Embarrassment of Riches

A Spindletop of money lets off an uproar of controversy

Once again, the nation's energy debate deteriorated into a cacophony of angry charges, bitter recriminations and defensive denials. As irate Americans paid their first newly inflated heating bills, Exxon and other oil giants last week reported a new Spindletop of profits. For a people unshakably convinced that somebody must be ripping them off on energy prices, here was smoking-gun proof.

The specter of Big Oil wallowing in billions raised a number of policy issues that could change the structure of the nation's energy institutions. Talk rose in Washington of increasing the taxes that oilmen must pay, of putting limits on profits and keeping controls on prices, perhaps ultimately of breaking up the companies or moving toward partial nationalization. There was not much discussion that holding down profits might also reduce exploration and production, that holding down, prices would fire up demand for even more oil imports. At the same time, the U.S. may have to move toward more dependence on foreign oil because a major new report cast doubt on the future expansion of domestic nuclear power (see following story).

Exxon set off the latest oil brouhaha with a bland eight-page report on its business from July through September. This showed that the world's second largest firm (after General Motors) had more than doubled its profits to a walloping $1.1 billion--its first billion-dollar quarter in history. Soon after, other U.S. energy corporations reported spectacular quarterly earnings. Among the majors, Texaco walked away with the dubious first prize of a 211% increase, while Standard Oil of Ohio was second at 191% and Conoco third at 134%.

Immediately a storm of protest broke out. President Carter threatened to punish oil companies if Congress failed to pass a stiff windfall tax on profits from oil decontrol. House Speaker Thomas (''Tip'') O'Neill called the profits ''sinful,'' while James G. Archuleta, head of the Oil, Chemical and Atomic Workers called the Exxon profits ''pornographic.''

Under normal circumstances, Exxon's report would have been cause for corporate chest puffing. But Chairman Clifford C. Garvin Jr. tried unpersuasively to accentuate the negative, arguing that earnings in the U.S. from refining and marketing ''continued to be depressed.''

Little else was low. Despite decreases in sales of petroleum products and natural gas and a drop in refinery production, Exxon's revenues increased 30%, to $20.6 billion, compared with $15.9 billion in last year's third quarter. Net income soared 118% to $1.1 billion. Earnings per share jumped from $1.18 to $2.60, but Garvin failed even to mention that bullish news in his statement.

The high earnings were due partly to special, unrepeatable circumstances. The third quarter of 1978 had been the worst three-month period in five years, and thus comparisons with this year's figures would show exaggerated growth. A July change in British tax law provided a onetime $200 million bonanza, and a reduction in foreign exchange losses saved Exxon $51 million. Those two items accounted for nearly a quarter of the 118% increase.

In addition, the high profits resulted much more from a surge in foreign earnings than from U.S. sales. Profits in Europe grew sharply because sales that have been depressed since 1973-74 began to pick up. Exxon's earnings on refining and marketing abroad soared 306%, to $610 million, and that ultimately will help the nation's balance of payments. Proceeds from U.S. petroleum and natural gas operations increased 18.5% in the third quarter but have been up only 2.7% in the first nine months of this year.

Yet Exxon, and all energy companies, unquestionably have benefited from the tight energy market and OPEC price increases following Iran's reduction in oil production a year ago. Exxon conceded that the "major contributor" to the earnings increase was "improvement in [profit] margins in most markets as compared with depressed 1978 levels." Profits on heating oil have risen sharply. Mobil says that its worldwide petroleum earnings for the past twelve months came to 3.4-c- per gal., up from 2-c- per gal. the year before.

The companies have also benefited indirectly from OPEC's 60% price increases since last December.

Those lifted the value not only of the millions of barrels of oil that companies have stored around the world but also of crude coming out of their wells in such noncartel countries as Malaysia or Britain. To head off charges that it was taking advantage of these special circumstances, Standard Oil of California last week lowered its wholesale gasoline price from 70-c- per gal. to 67-c-.

The impressive third-quarter oil profits, though, were not a simple case of price gouging. In the oil game everything from supertankers as long as three football fields to offshore drilling rigs as tall as the Empire State Building is brobdingnagian. Exxon's expected $4 billion profits this year, for example, will be larger than the sales of all but 65 American companies. Compared with other industries, however, the energy companies' profit record does not look all that impressive. Except for several years after the first OPEC price increase of 1973-74, other industries have usually returned more on sales. So far this year, manufacturing companies (other than oil companies) earned 6.6-c- on each dollar of sales, while the oil firms made only 6-c- on the dollar. In part because they are using then" refineries, chemical plants and other production capacity more intensively, oil companies are doing better than in the past in terms of return on net worth.

