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TIE PETROLEUM INDUSTRY
on the Pacific Coast and Recent World Oil Developments

1
I

Supplement to

MONTHLY REVIEW
MARCH, 1 9 5 4

F E D E R A L




R E S E R V E

B A N K

O F

S A N

F R A N C I S C O




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CO N TEN TS

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Page

RECENT WORLD PETROLEUM DEVELOPMENTS

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PACIFIC COAST OIL INDUSTRY.................................................. 4

INVENTORY PROBLEMS, PAST AND PRESENT

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Prepared by W ilfre d Eldred, Economist,
under the direction and review of officers
of the Research Department

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9

l h e world petroleum situation has undergone remarkable changes in
the past decade. Production and consumption of petroleum have more than
doubled. The Middle East has risen to prominence among sources of the world’s
oil, and its shipments of oil to Europe have displaced a large volume of Western
Hemisphere exports. The United States, formerly the world’s largest petroleum
exporter, is now one of the largest petroleum importers.
The Pacific Coast oil industry has had an important share in these changes.
In the two decades before the second World War, production of crude oil on
the Coast was far in excess of local demand, and large quantities of both crude
oil and gasoline were sold to the rest of the world— often, in fact, practically
dumped on the world’s markets for whatever price they would bring. B y contrast,
since the second World War, the demand for petroleum products in the domestic
markets normally served by Pacific Coast refiners has been overtaking the locally
produced petroleum supply so rapidly that in 1953 the Coast was a net importer
of oil. Exports of oil, however, have continued large, so that at the present time
the Pacific Coast simultaneously imports and exports oil. One of the reasons
for this paradoxical situation is that the Coast produces a large proportion of
low gravity crude oil but has refining facilities much better adapted to high
gravity crudes. With existing facilities, which are constantly being improved, it
is difficult for the industry to meet the market demand for all products without
supplementing local supplies of crude with some high gravity crudes, or their
equivalent, obtained elsewhere.
The concern over the recent top-heavy inventory situation in the oil industry
has made the high level of oil imports into the Pacific Coast a subject of much
debate. There are also many other elements in the current inventory problem.
The end of active hostilities in Korea, the competitive inroads of natural gas on
the oil industry, the accumulation of cracking stocks in anticipation of additions
to the refining capacity, and the mildness of the 1953-54 winter have all played
some part in the growth of inventories to their present high level. But in spite
of the temporary oversupply, the basic problem of the Pacific Coast petroleum
industry in its present stage remains one of a shortage of the right kind of
locally produced crude oil.
Since it is too soon to appraise them, this study takes no account of the pos­
sible effects upon Pacific Coast oil production that may occur in the future as
a result of the transfer of title in M ay 1953 of certain offshore tidelands from
the Federal Government to the respective coastal states.







RECENT WORLD PETROLEUM DEVELOPMENTS
h e

Persian Gulf and of Saudi Arabia where American inter­
ests had been systematically developing new oil fields of
great potential wealth, had increased to over 100 million
barrels a year, representing about 5 percent of total world
production.
Following completion of the Trans-Arabian Pipe Line
from Saudi Arabia to the port of Sidon on the coast of
Lebanon late in 1950, Saudi Arabian oil production has
expanded at a sensational pace and that country is now
ranked among the first four or five crude oil producers
of the world. Extending some 1,060 miles across the des­
erts of four nations, “ Tapline” rates as a major engineer­
ing and construction project. Its original pumping capac­
ity of 300,000 barrels per day was subsequently increased
to permit the delivery of crude at the Mediterranean at a
daily rate of about 500,000 barrels, making Tapline by far
the world’s largest oil transport system.1
An equally spectacular development has occurred in
the Arab sheikdom of Kuwait on the Persian Gulf, where
both British and American interests have been active.
Shipments of crude oil from Kuwait began in 1946. Fol­
lowing the nationalization of the Anglo-Iranian Oil Com­
pany’s properties in Iran in 1951, Kuwait took second
place among the Middle Eastern producers and is cur­
rently disputing the leadership with Saudi Arabia. The
combined output of these two countries, together with
that of Iraq, exceeded 715 million barrels in 1952 or more
than double the production of California in that year. In­
creased production from these areas in fact more than
offset the loss of the great Iranian oil fields. The aggre­
gate production of this entire group of Middle Eastern
countries approximated 780 million barrels in 1952 or
about 2,130,000 b/d. This included a small quota from
Egypt and a somewhat larger and rapidly growing vol­
ume from Qatar, a sheikdom adjoining Bahrein.
Further large expansion of production took place in
Iraq in 1953, made possible by the first full year of opera­
tion of a new 32-inch pipe line from the Kirkuk field to
the port of Banias in Syria. This line, in effect, replaced
an older line terminating at Haifa, Israel, which had been
shut down since May 1948. Iraq’s production jumped
nearly 50 percent from 141 million barrels in 1952 to 209
million in 1953. Total Middle Eastern production in 1953
reached 894 million barrels, a rate of almost 2,450,000
b/d. This was approximately 19 percent of the estimated
total world output of crude oil in that year. Already by
1950 Middle Eastern production exceeded the total out­
put of all in the South American and Caribbean countries;
last year the margin was almost 20 percent.

past decade has witnessed a remarkable expansion

and development of the world’s petroleum industry.
T
This expansion has occurred so smoothly and impercep­
tibly that the community as a whole has probably taken
its results for granted without realizing that something
like a revolution in basic energy sources has been taking
place. Total world production and consumption of petro­
leum have more than doubled wTithin the past ten years
while coal has gained a scant 10 percent. Increasingly the
nations of the modern world are turning to petroleum and
its associated natural gas as primary sources of heat and
power. The search for new oil fields goes on apace in many
parts of the globe and important shifts have occurred in
the flow of oil in international trade. All signs point to
the permanence of these trends, as enormous additional
investments continue to be made in enlarging the world’s
oil producing and marketing facilities.
The reasons for the rapidly accelerating demand for
petroleum and natural gas are almost as numerous as the
complex activities of modern industrial society itself. The
economy and convenience in use of oil and gas for heating
purposes and as boiler fuel have played a large part in
the displacement of coal. The internal combustion engine,
whether using gasoline or diesel fuel, has taken over a
considerable fraction of the world’s marine transport and
an increasing part of its railway traffic. The almost uni­
versal use in this country of the automobile and its rapidly
increasing use in other countries, especially for highway
transport of goods, represents of course a completely new
market for energy sources in an application where petro­
leum products are the only practicable form of power.
With the substantially complete economic rehabilitation
of the war-damaged countries of Western Europe and
with increased industrialization and rising standards of
living in many of the “ outlying” parts of the world, it is
highly probable that total global demand for petroleum
and petroleum products will continue to grow at a rate
not far short of that experienced during the past decade.
Phenomenal rise o f petroleum production
in the M id d le East

Outstanding among the petroleum developments of the
past two decades has been the emergence of the Middle
Eastern countries adjoining the Persian Gulf area both as
an important source of current new supplies and, even
more significantly, as the world’s largest concentration of
proved petroleum resources and as its potentially greatest
oil producer.
Crude oil has been produced in Iran since the year
1913 when the Anglo-Iranian Oil Company began actual
shipment following several years of exploratory work.
Iraq came into the picture in the early 1930’s when pipe
lines were completed from the great Kirkuk field to the
Mediterranean ports of Haifa in Palestine and Tripoli in
Lebanon. By 1935-39 the combined output of these two
countries, supplemented by that of Bahrein Island in the




With the probable early rehabilitation of the great
South-Iranian oil field and the resumption of operations
by the world’s largest refinery at Abadan, supplemented
by a new 120,000 barrel per day refinery currently under
construction at Aden, there can be little doubt that this
1 The Oil and Gas Journal, January 25, 1954, p. 145.

3

whole Middle Eastern area is destined to play an increas­
ingly important role in world oil supplies. This conclusion
is reinforced by the enormous size of Middle Eastern re­
serves which have been proved by the exploratory work
of the past few years. These reserves are currently esti­
mated at a figure in excess of 81 billion barrels, or approx­
imately 58 percent of the world’s total proved reserves.1
Reserves of this magnitude could assure production at
almost any rate desired, political conditions permitting,
depending on the size of the market and the transport
facilities available.

C hart 1
W O RLD PRODUCTION OF C R U D E PETROLEUM BY PRINCIPAL
AR EAS—FIVE Y E A R A N N U A L A V E R A G E S—1935-39,
1943-47, A N D 1948-52
Annual average in
billions of barrels

Shifts in the international flow o f oil

While large refinery capacity has been installed at the
seaports of the Persian Gulf area, chiefly to supply fin­
ished products to the markets of Asia and Africa, the
great bulk of Middle Eastern oil output seeks its market
in crude form or as fuel oil in Western Europe and
the Mediterranean countries. Very large additions have
been made in recent years to refining facilities in West­
ern Europe and the Far East, much of it represent­
ing the investment of American capital. Middle Eastern
shipments to European markets have replaced a consid­
erable volume of exports from the Western Hemisphere,
chiefly refined products from the United States and crude
or fuel oil from the Caribbean area. Substantial quantities

1 9 3 5 -1 9 3 9

1 9 4 3-1947

1 9 4 8 -1 9 5 2

Source : United States Department of the Interior, Bureau of Mines,
World Petroleum Statistics.

of Middle Eastern crude have also reached American re­
fineries on both the Atlantic and Pacific Coasts. The loss
of European markets by the Venezuela producers has
tended to divert a substantial part of their shipments to
the United States, chiefly in the form of heavy fuel oil,
a situation which has had serious repercussions upon
American producers both of oil and bituminous coal.

