We Do It All for You

By Richard Hornik

As Americans head for the beach or the mountains this summer, the odds are about 1 to 4 that they will be driving a foreign-built car. The chances are even higher that they will fill their tanks with foreign fuel, since about half the 300 million gal. of gasoline bought each day are made from imported petroleum. What few American consumers realize is that an increasing amount of the fuel they use is not only shipped, refined and delivered but also pumped into their car by foreign producers. To paraphrase the old Texaco jingle, The man who wears the star is also wearing an Arab burnous.

The once dominant American oil companies are now being challenged on their home turf. For almost three decades after World War II, the great international oil companies based in the U.S. and Europe controlled the supply of the world economy's lifeblood. At the peak of their clout in the 1960s, the renowned Seven Sisters -- British Petroleum, Gulf, Esso (now Exxon), Mobil, Royal Dutch/Shell, Standard Oil of California (now Chevron) and Texaco -- ruled with unquestioned authority. They discovered crude oil in the Middle East and Asia, shipped it to the developed world in their own tankers, processed it in their own refineries and sold it through gas stations that carried their logos.

Now some of those logos are gone, while others have new owners. Gulf's orange ball went down like a setting sun, replaced by Chevron's stripes after a corporate takeover. More important, some of the new owners are foreign oil companies. Texaco's refining and marketing operations in 26 Eastern and Gulf Coast states are now half-owned by the Saudi Arabian oil company Aramco. Venezuela's national petroleum company bought out Citgo. In Europe a new symbol has emerged: Q8. The homophonic logo representing Kuwait's oil company appears on the signs of 4,800 gasoline stations in Western Europe.

These incursions by national oil companies, which only a decade ago did little more than keep track of the crude they sold wholesale to foreign firms, have transformed the oil industry. The declining clout of U.S. and European companies is more than just a blow to Western pride. As petroleum-producing countries become more involved in refining and retailing, they will carry off an increasing share of profits that might have gone to American business. Yet the overall impact of this steady loss of American economic sovereignty is not all bad. For consumers, it may bring a pleasant stability in prices. Reason: by taking a substantial stake in the refining and sale of the crude oil they used to pump for others, these newly empowered national oil companies now have much more to lose from a cutoff of crude to the West than they did in 1973 or 1979.

At the moment, motorists may wonder where the bargain is. While crude prices have fallen from nearly $17 a year ago to about $13 per bbl. currently, the average price of regular unleaded gas has declined only about 4 cents per gal., to $1.08. The main reason gas prices have lagged behind the fall in crude is a shortage of U.S. refining capacity. Demand for gasoline has risen in recent years, but new refinery construction has been hampered by environmental protests and changes in tax laws. As a result, refineries have been reaping fat profits, a growing portion of which is heading overseas. That is one reason why Washington's deficit cutters will feel more inclined to look at energy as a ripe category for higher taxes.

Before 1973, no other global industry had ever been so perfectly integrated, meaning that the companies controlled their product from oil well to gasoline tank. But the rise of the Organization of Petroleum Exporting Countries and the oil embargoes of the 1970s began to interrupt that arrangement. Newly confident Third World governments abrogated or phased out the concessions under which Western oil companies had pumped oil on their territory. The national oil companies, which controlled 75% of the world's crude output, insisted on higher prices that cut into the profit margins of Western companies. The once cozy world of Big Oil quickly became a cutthroat competition in which the lack of a guaranteed supply of crude oil could mean the end of a once dominant firm.

The breakup of the old partnerships between Western oil companies and the producing countries led to a chaotic era in the late 1970s and early 1980s of free-swinging prices set almost purely by market forces. But in the past few years the oil industry has been seeking new collaborations to restore some stability to both supply and demand. Explains Saudi Oil Minister Hisham Nazer: "We have become an integral part of the oil market of the U.S.A., and the return on our investment depends on the health of that market. This is a mutual benefit."

This time, however, the real clout rests with the oil-rich countries. Cut off from its former sources of supply and struggling from a failed bid to buy Getty Oil, Texaco turned to its former junior partner, Aramco, for help in 1988. The result was Star Enterprise, a fifty-fifty joint venture between Texaco and Aramco, for which the Saudis paid $1.8 billion. The venture operates three U.S. refineries and markets fuel at 11,450 filling stations.

