Middle distillate decontrol

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Material Information

Title:
Middle distillate decontrol
Series Title:
Serial - Senate, Committee on Interior and Insular Affairs ; no. 94-35
Physical Description:
v, 132 p. : ill. ; 23 cm.
Language:
English
Creator:
United States -- Congress. -- Senate. -- Committee on Interior and Insular Affairs
Publisher:
U.S. Govt. Print. Off.
Place of Publication:
Washington
Publication Date:

Subjects

Subjects / Keywords:
Petroleum products -- Prices -- United States   ( lcsh )
Petroleum as fuel -- Prices -- United States   ( lcsh )
Genre:
federal government publication   ( marcgt )
non-fiction   ( marcgt )

Notes

Additional Physical Form:
Also available in electronic format.
Statement of Responsibility:
printed at the request of Henry M. Jackson, chairman, Committee on Interior and Insular Affairs, United States Senate, pursuant to S. Res. 45, a National fuels and energy policy study ...
General Note:
At head of title: 94th Congress, 2d session. Committee print.

Record Information

Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 025957589
oclc - 02873411
System ID:
AA00025949:00001

Full Text



q94th VogesC RM T E R N
2d SessionJCOJTTEPST





MIDDLE DISTILLATE DECONTROL





PRINTED AT THE, ]REQUEST OF

HENRY MK JACKSON, Chairman

COMMITTEE ON INTERIOR AND
INSULAR AFFAIRS

UNITED STATES SENATE

PUJRSUANT TO

S. Res. 45
A NATIONAL FUELS AND ENERGY
POLICY STUDY

Serial No. 94-35 (92-125)



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Printed for the use of the
Committee on Interior and Insular Affairs


U.S. GOVERNMENT PRINTIING OFFICE



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Fuels and Energy Policy Study, authorized by Senate Resolution 45 of the 92

Senate Resolution 45, introduced by Senator Jennings Randolph and Henry
M. Jackson, was amended and agreed to by the Senate on May 1971. The reso-'
lution authorized the Senate Committee on Interior and I r Affairs and ex-
ofmcio members of the Committees on Commerce and Public Works and the Joint
Committee on Atomic Energy to make a comprehensive study of programs and
policies required to meet national energy needs.
Subsequently, the Senate approved the addition of ex-officio members from the
Committees on Aeronautical and Space iences, on Finance, on Foreign Rela-
tions, on Government Operations, and on Labor and Publi Welfare.

COMMITTEE ON INR AND INSULAR FAIRS
HENRY M. JACKSON, Washington, Chairman
FRANK CHURCH, Idaho PAUL J. FANNIN, Arizona
LEE METCALF, Montana CLIFFORD P. HANSEN, Wyoming
J. BENNETT JOHNSTON, Louisiana MARK 0. HATFIELD, Oregon
JAMES ABOUREZK, South Dakota JAMES A. McCLURE, Idaho
FLOYD K. HASKELL, Colorado DEWEY F BARTLETT, Oklahoma
JOHN F. GLENN, Ohio
RICHARD STONE, Florida
DALE BUMPERS, Arkansas
GRENVILLE GAaRSIDE, Special Counsel and Staff Dirctor
DANIEL A. DREYFUS, Deputy ~taf Director for Legislation
WILLIAM J. VAN NESS, Chief Counsec
D. MICHAEL HARVEY, Deputy Chief Counsel
OWEN J. MALONE, Senior Counsel
W. 0. (FRED) CRAFT, Jr., MinorYff Counsel


Ex-OwrcIo MEMBERS FOR NATIONAL FUELS AND EY STUDY

Committee on Seator.
AERONAUTICAL AND SPACE SCIENCES FRANK E. MOSS, Utah, Chairman
BARRY GOLDWATER, Arizona
COMMERCE WARREN G. AGNUSON, Washington,
Chairman
JAMES B. PEARSON, Kansas
FINANCE RUSSELL B. LONG, Louisiana, hairman
SPAUL J. FANNIN, Arizona

FOREIGN RELATIONS CLAIBORNE PELL, Rhode Island
CLIFFORD P. CASE, New Jersey
GOVERNMENT OPERATIONS ABRAHAM RIBICOFF, Connecticut,
Chairman
CHARLES H. PERCY, Illinois
LABOR AND PUBLIC WELFARE WILLIAM D. HATHAWAY, Main
RICHARD S. SCHWEIKER, Pennsylvania
PUBLIC WORKS JENINGS ANDOLPH, Wt
Chairman
"PETE V. DOMENICI, New Mexico
ATOMIC ENERGY [JOINT] JOSEPH M. MONTOYA, New Mexico
** : **

RICHARD D. GRUNDY, Executive Secretar ad Pl
DAVID STANG, Deputy Director for Minority











MEMORANDUM OF THE CHAIRMAN


To Members and ex-of)icio members of the National Fuels and Energy
Policy Study (S. Res. 4b, 92d Cong.), Committee on Interior
and Ivsular Affairs:
Mandatory price and allocation regulations governing sales of crude
oil, residual fuel oil and refined petroleum products have been in exist-
ence since the enactment, during the Arab embargo, of the Emer-
gency Petroleum Allocation Act of 1973. Congress has repeatedly
determined that the continued existence of features of these price and
allocation regulations is desirable and essential to protect both con-
sumers and independent segments of the petroleum industry from
dislocations caused by the arbitrary, precipitous increases in world
oil prices which have been imposed by the Organization of Petroleum
Exporting Countries cartel. The Energy Policy and Conservation
Act (Public Law 94-163) which the President signed on December 22,
1975, establishes a policy and a procedure for executive branch pro-
posals for the modification of the price and allocation regulations.
The conference committee which reported the EPCA recognized that
Sprocedure to modify the regulation would be necessary to take ac-
count of changing circumstances in the domestic petroleum supply
and demand situation since the 1973-74 "crisis" period.
The procedures adopted in sections 455 and 551 of EPCA involve
the submission to the Congress by the President of a proposed "energy
action" modifying the regulation as the President finds necessary.
Each action is to be accompanied by detailed backup information out-
lining the issues and presenting te findings of the Administration
with respect to these issues. The modification of the regulation would
take effed unless disapproved by one House of Congress within 15
legislative days.
On June 15, 1976, the President proposed the removal of all price
and allocation controls from home heating oil, diesel fuel and other
middle distillate refined petroleum products. These proposals, energy
actions No. 3 and 4, will become effective on midnight, June 30, 1976,
unless a majority of either House adopts a resolution of disapproval.
Middle distillate price increases and supply dislocations have a sub-
stantial impact on homeowners and small businesses relying on oil
for heating and on anyone who depends on commodities delivered by
truck or diesel-powered railroad. Therefore, to assist in analyzing
the administration's justification for removal of controls on these
vital petroleum products, I have asked the staff of the Senate Interior
Committee to assemble the key technical documents relating to these
proposals and to reprint them for the use and information of Mem-
bers of the Senate.
HENRY M. JACKSON, Chinern.
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CONTENTS


Page
Memorandum of the Chairman ---------------
Sections 455 and 551 of the Energy Policy and Conservation Act (Public
La w 94-163) -------------..------------------------------------ 1
Transmittal relating to energy action No. 3, June 15, 1976 ------------.. 5
Transmittal relating to energy action No. 4, June 15, 1976 ------------- 25
Findings and views concerning the exemption of middle distillates from
the mandatory petroleum allocation and price regulations, June 15,
1976 ----------------------------------------------------- 45







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SECTION 455 OF THE ENERGY POLICY AND CONSERVATION ACT



455. The Emergency Petroleum Allocation Act of 1973, as
amended by this Act, is further amended by adding at the end thereof

"COWVERSION MECHANISM TO STANDBY ATrHORITIES
1. (a) dt may not amend the regultion under 15 USC 760a.
section 4 (a) n any manner which-
empts crude oil produced in the United States from any
of s regulaton requied to be made a part of su
r:lation b section 8; Ante p. 942.
(2) resuts in makg such regulation, as so amended, ineon-
sistent with any limitation or other requirement specified in see-
tion 8.in e-
) as provide s(a), the President may
amend th gulaion under section 4(a) if he determines that such
amendment is consistent with the attainment, to the maximum extent
practicable, of the objectives s ified in section 4(b) (1) and that the
e attainment, to the maximum
S() (1) Any such amendmentwhich, with respect to a class of
persons or class of transactions (including transactions with respect to
y m t leve, e s c e o al fuel oil, or any refined
petroleum product or refined product ategory from the prosions of
th 4(a) as such provisions pertain to either 15 USC 7s3.
(A) the allocation of aiounts of any such oil or product, or (B) the
specification of prief or the ianner for determining the price of any

Subsectioni.
or bi f h atters en ouhpa

(2)The President shall submit any amendment referred to in para-
graph (1) to the Congress in accordance with the procedures specified
So von Act. Any such Post, p. 965.
amendent shall be accompanied by a specific statement of the Presi-

"A) may apply only to one oil or one refined product category;

Sthis subsection, or both; and
) may, provide for scheduled or phased implementation.
"(3) used thissectiontheterm'refinedproduct category' "Refined
S;means-E ; product cate-
"(A) -motor gasoline; gory."
"(B) Number 2 oils (Number 2 heating oil and Number 2-



ucts, other than propane).
"(4) Such an amendment shall not take effect if either House of

Act.
of this section with a finding that such aendment is consistent


and in-the case of-








"(A) any exemption described in subsection (c) (1) (A), with
a finding that such oil or refined product category is no loner in
short supply and that exempting such oil or refined product cate-
gory will not av a adverse pact on the suply of ny other
oil or refined petroleum product subject to this Act; and
"(B) any exemption described in subsection (c) (1) (B), with
a finding that competition and market forces are adequat to pro-
tect consumers and that exempting such oil or refined product
category will not result in inequitable prices for any class of users
of such oil or product.
"(2) Any amendment which the President submits to the Congress
under subsection (c) of this section shall be accompanied-
"(A) by a statement of the President's views as to the potential
economic impacts (if any) of such amendment which, where prac-
ticable, shall include his views as to-
"(i) the State and regional impacts of such amendment
(including effects on governmental units);.
"(ii) the effects of such amendment on the availability of
consumer goods and services; the gross national product;
competition; small business; and the supply and availability
of energy resources for use as fuel or as feedstock for indus-
try; and
(iii) the on employment and consumer prices; and
"(B) in the case of an exemption described in subsection
(c) (1) (B) of this section, by an analysis of the effects of such
amendment on the rate of unemployment for the United States,
the Consumer Price Index or the United State, and the implicit
price deflator for the gross national product.
"(e) In any judicial review of an amendment required by this
section to be submitted to Congress in accordance with the procedures
Post, p. 965. specified in section 551 of the Energy Policy and Conservation Act,
the reviewing court tmay not hold unlawful or set aide any such
amendment on the ground that any findings made by the President
were not adequate to meet the requirements of subsection (c), (d),
Sor (g) of this section or subparagraph (A), (E), or (F), of section
706(2) of title 5, United States Code.
"(f) With respect to any oil or refined product category which is
exempted pursuant to the provisions of this sectin, the President
shall have authority at any time thereafter to prescribe a regulation
or issue -an order respecting either the allocation of amounts, or the
specification of price or the manner for determining the price, of
any such oil or refined product category upon a determination by
him that such regulation or order is necessary to attain, and is con-
15 Use 753. sistent with, the objectives specified in section 4(b) (1). Any such oil
or refined product category for which allocation or price requirements
are reimposed under authority of this subsection may subsequently
be exempted without regard to the provisions of srbsectioni (c) of
this section.
Ante, p. 948. "(g) Notwithstanding the provisions of subsection (e) of section 4,
the President may, if he determines that the exemption from payments
for certain small refiners required by such subsection-
"(1) results in unfair economic or competitive advantage with
respect to other small refiners; or
"(2) otherwise has the effect of seriously impairing the Presi-
dent's ability to provide in the regulation under section 4(a) for
the attainment of the objective specified in setion 4(b) (1) (D)
and for the attainment of those other objectives specified in section
4(b) (1) ;
submit, in accordance with the procedures specified in section 551 of
the Energy Policy and onservation Act, an amend nt to modify the
regulation under section 4(a) with respect to the provisions of such
regulation as they relate to such exemption. Such amendment shall not
take effect if disapproved by either House of Congress under the pro-
cedures specified in such section 551.".







SECTION 551 OF THE ENERGY POLICY AND CONSERVATION ACT
(PUBLIC LAW 94-163)

PROCEDURE FOR CONGRESSIONAL REVIEW OF PRESIDENTIAL REQUESTS TO
IMPLEMEN CERTAI AUTITI

SE. 51. (a) F purposes of this section, the term rgy action" 42 USC 6421.
meansny matter required to be transmitted, or submitted to the Con- "Energy action,"
Sa an i f this in.
(b) The President shall transimit any energy action (bearing an Transmittal to
identication ber) to both Hoses of Congress on the same day. If Congress.
both Hlouses are. not in session on the day any nergy action is received
by the appropriate officers of eahi Iouse, for purposes of this section
such energy action shallbe eemed to have been transmitted on t he
first sueepedinc day on which both Houses are in session.
(c) (1) T-xeept as provided in paragraph (2) of this subsection if
to he of Congress, such action
sall ake.effect at te end of te first period of 15 Jalendar days of
continuous session of Congress after the date on which such action is
transmitted to such IIouses, unless between the date of transmittal and



the en of such 15-dayperiod, either House passes a resolution stating
prior to the e rato f the 15-alendr-day period after the date on
which such action is transmitted, if each House of Congress approves
a resolution afrmatively statgin mubstance that such House does not


object to such action.
(1) continuity of session is broken only by an adjournment of
Congress sine die; and
(2) the days o wich either House is not in session because of
an adjournment of more than 3 days to a day certain are excuded
in the computation of the 15-calendar-day period.
l(e) Under provisions conrtained in an energy action, a provision of
such anl action may take effect on a date later than the date on which

section.Ro .




House in the case of resolutions described by paragraph (2)
















action numbered transmitted to ('n aes Oil
Specifies more than....e energyaction.
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(3) A resolution once introduced with respect to an energy action
shall immediately be referred to a committee (and all resolutns with
respect to the same plan shall be referred to the same conuittee) by
the President of the Senate or the Speaker of the House of Representa-
tives, as the case ay be.
(4) (A) If the committee to which a resolution with respect to ai
energy action has been referred has not reported it at the end of 5
calendar days after its referral, it shall be in order to move either to
discharge the committee from further consideration of such resolution
or to discharge the committee from further consideration of any other
resolution with respect to such ergy action which has been referred
to the committee.
(B) A motion to discharge may be made only by an individual
favoring the resolution, shall be highly privileged (except that it may
not be made after the committee has reported a resolution with respect
to the same energy action), and debate thereon shall be limited to not
more than one hour, to be divided equally between those favoring and
those opposing the resolution. An amendment to the motion shall not
be in order, and it shall not be in order to move to reconsider the vote
by which the motion was agreed to or disagreed to.
(C) If the motion to discharge is agreed to or disagreed to, the
motion may not be renewed, nor may another motion to discharge the
committee be made with respect to any other resolution with respect to
the same energy action.
(5) (A) When the committee has reported, or has been discarged
from further consideration of, a resolution, it shall be at any time
thereafter in order (even though a previous motion to the same effect
has been disagreed to) to move to proceed to the consideration of the
resolution. The motion shall be highly privileged and shall not be
debatable. An amendment to the motion shall not be in order, and it
shall not be in order to move to reconsider the vote by which the motion
was agreed to or disagreed to.
(B) Debate on the resolution referred to i, subparagraph (A) of
this paragraph shall be limited to not more than 10 hours, which shall
he divided equally between those favoring and those oposing such
resolution. A motion further to limit debate shall notb debatable.
An amendment to, or motion to recommit, the resolution shall not be in
order, and it shall not be in order to move to reconsider the vote by
which such resolution was agreed to or disagreed to; except that it
shall be in order-
(i) to offer ah amendment in the nature of a substitute, consist-
ing of the text of a resolution described in paragraph (2) (A) of
this subsection with respect to an energy action, for a resolution
described in paragraph (2) (B) of this subsection with respect to
the same such action, or
(ii) to offer an amendment in the nature of a substitute, consist-
ing of the text of a resolution described in paragraph (2) (B) of
this subsection with respect to an energy action, for a resolution
described in paragraph (2) (A) of this subsection with respect to
the same such action.
The amendments described in clauses (i) and (ii) of this subpara-
graph shall not be amendable.
(6) (A) Motions to postpone, made with respect to the discharge
from committee, or the consideration of a resolution and motions to
proceed to the consideration of other business, shall be decided with-
out debate.
(B) Appeals from the decision of the Chair relating to the appli-
cation of the rules of th Senate or the House of Representatives, as
the case may be, to the procedure relating to a resolution shall be
decided without debate.
(7) Notwithstanding any of the provisions of this subsection, if a
House has approved a resolution with respect to an energy action, then
it shall not be in order to consider in that House any other resolution
with respect to the same such action.















TRANSMITTAL RELATING TO ENERGY ACTION NUMBERED 3,
.ii. '' .' *











WASHINGTON,D.C. 20461




:: 8 * '
June 15, 1976 OFFICE OF THE ADMINISTRATOR


Honorable Nelson A. Rockefeller
President of the Senate
Washington, D.C. 20510
Re: Exemption of No. 2 Heating
Oil and No. 2-D Diesel
Fuel from the Mandatory
Petroleum Allocation and
Price Regulations (Energy
Action No. 3)

Dear Mr. President:

On April 21, 1976, the Federal Energy Administration gave
notice of a proposal to exempt No. 2 heating oil, No. 2-D
diesel fuel and other middle distillates from the Mandatory
Petroleum Allocation and Price Regulations and to revoke

Written coments from interested persons ere invited
through My 11, 1976, ad a public hearing regarding the
proposal was held on May 12 and 13, 1976.

FEhas no completeits consideration of all the information
availablein .this proceeding and has determined that the
proposal to exemptmiddle distillates should be adopted and
that Part 215 should be revoked. As required by section 455
of the Energy Policy and Conservation Act, Pub. L. 94-163
(EPCA), which added section 12 to the Emergency Petroleum
Allocation Act of 1973, as amended (EPAA), each amendment
*




exempting a refined product category from regulation must be
submitted separately to each-House of the Congress for


FEA is, therefore, herewith submitting the amendment revoking
Part 215 and exempting No. 2 heating oil and No. 2-D diesel
fuel, which are defined in the EPCA as a single refined
product category, to the Senate, and is also concurrently
submitting the amendment to the House of Representatives for
Congressional review. By Energy Action No. 4, FEA is separately
submitting to each House ofCongress an amendmiient exempting





6


the other middle distillates (No. 1 heating oil, No. 1-D
diesel fuel and kerosene), which are defined in the EPCA as
another refined product category, for review pursuant to
section 551 of the EPCA.