1 The Oil and Gas Journal, Loc. cit.

PACIFIC COAST OIL INDUSTRY
h a t

are the implications of these developments in

Recent changes in raw m aterial sources

W the world petroleum situation for the Pacific Coast
oil industry? An earlier article in the Monthly Review1

and markets o f Pacific Coast refiners

These developments, together with the rapid increase
in the importation of natural gas into California from west
Texas and New Mexico and the proposed large-scale sup­
ply of natural gas to the Pacific Northwest, either from
Texas or from Canada, indicate a significant change in
the fuel and energy economy of the Twelfth District. The
construction during the last few years of long distance
pipe lines to bring crude oil and refined products into the
Intermountain and Pacific Northwest areas from such
diverse sources as Colorado, Utah, Wyoming, Montana,
and Alberta indicates that the use of both “ outside” raw
materials and finished petroleum products is likely to be­
come a permanent part of the Pacific Coast oil economy.
The demand for petroleum products caused by the ex­
traordinary postwar population growth and the rapid in­
dustrialization of many parts of the region has begun to
outrun the ability of the local industry to produce enough
raw material to supply its traditional markets and leave
an adequate reserve to take care of emergency require­
ments. Already some of the more distant markets which
Pacific Coast refiners formerly dominated have been re­
linquished to producers more favorably located with re­
spect to raw materials and transportation costs.
In spite of the “ importation” of both crude oil and
refined products into the Pacific Coast marketing area,

discussed some aspects of this question and pointed up
the growing integration in recent years of the oil industry
in this area with national and international oil develop­
ments. It was indicated that this closer connection has
not involved a larger participation by Pacific Coast pro­
ducers of crude oil and petroleum products in outside
markets, but rather the converse. The vigorous growth
of domestic demand has been catching up with local sup­
plies of raw material. The unwieldy surpluses of crude
which in the past plagued the Pacific Coast industry be­
cause of excessive and wasteful rates of production have
long since disappeared; during the past three years, in
fact, particularly in 1953, California refiners have im­
ported substantial quantities of crude from foreign
sources. Some of the markets formerly served by Pacific
Coast refineries, chiefly the Intermountain states, are in­
creasingly looking to other regions to supply their re­
quirements for finished products, while the impending
new supplies of Alberta crude made possible by the com­
pletion late in 1953 of the Trans Mountain Pipe Line
will effect far-reaching changes in the production and
marketing of petroleum products in the Pacific North­
west.
1Monthly Review, May 1953, “ Pacific Coast Oil Industry in Transition,”
pp. 61-66. See also the supplement to the Monthly Review, November 1950,
“ Western Power and Fuel Outlook.”




4

of a considerable number of California oil fields runs to
a relatively high proportion of so-called “ low gravity”
crudes, which are heavier and more viscous than the high
gravity or “ light” crudes typical of Mid-Continent or
Texas production. These low gravity or heavy crudes are
intrinsically less desirable than the light crudes because
of their relatively low yields of gasoline, diesel oil, and
other “ light” distillates—which are the higher priced
products. Until recent years, in fact, some of the lower
gravity California crudes were regularly classified by the
Bureau of Mines as “ non-gasoline bearing.” This did not
mean that no gasoline or other light distillates could be
obtained from such crudes, but that in the stage of refin­
ery technology then current it often paid better to use
them as raw material for lubricants and such “ low end”
products as fuel oil, road oil, or asphalt rather than for
straight-run distillation.
It is argued that there is not enough high gravity crude
produced in the Pacific Coast area, i.e., California, to pro­
vide sufficient raw material for the refineries to produce
all the gasoline and other “ light” distillates that the mar­
ket requires. Either local supplies of high gravity crudes
must be supplemented by bringing in additional supplies
from outside or resort must be had to the lower gravity
crudes which represent between 25 and 30 percent of the
total annual production of petroleum in California. These
low gravity crudes typically yield little gasoline but much
heavy “ residual” fuel oil.
With the type of equipment traditionally used by most
California refineries, the use of heavy crude or low grav­
ity oil as charging stock results in relatively large outputs
of so-called “middle distillates” and of “ residual,” a really
heavy fuel oil. To handle the low gravity crudes so as to
obtain more of the lighter products requires the supple­
mentary treatment of these refinery residues by methods
that are technologically feasible but are relatively costly
in capital requirements. The small or moderate size oper­
ator in particular wxmld probably find both capital costs
and operating costs of such equipment prohibitive. Some
of the larger Pacific Coast refining and marketing com­
panies find it necessary to go far afield in order to obtain
enough high gravity crude to take care of their customers’
needs. The only alternative is to install expensive refinery
equipment in order to obtain salable products in the right
proportion from the kinds of crude available in the local
area. Both procedures are expensive; hence the dilemma.
It may be true that, taken as a whole, Pacific Coast re­
fineries have been relatively slow to adopt generally
the more advanced refining techniques employed in other
parts of the country to increase the total yield of gaso­
line and other light distillates obtainable from a given
volume of crude oil. It is true, of course, that they have a
more refractory and difficult raw material to work with.
It is also true that lacking coal of good quality, the Pacific
Coast area has been essentially an oil-fuel economy and
adequate supplies of fuel oil have been an absolute neces­
sity in the economic development of the region. Hence the
average California yields over the past ten or twelve years

California still produces more petroleum than is con­
sumed in the domestic markets regarded by the local re­
finers as peculiarly their own—the five westernmost states
plus Alaska, and Hawaii, and including also normal de­
mand by the Military, much of which is actually shipped
to outside points. There is even a regular and substantial
volume of local crude petroleum shipped out of the area.
How is this anomalous condition to be explained ?
A number of influences have combined to produce this
seemingly confused and illogical pattern of production
and use. Some of the factors which result in apparently
inconsistent practices are undoubtedly of a temporary
nature and some will yield to technological progress in
the industry ; others may remain for a long time to come.
Among the influences which have contributed in recent
years to the apparent anomaly of concurrent “ imports”
and “ exports” may be mentioned: (1) the regular ship­
ment of California crudes to certain outside markets
more economically served from this area than from other
sources, in some cases involving the possibility of a con­
venient “ back-haul,” as illustrated by the shipment of
California low-sulphur crudes to Japan incident to bring­
ing cargoes of Eastern Hemisphere crudes to Pacific Coast
refineries ; (2) the great increase in world oil supplies in
1952-53, associated with the spectacular rise of crude
production in the Middle East, already discussed above ;
(3) increased prices in the United States for both crude
oil and refined products following the expiration of price
controls in 1953 which stimulated the shipment of “ out­
side” high gravity crudes to California refineries ; (4)
very low tanker rates in 1953, which made importation a
paying proposition, especially where high gravity crudes
were involved; (5) the sharp stimulus to military and
maritime demand for oil products resulting from the Ko­
rean war, which had reduced Pacific Coast refinery stocks
to extremely low levels in the winter of 1951-52 ; (6) the
basic characteristics of California crude oils, which run to
a relatively high proportion of low gravity crudes, difficult
and costly to refine ; (7) the relatively backward techno­
logical setup of many Pacific Coast refineries, with a high
proportion of “ straight-run” stills and a low proportion
of supplementary cracking facilities; and (8) the struc­
ture of the Pacific Coast oil industry, consisting of hun­
dreds of distinct and independent units whose interests
are more or less diverse and conflicting, leading to a wide
variety of individual practices and policies which are fre­
quently at sharp variance with each other.
Most of the factors listed above are self-explanatory
and require little or no elaboration; some of them are
likely to be of temporary duration in any event. The last
three items, however, call for some further comment.
Peculiar characteristics o f C alifo rn ia crude oils an d
the setup of the Pacific Coast refining industry

It has frequently been said that one of the basic prob­
lems of the Pacific Coast refining industry is that not
enough crude oil of the right kind is produced in Califor­
nia. This refers to the well known fact that the output




5

as exemplified by the practice of several highly successful
units already in operation.1
Hence there has been a persistent demand by spokes­
men for the independent or small scale crude oil producers
that California refinery facilities be revamped to bring
their “ product mix” more nearly into accord with estab­
lished demand patterns for the various refined products.
Unless this is done, it is argued, the continuing produc­
tion of some 250,000 barrels per day of California crude
of gravities below 20°, representing the output of nearly
half the producing oil wells in the state, will inevitably
result in recurrent surpluses of heavy fuel oil which will
become a drug on the market, repeating the unhappy
experiences of 1949-50.2

of 36 to 40 barrels of residual fuel oil per 100 barrels of
total crude input (including crudes of all gravities), as
compared with an over-all national average of about half
that figure, were not considered unwelcome as long as an
assured market for residual fuel was at hand. That situa­
tion is rapidly changing, however, as the market for heavy
fuel oil has been increasingly restricted by the rapidly
growing use of natural gas in industrial applications and
of diesel oil for railway motive power.
The basic processes used to increase the yield of gaso­
line and other light distillates beyond the results obtained
by simple straight-run distillation are known as “crack­
ing.” They consist essentially of treating the residues
of the distillation process, either by thermal or catalytic
methods, so as to break down or crack the hydrocarbon
molecules characteristic of the heavy residues into smaller
molecules from which more gasoline and other light “ frac­
tions” can be obtained.
As compared with other parts of the country, the Cali­
fornia oil industry has a relatively low ratio of cracking
capacity to total refinery crude capacity. In no year
since 1947, for example, has the ratio of refinery cracking
capacity to crude oil throughput capacity exceeded 20 per­
cent in the Pacific Coast industry, while for the rest of the
country, where higher gravity crudes are more common,
the ratio has remained regularly in the range of 28 to 30
percent.
In view of this situation, it is plausibly argued that the
basic problem in securing full utilization of California
crude—which, to repeat, is produced in ample quantity—
is the fact that so few Pacific Coast refineries are properly
equipped to handle the low gravity crudes which account
for approximately 27 percent of the total California crude
output. The difficulty is primarily the traditional lack of
facilities to convert heavy crudes into light products—
distillates and gasoline—on an economical basis. This is
essentially a financial problem rather than a technological
one; the procedures are well known and adequately tested,
T

