Battling the West Coast Oil Glut

A preference for imported sweet over California sour

While the White House continues to urge Americans to conserve energy by driving at 55 m.p.h. and turning off the air conditioning, a severe oil glut is building west of the Rockies. At times, as many as 20 bulging tankers have been backed up in California's Long Beach harbor. Nearly half a million barrels of Alaskan crude, which oilmen had originally figured would go to the West Coast, are rerouted daily through the Panama Canal to the Gulf or East Coast ports at additional costs of more than $1 million. And although independent California oilmen are protesting a surplus that has forced them to close, or "shut in," some wells, the West Coast continues to import 400,000 bbl. a day from Indonesia.

This bizarre situation has been caused by a combination of bad planning, bureaucratic bungling and environmentalist zeal. Contrary to the expectations of oil companies when the Alaskan pipeline was proposed, the West Coast states just cannot use all the North Slope output of 1.2 million bbl. a day, primarily because energy-saving measures have cut anticipated demand. A federal oil-pricing scheme has further reduced the use of California's own oil within the state.

The federal "entitlements" program, introduced after the jarring rise in OPEC prices, was designed to average out the prices that all refineries around the nation paid for oil; that way, refineries (and voters) in the East would not suffer much higher oil prices because of their larger dependency on imports. In practice, refiners in California can buy local oil at roughly $4 a bbl., but they have to send between $4 and $8 a bbl. into a federal pool, which Eastern refiners draw on to buy expensive OPEC oil. Consequently, refineries have to pay about the same for California oil as they'do for imports--or not that much less. Few buyers want the California crude even at slightly cheaper prices because it is "sour," high-sulfur oil. It is costlier to refine because it produces less gasoline and other clean fuels than Alaskan oil and higher-quality imports. Its primary end-product is a high-polluting residual fuel.

Governor Jerry Brown condemns the price-propping entitlements scheme as "a classic case of bureaucratic constipation," and urges President Carter "to seriously consider junking the whole program."

Late last year, Carter tried to aid California producers by cutting the entitlements obligation on their oil by $1.74. But this had little impact, and political pressures would probably prevent this inefficient program from being ended.

California aggravated its problem, however, by banning the burning of high-sulfur, dirty residuals such as those produced from California oil. Not only must refiners who buy Californian pay about the same price as for higher-quality crude and spend more on processing; they must also find a home for the residuals--either store them up or ship them to the only markets available, which are out of state.

To reduce these problems, very clean, low-sulfur "sweet" oil especially suitable for gasoline is still being imported from Indonesia in large quantities.

In fact, there are several surpluses, amounting daily to some 500,000 bbl. of Alaskan crude, which must be shipped through the canal; at least 100,000 bbl. of California crude, which is shut in; and 50,000 bbl. of residuals. Jimmy Carter is considering federal action to ease the glut.

As one step, he could impose some restrictions on Indonesian oil imports. But he is more likely to cut the entitlements fees further--perhaps as much as $3--giving the refiners more incentive to install the equipment needed to refine more sour crude into high-quality fuels.

This would not solve the immediate problem of finding an inexpensive and efficient way to move Alaskan oil to markets where it is really needed. Many plans have been considered, especially because Alaskan oil shipped through the Panama Canal is even costlier than OPEC oil on the East Coast. One idea is a three-way trade: Alaskan oil could be shipped to Japan, replacing OPEC oil that would then be sent to the U.S. East Coast. Problem: the export of Alaskan crude would raise a political storm in the U.S.

There is much more support for building pipelines to link West Coast oil terminals with refineries in the Midwest. Standard Oil Co. of Ohio has the most promising plan. It wants to buy 1,026 miles of underused natural gas pipelines and construct 230 miles of new line to link Long Beach with Midland, Texas; from that point, the oil would head east through existing pipelines. The $500 million project could carry half a million barrels a day and would cost considerably less than tanker transport. The Government has strongly supported the idea for four years, but the project has bogged down while its backers await California permits.

State authorities worry about air pollution, particularly the hydrocarbons that will escape when the tankers unload at Long Beach. The California Air Resources Board argues that pollution in the Los Angeles area is already higher than federal standards permit. Under the Federal Clean Air Act the board has ruled that Sohio can build only if the company pays for a tradeoff: it must locate an existing local industrial polluter and assume the cost for it to clean up its emissions even more than Sohio's oil will foul the air. The oil company has accepted the trade-off and is talking with Southern California Edison about spending some $100 million to buy the latest in expensive smokestack air scrubbers for the utility.

Edison has not yet agreed to accept this gift horse. Even if the Sohio project is approved soon, it cannot accommodate all the West Coast surplus, or even begin to ease it, before 1981. Only a dramatic readjustment in complicated Government oil-pricing policies, freeing the market from entitlements, will solve the basic problems facing shut-in California producers and energy-hungry East Coast consumers.

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