The Mexican Problem (1917)/Why The Pan-American Company Controls Mexican Petroleum
CHAPTER XI
WHY THE PAN-AMERICAN COMPANY CONTROLS MEXICAN PETROLEUM
American financial interests are now more keenly alive than ever before as respects their responsibilities toward investors. The opening up in Alaska of the greatest copper bonanza the world has ever seen sent Kennecott Copper mining shares into the fifties and made a wide distribution. J. P. Morgan & Company and their associates might have been tempted to dispose of all their shares to the public and let the public take the risk of a continuation of the bonanza ore, which could be mined and marketed at less than five cents per pound when it was being sold at above twenty-five cents a pound.
Morgan & Company, however, realized their responsibilities and sought insurance for Kennecott's future by acquisition of the Braden Copper mines of South America, which, when developed, will insure a large copper output at low cost, and also by acquisition of more than one-third of the shares of the Utah Copper Company, the world's greatest copper mine, whether measured by output or by earnings. It is no longer considered sound American finance for shareholders as partners to run away from each other, especially when the partners are the managing owners.
The Mexican Petroleum Company has a bonanza in Mexico, the life of which no man can limit, but insurance of property in Mexico, and especially insurance of stability in political, social, and government conditions would carry a high premium rate.
Mr. Doheny believed the best way to attain the desired insurance for an investment future for his associated interests in Mexican Petroleum was to merge the control of the company in a new organization, which could open up a broad base of oil production in California and supply ships and shipping facilities for both California and Mexican oil around the world.
It was also in contemplation at the time the Pan-American Company was organized to make combination with other oil companies that their oil distribution might be combined. At present, however, the proposed union with the Union Oil Company, the Associated Oil Company, and other oil interests has been laid on the shelf, and the Pan-American Company has started a very extensive development in California, opening up two big properties there, the Bell Ranch of ten thousand acres and the Ojai Ranch of eight thousand acres.
THE INVESTMENT BASE
While the Mexican Petroleum Company has $12,000,000 non-cumulative eight per cent preferred stock, about $40,000,000 of common stock, and about $4,000,000 of bonded indebtedness, the Pan-American Petroleum & Transport Company is organized with a large outline for expansion as occasion warrants.
It has outstanding $10,500,000 seven per cent preferred stock, convertible into common at the rate of $115 par value for $100 par value of common stock, but the amount of authorized preferred stock is $25,000,000. It has an authorized common stock (par $50) of $125,000,000, but at present there is outstanding only $30,494,750.
The Pan-American Company is the part of the enterprise expanding by ocean transportation, California development, etc., and has in its treasury seventy-five per cent of the eight per cent preferred stock of the Mexican Petroleum Company and forty-five per cent of the Mexican Petroleum Company's common stock. With its shipping interests it is in position to pay dividends upon its common stock without waiting for dividends upon Mexican Petroleum common. It will thus be seen that the investment basis in this combined oil enterprise is in Pan-American and the speculation is in Mexican Petroleum. Indeed, it is figured that for Mexican Petroleum to pay more dividends than Pan-American, Pan-American must first pay sixteen per cent, or eight dollars upon its fifty-dollar shares. There is present expectation that Pan-American will begin dividends upon its common stock this year. The Pan-American Company has three sources of revenue and the Mexican Petroleum Company substantially one.
THE PAN-AMERICAN COMPANY IN CALIFORNIA
In southern California gasolene is used with great liberality. The broad state highways and asphaltum roads invite it. To visit the Bell Ranch of the Pan-American Company I took a little motor trip of two hundred and sixty-five miles, going from Los Angeles to Los Alamos, which is on the Bell Ranch property, and back to Santa Barbara in a day. I learned that four hundred-mile motor trips for a single day were not uncommon in southern California. The ladies think nothing of going fifty or one hundred miles as a morning drive for a distant noon luncheon.
Doheny bought the Bell Ranch for $1,800,000 and turned it over to the Pan-American Company. Boston people previously had an option on two thousand acres of this property at $1666 per acre and forfeited on it. Doheny bought the whole for less than the previous price of a part. This was the largest untouched oil property in the State of California. Derricks are being erected here one thousand feet apart, or one derrick to twenty-five acres. There are known to be four thousand acres of oil lands in the property and oil has been proven the full width at one end. The balance has not yet been proven. The whole is two and a half to three miles wide and seven and a half to eight and a quarter miles long. The Union Oil Company is on the west, the Standard Oil Company on the east, and on the north the Palmer Union brought in a fifteen thousand-barrel gusher, for which, of course, they were unprepared, as gushers in California are not common. They shut it in and later found that it had departed as a gusher. Most of the California oil is obtained by pumping. It is expected that the wells here will do two hundred barrels a day. Number 3 well was visited, which is down twenty-nine hundred feet and is doing one hundred and fifty barrels a day. Eleven derricks have been started. Oil sands here have about fourteen per cent porosity. The Union Oil Company pays eighty-five cents per barrel on the ground for oil and takes it into its own pipe line.
