Opinion ID: 2671515
Heading Depth: 2
Heading Rank: 1

Heading: World War II and the Need for Avgas

Text: Compared to other available fuels, high-octane avgas enabled aircraft to fly faster and higher, with improved rates of climb and higher payload carrying capacity. It was “the most critically needed refinery product” during World War II and was essential to the United States’ war effort. 2 J.A. 477 ¶ 4. It was still a new technology in the late 1930s, however, and production was nowhere near sufficient for the massive quantities the United States and its allies would need to prosecute the war. In 1942 and 1943, the Government, acting through the Defense Supplies Corporation (“DSC”) entered into the avgas contracts with the Oil Companies. The avgas contracts were long-term (primarily three-year) contracts to purchase avgas from the Oil Companies’ refineries in Southern California, and enabled the Oil Companies to build the new refining facilities needed to produce the high levels of avgas vital to the war effort. At the time the contracts were signed, the Govern- ment exercised substantial wartime regulatory control over almost every aspect of the petroleum industry. It had authority to impose obligatory product orders on private companies, with noncompliance subject to crimi- 2 “At least since the transformation of navies from coal to diesel fuels in the early twentieth century availability of sources of petroleum products has been recognized by great powers as vital to their national interest.” Evan J. Wallach, The Use of Crude Oil by an Occupying Power as a Munition de Guerre, 41 INT’L & COMP. L.Q. 287, 287 (1992); see also John W. Frey & H. Chandler Ide, A History of the Petroleum Administration for War 1 (1946), available at J.A. 431 (“World War II, from beginning to end, was a war of oil.”). SHELL OIL COMPANY v. US 5 nal sanctions or Government takeover. See Selective Training and Service Act of 1940, Pub. L. No. 76-783, ch. 720, § 9, 54 Stat. 885, 892 (1940). Facilities that accepted such obligatory product orders had to prioritize government military contracts above all other contracts. Act of May 31, 1941, Pub. L. No. 77-89, ch. 157, 55 Stat. 236 (1941). To the extent facilities relied on scarce raw materials, the Government could regulate supply chains to ensure continuing production. Id.; see also Second War Powers Act of 1942, Pub. L. No. 77-507, ch. 199, § 301, 56 Stat 176, 178 (1942) (authorizing the President to allocate any material or facility as necessary “in the public interest and to promote the national defense” whenever the country’s defense needs would create a shortage in such materials or facilities). The Government regulatory entities most relevant to the avgas contracts were (1) the Office of Petroleum Coordinator for National Defense (“OPC”), later replaced by the Petroleum Administration for War (“PAW”), and (2) the Office of Production Management (“OPM”), later run by and then replaced by the War Production Board (“WPB”). The WPB and PAW were created in January and December 1942, respectively. The WPB had primary authority over war procurement and production, and cooperated with the PAW to determine petroleum requirements and set national priorities for supplying the petroleum industry. Subject to the direction of the WPB, the PAW was charged with ensuring “adequate supplies of petroleum for military, or other essential uses” and “[e]ffect[ing] the proper distribution of such amounts of materials.” Exec. Order No. 9276, 7 Fed. Reg. 10,091, 10,092 (Dec. 4, 1942). The “PAW told the refiners what to make, how much of it to make, and what quality.” John W. Frey & H. Chandler Ide, A History of the Petroleum Administration for War 219 (1946), available at J.A. 1917. Days after Pearl Harbor, the Government recognized the need to quickly mobilize avgas production, with the 6 SHELL OIL COMPANY v. US OPC stating: “‘It is essential, in the national interest that the supplies of all grades of aviation gasoline for military, defense and essential civilian uses be increased immediately to the maximum.’” J.A. 498–99 (quoting OPC Recommendation No. 16) (emphases added). Then-existing facilities could not produce the required levels of avgas, necessitating construction of additional facilities. However, the Government’s substantial authority to control production only extended to existing facilities; it could not force companies to invest in new ones. See, e.g., An Act to Expedite National Defense and for Other Purposes, Pub. L. No. 76-671, ch. 440, § 8(b), 54 Stat. 676, 680 (1940) (authorizing the Secretary of the Navy to nationalize and operate “any existing manufacturing plant or facility necessary for the national defense” when certain conditions were met) (emphasis added). A further stumbling block for the Government was