U.S. Oil Industry Split Over Need for Oil-Import Fee
Oil hasn’t been a terribly popular industry ever since patriarch and monopolist John D. Rockefeller was doing battle with government trustbusters, but the business is feeling especially unloved and unappreciated these days.
A year after the steepest price collapse since petroleum’s early days, oilmen complain that Washington is fiddling while Houston burns--that, for instance, the industry’s tax burden was increased by $10 billion even as its ranks were decimated by the nose dive in oil prices.
“Some people in Washington simply dislike oil companies,” grumbles Charles J. DiBona, president of the American Petroleum Institute.
Another oilman complains: “General Motors lays off 29,000 people and everybody in Washington screams for protection. We lose a couple hundred thousand jobs and nobody says anything.”
Lately, however, some oil leaders sound less like the monopolist Rockefeller and more like the pragmatist Lee A. Iacocca, who managed to set aside his distaste for government interference long enough to accept $1.2 billion in federal loan guarantees to bail out his car company.
“There comes a time,” declares Robert O. Anderson, the bow-tied former chairman of Atlantic Richfield, “when you have to face reality.”
Reality at least for now is $15 for a barrel of oil, a price that has such prominent industry names as Anderson and George M. Keller, chairman of Chevron and the leader of Big Oil’s lobbying arm, openly advocating that government prop up crude oil prices.
But the industry’s seeming shift toward support of such federal help has its own in-house detractors, underscoring a philosophical dilemma for oil executives seeking a way out of today’s hard times yet leery of the strings attached to government aid.
And timeworn ideological disputes over free enterprise and government regulation aren’t the only thing dividing oil’s house these days.
This year’s collapse in the price of a barrel of crude oil--to $15 today from $30 a year ago--has cut an irregular swath through the industry, leaving some companies in better shape than others and strategically less inclined toward industrywide aid measures.
Asks Richard C. Adkerson, head of oil and gas industry services in the Houston office of Arthur Andersen & Co.: “If you were the lowest-cost producer, would you want government help for everyone?”
Indeed, there are well-informed oilmen who say privately that $15 is not as bad a price as some claim. A high executive at one big, comparatively well-heeled oil firm says: “This thing’s been exaggerated a little bit. The issue gets very cloudy as to what price the industry could live with. It’s possible for the industry to get along at lower numbers than what you’ve been seeing.”
William Hermann, Chevron’s chief economist, says of an import fee:
“What’s happened to this industry that it can’t make money at a price five times the level of the early 1970s, when prices overall went up just three times? That’s going to be the first question someone in Congress is going to ask, and I think that’s a tough one to answer.”
At the same time, some form of government price-fixing is seen as the only sure way of protecting the oil market from the volatility created by the continued market power of the Organization of Petroleum Exporting Countries. It was a shift in OPEC production that triggered the price collapse starting in late November, 1985.
It adds up to a tough call for hundreds of industry leaders such as Robert Horton, a wisecracking Briton who was recently brought in as chairman and chief executive of Cleveland-based Standard Oil. Asked how he felt about an import fee to drive up oil prices, he said forthrightly:
“I’m an agnostic.”
With the fall in oil prices a happy experience for most American consumers so far, the justification for government intervention is only indirectly based on the oil industry’s financial problems. It rests instead on the implications for national energy security, a concern that has brought respected outside allies to oil’s camp.
Most recently, they include academics at Harvard’s John F. Kennedy School of Government, who last week proposed a $10-per-barrel tariff on imported oil--a much stiffer measure than advocated by Chevron’s Keller--to encourage domestic oil production and head off extreme reliance on imports.
“View it basically as buying an insurance policy against the cost of some catastrophe or tragedy you’re likely to face in the future,” said Harry G. Broadman, director of the Kennedy School’s Energy and Environmental Policy Center.
The damage caused to the oil industry by the abrupt fall in prices is well-documented. Despite a recent recovery in prices to $15 from a midsummer low of less than $10, U.S. drilling activity remains at less than half the level it was a year ago and about one-fifth that of the peak price year of 1981.
The roughly 50% drop in revenue flowing into the oil firms has prompted virtually all of them to lay off employees, sell assets, shut in tens of thousands of low-volume “stripper wells” and call a halt to dozens of exploration ventures--especially the costliest and potentially most rewarding ones. More than 100,000 jobs have been lost in the process.
Already, the closing of old wells and a slowdown in completion of new ones has dropped U.S. production of crude oil by 270,000 barrels per day to about 8.6 million barrels. Meanwhile, the lower prices for gasoline and other oil products have boosted the country’s appetite for fuels by 2.5%.
That has created a shortfall that is being filled by more imported oil than at any time since 1981--about 5 million barrels per day. It has made for a speedy reversal of a trend toward dwindling reliance on foreign oil that had resulted from conservation gains and improved efficiency. After peaking at 48% of U.S. consumption in 1977, imported oil dropped steadily to about 31% last year.