The findings and views supporting this amendment, which are
required by section 455 of the EPCA, are set forth in the
enclosed document entitled. "Findings and Views Concerning
the Exemption of Middle Distillates from the Mandatory
Petroleum Allocation and Price Regulations".

The Administrator of the Federal Energy Administration has
been delegated by the President all the authority granted to
him by the EPAA (E.O. 11790, 39 F.R. 23185, June 27, 1974).

Unless disapproved by the Congress as provided by section
551 of the EPCA, the enclosed amendment will be effective
July 1, 1976 or on the first day following expiration of the
review period provided for by Section 551 of the EPCA,
whichever is later.

Sincerely,



John A. Hill
Acting Administrator

Enclosures




OFFICIAL COMMUNICATION
RECEIVED IN THE OFFICE OF
THE PRESIDEj T
DATE RECEIVED Jv 1 5 b


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7


:rl:: -" ;" .TITLE 10 E.NERGY

CHAPTER II FEDERL ENERGY ADMINISTRATION

PART 210 ENERAL ALLOCATION AND PRICE RULES
PART 211 MANDATORY PETROLEUM ALLOCATION REGULATIONS
PART 212 MANDATORY PET ROLEUM PRICE REGULATIONS
PART 215- LOW SULFUR PETROLEUM PRODUCTS REGULATION

Exemption of No. 2 Heating Oil and No. 2-D Diesel Fuel
from the Mandtory Petroleum Allocation and Price Regulations .


Introduction

On April 2i, 1976, the Federal Energy Administration

issued a notice of proposed rulemaking and public hearing

(4 751, April 26, 1976) to amend 0 CFR Parts 210, 211

and 212 tex t middle distillate, including No. 2 heating

oil an o 2-D diesel fuel, from the Mandatory Petroleum

Prie anAlloca n Regulations and to revoke 10 CFR Part

215 which regulates the use of low sulfur petroleum products.

The pr oosl was based on tentative conclusions set forth in

a document dated April 21, 1976, entitled "Preliminary

Findings and Views Concerning the Exemption of Middle Distillates

fr e Manatory Petroleum Allocation and Price Regulations"

("Preliminary Findings"). Written comments on the exemption

proposal and on th,e Preliminary Findings were invited through

May 11, 197G, and the public hearing was held May 12 and May

13, 19 6.

In the April 21 notice, FEA noted that its conclusion

that market conditions might be appropriate for an end to

price and allocation controls was shared by many members of












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8


Congress -?ho had urged FEA to coimence he process of exempting

products from regulation. .

As an example, FEA specifically cited a letter to the

Administrator of FEA dated November 4, 1975, from Senators

Kennedy, Durkin, Stafford, Muskie, Pastore, McIntyre, Brooke,

Pell and Ribicoff which stated:

As supplies of fuel oil and other petroleum products
have returned to normal levels, fuel dealers are reporting
to us that the price and allocation controls may be
preventing the free play of competitive forces and
thereby raising consumer prices. ..

Since there is conflicting and complex evidence on this
issue, we believe it is the best interest of all parties
to air fully the options for action and the possible
consequences of changing the allocation and price
control system. We therefore feel that public hearings
should be held by the Federal Energy Administration as
provided by section 4(g)(2) of the Allocation Act of
1973 and the similar provision of S. 622-H.R. 7014, now
in Conference. .

As the hearing process is a lengthy one and must, of
course, be followed by careful congressional review of
the FEA)" findings, the FEA should begin this process
soon so that the Congress and the public will have full
opportunity to consider this vital issue.

We therefore strongly urge that you issue the public
notice necessary to the commencement of public hearings
on the removal of allocation and price controls from
retailers and wholesalers of fuel oil and other petroleum
products.

Section 12(c)(2) of the Emergency Petroleum Allocation Act

of 1973 (EPAA) requires that an exemption amendment apply to

only one oil or one refined product category, and specifies

that No. 2 heating oil and No. 2-D diesel fuel constitute a

single product category. FEA proposed the exemption of No.

2 heating oil, No. 2-D diesel fuel and other middle distillate





9


fuels in a single noie of proposed rulemaking and issued a

single d ctaing its preliminary findings and

views ted to the exemption. wever, as required by the

EPAA s d rmind separately for the No. 2 oils and

for the other middle distillate fuels that an exemption

should be adopted, and is today submitting separate exemption

amendments ("Energy Actions Nos. 3 and 4") for these product

categories for Congressional review of FEA's findings and

views supporting these exemptions. The exemption amendment

contained in this document, to be submitted as Energy Action

No. 3, relates to No. 2 heating oil and No. 2-D diesel fuel

as a igle product category ("No. 2 oils"). "tNo. 2 heating

" means heating oil grade No. 2 as defined in American

Society for Testing and Materials (ASTM) D396-71. "No. 2-D

diesel fuel"' jns diesel fuel grade no. 2 as defined in

American.ocety fo Testing and Materials (ASTM) D975-71.

One hundred forty-seven written and oral comments were
%
recved in response to the notice of proposed exemption.

Those offering comments included major integrated refining

companies, small and independent refining companies, marketers,

ultimate consumers, state governments and trade associations.

Almost all of the parties commenting agreed with FEA

that No. 2 oils should be exempted from FEA's allocation and

price regulations. This support was based generally upon
*WS- ^ '" S* ""B! *"d a. .y ,.d








projections, competition, and other findings and views set

forth in the Preliminary Findings. Parties opposing the

exemption of No. 2 oils generally based their opposition on

the belief that the current surplus supply situation might

not continue through the upcoming heating season, that spot

shortages might occur, and that if such shortages were to

occur, independent marketers and consumers of No. 2 oils

would be without the protection of price and allocation

controls and might be subject to inequitable prices or

termination of supply.

FEA has carefully considered the comments of all persons

who participated in the rulemaking. Following its consideration,

FEA has concluded that its initial view that No. 2 oils

should be exempted from regulations is correct.

No information or data were presented in this proceeding

which significantly alter FEA's preliminary findings and

views. FEA does not anticipate that supply shortages will

occur in the future as predicted by some comments and in any

event FEA has standby authority under section 12(f) of the

Emergency Petroleum Allocation Act of 1973 (EPAA) to reimpose

allocation and price controls (on a temporary or permanent

basis) if necessary to attain the objectives set forth in

section 4(b) () of the EPAA. Therefore, FEA hereby adop'ts

the proposed amendments exempting No. 2 oils from the Mandatory

Petroleum Allocation and Price Regulations. Unless disapproved

by either House of Congress under section 551 of the Energy





4<








Policy and C onservation Act(EPCA), this exemption will be

ef fectve eit er July 1, 976 or the.~first .ay following the.

expiration of t'he 15 4dy period provided in section 551 for

Congressional review, whichever is later.

Although FEA is adopting this exemption amendment based

on its firm conclusion that a supply shortage respecting No.

2 oils will not.occur in the forseeable future, FEA recognizes

that unforseeable difficulties, unrelated to the exemption

amendment adopted today and confined to particular market

areas, could arise. In order to further ensure that any such

possible supply problems following the removal of controls

do not adversely affect independent marketers and their

customers, FEA intends to propose shortly procedures pursuant

to which firms experiencing supply problems may obtain

supplies. FEA's proposed rulemaking in this regard will






assign ents are currently effected.

S. Findings and Views

.In addton to this amendment to exempt No. 2 oils from

the Mandatory Ptrolem Alocation and Price Regulations,

FEA has prepared its findings and views supporting the

ame nt as required by sectio 12 of the EPAA based upon

its consideration of the comments of hose persons who













7 15 0-





12


participated in the rulemaking and other information available

to FEA. These findings and views are set forth in a docuent

dated June 15, 1976 and entitled "Findings and Views Concerning

the Exemption of Middle Distillates from the Mandatory

Petroleum Allocation and Price Regulations" ("Findings and

Views"). These findings and views may be summarized, in

part, as follows:

(1) No. 2 oils are not in short supply.


Projected supplies of No. 2 oils, taking into

account projected expansions of domestic

refinery capacity, will be sufficient to meet

demand over the near term (1976-1978).


(2) Exemption of No. 2 oils from the Mandatory Petroleum

Allocati'on and Price Regulations will not have an

adverse impact on the supply of any other oil or refined

product subject to the EPAA.


(3) Competition and market forces are adequate to protect

consumers, following an exemption of No. 2 oils from

regulation. In fact a greater degree of competition

would be expected after exemption than exists under

current regulations.


No price increases are anticipated to result

directly from decontrol.









The No..2oil market share of large., integrated

refiners has been decreasing since 1972,

while that of the lare independent and small

refiners has been increasing. However,

co.ntinued control could lead to a deterioration

of compet ition, resulting in reduced economic

efficiency and higher prices.


.. The exemption itself will. have a positive

effect on competition, in particular enhancing

the competitive viability of small and independent

refiners and marketers.

-- The ex tio n would p emit purchasers (including

consumers) to seek the lowest cost supplier

by freely usin compettive bids without

regard to fixed suppi~r/purchaser relationships,

thereby exerting downward pressure on existing

market prices and providing incentives to

enhance marketing services.


(4) Exmpton of No. 2 oils from regulatio will not result

in inequitable prices for any class of No. 2 oilor



ps





14


S Aggregate pr~ces for No. 2 oils will remain

unchanged by the exemption itself. Prices

can, however, be expected to rise over time

as the result of increased domestic and

foreign crude costs.


(5) Exemption of No. 2 oils from the price and allocation

regulations is consistent with the attainment of the

objectives set forth in section 4(b)(1) of the EPAA.


Since an adequate supply is anticipated, the

continued allocation and pricing of No. 2

oils are not necessary to protect the public

health, safety and welfare, and the national

defense [Section 4(b)(1)(A)]; the maintenance

of all public services [Section 4(b) (1) (B)];
-. '
the maintenance of agricultural operations

[Section 4(b) (1) (C) ; or the maintenance of

exploration for and production or extraction

of fuels and minerals [Section 4(b)(1)(G)].


- Adequate supply and the positive effects of

increased competition insure that the exemption

is consistent with the equitable distribution

of crude oil, residual fuel oil. and refined

petroleum products [Section 4(b)(1)(F)] and

that the exemption will have no adverse

effect on the allocation of suitable crude






15


oil to U.S. refineries [Section 4(b)(1)(E)].


Because the regulations issued pursuant to

the EPAA are designed to deal primarily with

shortage conditions, the exemption is not

only consistent with but, in the current

period of ample supplies, should actually

facilitate the attainment of the objectives

of preservation of an economically sound

petroleum industry [Section 4 (b) (1) (D) ] ;

economic efficiency [Section 4(b)(1)(H)]; and

minimization of economic distortions, inflexibility,

and interference with market mechanisms

[Section 4(b) (1) (I)].


The Findings and Views also state FEA s views concerning

the potentiaeconomic impacts of exempting No. 2 oils from

the Mandatory Petroleum Allocation and Price Regulations.

It is not anticipated that there will be any adverse state

or regional impacts resulting from the proposed exemption.

In fact, governmental units which use large quantities of

No. 2 oils will find that exemption will permit them to use

competitive bids more easily. In addition, FEA anticipates

no adverse economic impacts on the availability of consumer
." S ,





goods or services, the-gross national product, small business

or the supply and availability of energy resources as fuel

or feedstock for industry. FEA expects that the exemption
^^ ~~i ~i~ .. ""- -*-.* ..


^J r^ ..11^ ..^ .:. '* .. '* *' l" .i- 'e "** "". ^ """.." "' ^ '^ '* *9E *







16


will have a positive effect'on competition. The exemption

is likewise expected not to cause an adverse effect on

employment or consumer prices. FEA's analysis of the effects

of the exemption on the rate of unemployment in the U.S., on

the Consumer Price Index and on the implicit price deflator

for the gross national product are set forth in detail in

the Findings and Views.

Allocation of Increased Crude Oil Costs to No. 2 Oils

The refiners' cost allocation formulae of 212.83(c)

provide that the portion of a refiner's total increased

costs of crude oil and increased non-product costs which are

incurred in a month of measurement and which are attributable

on a proportionate volumetric basis to the quantity of

exempt products produced from crude oil must be excluded

from the amount of increased costs which may be passed

through in prices charged for covered (i.e., non-exempt)

products. Increased costs incurred with respect to purchases

of exempt products are excluded from the total of increased

costs of purchased product permitted to be included in

maximum allowable prices charged for covered products.

These exclusions effectively prevent increased costs incurred

beginning with the month prior to the effective date of the

exemption of a product and attributable to that exempt

product from being passed through in prices charged for non-

exempt products. The notice of proposed rulemaking noted







17


the substantial amounts ofnrecovered incrased costs

rrt t axiu llowable prices for middle

distillates and th fact that these increased costs could

be ealcated under current price rules to maximum allowable

prices for gasoline prior to the effective date of the

exemption of middle distillates. FEA therefore proposed to

limit the reallcatio of ny increased costs attributable to

No. 2 oils, effective as of the date of the April 21 notice.

FEA requested comments on both the extent and the effective

date of ts proposed imitatio in light of the seasonal

pricing patterns for gasolinend certain middle distillates

and any other historic pricing practices relevant to this

issue.

ting n i isue generally opposed

reducing refiners' banked costs, The great majority of this

opposition was voiced by refiners hich stated that: (1) the

limitation would beinonsistent with the general feature of

the price rules permtting more than a proportionate amount

of incasd cts o be recovered in gasoline prices; and

(2) the imitatiowould penalize refiners by causing them

ts. Although the refiner price rules


do i otiacion of increased cts
to gasoline prices, in no event do the price rules permit

increasedcosts attributable to exempt products to be recovered

in lawful prices charged for covered product; and while it

is true that the limitation would prohibit the recovery of










*l li i "' s i ' gg;l8 ''"'ss 'I "l 1 *
[UP~UI~l~l~~~Ul~ i~~nli0





18


these costs in gasoline prices, it does not follow that

these costs are "lost". Such costs may be recovered without

any restrictions whatsoever in prices charged for the exempt

middle distillates to which they are properly attributable.

Accordingly, the refiner price rules are amended to prohibit

the reallocation of increased costs attributable to No. 2

oils, effective April 21, 1976. Other conforming amendments

to the price regulations of Part 212 are also being adopted

to reflect the exemption of No. 2 oils.

On April 28, 1976, FEA adopted reallocation of increased

product costs provisions for resellers which granted them

the same pricing flexibility previously restricted to refiners.

The same reasons which have convinced FEA that the refiner

price rules should be amended to prohibit the reallocation

of banked costs attributable to No. 2 oils, effective April

21, 1976, are.equally applicable to resellers. Therefore,

conforming changes have been made to the reseller regulations

in 212.93 (i) (2).

Authority Delegated to the Governor of Puerto Rico

On March 7, 1974 the Administrator of FEA (then FEO)

delegated to the Governor of the Commonwealth of Puerto Rico-

all authority previously delegated to the Administrator of

FEO by section 3(a) of Executive? Order 11748 with respect to

the allocation of several refined petroleum products, including

middle distillate, within the Commonwealth of Puerto Rico. *

The March 7 delegation of authority, insofar as it applies





19


to No. 2 oi~ s will be revoked by separate order to reflect

the eet amendments adopted today.

Revocatioon of Part 215

The exemption amendments adopted today result in an end

to the effectiveness of Part 215 of FEA's regulations, since

middle distillate constitute the greatest part of the fuels

that remain subject to Part 215. FEA is therefore revoking

Part 215, the Low Sulfur Petroleum Products Regulation.

'Effective Date and Standby Authority
Comments and testimony received with respect to the

time necessary between the promulgation of the exemption

amend t and its implementation generally supported FEA's

tentative conclusion that July 1, 1976 is the most appropriate

effective date for the exemption of No. 2 oils. In particular,

the comments noted that an early effective date was necessary

to facilitate the implementation of "summer fill" and other

inventory maintenance programs historically utilized in the

marketing of No. 2 oils,

Section 12(f) of the EPAA provides that following the

inof any p ct from regulation, FEA shall have the

authority a any time to reimpose price and allocation
Scntrols if necessary to attain the objectives of the EPAA.
















r .
For tis rso, FEA is adopting amendments which stay the

effectiveness of Subpart G of Part 211 and of the general
price regulations as they would otherwise apply to No. 2
I? ***as ''S ****** *,~~ ''", .~~51~~ "~" ." ^ .s l' "',,









oils with d hout deleting those regulations from the Code of

Federal Regulations. They are in effect converted to standby

status, so that in the event of shortages or other occurrences

which might require reimposition of controls, they may be

quickly put into effect.

(Emergency Petroleum Allocation Act of 1973, Pub. L. 93-159,
as amended by Public L. 94-163; Federal Energy Administration
Act of 1974, Pub. L. 93-275; E.O. 11790 (39 FR 23185)).

In consideration of the foregoing, Parts 210, 211 and

212 of Chapter II, Title 10 of the Code of Federal Regulations,

are amended and Part 215 is revoked as set forth below,

effective July 1, 1976 or the first day following the expiration

of the 15-day review period under section 551 of the EPCA,

whichever is later, unless this amendment is disapproved by

either House of Congress pursuant to the review procedures

set forth inK-ection 551 of the EPCA.

Issued in Washington, D.C., June 15, 1976.







Michael F. Butler
General Counsel









1. Section 210.35 of Part 11 is amended by the addition of

a paragraph (b) to raead as follows:

S 210.35 Exempted products.
*i . :.- *.. *


(b) No. 2 heating oil and No. 2-D diesel fuel are

exempt from the provisions of Part 211 and Part 212 of this



2. Section 211.1 is amended in paragraph (b) by the addition

of-a new subparagraph (5) to read as follows:

S211.1 Scope.
* *' * *

: : . .



(5) Not withstandin the p visions f Subpart G of this

pat No. 2 eating oil ad No. 2-D diesel fuel, as defined

in S 212.31 of this chapter, are excluded from this part.

3. Section 212.3 is revised in the definition of "covered

products" to read as follows:

212.31 Definitions.



"Covered products" means aviation fuels, benzene,

butane, crude oil, gas oil, gasoline, greases, hexane,

kerosene, lubricant base oil stocks, lubicants, aphthas,

natural gas liquids, natural gasoline, No. I heating oil and

No. 1-D diesel fuel, propane, special naphthas (solvents),.





