Battle Over Special Privilege

In more ways than one, oil is power.

It provides 75% of the U.S.'s energy, serves as the basis of some of its most fa bled personal fortunes and influences its foreign and domestic policy. Now the Nixon Administration and the Congress are conducting some long-over due reappraisals of the Government's policy toward the oil industry itself.

The question increasingly asked in Washington is whether the industry should continue to enjoy its privileged position with regard to income taxes and import controls.

To find answers, President Nixon has appointed a task force that includes prac tically his entire Cabinet and ordered it to report to him this fall on oil policy.

Two congressional committees are also scrutinizing the industry. The inquiry is likely to be more intense than in the past, since many of oil's longtime friends in high places have departed. Lyndon Johnson has retired; former House Speaker Sam Rayburn and Senator Robert Kerr are dead. Louisiana's Rus sell Long is left to defend the industry against such Senate reformers as Edward Kennedy, Edmund Muskie, Philip Hart and William Proxmire. Oilmen have mobilized their own forces in a desperate battle to protect their interests.

Dwindling Reserves. The prime tar get of the critics is the oil depletion allowance. It permits owners to deduct from their taxable income 271% of the value that each well yields; more over, the deduction can be taken as long as the well produces, even if the original cost of exploration and devel opment has been returned many times over. The allowance was partially responsible for the fact that no taxes at all were paid by 155 U.S. citizens who earned more than $200,000 in 1967.

Oilmen argue that the special allowance is necessary to compensate them for the tremendous costs and risks involved in prospecting for oil, and to give them extra incentive to search for more of it. The search has been slowing lately. Since 1957, the number of new wells drilled in the U.S. has dropped 40%; domestic reserves have remained nearly constant but demand for oil has increased by as much as 29%. Two weeks ago, Michael A. Wright, chairman of Humble Oil, told Senator Hart's antitrust subcommittee that 87% of the nation's oil needs by 1985 will have to come from reserves that have not yet been discovered.

Quota System. Even so, Congress has not been persuaded that exploration would be discouraged by a reduction in the depletion allowance. On Capitol Hill, the feeling is growing that the allowances, which cost the Government about $1 billion a year in lost taxes, are indefensible from the viewpoint of tax equity. Partly because of its tax privileges, the oil industry has fairly high profits. Oil companies earn an average of 11.2% on their invested capital, which is slightly above the norm for all U.S. industry; they also earn 10% on sales, which is about double the figure for other U.S. industry. Oilmen seem reconciled to seeing the allowance cut to 22 1/2% or perhaps less, and the depreciation limited to fixed periods instead of the lifetime of the well.

Another target for congressional fire is the oil import-quota system, which helps keep domestic oil prices up by keeping foreign oil out. Middle Eastern oil costs about 4-c- a gallon compared with U.S. oil's 7-c-; best estimates are that the quotas oblige U.S. customers to pay $4 billion to $5 billion a year in higher oil and gasoline prices. Imposed by the Eisenhower Administration in 1959 on the grounds of "national security," the quotas limit imports of crude to 21% of domestic production.

Like the depletion allowance, the quota system is also justified as a means of encouraging exploration for more domestic reserves. The quotas, according to the oilmen's argument, save the U.S. from becoming too dependent on the oil sheiks of the unstable Middle East. They would probably raise their royalties --and thus the price--if the U.S. needed substantially more oil.

On the other hand, the protectionist system forces the U.S. to use up its reserves at a time when much cheaper oil is readily available abroad. Senator Hart has, perhaps extravagantly, accused the oil companies of "playing Russian roulette with national security" by supporting import restriction while drawing down the domestic supply. Ted Kennedy scoffs that the industry maintains that "our reserves will be conserved if we consume them first." In view of such attacks, Congress is likely next year to increase the import quotas.

Help from the North. The whole debate has been intensified by the discovery of a huge pool of oil under the snows of Alaska's North Slope. The biggest new find in the U.S. since the East Texas strike of 1930, the North Slope promises to lessen U.S. dependence on oil from the Middle East. Walter Levy, internationally known oil consultant, estimates the find could run as high as 20 billion barrels, enough to increase U.S. reserves by two-thirds.

For their part, oilmen maintain that they would not have risked North Slope drilling without the depletion allowance, and claim that the allowance is necessary to spur further development. Despite the likelihood of a cut in the allowance, however, the managers of Atlantic-Richfield, British Petroleum and Jersey Standard believe that the find will be so profitable that they plan to invest $900 million in an 800-mile pipeline. It will bring the oil to the ice-free port of Valdez, Alaska. In order to expand its marketing of Alaskan oil, British Petroleum last week announced its intention of merging with Standard Oil of Ohio, whose stock promptly shot up 271 points to close at 981.

Humble Oil's executives, hoping to succeed where Explorer John Cabot failed, announced last week that they are fitting out,the 115,000-ton tanker Manhattan as an icebreaker for a pioneering--and perilous--test run through the long ice-choked Northwest Passage to the Arctic next month. Denver's King Resources Co., wagering that the Manhattan will make it, has drafted plans to build a deep-water port in Maine's Casco Bay. That port is even closer to the North Slope than Seattle is. No Alaskan oil is expected to be delivered to any of the "lower 48" states before 1972 at the earliest. But its existence may provide Congress with the reasons it needs to mate some major changes in the oil industry's present privileges.

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