Divergent interests within the Pacific Coast
petroleum industry

It is fairly obvious that no simple or easy answer can
be given to some of the questions suggested by the fore­
going discussion. There is little or no uniformity in the
structure of the Pacific Coast oil industry, which consists
of hundreds of different units ranging from relatively
small independent crude oil producers to huge integrated
organizations, some of which operate on a world-wide
1 With the improved refinery technology of today, more and more light dis­
tillates are being obtained from practically all crudes. Only last summer
the research department of a large oil company announced the discovery
of a new process known as “ liquid coking” which may greatly enhance the
economic position of the low gravity crudes. This process, which will be
commercially available on a license or royalty basis, contemplates the ex­
ploitation of very low gravity crudes by methods expected to recover from
10 to 20 percent more gasoline and light heating oils than can be ob­
tained by standard procedures. In effect, the heavy residues lett by con­
ventional refining methods are re-refined after being vaporized by the use
of hot mobile coke pellets. .This fluid coking process is expected to open the
way to more effective utilization of many heavy California crudes and oils
of very low gravity from certain Canadian fields. See Oil and Gas Journal,
August 17, 1953, pp. 74-75; November 16, 1953, pp. 181-82 and pp. 200207.
2 See pp. 10 and 11. Conventionally the dividing line between high gravity
and low gravity crudes is set by the Conservation Committee of California
011 Producers at 20° on the A .P .I. gravity scale. Over the 13 years from
1941 to 1953 for which this group has analyzed production data the trend
of heavy crude oil production {i.e. oil below 20° gravity) has been sharply
upward, rising from 20.7 percent of total California output in 1941 to 27.3
percent in 1953. The number of wells_ producing heavy oil has also in­
creased much more rapidly than the light oil producers, rising from 42
percent of the total number of producing wells m 1941 to over 48 percent
in 1953. See Conservation Committee of California Oil Producers, Annual
Review of California Crude Oil Production, 1952, Historical Section, p. 14.

able

1

P e t r o le u m S u p p ly a n d D e m a n d P o s i t io n in D i s t r i c t F i v e / 1 9 45-1953
(in thousands of barrels per day)

1945
1946
1947
1948
1949
1950
1951
1952
1953

Receipts
from outside
Production
f—District Five—N
(all liquid
Crude
hydrocarbons) Total
(3)
(2)
(1)
40
18
..................
4
17
923
.................. ....................
4
14
..................
15
3
1,001
.................. ....................
6
986
23
.................. ....................
4
16
.................. ....................
975
1,052
37
14
.................. ....................
79
41
1,064
.................. ....................
84
135
1,085
.................. ....................

Total
current
new
supply
(4)
993
940
997
1,016
1,009
991
1,090
1,143
1,220

Foreign
and intercoastal
-shipmentsTotal
Crude
Other
(5)
(6)
(7)
23
11
12
59
14
45
17
76
59
72
19
53
73
18
55
293
1423
113
110
23
87
18
86
68
92
16
76

Domestic
Increase (---------- demand and losses2---------- N Total
or
Total
Military Civilian
demand
decrease
including
demand including including
in stocks
losses
net
losses
losses
(8)
(9)
(10)
(12)
(11)
— 38
1,007
294
713
1,031
+ 42
839
78
761
898
+ 8
914
67
847
990
+ 44
900
88
812
973
+ 50
886
76
810
959
— 76
9253
833
8423
1,067
— 37
1,017
112
905
1,126
+ 37
1,020
78
942
1,106
+ 70
1,060
93
967
1,152

1 District Five of the United States Bureau of Mines includes California, Oregon, Washington, Arizona, and Nevada.
2 Includes demand within District Five (including oil company use and bunkers), shipments to Alaska and Hawaii, and rail and truck shipments to United
States points outside District Five. Losses in refining and transportation have averaged slightly over 1 percent of “ Domestic demand and losses” for the
eight-year period 1946 to 1953 ; losses also include adjustments not otherwise accounted for.
3 Data differ from those published by the Bureau of Mines because of differences in methods of accounting for military shipments of some 2,636,000 barrels
of crude oil to Japan in the early months of 1950; (This is equivalent to an average of 8,318 barrels per day for the year.) It was originally understood
that export licenses would be issued for these shipments and that they would therefore be included under export statistics. However, they were officially
listed as “ Military exports” and were therefore included by the Bureau of Mines publications in “ Domestic demand” along with other military business.
In the above table they have been deducted from columns 9, 10, and 11 and included in columns 5 and 6. (See Bureau of Mines Petroleum Situation in
District Five, No. 235-B, June 12, 1950.)
N ote: Figures may not total exactly due to rounding.
Sources: United States Department of the Interior, Bureau of Mines, Petroleum Situation in District Five and Conservation Committee of California Oil
Producers.




6

scale. These various components of the industry fre­
quently have divergent interests and quite different prob­
lems. If the entire industry could be operated as a single
integrated enterprise, some of the existing anomalies, such
as concurrent imports and exports, would probably dis­
appear. But with the situation as it is, one concern may
have to bring in the specific raw material it requires from
outside sources at the same time that another company
has stocks of crude or products accumulating from local
sources and may have to seek export markets. There is no
“ organized” market in crude oil where such temporary
deficits and surpluses can be offset. Even if there were
such a market, the differences in kind of oil would still
persist and would probably nullify attempts to balance the
“ long” and “ short” positions of the different units in the
industry. Viewed in this light, the aggregate industry
statistics, as illustrated by the unprecedented volume of
imports in 1953 in the face of rapidly mounting inven­
tories, require careful interpretation.
Every important producing unit in the industry, par­
ticularly among the large integrated companies, is dif­
ferently situated with respect to raw material supply,
whether primarily owned outright, controlled by long­
term contracts, or purchased from independent producers
in the open market. Each concern faces its own distinctive
set of conditions in maintaining a proper balance between
the flow of various types of raw material it is equipped to
handle and the specific requirements of its market outlets.
Some of the large marketing companies probably have
access to all the high gravity local crude they require—
either owned or under contract—while others are in a
“ deficit” situation, and some few simply cannot produce
or buy enough crude of the right kind in the local area to
satisfy their total requirements. Hence they resort, when­
ever conditions are favorable, to outside sources of supply,
sometimes to the chagrin of their competitors who may be
overstocked.
Some companies again, because their own field opera­
tions yield a disproportionately high quantity of low grav­
ity crudes, have found it necessary to install the expensive
supplementary refining facilities required to increase the
yield of the lighter distillates obtainable even from low
T
P etroleum S u p p ly

and

gravity oils. Frequently, in order to maintain continuity
of refining operations or for reasons of policy, such com­
panies may elect to buy the heavy crude output of inde­
pendent producers. In either case the added expense in­
volved in providing and operating the extra refining facili­
ties is largely or completely offset by the much lower
price of such purchased oil due to the fact that low gravity
crudes sell in the open market at sharp discounts below
the prices commanded by high gravity crudes. These price
differentials, in other words, tend to even up the com­
petitive position of refiners who produce or buy heavy
crudes as compared with those who must buy consider­
able quantities of high gravity oil, whether from local or
distant sources. By the same token, these discounts op­
erate to the relative detriment of the non-integrated pro­
ducer of heavy crude who must sell his output to a refiner
or exporter.
D em and for Pacific Coast oils outrunning
local supply

Some idea of the rate at which demand for petroleum
products in the Pacific Coast area has been overtaking
locally produced raw material supplies in the postwar
period is given in Table 1 and Chart 2. These exhibits
show that District Five’s1 output of petroleum raw mate­
rials, consisting of crude oil, condensate, natural gasoline,
and liquefied petroleum gases, increased by about 18 per­
cent between 1946 and 1953, rising from an average daily
rate of 923,000 barrels in 1946 to 1,085,000 barrels per
day in 1953. Demand for petroleum products in the do­
mestic markets normally served by Pacific Coast refin­
ers2 expanded during the same period by more than 26
percent, rising from about 839,000 b/d in 1946 to over
1,060,000 b/d in 1953. Civilian consumption increased
27 percent, rising from 761,000 b/d in 1946 to 967,000
b/d in 1953. Military demand averaged about 83,000 b/d
over the eight years, reaching a postwar peak of 112,000
b/d in 1951.
1 District Five of the United States Bureau of Mines consists of California,
Oregon, Washington, Arizona, and Nevada.
2 The normal Pacific Coast marketing area consists of the five District Five
states, Alaska and Hawaii, and that part of the United States lying east
of District Five served by rail and truck shipments but excluding water­
borne shipments to the Atlantic Coast.

able

2

D e m a n d P o s it io n

in

D is t r ic t F iv e ,1 1953

by

M

onths

(in thousands of barrels per day)

Production
(all liquid
hydrocarbons)

January ..
February .
March . . .
A p r i l.........
M a y ...........
June .........
July .........
August . . .
September'
December
YEAR ..

