Canadian government investigators have accused the country's major oil companies of overcharging their customers $12.1 billion in the 15 years 1958 through 1973.
Their seven-volume report has been turned over to the Restrictive Trade Practices Commission, Canada's version of the U.S. Federal Trade Commission. The RTPC may in turn recommend new antitrust laws to parliament.
The greenbooks, as the seven volumes are called, were published in March and little noted elsewhere but much debated here. Among other things, they have fueled the controversial recent efforts by Prime Minister Pierre Trudeau to reduce foreign control of the Canadian oil industry; the major Canadian companies now are mostly subsidiaries of U.S. and other international oil companies.
The report charges that, to keep prices and profits high, the oil companies did such things as:
Artificially inflate their crude oil costs. One company, Imperial Oil Limited (IOL), largely owned by Exxon, is said to have gone so far as to set up a dummy trading company in Bermuda to make its crude costs look higher than they were.
Act in various ways to limit exploration and supply, again to hold up prices. In one such effort Imperial in 1969 backed imposition of quotas on imports into Canada of then low-cost crude from the Middle East. "Basically," said an internal Imperial memo of this effort, "it is a scheme under the guise of 'protecting the citizens' interests' to increase the production and hence profits of Canadian producers."
Threaten to cut off independent retailers who were underselling them. One middleman wrote in a memo of this threat from a major: "I received a phone call from Husky Oil stating that unless I was successful in getting Dominion Motors the offending retailer to raise their gasoline price that there was a good chance that our gasoline supply would be discontinued."
The oil companies have denied the charges in the report. Imperial, the largest, sent a brochure titled "Not Guilty" to its credit-card customers, took out newspaper ads and held a news conference. The company "has broken no laws" and engaged in no "unethical practices," said President J. A. Armstrong. He said "absolutely no overcharging occurred" and that there was "no evidence of a lack of competition in the marketplace." Other companies reacted similarly.
Armstrong objected especially to a calculation in the report that, if the $12.1 billion had been regularly invested, it would amount by now to $89.2 billion, or $15,000 per family in Canada. "Utterly irresponsible," he called this.
The greenbooks are based on 300,000 company documents, many of them seized by the Canadian investigators in carefully orchestrated raids on company offices in 1973 and 1974. Such seizures by government investigators are permitted by Canadian antitrust law.
The books were prepared under the Combines Investigation Act by the Canadian government's No. 1 antitrust investigator, Robert J. Bertrand, and his staff. On July 27, the RTPC held an organizational meeting to prepare for up to two years of hearings on Bertrand's work and, ultimately, to make recommendations.
One issue in the hearings will be the relevance of the report to the period since 1973, when the Organization of Petroleum Exporting Countries asserted itself to transform the world oil market into its present form. Governments of oil-exporting countries are now more powerful than they were before, and the international oil companies less powerful.
Bertrand is one who believes that the report is still relevant. He says, for example, that since August, 1978, most independent retailers "have faithfully followed the price structure established by the majors," so that price competition is weaker than at any point since 1958.
His report, seeing "no indication that the majors, left to themselves, will not abuse their dominant position," made 12 recommendations. They included new laws that would bar "artificially high transfer prices" when oil moves between units of the same company and force the majors to divest their holdings in trunk pipelines. (The Canadian section of the line that carries crude from Portland, Maine, to Montreal earned an average of 75 percent more than the U.S. section after the latter's profits were scrutinized by the Justice Department, the report said. The owners include Imperial, 32 percent, and Gulf, Texaco and Shell, 16 percent each.)
The greenbooks' call for greater regulation of the oil companies comes at an ironic time in one sense; the Reagan administration is now calling for less regulation and more reliance on the asserted free market in oil in the United States. Oil industry critics have often charged in the past, though rarely with as much evidence, that the companies have engaged in the United States in practices similar to those now alleged in Canada.
The greenbooks are particularly rich in excerpts of documents from Imperial Oil, which is 69 percent owned by Exxon and leads every sector of the industry in Canada. Ranking after it are subsidiaries of Gulf, Shell (Dutch/British), Texaco, Amoco and Mobil.
The report is extraordinary partly because of the behind-the-scenes glimpses it gives of oil executives describing their goals and methods in altogether candid exchanges they never expected to be made public. Among these:
An unelaborated January, 1968, memo in which Imperial's senior counsel "noted that in the United States, Exxon led the way in coordinating and even in writing government policy and that, in Canada, 'Imperial is in somewhat the same position in its relations with Ottawa.' "
IOL's plans, in the late 1960s, to enlist the government, if necessary, to limit crude production in large new fields in Canada's Arctic and East Coast. "Imperial recognized that, should the new finds be owned solely by the majors, then coordination and restraint of production could probably be accomplished within the industry," the report says. Otherwise, IOL foresaw "the necessity of legitimating the 'cartel' by acquiring government sanction." The word "cartel" came from a November, 1968, IOL memo saying: "Certainly governments will have to be involved if any such arrangements are required, to avoid the appearance of an operating combine or cartel."