So far this year, imported oil--which, for geological and other reasons, can be profitably produced at lower world prices than U.S. oil--has climbed to about 35% of domestic consumption, according to the American Petroleum Institute. In the past few months, the share has exceeded 40%.
Some industry leaders warn that such month-to-month measures are unreliable. Strategists at one major company calculate that half the oil imported into this country this year has gone into inventory, and thus does not reflect true demand. Moreover, growth in total oil demand next year is expected to subside because the price of competitive fuels such as coal is catching up with oil and will regain some ground lost this year to petroleum.
Longer-Term Effects
But straightforward calculations by the American Petroleum Institute--generally supported by independent researchers--conclude that about three more years of $15-per-barrel prices would drive U.S. oil production down by 2 million to 3 million barrels a day while consumption climbed a like amount. The shortfall would thus drive the import share above 50% by 1990, the trade association calculates--a record high.
Most worrisome is the fact that the ultimate supplier of oil to energy-dependent nations is the Middle East, home to 57% of all known oil reserves and to the world’s most prolific and low-cost fields.
Already this year, Saudi Arabia--where oil can be pumped profitably for less than $2 per barrel--has jumped to fourth place from ninth among the foreign suppliers of oil to the United States. Saudi Arabian shipments here have more than tripled since 1985, to 638,000 barrels per day, in the aftermath of the Saudis’ decision to boost production.
The nation’s growing vulnerability to interruptions of oil supplies from the Mideast is an inevitable “social cost” that is not reflected in today’s seemingly cheap prices of gasoline and other petroleum products, Harvard’s Broadman says.
With similar logic, Chase Econometrics, a forecasting subsidiary of Chase Manhattan Bank, figures that the next oil crisis will occur in the 1989-1991 period and adds: “Today’s oil-field economics dictate that major additions to production will not occur until after a crisis has dramatically increased oil prices again.”
Unless, of course, prices are boosted artificially to encourage exploration and drilling.
Political Considerations
The Harvard researchers are pushing a fixed tariff of $10 per barrel, which Broadman admits is at least twice what Congress might support. In fact, some oil industry leaders are proposing far more modest proposals on the assumption that any measure that raises gasoline prices would be politically unfeasible.
After kicking around ideas that ranged from a “reverse windfall profits tax” to outright drilling subsidies, Chevron’s Keller--chairman of the American Petroleum Institute, which lobbies for 200 big oil companies--proposed a floor on crude oil prices.
He did not say what the price should be but hinted that to be politically acceptable it could not be any higher than the prevailing price, now about $15. That wouldn’t raise prices to consumers, and Keller said such a number would let the industry “survive” while assuring financial institutions that the economics will not get any bleaker than that.
To many industry leaders, however, $15 is either too high or too low.
Fred Hartley, the outspoken chairman of Los Angeles-based Unocal and longtime advocate of an oil-import fee to boost prices, calls Keller’s proposal a “gentle” one and suggests a floor price of $22 to $25 a barrel.
But a counterpart at another large oil company, who asked to remain anonymous rather than appear “confrontational” within the industry, says of an artificially higher price: “Most of the guys will take the money and pay off their bankers instead of use it to drill for oil. And if we get help now, the public won’t tolerate us making a dime when things get better.”
The greater a company’s involvement in refining and selling oil products, as opposed to finding and pumping oil, the better it is doing at today’s low prices. Among the strongest advocates of an import fee are independent oil producers; among the strongest opponents are said to be Exxon, Mobil and Shell.
“Those are the world’s biggest marketers of petroleum products,” notes Adkerson of Arthur Andersen.
Occupying the middle ground are many oil executives--including Richard Morrow, chairman of Amoco Oil, formerly Standard of Indiana--who say they will support an import fee if it does not exempt any oil producing nations or contain other bureaucratic pitfalls.
The industry’s experience with quotas and price controls in the 1960s and 1970s, generally intended to keep prices down rather than up, was unpleasant.
“We have not been an advocate because of concern that we could not attain a clean import fee,” Morrow says. “We are not opposed to an import fee, per se.”
Across-the-Board Levy
A “clean” bill would be one that applies to all incoming petroleum, including that from such oil-dependent Western Hemisphere countries as Mexico, Canada and Venezuela.
It would also apply to oil bound for such special-interest oil consumers as petrochemicals producers, steel plants and New England homeowners with oil-burning furnaces--groups whose elected representatives have sought to protect them in the past from higher prices.
Such industry disarray is more than academic. Oil industry leaders meeting recently in Houston were warned by Sen. Ted Stevens (R-Alaska) that the sharp divergence of opinion within the industry could spell doom for import-fee legislation in Congress.
“It seemed like the only thing the industry could agree on was that there was some sort of crisis that required some sort of response,” Stevens said.
But Adkerson said the longer the slump continues, the easier it will be to form a consensus.
“It’s been an evolutionary thing,” he said. “In places like Houston, there’s been a lot of emotional support for it, but you’d go to Washington and find out that the political realities were such that there was no constituency for it. And the larger international oil companies were opposed to it. But as we’ve lived through 1986, there’s been a growing degree of acceptance.”
