More Profit, and Suspicion

Nothing has angered consumerists more than the huge profit increases that oil companies have enjoyed during the energy crisis. Last week the critics got more fuel for their attacks. Nine oil majors reported first-quarter rises in some cases even larger than those of late 1973. And federal energy officials charged that some unnamed oil companies have been indulging in illegal price gouging. Together, the profits and accusations seemed likely to reinforce public suspicion of the industry and increase the chances that Congress might translate those doubts into anti-oil legislation.

Oil executives have been saying for months that profits would be strong again this quarter, but some of the gains were truly spectacular: Shell, up 52% over the 1973 first quarter; Mobil, 66%; Gulf, 76%; Standard of Indiana, 81%; Standard of California, 92%; Texaco, 123%; Continental, 130%; and Occidental, a stunning 718%.

Exxon, the world's largest oil firm, showed the smallest gain: 39%. Its report drew accusations from Wall Street oil analysts quoted by the Associated Press that Exxon had understated its profits by $400 million, and that the true increase was 118%. The money, said the analysts, is being salted away in a reserve fund that would be used to help offset expected losses this year resulting from higher U.S. taxes on the oil industry and from the higher prices that Middle Eastern countries are expected to charge Exxon for crude under revised participation agreements. Both are reasonable expectations, but neither is yet certain. Exxon Chairman J.K. Jamieson confirmed that the company had such a reserve, but did not say how large it was and denied that its purpose was to understate Exxon's profits. Jamieson called that charge "absolutely wrong." Creation of the reserve, he said, is a legitimate accounting practice. Not only did some analysts agree with Exxon's "prudence" but Texaco and possibly other oil companies are also setting up reserve funds.

One Shot. Aside from--accounting changes, the reasons for the first-quarter profit rises are mostly related to prices. Some of the gains look oversize partly because there was still some price cutting in oil in early 1973 and profits then were closer to normal levels. In addition, the subsequent rise in prices has generated large "inventory profits"--one-shot gains made by selling at today's high prices stockpiles of petroleum products built up months ago at the much lower rates prevailing then. Also price controls in the U.S. allow oil companies to pass on to consumers increases in the cost of foreign crude.

Federal Energy Office Deputy Administrator John Sawhill last week defended oil profits in general as "reasonable," but some of his aides harbor deep suspicions. FEO General Counsel William Walker told TIME Correspondent John Berry that the agency is quietly investigating the possibility that "several" major oil companies have sold crude, pumped by their foreign subsidiaries, to their U.S. subsidiaries at prices at least $1 or $2 per bbl. higher than world market prices--and then passed on the artificially high prices to the U.S. consumer. Charles Owens, the FEO's man in charge of price control, added that he believes one major producer made as much as $100 million in wrongful profits. When the FEO completes its investigation, he says, a "substantial percentage" of the nation's ten or so largest oil firms likely will be socked for at least $150 million in refunds to the public--assuming, of course, that his suspicions are correct and can be proved.

Sawhill himself announced last week that the FEO already has ordered oil companies big and small to refund $86.7 million in profits from sales of gasoline, home heating oil, diesel fuel and propane gas sold over the past four months at prices higher than those allowed by law. The refunds are being made directly to customers or, where records do not exist, in the form of lower prices. Some of the overcharges were the result of honest misinterpretation of federal pricing guidelines, Sawhill said, but others "were out-and-out examples of price gouging." Sawhill did not name the companies.

Oil profits should level out later this year, partly because increased supplies of some petroleum products--notably home heating oil--have taken the steam out of price rises. Yet even before last week's reports, oil profits had become substantial by almost any measure. According to First National City Bank, the industry's profit return on net worth for 1973 was 15.6%, a shade higher than the average for all manufacturing companies; oil profits in 1973 were 8% of sales, v. 5.6% for all manufacturing.

Oil industry spokesmen contend that they need high profits to finance expansion of exploration and production, and Sawhill agrees--but others emphatically do not. Pickets appeared last week at Gulfs annual stockholders' meeting with signs denouncing the profit rise, as well as Gulf involvement in Portugal's African territories (see THE WORLD). The House Commerce Committee last week voted to roll back domestic crude prices, and the Ways and Means Committee is working on a bill that would tax away "excess" profits that are not quickly spent to increase supply. The tax bill also would raise oil company taxes $16 billion over the next six years by phasing out the depletion allowance and tightening taxes on foreign profits. President Nixon has threatened to veto the price rollback and excess-profits tax if he considers them unduly punitive. But siding with the oil industry is becoming increasingly unpopular for any politician.

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