The number of profit takers from oil is prodigious: 690,000 Exxon stockholders pocketed third-quarter dividends of $1 on each of 439 million shares. The largest individual owner, an elderly woman whose identity the company keeps secret, controls only one-tenth of 1% of the company. She will collect $439,000 on the quarter's earnings. Two-thirds of the shares are owned by pension funds, insurance companies, foundations and other institutions. The largest holder is a teachers' retirement fund that owns eight-tenths of 1% of the energy giant and earned $3,512,000 on its investment last week.

The real beneficiaries of the super profits were the OPEC countries and various tax collectors. The cartel govern ments will collect an estimated $185 billion this year, vs. a possible $25 billion in combined profits for the 110 biggest U.S. oil companies. Taxes similarly dwarf earnings. Exxon paid $6.2 billion in U.S. and foreign taxes in the third quarter, or nearly six times more than profits.

The taxes stand to rise. President Carter used the earnings reports as a weapon in his struggle for a stronger windfall profits tax on decontrolled oil. He wants to increase the industry's taxes by $292 billion over the next ten years. The House has passed a bill providing for $273 billion in windfall taxes, but the Senate Finance Committee has voted to ease the bite to $138 billion. Carter warned last week that he would introduce "punitive" legislation against the oil companies if the full Senate fails to approve a tax bill that he considers sufficiently tough.

Some parts of Carter's energy program progressed easily last week. After months of hard wrangling, Congress finally passed a bill to give the President the power to draft an emergency gas-rationing plan. In addition, the Administration's billion-plus dollar program of emergency aid to help people on welfare pay fuel bills this winter was adopted in the House by a quick 290-105 vote after a similar bill passed the Senate.

The day after the Exxon announcement, the House by a vote of 225 to 189 also overturned its earlier decision to end federal controls on gasoline prices; many Congressmen cited soaring profits as grounds for continuing restrictions. Other federal officials took aim at Big Oil. The Energy Department accused Texaco and Atlantic Richfield of violating the incredibly complex, controversial oil price controls by overcharging customers during 1973-76 by $132 million and $63 million respectively. The Council on Wage and Price Stability began an investigation of profit margins on all oil products this year, alleging that only half the price increases were due to higher crude and product costs. Said Council Chairman Alfred Kahn: "We're going to scream bloody murder to the American people."

While disputes grew and divisions widened in America, OPEC was increasingly successful in pressing its dangerous new strategy of holding down oil production in order to squeeze world supplies and lift prices higher. Following the lead of Libya, Algeria last week boosted crude prices nearly 12%, to $26.27 per bbl. Still more increases are expected at OPEC's December meeting in Caracas. The cartel over the past ten months has raised oil nearly $10 per bbl., the same in dollar terms as the 1973-74 increase, which ignited the world's current inflation and the worst recession since the Great Depression. Iran last week demanded nearly $50 per bbl. for spot-market oil that would have cost $3 per bbl. only seven years ago.

The cartel cannot lose, of course, but losses as well as profits are part of the U.S.'s free economy. While the oil companies were reporting their highs, General Motors announced that its third-quarter profits fell 96%, and nobody in Washington was arguing that such a plunge was pornographic. The popular mood seemed to be that, except in rare cases, such swings were all right on the downside but not on the upside.

The energy companies will need vast sums to pay for development projects, and much of it will have to come from profits or from the capital of investors attracted by profits. While Exxon, for example, has earned nearly $3 billion so far this year, it has also invested $7.5 billion in energy exploration and development, with 41% of it in the U.S. Partly because prices and profits are up, domestic drilling is booming. The number of oil rigs at work in the U.S. has jumped from 1,929 in April to 2,391 at present and is expected to reach 2,600 by year's end. It is highly questionable whether stiffer controls or nationalization would spur more efficiency. The record of the Post Office and the heavily regulated railroads is hardly encouraging.

The soaring profits of the private oil companies certainly deserve examination. But the question should be whether the price is high enough to stimulate conservation and whether the profit is being put into exploration, for only if the U.S. saves and produces more energy can it ease OPEC's monopoly power.

This file is automatically generated by a robot program, so viewer discretion is required.