22










*,. -
Si* ...
toluene, unfiReallished oils, xlene, and other finished products.

A blend of two or more particular c c is

to be that particular covered product constitti ng te major

proportion of the blend.



4. Section 212.83 is revised in subparagraph (2) of paragraph

(d), to read as forllows:

212.83 Price rule.



(d) Realloaction of increased costs among product categories.



(2) No. 2 oils.

(i) To the extent that a refiner does not allocate

its increased costs for No. 2 oils to maximum allowable

prices for No. 2 oils, it may instead allocate that part of

its increased costs for No. 2 oils only to maximum allowable

prices for gasoline. No increased costs for No. 2 oils may

be reallocated to maximum allowable prices for general

refinery products or aviation jet fuel.

(ii) Beginning on April 21, 1976, no increased

costs for No. 2 oils may be reallocated to maximum allowable

prices for any other covered product.

5. Section 212.93 is amended in clause (ii) of subparagraph (2)

of paragraph (i) to read as follows:

S 212.93 Price rule.
*









(i) Re'allocation of indreased product costs among products.

** .

(2) *

(ii) No. 2 oils.

(A) To the extent that a seller does not allocate its

increased product costs for No. 2 oil to the prices for that

pr t, it may reallocate the unallocated part of its

increased product costs for that product to the prices for

gasoline, in whatever amounts the seller deems appropriate.

No increased product costs for No. 2 oils may be reallocated

to the prices for any general refinery product or products,

including propane, or for aviation jet fuel.

(B) Beginning on April 21, 1976, no increased costs for

No. 2 oils may be reallocated to maximum allowable prices

for any othe -covered product.

6. Part 215 is revoked.
















is '
jjs - -r--;s 1 i,- :! s is ^! i --s* f s 1 ss l s. ? ^S. ^ ^ S




ii
'h,




















~ip~E ~~ ~~ ""~""~ "i' ~,~" ;- , a, ~: ~I, ~, ~I r;':'i~~ iii
















ss




i,





f





E I , ,,,,,,,, L~1;
14








































~iEi,


































































































r-


B


;s















TRANSMITTAL RELATIN T EN GY ACTIyON NIMBEREDts 4,
JUNE 15, 1976



SFEDERAL ENERGY ADMINISTRATION
WASHINGTON, D.C. 20461



June 15, 1976




Honorable Nelson A. Rockefeller
Presiden o the Senat~e
Washington, D.C. 2I051

Re: Exemption of Middle
Distillates (Other Than
No. 2 Heating Oil and No.
2-D Diesel Fuel) from the
Mandatory Petroleum
Allocation and Price
R~egulations (Energy
SAction No. 4)

Dear Mr. President:

l 21, 1976, t Feder Energy Administration gave
notice of a proposal to exempt No. 1 heating oil, o. 1-D
Sfue, e ee her mile distillates from the
atory Petro loaton and Price Regulations and to
Sr t u Products Regulation).
Written commts from interested persons were invited
through may11,1976, and a public hearing regarding the
proposal s hed on ay 12 a 13, 1976.

FEA has nocompleted its consideration of all the information
availsand has determined that the
proposal to exempt middle distillates should be adopted and
that Part 215 should be revoked. As required by section 455
of the Energy Policy and Conservation Act, Pub. L. 94-163
(EPCA), which added section 12 to the Emergency Petroleum
Allocation Act of 1973, as amended (EPAA), each amendment
exempting a refined product category from regulation must be
suitted separately to each House of the Congress for
review pursuant to section 551 of the EPCA.





26


FEA is, therefore, herewith submitting the amendment revoking
Part 215 and exempting No. 1 heating oil, No. 1-D diesel
fuel and kerosene (which are defined in the EPCA as a single
product category) to the Senate, and is concurrently submit-
ting this amendment to the House of Representatives, for
Congressional review. By Energy Action No. 3, EA is sepa-
rately submitting to each House of Congress an amendment
exempting the other middle distillates (No. 2 heating oil
and No. 2-D diesel fuel), which are defined in the EPCA as a
separate refined product category, for review pursuant to
section 551 of the EPCA.

The findings and views supporting this amendment, which are
required by section 455 of the EPCA, are set forth in the
enclosed document entitled "Findings and Views Concerning
the Exemption of Middle Distillates from the Mandatory
Petroleum Allocation and Price Regulations".

The Administrator of the Federal Energy Administration has
been delegated by the President all the authority granted to
him by the EPAA (E.O. 11790, 39 F.R. 23185, June 27, 1974).

Unless disapproved by the Congress as provided by section
551 of the EPCA, the enclosed amendment will be effective
July 1, 1976 or on the first day following expiration of the
review period provided for by Section 551 of the EPCA,
whichever is later.

Sincerely,


John A. Hill
Acting Administrator

Enclosures


OFFICIAL COMMUNICATION
RECEIVED IN THE OFFICE OF
THE PRESIDEjE -A
DATE RECEIVED TF91.b
TIME RECEIVED S`,^_ o 00
DATE DELIVERED ti 1 197
< ... .^ /.. ..





'* -_ 1 1 !K "*"






27


TITLE 10 ENERGY

CHAPTER II FEDERAL ENERGY ADMINISTRATION

PART 210 GENERAL ALLOCATION AND PRICE RULES
PART 211 MANDATORY PETROLEUM ALLOCATION REGULATIONS
PART 212 MANDATORY PETROLEUM PRICE REGULATONS
PART 215 LOW SULFUR PETROLEUM PRODUCTS REGULATION

Exemption of No. 1 Heating Oil, No. 1-D Diesel
Fuel and Kerosene
from the Mandatory Petroleum Allocation and Price Regulations


Introduction

On April 21, 1976, the Federal Energy Administration

issued a notice of proposed rulemaking and public hearing

(41 FR 17512, April 26, 1976) to amend 10 CFR Parts 210, 211

and 212 to e.empt middle distillate, including No. 1 heating

oil, No.1-D diesel fuel-and kerosene, from the Mandatory

Petroleum Price and Allocation Regulations and to revoke 10

CFR Part 215 which regulates the use of low sulfur petroleum

products. The proposal was based on tentative conclusions

set forth in a document dated April 21, 1976, entitled

"Preliminary Find s and Views Concerning the Exemption of

Middle Distillates from the Mandatory Petroleum Allocation

and Price Regulations" ("Preliminary Findings"). Written

comments on the exmption proposal and on the Preliminary

Findings wre invited through May 11, 1976, and the public

hearing was held May 12 and May 13, 1976.

In the April 21 notice, EA noted that its conclusion

that might appropriate for an end to

p all tion trols way many members of














73-159 0 76 3





28


Congress who had urged FEA to commence the process of exempting

products from regulation.

As an example, FEA specifically cited a letter to the

Administrator'of FPEA dated November 4, 1975, from Senators

Kennedy, Durkin, Stafford, Muskie, Pastore, McIntyre, Brooke,

Pell and Ribicoff which stated:

As supplies of fuel oil and other petroleum products
have returned to normal levels, fuel dealers are reporting
to us that the price and allocation controls may be
preventing the free play of competitive forces and
thereby raising consumer prices. . .

Since there is conflicting and complex evidence on this
issue, we believe it is the best interest of all parties
to air fully the options for action and the possible
consequences of changing the allocation and price
control system. We therefore feel that public hearings
should be held by the Federal Energy Administration as
provided by section 4(g)(2) of the Allocation Act of
1973 and the similar provision of S. 622-H.R. 7014, now
in Conference .

As the hearing process is a lengthy one and must, of
course, be followed by careful congressional review of
the FEA's findings, the FEA should begin this process
soon so that the Congress and the public will have full
opportunity to consider this vital issue.

We therefore strongly urge that you issue the public
notice necessary to the commencement of public hearings
on the removal of allocation and price controls from
retailers and wholesalers of fuel oil and other petroleum
products.

Section 12(c)(2) of the Emergency Petroleum Allocation Act

of 1973 (EPAA) requires that an exemption amendment apply to

only one oil or one refined product category, and specifies

that No. 2 heating oil and No. 2-D diesel fuel constitute a

single product category. FEA proposed the exemption of No.

2 heating oil, No. 2-D diesel fuel and other middle distillate









fuels (No. I heating oil, No. 1-D diesel fuel and keroqsene,

which are hereinafter referred to as "other middle distillates")

in a single notice of proposed rulemaking and issued a

single document containing its preliminary findings and

views related to the exemption. However, as required by the

EPAA, FEA has determined separately for No. 2 heating oil

and No. 2-D diesel fuel and for other middle distillates

that anr exemption should be adopted, and is today submitting

separate exemption amendments ("Energy Actions Nos. 3 and

4") for these product categories for Congressional review of

FEA's findings and views supporting these exemptions. The

exemption amendment contained in this document, to be submitted

as gy Action No. 4, relates to other middle distillates,

which are defined as follows. "No. 1 heating oil" means

heatinpg oil grade No. 1 as defined in American Society for

Testing and Materials (ASTM) D396-71. "No. 1-D diesel fuel"

means diesel fuel grade no. 1 as defined in American Society

for Testing and Materials (ASTM) D975-71. "Kerosene" means

all petroleum distillate suitable for use as an illuminant

when burned in a wick lamp.

One hundred fortyseven written and oral comments were

received in response to the notice of proposed exemption.

Those offering c nts included major integrated refining

companies, small and independent refining companies, marketers,

ultimate consumers, state governments and trade associations.

Almost all f the parties commeting agreed with FEA

that other middle distillates should be exempted from FEA's





30


allocation and price regulations. This support was based

generally upon agreement with FEA's conclusions as to supply

and demand projections, competition, and other findings and

views set forth in the Preliminary Findings. Parties opposing

the exemption of other middle distillates generally based

their opposition on the belief that the current surplus

supply situation might not continue through the upcoming

heating season, that spot shortages might occur, and that if

such shortages were to occur, independent marketers and

consumers of other middle distillates would be without the

protection of price and allocation controls and might be

subject to inequitable prices or termination of supply.

FEA has carefully considered the comments of all persons

who participated in the rulemaking. Following its considera-

tion, FEA has concluded that its initial view that other

middle distillates should be exempted from regulations is

correct.

No information or data were presented in this proceeding

which significantly alter FEA's preliminary findings and

views. FEA does not anticipate that supply shortages will

occur in the future as predicted by some comments and in any

event FEA has standby authority under section 12(f) of the

Emergency Petroleum Allocation Act of 1973 (EPAA) to reimpose

allocation and price controls (on a temporary or permanent

basis) if necessary to attain the objectives set forth in

section 4(b) (1) of the EPAA. Therefore, FEA hereby adopts






31


the proposed amendments exempting other middle distillates

from the Mandatory Petroleum Allocation and Price Regulations.

Unless disapproved by either House of Congress under section

551 of the Energy Policy and Conservation Act (EPCA), this

exemption will be effective either July 1, 1976 or the first

day following the expiration of the 15 day period provided

in section 551 for Congressional review, whichever is later.

Although FEA is adopting this exemption amendment based

on its firm conclusion that a supply shortage respecting

other middle distillates will not occur in the forseeable

future, FEA recognizes that unforseeable difficulties,

unrelated to the exemption amendment adopted today and

confined to particular market areas, could arise. In order

to further ensure that any such possible supply problems

following the removal of controls do not adversely affect

independent marketers and their customers, FEA intends to

propose shortly procedures pursuant to which firms experiencing

supply problems may obtain supplies. FEA's proposed rule-

making in this regard will request comments on programs that

operate in a manner similar to the state set-aside program

currently in effect and in a manner similar to that by which

supplier/purchaser assignments are currently effected.

Findings and Views

In addition to this amendment to exempt other middle

distillates from the Mandatory Petroleum Allocation and










i-.-
~Ci"r~'~n """". .,.'"' ^ ""





32


Price Regulations, FEA has prepared its findins ad views

supporting the amendment as required by section 12 of the

EPAA based upon its consideration of the comments of those

persons who participated in the rulemaking and other information

available to FEA. These findings and views are set forti in

a document dated June 15, 1976 and entitled "Findings and

Views Concerning the Exemption of Middle Distillates from

the Mandatory Petroleum Allocation and Price Regulations"

("Findings and Views"). These findings and views may be

summarized, in part, as follows:

(1) Other middle distillates are not in short. supply.


Projected supplies of other middle distillates,

taking into account projected expansions of

domestic refinery capacity, will be sufficient

to meet demand over the near term (1976-

1978).


(2) Exemption of other middle distillates from the Mandatory

Petroleum Allocation and Price Regulations will not

have an adverse impact on the supply of any other oil

or refined product subject to the EPAA.


(3) Competition and market forces are adequate to protect

consumers, following an exemption of other middle

distillates from regulation. In fact a greater degree

of competition would be expected after exemption than

exists under current regulations.





33


c .No price increases are anticipated to result

directly from decontrol.


-- The market share for other middle distillates

of large, integrated refiners has been decreasing

since 1972, while that of the large independent

and small refiners has been increasing.

However, continued controls could lead to a

deterioration of competition, resulting in

reduced economic efficiency and higher prices.


-- The exemption itself will have a positive

effect on competition, in particular enhancing

the copetitive viability of small and independent

refiners and marketers.


-- The exemption would permit purchasers (including

consumers) to seek the lowest cost supplier

by freely using competitive bids without

regard to fixed supplier/purchaser relationships,

thereby exerting downward pressure on existing

market prices and providing incentives to
enhance marketing services.


(4) Exemption of other middle distillates from regulation

will not result in inequitable prices for any class of

other middle distillate or other product user.










j ': ... '*'E "f~ ~ '~ ' '





34


-- Aggregate prices for other middle distillates

will remain unchanged by the exemption itself.

Prices can, however, be expected to rise over

time as the result of increased domestic and

foreign crude costs.


(5) Exemption of other middle distillates from the price

and allocation regulations is consistent with the

attainment of the objectives set forth in section

4(b) (1) of the EPAA.


Since an adequate supply is anticipated, the

continued allocation and pricing of other

middle distillates are not necessary to

protect the public health, safety and welfare,

and the national defense (Section 4(b)(I)(A)];

the maintenance of all public services [Section

4(b)(1) (B)]; the maintenance of agricultural

operations [Section 4(b) () (C)]; or the

maintenance of exploration for and production

or extraction of fuels and minerals [Section

4(b)(1)(G)].

Adequate supply and the positive effects of

increased competition insure that the exemption

is consistent with the equitable distribution

of crude oil, residual fuel oil and refined

petroleum products [Section 4(b)(1)(F)] and





35


that the exemption will have no adverse

effect on the allocation of suitable crude

oil to U.S. refineries [Section 4(b)(1)(E)].


-- Because the regulations issued pursuant to

the EPAA are designed to deal primarily with

shortage conditions, the exemption is not

only consistent with but, in the current

period of ample supplies, should actually

facilitate the attainment of the objectives

of preservation of an economically sound

Spetroleum industry [Section 4(b)(1)(D)];

economic efficiency [Section 4(b)(1)(H)]; and

minimization of economic distortions, inflexi-

bility, and interference with market mechanisms

[Section 4(b) (1) (I)].


The Findings and Views also state FEA's views concerning

the potential economic impacts of exempting other middle

distillates from the Mandatory Petroleum Allocation and

Price Regulations. It is not anticipated that there will be

any adverse state or regional impacts resulting from.the

proposed exemption. In fact, governmental units which use

large quantities of other middle distillates will find that

exemption will permit them to use competitive bids more

easily. In addition, FEA anticipates no adverse economic

impacts on the availability of consumer goods or services,

the gross national product, small business or the supply and

availability of energy resources as fuel or feedstock for






18 '- .. ,*";









industry. FEA expects that the exemption will have a positive

effect on competition. The exemption is likewise expected

not to cause an adverse effect on employment or consumer

prices. FEA's analysis of the effects of the exemption on

the rate of unemployment in the U.S., on the Consumer Price

Index and on the implicit price deflator for the gross

national product are set forth in detail in the Fininings and

Views.

Allocation of Increased Crude Oil Costs to Other Middle Distillates

The refiners' cost allocation formulae of 212.83(c)

provide that the portion of a refiner's total increased

costs of crude oil and increased non-product costs which are

incurred in a month of measurement and which are attributable

on a proportionate volumetric basis to the quantity of

exempt products produced from crude oil must be excluded

from the amount of increased costs which may be passed

through in prices charged for covered (i.e., non-exempt)

products. Increased costs incurred with respect to purchases

of exempt products are excluded from the total of increased

costs of purchased product permitted to be included in

maximum allowable prices charged for covered products.

These exclusions effectively prevent increased costs incurred

beginning with the month prior to the effective date of the

exemption of a product and attributable to that exempt

product from being passed through in prices charged for non-

exempt products. The notice of proposed rulemaking noted









the substantial amounts of-unrecovered increased costs

currently allocale to maximum al ble prices for middle

distillates and he fact that these increased costs could be

reallocated under current price rules to maximum allowable

prices for gasoline prior to the effective date of the

exemption of midde illates. FEA therefore proposed to

limit the reallocation of any increased costs attributable

to other middle distillates, effective as of the date of the

April 21 notice. FEA requested comments on both the extent

and the effective date of this proposed limitation in light

of the seasonal pricing patterns for gasoline and certain

middle distillates and any other historic pricing practices

relevant to this issue.

Parties commenting on this issue generally opposed

reducing refiners banked costs. The great majority of this

opposition was voiced by refiners which stated that: (1) the

limitation would be inconsistent with the general feature of

the price rules permitting more than a proportionate amount

of increasd costs to be recovered i gasoline prices; and

(2) the limitation would penalize refiners by causing them

to lose unrecovered costs. Although the refiner price rules

do permit a disproportionate allocation of increased costs

to gaslne prices, in no event do the price rules permit

inreased costs attributable to exempt products to be recovered

in lawful prices charged for covered products; and while it

is true that the limitation would prohibit the recovery of








these costs in gasoline prices, it does not follow that

these costs are "lost". Such costs may be recovered without

any restrictions whatsoever in prices charged for the exempt

middle distillates to which they are properly attributable.

Accordingly, the refiner price rules are amended to prohibit

the reallocation of increased costs attributable to other

middle distillates, effective April 21, 1976. Other conforming

amendments to the price regulations of Part 212 are also

being adopted to reflect the exemption of other middle distillates.

On April 28, 1976, FEA adopted reallocation of increased

product costs provisions for resellers which granted them

the same pricing flexibility previously restricted to refiners.

The same reasons which have convinced FEA that the refiner

price rules should be amended to prohibit the reallocation

of banked costs attributable to other middle distillates, effective

April 21, 1976, are equally applicable to resellers. Therefore,

conforming changes have been made to the reseller regulations

in S 212.93(i) (2).

