products as gasoline, because a large proportion of the crude petro- leum produced in this section, especially that from the Cushing pool, yields a large percentage of gasoline when compared with the crude oil produced east of the Mississippi River. Mid-Continent crude oil 16 PIPE-LINE TRANSPORTATION OF PETROLEUM. is used in large quantities for refining purposes, not only by the refineries of Louisiana, Texas, Oklahoma, Kansas, and Missouri, but also by the refineries of Illinois, Indiana, Ohio, Pennsylvania, Mary- land, New Jersey, and New York. PROFITS OF OIL COMPANIES OWNING PIPE LINES. The average rate of earnings on the net investment from 1911 to 1913 for the entire business, including the producing, transporting, refining, and marketing activities, of the companies operating the large interstate pipe-line systems from the Mid-Continent field aver- aged about 19 per cent. The rate of earnings on the net investment is shown in the following statement: Company. 1911 1912 1913 tº: Per cent. | Per cent. | Per cent. | Per cent. The Texas Co."---------------------------------------. 6.99 15.02 12.38 11. 71 Standard Oil Co. of Louisiana.......................... 3.54 12. 31 35.58 19.40 Prairie Oil & Gas Co................................... 20.64 36.35 20.83 25.83 Oklahoma Pipe Line Co............................... 12.30 9.08 22.90 14. 77 Gulf Refining Co. of Louisiana..................................... 35.78 59.45 49.79 Gulf Pipe Line Co. (of Texas) and Gulf Pipe Line Co. of Oklahoma.---------------------------------------- 14. 13 15. 52 15.83 15. 11 Magnolia Petroleum Co................................ 2 . 56 16, 17 16. 62 12.72 Average for all companies. -----------------------...... 12.59 23. 57 20.44 19.33 ! Years ending June 30, 1912, 1913, and 1914. 2LOSS. The rate of earnings was computed on the net investment, which includes the capital stock, bonds, long-term notes, and surplus, and is considered as capital employed in the entire business—i. e., pro- ducing, transporting, refining, and marketing—of all the companies, and was computed before any deductions were made for the payment of interest on the outstanding bonds and long-term notes. The Oklahoma Pipe Line Co. is the only one which is engaged in the transportation business solely, while all the others combine a num- ber of activities, such as refining, producing, and selling oil. Under these circumstances the earnings of the Oklahoma Pipe Line Co. represent the actual earnings of its pipe-line business. In other cases the companies do not segregate the earnings of the pipe-line depart- ment from their other activities. In considering the earnings of the Prairie Oil & Gas Co., which operates the largest and most extensive system in this territory, attention should be directed to the fact that this company controls extensive storage facilities. It holds over 40,000,000 barrels of oil in storage tanks, which was accumulated gradually during the period 1905 to 1910. The only important vari- ation in the quantity in storage occurred in 1912, when approxi- mately one-sixth of the stock oil was sold to supply current demands. PIPE-LINE TRANSPORTATION OF PETROLEUM. 17 COMPUTED EARNINGS BASED ON PIPE-LINE TARIFFs. The rate of earnings on the net investment for the pipe-line transpor- tation business, if all of the oil transported had been charged the present pipe-line tariff rates, would have been, in most cases, highly remunera- tive. During the period covered by this report none of the companies, except for one small shipment, acted as a common carrier in interstate commerce. All of the companies, except the Oklahoma PipeLine Co., transported their own crude oil, and delivered it to their own refineries, torefineries operated by affiliated companies, or to connecting pipelines transporting it to refineries owned by the same interests. In order to show what the earnings would have been had each company charged the published rates for all crude oil transported by it, the Federal Trade Commission has computed such earnings at the tariff rates on the total quantity of crude oil transported by each company. The Commission first determined the investment actually used for the gathering and pipe-line transportation of crude oil. The large in- vestment in storage facilities has not been considered a part of the investment properly assignable to the transportation business. The rate of earnings on the net investment in trunk and gathering lines as computed by the Federal Trade Commission is shown in the following statement: - T : iro Gathering-line Combined trunk and A Trunk-line earnings. earnings. gathering earnings. tº a gathering Company. * Or Q. 1911 || 1912 | 1913 1911 | 1912 || 1913 | 1911 | 1912 || 1913 years. P. cent. P. cent|P. cent P. cent.I.P. cent.