.
.
.

(1)
1,076
1,0 77
1,087
1,079
1,086
1,095
1,086
1,082
1,084
1,084
1,094
1,090

.

1,085

.
.
.
.
.
,

Receipts
from outside
<— District Five—
Total
Crude
(2)
(3)
80
66
137
180
185
187
141
158
118
121
138
101
135

Total
current
new
supply

Foreign
and intercoastal
-shipments------------ ^
Crude
Other
Total

Domestic
Increase ,f------------demand and losses------------N Total
or
Total
Military
Civilian
demand
decrease including
demand
including including
in stocks
losses
net
losses
losses
(8)

38
31
91
103
113
125
86
115
82
80
89
52

(4)
1,156
1,143
1,224
1,259
1,271
1,282
1,227
1,240
1,202
1,205
1,231
1,190

(5)
91
97
96
111
80
91
77
96
91
79
98
96

(6)
17
22
18
23
16
22
19
22
18
8
4
5

(7)
74
75
79
88
64
69
57
74
73
71
94
91

39
— 44
84
81
179
144
104
107
56
48
60
— 27

(9)
1,028
1,094
1,047
1,061
1,022
1,051
1,043
1,034
1,062
1,081
1,068
1,131

(10)
61
80
79
76
86
99
86
93
91
121
120
127

84

1,220

92

16

76

70

1,060

93

(12)

(11)
967
1,014
968
985
936
952
957
941
971
960
948
1,001

1,119
1,191
1,144
1,172
1,102
1,141
1,120
1,130
1,152
1,159
1,166
1,227

967

1,152

1 District Five of the United States Bureau of Mines consists of California, Oregon, Washington, Arizona, and Nevada.
N ote: Figures may not total exactly due to rounding.
Source: United States Department of the Interior, Bureau of Mines, District Five “ Military” and “ Civilian” Petroleum Demand and Petroleum Situa­
tion in District Five.




Total demand, foreign and domestic, military and civil­
ian, for District Five petroleum products rose from
898.000 b/d in 1946— the first full year of peace—to
1.152.000 b/d during 1953. For the past four years total
demand in District Five has exceeded by a considerable
margin even the heavy drafts made in 1945, the year of
maximum drain during World War II when military
liftings approached a rate of 300,000 b/d or nearly onethird of the total California production of petroleum raw
materials in that year. In order to supplement the local
output, it became necessary to bring in Texas crude at
the rate of 18,000 b/d in 1945 ; somewhat more than that
quantity of finished petroleum products was also brought
into District Five from other parts of the country.
Significant changes in the statistical position and busi­
ness outlook of the oil industry sometimes occur very
quickly, especially when the concern is with the sale of
fuel oils which must compete with alternative fuels whose
supply is subject to irregular fluctuations. Some of these
shifts during the years since 1945 are indicated by the
figures on demand and inventories included in Table 1.
These figures reflect the composite effect of a great variety
of influences—general business prosperity or recession,
sharp fluctuations in military purchasing, availability of
hydroelectric energy and natural gas, and even such fac­
tors as unexpected weather variations, particularly the
relative mildness or severity of the winter season which
may spell the difference between glut and scarcity in the
supply of heating oils.
It is evident that, taking crude oil and refined products
together, District Five has until the last year or two been
a net exporter of oil, particularly if intercoastal shipments
to the Atlantic Coast are considered as exports along with
foreign shipments. The excess of foreign and intercoastal
shipments over receipts from outside points in District
Five from 1945 to 1953 are as follows:

C hart 2
PETROLEUM D E M A N D A N D SUPPLY SITU ATIO N IN DISTRICT
F IV E 1— BY QUARTERS, 1946-1953
Daily average
in bcirrels

1300

1200

1100

1000

900

800
700

200

100
0
1 District Five of the United States Bureau of Mines consists of California,
Oregon, Washington, Arizona, and Nevada.
Source: United States Department of the Interior, Bureau of Mines,
Petroleum Situation in District Five.

in the last column of the preceding table, shipments of
finished petroleum products out of District Five have
regularly exceeded receipts of finished products into the
area. Most of the huge military purchases of 1945, listed
in column 10 of Table 1, were probably destined for outof-District consumption.
Rapid rise in crude oil imports, 1951 -7 9 5 3

Except for a few months in mid-1945, when Califor­
nia’s oil fields could not produce enough crude to meet
the wartime requirements of the Pacific Coast refineries,
District Five receipts of outside crude did not again reach
significant quantities until 1951 when military needs
again became insistent. In that year, Pacific Coast refin­
ers brought in from outside sources some 5 million barrels
of crude or somewhat over 14,000 b/d, of which nearly
10,000 b/d consisted of foreign oil, almost entirely from
Borneo. During the same year about 23,000 b/d of Cali­
fornia crude were shipped to points outside District Five.
In 1952 for the first time the inflow of crude into the Dis­
trict significantly exceeded the outflow; about 41,000 b/d
were brought in—nearly 33,000 b/d from foreign sources
—while some 18,000 b/d were shipped out. Borneo, Su­
matra, Venezuela, and even Saudi Arabia and Kuwait
contributed to the crude supply in 1952.
Receipts of foreign crude, coming almost entirely from
such sources as Sumatra and the Middle East, wTere
stepped up sharply early in 1953 and for the nine months
from March to November amounted to over 25 million
barrels, equivalent to an average rate of nearly 92,000 b/d.
This was only a little less than 10 percent of the crude oil
output of California during that period. It was substan­
tially larger than the output of the great Ventura oil field
in southern California and exceeded the combined pro­
duction of the two new fields, South Cuyama and San
Ardo, with the Elk Hills field thrown in for good measure.
The impact of these heavy imports of foreign crude, added

(in thousands of barrels per day)
Total
Petroleum
1945
1946

—

17 —
42

7

Crude
—
10

All Other
10
32

1947

62

13

1948

57

16

41

1949
1950

50
126

12
25

38
101

1951
1952
1953

73
7
43

9
— 23
— 68

—

49

64
30
25

For the seven-year period 1946 to 1952, the excess of
foreign and intercoastal shipments over receipts from all
outside sources averaged close to 60,000 b/d.1 About 85
percent of the aggregate excess consisted of refined prod­
ucts, although approximately 20,000 b/d of crude oil have
regularly been shipped to offshore markets such as Brit­
ish Columbia, Japan, and other Pacific destinations. In
every year, with the apparent exception of 1945, as shown
1This quantity was greater than the average rate of output during those
years of California’s second largest oil field— Ventura— which produced at
an average rate of about 57,000 b /d from 1946 to 1952.




8

operating levels of the industry at any given time; (2) the
tendency of a competitive industry to run its facilities at
a rate approaching capacity operation, lacking the re­
straints which might be imposed by a legally constituted
regulatory or conservation agency; and (3) the failure of
demand to reach anticipated levels—due to the mild win­
ter of 1952-53 and the cessation of military operations
in Korea.1 Because of the combination of all these factors,
the high level of crude oil imports has undoubtedly con­
tributed to the current large inventories of the oil indus­
try, both locally and nationally.

to the record-breaking output of California’s oil fields in
1953, has created something of an inventory problem for
the Pacific Coast industry. For the time being, at least,
the traditional position of the area as an oil exporter—
considering both crude and refined products—has been
reversed to that of a net importer.
The sustained high level of crude imports into District
Five over the past two years assumes added significance
when considered in conjunction with several other factors
which have an important bearing on the situation. Among
these influences may be mentioned: (1) what has been
called the national policy to secure and maintain a safe
working margin or “ reserve” of facilities for the produc­
tion, refining, transportation, and storage of approx­
imately a million barrels of oil a day above the normal

1 The winter of 1952-53 was distinctly warmer than normal over a large part
of the Pacific Coast area. So far during the present season, data supplied
by the United States Weather Bureau and by the largest California gas
and electric public utility company indicate appreciably above normal aver­
age temperature in California during the months from October 1953 to
January 1954.