Authority Delegated to the Governor of Puerto Rico

On March 7, 1974 the Administrator of FEA (then FEO)

delegated to the Governor of the Commonwealth of Puerto Rico

all authority previously delegated to the Administrator of

FEO by section 3(a) of Executive Order 11748 with respect to

the allocation of several refined petroleum products, including

middle distillate, within the Commonwealth of Puerto Rico.

The March 7 delegation of authority, insofar as it applies









to other middle distillates, will be revoked by separate

order to reflect the exemption amendments adopted today.

Revocation of Part 215

The exemption amendments adopted today result in an end

to the effectiveness of Part 215 of FEA's regulations, since

middle distillates constitute the greatest part of the fuels

that remain 'subject to Part 215. FEA is therefore revoking

Part 215, the Low Sulfur Petroleum Products Regulation.

Effective Date and Standby Authority

Comments and testimony received with respect to the

time necessary between the promulgation of the exemption

amendment and its implementation generally supported FEA's

tentative conclusion that July 1, 1976 is the most appropriate

effective date for the exemption of other middle distillates. In

particular, the comments noted that an early effective date

was necessary to facilitate the implementation of "summer

fill" and other inventory maintenance programs historically

utilized in the marketing of other middle distillates.

Section 12(f) of the EPAA provides that following the

exemp n of any prodc from regulation, FEA shall have the

authority at any time to reimpose price and allocation

controls if necessary to attain the objectives of the EPAA.

For this reason, FEA is adopting amendments which stay the

effectiveness of Subpart G of Part 211 and of the general

price regulations as they would otherwise apply to other














" *t . * '** "

" ? .









middle distillates without deleting those regulations from

the Code of Federal Regulations. They are in effec converted

to standby status, so that in the event of shortages or

other occurrences which might require reimposition of controls,

they may be quickly put into effect.

(Emergency Petroleum Allocation Act of 1973, Pub. L. 93-159,
as amended by Public L. 94-163; Federal Energy Administration
Act of 1974, Pub. L. 93-.275; E.O 11790 (39 FR 23185)).

In consideration of the foregoing, Parts 210, 211 and

212 of Chapter II, Title 10 of the Code of Federal Regulations,

are amended and Part 215 is revoked as set forth below,

effective July 1, 1976 or the first day following the expiration

of the 15-day .review period under section 551 of the EPCA,

whichever is later, unless this amendment is disapproved by

either House of Congress pursuant to the review procedures

set forth in section 551 of the EPCA.

Issued in Washington, D.C., June 15, 1976.







Michael F. Butler
General Counsel











a new paragraph (c) to read follows:



X* **

(c) No. 1 heating oil, No. 1-D diesel fuel and kerosene,

as defined in Part 212 Section 212.31, are exempt from the

provisions of Part 211 and Part 212 of this chapter.

2. Section 211.1 is amended in paragraph (b) by the addition

of a new subparagraph (6) to read as follows:

S 211.1 Scope.
*



(b) Exclusions.



(6) Notwithstanding the provisions of Subpart G of this

part, No. I heating oil, No. 1-D diesel fuel, and kerosene,

as defined in Section 212.31 of this chapter, are excluded

from this part.

3. Sti 21.1 is revised in the definition of "covered

products" to read as fo11ows:





"Covered products" ma aviation fuels, benzene,

butane, crude oil gasone, ease, greases, hexane,

lubricant bae oil stocks, lubricants, naphthas, natural gas

liquids, natural gasoline, No. 2 heating oil and No. 2-D





'C j '








|L s *^ s \ ":* '/ "'v '" '" ..





42


diesel fuel, propane, special naphthas (solvents), toluene,

unfinished oils, xylene, and other finished products. A

blend of two or more particular covered products is considered

to be that particular covered product constituting the major

proportion of the blend.

** *.

4. Section 212.83 is revised in paragraph (d) by the addition

of a new subparagraph (6) to read as follows:

S 212.83 Price rule.



(d)- Realloaction of increased costs among product categories.



(6) No. 1 heating oil, No. 1-D diesel fuel, and kerosene.

Beginning on April 21, 1976:

(i) The amount of increased costs attributable to

general refinery products which bears the same proportion to

the total of such costs as the combined volume of No. 1

heating oil, No. 1-D diesel fuel, and kerosene refined by

the refiner from crude oil during the calendar year 1975

bears to the total volume of all general refinery products

refined by the refiner from crude oil during the calendar

year 1975, shall be excluded from reallocation to maximum

allowable prices for covered products other than kerosene.
** **





43



5. Section 212.93 is amended in clause (i) of subparagraph

(2) of paragraph (i) to read as follows:

S 212.93 Price rule.

-* *

(i) Reallocation of increased product costs among products.



(2) *

(i) General refinery products.

(A) To the extent that a seller does not allocate its

increased product costs for a particular general refinery

product,, other than propane, to the prices for that product,

it may reallocate the unallocated part of its increased

product costs for the product to the prices for gasoline or

for any other general refinery product (or products) except

propane, in whatever amounts the seller deems appropriate.

No increased product costs for general refinery products

other than propane may be reallocated to the prices for No.

2 oils, for propane, or for aviation jet fuel.

(B) Beginning on April 21, 1976, no increased costs for

No. 1 heating oil, No. 1-D diesel fuel, or kerosene may be

reallocated to maximum allowable prices for any other covered

product.

6. Part 215 is revoked.




















73-159 0 76 4
I ": "" f s .


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I*







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tiliia~ ~ i ""~;I E 11 I







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-"






































rs~

















II. BACKGROU D .7

Figure 11-1 Relative e~centage 11
Yields Per Barrel
of All Refinery
Products Annually .
in the U.S. From
1964 to 1974

FINDINGS AND VIEWS CONCERNING THE Figure II-2 Simplified Refinery 13-14
L CO Pr ocesses
EXEMPTION OF MIDDLE DISTILLATES FROM THE UR

MANDAORY PE OEUM ALOCATION AND PRICE REGULATIONS Usage by Categry

Table I Sales of Distillate 16
Fuels in the U.S.
from 1970 to 1974
Figure 11-4 Simplified Niddle .18 '
Distillates
Transportation and
Distribution Network

III. HISTORICAL CONDITIONS (1968-1975) 20
SFigure III- Demand for 28
Tabre I Distillates Fuel
Oil in Relation to
Stocks of
Distillate (1963-1975)
FEDERAL ENERGY ADMINISTRATION
WASHINGTON, D.C. 20461
JUNE 15, 1976 .

FE E A E RG ADM
WASHIGTON D.C. 2046
JUNE 5, 17690












TABLE OF CONTENTS (continued) TABLE OF COTENTS (continued)

PAGE P
PAGE

. HISTORICAL CONDITIONS (1968-1975) III. HISTORICAL CONDITIONS (1968-1975)
(continued)
Table IV Middle Distillate 49
Figure III-2 Demand by PAD for 29 Table I il i llae 49
Middle Distillates Fuel Oil Sales by
Middle Distillates Use Within Census
(1968-1975) Regions (1974)
Figure III-3 Middle Distillates 31 Figure III-10 Reginal Middle 50
Supply (1968-1975) Distillates

Table II Domestic Production 32 Sales by Class
of Refined Products of Use
a 9Refineres Figure III-ll Bureau of Census 51
Regions
Figure III-4 Crude and Product 34 Table V Distribution of 53
Imports
Imports Marketed Supply
(1968-1975) Marketed Supply
(1968-1975) of Distillate

Figure III-5 Middle Distillates 35 Fuel Oil by Type
Supply by PAD Markeers (974
(1968-1975) Marketers (
Table VI Percent Distribution 56
Figure III-6 Allocation Fractions 37 leof Distillate eti 5
for Middle Distillates Oil by Refiner
(1974-1975) Marketers and

Figure III-7 Refinery Capacity and 38 (Independ19 ent 74et
Crude Runs Percent of ..
Utilization (1968-1975) Table VII Middle Distillate 58
Fuel Oil Domestic
Figure III-8 Average Heating Oil 40 Demand by Uses
prices (1968-1975)

Table III Refiner/Distributor 44 Table VIII Rfiner Sar of 62
Margins Per Barrel Saddle st
(1968-1975)
Table IX Distribution of 65
Figure 111-9 Refiner/Distributor 45 Middle Iistillates
Heating Oi'l Margin by Refiner Groiu
(1968-1975)byefiner


i-! -.i cS,










TABLE OF CONTENTS (continued) TABLE OF CONTENTS (continued)
PAGE

I. HISTORICAL CONDITIONS (1968-1975) IV. FUTURE CONDITIONS IMPACT OF 80
(continued) DECONTROL ON SUPPLY/DEMAND, PRICE
AND MARKET STRUCTURE
Table X Refiner Distribution 66 AND MARKET STRUCTURE


Middle Distillates po ct ed
of Middle Distillates Table XVI Projected Petroleum 82
Direct to End-Users Ptroduct Demand -
and to Indepnendent ligth Demand Case
Marketers



Table XII Large Integrated 70 Table XVII Percentag e Increasery 83
Figure III-12 Distribution of 67 In Anticipated
Middle Distillates Product Demand
by Class of Refiner Product Demand
Tle X tal Refnes 69 Table XVIII Projected U.S. 86
Table XI Total Refiners 69 Petroleum Supply
Table XII Large Integrated 70 Table XIX Domestic Refinery 87
Refiners Capacity

Table XIII Other Refiners 71 Table XX Projected Refinery 88
Table XIV Regional Market 74 Capacity by PAD
Shares of Refiner Table XXI Refinery Yields for 89
and Independent the United States
Marketers ofe
Distillate Fuel Oil Table XXII Forecast Refinery 90

Table XV Regional diddle 75 Production 1978
Distillate Sales Table XXIII Refinery Capacities, 92
to End-Users by 1973-1977, and
Refiner and Petroleum Consumption,
Independent 1973-1974
Marketers
Table XXIV Crude Oil Production 95

Table XXV Projected Composite 103
Crude Cost Increases
With Controls
Table XXVI Projected Middle 105
Distillates Price
Increases With
Controls

* *


"*




















TABLE OF COJTENTS (continued) TABLE OF CONTENTS (continued)

PAGE E
PAGE
IV. FUTURE CONDITIONS IMPACT OF V. IMPACT OF DECONTROL ON THE ECONOMY 131
DECONTROL ON SUPPLY/DEMAND, PRICE
AND MARKET STRUCTURE (continued) Table XXXIV Effects of Decontrol 135
on the Gross National
Table XXVII Comparison of the 108 t ploymnt, Unemploy-
Markup of the Price ment, P, and WPIo-
of No.2 Heating Oil m Iand W
Over Crude Cost to Table XXXV Impact of Decontrol 13a
the Consumer Price on Real Personal
Index (CPI) Income by Census

Table XXVIII Comparison of Price 109 Region
Markup of Heating Table XXXVI Impact on Expenditures 141
Oil Over Crude Cost, of Households Which Use
Adjusted for Increased Heating Oil of a 1-cent
Sales Volume, to the Per Gallon Increase In
CPI the Price of Middle

Table XXIX Comparison of Heating 110 Distillate Oil
Oil Refiner Margins
to the CPI VI. FINDINGS AND CONCLUSIONS 141

Table XXX Comparison of Heating 112
Oil Distributor
Margins to the CPI APPENDIX I Specific Product

Table XXXI Rates of Return on 114 Type Definitions
Equity APPENDIX II Overview of the ii
Short-Term Petroleum
Table XXXII Domestic and Landed 116 orecasting Procedure
Imported Product Forecasting Proced
Prices

Table XXXIII Imported Refined 118
Product Price for
Saudi Arabian Crude
Oil, Refined in the
Caribbean and
Transported to USNH
for Consumption









-" XECUIV S Y- will not have an adverse im-act on the supply of any

To exempt middle distillates from the Mandatory other petroleum product.

Petroleum Allocation and Price Regulations, the -- To exempt middle distilates, FEA must also find

Federal Energy Administration (FDA) must find "(8)...that competition and market forces are

"(A)...that such oil or refined product category adeauate to nrotect consumers and that exempting

is no longer in short supply and that exempting such oil or refined product category will not

such oil or refined product category would not have result in inequitable prices for any class of users

an adverse impact on the supply of any other oil or of such oil or product..." [Section 12(d)(1)(8) of

refined petroleum product..." [Section 12(d)(1)(A) the EPAA of 19731. With ample supplies of middle

of the Emergency Petroleum Allocation Act of 1973 distillates, competition exerting downward pressure

(EPAA)J. FEN finds that middle distillates are not on prices, and the industry generally operating

in short supply and supplies are expected to be at a historically adequate level of profitability,

adeauate durino the near-term future. The national the exemption of middle distillates from price and

middle distillate allocation fraction is approximately allocation controls is not expected to cause any
1.0 and surplus product is available in the market- significant price increases. Thus, FEA finds

place. Domestic refinery capacity utilization for that competition and market forces are adeauate to

1975 is estimated to have been only 85.7 percent of protect consumers and that exempting middle dis-

the available 15.1 million barrels per day total tillates from regulation will not result in

capacity (compared with the pre-embargo long-term inequitable prices for any class of end users or
norm of approximately 90 percent utilization of then other product uses.

available total capacity) and refinery yield capability -- The FEA further finds that the exemption of middle

is sufficiently flexible to meet any anticipated distillates is consistent with the attainment of

increased demand. Similar conditions exist with the objectives set forth in the EPA4.
respect to available world refinery capacity. As a -- It is also FEA's analysis that the exemption of

result, FEA concludes that amole unused refinery capacity middle distillates from regulation will have no

assures that the exemption of middle distillates significant effect on the rate of unemployment,









FIIIJun GS AND VIEWS CONCER ING THE
EXEMPTION OE MIDDLE DIS'~[LLATES FROM THE MANDATORY
PETROLEUM ALLOCATIOi4 AND PRICE REGULATIONS
the Consumer Price Index, or the Gross National
CHAPTER I
Product.
INTRODUCTION
In summary, continued regulation of middle distillates

is no longer necessary to achieve the objectives of This report presents the Federal Energy Administration's

the EPAA and is now actually operating to frustrate findings and views with respect to its proposal to exempt

the achievement of those objectives. Consequently, middle distillates from the Mandatory Petroleum Allocation

the FEA has concluded that the Mandatory Petroleum and Price Regulations, issued pursuant to the Emergency

Allocation and Price Regulations should be amended Petroleum Allocation Act of 1973 (EPAA), (10 CFR Parts 210,

to exempt middle distillates and is transmitting 211, 212, and 215). The Energy Policy and Conservation

such an amendment to the Congress as required by Act (EPCA), Public Law 94-163, in section 455 added

Section 12 of the EPAA. Section 12 to the EPAA (December 22, 1975), requiring that
any amendment submitted to the Congress to exempt a product

or product category from regulation be supported with

certain findings and FEA views on a variety of matters

related to the exemption.

Based on an analysis of historic and projected supply,

demand, and price trends, the PEA has concluded that manda-

tory allocation and price controls are no longer necessary

for middle distillates and that exemption of middle distil-

lates is consistent with the attainment, to the maximum ex-

tent practicable, of the objectives specified in Section 4

(b)(l) of the EPAA. Accordingly, the FEA is submitting an
amendment to the Congress, in accordance with provisions of

section 12 of the EPAA, to exempt middle distillates from

allocation and price controls. If neither House of Congress

disapproves this amendment during the 15-day period allowed








2 -
3 -
for legislative review, the exemption would become effective Section 12(c)(3)(B) of the EPAA as amended by the EPCA

upon the date specified in the amendment and the regulations requires that an amendment to exempt No. 2 heating oil and

would be converted to standby status. No. 2-D diesel fuel be submitted separately for Congressional

To ensure that the findings and views ultimately review from an amendment to exempt other refined petroleum

submitted to the Congress are based on the most comprehensive products. The FEA has determined that middle disillates

and accurate data available, represent the most reasonable should be exempted from regulations. Therefore, two amend-

conclusions drawn from such data, and fully support the ments are being submitted to Congress -- one to exempt No. 2

exemption of middle distillates from regulation, the FEA heating oil and No. 2-D diesel fuel and another amendment

published preliminary findings and views on the possible to exempt all other middle distillates. However, the findings

exemption of middle distillates from price and allocation and views to support both amendments are based on this analysis.

controls. The written and oral comments received in The FEA's findings regarding the exemption of middle

response to these preliminary findings and views, where distillates from regulation are:
ever considered valid and appropriate, are now reflected o Middle distillates are not in short supply.

in these final findings and views. o Exemption of middle distillates from the allocation
or purposes of this proposed exemption, middle and price regulations will not have an adverse

distillates include kerosene, No. 1 and No. 2 fuel oils, impact on the supply of any other oil or refined

and No. 1-D and No. 2-D diesel fuel as defined in FEA's price petroleum product subject to the EPAA.

regulations in 10 CFR 212.31. (See Appendix I) Kerosene- o Competition and market forces are adequate to

base jet fuel is not included in this proposed exemptions protect consumers following exemption of middle

nor are No. 4 heating oil and No. 4-D diesel fuel.* distillates from regulation.

o Exemption of middle distillates from regulation

No. 4 heating oil and No. 4-D diesel fuel were proposed will not result in inequitable prices for any
for exemption pursuant to an amendment which exempts
residual fuel oils from regulation. That amendment class of user of middle distillates or other
became effective June 1, 1976. Aviation fuels (including
kerosene-base and naphtha-base jet fuel) are not products.
currently being proposed for exemption.
3 .. .









