Big Oil's Bad Rap

By Richard Behar.

Antiwar protesters shouting "No blood for oil!" infuriate George Bush. His color rising and lip curling, he retorts in speeches and private meetings, "It's not about oil! It's about naked aggression!"

Bush, a former oilman, knows well the visceral animosity most people feel toward America's major oil companies. A survey by the American Petroleum Institute, the industry's trade group, finds that 72% of Americans view Big Oil unfavorably. A study by Chevron shows that 65% of citizens say they cannot believe anything the industry says about the gulf war. Most Americans think -- incorrectly -- that oil is more profitable than most businesses, a view that is reinforcing cries in Congress for a windfall-profits tax.

The industry's latest offense, in the popular wisdom, is apparent in its profits for 1990's fourth quarter, reported by the Energy Department last week. Thanks mostly to a brief rise in the price of crude to a high of $40, those earnings rose 77% above 1989's level. "We are protecting their oil with American boys," complains Senator Howard Metzenbaum, the Ohio Democrat who introduced a bill earlier this month calling for a surtax on the profits of the largest companies. "As quick as Saddam raised his sword, the oil companies raised their prices."

Sometimes it's hard to believe Metzenbaum was a businessman before becoming a Senator. The quarter's profit increases looked so dramatic because the corresponding period in 1989 was the industry's worst in a decade. Disregard its Valdez-size write-offs of 1989, and the industry's total profits rose only 11% in 1990. That still didn't make them especially high. They represented just a 13.5% return on the shareholders' equity, far lower than in such businesses as cosmetics (30.5%), pharmaceuticals (29.5%) and restaurants (19%). "No one is accusing the cosmetics industry of making obscene profits," says William O'Keefe, vice president of the A.P.I. Oil-company returns have averaged 12% since 1985, vs. an average of nearly 15% for all other manufacturing.

Most consumers were understandably livid over the way gasoline prices leaped after Iraq's invasion of Kuwait, peaking at an average $1.30 in October for an unleaded gallon. Actually, however, the U.S. rise was much less than the rise in European nations and Japan, where pump prices more accurately reflected the cost of crude. The Energy Department last week announced it had found no proof of profiteering by the oil industry, while the Hudson Institute concludes that 80% of the benefit of the higher prices went to the foreign nations that control the commodity.

Since war broke out on Jan. 16, crude prices have dropped from $32 per bbl. to $21 per bbl., but oil companies have been slow to cut retail gas prices correspondingly. This has fed anti-oil acrimony, but the industry argues that it is just making up for not hiking prices all the way during last fall's crude run-up. Even so, the average price of a gallon of unleaded is down to $1.18, only 10 cents higher than the day before Iraq invaded Kuwait -- and half that difference is from a nickel-a-gallon federal tax imposed in December.

The war has been bad news for the major oil companies so far. Not only are crude prices down, but many experts foresee a further plunge when the war ends. Other countries have more than made up for Iraq's and Kuwait's lost production, and the U.S. is getting by on less imported oil, thanks in part to a warm winter and reduced demand driven by the recession. When Iraq and Kuwait start pumping again, the sudden glut could force prices down temporarily to $15 per bbl. or less. That would wash away the industry's profit gains of last quarter and further lower its subpar returns. Warns Unocal chairman Richard Stegemeier: "Instability is coming, and the industry doesn't do well in turbulent times."

So why do Americans deeply detest Big Oil? After all, observes Stegemeier, "No one seems too concerned when orange juice goes up after a freeze. Society says everyone should have a free market, except the oil industry." Harvard Medical School psychologist Steven Berglas, who works with corporations that suffer from image problems, concurs. "People resent powerful entities that control necessities like oil," he explains. "We can actually gain psychological control by hating them." Berglas also suspects that some civilians deflect their anti-Iraq feelings toward Big Oil, a more accessible target. "You and I are not flying F-15s," he says. "But we can really be ticked off at the oil companies for supposedly reaping profits off misery." And never mind whether it makes sense.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Steve Hart

CAPTION: BEFORE AND AFTER THE INVASION

With reporting by Thomas McCarroll/New York