INVENTORY PROBLEMS, PAST AND PRESENT
percent. While the demand for motor fuel and lubricants
is also subject to marked seasonal influences in those parts
of the country having severe winter weather, this is a
much less important factor in the Pacific Coast region.
The consumption of gasoline by private automobiles is
apparently also much less influenced than the demand for
fuel oils by fluctuations in general business activity.
The fundamental problem for the western refining in­
dustry, therefore, in gauging demand and scheduling pro­
duction is to forecast the probable volume of sales of heat­
ing and fuel oils and to provide the requisite quantity well
in advance of actual need. This means building up stocks
during the off season. The only alternative would be the
maintenance of a substantial amount of standby facilities
to be operated during the winter months, and then only
if the “ probable” weather conditions and expected eco­
nomic factors held constant. This is obviously a prohib­
itively costly procedure: the only practical course is to
make stock additions both of heating oils and of motor
fuel during their respective off seasons. This means tak­
ing a chance of overproduction—or shortage—from fore­
cast levels of demand.
The memory of heating oil shortages of a few years ago
or at least of local transportation difficulties in their geo­
graphical distribution, with attendant unfavorable pub­
licity and political heckling, has probably caused many oil
companies to go to the opposite extreme in making every
possible effort to meet the needs of the community for
heating oils and has no doubt contributed to the provision
of such stocks in excess of probable actual needs. In any
event, it is noteworthy that one of the most troublesome
aspects of the current inventory situation in many parts
of the country has been the existence of very large stocks
of distillate, or light heating oils of the kind widely used
in domestic house heating, while demand for these oils
was extremely slow during the early stages of the winter
season. This repeats the experience of the 1952-53 win­
ter, with the difference that excessive inventories marked
the whole of that season. Demand for distillate picked up
sharply in the East and Mid-West in January 1954 with

oil industry has for several months been seriously
concerned with a top-heavy inventory situation; it was
freely predicted last fall that unless drastic remedies were
applied the industry would find itself lucky to get through
the winter of 1953-54 without having to make substantial
reductions in the prices of its products which might ex­
tend all the way back to the basic price of crude petroleum.
The remedies most frequently suggested have chiefly to
do with the supply side of the price equation and are di­
rected at tighter control of domestic production and, per­
haps more widely popular, limitation of foreign imports
of crude oil and heavy fuel oil through the imposition of
a quota system, the levying of higher import duties, or
both. Apparently little expectation was entertained that
any significant increase in consumption of petroleum
products could be achieved over the short term, although
it has been suggested that part of the inventory burden
could be shifted to the broad shoulders of Uncle Sam by
increasing military purchases. The contingency of an ab­
normally cold winter season, preferably a dry one with
low stream flow and low production of hydroelectric
energy, would also not have been unwelcome to many
units in the oil industry.
Even in the best of times the industry is faced with a
problem of no small magnitude in adjusting the current
output and normal inventory build-up of its several major
products to meet the shifting and unpredictable demands
of the market. This is basically due to the seasonal nature
of the demand for heating and fuel oils which fluctuates
with the varying intensity or “ seasonableness” of the sea­
sons, and which in the aggregate considerably exceeds the
demand for gasoline. While gasoline is much the largest
single product of the refining industry and by far its most
valuable product, it bulks considerably less in quantity,
especially in the Pacific Coast area, than heating and fuel
oils. Thus, of the total refinery output of District Five in
1953 amounting to 1,085,000 b/d, gasoline represented
456,000 b/d, stove and diesel oil 156,000 b/d, and heavy
fuel oil 369,000 b/d. Gasoline accounted for 42 percent of
the total output, and the other two major products for 48
he

T




9

the advent of really cold weather and stocks of these oils
were rapidly reduced.

C h art 3
REFINERS’ STOCKS OF PETROLEUM IN DISTRICT

Competition betw een fuel oil, coal,
an d natural gas

In many of its uses, including both space heating and as
boiler fuel, notably in the generation of electric power by
public utility companies, heavy fuel oil is competitive in
many parts of the country with both coal and natural gas.
Over the years oil and gas have won steadily widening
public acceptance in a considerable range of applications,
largely at the expense of coal. Many industries as well as
public power plants are equipped to use either coal or oil,
as in New England and the East generally, or oil or gas,
as in California; while in some parts of the country which
are served by long-distance natural gas pipe lines from the
Texas-Louisiana area, the newer industrial installations
can use all three fuels with a minimum of delay in effect­
ing the change-over. In California, in fact, it is a legal
requirement, embodied in the contracts of the gas utility
companies with their customers and approved by the state
regulatory commission, that applicants served under interruptible rate schedules must have standby equipment
available for use of other fuels, chiefly oil, as a condition
of service. The fact of potential and actual competition of
alternative fuels is, therefore, a further complicating factor
in the planning of the oil companies to meet the require­
ments of their industrial customers.1
The situation in

7949

In order to get some perspective on the current inven­
tory and supply position in the Pacific Coast oil industry,
it may be helpful to take a brief look at some of the high­
lights in the industry’s experience since World War II.
A glance at Charts 2 and 3 will perhaps give a fair
working idea of the general course of the demand for and
supply of petroleum in the Pacific Coast markets during
the postwar period. The inventory breakdown shown by
Chart 3 should also help clarify some of the differences
between the acute inventory situation which developed in
1 See supplement to Monthly Review, November 1950, “ Western Power and
Fuel Outlook,” pp. 14-20.

stock.
Source: United States Department of the Interior, Bureau of Mines,
Monthly Petroleum Situation in District Five.

1948-49 and the position today. Those differences are
substantial.
The inventory difficulties of the Pacific Coast oil indus­
try in 1949 sprang from two basic sources: (1) the fact
that following the rapid increase in production and con­
sumption of petroleum as the postwar boom got under
way after the temporary letdown in 1946, production of
oil was maintained at a high level for a considerable time
while demand fell away during the business recession of
1949; and (2) the persistent accumulation of heavy fuel
oil (and of low gravity crude) greatly in excess of market
requirements. The market for heavy fuel oil was stymied
at that time as a consequence of the great reduction in

C hart 4
C IV IL IA N D E M A N D FOR H E A V Y FU EL O IL IN DISTRICT F IV E 1— 1946-1953

1 District Five of the United States Bureau of Mines consists of California, Oregon, Washington, Arizona, and Nevada.
Source : United States Department of the Interior, Bureau of Mines, District Five “ Military” and “ Civilian” Petroleum Demand.




10

naval and merchant shipping activity after 1946, the rapid
dieselization of railway motive power, the widening busi­
ness recession of 1949, and the growing competition of
natural gas (Chart 4). Imports of natural gas into Cali­
fornia from the San Juan and Permian basins of west
Texas and New Mexico were beginning to assume large
proportions about that time. The following data indicate
the rapidly increasing use of “ out of state” gas in Cali­
fornia since 1947
Cubic feet of gas per day
(in thousands)

1947
9,590
1948
179,127
1949
257,804
1950
405,586
1951
667,806
1952
813,148
1953 (estimated) 1,000,000

Equivalent barrels
of oil per day
1,598
29,854
42,967
67,598
111,301
135,525
166,667

Imported natural gas represented nearly 25 percent of
the total California supply available for general use in
1950; by 1953 this figure had risen to about 50 percent
and it promises to increase still further as plans are being
pushed by the public utility companies to enlarge the
carrying capacity of their pipe lines to permit raising the
annual rate of imports from the current level of somewhat
above 1 billion cubic feet daily to 1.4 billion cubic feet by
early 1955. The increasing availability of this convenient
and economical fuel has led to its heavy use by the electric
utility companies and general industrial consumers in
preference to oil, in addition to serving its primary func­
tion as domestic fuel for cooking and heating.2
The redundant heavy fuel oil stocks which burdened
the Pacific Coast refineries through most of 1949 created
a serious problem for the industry. Prices of fuel oils and
of low gravity crudes were cut drastically and production
of crude was curtailed by shutting in some 3,000 produc­
ing wells, chiefly in the fields producing low gravity oil.
The problem was finally resolved by shipping large quan­
tities of residual fuel oil to the Atlantic Coast where a long
succession of strikes in the bituminous coal mines had
created a serious fuel shortage. During the twelve months
from October 1949 to September 1950 more than 21 mil­
lion barrels of heavy fuel oil, or nearly 60,000 b/d, were
shipped to the Eastern Seaboard where it found a ready if
not particularly profitable market. Considerable quanti­
ties of gasoline were also shipped to eastern markets in
mid-1950.
Within the twelve-month interval ending September
1950, Pacific Coast refineries, stocks of heavy fuel oil were
cut down from a level exceeding 41 million barrels on
September 30, 1949 to less than 15 million barrels a year
later. District Five stocks of all kinds, including crude and
refined products, were reduced from a postwar high in
September 1949 of 134 million barrels to less than 98 mil­
lion in September 1950, a more nearly normal quantity,
representing about 90 to 95 days' supply at then existing
rates of consumption.
*Data for 1947-52 supplied by Gas Supply Department, Southern Cali­
fornia Gas Company; 1953 data based on estimates supplied by industry
sources.
2 See Public Utilities Commission, State of California, Decision No. 46537,
December 11, 1951, p. 6 ; Decision No. 49127, September 22, 1953, p. 5.