The "unique" relationship with the National Energy Board shown by a 1961 memo in which IOL's president said, "We have been confidentially requested to help the NEB devise a discriminatory licensing system."
The majors' admissions of inefficient gasoline retailing in the late 1960s and early 1970s, when the independents they supplied undersold them by up to 16.9 cents per Canadian (five-quart) gallon. A 1972 Gulf memo, inadvertently reinforcing an obscure study later claiming that U.S. independents were underselling the majors by 10 to 12 cents a gallon, said:
"The key problem that all major companies have is the large number of low-volume, low-potential, nonviable stations resulting from the expansion in the 50s and 60s. These are the millstones around the neck of the industry and have only existed as long as there were fat margins available. They are not able to compete if margins are narrowed and are not capable of developing the increased volume required."
The restoration of "extremely high" profit levels to the majors via consistent "predatory behavior," such as supply cutoffs and strategic placement of "fighting brand" economy stations to discipline "irresponsible" gasoline marketers that undersold them by more than two cents a gallon.
In 1968, Dominion Motors cut its price in Winnipeg by four cents. An executive of the wholesaler, Veedol, wrote: "I received a phone call from Husky Oil Veedol's supplier stating that unless I was successful in getting Dominion Motors to raise their gasoline price that there was a good chance that our wholesale gasoline supply would be discontinued."
In turn, the report says, Imperial, which had decided in 1962 that a cutback in the number and size of discounts to the private brands was "the only effective solution," had "pressured Shell to have Husky stop supplying a discounter -- Dominion Motors."
"While I did not threaten them Dominion with a cutoff," the Veedol official wrote, "I did point out what I felt might occur if their price stayed where it was." His memo ends with him awaiting the results of a Dominion counter-threat to complain to Ottawa.
Obviously fearing ruin, the owner of the independent Gasex stations wrote plaintively to Gulf President Jerry McAfee to repudiate as "false" a report that Gasex had started a 1971 price war in Montreal and "to inform you that our company's policy is not to 'cut prices' . . . . "
The pervasive exchange of sensitive business information, including "direct communications regarding price changes," through joint ventures, particularly trunk pipelines, to weld nominally rival firms "into a joint decision-making entity." The report's principal example was Interprovincial Pipe Line (IPL), controlled by Imperial and used by it to exercise "domination" even over other majors.
Imperial took "the lead in establishing a pricing formula for crude and in achieving a consensus with other firms on the price structure," the report says. It had an edge because IPL provided it and no other shipper "with its daily stock report, its daily receipt report, its four-month pumping forecast, and its monthly receipt/delivery statement."
At another point, the report told of an episode in 1969 when Sun Oil met with Texaco to discuss the prices for crude "that would be acceptable to the taxation authorities. Similar discussions were held at about the same time between Sun and Shell. When Shell contacted Imperial . . . to discuss crude prices, Shell indicated that it had already been in touch with Gulf."
The majors' use of devices such as offshore trading and shipping companies to lower costs. For example, IOL's Bermuda-based Albury company "bought" crude, resold it to Imperial for a dime a barrel more than it had paid, and remitted the difference to Imperial in a tax-free transaction. Albury provided IOL with "an after-tax advantage of 21 cents per barrel," according to the report.
The inflation of "transfer prices" by companies integrated from the well to the gas pump, particularly to force their refining subsidiaries to pay more than world market or arm's-length prices for crude. What-ever the crude transfer prices charged to subsidiaries by Gulf, Texaco and others, the report says, they were prices "harmonized" with those of the leader, Imperial.
Starting in 1959, for example, "Gulf's transfer price for Venezuelan crude was set equal to Exxon's posting alone. . . . while its price for Middle Eastern crude was tied to the average postings of Mobil, Texaco, Shell, and British Petroleum. Texaco's parent adopted a straightforward approach by tying its subsidiary's transfer price for both Venezuelan and Middle Eastern crudes to the prices posted by Creole, Exxon's major Venezeulan subsidiary."
As of 1964, IOL said, it "has not, for quite some time, been able to buy Venezuelan crude from Creole at competitive prices" although, the report says, Middle East crude was available in the open market at 35 cents a barrel under Creole's price. In 1968, Sun Oil's subsidiary complained that it was "not free" to buy crude in the open market; the "sizable penalty" for being compelled to buy from its parent was, it said, about 41 cents a barrel. Between 1958 and 1962, when selected Arabian crudes imported into the United States fell 58 cents a barrel, Texaco dropped the price to its Canadian subsidiary by only 42 cents.