|P. cent. P. cent ||P. cent. P. cent. Per cent. The Texas Co.'............. 12.08 || 21.04 || 23.00 || 44.15 |43. 15 || 52.83 | 18.53 || 25.80 || 29.35 24. 50 Standard Oil Co. of Louis- iana---------------------- 15. 28 21. 17 || 23.26 88. 41 || 76. 12 103.99 || 21.42 26.60 29.93 26.62 Prairie Oil & Gas Co....... 59. 83 || 75.73 50.92 (115. 14 | 89.61 96.20 | 70. 11 78. 61 59.74 68.84 Oklahoma Pipe Line Co....] .20 | ?. 24 || 6.96 |.......|.......|....... . 20 | 2.24 || 6.96 2.30 Gulf Refining Co. of Louis- iana.---------------------|-------|-------|-------------- 46. 13 43.48 |....... 46. 13 43.48 44. 60 Gulf Pipe Line Cos. (Texas e and Oklahoma).......... 36.63 || 33.41 38.07 ||106.98 || 81.03 || 87.14 || 45.21 || 39. 13 || 44.52 42.94 Magnolia Petroleum Co....!-------|------- 12.78 20.66 30. 11 || 20. 49 20.66 30. 11 || 13.93 15.97 Average for all com- panies-------------- 35.90 43.47 || 34.49 85.20 | 67.37 74.15 || 44.25 || 48. 14 41.53 44.43 1 Years ending June 30, 1912, 1913, and 1914. - * Loss. The net investment in pipe-line property used for transportation purposes is determined by deducting from the gross investment a uniform annual rate of 5 per cent for depreciation and then adding an estimated amount for working capital. This depreciation allow- ance slightly exceeds the average allowance made by the companies in their books. The computed earnings for the several companies, with 18 PIPE-LINE TRANSPORTATION OF PETROLEU M. one exception, are uniformly much higher than those taken from the records of the companies and shown in a preceding statement. The exception is the Oklahoma Pipe Line Co. In this case the computed earnings are quite low; in fact, in 1912 this company, on account of the small quantity transported compared with its capacity, would have actually lost money had it conducted its operations on this pipe-line tariff rate, which became effective August 15, 1914. The computed earnings of the Texas and Gulf systems and the Stand- ard Oil Co. of Louisiana are highly remunerative. The earnings for the Standard Oil Co. of Louisiana appear to vary approximately with the capacity at which the pipe line was operated. The com- puted earnings of the Prairie Oil & Gas Co. are very high and reflect fully the efficient operations of its pipe lines at full capacity. Taking all these five pipe-line systems together, the average net in- vestment (after deducting depreciation and storage) for the three-year period 1911–1913 was $38,522,728.08; the average gross receipts which would have been obtained if the tariff rates had been charged on all the oil carried, $25,836,301.48; and the average aggregate cost of transportation by pipe lines, including depreciation on the invest- ment, $8,720,052.42. On this basis the average net earnings would have been $17,116,249.06, and the rate of return on the net invest- ment 44.43 per cent. For the year 1913 alone the net investment for the five systems aggregated $43,857,438.32, the gross receipts $28,837,571.62, the cost of transportation $10,624,276.28, the net earnings $18,213,295.34, and the rate of earnings 41.5 per cent. LARGE MARGIN BETWEEN PIPE-LINE COSTS AND RATES. There are wide margins between the cost of pipe-line transportation of crude oil and the present published pipe-line tariffs. At the present time the interstate pipe lines are common carriers and have filed tariffs with the Interstate Commerce Commission, but the said com- mission has not passed on the question of their reasonableness. The difference between the costs of transportation, plus 6 per cent on the net investment, through trunk pipe lines, and the trunk-line tariff rates and the margins between the combined gathering and trunk-line costs and the published tariffs for shipments from the more important producing pools based on the average costs for 1913 are shown in the following statement: Combined trunk and gathering line. Trunk line. Gathering line. Cost per Cost per Cost per Shipping point. Destimation. Distance. Tariff rate | Cºst pºr º.