Kuwait Petroleum has moved even more aggressively than Aramco into refining and marketing. Kuwait bought Gulf's refining and marketing operations in Europe in 1983, and recently launched an exploration and marketing campaign in the Far East, beginning with Thailand. Brags Kuwait's Sheik Ali Khalifa Al- Sabah, who recently switched posts from Oil Minister to Finance Minister: "We will be flying our colors in other countries soon. We expect to find many new opportunities in Eastern Europe, and if an opportunity arises in the U.S., we will look seriously at that too."

Other major producing countries are scrambling to keep pace. The United Arab Emirates has bought a stake in CEPSA, Spain's biggest privately owned refinery, and in Total, France's second largest oil company. Libya, which operates gas stations under the Tamoil logo in Italy, is rumored to be negotiating for a 50% stake in a U.S.-owned refinery in West Germany.

The group that is now the Six Sisters is searching for new ways to make profits. One method is a more efficient approach to marketing, which has prompted them to consolidate their retail networks. The number of gas stations in the U.S. has declined from 226,000 in 1972 to about 112,000 last year. By adding convenience stores and car washes to their stations, the companies have boosted gasoline sales of many remaining units. "You can't depend on the birthrate and ever increasing demand to bail you out anymore," says Texaco President James Kinnear. "You have to create your own opportunities."

At the same time, U.S. oil companies are attempting to stretch their supplies through more selective exploration and better use of technology in refineries and producing fields. Texaco is pioneering other means of producing fuel, notably in a coal-gasification venture in the Mojave Desert. Kinnear also sees significant opportunities in so-called secondary and tertiary methods of recovering oil from old fields by flooding them with oils, gases and chemicals.

What the Western companies still have in their favor is their experience in finding and developing oil fields. Many producing countries need that help, but on their own terms. Says industry economist John Lichtblau of the Petroleum Industry Research Associates: "There's a realization that just having the oil isn't enough, that you need capital and expertise to develop it."

As worldwide demand grows, those state companies with the ability to produce more will have greater clout in setting prices. That will boil down to a few countries with the most abundant reserves: Saudi Arabia, Iraq, Iran, Abu Dhabi and Kuwait. Among them, these countries control almost 547 billion bbl. of proven reserves, or 60% of the world's supply. Says Sam Vastola Jr., manager of corporate strategy for Exxon: "With fewer actors with their hands on the valve, they should be able to control production better."

In the past, such a concentration of power might have been cause for concern, but today hardly anyone in the industry is ringing alarms. Asserts Allen Murray, chairman of Mobil: "It's doubtful the nations with large volumes of reserves really ever want rapid price increases. They recognize it isn't good. We'd have higher prices today if they hadn't gone so high in the past" because runaway prices in the 1970s prompted strong conservation measures.

Many oilmen believe that aside from short-term jumps created by speculation in the futures markets, overall crude prices are unlikely to increase dramatically in the near future. "We don't see oil prices exceeding inflation by very much in the next ten years," says W.J. Price, president of Chevron U.S.A. Other analysts look at historical 20-year oil price cycles, which indicate that another spike is likely in the next few years. The problem for consuming countries is that low oil prices make investments in new production unattractive while at the same time encouraging consumers to use more fuel. "We believe oil could go as high as $30 a bbl. in the mid-1990s," says J. Robinson West, president of Petroleum Finance, a Washington consulting firm.

A surge of that size could wreak havoc on the world economy and on the U.S. in particular. Oil imports, which now account for more than half of U.S. consumption, are expected to rise to more than 60% in the coming decade as domestic oil fields are tapped out. Coupled with a major price increase, that level of dependency would boost America's annual cost of imported crude from $50 billion to more than $100 billion. But if prices rise more steadily, Western consuming countries can adapt, as they have in the past.

The growing dominance of the developing world's oil firms is certainly inevitable and possibly salutary. As the world develops a more interdependent economy, national borders and ownership will mean less and less. In the oil game, this new roster of major players is probably a net plus, since they could act responsibly to cushion the price shock if another petroleum cycle does come around. Says a top U.S. Government energy official: "I doubt if we've achieved the stability we had with the Seven Sisters in the 1960s, because the industry is still more fragmented. But it is much more stable than in the 1970s and '80s."

Oil prices will always be vulnerable to unexpected shocks ranging from harsh winters to wars in the Middle East. But Western consumers at least should be relieved that the once dreaded OPEC now has too much investment tied up in street-corner gas stations to be willing to alienate customers with long waiting lines and skyrocketing prices.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Steve Hart

[TMFONT 1 d #666666 d {Source: Petroleum Intelligence Weekly}]CAPTION: PETROPOWER SHIFT

With reporting by Aileen Keating/Bahrain and Richard Woodbury/Houston