The Oil Company Blues

The seven oil executives who testified on the energy crisis before Senator Jackson’s subcommittee in January claimed that Jackson was picking fights with the oil witnesses, was making unsubstantiated accusations, and was generally acting like a politician seeking his party’s presidential nomination. Many journalists and editorial writers seem to share some of the industry’s misgivings. The Jackson hearings and the oil companies’ rapidly intensifying public relations campaign may have left the public more confused than ever about the current energy shortage. The consumers know they are paying higher and higher energy prices. But are the gains enjoyed by the oil companies fair and equitable, or not?

To evaluate fairly what the oil companies have gained, it is necessary to examine their recent record, or at least what we know of it, since they have been more secretive about their operations than most other industries. According to the Consumer Price Index, calculated by the US Department of Labor’s Bureau of Statistics, the price of gasoline rose 19.7 percent during 1973, while the price of fuel oil rose 46.8 percent. Some petroleum products such as propane, used for home heating in the South and crop drying in agricultural sections of the Midwest, have increased in price by 300 percent.

In recent weeks the price of gasoline has continued to climb at an accelerated pace without any sign of leveling off. Spot shortages in a number of cities, particularly in the Northeast, have led to price gouging and long waits for motorists who are allowed to buy a limited amount of gas on each visit to the stations. Naturally, these rising prices have been reflected in higher profits for the oil industry. Profits for the top ten companies this year will total $7.8 billion—up 51.2 percent over last year’s figure.

In the face of these rather disturbing statistics, the oil companies argue that their higher profits are needed to provide the capital necessary to search for new sources of oil and gas around the world. In fact, the industry estimates that between now and 1985 more than $800 billion in investment capital will be needed in order to keep pace with the US demand for fossil fuels (assuming that the demand for these fuels continues to grow at the current rate).

However, these claims about the need for higher profits for investment are somewhat suspect in view of the oil industry’s unwillingness to go into debt to find new capital. Traditionally the oil industry—and it is nearly alone in this respect—has depended heavily on retained earnings for investment. For example, during the third quarter of 1972, according to the Federal Trade Commission, for every five dollars invested from profits for all US manufacturing the companies also borrowed two dollars, a ratio of 2.5:1. For the oil industry, however, the ratio was closer to 6:1, a figure reflecting the oil industry’s reluctance to borrow.

The most convincing test of the oil industry’s seriousness about reinvesting profits for exploration and development of new sources…

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