SOME CALIFORNIA OIL STATISTICS
The cost of a well and equipment here is figured at fifteen thousand dollars, and at present prices for oil it may net forty-five thousand dollars the first year. Figures have been made that show possibilities of four hundred wells drilled on this property in two years to cost six million dollars, but to earn three times this sum per annum. This would be more wells than were ever drilled on any one property in the State.
The Ojai Ranch, several miles farther south, cost about seven hundred and fifty thousand dollars. Oil was discovered in California in 1859, and Thomas A. Scott, of the Pennsylvania Railroad, was interested in this property about 1865, but he was looking for kerosene, and the heavy oil found here was not then of value. Scott was interested in the first projected railroad from San Diego, and construction was begun there in the sixties, but no rails were ever laid by that railroad enterprise. When the Boston people came to build the Southern California road they avoided litigation by keeping outside the old Scott right of way.
Senator Bard of California was interested in this Ojai property, and it is from the Bard Oil Company that the Pan-American now gets title to about two thousand acres of surface and all the mineral rights of the valley, about seven miles long and two and a half miles wide. On the Sulphur Mountain side of this valley are oil seepages that are declared to be the greatest in the State. On the other side of the valley the cleavage of the hills reveals the entire geological formation so that it can be followed for many miles. The oil in this territory varies from fourteen to thirty-four gravity and the wells are from four hundred to four thousand feet deep.
PRODUCTION COSTS IN CALIFORNIA
The average California oil well will yield from one hundred to two hundred barrels per day, and six hundred barrels is a big well. Oil wells running from five to fifteen barrels have been automatically pumping in southern California for many years— something of a contrast to what one sees in the Mexican oil field. Old oil wells are being remade here and new machinery will be installed and new wells driven. Well number 36 on the side of Sulphur Mountain already furnishes a beautiful lubricating oil with gasolene and no asphalt. It is thirty-four gravity and is worth at the present time about two dollars per barrel, although most of the heavy oil in this district is worth about seventy-five cents a barrel.
Whether an oil well is large or small, the cost of oil production at the well cannot be over ten cents per barrel; and oil can be pumped one hundred miles at a cost of one cent a barrel.
The Pan-American people are at work on experiments to make a cheaper gasolene motor oil and also on improvements to the "cracking" process. Cracking oil is not a new invention but it is the basis of all the reports and promises from Washington for cheapening gasolene. A heavy crude oil is cracked by being heated to a temperature of eight hundred degrees under pressure with hot steam. Oil of eight and a half gravity is thus converted into an oil of sixteen gravity and will flow like water. In the process oxygen and hydrogen are separated and new chemical compounds are formed so that in reality a new combination produces a new and lighter oil. It is said that oil can now be cracked at a cost of three and a half cents per barrel.
The Pan-American people realize the obligation resting upon them to expand the market for oils in every possible direction.
The report of the Federal Trade Commission, that found Standard Oil interests still dominating the price of gasolene, should again emphasize how so-called anti-trust laws are responsible for the abolition of competition and really prevent the lowering of prices.
The Washington report shows the division of gasolene marketing into eleven territorial areas, nine of which are said to be dominated by various Standard Oil companies, which produced more than sixty per cent of the gasolene in 1915 and made sixty-five per cent of the total sales.
I have always been annoyed in shifting my motor gasolene purchases from one oil company to another to find that very soon the price for my gasolene was regulated by the Standard Oil price and that, notwithstanding any market conditions or supplies, when the independent oil man had hooked me on as a customer he was very shortly giving nothing but Standard Oil prices, yet claiming no connection with Standard Oil.
I noted that in California gasolene had fluctuated from twenty-two to twelve and back to twenty, and in southern California I declared, "Here I shall find the truth," as gasolene is sold on street corners by more than a dozen independent producing and refining companies competing with more than one hundred Standard Oil stations.
Yet when I inquired as to prices and conditions of competition, I found that prices were uniform and that competition was geographical a man bought his gasolene at the nearest gas corner. Gasolene users do not, as in the East, maintain underground gasolene tanks in or out of the garage to any considerable extent. They buy at the gas corner and it does not pay to run a car very far to buy its fuel.
