Inside the Big Oil Game

From Saudi Arabia to Sumatra, from Nigeria to the North Sea, up comes the oil. And every day, 24 hours a day—at a rate of 30,000 gallons per second—the petroleum-thirsting world swills it back down in desperate, energizing gulps.

Welcome to the Oil Game—the highest stakes, most dazzling game on earth. See the world’s largest, wealthiest companies match wits with lumbering bureaucracies. Behold developing nations become Croesus-rich overnight. Watch capitalists try to raise billions for offshore drilling rigs taller than the Empire State Building, for supertankers bigger than aircraft carriers, for refineries that look like visions out of Star Wars. Be amazed as mesmerized millions of people place their bets on a future of abundant energy and hope for the best, in a game with rules so complex and fast changing that practically no one can understand them.

It is, of course, the craving for crude that keeps the game going. Petroholic economies everywhere remain excessively hooked on Demon Oil. When consumption periodically eases back, as it has been doing moderately in the industrial nations during the past two or three years, it is not so much because of effective governmental policies or the shift to alternative fuels as it is because of economic weakness and fitful growth at home.

On paper, the U.S. at long last seems to be tempering its petroleum profligacy. Annual growth in demand subsided from 5% as recently as 1977 to 2% last year. But nearly all the improvement has come from conservation by industry, while individuals blithely go along wasting fuel. Not only has demand for gasoline, which accounts for one-third of the nation’s fuel bill, continued to grow fast, but U.S. dependence on foreign oil has increased by nearly 50% since the 1973-74 Arab oil embargo, and this year will reach some $50 billion.

For the second time in a decade, energy scare stories have become the stuff of headlines: motorists who confront the prospect of a summer of gasoline shortages at $1 per gal.; homeowners who have visions of dollar bills fluttering up the chimney every time the oil burner in the basement trips on. Angry and resentful, people are blaming the one institution that not only grows richer every time there is an oil squeeze, but is as close at hand as the nearest service station: the $360 billion-a-year U.S. oil industry.

According to a recent CBS-New York Times poll, 69% of the public still believe that gasoline prices are rising not because there is an energy crisis but merely because the oil companies want to make more money. In a sentiment that is widely shared, Margaret Dadian, vice president of an Illinois sales company, complains: “There is a shortage all right, but not as serious as we are told it is. It is more a question of oil companies’ holding back until they can get higher prices. We have Arabs of our own in this country.”

All around the U.S., the lament is the same: in ways both devious and sinister, and too mystifying to understand, Big Oil is somehow out to rip off the public. Says Irene McMackin, a Milwaukee public relations consultant: “I just don’t feel the crisis is real. I don’t trust the oil companies.” Adds William Meier, an Indiana insurance agent: “My emotional response is that the oil companies are trying to do a number on us.” Even a high-ranking General Motors executive in Detroit remarks: “The whole thing smells funny to me.”

Last week the industry’s critics got some powerful new ammunition. Fifteen of the nation’s largest oil companies released first-quarter profit figures, and they showed an acceleration of the winter-long earnings surge. Included in the group were six of the so-called Seven Sisters,* the richest and most powerful oil companies in the world, which, more so than their smaller competitors, have huge investments in all four aspects of the business: drilling, transporting, refining and marketing.

Profits are shooting up because tight supplies worldwide have allowed oil companies to raise their prices just as the 13-nation Organization of Petroleum Exporting Countries has raised its own. Companies with big business overseas had certain advantages. Earnings in markets like West Germany, which has no price controls on petroleum products, climbed especially sharply. Also, the recent strengthening dollar against foreign currencies improved the overseas balance sheets of the companies.

Both Shell Oil, the Houston-based affiliate of Europe’s Royal Dutch/Shell Group, and Standard Oil of Indiana, one of the nation’s largest retailers, are heavily dependent on business in the U.S., where prices are federally controlled. They had large increases that only seemed puny when compared with the others, which enjoyed gains that ranged from impressive to downright startling: SoCal’s ARRIS earnings rose 43% over the past year, Gulfs profits increased 61%, and Texaco’s were up 81%. Marathon Oil had a rise of 108%, while Amerada Hess jumped 279%. Standard Oil of Ohio, holder of a large and profitable stake on Alaska’s North Slope, increased 303%; Continental Oil, which owns Consolidation Coal and suffered a slide in income during last I year’s coal strike, posted a stunning recovery of 343%.