New Problems Created by International
Tensions in 1950-51
Meanwhile the Korean conflict had broken out. The
abnormal demand for practically all kinds of petroleum
products arising from this occurrence, together with the
upset in world oil supplies caused by the cessation of pro­
duction in Iran in May of 1951, put an additional strain
on the resources of the Pacific Coast oil industry. In order
to meet these exceptional demands it was necessary to
bring in raw material from whatever source available.
Rising from an average level of about 17,000 b/d over the
five-year period 1946 to 1950, or less than 2 percent of the
average annual California production of crude petroleum,
total receipts of oil from outside sources, foreign and do­
mestic, by refineries and distributors in District Five at­
tained a rate of 37,000 b/d in 1951 and more than triple
that figure in 1953 (Table 1).
Following the intensification of the war in Korea late
in 1950, military demands on Pacific Coast refiners be­
came exceptionally heavy in the first half of 1951, rising
for the year as a whole to 112,000 b/d—a 42 percent in­
crease over the average level of the previous five years.
In addition to strictly military purchases, a great increase
in civilian demand resulted from the stepping up of indus­
trial and transportation activity as the defense program
got under way, and laid-up ships and steam locomotives
were reactivated and returned to service. May of 1951
also saw the shutdown of the world’s largest refinery,
the Anglo-Iranian plant at Abadan, an event which had
world-wide repercussions. Commercial trans-Pacific ship­
ments of California refineries jumped from an average
level of about 63,000 b/d in 1946-50 to over 106,000
b/d in 1951.
The drain of the extra demand on the Pacific Coast oil
industry caused by the war in Korea and the loss of the
Iranian supplies has been estimated by one authority as
on the order of 140,000 b/d, or about one-eighth of the
total deliveries of the industry in 1951.1 Coming on the
heels of the large intercoastal shipments of the previous
year, Pacific Coast refiners’ stocks were still further re­
duced to a level of approximately 85 million barrels in the
early months of 1952. Representing only about 75 days’
supply, this was too low a level for safety and was a prin­
cipal factor leading to the large imports of both crude and
refined products indicated above.
How the demands w ere met

How did the West Coast industry meet the extraordi­
nary demands of the last three years? Three principal
sources were levied upon: local crude output was stepped
up by returning to production the low gravity wells shut
in during the 1949-50 crisis and additional wells were
brought in, notably in the new Cuyama and San Ardo
fields; more raw material was obtained from outside
sources; and inventories were drawn down from a level
of around 110 million barrels at the eve of the Korean
1 Robert L. Minckler, President. General Petroleum Corporation, “ Oil Sup­
ply and Demand in the West, an address before the National Federation
of Financial Analysts Societies, San Francisco, California, May 5, 1952.

11

outbreak to around 85-86 million in the first quarter of
1952 (Chart 3). The increase in local output of all liquid
hydrocarbons from the 1949-50 level of around 980,000
b/d to the 1951-52 level of about 1,060,000 b/d was equiv­
alent to an annual rate of gain of about 40,000 b /d ; out­
side receipts of crude rose from 4,000 b/d in 1950 to
14,000 b/d in 1951 and to 41,000 b/d in 1952; the net
draft on stocks between June 1, 1950 and May 1, 1952
was around 24 million barrels, equivalent to an average
rate of about 34,400 b/d over the 23-month period.
Because of the heavy concentration of military buying
on the West Coast, with about 40 percent of total military
purchases of petroleum products being made in this area
in 1951, strenuous efforts were made to divert a large part
of this business to other parts of the country. Had it not
been for the increased participation of Gulf Coast refin­
eries in supplying military requirements in 1952 and the
fortunate availability of high gravity crudes from the rap­
idly developing oil fields of Indonesia and the Middle
East, the Pacific Coast refineries might have found it im­
possible, except at prohibitive costs, to supply the needs of
their markets. Making allowance for the partial diversion
of military buying, all demands were met, including the
shipments already indicated to trans-Pacific markets
which would ordinarily have been supplied by the Abadan
refinery.
From an over-all standpoint it seems fairly certain that
in this period of abnormal demand imports of natural gas
and crude oil into the Pacific Coast area in 1951-52 were
the saving factors in what might otherwise have been an
impossible situation.
Im portance o f transportation costs

Tanker rates were still very high in 1951 and 1952 fol­
lowing the upsurge caused by the outbreak of the conflict
in Korea. These high costs of ocean transport made the
importation of crude oil from the Persian Gulf and Indo­
nesia, the principal foreign sources for Pacific Coast re­
fineries, a relatively expensive business in those years,
particularly in view of the frozen ceiling prices for petro­
leum products then in effect. Some of these imports are
reported to have involved losses, which had to be accepted
more or less as a matter of military necessity. By early
1953, however, the growing surplus of tankers, particu­
larly the construction of “ supertankers,” had brought
about a drastic decline in rates, especially for long-term
charters. Tanker rates fell so low in the summer of 1953
that they threatened to put out of business, at least tempo­
rarily, the famous Tapline which carrries Saudi Arabian
oil a thousand miles across the desert to the Mediter­
ranean Sea, thus eliminating a 7,000-mile round trip via
Suez as well as the canal tolls themselves. Owned by four
American oil companies and completed in 1950 at a cost
of $230 million, Tapline is capable at maximum operating
capacity of releasing the equivalent of about 65 normal
size tankers for service elsewhere.1
The abnormally low tanker rates of 1953, together with
increases in posted prices for high gravity crudes in Cali1 See The Journal oj Commerce, New York, July 27, 1953.




fornia running in some cases as high as 50 cents per bar­
rel, made the continued import of oil from the Middle
East and other surplus regions much more attractive to
Pacific Coast refiners.1 Through much of 1953, in fact,
Middle Eastern oil was really “ on the bargain table,” as
other important producing areas in that region stepped
up their rate of production to take advantage of the Iran­
ian shutdown. For a time indeed, before Middle Eastern
prices were adjusted to the price rises which occurred in
this country in February and June, it was cheaper to lay
down oil from the Persian Gulf at Atlantic Coast ports
than to haul it from the Gulf Coast.2
O ther considerations lea d in g to imports

The inducement to bring in crude from the Middle East
and Indonesia, and to a lesser degree from Venezuela,
also probably had some weight with those American oil
companies, including a few in the Pacific Coast area,
which have made large investments in developing oil
fields in those areas. Some Middle Eastern fields in par­
ticular are enormously productive; their potential has
been rapidly developed during the postwar years and it
is only recently that they have begun to make a really sub­
stantial contribution to the world’s commercial oil supply.
The advantage of buying from a subsidiary or affiliated
company and thus sharing in intercompany profits prob­
ably also plays a part. There is the further consideration,
again from a strictly business point of view, that the in­
creasing trend toward nationalization of profitable foreign
ventures domesticated in areas having relatively little
other sources of revenue may operate to hasten the efforts
of the foreign investor to recover his capital investment
as rapidly as possible.
Another factor influencing the high rate of crude oil
imports during the past two years has been the desire of
certain Pacific Coast refiners to rebuild their raw material
stocks from the relatively low levels which have marked
the entire postwar period as compared with the previous
operations of the industry. During the four years 1940-43,
for example, when Pacific Coast refineries were using up
crude oil at an average annual rate of 602,000 b/d, the
industry stocks of crude ranged between 40 million and
50 million barrels, with an over-all monthly average for
the four years of 46 million barrels. During the four years
1944-47, crude stocks dropped to an annual range of
about 25 to 30 million barrels, with an average inventory
of about 27 million, while crude runs to stills had in­
creased to an average rate of 812,000 b/d. By 1948-50,
some recovery had occurred in stocks, with crude inven­
tories ranging from 30 to 38 million barrels while crude
runs to stills required an average of around 885,000 b/d.
In the two years 1951-52, in contrast, Pacific Coast
refineries were consuming crude oil at an average rate of
about 972,000 b/d, while refinery stocks of crude never
got above 32 million barrels and averaged only about 12
1 See The Economist, August 1, 1953, pp. 338-9, “ Tankers Galore” ; August
8, 1953, pp. 401-03, “ Too Many Tankers?” (Vol. C L X V I I I , Numbers
5736-7).
2 See Petroleum Outlook, Vol. 6, No. 5, May 1953, pp. 41-42.

12

T
C o m p a r is o n
R ate

of

able

3

R e f in e r y S t o c k s

of

of

C rude P etro leu m

and

C o n s u m p t i o n , D is t r ic t F iv e , 1940-53
f------ Crude petroleum stocks1------ Refinery
(in m illion s o f b arrels)
crude input
Monthly average (th ou san d B / d )
48.7
536
46.8
568
47.0
601
42.9
705
29.8
792
23.9
842
25.6
777
29.8
835
32.0
895
35.4
879
33.9
880
30.1
956
31.2
989
35.7
1046

Range
....47-50
....45-49
....43-51
....40-45
....27-35
....22-26
....24-28
....28-31
....30-36
... 33-38
....30-38
....29-32
....30-32
....33-38

1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953

1 Total refinery stocks, regardless of location.
Source: United States Department of the Interior, Bureau of Mines, The
Petroleum Situation in District Five.

percent above the inventory levels of 1944-47 when refin­
ery input was approximately 160,000 b/d lower than in
1951-52. The basic data for each year from 1940 to 1953
are in Table 3.
Whatever the motivation, the import of foreign crude
into the Pacific Coast area by several of the large inte­
grated companies proceeded at a very high rate through
a large part of the year 1953. The average daily rate of
crude imports in each quarter and for the year as a whole
was as follows (in barrels per day) :
First quarter ................................................................
Second quarter ...........................................................
Third quarter .............................................................
Fourth quarter ...........................................................
Year

1953 .......................................................................

