Just-released documents from a long-running federal court case in California show that major oil companies, beginning in the early 1960s, secretly arranged a complex barter system to swap crude oil among themselves, which held down prices they paid for oil used in their refineries.
The documents are exhibits and other parts of a nine-year-old case in which the city of Long Beach, Calif., charges that the companies conspired to fix prices. The judge in the case, U.S. District Judge William P. Gray, has said there is "substantial indication" that the allegations are true, although he was "not certain that it has been established as a matter of law."
The system at one time included regular exchanges of pricing information between personnel at competing oil companies, as well as inter-company swaps of oil that apparently allowed the companies to obtain crude oil for their refineries at artificially low prices, according to the documents. Long Beach charges the system has never been completely dismantled.
One of the defendants in the case, Atlantic Richfield Co., settled the case with Long Beach last week for $22.5 million. Lawyers for the California State Lands Commission, which supports Long Beach in the case, say that at that rate, the cost of a settlement by all the defendants in the case would be $270 million.
The other companies have continued to defend their innocence in the suit. Yesterday, Mobil Corp., one of the defendants, said in a statement, "Based upon our appraisal, we cannot understand the Arco settlement, and Mobil plans to go to trial on the merits, at which time all the information concerning this situation will be presented to the court. We are confident that, as a result, no wrongdoing will be found."
Many of the records in the case have been sealed since its inception, because of the companies' claims that they contain proprietary information. But Gray released the documents late last week, following Arco's settlement, as the result of a case brought by the Wall Street Journal.
The documents contain memos, telephone messages and depositions of key figures in the case that set forth what appears to be an organized attempt to control prices of crude oil in California, one of the nation's major petroleum markets, from 1961 until at least the late 1970s.
On November 24, 1961, according to one of the documents, a Standard Oil Co. of California official wrote in an internal memorandum, "Currently, heavier crudes in California are priced at a level less than their true refining values. If it became generally recognized throughout the industry that these crudes were underpriced, this could create considerable unfavorable reaction which might ultimately lead to legal action against segments of the oil industry."
Central to the case are records of meetings in 1961 and 1962 between officials of Mobil, Arco, Texaco Inc., Standard of California, Union Oil Co., Shell Oil Co. and Getty Oil Co. (which was not named as a defendant). At those five meetings, according to the documents, the companies put together a complicated barter system that allowed them to trade oil without ever formally putting a price on it. Exxon Corp. later joined the group, according to the documents.
Under the barter arrangement, oil was priced at generally set levels as it came out of wells on state and federally owned land on the California coast. The California "wellhead" oil prices "posted" by the various major oil company refinery buyers -- which controlled 80 percent of the state's refinery capacity -- were somewhat lower than the market value for similar oil elsewhere in the world.
The oil was shipped from well to refinery frequently over other companies' pipelines.
Under a system of cash purchases, Long Beach charges, each successive seller of the oil as it made its way to the refinery would have set a new price, which would have been known to both Long Beach and the oil companies, establishing a fair, open market value for the oil.
By using the barter system, Long Beach says, the companies avoided having to raise the posted price, so that the oil reached the refinery at the lower price. Once refined, the companies would then sell the resulting products at the normal market price, giving them additional profit from the cheaper oil. According to the documents, the barter method was used only in California.
Any of the companies could have broken the system by posting a higher price at which they would buy the oil, but none did.
"Businessmen evaluating crude oil transactions, no less than homeowners or consumers, are always looking for a good deal," Mobil said. "There is nothing illegal, or even suspicious, about that," attorneys for Mobil told the court.