Industry Restructuring : Experts Fear Higher Gas Prices, Foreign Oil Surge
The restructuring of the oil industry--highlighted this week by Atlantic Richfield’s decision to cut a major part of its domestic operations and spend $4 billion to buy back a large block of stock--ultimately may contribute to increased dependence on foreign oil, weakened oil firms and higher gasoline prices, some industry experts fear.
The restructuring moves, however, are likely to continue as the U.S. oil industry struggles with lower prices, a glut of crude supplies and takeover threats.
Arco’s massive reorganization follows similar moves by such firms as Phillips, Texaco and several other oil giants, which since 1981 have sold or closed refineries, gasoline stations and other unprofitable operations, slashed oil-exploration budgets, bought back their own stock or acquired other oil firms.
Other companies mentioned as candidates for further restructuring include Exxon, Mobil, Standard Oil of Indiana, Standard Oil of Ohio and Amerada Hess. Many, in fact, already have taken some steps in that direction.
These companies essentially are giving much of their cash to shareholders rather than using it to explore for more reserves.
But by reducing domestic oil production at a time when imports of crude oil and gasoline have been increasing, some analysts say, these moves threaten to roll back the nation’s hard-won gains to reduce its dependence on foreign oil.
Aided by the strong dollar, which has made foreign goods cheaper, imports of crude oil rose 6.5% last year, the first increase since 1979. Imports of gasoline rose even more, by 30%, as Middle Eastern nations and other producers have built new refineries in recent years in part to reduce their dependence on selling crude oil.
The Energy Information Agency, the government’s chief energy forecaster, predicts that the import percentage of total U.S. oil consumption could rise from its current 29.6% to 40% by 1990 and 48% by 1995, which would top the previous high of 46% set in 1977.
Some experts say this increase in imports is not much of a problem right now, given plentiful fuel supplies and the progress made to conserve energy. But they fear that continued increases in imported oil could again make the nation vulnerable to oil shortages and sharp price rises like those in 1974 and 1979 sparked by political upheaval in the Middle East.
Existing Vulnerabilities
“There’s nothing that’s happened in recent years to make the Middle East more stable,” said Larry Goldstein, executive vice president of the Petroleum Industry Research Foundation. “The vulnerabilities that we had in 1979 are still here.”
These worries also come amid concern about the slowdown in development of oil shale, solar power and other alternative energy sources. Also sparking concern is a Reagan Administration proposal, amid budget-cutting pressures, to at least temporarily halt additional purchases of crude for the nation’s Strategic Petroleum Reserve, the federal emergency stockpile. The proposed halt as of next Sept. 30 would put the reserve at about 500 million barrels, equal to about 90 days of imports.
Industry experts also are concerned that the increased debt that oil companies have added to buy back their stock or acquire other oil companies has weakened them financially. Should oil prices tumble further, as many analysts predict, these firms may be forced to sell still further assets to help pay the interest on their debts.
Standard & Poor’s Corp., a major debt-rating service, warned Tuesday that it might lower the quality ratings on some of Arco’s debt securities and preferred stock. The rating service noted that Arco’s ratio of debt to capital would rise to 63.5% from an otherwise expected 31%, the result of a $4-billion increase in its debt to buy back shares.
River of Cash
Because of its strong $4-billion-plus annual cash flow, Arco is quite capable of handling more debt, some analysts said. “The company is like a river, pouring cash out,” said one investment banker.
But other firms may not be so flexible. Some major oil firms “have such large debt burdens that their competitive vigor and risk-taking ability must be in serious doubt,” Fred L. Hartley, chairman and chief executive of Unocal, told a House judiciary subcommittee on monopolies and commercial law last week. Unocal itself plans to boost its debt to buy back its shares and thwart an unfriendly takeover from Texas oilman T. Boone Pickens.
“The search for development of domestic oil and gas reserves will be a victim” of oil firms’ higher debt loads, said Sanford L. Margoshes, an oil analyst at the brokerage of Shearson Lehman Bros. “Servicing debt will take precedence over searching for oil and gas.”
In addition to its stock buy-back, Arco plans to sell all of its 1,350 gas stations east of the Mississippi, which it says have been unprofitable since 1981.
Some industry experts fear that reduced numbers of service stations eventually could lead to retail gasoline prices that are higher than they otherwise might have been. As a result of the industry shakeout, the number of stations nationwide has dropped to 130,000 from 240,000 in 1980, according to Dan Lundberg, who publishes an industry newsletter that tracks gasoline prices.
Non-Competitive Actions
Fewer service stations and gasoline suppliers give those remaining “a greater ability to act in a non-competitive fashion, leading to higher prices,” contended Edwin Rothschild, assistant director of the Citizen/Labor Energy Coalition, a Washington-based consumer organization.
In fact, despite continuing weakness in the worldwide fuel market, prices at the pump have been increasing in the last two months, largely because refiners have been producing less gasoline recently. Refiners have kept crude oil inventories at sharply lower levels for fear that prices will decrease.
The average retail price of a gallon of self-serve unleaded gasoline has climbed nearly 10 cents to $1.178 since Feb. 8, Lundberg said. In Los Angeles, the rise has been even higher, jumping nearly 16 cents to $1.235.
Lundberg said there is pressure for prices nationally to rise even further, as wholesale prices have risen even faster than retail prices.
In addition, Conoco on Tuesday announced a 60-cent increase to an industrywide high of $28.25 a barrel for the major grade of U.S. crude oil, marking a continued recovery in oil prices from five-year lows set earlier this year.
However, prices in oil markets outside the United States have been falling recently, and analysts say prospects for a major price decline are still pervasive.