Throughout California, and most notably in Los Angeles, the most conspicuous store is the gasolene supply store. It is almost always on a corner vacant lot, often set in a small attractive garden, into which the car moves for its supply, the curbstones being cut down on both sides of the corner. These houses are one-story buildings of glass and wood, similar to the headhouse or potting-room of a green house. Roof and sides are painted conspicuously the Standard Oil Company's always in red, white, and blue colors and other companies' in uniform trade-mark colors. All kinds of oil supplies are attractively arranged on the shelves within, and polite attendants in white suits remind you of a combination between a certified milk dairy and a well-kept green house.
COMPETITION BY SERVICE
What interested me most was the problem of how all these corner oileries could compete with the Standard Oil Company, with its organization, system, and unlimited capital. I promptly found the answer they did not compete at all. The Standard Oil Company fixed the prices and everybody else made the same price. There is no difference in gasolene of the same specific gravity, whether made by the Standard Oil Company of California or the Ventura Oil Company of Boston and Los Angeles. The California people brought up in the oil regions know the fraud of any advertiser who declares that his gasolene will carry a car more miles than the gasolene of his neighbor, if it is of the same gravity.
The competition was entirely in the service and by location, and I was astonished that the Ventura and a dozen other companies could maintain oil supply stations over so wide a territory in competition with unlimited capital. It is a matter of enterprise in management; but the prices are fixed by Supreme Court decisions and anti-trust legislation, both practically forbidding price competition.
Every oil producer and every oil seller knows without any argument what he is up against that the Standard Oil Company can sell oil in as large quantities, as well refined, and at as low a price as he can afford and if need be a little lower.
INDEPENDENTS NOW HOLD UP OIL PRICES
The safety of the independent, therefore, is the umbrella price of the Standard Oil Company. He cannot hope to cut out the Standard Oil Company business. He has neither the capacity, the supply, nor the capital for a contest of endurance. Self-interest requires that he sell at the same price. He cannot get more. He may therefore hold his own by the location of his supply stations. If he attempts to get less he only lowers the general price and hurts himself and every other independent producer, and does not bring a frown or a wrinkle upon the face of smiling Standard Oil.
The "trust octopus" is seconded and supported in price and service by all the independents. Any one of them can put the price down if he wishes. In that case, his enemies would be the suffering independent producers and not the Standard Oil Company, which usually finds a still larger profit in lower prices and broader markets.
The position of the Standard Oil Company is exactly that of the big copper producer, the big steel producer, or any other large vendor of a raw article. The producer knows, if he knows anything about business economics, that the advancing price restricts the consumption and a lower price enlarges it. What he wishes is the largest possible distribution consistent with profits. Distribution is governed by the minority and the accumulation of supplies lowering the price which all producers are mutually interested to sustain. At the lower price consumption is broadened, the supply is decreased, and if the leading producer does not advance the quotation, exhausting supplies will do it automatically.
On an advancing market producers accumulate supplies which automatically check the advance.
There is perfect action of the law of supply and demand at top and bottom, but intermediately there is the law of self-interest placing the so-called trust and the independent upon exactly the same basis mutual maintenance of price and profits; with competition only in service.
"DON'T ROCK THE BOAT"
The Supreme Court decisions, the regulations by state and United States governments and "anti-trust" laws, all pressing from the outside, force all producers into absolute mutual understanding without any agreement written or oral.
They absolutely boycott the government decree and that without conspiracy or combination. They understand the law, "Don't Rock the Boat."
When the government shakes its finger at the large company and tells it to compete and destroy the smaller companies and decrees aid and comfort to the smaller producing company to destroy the larger one, it makes impossible the competition which under the law it seeks to enforce. COMPETITION BOYCOTTED
There is little difference in human action either side of the world. On the western side of the Pacific the Japs have attempted to dictate to unarmed China. The Chinaman does n't so much as wink. He just lays down his chopsticks and refuses to buy, serve, or eat a piece of Japanese fish, and the Japs see the point of distress and starvation before the Chinese feel it. The Japs threatening the Chinese make them a unit without other understanding than that of mutual self-interest.
Throughout the United States the oil producers and selling agencies boycott the government edict and refuse to cut each other's throats in price competition. The Standard Oil Company can laugh at all Supreme Court decrees. They continue to live under the law which by the same breath demands that they compete and destroy the small man and go to jail for doing it.
The result throughout the United States is higher prices for oil; for when the Standard Oil Company had a monopoly, it had a responsibility concerning rising prices, and would conserve supplies, pass them from surplus territories to exhausted territories, stimulate production to prevent erratic movements, and balance the markets to prevent wide fluctuations.
Now the government has stepped in as a regulator, and the Standard Oil Company has no responsibilities; its valuations have multiplied fivefold, and Mr. Rockefeller is worth more hundreds of millions than he ever dreamed of, and this by legislative and Supreme Court decree and his own helplessness.
Washington has decreed in the oil business, the copper business, and the steel business a capital socialism— where the weak protect the strong and the strong must permit it.