Monday, Sep. 10, 1973

A Deep Investigation of Oil

Gasoline shortages this summer, serious threats of renewed scarcities of heating oil next winter and rising prices of petroleum products have stirred deep suspicions among the public and some Government officials about the oil industry's pricing policies. In a federal appeals court in Washington, D.C., last week, the Cost of Living Council won the right to force rollbacks of some gas-station prices. A lower court earlier had enjoined the COLC from enforcing Phase IV guidelines that would require the price cuts; they will now go into effect Sept. 8. The COLC has also demanded that Atlantic-Richfield Co. (ARCO) justify a 1-c--per-gal. increase on gasoline and a 2-c--per-gal. hike on fuel oil that the company posted Aug. 20. If the company's data do not convince the COLC that the boost was forced by increased costs, chiefly for buying imported crude oil, it may be ordered to cancel the rise. Such actions are needed, says COLC Director John Dunlop, because "rapidly increasing prices for gasoline are one of the biggest contributors to inflation in this country."

Dunlop's angry words, however, scarcely begin to indicate the depths of the trouble that the oil industry is in. In Los Angeles, the antitrust division of the Justice Department is gearing up for a broad-gauge grand jury investigation of gasoline pricing. It has subpoenaed confidential records of more than 30 oil companies, including not only ARCO but also such giants as Exxon, Mobil, Texaco, Gulf, Standard of California, Standard of Indiana, Shell, Phillips and Union. Attorneys for the companies say that summonses will also be issued soon to a number of executives. They will be called to testify about whether there was a massive conspiracy to fix wholesale and retail gasoline prices in 1971 and 1972.

The grand jury will also explore reports that a high-ranking federal official tipped the oilmen off to the 1971 price freeze in time for the companies to get their prices frozen at a high rather than a low level. The word was supposedly passed to an oil executive, who quickly spread it throughout the industry. Some executives of independent oil companies have told investigators that they got phone calls from competitors and other industry sources advising them that the freeze was coming and urging them to get their prices up.

Prices Rise. Whether as a result of a conspiracy or through the natural workings of the marketplace, as oilmen contend, prices did in fact go up rapidly. In July 1971, the nation's largest oil firms, followed by big independent refiners, began to withdraw temporary competitive allowances (TCAs) from service stations they supply. TCAs are discounts on wholesale gas that enable a dealer to hold prices down at the pump, usually during a price war; removing them causes prices to shoot up. As TCAs came off, the national average price of regular gas rose from less than 34-c- per gal. to more than 37-c-; in some markets, prices rose 6-c- per gal. in a matter of days. After the freeze went into effect Aug. 15, of course, the steep rise stopped and, in some markets, prices resumed normal sharp fluctuations.

Almost the same pattern of price rise recurred a year later. This time the move may have been triggered by strong--but unfounded--rumors that a second freeze would be imposed in mid-August 1972. During early August, TCAs were again withdrawn, first by major oil companies, then independent refiners, and prices rose about 6-c- per gal. on the West Coast. Within a week, similar rises were occurring all over the country. For the remainder of the year, the average price of regular gas sold in big cities was 1.5-c- per gal. higher at the pump than during the first seven months of 1972. Experts within the industry estimate that a 1.5-c--per-gal. boost, put into effect at all of the nation's 220,000 gas stations, would bring $127 million a month in additional revenues to the oil industry.

Federal prosecutors are expected to tell the grand jury when it begins hearing testimony in October that the TCA withdrawals in 1971 and 1972 came after intense communication between supposedly competitive companies, each of which feared to raise prices on its own because such an action would result in a loss of business. The Justice Department has subpoenaed telephone logs, expense accounts and diaries from the companies under investigation, indicating that it is trying to pin down alleged contacts between the firms.

Those few oilmen who will talk about the investigation hotly deny that the price jumps resulted from any conspiracy. A Texaco spokesman, for example, calls the increases "a natural firming up of prices." A Shell official concedes that his company pulled out TCAs in both 1971 and 1972 but denies that this had anything to do with what service-station operators charged for their products. "I'm afraid that we have nothing to do with retail prices," he says. "We just sell gas to independent dealers." Discontinuance of TCAs, he adds, is normal practice when a price war ends. Critics grant that it is, but insist that there was no nationwide price war whose ending would have justified removal of subsidies all over the U.S. almost simultaneously during the summers of 1971 and 1972. Moreover, they argue, the price of imported crude oil, upon which U.S. oil companies have become more dependent, went up--but not by enough to account for these steep rises.

Years may be required to determine who is right. The grand jury may decide that the Government's case does not stand up, which would end the matter right there. If, on the other hand, the grand jurors find that there is enough evidence to merit indictments against the companies, a lengthy trial would ensue. Under the Sherman Antitrust Act, individual executives could also be indicted, as were 16 officials of the steel companies accused last week of antitrust violations in Texas. Provided that the case goes to trial, an even larger battle will be waged in the court of public opinion. Oilmen have been telling a skeptical public that circumstances beyond the companies' control have brought to an end the era of abundant, relatively cheap petroleum products. They may be right, but indictment on charges of conspiring to pump up gas prices would strike a damaging blow to their credibility.

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