# Tariff rate | Cost per º 3. Tariff rate | Cost per * ; - per barrel. barrel. on invest. P* barrel. barrel. on invest. | Pºr barrel. barrel. On invest- ment. ment. ment. Miles. Cents. Cents. Cents. Cents. Cents. Cents. Cents. Cents. Cents. Cushing Pool............ Neodesha, Kans. . . . . . . . . . 117.01 20.00 2. 64 3.25 12.00 3.99 4. 49 32.00 6.63 7. 74 Do------------------ Sugar Creek, Mo.......... 260.66 28.00 4.94 6. 22 12.00 3.99 4. 49 40.00 8.93 10. 71 Do------------------ Woodriver, Ill............ 505. 54 34.00 8.45 10.82 12.00 3.99 4. 49 46.00 12.44 15.31 Do------------------ Griffith, Ind.............. 686.05 139.00 11, 03 14. 21 12.00 3.99 4. 49 51.00 15.02 18. 70 Do------------------ West Dallas, Tex......... 265. 31 3-20.00 9. 72 12, 52 12.50 5.08 5. 79 32.50 14.80 18.31 Do.----------------- Fort Worth, Tex.......... 361.18 27.50 15.95 20.71 12.50 3.05 3.50 40.00 19.00 24.21 Do------------------ Port Arthur, Tex......... 492.03 40.00 15.97 19.85 12, 50 3.05 3. 50 52.50 19.02 23.35 Do----------------------- do-------------------- 583.09 2 37.50 21. 61 27.75 12.50 5.08 5. 79 50, 00 26. 69 33.54 Glenn Pool.............. Baton Rouge, La. . . . . . . . . 513. 60 37.50 22. 03 31.91 12.00 3.99 4. 49 49.50 26.02 36.40 Electra Pool............. Fort Worth, Tex.......... 137.74 12.50 3.48 4, 97 10.00 5.45 6.22 22. 50 8.93 11. 19 Do------------------ West Dallas, Tex......... 159. 33 20.00 5.96 7.64 10.00 3.58 4.04 30, 00 9.54 11.68 Do------------------ Corsicana, Tex... . . . . . . . . . 211.30 17. 50 5.34 7. 63 10.00 5.45 6.22 27, 50 10. 79 13.85 Po------------------ Beaumont, Tex........... 448, 82 30.00 11.34 16, 20 10.00 5.45 , 6.22 40.00 16. 79 22.42 Do......------------ Port Arthur, Tex......... 477. 11 37.50 17.85 22.86 10.00 3.58 4.04 47.50 21. 43 26.90 Do.----------------- Sabine, Tex............... 479.36 32.50 19, 16 25. 19 10.00 5.45 6. 22 42.50 24.61 31. 41 1 The rate to Whiting, Ind., is 42 cents per barrel. During 1913 the Indiana Pipe Line Co. received 3 cents per barrel for transporting the crude oil from Griffith to Whiting. * An additional charge of 23 cents per barrel for delivery into customers’ tanks. § 20 PIPE-LINE TRANSPORTATION OF PETROLEUMI. The shipping points in the above statement include three of the largest producing oil pools in the Mid-Continent field. The points of delivery include all of the important ones reached directly by pipe lines from this oil field. At Griffith, Ind., and Woodriver, Ill., con- nection is made with eastern pipe lines. The differences between the costs plus 6 per cent interest on investment and the trunk-line tariff rates show wider margins for shipments north to Neodesha, Sugar Creek, Woodriver, and Griffith than for the southern shipments. This is largely due to the low cost per unit shown for the Prairie Oil & Gas Co. as compared with that for other companies. The differ- ence is especially large for shipments to Neodesha, Kans., and Sugar Creek, Mo., which show margins of 16.75 cents and 21.78 cents on tariff rates of 20 cents and 28 cents, respectively. The tariff rate for these shorter distances is higher per mile than for the longer dis- tances. On the through shipments via Griffith, Ind., and Woodriver, Ill., the proportion of the rate now received by the Prairie Pipe Line Co. gives a smaller margin than direct shipments to these points. The smallest margin is shown for deliveries to Baton Rouge, La. This is due to the high cost shown for the Oklahoma Pipe Line Co. and the Arkansas division of the Prairie Oil & Gas Co. These high costs are caused by the small percentage of capacity at which their pipe lines were operated. The two costs from Cushing pool to Port Arthur are for the Gulf pipe line system and The Texas Co. The distance from the Cushing pool to Port Arthur via The Texas Co. is greater than that by the Gulf pipe-line system, and the cost is likewise greater. - The distance from the Cushing pool to the different destinations shown for shipments via the Prairie Oil & Gas Co. is greater than that from any other shipping point listed in their pipe-line tariff—hence larger margins would be shown for shorter shipments. For ship- ments via the Gulf pipe-line system and The Texas Co. considerable quantities of crude oil are transported from Bartlesville, which is 16 and 22 miles, respectively, farther from Port Arthur than their Cushing pumping stations; however, for both companies large quan- tities are received from points less distant than the Cushing pool. IRIEGULATIONS OF PIPIE-LINE TARIFFS. The regulations of the companies governing pipe-line shipments of crude oil are not only more onerous than those for rail shipment, but the requirements for minimum shipments are sometimes so high as to prevent small producers or refiners from shipping by pipe lines. In comparing conditions of pipe-line and railroad transportation, the regulations accompanying the tariff rates which are made a part of all contracts to transport crude oil are often as significant as the rates •º- PIPE-LINE TRANSPORTATION OF PETROLEUMI. 