The biggest oil multinational of them all, Exxon Corp. (1978 sales: $60.3 billion), reported a gain of 37.4%, to $955 million, by far the most impressive three-month earnings period in the company’s history. Recalling the rough treatment that the press gave top management in the winter of 1974, when Exxon announced similarly enormous profit gains during the Arab oil embargo, the company avoided a press conference; instead, it announced the earnings by faceless press release. Chairman Clifton Garvin and President Howard Kauffmann even managed to be out of town on vacations, leaving any explaining to be handled by a monotoned vice president.

The embarrassment of riches comes when oilmen are battling to keep as much as possible of the increased profit that will begin flowing to the industry at the end of the month, when Jimmy Carter starts phasing out domestic crude oil price controls. As a result of controls, the average price of crude in the U.S. is $9.45 per bbl., vs. the world level of $14.55; removing the ceiling will increase oil company revenues by perhaps as much as $ 13 billion over the next 28 months.

As the debate over decontrol and Carter’s call for a windfall profits tax intensifies, the President has been amplifying charges made more than a year ago that the industry is plotting “the biggest rip-off in history.” Now, Carter is actually accusing oilmen of trying to subvert Congress against the will of the people. In fact, Congress was never as opposed to the windfall tax as people had at first thought, and some form of tax seems almost certain to pass.

The news of the latest profits gusher reached the White House just as Carter was sending Congress his proposal for the windfall tax, and he seized the opportunity to make yet another appeal for passage, saying that the industry is “already awash” with profits. The occasionally populist President shows a deep distrust of large oil companies, and they are perfect targets for a bit of demagoguery because much of the public dislikes them too. Carter’s verbal overkill is also intended to deflect public fury from the White House when gasoline prices, which are already rising sharply, go up even more as a result of decontrol.

The attacks are only fanning suspicions and dividing the nation instead of providing sober answers to the questions that bedevil the public. Among them:

Are the companies creating a phony shortage? No. The crisis is real. World supplies are limited, and the present squeeze has been caused by cutbacks that began in Iran last autumn and have spread to other producing countries.

Are the companies hoarding gasoline to raise the price? No. They are rebuilding their inventories, which they had to draw down sharply in recent months in order to supply customers. Companies are also shifting production from gasoline to heating oil so as to build up stocks for next winter. Even Carter last week admitted that this is necessary, and he warned that the U.S. faces gasoline shortages this summer and fall and a worse pinch next year.

Are the companies earning excesisive profits? Not really. True, they take advantage of overly generous tax credits on their foreign earnings.

What is more, their profits rise automatically whenever prices are kicked up by OPEC. With all that, oil firms last year earned only 4.5% on their revenues, vs. 5.25% earned by all U.S. industry.

In fact, Big Oil is hardly the voracious, devouring money muncher that the White House contends. That distinction belongs to OPEC, which provides the world with half its daily petro-ration and, by controlling the supply, fixes the price. Having hiked the base price 14.5% since January, the cartel has lately tacked on expensive premiums and surcharges and now threatens price increases in June. The rises are a major reason why inflation hit 13% in this year’s first quarter.

Since 1973, as the price of the cartel’s oil has jumped from $2.41 per bbl. to $14.55, an incredible $550 billion has cascaded into OPEC coffers. The cartel’s leaders, many of whom head backward and unstable regimes, have been propelled to the forefront of world economic, financial and strategic affairs. Variously smooth and snappish, OPEC’S chiefs contend that they are merely embellishing the rules of the game as taught by the oil majors. From the moment that John D. Rockefeller organized the infant U.S. petroleum industry into a producers’ cartel to maintain stable and profitable prices, companies have employed one device after another to prevent price-disrupting swings between glut and shortage.

Now, OPEC is trying to carry the concept of price fixing to its extreme limits. Reports TIME Correspondent Dean Brelis from the Middle East: “The producing states have discovered that the secret to the Oil Game is collusion, not competition. So far, the cartel’s principal difficulty has been getting all members to agree to price-propping production quotas. But Libya has been cutting back on its normal deliveries by 17% since April 1, while Iran, whose production is now at 4 million bbl. a day, is actually pumping only two-thirds of its prerevolutionary volume. Others may soon follow with cutbacks of their own.”