4 -

The FEA also finds that the exemption of middle
5 -
distillates from price and allocation regulations is

consistent with the objectives set forth in Section 4 Further, the exemption should not have an adverse

(b)(l) of the EPAA. Since supplies of middle distillate effect on allocating suitable crude oil to U.S. refineries
are adequate, and should continue to be sufficient, con- (Section 4(b)(l(E)], maintaining energy production, or
tinued mandatory price and allocation controls for middle providing for maximum use of refinery capacity.

distillates are unnecessary to: FEA's views and analysis are that the exemption of

o Protect public health, safety, welfare, and middle distillates from regulation will not have an adverse

national defense [Section 4(b)(l)(A)]; effect on:

o maintain all public services [Section 4(b)(l)(B)] Any state or region of the country

and agricultural operations [Section 4(b)(1)(C)]; availability of consumer goods and services

o maintain exploration for and production or the Gross National Product (GNP)

extraction of fuels [Section 4(b)(l)(G)]; and competition

o insure equitable distribution of crude oil, small businesses
residual fuel oil, and refined petroleum products the supply and availability of energy resources

[Section 4(b)(l)(F)]. for use as fuel or feedstock for industry
Because the regulations issued pursuant to the EPAA the Consumer Price Index, consumer prices, or

are designed to deal primarily with shortage conditions, the the implicit price deflator for the GNP, and
FEA has concluded that the exemption is not only consistent the rate of unemployment

with but should actually facilitate the attainment of the Chapter II provides background information on use,
following EPAA objectives in the current period of ample production, and distribution of middle distillates while

supplies: Chapter III analyzes the historical interaction of supply,
o preservation of an economically sound petroleum demand, and price, and explores the market structure for

industry [Section 4(b)(l)(D)]; middle distillates during 1968-1975, prior to and during
o economic efficiency [Section 4(b)(1)(H)]; and imposition of allocation and price controls. Chapter IV

o minimization of economic distortions, inflexibility, examines the effects upon middle distillate supply, demand

and interference with market mechansims
[Section 4(b)(l)(I)l.








CHAPTER II
6 -
BACKGROUND

price and market structure of exempting middle distillates

from conteols and indicates the positive benefits to be This chapter provides background information regarding

derived from such exemption. In Chapter V, the potential the middle distillate products, their refining, their uses

economic impacts of exemption are evaluated, and Chapter VI and their distribution.
provides a final summary of the FEA's findings and views Analysis of the impact of exempting middle distillates

in support of its judgment that middle distillates should is complicated by the manner in which data on these products
be exempted from the Mandatory Petroleum Allocation and is collected and maintained.. The Federal Energy Administra-

Price Regulations tlon's Mandatbry Petroleum Allocation Regulations define
middle distillates in Section 211.51 as:

"any derivatives of petroleum, including kerosene,

home heating oil, range oil, stove oil, and dLesel

fuel, which have a fifty percent boiling point in
the ASTM D6 standard distillation test falling
o 0
between 371 F and 700 F. Products specifically
excluded from this definition are kerosene-base and
naphtha-base jet fuel, heavy fuel oils as defined in

VV-F-815C or ASTM D-396, grades #4, 5 and 6, inter-
mediate fuel oils (which are blends containing *6

oil), and all specialty items such as solvents,

lubricants, waxes and process oil."

The definition of middle distillates in Section 212.31
of the Mandatorv Petroleum Price Regulations reads as

follows:

"Nos. 1 and 2 heating oils, Nos. l-D, 2-D, and 4-D

diesel fuels, No. 4 fuel oil, and kerosene and

aviation fuels."











8 9

Understanding supply, demand, price, and market
It is useful to note, for purposes of this analysis, structure relationships for middle distillates requires a

that the Bureau of Mines (BOM) maintains aggregate sales general knowledge of refining processes. This is necessary
and refinery production data for distillate fuel oil so that the close relationship of these products with other
(on a basis that includes Nos. 1 and 2 heating oils, products subject to FEA regulations may be seen in its
Nos. 1-D, 2-D and 4-D diesel fuels, and No. 4 fuel oil) and proper perspective. Therefore, in this chapter an over-

kerosene. view of production and relationships among various refinery

Because both the PEA's definition of middle distillates yields precedes a discussion of the nature, production,

for price purposes and that used by BOM include products and uses of middle distillates, as well as a brief summary
which are not beinq proposed for exemption in this report, of supply, demand, price and marketing characteristics
the PEA has adjusted data obtained from PEA and BOM sources of the middle distillate products.
to be on a comparable basis where possible. In some cases The Refining Process
this was not done, but this should not affect conclusions The first stage in refining is distilling crude oil
drawn from the data because the Quantity of excluded product into various fractions. Crude oil is first boiled and
in any particular compilation is insufficient to cause fractions are recovered at different levels of the
significant distortions. For example, inclusion of No. 4 fractionation tower, where its components condense
oils is unavoidable since no discrete data are available according to different boiling points. The lightest-
for these products; however, since No. 4 oils account for weight, lowest-boiling (less than 85 oF) fractions, the
less than 4 percent of total middle distillate supply their liquid petroleum gases (LPG's), including ethane, propane
inclusion in data presented in this report should not and butane, emerge directly from the top of the tower.
affect conclusions drawn from that data. Naphtha follows with an approximate boiling range of 85Oto

430 "F. Gas oils are fractions whose boiling points are
at or above 4300 F. Finally, a heavy residue is obtained

from the bottom of the tower. These initial fractions

must be further refined to yield relative volumes and

specific properties of products required by end-users.
*










iNphthas and gas oils are not ftiished refined
FIGURE II-I
products. They are two principal distillation fractions

in a refinery, from which many finished products are made. Percentage Yield of Refined Products from Cre Oil
"Percentage Yield of Refined Product from Crude Oil
Most naphtha eventually ends up as motor gasoline and most 1964-1974

gas oil eventually ends up as one of the middle distillates. Percent i t he United Sates Annually
The naphtha fraction from which motor gasoline is made .

constitutes about 25 percent of distillation yield Motor Gasoline
__ Motor Gasoline

(excluding light ends) while gasoline sales make up

nearly 50 percent of refinery sales. On the other hand,
'40
the gas oil fraction is about 45 percent of yield, but

products made from it, .cluding home heating oil and

diesel fuel, are only about 30 percent of total demand

for refinery products. Figure II-1 shows relative
:::::s ------ --:::






30
percentage yields per barrel of all refinery products from
1964 to 1974. Middle Distillates
;. I *** ts..... ,,,, ...
Naph tha stocks used for gasoline must be blended to """"*"""***".., ,.....,

give the final product a sufficient octane rating.
20
Accordingly, additional refining processes are used
to increase the volume of naphtha stocks and produce

finished products with desired properties. This is All other Products

accompltshed by breaking down or "cracking" #ome of the
10 -
larger molecules in the heavier gas oil and residue stocks Residual Oils ,.... Jet Fuel

as well as combining the smaller molecules of some of the W.--'Wm .mm nm-' *

lighter oils through alkylation. In a catalytic cracker, Liquified Gases

or "cat-cracker, heavier stocks are broken down in the
0 I I I I I
1964 65 66 67 68 69 70 71 72 73 74
Rource Bureau of Mines









13
12

presence of a catalyst, which is not itself consumed in
FIGURE 11-2(a)
the chemical reaction. A hydrocracker uses hydrogen under

high temperature and pressure as a catalyst. Cat-crackers
REFINERfY FLOW SHEET
produce additional naphthas, light ends, lighter gas oils,

and a heavy aromatic (ring-compound) gas oil, residue. This

residue may be further cracked in the hydrocracker to yield

still more naphtha and light ends, with some residue still

remaining after this processing. A simplified diagram of _____

the refinery process is shown in Figures II-2(a) and II-2(b). WI N *u .

Use __ L
Liu Q5se G s* 00c 1"s 0o..U$."
Middle distillates are used primarily for space S I r --- o nL.
HCK IC* to *tK Keene H--pT
heating in residential, commercial, and industrial I. I I I ,3S ,., .

facilities; highway motor fuel in trucks and buses; boiler ,, ,

fuel in industrial applications; fuel for railroado 1 C i

locomotives and steam generation for power plants. ,__. _.__ s_

Middle distillates' use by category for 1974 is shown csr u J ,cu

in Figure 11-3.

Space heating represents the largest use category |* to- 15150 s
4 110 IC ron / _KP
for middle distillates, accounting for approximately ..* I,-,., c o,., o m .

half of the annual consumption. Demand peaked at a' 'I", 1,o10 ma& L19t( 10 PrtrOmIn~
approximately 610 million barrels in 1972 and dropped A" ,,,o ne .. O ---wCc i oie to...U 1 ...F
Amo. P~Prmccs e i l
to a low of approximately 540 million barrels in 1974.

The decline can be attributed to warmer than normal

winters, energy conservation efforts and other factors.

Highway use, on the other hand, increased from approximately

150 million barrels in 1970 to approximately 220 million

barrels in 1973 and 1974 (see Table I).





14
15

FIGURE II-2(b)

FIGURE II 3














AmospherIh






Hydrrogaltt o10 RuSidual Fuel Oil
Gas ils to a
aCCU or HCK

(d-stlat, proccs-ing) Visblnaker Resfiual
R F uol Oil

A U Naphtha & Lighter
H 14-- O |\
C I
T GGas Oils to
M Hydroctacklg CCU or HCKy
O -Railroads
9%


Sindustry Off
Naphtha & 11hl1r Electric Other 4%


CCoK











Source: Bureau of Mines
i % '- - - i : ,: -T C














16 17

Transportation and Distribution

TABLE I Virtually all middle distillates (90-95 percent)
sold in the U.S. are produced in domestic refineries.

Yearly Sales of Middle Distillate Fuels (Excluding Jet Fuel)* Moving the product from the refinery to the marketplace
In The United States 1970-74
(Thousands of Barrels) involves a complex network of pipelines, transportation

services, and storage facilities. Specific routes chosen

to deliver product are largely a result of refinery

location, amount of product to be moved, and location of

consumers. (See Figure 11-4.)

Heating oil, for example, may leave a coastal

refinery by barge for a fresh water port where it is pumped

through a pipeline to an inland terminal. It may then be
USrE- 1970 1571 17.2 171 174 6loaded into railway tank cars and shipped to a local bulk
Ieating ............................ 594,323 593,185 609,536 598,128 542,586
iusriastrl (Ecluding ol co. use).. 43,668 50,731 o,3a 67,366 64,03a plant for distribution by tank truck to the ultimate
Oil Ce any Use .................... .. 11,518 14,038 13,4C5 14,902 13, CO
Ezlctric Utilities Companies ....... 24,770 35,329 68,334 77,950 84,f01
SJsroOds .......................... 88,416 66,251 97,001 102,828 102,549 consumer. Conversely, many industrial users near refineries
Vesels ............................. 19,503 20,959 22,125 26,7C6 24,257
:ilttry ............ ............... 12;447 17,427 20,187, 19,59 he direct pipen1774s into tank fs d d litle
n-hiay tisl:.................: 148,796 166,961 189,055 221,420 219,612 have direct pipelines into tank farms and do little more
Off-hig Hway diesol ...... ....... 46,123 46,925 50,186 55,541 43,446
All other ........................... 33,660 30,361 30,507 29,519 24,634 than open valves to receive their product.
United States Total 1,023,224 1,062,237 1,160,724 1,213,978 1,142,334
There are three fundamental points in the distribution

network: the refinery, terminal, and bulk plant. Each plays

an important role in the distribution of product. The

source i u. s. Bureau of mines refinery is a production site equipped to move very
* Includes kerosene large quantities of product and having a limited ability

to deal with small volumes.






18 19

.usually provide the intermedate disributio n llhnk

P M IS between the refi er anMd local retail fuel dealers or bulk

pl ants. The ab'ilty of termials to ept, staore and
distribute large volumes at product allows the refinery
to produce product on a continuing ~aes wh.ich bels
maintain high refinery uitilzation. Terminal operators
in turn redistribute product in guantities mre in
BAn -TC P ENE keeping with the limited capa i4ities oa siall resellers.

The final element in the distribatton chain of







S LARGE INDUSTRIAL USER have traditionally provided spe~ized delivery services
Ito the local commnities. Services include 24-hur
delivery during planting and/or harvesting seasons,
delivery to unimpoved areas such as mines, qu ies,

A AR T- and construction sites, and the ability to handle
relatively small orders for dir.ct delivery to
homeowners.

Within urban areas, the functions of a jobber,
bulk plant operator and fuel oil dealers often overlap.
The jobber may own a bulk plant and sell product direct
to consumers as well as to other dealers.

TRUCK STOP



CONSUMER CONSUMER 0-ROAD TRUCKING
.'. i -i *' ** s *' r -' * ** i * *







;'. **. W to cosuers ast. _ell a t o thrdaes
I ."' t roy "* "
1- ** * ., . .. .. : ..
,,, .rr~ n .etit : .
CONSUMER CO-rMF UN-nOAD TRUCKING"~









21
CHAPTER III of these price and allocation controls is therefore presented
HISTORICAL CONDITIONS first in this chapter, followed by a discussion of the
(196a-1975)
INTRODUCTION effects which these controls have had on the supply, demand,
I NTRODUCTI O
and price of middle distillates and on the market structure
The historical interaction of supply, demand, and price of the petroleum industry.
or middle distillates, and the market structure of the petro-
Chronoloy of.Allocation and Price Controls
leum industry are examined in this chapter in order to make --- -----
Allocation and price controls on middle distillates have
the findings required by the EPAA. These findings raise the Al t and ice c middl l s ave
fo wing questions: been imposed at various times over the past several years
following questions;
n a s as part of major U.S. economic regulatory programs beginning
o Are middle distillates in adequate supply?
Sd with the series of price controls established under the
o will exemption of-midle distillates from
Economic Stabilization Program. The principal allocation
regulations result in shortages of other
and price controls involved, for pr:poses of this report,
refined products?
o Will competition and market forces be adequate are as follows:
Descriptio and
to protect consumers following an exemption of r am Effective Date Respnsibe Offic
middle distillates? Phase I Aug. 15, 1971 Original Price Freeze
Office of Emergency
0 Will exemption result in ineauitable prices for Preparedness
any class of user? Phase II Nov. 13, 1971 Mandatory Price Contro
o Is the exemption of middle distillates consistent Price Comissio
with the attainment of the objectives of the EPAA? Phase III Jan. 1, 1973 Volune adards
To provide a perspective for assessing the effects of Special* Mar. 6, 1973 Mandatory Price Controls
exempting middle distillates from the Mandatory Allocation Rule No. on Petroleum Industy
Cost of Living Council
and Price Regulations, these questions are addressed from Voluntry May 10, 1973 Office of il and Gas,
Petroleuntr Dep tn oI'n o
an historical viewpoint for the period 1968 through 1975. Alrocaleum nDept. of Ieri
Beginning In 1971, various price and allocation rules Program (VPAP)
were implemented which had both a direct and an indirect im- June 13, 1973 Price Freeze I

pact on the free market relationships. A chronological review Phase IV Aug. 19, 1973 Mandatory Price Controls
on Petroleum Products
Cost of Living Council








22 23
andatory Nov. 1,,1973 Offie of Oil & Gas lawfully in effect on January 11, 1973, were permitted
Distidlates Dept. of Interior
Sr Poiy ffice (EPO) to reflect increased costs without regard to profit

Program margin limitations. Phase III voluntary controls
mergen No. 27, 1973 MaIdatory Allocatioin & Price had the effect of permitting the petroleum industry
Petroleum Regs. issued Jan. 14. 1974
SAllocat Federal Energy Office. and to correct the price imbalance between motor gasoline
Act of.. 193 Federal Energy Administration
(P eda ng AA)Admnistration and middle distillate refined products that had prevailed

C Major ovisionsoftheontr"ols under Phases I and I1. However, Phase III also'had
The PHASE I CONTR consisted of a general price the effect of permitting lare reases i p&trolm
freeze impose~ on all sectors of the U.S. economy for a product prices. As a result, Phase III was amended
period of 90 days under which prices were frozen at their by Special Rule No. 1 on March 6, 1973, the first
August 15, 1.97 level. This had the effect of freezing tme price controls were establish d expressly for
gasoline prices at their seasonally high levels, and, the petroleum industry. Under Special Rule No. 1,
convesely, of reezing home heating oil and other mandatory price controls were imposed on the sale of
middle distillate prices at their seasonally low crude oil and refined petroleum products by firms with

price levels, annual sales of $250 million or more, which generally
The PHASEI Y PICECTRLS established limited price increases to a weighted avetage price of
ceiling prices for all industries based on Phase I one percent above the January 11", 1973, base price

prices with limited adjustments allowed to reflect levels. Special Rule No. 1 applied only to the 23

increased costs. The Phase II rules therefore had the largest oil companies; therefore petroleum prices

effect of continuing the seasonal high price levels continued to rise because of price increases by the
allowed for motor gasoline, while middle distillate uncontrolled portion of the petroleum industry.
refined products were held to their seasonal low price Partly because of continuing increases in

levels. petroleum prices, PRICE FREEZE II was placed in
The PHASIII.VOLNTARY PRICE STANDARDS, which effect on June 13, 1973, for a 60-day period. This
followed Phase II, also applied to all industries 60-day price freeze was imposed on virtually all
generally. Under Phase III, increases above prices consumer prices. At the same time, the Cost of Living







24
25
Council was directed to develop Phase IV regulations to dal with the problems created by the reduction
which were to include measures to stabilize the : in supplies of petroleum product aggravated by
price of petroleum products. the October 1973 oil embargo. .These programs were

The ASE VONTROLS FOR PETROLEUM PRODUCTS' designed in part to preserve, to the extent possible,
developed during the 60-day price freeze, went into during shortage sitation, an economically sound

effect on August 19, 1973, and provided for a compre- and competitive petroleum industry, including the

hensive system for controlling petroleum prices at the competitive viability of the independent segments

oroducer, refiner and distributor levels. Cnntrols regar1inn of the industry. In addition, these programs
retailers were implemented on September 7, 1973. contained provisions to assure equitable distribution

The Phase IV price controls were incorporated of refined petroleum products at equitable prices.

into the Mandatory Petroleum Price Regulations now Also included among these controls is the Domestic Crude nil

in effect under the EPAA. Entitlements Program, which was created for the purpose
The MANDATORY MIDDLE DISTILLATES ALLOCATION of allowing all refiners to share in the benefits
PROGRAM, which went into effect on November 1, 1973, of price controlled crude oil production. Under this

required suppliers to allocate to wholesale purchasers program, refiners with greater than average access to
supplies equal to volumes purchased in the corres- low-cost domestic crude oil are required to ke payments
ponding month of 1972, or, if these quantities were to refiners who use greater than average amounts of
not available, then a pro rata share of the supplier's more costly imported crude oil, so that all domestic refiers

supplies. Any supplies available in excess of 1972 have an equitable share ofthe limitd qa s of low-
levels could be distributed at the supplier's priced domestic crude oil.
discretion under this program.