21 themselves. There are five requirements imposed upon pipe-line shipments which are not imposed upon shipments by rail. These requirements relate to: (1) Minimum quantity of crude oil shipment, (2) identity of crude oil delivered, (3) quality of crude oil accepted for shipment, (4) loss in transit, and (5) terminal facilities. All pipe-line tariffs governing shipments from the Mid-Continent field contain requirements regarding the minimum quantity of crude oil which will be received as a single shipment. These minimum quantities vary from 25,000 barrels required by the Gulf and Mag- nolia systems to 100,000 barrels of a specific kind or quality required by the Prairie Pipe Line Co. and the Oklahoma Pipe Line Co. Rail- roads, on the other hand, accept single tank-car loads, i. e., from 150 to 300 barrels. The Texas Co. prescribes no specific limit, but states in its tariff that the quantity must be a reasonable one. This company, furthermore, has advised the Commission that, while the minimum quantity transported by it as a common carrier is 25,000 barrels, it has “never refused to accept a shipment on account of the smallness of the quantity offered.” The pipe-line companies in their purchases for their own account have prescribed no minimum requirements to govern the quantity received into their lines. They have regularly received the crude oil into their lines in comparatively small quantities from the settling tanks of the producers, which usually have a capacity of from 250 to 500 barrels. Furthermore, some of the pipe lines are constantly making deliveries of crude oil from their different pumping stations in small quantities which frequently do not exceed 500 barrels. Provided nogreater quantities were being offered than the pipelines could handle, it would appear that the burden of proof is on the pipe-line company to show whether there is any technical or commercial reason for refusing to accept such comparatively small shipments where the delivery of the specific oil shipped is not required. The really diffi- cult problem for pipe lines acting as common carriers would appear to arise only when the shipments offered exceeded the capacity of the line, and in that case some equitable rule would have to be determined for apportioning shipments. In making such apportionment it is obvious that no preference should be given to the crude oil belonging to the pipe-line company or to concerns affiliated with it. As many refineries use less than 200,000 barrels of crude oil annually, while many producers would have to accumulate their oil for years before they obtained 100,000 barrels, it is evident that the high minimum- shipment requirements, such as those noted above, may alone often prevent the utilization of pipe lines as common carriers. Pipe-line companies deliver to the consignee not the identical crude oil shipped, but a certain quantity of crude oil, in some cases subject 22 PIPE-LINE TRANSPORTATION OF PETROLEUM. to such changes in quality as occur in transit, and in other cases they reserve the right to deliver from their common stock, of the same kind and quality of oil. The regulation regarding the quality of the crude oil received, on the other hand, allows the pipe line companies to reject any oil known to be of a grade lower than that specified. Oil losses normally occur during transportation, especially as a result of “shrinkage and evaporation,” and the companies contract, therefore, to deliver only from 97 to 99 per cent of the crude oil shipped. Further losses from accidental causes, such as fires and floods, are distributed proportionately among all shippers who have oil in transit. Consignees of crude oil must have sufficient storage facilities to receive the shipment promptly when it reaches the delivery point. The railroads, on the other hand, accept any quantity of crude oil in tank cars, deliver the identical oil, accept crude oil, irrespective of its quality, and are responsible for all losses. On all of these points the service