Some cartel members, of course, really do need the money. States like Venezuela and Indonesia have launched crash development programs to provide for their large, poverty-blighted populations. From an initial surplus of $60 billion in 1974, which the cartel simply could not spend fast enough, OPEC’S ledgers have returned to close to balance for nearly all members. But there are major exceptions. Saudi Arabia, Kuwait and the smaller Persian Gulf sheikdoms still have large surpluses.

Much of the cartel’s wealth has been squandered on well-intentioned but poorly planned and executed development schemes: atomic power plants for Iran, whose bountiful natural resources can meet that nation’s energy needs for a century or more; steel mills and petrochemical plants at remote desert sites throughout the Gulf, where transportation costs alone render the products uncompetitive.

Yet even so, OPEC officials insist that there is nothing wanton or immoral about their policies. Cartel members point out that in Western Europe most governments still collect more in taxes on petroleum imports than OPEC does when it exports the crude. Eventually, everyone stands to lose. The world’s poorest countries have borrowed so much to pay for oil that their accumulated indebtedness has risen to more than $210 billion. Such major U.S. lenders as Citicorp and Chase Manhattan have huge loans out to India, Pakistan, Turkey and many other countries. Fears are rising that sooner or later some borrowers will not be able to afford even their interest payments. The threat is not simply of defaults leading to instability, but of worsening hunger and unrest among the world’s more than 1 billion subsistence-level people.

These harsh realities are every bit as troubling to oilmen as to anybody else. They chafe at charges that they belong to some sort of seamless monolith, and they are bewildered by the public’s suspicions. The dismay is understandable. Hardly the conspiratorial business that it is widely thought to be, the 1.8 million-employee industry operates in an intensely competitive arena.

Some 50% of all domestic production, which now stands at 8.7 million bbl. per day, comes from wells dug by the industry’s 10,000 independent wildcatters. The breed’s home base is the boom city of Houston, and the risks and rewards of the profession are reflected in a remark by one of its members, Chester Benge: “The oil business is one of the few businesses in the world where you can go to bed poor and wake up rich.”

Though the Seven Sisters dominate the industry, their influence and power are actually being cut down by the energy upheavals of the 1970s. This winter the worldwide shortage of crude has encouraged one nation after another, and numerous independent oil firms, to deal directly with OPEC, in effect short-circuiting the big multinationals. Says Thornton Bradshaw, president of Atlantic Richfield of Los Angeles, which is nearly as large as the Sisters themselves: “OPEC realizes that it doesn’t need the internationals any more. Smaller companies can go directly to the producing state.” From a time not long ago when the Sisters all but ran the nations that sold them their oil, the companies now find themselves largely reduced to hired contractors that pump out the crude for a fee.

The senior Sister of the sorority, Exxon, has the highest visibility, not only in OPEC, but in the U.S. as well. As the energy squeeze has worsened, the company has grown so preoccupied with its public image that these days it spends 78% of its $18 million network-TV and magazine advertising budget not on selling products but on promoting its business as one essential to the nation’s strategic interests. No longer merely a department title, public affairs affects who is promoted and who is fired within the company, and what actually gets decided. Confesses Chairman Garvin: “I simply do not know of any operating decisions that now get made without lots of awareness of the political and public implications.”

Yet the company remains wary and unsure of the public, and in its towering, glass and stone headquarters in Manhattan’s Rockefeller Center there is a vague but persistent sense of being under siege.

For engineers and chemists like Garvin, who have risen through the company’s legendary “Texas pipeline”—from Exxon’s sprawling refinery complexes of the Gulf Coast to senior management positions—the Oil Game is no longer very much fun. Hounded by the White House, harassed by consumer and environmental groups, harangued even by OPEC for profiteering, the company has become a target of opportunity for practically every cranky, disaffected group.

Garvin reflects the tensions that plague the company. Tall, blond, looking younger than his 57 years, he nonetheless seems put off balance by the schizoid demands of his position. Is his primary task to make profits for shareholders, who consist not just of the Rockefeller family (they control only about 1% of the stock) but also of union pension funds, investment trusts, and more than 600,000 everyday investors? Or is his main job, as Exxon’s advertisements imply, to be a defender of the national security? As Garvin told TIME Correspondent John Tompkins, in an observation that no Exxon chief would have made as recently as five years ago: “I accept that we are in some sense ‘different’ and that Government is going to have an increasing role in setting the parameters. Our problem is in getting it to act realistically.”