The programs established under the EMERGENCY
PETROLEUM ALLOCATION ACT OF 1973, and under the

Mandatory Petroleum Allocation and Price Regulations,

issued January 14, 1974, provided for comprehensive
controls for both allocation and pricing of petroleum
products at all levels of the petroleum industry.
These regulatory programs were established



. ... ..... ..... .,,,.,,;,,,,,. .,,,,,,,,, _,,,








27
26
SUPPLY/DPEMAND
Under the allocation portion of these regulatory
This section traces the historical growth in demand
controls, all regions and economic sectors are to
for middle distillates and examines the adequacy of supply
reeive, to t~he'maxinum extent practicable, equitable
Sof crude o, residual fuel oils, nd refined in meeting that demand before and during the four phases
shaies of crude oil, residual fuel oils, and refined
of controls.
petroleum products. Accordingly, a priority allocation
Crowth In Demand
system was established for the distribution of petroleum
The demand for middle distillates increased fairly
products. As part of this system, a state set-aside of
steadily from 1968 t 1973, as illustrated in Figure III-1.
certain petroleum products was ceated for the purpose
The annual rate of increase in demand averaged about 4.7
of meeting local hardship and emergency requirements.
Spercent from 1968 to 1973, before peaking in 1l73 at an
average of 3,088,000 barrels per day. The subsequent
During the shortage that occurred as a result of
decrease in demand in 1974 and 1975 (a 2.5 percent decline
the October 173 embargo, the allocation end price
from the 1973 level) represents a significant departure
regulations achieved a substantial measure of success inom the 1973 level) represents a signific
from the historical demand trend. The combination of the
easing the impact of the shortage. However, there are
increased middle distillate costs resulting from the
clear indications at this time that adequate supplies
*embargoand relatively mild winters in 1974 and 1975
are available and controls may no longer be needed. embargo and relatively mild winters in 1974 an 1975
,compared with 1973 contributed to this dampening of demand.
In fact, many of the regulations seem to be operating in
The demand for middle distillates by Petroleum
direct conflict with the objectives of the EPAA in that
Administration for Defense (PAD) District (see Figure II-2)
they are actually inhibiting competition, detracting
reflects the national demand pattern. Demand for middle
from economic efficiency, and unnecessarily interfering
distillates peaked in each PAD District in the 1972-73 period,
with the operation of market mechanisms.
declined in 1974, and leveled off in 1975.
Whether the present regulations are needed to
SStocks of middle distillates (see Figure III-1) declined

19 percent during the period 1971-1973, while demand grew
users is the subject of the next section, which addresses
miid p e 13.3 percent. Stocks supplied a portion of this demand
middle distillates supply, demand, and price patterns
in 1972, but were not replenished during the peak demand
before and during controls.











28


DEMAND FOR MIDDLE DISTILLATES IN RELATION TO STOCiS
DEMAND BY PAD FOR MIDDLE DISTILLATES
FIGURE III- 1
FIGURE *II-2
oDnmmd (Million barrels/day) (Million barrelt/dayl





N ational Trend
2.8 --.0 PAD V





2.4





S I I I 1 1 I I'.
2.2
2.0
PAD II

Stocks* M11illions of barrls)


180






160, .. PAD 1




140



1968 69 70 71 72 73 4 5 1969 70 71 72 73 74 7,
Source: Bureau of Mines Source: ureau of Mines
Dasl on anm1al averages







30

year of 1973. They were rebuilt substantially during

1974. By 1975, stocks of middle distillate. had JW SlPY 1 9L
F1GUAL MIII3
returned to their 1968 and 1969 levels. Post-embargo .

stock level probabl are not required to be as high as 3
were 1970 and 1971 levels because there is a larger
refining capability margin than existed in 1970 and
197i due to increased refinery capacities. This .

larger margin can be relied upon to accommodate
demand surges, with stocks meeting the initial part Eof

the surge while refinery runs are being increased. 3.1 -


Growth in domestic production of middle distillates
did not quite keep pace with the groith in consumption during .9

the period of 96 to 1973. (It did in '73 and '74)
Production increased 15 percent during the 1968-1975 period
2.7 -
while consumption increased 17 percent. Domestic production

reached its peak of 2,820,000 barrels per day in 1973

(see Figure 111-3) and subsequently paralleled the 1974-1975
decline in consumption. Table II indicates that domestic

production of middle distillates historically followed
the domestic production trends of all refined products.
2.3
In addition to production and change in stocks,
Jan throujh Aug, 975 average
the third component of middle distillate supply is 7 J LhrO Au, 1975 v rag

imports. The difference between the two curves on
Figure 111-3 represents the amount of middle distillatos 19G 9 70 71 7 73 74 75 *
SSurcoi 10









32
TABLE 1I 33

DOMeSTIC PRODUCTION Or REFINED PRODUCTS imported. Imports remained relatively constant from
AT PIXPINERIES FOR 1966-1975
(Thousands of borrels/day) 1968 through 1972, increased to a peak 12.3 percent

of total supply in 1973, and declined thereafter. The
Motor *Middle Fuel Jet ** Other Total All relationship of imports to the total imported supply
Gasoline Ditilates Oil Fuel Products Products
of crude oil and refined products is shown in Figure
1968 5,212 2,300 756 863 2,001 11,132
11III-4.
1969 5,468 2,320 729 881 2,062 11,460
The total national supply of middle distillates
1970 5,699 2,454 705 827 2,222 11,907
(domestic production plus imports) increased 16 percent
1971 5,971 2,495 752 834 2,245 12,297
from 1968 to 1975 (see Figure 11-3), although supply
1972 6,281 2,637 799 846 2,149 12,712
deviated from the historical trend by rising sharply

1973 I Qtr. 6,213 2,872 1,035 893 2,299 13,315 in 1973 and declining markedly during 1974 and 1975,
II Qtr. 6,695 2,626 914 854 2,520 13,609
III Qtr. 6,830 2,790 890 839 2,628 13,977 The cold winter of 1972-73 caused imports of middle
IV Qtr. 6,366 2,992 1,089 852 2,404 13,703
AVERAGE 6,527 2,820 971 860 2,475 13,653 distillates to reach a record high even though domestic
production for that year was also a record high.
1974 I Qtr. 5,950 2,505 1,003 805 2,151 12,414
II Otr. 6,433 2,670 1,002 849 2,415 13,369 The regional supply of middle distillates (see
III Qtr. 6,699 2,694 1,052 824 2,580 13,829
IV Qtr. 6,349 2,808 1,220 865 2,301 13,543 Figure 11-5) indicates that PADS II and III are the major
AVERAGE 6,358 2,668 1,070 836 2,362 13,294
producers, while Figure 111-2 has shown that PADs I and ZI

1975 I Qtr. 6,285 2,688 1,356 855 1,964 13,148 are the major consumers of middle distillates. More of
II Otr. 6,279 2,469 1,182 856 2,121 12,934
III Qtr. 6,900 2,663 1,161 917 2,422 14,063 the demand is satisfied by imports in PAD I than in other
Average*** 6,488 2,607 1,233 876 2,169 13,382
districts.
Source: BOM
Analysis of allocation and surplus product reports
Exclude Kerosene
** Includes Kerosene submitted by refiner ofers strong evidence that supplies
** 3 Otrs. Only
are presently adequate to meet demand. First, the national
allocation fraction (i.e., te dequacy f major middle
distillate suppliers' available product to meet their








34, 3


MIDDLE DISTILLATES SUPPLY BY PAD i968-1975
CRUDE AND PRODU1 W*OIS 1968- 975 FIGURE IlI-5
FIGU 111-4 (Thousand barro ls/dnv)
3.0
7 1 1 1 1 1_ 1 1 1 1 111



2.5 'PAD iV


Note: All 1975 data e fcept Residual
based on Jan -Sept.

S- "2.0 PAD III








ICporfes ^ ^t
5 14. 5 ".





--1. ll





u- sidual Puel Oil

PAD I


.- 196B 69 70 71 72 73 74 7S
41. ---aii^a^ ^ ^ ^u -* *t 8rourceo Duroou of line-s, FA

1968 69 70 71 72 73 74 75
Sourcen lureau of Mines











36 37

customers' allocation entitlements) indicates a normal

(i.e., approximately 1.0) supply situation. The fraction

reached a low. of 0.87 in February 1974 (the most severe FIGURE III-6

point of the embargo), recovered to 0.97 by March 1974, ALLOCATION FRACTIONS FOR MIDDLE DSTILLATES
(1974 a 1975)
and generally remained close to 1.0 through the end of
1975 (see Figure 111-6). This supply adequacy is

verified by the surplus product* declared in supplier

reports for the past year.

Projections of refinery capacity utilization also .4. -

indicate adequate supply. In 1974 and 1975, refinery

capacity utilization declined to 83.1 percent and 85.7
percent, respectively, from 89.8 percent in 1973 o.rso- \

(see Figure 1II-7). 74

Optimal capacity utilization is considered to be --

approximately 90 percent. Domestic refinery capacity

has generally kept pace with the demand for distillates

and is currently more than adequate. The existence

of excess refinery capacity, surplus product, and Jm. ra. M. wa. mW a U mra. Ya. wV, Ce.
1974 0 o.a S 0.949 1001 0.9 1 1.0 1 017 0.950 0.60 0.964
high allocation fractions document that current supplies 1ts .50 o.9s o.9T7 o.9M 0 9 a.os e..17 o0.9 *o.n1 .00 .w1

of middle distillate are adequate.



*Under FEA allocation regulations, surplus product is defined
as product in excess of the amount of the supplier's obliga-
tions to his base period purchasers, or product not actually
lifted by those purchasers.
't'-










PRICE AND MARGIN TRENDS
This section traces middle distillates price trends
AFINERY CAPACITY AND CRUDE RUNS-PERCENT OF UTILIZZSATION.
for the period 1968-1975 and examines gross margins for the
i IGURE 1 e 1
llion barrels/day) refining/distribution and retailing segments of the petro-






the U.S. economy underwent a recession, experienced high

S levels of nflation and oerate under fo phases of price
controls. Each of these three factors had an important

*13 impact on prices, gross margins, and operating profits.
S7 To the extent possible, given data limitations, this
section considers the extent to which price controls

A ,have restrained profits ancreated pressures for future
Sprice increases.
PRICE TRENDS
Trends in middle distillate prices can be traced in
S- 85.7% terms of the four phases of controls:
Phase I: Average prices for home heating oil
83.11 (which represents approximately 50
88.4%
S88.6t 7.2 percent of total middle distillate
Sconsumption) increased approximately
90.61
S,90.6, 6 percent during 1970, to 19.0 cents
per gallon by 1971 (see Figure III-1).
.196 .. .69 1 13 74 s Prices were frozen at a seasonally
SSource FEA Trends in Refinery apacity Utilization, December, 1975.
f..l~3"..' if 1 1;^'-. . .*. ,~ ,: ,.








Average Heating Oil Prices 1968-1975 41
FIGURE Iz-s low level in August 1971 (summer is
(ceuts/..l Ion)
40 a low demand period), when Phase I

Scontrols were instituted. Thus,
Phase I impeded the normal seasonal
movement of middle distillate prices.
35 --- Phase II: Phase II controls were in effect

throughout 1972. Middle distillate
prices exceeded their 1971 levels
only slightly during this period.
Current
30- Dollars Phase III: Phase III controls contributed to a
leveling of prices in the early months
of 1973. However, prices increased
Srapidly in the Spring, giving rise to

2s complaints of inequitable distribution
of petroleum products. In particular,
complaints were filed by retail dealers,
jobbers, and independent marketers alleging
unfair pricing ractices on the part of
their suppliers.

Phase IV: Phase iV controls, introduced in
August 1973, were still in effect at the








i~~~ei ~l i--- ^ --- --- ^ --- ^ ---
time of the embargo. The cost of rde

oil to U.S. refiners more than doubled
rising from an average of 9.6 cents pe

gallon in August to 20.4 cents per


1968 69 70 71 72 73 74 75
uvoi of YtLir Fiy"ra
Scurce: hiureou of LAIr Statisttcs, rIa










43
gallon o February 1974 as the cost of
0 that are largely price-inelastic in the
Scrude oil inputs to domestic refineries
range of prices experienced. Thus, the
rose. Under the Phase IV cost pass-through
Srelatively inelastic demand for middle
provision, this cost increase was permitted to
distillate products in spite of price
be passed on to consumers on a dollar-for-ollr distillate products in spte of price
increases has largely supported the
basis, causing middle distillate prices
continued upward movement of prices.
to rise by nearly the same amount -- 10.8
MARGIN TRENDS
cents per gallon. Thus, despite Phase IV's
contl of mide distil s prics Gross margin expressed on a per unit (gallon or barrel)
ceontrel of middle distillates prices
basis is defined as follows:
and only slight increases in distributing gross
mgins, prics in d significntly Refiner/distributor gross margin = refiner/distributor
margins, prlces increased significantly
selling price minus
simpl because of crude oil price increases. selling or ce oi
cost of crude oil
Phase IV controls were ineffective in
into the refinery
counteracting the "cost push" forces that
Thus, the gross margin represents the difference betwee
were causing prices to spiral. The controls
the particular industry sector's purchase price and
were limlted in their impact on costapush
subsequent selling price of petroleum. This difference
factors largely because they permitted
is a measure of the amount of revenue available to
product cost pass-through and were unable to
Scover all costs other than costs of goods sold, and to cover
control the cost of imported crude oil
even t h d i cd p e wr profits. Gross margins are discussed in this chapter in the
even though domestic crude prices were
context of their historical movement and the pressures
controlled.
that movement has placed on prices from 1968 to 1975.
The 70 percent increase in middle
distillate p s ad 69 p t d e The effect of current qgoss margins on futue prices will
distillate prices and 6,9 percent decline,
be discussed in Chapter IV.
in demand from 1973 to 1975 indicate that

middle distillates are essential products
3











45
44
Refiner/Distributor mgy

An awareness of the trend in reftter/d4stributor gross
Rfinrr/fistributor Heatfino Oa GOei s awin 1W0-1975
margins for all refined products is usefual in oderstandinqg z_
middle distillates prices. The gross amWcgi ten d Eor all ce tsa~ all __
refined products (depicted in Fiqure III-3) was determinled
using a mixed barrel of motor gasoline, W 2 distillate,
jet fuel, and residual fuel. These four products reppe- 7. --
sent more than 80 percent of al refined products sales.
The actual mixed barrel prices and gross margins are shown nl
Table III.

TABLE III
Average Mix53d Aveai5 5e11ner. istrIbut5or
Barrel Price Crude Cost Gros*s MArSi_ 6.0
(ail flgures are ln dollars per-barrel)-
1968 $ 5.13 $ 3.17 $ 1.96
1969 5.24 3.29 1.95 Distillates

1970 5.41 3.40 2.01 5.5 -- Westing o)
1971 5.85 3.60 2.25

1972 5.75 3.58 2.17
1973 6.73 4.15 2.58
1974 11.92 9.07 2.85
1975 14.02* 11.05* 2.97*
- - - - - - - - - - - - - -

Represents November 1975-Prices Average of Months May, Aug, Sept Oct, Nv, D F 1973)

SOURCE: JMandatory Reports (FEO-96) submitted to FEA,
Bureau of Mines, Platt's Oilgram and Lundberg
Survey Inc. 1 69 70 71 72 73 74

Source: FEA, .BOH, and Platt's Oilgram










46
47
As indicated in Figure 111-9, gross margins were
relativly stabe during the period 1968-1972, including
the period the period 19731975, however, gross marginThis section addresses the question of whether market

increaed consideraby, which may be attributed to the effect
of o ortng ost of re ers a d rburs. marketing are adequate to preserve the copetitive viability
s mgins fr No. 2 h in oil, wic c i of independent refiners and marketers, and thereby

48 percent of m e distiate onsumptio, also id ensure consumers an adequate spply of middle distillate
during the period of 1973-1975 but at a s r re tn at equitable prices folloing exemption of middle
did al petrolum podton distillates from regulation.
data on gross margins prior to May 1973 are not available, Recent trends indicate that independent refiners and

thus limiting a complete review of historical gros margins independent marketers of middle distillates are increasing
for middle distillates. their market share. This section discusses this trend in
for> mi44~ s 4itU ltee

The fact that gross margins for the refiner/distributor detail by:
segmet of the industry have inreased rapidly in the last o Describing the consumers and distribution system

two years does not represent a direct measure of the profita- for middle distillates,
bilty of the industry doring these periods. T determine o Briefly tracing the market structure of the
profitabllty the aditional factors o t t refining and marketing segments before the
lue, an investment levels for the refiners, distribtors period of allocation and price controls, and
and retailers must be considered. The projected affects of o Examining the changes in market share experienced
urrent refiner/istributor gross mrgins on future middle by different classes of refiners and marketers
distillate prices will be the asbject of discussion in during the period of controls.
Chapter IV.



*;









49

48 TABLE IV

Consumers and Distribution System Middle Distillate Fuel Oil Sales by
Home and commercial heating oil (primarily No. 2 fuel Class of Use Within
oil) and "on-highway" diesel fuel accounted for 67 percent Census Regions

of the national demand for middle distillates in 1974. 1974
The other principal uses of middle distillates were:

iagriculture and construction, 4 percent; railroads, 9 per-
cent; electric utilities, 7 percent; industrial equipment, CENSUS REGION
7 percent; vessels, 2 percent; and, military and END-USE North North Total
East Central South West U.S.
miscellaneous, 4 percent.
The regional distribution of distillate fuel oil is Heating 24.4% 12.8% 7.6% 2.6% 47.5%
depicted by U.S. Bureau of Census regions in Table IV and "On-Highway"Diesel 2.9 5.5 7.1 3.7 19.2
Figure III-10. Regional boundaries are indicated in "Off-Highway" Diesel 0.5 1.0 1.7 0. 4.2

Figure III-11. As these data indicate, end-use market Railroads 0.7 2.7 3.4 2.2 9.0
demand varies regionally. Heating represents the major Vessels 0.3 0.2 1.3 0.3 2.1
middle distillates demand market in the Northeast and Utilities 2.2 1..82.8 0.6 7.4

the North Central states, and diesel fuel and other forms Industrial 1.1 1.6 2.5 1.6 6.8
of transportation represent the major middle distillates All Other 0.5 0.6 1.8 0.8, .7
demand markets in the South and West.
TOTAL 32.7 26.3 28.2 12.8 100.0
Mi ddle distillates move through a complex system of

pipelines, trucks, and intermediate storage facilities
operated by refiners, terminal operators, distributors, and
other retail dealers. At each level in this system, some

facilities are owned or controlled by major or independent Source: Bureau of Mines
refiners, while others are owned and operated by independent
(non-refiner) marketers, both branded and nonbranded.