by rail is more favorable to the shipper. For the railroad, however, the expense of delivering the crude oil for shipment is gen- erally greater than for the trunk pipe line, while the rates for trans- portation, as already shown, are also higher. Generally speaking, railroads are built without regard to the location of oil pools in the various States, and the cost of the sidings and apparatus required for loading crude oil is borne ultimately by the shipper, who must also bear the additional charge of delivering his crude oil to the shipping point. INDEPENDENTS CAN NOT USE RAILROADS IN PLACE OF PIPE LINES. - The differences between published pipe-line tariff rates and railroad rates for shipping crude oil are so large that producers or refiners not connected with pipe lines do not and evidently can not afford to ship by rail, except for comparatively short distances. While the pres- ent pipe-line tariffs allow a wide margin between the cost of pipe- line transportation and the published tariff, the pipe-line rates are still much lower than those charged by the railroads for tank-car shipments. The cheapness of pipe-line transportation at the pres- ent published pipe-line rates as compared with the railroad rates for tank-car shipments from the Cushing (Okla.) pool to important crude-oil consuming points is shown in the following statement: PIPE-LINE TRANSPORTATION OF PETROLEUM. 23 Margin Railroad Pipe-line hetween Shipping point. Destination. r: º, r: ºr rººd barrel. barrel. pipe-line rateS. Cushing Pool. . . . . . . . . . Neodesha, Kans. . . . . . . . .----------------....... $0.311 $0.200 $0.111 Do----------------- Sugar Creek, Mo..... --------------------------- . 373 . 280 .093 Do----------------- Woodriver, Ill. . . . . . . . . . . ** * * * * * * *s tº as * * * * * * * * * * * * * * . 544 .340 .204 Do----------------- Whiting, Ind. . . . . . . . . . . . ** sº as tº $º es 4-8 º • * * * * * * * * * * * * * * . 622 .420 . 202 Do----------------- Cleveland, Ohio. . . . . . . . . . . . . . . . . . . . . . . . . .* * * * * * * * . 979 . 580 .399 Do.---------------- Pittsburgh, Pa.. . . . . . . . . . . . ------------...------ 1.054 . 590 .464 Do----------------- Buffalo, N. Y. ---------------------------------- 1.054 . 590 . 464 Do----------------- Philadelphia, Pa... . . . . . . . ... -----------. . . . . . . . . 1.348 . 700 . 648 Do----------------- Marcus Hook, Pa. . . . . . . . . . . -------------------- 1. 348 .685. . 663 Do----------------- Baltimore, Md. ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 320 . 700 . 620 Do----------------- Bayonne, N. J.--------------------------. . . . . . . . 1.403 . 700 . 703 D0----------------- Constable Hook, N. J. . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 403 . 700 . 703 Do----------------- New York City (Brooklyn). . . . . . . . . . . . . . . . . . . . . 1. 403 . 700 . 703 Do. ---------------- West Dallas, Tex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 1, 200 . 192 Do----------------- Fort Worth, Tex... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 . 275 . 054 Do. ---------------- Port Arthur, Tex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466 . 400 . 066 Glenn Pool. . . . . . . . . . . . Baton Rouge, La. . ... ---------------------. . . . . . 544 . 375 . 169 1 Additional charge of 2% cents for delivery to customers’ tanks. On both the railroads and pipe lines west of Buffalo and Pittsburgh the rates increase with the distance, but the increase in the railroad rates is much greater proportionately than the increase in the pipe- line rates. This is particularly marked for points east of Whiting, Ind. Even at Whiting the difference in favor of the pipe lines is $0.202 per barrel, but at Cleveland this has increased to $0.399 per barrel, and at Buffalo and Pittsburgh to $0.464 per barrel. For points east of Buffalo and Pittsburgh the railroad rates vary, but the pipe- line rates are the same, $0.700 per barrel, except to Marcus Hook, which is $0.685. The Pure Oil Co. operates a refinery at Marcus Hook, but as this company operates its own pipe lines, this differential in pipe-line rates is of no advantage to it. In the case of railroad trans- portation there is a differential in favor of Baltimore, a large oil- exporting point, of $0.028 per barrel as against Philadelphia and Marcus Hook, and $0.083 per barrel to points in the vicinity of New York. For shipments from Cushing, Okla., to Fort Worth and Port Arthur, Tex., the