Some other Exxon executives are less circumspect. Mused one to Tompkins: ”What we’re playing is something like Monopoly, only the board has been changed around, and the dice are loaded. Every time you roll you go directly to jail, and whenever you do collect money it is in rials or yen. Worst of all, you have to play blindfolded while your opponents get to cheat and knock over the table in periodic rages.”

Even under the best of circumstances, the challenges that the industry encounters every day create problems of mind-numbing complexity. The volume of oil moved by the companies far exceeds that of any other product or commodity in the world. The more than 380.5 million tons of supertankers, the countless barges and trucks, the 227,066 miles of pipelines in the U.S. alone make up the world’s biggest transportation system.

When technical hiccups occur, the whole global system often begins to tremble and twitch. Example: just as U.S. refinery capacity was being strained by the demand for gasoline, Exxon was hit in late March by a freak fire at its Bayway Refinery in Linden, N.J. The accident has knocked out some 160,000 bbl. per day of refining production until at least June. That has kept the company switching around tankers on the high seas, sending them to other refineries in a desperate rush to make sure that every drop of crude is refined in a hurry.

OPEC’S production cutbacks are aggravating the operational headaches. To begin with, not every refinery can process every grade of crude. From high-quality Nigerian oil that contains almost no sulfur at all to the heavy goo that glubs from the ground in Kuwait, petroleum covers a wide range of viscosities and weights. But not all refineries can handle every kind of oil, and as OPEC’s squeeze has intensified, supplies of light oil used for gasoline have tightened.

To try to keep ahead of the uncertainties brought on by supply interruptions, Exxon uses a pair of IBM 3033 computers that are constantly updated with details that show, among other things, where the entire Exxon fleet is at any moment, and toward what ports the ships are headed. Sometimes the telex traffic originated by the so-called LOGICS system takes on real drama. Recently, when LOGICS operators learned that an Exxon tanker was due to call at the Colombian port of Buenaventura, where marauders in small boats are common at night, a message was quickly dispatched to the ship’s master: “Beware bandits and double watch. Raise accommodation ladder and lay out high-pressure hoses.”

People accept and admire the technical expertise of oilmen; it is the business side of the industry that they suspect. They fail to understand why prices keep going up, especially when the announcement of an OPEC production cutback or an increase in the cost of oil that is a month or more away by sea from the U.S. seems almost immediately to send the price of gasoline leaping at the pump.

There are, in fact, convincing reasons, some of them highly technical. Gasoline prices are federally controlled, but ceilings vary from station to station, some right across the street from each other, because their expenses vary. The price control formula permits dealers to offset the cost of gasoline, the rent on their gas stations, the wages of their employees and other overhead expenses, and still earn a profit. For competitive reasons, dealers normally sell at somewhat less than their maximum allowable prices; drivers shop around for the best prices when supplies are ample. But when a small surplus of oil turns into a modest shortage, companies are forced to cut back on gasoline shipments, and that lets retailers raise their prices right up to the federal ceilings.

Coming on top of OPEC’s cutbacks, the cartel’s price increases have a snowball effect. With supplies tight, retail prices in the U.S. begin edging up to the maximum. Then, when OPEC raises its crude oil charges, the U.S. Government allows the price controlled ceiling itself to creep higher. As the demand for gasoline mounts, the retail price moves to the new, higher ceiling. In the last six months alone, the average U.S. price of gasoline has risen from 67¢ to 77¢ at the pump.

Since January, demand for gasoline has jumped more than 5% over a year ago. Consumption of unleaded gasoline has soared 25%, far surpassing the capacity of refineries to make enough. To keep abreast of demand, refineries have had to wring every last drop of gasoline out of crude oil shipments, and this has held down production of heating oil. Now, just as the summer driving season is approaching, refineries may have to cut back on gasoline production in order to increase output of heating oil to replenish stockpiles.

Though the companies are only doing what is necessary to keep the oil flowing, their public-image difficulties are compounded by one economic fact that no oilman can explain away: for better or for worse, the Seven Sisters, and many of their smaller competitors as well, have interests that are often parallel to those of the price-gouging OPEC cartel.