that contracts with the Army and the Navy were subject to annual Congressional appropriations and thus limited to a one-year term. Such one-year contracts did not provide the long-term security necessary to justify the Oil Companies’ investment in new facilities. In light of these limitations, the Government turned to the DSC, a government-owned corporation authorized to acquire critical and strategic materials, including avgas. The DSC was a subsidiary of the Reconstruction Fi- nance Corporation (“RFC”), another government-owned corporation. The designation in 1941 of avgas as a critical material enabled the RFC and its subsidiaries to buy, sell, and produce avgas and to make loans to companies to construct avgas production facilities. See Act of June 25, 1940, Pub. L. No. 76-664, ch. 427, § 5(1), 54 Stat. 572, 573 (codified at 15 U.S.C. § 606b (1940)). After purchasing avgas from the Oil Companies, the DSC resold it to the Army and the Navy at the national price established by the PAW (or its predecessor, the OPC). SHELL OIL COMPANY v. US 7 Between 1942 and 1943, the Oil Companies entered into contracts with the DSC agreeing to sell vast quantities of avgas. 3 The contracts set forth a base price for each barrel of avgas, which was negotiated individually with each refiner based on the refiner’s production costs. The base price was calculated with the goal of permitting an estimated profit of between 6% and 7%. Profits were further subject to the Renegotiation Act of 1942, which required contractors to repay excess profits to the Government. Pub. L. No. 77-528, ch. 247, § 403, 56 Stat. 226, 245 (1942). Given the low profit margin, the avgas contracts contained various concessions to the Oil Companies. They were three-year contracts, thus providing some measure of certainty that the newly-constructed avgas production facilities would pay off over time. They also contained cost-allocation measures to limit the Oil Companies’ risk in producing avgas. For instance, the agreed-upon base price of avgas was subject to adjustment depending on the Oil Companies’ costs, including the price of crude and other raw materials, and the transportation of raw materials. The contracts also required the Buyer, DSC, to pay “any now existing taxes, fees, or charges . . . imposed upon [the Oil Companies] by reason of the production, manufacture, storage, sale or delivery of [avgas].” E.g., J.A. 111 (1942 Shell contract) (emphasis added). Relevant to the CERCLA charges in this case, another subsection required DSC to reimburse the Oil Companies for “any new or additional taxes, fees, or charges, . . . 3 At least some of the avgas contracts provided for loans to the Oil Companies to expand avgas production facilities, and required the Oil Companies to use “best efforts” to complete such construction as quickly as possible. See, e.g., J.A. 97, 106 (1942 Shell contract) (promising to “maintain work on the expansion day and night”). 8 SHELL OIL COMPANY v. US which [the Oil Companies] may be required by any municipal, state, or federal law in the United States or any foreign country to collect or pay by reason of the production, manufacture, sale or delivery of the [avgas]” (“the new or additional charges provision”). E.g., J.A. 111 (emphases added). These price-adjustment mechanisms ensured the Oil Companies would not be forced into lossmaking activities by factors outside their control, such as the costs of materials and transportation, or unforeseen Government-imposed charges. The avgas contracts thus “assured the manufacturer of his costs, plus a fair but moderate profit.” J.A. 1996 (statement of the Chief Legal Counsel for the PAW to the House Appropriations Committee). During contract negotiation and the years that followed, the Government’s primary concern was maximum avgas production. The Government directed the Oil Companies to “undertake extraordinary modes of operation which were often uneconomical and unanticipated at the time of refiners’ entry into their [avgas] contracts.” J.A. 514. For example, the PAW sometimes ordered companies to purchase raw materials outside their normal supply chain to achieve maximum avgas production. The Aviation Gasoline Reimbursement Plan required the Government to assume the costs of such uneconomical operations. The arrangement between the Oil Companies and the Government was a cooperative endeavor in which the Oil Companies worked to achieve the Government’s goal of maximizing avgas production and the Government assumed the risks of such increased production. The Oil Companies held up their end of the bargain: avgas production increased over twelve-fold from approximately 40,000 barrels per day in December 1941 to 514,000 SHELL OIL COMPANY v. US 9 barrels per day in 1945, and was crucial to Allied success in the war. 4