difference between railroad and pipe-line rates is only 5.4 and 6.6 cents per barrel, respectively. This difference is largely offset by the fact that shipments of unmixed Cushing crude oil, which contains a much higher per cent of gasoline, can be secured through tank-car delivery. The margin between rail and pipe line rates from Cushing to Fort Worth, Tex., and from Glenn Pool to Baton Rouge, La., is so great as to be prohibitive. The differences between the charges for pipe-line and railroad transportation of crude oil for practically all long-distance shipments are so great that pro- 24 PIPE-LINE TRANSPORTATION OF PETROLEUM. ducers and refiners who are dependent upon rail transportation can not secure supplies from distant oil fields. PIPE-LINE RATES A LARGE FACTOR IN PRICEs. The importance of transportation charges as a factor in the price of oil at destination is shown by a comparison of the present tariff rates on crude oil shipped by pipe line with the posted prices of Oklahoma and Kansas crude oil. The price per barrel paid at the well for crude oil produced in northeast Oklahoma and Kansas is nominally the same. As a matter of fact premiums are often paid for oil from par- ticular pools either on account of the quality of the oil or on account of the particular necessities of the purchaser. The relation of the present pipe-line tariff rates and the lowest and highest prices of Oklahoma crude oil during 1915 is shown in the following statement: Pipe- Lowest || Highest Market. º, (ºis, (15.4, rate. 1915). 1915). Posted price at wells............................................................... 30.40 $1.20 Neodesha, Kans---------------------------------------------------------- $0.20 . 60 1. 40 Sugar Creek, Mo......... * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * . 28 . 68 1. 48 Woodriver, Ill------------------------------------------------------------ . 34 . 74 1.54 Whiting, Ind---------. . . . . . . . . . . . . . . . . . . . . . . . . - - - - - - - - - - - - - - - - - - - - - - - - - - - .42 .82 1.62 Cleveland, Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .------ . 58 .98 1.78 Buffalo, N. Y. . . . . . . . . . . . . . .--------------------------------------------- . 59 .99 1. 79 Pittsburgh, Pa. . . . . . . . . . . . . . . . . ------------------------------------------ , 59 .99 1. 79 Franklin, Pa.. ----------------------------------------------------------- .59 .99 1. 79 Marcus Hook, Pa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------------------- . 685 1.085 1.885 Bayonne, N. J. . . . . . . . . . . . . . . . . . . . --------------------------------------- . 70 1. 10 1.90 Brooklyn, N. Y. . . . . . . . . . . . . . . . . . . . . . . . . . -------------------------------- . 70 1. 10 1.90 Philadelphia, Pa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .--------------- . 70 1. 10 1.90 Baltimore, Md. . . . . . . . . . . . . . . . . . . . .... • * * - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - . 70 1. 10 1.90 Fort Worth, Tex... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 . 675 1. 475. Port Arthur, Tex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 .80 1. 60 West Dallas, Tex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------- . 20 . 60 1. 40 Beaumont, Tex... . . . . . . . . . . . . . . . . . . . . . . .-------------------------------- 1 - 35 . 75 1. 55 Baton Rouge, La. . . . . . . . . . . . . .------------------. . . . . . . ------------------ . 375 . 775 1. 575 ! There is an additional charge of 23 cents for delivery to customers’ tanks. The price at wells is the posted price per barrel, which is the price quoted at all the oil pools in Oklahoma and Kansas on the respective dates. The delivered price at any given point includes the posted price of the oil plus the charge for delivery; for example, at Buffalo, N. Y., on February 15, 1915, the cost of Oklahoma oil was $0.99, i.e., 40 cents posted price and 59 cents transportation charge. The above statement clearly shows the price of the crude oil delivered at the refineries is to a large extent made up of the transportation charge. This is true (1) when the refining company does not own its own pipe line, but must pay the tariff charges of the common-carrier pipe lines, and especially (2) when the refinery is located at a considerable dis- PIPE-LINE TRANSPORTATION OF PETROLEUM. 