Many factors—earnings, accounting practices, taxes—discourage companies, often forcefully, from pressuring OPEC to hold down prices. That is something that the companies once managed with ease, but now no longer have much power to accomplish. Yet if they tried, they would be harming their own interests. The Sisters hold concessions in non-OPEC areas, like the British and Norwegian North Sea and Canada. Every time the cartel jabs up the price, up goes the value of the companies’ holdings as well.

The Big Exporters 1978 estimates

Saudi Arabia $35,200,000,000 Iran $20,700,000,000 Iraq $9,800,000,000 Libya $9,800,000,000 Nigeria $9,500,000,000 United Arab Emirates $8,600,000,000 Kuwait $7,700,000,000 Indonesia $6,500,000,000 U.S.S.R. $5,800,000,000 Venzuela $5,400,000,000 Algeria $5,100,000,000 United Kingdom $2,400,000,000 Norway $1,700,000,000 Mexico $1,600,000,000

The Multinationals excluding government-owned oil companies operating in only one country. 1978 sales** Exxon $60,334,527,000 Royal Dutch/Shell $44,054,400,000 Mobil $34,736,045,000 Texaco $28,607,521,000 British Petroleum $27,390,915,000 Standard Oil of Calif. $23,232.413,000 Gulf Oil $18,069,000,000 Standard Oil (Indiana) $14,961,489,000 ENI (Italy) $12,500,000,000 Atlantic Richfield $12,298,403,000 Française des Pétroles $10,875,1 17,000 Continental Oil $9,455,241,000 Petrobrás (Brazil) $9,131,101,000 Elf -Aquitaine (France) $8, 341,081,000 *1977 **minus excise taxes

American companies that operate abroad, including the oil firms, also enjoy the U.S. tax code’s foreign credits. Unlike most nations, the U.S. not only taxes domestic income, but all earnings worldwide of American taxpayers. The credits are quite legitimately designed to make sure that a company is not taxed twice on foreign income.

For oil companies, however, the credits produce a perversely beneficial result. Instead of simply holding their U.S. tax liability to the nation’s corporate rate of 46%, which is what they are intended to do, the credits sometimes let companies pay no taxes at all on their foreign profits. The basic reason: if a company has to pay taxes of more than 46% on its profits in a foreign country, the excess is counted as a credit. Then the company can use the credit to reduce or even totally wipe out income taxes owed to the Internal Revenue Service from profits earned in other countries, where the rate is lower than 46%. Income taxes in some OPEC states not only are much higher than 46% but are sometimes based on the price of the oil. That gives the companies large credits that they can use to “shield” profits from, say, refineries in Caribbean tax havens where there are low or even no taxes at all. Complains Washington Attorney Jack Blum, for eleven years a staff member of the Senate Antitrust and Monopoly Subcommittee and the Foreign Relations Committee, and now a frequent critic of the Oil Game’s international accounting and tax methods: “We have reached the point with the oil companies where the foreign tax credit is being abused on a scale that no one had imagined. The whole scheme is now simply subsidizing foreign imports.”

One of the biggest beneficiaries of all is the Arabian American Oil Co., the Delaware corporation that is jointly owned by Exxon, Texaco, Mobil and SoCal, and pumps the oil that flows from Saudi Ara bia. Last year the company earned profits of more than $580 million, but it paid no U.S. income taxes at all on its Saudi bonanza. In fact, it has paid no such taxes since 1950.

Carter has asked for legislation to tighten the loopholes that permit such abuses, but there is a common belief, fanned by some of the President’s own charges, that Congress is a patsy for petroleum interests. The impression is strengthened by Congress’s own inaction on energy policy. Sometimes, however, the foot dragging is actually helpful. Last week, for instance, a House committee sensibly refused to give Carter stand-by authority to order gas-station closings if supplies get too tight. The closings might well provoke motorists to start topping off their tanks, resulting in long lines at the pump just as during the Arab embargo.

One of the biggest changes in Congress in recent years is that it is no longer dominated by a few pro-oil titans from petroleum states. The industry still has powerful legislative pals, notably Louisiana Democrat Russell Long, chairman of the Senate Finance Committee. But legendary figures like Lyndon Johnson and Sam Rayburn of Texas and Oklahoma’s Robert Kerr are long gone. Now the industry has to deal instead with all 535 members of the House and Senate. Explains one leading oil lobbyist: “The industry realizes that it has to speak to everyone and it tries. We let the facts speak for themselves.”