50
51


FIGURE IfI-11
MIOAL MIDLE DISTILIATES
SALES BY0SS OF LEE, 1974
mullions barrels/day) AS S BUREAU OF CENSUS REGIONS
40 Figure III-10 All Other
Industrial

E le ctric Utiliti es -B 1
; fli,.esel ,7a
Railroads, vessels & Diesel
H. eating





-- )z























Hortiast Nortcnntrai South s
SSou: Duu of
To























Source: Bureau of iines










$3
32

Jobbers buy products from refiaers ar terminal

operators* for salI directly througb their swn or other

Aealzrs.. The jobber usually vWaS igs deli-very equipment

nd elthbez owns a bulk storage pleat or uses a terminal. isirtrbtin oorketk d Suppy f r

randed indepedent .marketes opeate at both the e Puel i ype of

retail and wholesale levels,, selling products umnder the 1srs rktrs, 1971

brand name rof a refieaine Nowbranded iroependent markeeters

perfors thUe same functioas as do br.anded terminal operators,,

lobberesB, .4u xetaiil de-aletr, sielling poducts uander their T UanMdnpnent --air s

own brand zzmes ox r lyang othr rmonanb ted aIndependent 3Saranded ortnad lrnn1f it 'ertima"

d oatr~mAn 11 a 4
The distrbution stuctue of the middle distillates 1. ..0 7-.7
S..es iol/T/rnrn -
warHat wrixes witth the atype of ndBusex t avelnd. As iportation .1 5 a/A lA 3 4. ..7

ahown in Tae V, timita B adustriaes, and &other utaity A.7 1B.6 ia- 4

large-scale accounts,, hich requlrT-e arge ,voilumes but
R11 Other -3 a.f ;* 0...a* 0.5* g^ .I

A1aaRtedkB wevice, are se;rve prTimarily sthrough dire ut -*- -3.- --* ---7'-


other hand, play a dominant role in the retail

distrb ution vf 4iese1 'fuel1 ara behatt-ng oIl to 'thes smail

consumer, vwho requsimes adBditional services* 6src: inI enr totiol lBnd-Wun. rA FurT 0i .uvey (PO&i-la---a
'tar mniktcer ditribhutinn by enI-%,se..
(1) IInrc r< *aijrci rnr an antd srBBr-hiahwr y uses, andmniaDwu
and vua2l btuinkcrinci.
*Jhoim... b.aned13 in Pl:A P30fl ratLin ,w tnarIketrr. ',yyr 1 h
"otLhe'r" catii'oy mpiied *to h0 .prtiauct volaumCn not CJir-


Targe-quantIty nbuyers with substanttial investments in *W-RMLJwatir hbnsrd on the pereonarre of nonhrantit pminwIct and
fa ilities, such as aa river or deipwateir port or a .Jm -n n ie l Hit*, t* t nu tlied to -i'jjntr. ma rkete ne-
pipeie termina and associated tanrks and loading (&1 r I li nl i.qmn in I-41 re). lm'-on rc inr1 t
IA Cl-irties* Lhr n oirtintt iindnnltciL Wsp i PnUailMsa .








54, 55

ease of the pariur iportance of space heating Refiners also service a higher percentage of large

and hway-us to th i e distilas market, volume commercial and institutional accounts that involve

additionaL dscuasin of, the distibution of these two limited service. In 1974, these accounts represented

fuels is warranted. 46 percent of refiners' direct heating oil sales to end-

The hating a. s. In contrast, dependent marketers sold 89 percent

service asines.. Bside eidentialusers, othet of their heating oil to residential customers and only

castemers-far heating oil include apartment houses,, 11 percent to commercial accounts (see Table VI) in

of fas: buildngs, hool, hospit andcomm ial. 1:9741. Refiner-marketers~ commercial sales may be more

fac ilktia& Largecan em purchase at a. d4icount snsItive to chancig in.the economy than sales by

himh the re-finer ox terminal. operator,. o on: a. bid basis., independent macketers.to homeowners.

n. addition to selling oil and, providing.s asional Diesel Fuel. Diesel, fuel Lia ditributedi to the




Appoiately 16,000- fuel oilt dears ace presently diesel angnas. Diesel fuel for truis iLa. maketed in

e ,tia gt inM the U.S., according to a n nt Dun. antwways: &ectly t) truaki fims who. buy in, bulk, st:em

Baflart istin;.. In 174., independent marketers Ln their own facilities, and-fuel their own trucks and

aountedfor about 75 pccent X total heating oil through.truck stops, the daies* aqquv4lent of setwice

&a&s" to endusers (,aase. Table V);.. tatitnwa. fo gasolne. While indpedent terminal
Reftimers have concentrate their dnect m ting jar aperts serve, some, bak1 canumer mnts, independent


the heataing ol. t.* A a reat- af dsps *d terck &top&.. Most tuak stps are eZrated by

peoplation ad mar in steinDent sewie requements,, indipend t makltetrs, som.e banded ( i.e., owned o

refiiies &couent f=z oay L9 percnt. e4 theA retail heating, finatBd by majoer panLes a leased to the operars

oi 5*l ales in nataba.na6reas arid some anhanadedI-.

ETC. AA EValuation ae the Mandatzry Preroeum n
allcati Fo Pggaim (Mariait,14)
t ' '












TAE VI57
Market Structure Before Controls
Percent Distribution of DistilUte l i Oil by The middle distillates market was relatively stable
Percent Distribution of Distillate Heating Oil ty
Refiner Marketers and Independent arketers, 1974 from 1968 to 1971. As shown in Table VII, consumption of

Percent of Hea l S s y p: almost every distillate fuel increased steadily from
I t of leatang O i Sales ty Group: .
Branded Nobranded 1968 into the period of controls. Product supplies were
Refiner Independent Indlependent
eating Oil Acount Mareters Marketers Marketers ample, and inventories at year-end fluctuated minimally

between a high of 195 million barrels in 1970 and a low
esidetial 53.,8 89.0 89.2
of 172 million barrels in 1969.
Commercial/Insti- Domestic prices were also stable, remaining low as
tutional 46.2 11.0 10.8
a result of potential price compeition from abroad (e.g.,
Total 100.0 100.0 100.0 Italy, the Netherlands). Imports had little effect on

the domestic mrarket, varying betwee 5.5 and 5.8 percent
of demand between 1968 and 1971.
Source: FEA Fuel Oil Szaey (FFA P-30- -01.
This historical situation of abundant supply and low

price can be attributed to two major factors: the crude
oil market proration laws of the various producing states,
and the mandatory import restrictions on products and crude
oil imposed in 1959. The mrket proration laws restricted

the amount of domestic crude production to the level that

the market could absorb at current prices, effectively
ensuring relatively stable unit crude prices. The maadatory

import restriction were instituted to pte the destic
oil production industry from-low-cost foreign crude. Under








58
59

a foreign crude oil allocation system, "tickets" were
TABLE VII
issued to each refiner based on his runs. While these

MIDDLE DISTILLATE FUEL OIL DOMESTIC DEMAND BY USES tickets could not be sold, they could be and were
(Thousands of barrels per day) traded. The price disparity between foreign lrude oil
and domestic crude oil set a value of $1.00 $1.25 per

barrel on each "ticket." Through the ticket exchange

mechanism, inland refiners without historical access to
foreign crude were able to obtain cheaper crude. All
classes of refiners were thus able to compete equally

for available crude oil, foreign or domestic. To maximize

1968 1969 1970 1971 1972 1973 1974 the "ticket" flow, however, it became necessary to

rT OS. 1,35 1,402 1.427 1,431 1 1,471 1.3o maximize refinery runs. The result was a readily
No. I -176 136 !35 135 5~ 133 131 11 0
No. 2 1,176 1,190 1,213 1,205 1,238 1,225 1.171 available supply of middle distillates to all classes
No. 4 71 76 79 -91 113 15 69
z::WUSTRZAL 125 116 120 ~9 165 184 _175
OL CO.P',Y FUEL 27 38 32 39 37 41 38 of trade.
ECTIC UTILITY 23 33 68 97 187 214 232
.-o 230 237 242 236 265 282 281 Although complete data on the middle distillates
VISSEL 3U::XERfIG 50 52 53 57 60 73 66
.34 38 34 48 55 54 49
o:L T?'r : 469 5sY 5 586 654 735 market structure prior to 1972 are not available,
On ii y 3-9 0 -- - ti-o 45 517 60r 60
off Iigliw ", 130 136 126 129 137 152 133 discussions with fuel oil distributors identified two
TC7AL DISI.LAI.E FUEL 2,353 2,432 2,510 2,633 2,907 3,078 2,926 major trends from the late 1940s through the 1960s:
Kerosene 282 275 262 249 235 216 176
o The number of independent marketers increased

SOURCE: au raa of Hines, Sales of ruel oil and xerosine rapidly after World War II as new home builders

and existing homeowners converted from coal to

oil-fired heating systems.

o Major oil companies have occasionally attempted

to develop or increase their direct distribution
volume to the consumer. However, they were











60 61

unable to compete profitably with the local Refiners. The Emergency Petroleum Allocation
or independent marketers, who were locally Act (EPAA) defined three types of refiners based on
established, service-oriented, and therefore refining capacity, and crude oil self-sufficiency ratios.
more responsive to consumer needs. Fifteen l galeintegratedrgefiEtirs have refining capacities
It should also be noted that during the post- in excess of 175,000 barrels per day and own or control
World War II era gasoline demird grew rapidly and directly more than 30 percent of the crude oil used
offered an easier market for nationally oriented oil in their refineries. Four large indeS1ndent refiners
companies to expand their market share than did middle have refining capacities in excess of 175,000 barrels
distillates." A residential heating oil consumer does not per day and own or control less than 30 percent of the

generally consider shifting to another marketer as readily crude oil used in their refineries. Over 100 small
as he would shift from one retail gasoline station to reSfiners have refinin" capacities of less than 175,000
another. barrels per day. Most small refiners also own or control
Market Structure During Cntrols less than 30 percent of the crude oil used in their
During the 1971-1975 period of price controls, refineries,
the middle distillate market share of independent The large integrated refiners' market share of
refiners increased steadily and the share of middle distillate declined slightly after 2, the first

independent marketers remained or increased in all full year after price controls were instituted, and then
regions of the the U.S., reflecting the strength of declined 1-2 percent by 1975. Conversely, the shares of
the independent sector of the industry. This section large independent and small refiners (with the exeption
discusses the trends and factors underlying this of early 1974, when allocation regulationir-ere just
increase, taking hold) gradually increased from less than 24
percent to over 25 percent of sales at the refiner level
(see Table VIII). Although the allocation and price








62
63

regulations were available during 1974 to preserve
TrsL' vzn the shares of the independent and small refiners,

*Rer.1nr Sihares of Midet li Dintllnle Salcn the trends since 1971 indicate that these refiners
. are able to maintain their market share when they have
Larqo IntUqratft1 Laorq le. IndepwPdnk/ Rr ipcner
er '_ 't l...inr n lml iI orinr :aren, equal access to a competitively priced crude oil

1972 1 76.1 23.! 100.') supply.
2 75.5 23.5 100.0 Other Marketes. .Refiners market their
3 76.1 23.9 100.0 middle distillates through the following
4 76.3 23.7 100.0 channels:
Arnnu 7h.2 2nne. 100.0s
So Directly to ultimate consumers through:

1973 1 77.1 22.9 iOn.o --large volume consumer accounts (e.g.,
2 75.5 24.5 100. utilities, railroads, and other
3 75.3 24.7 100.0 industrial accounts) serviced
4 7. .24.2 by the refiner
Annual 76.3 23.7 100.0
--refiner-owned retail facilities operated

1974 1 77.4 22.6 100.n by salaried or commissioned personnel
2 73.2 26.8 100.0 for the distribution of diesel fuel
3 72.1 27.9 100.0 and/or heating oil
4 74.5 25.5 100.0 o To branded independent marketers for retail
Annu 1l 74.6 25.4 100.0 sale by their own dealers, or for

distribution to other dealers
1975 IP)
o To nonbranded independent marketers for
I 75.8 24.2 100.0
S73.4 26.6 n10.0 retail sale through their own dealers, or
.1 71.5. 20.5 100.0
Annutl 74.7 2S. .0 for distribution to other dealers
ourcel: t 'A tertinh riW Su'Ve (MIr A P-305S---n P t-Jin-H-nl).
Ii;cp ni, Ftl t i r.y trl: n ltw l to 300Q1n tlu to rnelTc1inr
(ll I'l.'Blrlrlnntv antimntfc










64 65

Table IX presents the changes in market shares of

direct and independent marketer distribution channels by TABLE IX

type of refiner from 1972 to 1975. The market share
DISTRIBUTION OF MIDDLE DISTILLATES BY REFINER GROUPS
trends are shown in more detail by quarter in Table X

and Figure III-12. These figures show that the

distribution of distillates to independent marketers

by refiners follows a seasonal pattern peaking in the

first and fourth quarters (winter) of each year. This

distribution pattern coincides with the demand for
Percent o Ref iner S al es
heiting oil, the market segment dominated by independent Branded Proct ro ded
Direct. Sold to Independent to Independent Total
marketers (see Table VI). Refiner Grou ISca-r ~l.s KartC.rzi ..ar.k. tc-ers
Large Integrated 1972 47.8 36.9 15.2 100.
There has been a shift since 1972 in refiner marketing Refiners 1973 46.6 36.0 15.5 .
1974 45.3 38.0 16.8 1CO.0
away from direct sales to consumers and toward increased 1975 42.6(P) 39.0 (P) 18.4 (P) 100.0
Large Independent 1972 39.0 22.9 38.1 100.0
distribution through independent marketers. The increase /Sall Rener.ners 1973 o0.3 24.1 35.6 1000a
1974 39.4 24.6 36.0 100.0
in refiner supplies to independent marketers has been 1975 40.4(p) 25.2 (P) 34.4 (P) o00.0
Total Refiners 1972 45.7 33.7 20.6 100.0
most pronounced among the large integrated refiners. 1973 45.1 34.6 20.3 t10.0
1974 43.8 34.6 21.6 100.0
These refiners increased their sales to independent marketers 1975 42.0(P) 35.5(P) 22.s5() 100.0

from 52.1 percent of their sales in 1972 to 57.3 percent
Sourse: FEA Recin~er Survey :(1EA P-305-aS- an P-306.-CtL )
in 1975 (see Table IX). Large independent and small (P) = Prellinary eatiate.

refiners, on the other hand, have increased their relative

distribution of branded product but reduced their supplies

of nonbranded product from 38.1 percent of their sales

in 1972 to 34.5 percent in 1975.

Nationally, branded independent home heating and

diesel marketers of both the large integrated and other


)k














66 6





FIGURE I11-12

TABLE X
Refin r Dist ribution of Middle Disti s DM
4Diret to End-Users ar4 to Independent
Marketers



to Sales to Indep- Sales to Indep- Refindr
Quarter End-Users endtnt Marketers endent Marketers Sales*

1972 1 4 0. 8 36 .0 23 1 3o 0 -S 5

Annual 45.7 33.7 20.6 100.0 '~ -,- ..

1973 1 40.5 36.7 22.8 100.0
49.4 33.1 17.5 100.0 Direct sales
; 3a3t t .*o o .
51.6 30.8 17.6 100.0 zooc
42.7 36.0 21.3 100.0 Sals
AnnuAl 45.1 34.6 20.3 100.0s


3 50.2 3n.3 19.5 100.0
4 0937.5 21.7 100.0
Annual 43.8 34.6 21.6 100.0
1975 1 (P) 38.7 38.1 23.2 100.0
2() 44. 7 33.1 22.2 100.0

Annua 1 (0) 42.1 35.5 22 100.0
Non-randed Product Sales

Source: FA Refiner Survey (FEA P-305-S-0, P-306-M-0).
*Percentages may not sum to 100.0 due to rounding.
sumce : r'.e
(P) = Preliminary estimate.
-"***** 'f '* : ;o 'T .g l B.o **: / \ i / / \ a 'r .' 37 'i S a '.
^. ^ S '*AM..,*: d .., a<.- ?* ::- 2 ao~o \V ;*, /J, V__AT/ \ : / W ? *
* *'* l .' '" '"^ I u 1 I-' : '1> g .. i- 1; 1 *- r- 23ti ; :I ', '^ ^ -








68

refiners have fared well since 1972. An increasing

percentage of refiner volume has gone to this

independent sector for the last four years.

Nonbranded product supplies to independent marketers

have not grown at the same rate as branded product. While

large integrated refiners have increased their supplies

of nonbranded product to independents since 1972, large

independent and small refiners generally have decreased

their nonbranded supplies to independents during the same

period.

The decline in direct marketing by refiners has

occurred primarily in No. 2 heating oil and diesel fuel

oil. For these other fuels, which constitute about 20

percent of total middle distillates sales, refiners

increased their direct marketing slightly from 50.8

percent in 1972 to 51.7 percent in 1975. Table XI shows

in detail the annual volume and percentage market share

of each distribution channel for No. 2 distillate fuel

oil and for other middle distillate fuels. Tables XII

and XIII show the market shares of the large integrated

refiners versus the independent and small refiners, and

show that the independent and small refiners increased

their share of other middle distillate fuel sales

at the refiner level at the expense of large integrated

refiners from 1972 to 1975.






TOTAL REFINERS






DM ....... I w !wmb TO IMMD
.... .. I .. .i i _l j i," -f i i v i ;



C1S *l l t P U ...... Ei i" +^ .... :+ M O SALES I S1: 1 -
G-0-
C 4:Y R T JDI3: RS _+ RI + +ESE ID



1972 4,059 24 r... - .- ... 2,. 1 .-AL 4. -8 42 -
4 ".... R 27.4 1 Ii l 116 -0
A S,7* 3 .8

S -973 41 _3 9 2.2 7 1 S -" : 548
I 17 7- A - - - f 10
1975 " ***7 ly 5 : 0 100


S...... --...... .. ..4. 8 7 5 5_ ? ; __ .* 0
N.2973 17. ITT 2,627 11,476 Ion
8 2 24
. . *,, 0 -H - - 6, -.,- - 2F' 1 -00%, 10O0

*1.,- 6.3 57.3
M N e R-. 8- 17. C. 5.4 6l -u t.1_- 1-0 7i 100 :

1972 .. - 7 .... -. -" "- -r -o
Wr974 1 97 lu 'L .f .- - -AL?. - - :;-n .-1 .. - -I O i

D S L A On6 6 .1 ? S 2 1. 1 -5 10 0
197 18* ,M 2 7n) 2 0 A 1r 3, C1 7 1*7__26 S T 4 5.9 93
4 33 5 - -4- - --4 r 100.