25 tance from the crude-oil producing center, as is the case with the Atlantic seaboard refineries. . The ratio which the transportation item bears to the total delivered price depends upon the “well price” of the crude oil as well as upon the tariff charge. On February 15, 1915, the cost of Oklahoma crude oil to refineries in Bayonne, N. J., was $1.10 per barrel. The trans- portation charge made up $0.70, or 63.6 per cent of this cost. The other extreme is shown by the cost of crude oil to the Neodesha (Kans.) refinery in December, 1915. The cost of crude oil delivered at Neo- desha at that time was $1.40 per barrel. Of this cost $0.20, or 14.3 per cent, was due to the transportation charge. During 1915 the charge for transportation by pipe line on Oklahoma oil to the Gulf coast refineries varied from 25 per cent to 50 per cent of the delivered crude-oil price. t . . SMALL comPANIES CAN NOT BUILD LINES TO BEST MARIKETS. The low cost of pipe line transportation makes it cheaper to trans- port the crude oil to refineries located near large consuming markets or strategic distributing points than to locate the refineries near the supply of their raw material and distribute the refined products from such points. For this reason the refineries located in the vicinity of oil-producing pools can distribute their refined products economi- cally only in near-by consuming territory. Where the market is a considerable distance from the area of production, the large invest- ment required for a pipe-line system of sufficient length to reach the distributing point is so great that neither a small producer nor a small refiner can build such a line. Moreover, the pipe-line systems now operating from the highly productive pools of the Mid-Continent field have sufficient pipe-line facilities to transport annually from 70,000,000 to 75,000,000 barrels of crude oil from the Kansas and northeastern Oklahoma oil pools. - t This report shows that approximately 2,200 miles of 8-inch pipe line, with the requisite pumping stations, working tanks, tele- graph facilities, and other necessary equipment, have been constructed in and from the Mid-Continent field by six different companies at an average cost of about $9,000 per mile. An operator who desired to deliver his oil by pipe line from the Cushing pool to the Gulf coast would require 500 miles of pipe line, which would necessitate a fixed investment of at least $4,500,000; to reach the vicinity of Chicago would cost him about $6,000,000, while the investment required for a single 8-inch line, properly equipped, from Cushing pool to the Atlantic coast in the neighborhood of New York, would be about $13,500,000. The large investment required necessarily limits the number of pipe lines that can be operated profitably between the Cushing pool and any one of the most desirable terminals. At present there are three distinct trunk pipe lines going south which connect 26 PIPE–LINE TRANSPORTATION OF PETROLEUM. Oklahoma pools with the Gulf coast, while a fourth trunk line reaches the Mississippi River at Baton Rouge, La. There is only one system going north, and that system connects with the eastern pipe lines running to the Atlantic seaboard. - LOWER RATES NECESSARY FOR SMALL CONCERNS TO COMPETE. Lower pipe-line-tariff rates would be necessary in many cases to enable the smaller refineries not owning pipe lines to compete with the large refining companies owning pipe lines. The difference between railroad tariff rates and pipe-line tariffs is so large that a competing refiner who is wholly dependent on railroad service can never extend his operations to a point where he will exert much influence in the industry. The present rates for shipping crude oil by rail in tank cars are so high that it is apparently impossible for a refiner to ship the crude oil from the Mid-Continent field to distant distributing centers and there refine it in competition with rival refineries having ready access to pipe-line transportation, even at present pipe-line rates. Such a refiner is at a still greater disad- vantage when in competition with a refinery owning its own pipe line on account of the wide margin between pipe-line costs and existing pipe-line-tariff rates. The high pipe line and much higher railroad rates for crude-oil shipment have resulted in the location of many small refineries in or near the oil-producing regions. These small refiners, however, must pay high railroad rates in shipping their refined products to market and, therefore, can not compete in the sale of their refined products, except