The industry’s big advantage is that it can produce more “facts” more quickly than any of its critics. Since the 1973 Arab oil embargo, the companies have greatly expanded their Washington staffs; Gulf Oil, for example, increased its corps of lobbyists, lawyers and aides from four to twelve.

The Big Importers 1978 estimates (nonCommunist countries)

United States $42,200,000,000 Japan $23,900,000,000 West Germany $14,100,000,000 France $11,.100,.000,000 Italy $8,000,000,000 Spain $4,400,000,000 United Kingdom $4,200,000,000 Brazil $4,100,000,000 Netherlands $2,500,000,000 Sweden $2,500,000,000 Belgium/Luxembourg $2,500,000,000 India $1,500,000,000 Canada $1,200,000,000 Australia $800,000,000

Although they try to influence legislation, lobbyists as well as executives back in home offices spend much more time wrestling with regulations. Of the Department of Energy’s 18,900 employees, nearly half are employed only to propose, write and enforce regulations. In Houston, the DOE keeps 40 full-time auditors in residence at Shell headquarters, and other companies also have their own in-house bureaucrats hovering in the halls. Much of the DOE’S staff has a self-interest in seeing the regulations proliferate: without them, Government workers would be out of jobs. So would small armies of lawyers in Washington, New York and Houston. Says a rich Houston lawyer: “Government regulations have been a real source of new business. The sums of money involved in DOE regulations are astronomical.”

Many of the regulations benefit OPEC.

The worst offender is the so-called entitlements program. It was set up under Gerald Ford in 1974 to equalize the burdens of surging import prices between refineries that depend on expensive foreign oil and those with supplies of low-cost domestic petroleum. The complex program works this way: for every barrel of domestic crude that a refinery processes, the company must make a payment into an entitlement pool. The payment raises the price of each barrel of domestic oil halfway up to the cost of more expensive OPEC crude. At the same time, any refinery that imports costlier OPEC crude gets to withdraw an equal amount from the pool. For example, a refinery that buys domestic oil for, say, $9.45 a bbl. would pay about $2.50 to the fund; a refinery that imports foreign oil for $14.55 would then collect that $2.50. Observes Oil Economist Arnold Safer: “The entitlements program, in effect, gives any company that imports OPEC oil $2.50 for absolutely nothing. The system creates a perverse incentive, just the opposite of what is really needed.”

What is needed, of course, is an energy policy to lead the U.S. from its dependence on petroleum, especially imports. Energy Secretary James Schlesinger is probably too pessimistic when he warns that a severe global supply squeeze could come as early as the mid-1980s, but the nation will be in increasing jeopardy anyway. The threat is not that some day soon there will be much too little oil, but that consumers will have to pay ever more extortionate prices to get it. Says Guido Brunner, the Common Market’s energy commissioner: “We have to realize that the age of cheap energy has come to an end, not because of diminishing supplies but because of OPEC’s production policies.”

The cartel’s share of the world market has dropped slightly, from 65% in 1973 to 58% now, as a result of increased output from Alaska, Mexico and the North Sea. But it would be foolhardy to expect that OPEC will any time soon lose its ability to control prices. Saudi Arabia alone has more than 25% of all proven world reserves; its daily output of 8.5 million bbl. is indispensable to Western Europe and Japan, and provides more than one-fifth of all U.S. crude imports.

Only two years ago, oilmen were confident that the Saudis would steadily boost production, to as much as 20 million bbl. a day by the early 1980s. A Senate report three weeks ago concluded that the West will be lucky if the Saudis achieve much more than half that level over the next eight years. They have been shaken by the experience of Iran, where the social strains of rapid industrial development brought on revolution. The royal family is split between moderates eager to expand production, if that is what the U.S. requests, and hard-line elements that want to hold down production and prop up prices. No oilman knows what the Saudis will do.

Carter’s plan to decontrol domestic crude-oil prices is a good first step to help the nation shake free of foreign oil dependence and the uncertainties that come with it. But there are misconceptions as to why the move is the right one.

It is doubtful, for instance, that rising prices will bring about enough conservation to cut oil imports sharply.