Numbers may not sum .to total due to rounding





TABLE XII


LARGE INTEGRATED REFINERS



IfML .9MM
SAT)S DTSTRTliU1:nl (volltro in rrJllons oTO gcl.ons)

0t1! ,.'.DO PRO(IC SAfLES

DIir,'T SJ.PS 'ITO IW!'AD.D TN PpIn'DBT TO DrR'O >TOrAtL .
P"titCT YLAt _._^' ____ l_ KON!,p.JP.D & WO::IP..'D.OD w '* REI-:R
+"- (Ct- S'.2-:R 'll''X';ll PI)i. x 'r SA[JS 1 ;r:D.:i'; NT1 S .. .
C'rT,) fiI).i:R iU,'TT Jor:DKS "O *!.r.,I.ic p. Rr:pj. ,Say
OQi:',Wn:D r'DiLERS .INDI.TDET (tc)+(d)+(o) (a +(b)+(f) BY Y.P...
'i.iris *1** K 1::
(_) (b) (c) (d) () (f
1972 2 990 7- 1- 1 858 747 2.710 5 707 67.1
2. 4 - -- 4 - - T ^a
1973 2 .78 0 1 .- .823-. -.. 8 .-.- f 67.2
.42L 91 4 7 -2 1


,19, 2,, 24 -95 *L..5L .- 5 1...- -.0. A 1.2 2 60l. .7
3. 0. 1 14 A I 417 1ni
1972 14 069 101 1.^ 5 1 4 7.7 .3- .. 39 6 78.2
:o. 2 5 -A ~. -- 4 5.. .
*171 1 769 4 00 13,.9 31 11L 7 .
- --
",I44.0 -1 a ._

__ __ S -7-___ J32 '- 70.2 _?S
(l 'in & 7 2 .. 210 &
Di197) 175 0 -4 1. -7 -- U7 99 34 7 27.
-- -T ... I M 1I


i' 74. q 5 A ._ .... 9- 1.* _
D1974 -T ".. - .- J LU Q. 1. L-9,..2L - J.L 7- -.15 7
46. .0B .3 13 R 100
19.75 1414f. 6 1 9.67? 34 218 74.1
- 1 T.7- -- -
-lumbers may not sum tn total due to round i"-

*numbers may not sum to totl due to rounding





TABLE XIII


OTHER REFINERS


Sm S DISTRIBWuXC (volucm in ,illions of gallons)

BDiRT* r UC1' SAt..ES




Orr D S I T (c)+(d+ () ()+ (b)+(f) DY C!"P. ,
2 Y7- - 10 '
(_)_____(c) (d) (e) ()
S1,069 "03 .694 7 ...
-3 'V. 8T -8 - ~ 6 7 - o. 0" : 32.7


MIDDLE 1.I 7.-5 9.. 7 22- -S Y- TOo 37-.6
DISTILLATES 97 1,321 -36ii 12 1 257 7 .. 8


NO. 2 1973 2866 439 8S8 12 )4 5313 T,4 8,762
9t "u Tu.9


DISTILLATE 3.7 5.0 9. . .. ..- 4 "- 84 6 -- -- --O "z 21.9
-----O SL 2- -i--. 12- C 3,66-1.- ...-. o-. ,
FUEL OIL 1974 2.t03 39) 2 3 .
-. r 71 1n 4. *
(11 atfing- 9 2,1 s5 4*01 77?5 1 .496 3 3 5
*Diese 3T1.- -~ -- T -82 467.- T" T - h Z 22.8
193 .2 r7'. -p "
.13.0 - -.- -T 5 TS' T1 I6 23.8 -
TOTAL 35..9 10.T 4 15 6 s-T. 7' T UZ 23.S
HIDDLE 197 4 112 614 1 1 4 1.844 4 1 4,310 58 --4 -
DISTILLATE ___3 .. 9.2 135.4 3. -3.0 ____ 6 .6 o 25.
- - 5 I- I--- ---A--- I -A
1 9 lu.1 .. 551 ,..a *E.tii 3,997 tota 1.,to i0
_ ._ .. .
.. t.e8 V.9L JLtoL. 3 A L ..d. o o n dA u t o
uumnbers may not sum to total due to rounding









72
73
Part of the relative decline in direct marketing
art of the relati dci in d ct maretnhad been withdrawing from the home heating oil market for
of distillates by refiners can be attributed to the price nu r o because they un e to market
a number of years because they ere unable to market that
regulations instituted in 1971. The August 1971 controls .'"_ -
regulations insi in 1971. Th ugust 1971 cotrls fuel and serve the customers as effectively as could their
affected the relative profitability of different refinery
independent competitors.
products, causing refiners to shift their refinery yield
Overall U.S. market share trends were reflected in
(until imposition of the Mandatory Petroleum Allocation
Sf m each region of the country, but were more pronounced in
Regulations) froam middle distillates to gasoline and
the North Central and Southern regions in 1975. Table XIV
other products. This shift was more pronounced for large
shows direct refiner and independeot marketer market
integrated refiners than for other refiners.
I' shares and Table XV shows actual galonage sales by
Price controls also created significant disincentives shares and Table XV shows actu allonage sales by
region for the period 1972-1975.
for the marketing of distillates. The Phase I price freeze
One region the Northeast relies mor heavily on
limited prices to their August 15, 1971 levels, when
middle distillate imports than do the other regione
gasoline was at its seasonal high price and middle i e le im t
(consuming almost all the middle distillates imported,
distillates at their seasonal low price. Phase II controls,
which account for less than 5 percent of total U.S. middle
which were in effect from 1971 until January 1973, allowed
i distillata. consumption). Consequently, independent
oil companies to allocate cost increases between product distillate consumption). Consequently, independent
il i t t t i t marketers in the Northeast include a number of important
lines provided that their average cost increases were below
terminal operators and jobbers. When competitively priced
2 percent. As a result, the petroleum companies did notd jobbers. Wn cy
domestic tupplies becane less avail ale starting in (*73,
have enough flexibility to adjust the price of distillates domestic supp s b e ls ae s g in
to seasonally higher prices during the 1972-1973 heating Northeastern independent marketers were forced to purchase
to seasonally higher prices during the 1972-1973 heating
Shigher-priced imported product; consequently, their arket
season, a factor which aggravated that winter's heating
share position was somewhat weaker than that of independent
oil shortage.
|.rketers in other regions. However, the middle distillate
The decline in direct refiner marketing since 1972
can also be partially attributed to valid competitive
trends. Refiners, especially the large integrated refiners,

.r* i -^ -r r *;





















,leam IV
4






."TADLE XIV .,


toohogial Middle Distillate Sales
Dis till (epaaateMa Fuel r oi .millions of Giallons)


"~r t S'lales to
C u Region --- IW B ...-tino^ Sa S Cenwsus R"ion Yer lf Bafinxr Marktebrs Marketer Total

Northast 1972 27.7 72.3 100.0
197 7. 100.0 Northeast972 4782 12,495 17,277

75 45.() 14. ) 100.0 15,67
1973 51.7 40.3 100.03
North Central 1972 1 7 46.3, 100.0 ,J7.| 7 1 1|,745
**1974 52.5 47.5 10 North Central 1972 7,200 6,211 13,411
1975 452.5() 54.9(P) 1973 6,814 6,371 13,185
1974 ,622 5,903 12,605
South 1972 51. 48.2 100.0 1975(P) 5,527 6,737 12,264
1974 401..9 100.0 South 1972 6,441 5,998 12,439
*7 43.9(P 56.1() 10.0 *l1974 6,696 6.646 13,542


st. 1972 61.9 38.1 100.0 IM(P) 6. 7,835 13,935

1975(P) 3,534 2,431 5.195

N WW2 1975 figures amre iridnrya T1h diraection
of the chania is b1havod to be correct. The e Mar Se 7h Fuel 0l Suzv
sapgnitudi ot tho change, hazr. p (P309-S-0) and WA Refiner Survey (P308-N-0)
ually high and turthr verification is T aotal Sales to Consuners DMI. Sales of mol
nwssary. 011 ard Karwsinc Inkpnrdand t Marketer Sales -
,*esumted as "Total Sale" ""tliner marketar

P Prelirtiary astinato. Ethyl C orporation
Ldata used W etimte "Total Sales to
Ua. owars" far 1975.









76 77

supply situation stabilized during 1974, with imports 0 Refinery capacit. With domestic refinery
falling below 1973 levels and continuing to fall in 1975. capacity utilization at 85.7 percent in 1975,
Presently, independent marketers in the Northeast compared with the pre-embargo average of
are able to obtain adequate supply at a competitive price. 88.7 percent, capacity to supply future demand
In summary, in view of the present adequate supply, for all refined products, including middle
independent and small refiners appear able to compete distillates, is more than ample.
effectively with the large integrated refiners and, thus, Stocks. By 1975 stocks of middle distillates
maintain their market share of middle distillate sales had reached a 65-day supply, up from 1972-1973
at the refinery level. Secondly, nonrefiner marketers level of a 53-day supply and are sufficient
appear able to obtain adequate supplies at competitive relative to demand.
prices in all regions. The market position of independent Supply vs. Demand. The national average allocaton
refiners and marketers has continued throughout the period fraction has approximated 1.0 since mid-1974,
of controls, and allocation and price controls appear not indicating that supply has been, ad continues
to be needed to preserve their market shares. to be adequate to meet demand.
SUMMARY OF CONCLUSIONS
This section summarizes the findings on the adequacy Prices
of the supply of middle distillates to meet demand and the The major purpose of FEA price controls was to deter
effects of controls on prices and competition. any potential price increases that capitalized on shortage
SugPly/Demand conditions. Price controls were thus needed during,
The following conclusions can be drawn regarding and immediately following, the embargo toassure equitable
middle distillates supply before and during allocation pricing of products. Despite controls, however, middle
and price controls: distillate prices rose dramatically as crude oil cost

increases were passed through to the consumer as
permitted by the EPAA. Furthermore, margins for the
refiner/distributor segment rose under controls for all
petroleum products, including middle distillates. However,










79
gr n ae .Although part of this increase in the independents'
profitability of the refiner/distributor segment and
Sma rket share was the result of valid competitive
increases in gros margins do not necessarily reflect
strengths (e.g.., local service orientation and
Sresponsiveness of independent marketers), some was

.also the resul to profit distortions caused by Phase I
exemption of middle distillates from the Mandatory Alloca- lo t resu o rot disortion case by Phase I
ad II price controls that tended to shi:t, the
tion and Price Regulations pr t ns. d aretin emphas eftos ro
The effect of current margins on future middle distillates refining and marketing emphasis of refiners from
m:'idiet" distillates to other fuels.
prices, after exemption, is aalyzed in Chpter IV.e distillates to other fuels.
In view of large numbers of independent and
Competition small refiners and independent marketers now competing
The competitive viabilfty of independent refiners successfully in the market, and the gradual drop in
and independent marketers f middle distillate has been direct marketing by large integrated refiners, it is
maintained throughout the period of controls. FEA's view that competition in the refining and marketing
At the refiner level, the small and independent of middle distillates in all regions of the U.S. is now
refiners slightly increased their share of middle adequate to protect consumers and will continue to be
distillate sales by refiners from 1972 through 1975, effective under exemption. The projected increase in
indicating that these refiners are able to compete U.S. refinery capacity over the next several years should
effectively when they have equal access to competitively enable marketers in any region to obtain adequate domestic
priced crude oil supplies. supplies of middle distillates.
Independent branded and nonbranded marketers
increased their market share of middle distillates sales
from 54 percent in 1972 to approximately 58 percent in
1975. There was a corresponding decline in direct sales
by refiners, especially large integrated refiners.
^ ^ .. '. ; . :;'; : ^ -* . .. ..* '" ..








81
CHAPTER 1V
--- 1 o Pricing factors -- The price movement pressures
IMPACT OF DECONTROL ON SUPPLY/DEMAND
I PRICE, AND MARKET STRUCTUREAN arising from the cost and margins associated with

the major industry segments, foreign market prices,
This chapter considers future demand, supply, price and the competitive structure of the industry
and the competitive structure of the industry
and market structure conditions, and assesses the impact
have been assessed.
of exempting middle distillates from mandatory allocation
o Market structure and comnetition -- Trends that
and price regulations. The findings required by the EPAA
may affect the future competition of the major
raises the following questions:
s te f industry segments have been examined.
o Are middle distillates in adequate supply?
o General Impacts -- Positive benefits to be derived
o Will exemption in shortges of any other
from decontrol have been considered.
refined product? Many trends in the industry will continue under either
o will exemption result in inequtable prices for
controlled or uncontrolled conditions. For example, rising
any class of user of middle distillates? '
y clas of ur middle dist tes? crude oil prices and increased refiner cost pass-throughs
o Will competition and market forces be adequate to
Swill tend to increase middle distillates prices with or t
to protect consumers following an exemption of
without controls. Accordingly, the discussion in this chapter
middle distillates from regulation? *
middle distillates from regulation? focuses on the effects resulting solely from exemption of
o Is the exemption of middle distillate consistent
middle distillates.
with the attainment of the objectives of the
DEMAND FORECAST
EPAA?
Demand for middle distillates was forecast using
To answer these questions, the following analytical
FEA's short-term petroleum demand model.* The forecast
approach has been taken:
was designed to indicate the probable high end of the
o Demand forecast -- A demand forecast for middle
range of demand, and thereby insure that subsequent
distillates and all refined products was developed
analysis of available supply adequacy would be
for the period 1976-1978.
conservative.
o Supply forecast -- The availability of refining

capacity and crude supply on both a domestic
and world wide basis to meet forecasted demand For ag description of the methodology used
for the short-term forecasting model, see APPENDIX II.
has been evaluated.







83
The key an ue ng te high dmand forect Total demand for all products is projected to increase
was that prices of crude oil and middle distillates would approximately 4 percent during 176, primarily as a result

of the general upswing in U.S. economic activity. Demand
(see Tables XXV and XXVI). P growth rate of 5.9 percent increases by 5.1 percent in 1977, again due priril to a
for 1977, and 2 percent or 197 were also assumed further increase in economic activity. Demand growth in
The high demand forecast is summarized in Table XVI belo 1978 s projected at only 2.5 percent over 1977, due t a

BLE I projected slowdown in economic activity. The cumulative

Dea d iProjected Domestic Petroleum Prod u;empton* rise in demand from 1975 through 1978 is projected to be
(Thousands of Barrels Per Day) slightly more than 2 million barrels per day.
1975 1976 1977 1978 TABL XVII

Motor Gasoline 6.623 6,005 7.109 7.375 PRECENTAGE INCREASE IN ANTICIPATED PRODUCT
Middle Distillates** 2,918 3,123 3,342 3,386 DEMAND OVER PRIOR YEAR DEMAND

Residual Fuels*** 2,540 2,534 2,538 2,541 1976 1977 1978
> Middle Distillates 7.04 7.0t 1.3%
Other Products 4,329 4,634 4,971 5,104 iduadle Distillates 70ue 0.20% 1.3
Jet Fuel 5.5% 7.0% 5.5%
TotalDomestic Dema_16,410 17,096 17,960_18406 Petrochemical Feedstocks 15.8% 8.5% 3.3%
Exports & Cu Motor Gasoline** 2.8 4.5% 3.7%
Oil Losses 216 216 216 216 Propane** 11.3% 5.0% 1.5%
Other Products 4.9% 8.2% 1.7%
Total Demand 16,626 17,312 18,176 18,622 Domestic Dman 4.9% 8.1% 2.5%
*Source: FEA Demand Model (3/12/76). Forecasts are Source: FEA Demand Model (3-12-76)
derived from FEA's short-term demand model
as revised on 3/12/76. Model does not take xcludes export demand
into account reductions in demand which may ** Preparation of the middle distillates report began in
occur as a result of conservation measures. February, 1976. The demand model included the most
To the extent that future conservation measures current information avalable to the FEA, but no 1976
reduce demand, these estimates would be data were then available.
overstated It is now obvious that 1976 demand increases in
motor gasoline (now at about 6 percent) will be much
** Kerosene is included in other products higher than forecast. This appears to result from an
improvement in overall economic conditions, generally
***Theane Residul fuel O1 demand estimates are revised mild and pleasent spring weather, and bicentennial --
downward from those rceorted in the FINDINGS AND VIEWS related tourism. We should note that this unusally
CONCERNING THE tiEXEBPTIO OF RESIDUAL FUEL OIL FRO: THE high demand was not foreseen earlier by the petroleum
MANDATORY FETROLEUM ALLOCATION AND PRICE REGULATIONS industry -- which forecast motor gasoline demand at a
March 29, 1976. FEA's short term demand model was lower level than did PEA.
revised Morch 12, 1976, to make imorovements in the Conversely, propane demand is considerably below
methodology and to take into account the latest forecast levels (currently at about 4 percent over
available date. 1975).









84
85
Demand for middle distillates is projected to increase
o Demand for 1iquefied petroleum gases is expected
at a faster rate than demand for petroleum products in
to rise during 1976 and 1977 at a faster rate than
general during 1976 and 1977. This projection reflects
can be attributed to increased economic activity,
increased industrial usage of middle distillates resulting a to
primarily due to shortages of natural gas and '
from a rise in the general level of economic activity and
growth of the petrochemical industry.
increased residential usage resulting from general economic
o Demand for petrochemical feedstocks is also expected
growth and rising income. By 1977, middle distillates
to increase at a faster rate than is the general
demand is expected to exceed 3.3 million barrels per day,
level of economic activity, reflecting expanding
which is roughly one-half million barrels per day (or 14.6
conditions within the petrochemical industry.
percent) more than its average level during 1975. A very
o Demand for jet fuel is expected to follow' the
small decline is projected from 1977 to 1978 due to an
rise in economic activity.
anticipated slowdown in the economy.
The above middle distillates demand projections reflect
Demand for motor gasoline is expected to closely follow
the most conservative price assumptions for analyzing the
the anticipated increases in the general level of economic i su
potential adequacy of middle distillates supply.
activity: from 1975 through 1976, slightly less than 3 percent;
from 1976 to 1977, between 4 and 5 percent; and from 1977 to SUPPLY FORECAST
1978, slightly less than 4 percent. The total expected rise To assess the adequacy of petroleum product supplies
in demand from 1975 to 1978 is projected at approximately relative to forecast demand, tte key supply determinants
750,000 barrels per day. The annual growth rate of 3.5 per- of refinery capacity and crude oil supply were analysed.
cent during this three-year period is forecast despite a The following overall supply forecast was developed (see
slight decline in demand over the 1974-1975 period. However, Table XVIII).
there may be a larger than normal seasonal rise in demand
during the 1976 high demand period resulting from bicentennial
activity. [This is not reflected in PEA's demand projections.]
The projected demand outlook for the remaining fuels
exhibits considerable contrast:
o Demand for residual fuel oil is not expected to change
significantly from its 1975 level.