at a great disadvantage, with refineries owning or affiliated with companies owning large interstate pipe-line systems. These latter refineries are able to locate their refineries at or near large consuming and distributing centers, thus obtaining an additional advantage over their weaker rivals. The oil-producing areas in the United States may be divided into three groups. The eastern group includes all States east of the Missis- sippi River. Immediately to the west lies the middle group, extend- ing as far as the Rocky Mountains, while the western or Pacific group includes all of the California field. There are, therefore, broadly speaking, three producing groups, with large cities, extensive indus- tries, and ample transportation facilities in each division. Between the first and second group there are large areas that produce no oil and it must be supplied from either side. The same is true with regard to the area between the second and third groups. These nonproduc- tive areas form the chief debatable ground in the competition between the several groups. The crude oil produced in the middle group ex- ceeds the demands of that territory and thus some of this production is available for use in other sections of the country. For this long trans- fer of crude oil the pipe line is the most economical method of trans- portation; in fact, the railroad charges are so high that it practically eliminates any competition between pipe lines and railroads. By PIPE-LINE TRANSPORTATION OF PETROLEUM. 27 using the pipe line, however, about 15,000,000 barrels of crude oil have been made available east of Whiting, Ind., and Woodriver, Ill. In addition to this, from 4,000,000 to 6,000,000 barrels of crude oil are transported annually by pipe line to Baton Rouge, La., and Gulf ports in Texas and thence by water to the North Atlantic seaboard. Crude oil is so heavy as compared with its value that even under the most favorable commodity rate the cost of transportation by rail is almost prohibitive. When pipe lines are available, it is generally much cheaper to move the crude oil to the neighborhood of the market before any refining process takes place. The transportation of refined products by pipe line is unusual. The establishment of pipe-line transportation between the Mid-Continent area and the North Atlantic seaboard has really stimulated competition between these groups, and lower rates would undoubtedly further develop compe- tition in the industry. The earnings of the several companies in their pipe-line departments would be very remunerative, even with con- siderable reductions in the tariff rates, particularly for northern shipments. EFFECT OF LOWER, IPIEPE-LINE RATES. The conclusion is evident that lower rates and equitable shipping requirements by pipe line are necessary in order to make pipe lines common carriers in fact as well as in law, and that the prosperity and perhaps even the existence of many small concerns are dependent upon reasonable and equitable shipping conditions. Lower pipe-line rates and reasonable pipe-line shipping require- ments would enable many small producers and refiners to transport crude oil from the Mid-Continent field by pipe line who are now unable to do so, and would, therefore, tend to equalize competition in the sale of crude oil by increasing it in some markets where it is slight or nonexistent and by reducing it in others where it is extraordinarily keen. While the natural disadvantage of location of the Mid-Con- tinent field with respect to the largest consuming markets can not be removed, the artificial disadvantage due to high pipe-line rates and shipping requirements can be eliminated. The removal of these artificial disadvantages would tend to a greater equality in the prices of Mid-Continent and Appalachian crude oil, and consc- quently the prices of the refined products which are made from them would tend to be more equal in different markets of the United States. Whether the general level of prices of refined products would be thereby reduced or kept at a lower level would depend chiefly upon the movement of the prices of crude oil. Such prices, under conditions of free competition in purchase and sale, would be determined by supply and demand. Competition would be promoted, however, and more equitable conditions established by the removal of these artificial disadvantages imposed on the Mid-Continent field. 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