Gasoline prices have more than doubled since 1973, a far steeper climb than that of inflation, and yet consumption continues to surge. Gasoline prices would have to climb much, much higher to make a significant difference; moderately higher prices will help a little bit, but nowhere near enough to make that alone the reason to decontrol.

A bigger benefit of decontrol will come from increased domestic production. When prices are free to climb to the world level, domestic output is likely to rise as companies pump more oil out of existing wells that are now uneconomical to keep on stream. The battle between Carter and the oil industry over his windfall profits tax concerns whether decontrol will also lead to increased exploration and drilling of new wells that will raise production. The President has repeatedly hit the industry with the charge that oilmen will just pocket the profits from decontrol. Even under existing price controls, however, the industry has spent far more than ever before in its history in the stepped-up search for oil, not only overseas in countries outside OPEC, but also in the U.S.

Oilmen now hope that a big new play will develop in some fairly promising areas of Oklahoma, Texas and, most important, the so-called Overthrust Belt in the foothills of the Rockies. Says Joseph Reid, president of The Superior Oil Co.: “The price for new gas and oil is such that people can afford to take more risks and drill deeper than when prices were cheaper. We are drilling in places where we previously would not have drilled. What was uneconomical is now economical.”

One question is whether there is much domestic oil left to be discovered. Oilmen say there is, but the odds are against them. With fully 507,034 operating oil wells dotting the landscape, the U.S. is the most explored region on earth. Last year companies and wildcatters drilled 48,573 new wells around the country, but discoveries were disappointing.

Decontrol could lead some oil companies to drill merely for the sake of appearances. Opinion among Exxon’s top management was divided on whether to invest what eventually became $460 million last year in a so-far futile search for oil in the Baltimore Canyon area of the Atlantic. Though preliminary seismic studies were not encouraging, the company went ahead anyway. The decision was made partly on the grounds that it could not be seen as declining to explore in an area so close to the petroleum-hungry Northeast.

Carter’s windfall profits tax would permit oil companies to keep fully 50% of the decontrol bonanza to spend on the search, and that seems plenty. The other half would go into an Energy Security Trust Fund. As he proposed to Congress last week, about 75% to 80% of the fund’s money would be spent on financing the development of alternative sources of energy like solar power, the oil and gas that can be extracted from coal, and the petroleum that lies trapped in shale rock. Fifteen percent or so would be spent on aid to low-income families that would suffer from rising fuel prices. The remaining 5% would go for further development of the nation’s mass-transit system.

Carter’s tax approach will help ensure that many kinds of companies, small as well as large, and industries besides oil will get a chance to test daring ideas. Oil companies should not be encouraged to try to dominate, or monopolize, whole new alternative-energy industries that come into being to compete with petroleum. In such esoteric fields as the direct conversion of sunlight into electricity and the extraction of gas from sea water and oil from coal, companies in other industries—electronics, mining, shipbuilding—have as much expertise as the oil industry and, in some cases, more.

Since Congress increasingly favors some sort of excess profits tax on the industry, a number of companies are coming around to a grudging acceptance of the idea, just as long as the levy would contain a so-called plowback provision that would permit them to reduce windfall taxes by investing the money in exploration. Congress could well go along with a plowback. Though Carter has attacked the scheme as a loophole “that you can sail an oil tanker through,” he may find that without a plowback he will have real trouble getting a tax at all.

People may not like it, but the U.S. badly needs the Sisters, the big independents and the wildcatters. The world requires more oil, and surely nobody knows how to find the crude better than oilmen do. Energy Secretary Schlesinger, who came into office both suspicious and wary of the industry, has since grown to appreciate the difficulties of the business. Says he: “The companies do a reasonably good job, far better than people are willing to recognize.” In dealing with the OPEC countries, he continues, “the only alternative would be a Government purchasing monopoly, and the overall performance of federal procurement does not make a case that the Government would do any better than the companies, and it is not likely to be as good.”

Snapping and snarling at the industry benefit nobody—except the OPEC producers, who exploit the divisions within importing nations. Only when those countries conserve more, produce more and reduce their umbilical dependence on the cartel, can they beat the Oil Game.

* Exxon, Gulf, Mobil, Royal Dutch/Shell, Texaco, British Petroleum, Standard Oil of California.