47,522
106,044
87,000
70,457
77,841

Imports and inventories

Foreign crude oil imported in 1953 represented be­
tween 6 and 7 percent of District Five’s total raw material
supplies in that year. This contribution to supply, to­
gether with substantial imports of petroleum products
from other parts of the United States (Table 4 on page
16) and the pushing of California crude production to
top-record levels, has led to the recurrence of an inven­
tory problem for Pacific Coast refiners. From a level of
around 85 million barrels in the first quarter of 1952, rep­
resenting about 75 days’ supply at then current rates of
consumption, refinery stocks of petroleum and petroleum
products increased to about 127 million barrels at the end
of November 1953. This was equivalent to approximately
110 days’ supply at the rate of demand prevailing in 1953.
A slight decline occurred during December, but this was
more than offset by a rise in January 1954. The total in­
crease over the 21 months from February 1952 to No­
vember 1953 represented an average rate of gain of about
65,700 b/d, a figure substantially larger than the average
daily output of the Huntington Beach oil field in the Los
Angeles basin in the same period. In absolute terms, the
level of inventories prevailing in the last quarter of 1953
was the highest since the end of 1949 when the Pacific
Coast industry was liquidating its excessive stocks of




heavy fuel oil by shipment to the Atlantic Coast at prices
reported to have yielded little profit.
Although the 42 million barrel increase in stocks since
early 1952 has occasioned some concern in the industry,
it cannot be said that total inventories are excessive in the
sense that they pose a dangerous threat to the stability of
the industry’s price structure. What the continuous rise
in total stocks through most of the year 1953 probably
does indicate is the need for restraint in maintaining the
current high rate of crude production in California and a
rate of crude imports beyond the need to provide a good
working balance of raw material supplies. While the in­
dustry generally considers a total inventory equivalent to
around 100 days’ supply—more or less—to be about
“ right,” the current figure, which is closer to 110 days’
supply at the average daily rate of consumption in 1953,
cannot be regarded as a clear and present danger. Cer­
tainly, as compared with the industry’s past experience,
current stocks expressed in terms of days’ supply would
probably be regarded as relatively safe. The present level
of inventories in District Five is far below the peaks at­
tained, for example, in 1930 or 1940, whether measured
in absolute size or in relation to number of days’ supply.
The top levels reached in those years— 189 million bar­
rels in 1930 and 160 million barrels in 1940— represented
269 days’ and 237 days’ supply, respectively, figured in
terms of average daily demand then existing. While these
huge stocks presented a serious challenge, they did not
disrupt the industry.
Composition of inventories

Dealing in aggregates, however, fails to get at the heart
of the matter, which is the composition of the total inven­
tory rather than its quantity. Herein lies the basic dif­
ference between the current position and the inventory
situation in 1949, which has already been discussed in
some detail. Not only were stocks relatively high in 1949,
around 134 million barrels at September 30—the highest
level since the second quarter of 1942, but still far below
the levels of the early 1930's—but they were badly unbal­
anced. It was the huge quantity of heavy fuel oil, 41 mil­
lion barrels, plus nearly as much crude oil, that was the
dangerous element in the situation at that time. Gasoline
stocks were in excellent shape, just around 20 million bar­
rels, comparing quite favorably with the years 1940 to
1943 when there were fewer cars and trucks on the road
and civilian consumption was rationed. Stocks of stove
oil and diesel oil were also perhaps somewhat out of line
in 1949, but the principal difficulty, to repeat, was an un­
manageable quantity of unsalable heavy fuel oil.
In contrast with that picture, District Five refinery
stocks are today much better balanced, although elements
of potential trouble are not absent. While inventories have
built up rapidly over the past two years, the increase has
been fairly well distributed among the several components.
The restoration of crude oil stocks to a more nearly nor­
mal supply has already been discussed in connection with
imports; this sector is not considered to present any very

13

serious problem. The persistent andcontra-seasonal stick­
iness of gasoline inventories at fairly high levels during
the last half of 1953, on the other hand, is causing some
concern in the industry; it suggests too uncomfortably
the experiences of 1949 which, like the present, was a
period of business recession.
The past year has also seen a marked tendency for heat­
ing and fuel oils (and their associated “ cracking stocks” )
to get out of line. This resulted in part from the failure
of these products to move into consumption at normal
rates during the mild winter of 1952-53. In part, the
mounting inventories of distillates (stove oil and diesel
oil) and more particularly of heavy fuel oil may reflect
somewhat lower industrial and public utility demand in
1953 than might have been expected, especially in view of
marked industrial growth and greatly enlarged steam
electric capacity in this area. Even more, perhaps, the
sluggish demand for fuel oil may reflect the greater avail­
ability and consequently larger use of natural gas during
the past year or more. Favorable weather conditions last
year made most of 1953 a good water year both in Cali­
fornia and the Pacific Northwest, with resulting high
stream flow and high generation of hydroelectric power
and relatively less pushing of steam power plants by the
electric utilities. Total electric utility power production in
the three Pacific Coast states increased nearly 17 percent
in 1953 compared with 1952, but in spite of an increase in
hydro output of nearly 2.7 billion kilowatt hours, electric
utility use of fuel for generation of power increased nearly
55 percent, with natural gas accounting for much the
greater part of the gain.
The large increase in cracking stocks over the past two
years calls for some comment. Two large California oil
companies are currently constructing considerable addi­
tions to their refining capacity, with the new units sched­
uled to come “ on stream” sometime during 1954. In antic­
ipation of the need for additional raw material for these
facilities, the two companies in question have been quietly
accumulating cracking stocks, which account for a con­
siderable part of the build-up in total inventories. Be­
tween February 29, 1952 and December 31, 1953, crack­
ing stocks increased from the very low level of 7.0 mil­
lion barrels to almost 20 million barrels. The difference
of nearly 13 million barrels alone accounts for nearly onethird of the entire increase in all stocks between the two
dates. It should be pointed out, however, that this is really
borrowing from the future; while present excess stocks
of cracking oils may be considered as “ dead” storage at
the moment, they will eventually come on the market as
finished products when the new refining facilities are put
into operation.
Taking as broad a view as possible, it remains true that
current inventories are relatively large, not only in the
Pacific Coast area but nationally as well. The cessation of
the shooting war in Korea, while long foreshadowed, per­
haps came before the oil industry was prepared to adjust
itself to some diminution in the military and transporta­
tion demands for petroleum products. The industry has




been under considerable pressure because of national de­
fense considerations to expand its production facilities
all the way from crude oil to finished product, and it is
perhaps natural that in the existing setup each unit in the
industry has felt itself impelled to keep on producing lest
its competitors gain a march. At least, this appears to
have been the situation in the Pacific Coast area.
An intriguing aspect of the petroleum inventory situa­
tion which has received relatively little attention in or out
of the industry is the suggestion that to the extent that
current excess stocks can be attributed to high rates of
domestic crude production in 1952-53, they represent in
effect “ national defense oil that has been transferred from
underground storage to aboveground storage.” 1They con­
stitute current “ borrowing” (by the industry) “ from the
nation’s military reserve.” It was largely at the behest of
the national defense authorities, reflecting the demands
of the military, that the oil industry embarked a few years
ago on the program of acquiring “ at its own expense” a
reserve productive capacity—within the limits of maxi­
mum efficient rates of production—of a million barrels per
day and of maintaining this reserve, again “ at its own
expense” and somewhat in the role of a trustee, for de­
fense use in the event of a national emergency.2 This
reserve has now largely been created, and the current high
level of industry stocks are, to some degree at least, one of
its consequences with the industry confronted with the
burden of carrying them.
Another m alefactor—the w eather

In assessing responsibility for the current top-heavy
condition of its inventories, a considerable body of opinion
in the oil industry finds the real culprit to be not entirely
the importers or the crude producers but the weather. An
unseasonably mild winter in 1952-53, both in the Pacific
Coast area and in the nation at large, left unusually large
unsold stocks of heating oils on refiners’ hands last spring.
These heating oils were naturally slow to move during
the off-season—the summer and fall of 1953—and in
most areas did not meet an active demand until well into
January of this year. At the end of 1953 national stocks
of kerosene, distillate (stove oil and diesel oil), and heavy
fuel oils had reached a total of about 210 million barrels,
exceeding the level of a year earlier by about 8 percent,
while the weather was again unseasonably warm.
Superimposed on heating oil stocks was the normal
seasonal build-up of gasoline stocks in anticipation of the
summer demand. That demand apparently fell consider­
ably short of refiners’ hopes and was substantially less
than the volume of new current supplies they made avail­
able, while military liftings also proved disappointing at
least until the final quarter of the year. At the year-end
the nation’s stocks of gasoline, including natural gasoline,
approximated 150 million barrels—a record figure, near­
ly 24 percent higher than a year earlier.
1 R. F. Windfohr, President’s Address, Annual Meeting Texas Mid-Conti­
nent Oil & Gas Association, Houston, Texas, October 6, 1953.

xJbid.

14

Contrast between methods o f meeting inventory problems
in Pacific Coast an d other oil producing areas

As just indicated, oil inventories have increased in
other parts of the country as well as in the Pacific Coast
area but more positive action has been taken in those areas
to correct the situation. During the four years between
May 1950, when national petroleum stocks reached their
low point following the recession of 1949, and May 1953,
total petroleum inventories gained about 25 percent rising
from 548 million barrels to 685 million, the latter figure
representing about 93 days’ supply at existing rates of
consumption. In the six months from May to October
there was a further rise, partly seasonal, in total stocks to
a figure of 757 million barrels, representing nearly 100
days’ supply. Normal seasonal decline brought the yearend figure down to approximately 740 million barrels,
still some 60 million above the level of a year earlier.
About one-fifth of the net increase from April to Decem­
ber was accounted for by Pacific Coast stocks.
Despite vigorous protests by crude oil producers and
royalty beneficiaries and in the face of much political
clamor, drastic cutbacks in crude oil production wTere
enforced in the last half of 1953 by state regulation com­
missions in Texas—which is by far the leading oil pro­
ducer—and in the important oil states of Louisiana, Okla­
homa, and Kansas. In some months Texas producers
were limited to less than twenty days of operation and at
one period all production w^as banned in Kansas for a
ten-day interval. These restrictions forced a reduction in
total output of about 500,000 barrels per day below the
rates prevailing in the peak months, June to August. Sev­
eral of the large integrated oil companies in the Texas and
Mid-Continent areas also curtailed their rate of refinery
operations in order to check the excessive accumulation
of finished products. In California, by contrast, where
there is no public regulatory agency, relatively little re­
duction in output either of crude or of products has oc­
curred ; by year-end only one major company had under­
taken to curtail its current rate of crude production, and
that only in a single field. This reduction was more than
offset by increased production by other companies and
larger output from other fields, notably in the Elk Hills
naval reserve, where some of the shut-in wells had been
threatened by water encroachment, with potential perma­
nent loss of oil unless current recovery were stepped up.
Meanwhile imports of foreign crude were maintained at
relatively high levels until late in the year.
The need for g reater flexibility in adjusting
supply to dem and

Apparently there is a real need in the oil industry for
greater flexibility in adjusting current new production
to consumers’ probable requirements, present and pro­
spective. This is a difficult problem at best and one not
likely to be completely mastered in practice, both because




of the inherent limitations of long range weather fore­
casting and because of the practical difficulties in predict­
ing fluctuations in economic conditions and changes in
the political and international outlook which affect total
demand for the various products of the industry. There
would appear, however, to be distinct possibilities of
achieving a greater measure of progress in some of these
directions, at least, than has been attained so far.
The availability of an abundant supply of crude pe­
troleum from outside sources is stressed by some mem­
bers of the industry as providing just this desirable ele­
ment of flexibility in accommodating current supply to
fluctuations in market demand or to make good local
deficiencies in crude production. It is partly for this rea­
son that these spokesmen, who are in most cases them­
selves importers, advocate the maximum freedom of
opportunity to import foreign oil as a means to insure that
flexibility. Advocates of a policy of import restriction,
who are largely members of the industry but who are
interested chiefly in developing or marketing local sup­
plies of crude oil, would grant the necessity of occasional
imports but only to the extent of “ supplementing” and
never to the point of “ supplanting” domestic production.
Here the difficulty is partly one of definition but more
fundamentally it reflects a basic clash of interest between
components of the industry who are differently situated
with respect to raw material supplies. It is more than
probable that no formula could be devised that would
please everybody.
It should also be remembered that flexibility, almost
of necessity, tends to operate in one direction only—ex­
pansion rather than contraction. It is easier to start than
to stop; sometimes easier to keep on importing beyond
the point of actual need than to attain a precise balance
between total industry supplies and total market require­
ments at any given time. This is due in part to the com­
petitive setup of the industry and in part to the difficulty
of modifying long-term commitments, once they are
made, in the light of downward changes in demand. It
usually takes some time to readjust arrangements for an
import program designed to cover a period of several
months or a year ahead. It is not like turning a spigot off
or on at will.
Hence it is hardly to be expected that fairly wide fluc­
tuations in oil inventories can be prevented. Nor should
inventory fluctuations be avoided: that is what inven­
tories are for—to take up the slack between the constant­
ly changing forces of supply and demand. Perfect balance
between these forces is seldom attained in practice in the
sense that current demands are precisely matched by
current new increments of supply. Whenever large dis­
crepancies appear, corrective forces are inevitably set in
motion to restore the balance; meanwhile industry inven­
tories act as a shock absorber, expanding or contracting
as the situation requires.
15

So long as the basic conditions in an industry are sound
there is probably little need to worry too much about in­
ventory fluctuations. Fluctuations beyond the normal
range usually correct themselves in time to avoid dis­
astrous consequences. Fundamental soundness can safely
be postulated of the American petroleum industry, which
is both mature and dynamic. It is perhaps inevitable that,
in discharging its twofold function of serving normal
civilian needs and at the same time of preparing itself to
supply the huge quantities of petroleum products which
military and quasi-military operations require, either
actually or potentially, the oil industry pendulum should
make some wide swings.
Sometimes the very conditions of national defense,
while imposing an enormous additional strain on the pro­
ductive facilities of the industry, may also actually
hamper the industry’s efforts to increase output because
overriding defense requirements for critical materials
such as steel may effectively deny the industry the ma­
terial needed for drilling wells or constructing additional
refinery and transport facilities. Once it has equipped
itself to carry the extra load, the productive capacity of
the industry may easily outrun, for a time, the normal
growth of market demand for its products. There is a
tendency at such a time for both crude oil and finished
products to be produced — or imported — in excess of
actual current requirements, and hence for inventories to
expand. This seems to be the phase of the cycle which the
industry is currently experiencing.
W ho is really responsible for excessive inventories?

The Pacific Coast situation well exemplifies the diffi­
culty of securing industry cooperation in effecting prompt
adjustment of supply to the requirements of market de­
mand. Opponents of freedom to import seek to lay the
blame for the inventory problems of the industry on the
excessive imports of their competitors while themselves
continuing to produce local crude oil with little or no
restraint. From an outsider’s standpoint it is somewrhat
difficult to distinguish between the responsibility of an
imported barrel of oil and that of a locally produced bar­
rel in accounting for the total supply. Of course, it is
easier to defend the policy of supporting home industry
and of giving local employment than to persuade a group
of local producers to forego their “ legitimate” market in
favor of the foreign producer, even though the quality
of the respective products may not be identical. Import­
ers, especially of large industrial corporations, frequently
incur no little political criticism and run the risk, if oppo­
sition becomes vocal enough, of having political action in­
volved to limit their activities.
Be that as it may, the inventory level of 127 million
barrels attained by Pacific Coast oil inventories at the end
of last October—approximately 120 days’ supply—was
realized to be probably more than adequate. Late in that
month a leading major company, which is the largest
importer, announced that it would cut substantially its
rate of imports during the final quarter of the year and




T able 4
A

n a l y s is

of

P e t r o l e u m R ec eipts

in t o

D is t r ic t F iv e 1

1 9 4 9-1953
(in thousands of barrels per day)

Total receipts................................... .

1949
23.2

All other products ..................
Receipts from United S tates... . .

19.9

Gasoline2 .....................................
Stove oil and diesel oil........... .
Lubricating oils ...................... .

3.9
3.7

Foreign im ports..............................

1950
16.4
4.0
12.4
16.4
4.0
4.0
3.0
3.4
2.0

1951
37.5
14.4
23.1
26.0
2.9
11.3
4.6
4.7
2.5
11.4
9.9
1.5

1952
79.4
41.1
38.2
40.7
8.5
19.6
7.7
4.4
0.5
34.6
32.7
2.0

1953
134.5
83.9
50.6
55.9
6.0
34.0
7.7
5.0
3.2
78.6
77.8
0.8

1 District Five of the United States Bureau of Mines consists of California,
Oregon, Washington, Arizona, and Nevada.
2 Including natural gasoline and liquefied petroleum gases.
N ote : Figures may not total exactly because of rounding.
Source: United States Department of the Interior, Bureau of Mines,
Petroleum Situation in District Five.

would make another cut early in 1954. At the same time,
the company emphasized that imports of foreign crude
would be continued at a rate sufficient to offset the short­
age of California crudes available to meet its customers’
requirements. It stressed the lack of adequate quantities
of local high gravity crude comparable to the foreign
crude being imported and maintained that these imports
had saved the situation during a period of critical short­
age.
This brings us again to the basic problem of the in­
herent shortage of high gravity crudes in California and
the consequent necessity to look to outside sources of sup­
ply. From this standpoint, it makes little difference
whether that supplementary supply comes from a foreign
source or from some other part of the United States.
Come it will, for nature abhors a vacuum whether in the
economic or in the physical realm. Table 4, showing the
receipts of crude and refined petroleum products in the
Pacific Coast area drawn from all sources during the fiveyear period from 1949 to 1953, makes it clear that only
within the last year have foreign imports exceeded “ im­
ports” from other sections of the United States. If all im­
ports from foreign sources were banned tomorrow, there
can be little doubt that the present importing concerns
would probably turn to importing crude oil from Texas
which has an enormous potential productive capacity only
partly utilized today, whereas in all probability the cur­
rent forced draft rate of “ producibility” in California will
taper off during the next few years unless significant new
discoveries are made. Texas crude would come either by
tanker, in spite of the high cost of operating American
flag vessels, or by overland pipe lines— in either case in­
curring costs considerably greater than those involved in
importing oil from foreign sources. The other alternative,
already discussed, is the investment of large additional
sums by Pacific Coast refiners to equip themselves to
process more completely the low gravity oils which in all
probability will continue to represent some 25 to 30 per­
cent of California’s total crude production— again a costly
business. Such investments, to repeat, are being made by
leading companies in the industry, but there is still a long
way to go and the ultimate financial soundness of such
investment may be open to question.
16