Page 1


How not to regulate oil industry Houston In our last issue \(Obs., a look at a gas company that enjoys no regulation whatever and at some of the unpleasant results thereof. In this story, by way of contrast, we present a tale of government regulation with results dreary enough to give free enterprise a good name. The Federal Energy Administration is the anti-hero of this tale since it has, with great bureaucratic zest, created a system under which Peter must be robbed to pay Paul, George has to charge Mary, Harry has to pay off Irving, Luther is in debt to Cristobel, and confusion reigns. The name of this crazy-quilt regulation is the entitlements program. The FEA, in what some oil industry folk assume was a spirit of zany madcappery, has annointed some oil refiners as Sellers. Sellers have the right to sell a piece of paper called an entitlement at a rate of $8.62 per barrel. Whereas those refiners named Buyers have to buy the piece of paper from the Sellers, at $8.62 per barrel, in order to legally refine their own crude oil. Pretend you are a small, independent American oil refiner and that you own some producing wells. You send the crude oil from your producing wells to your refinery to be refined so you can sell it. But, before you can refine your crude oil so you can sell it, you have to pay a major oil company $8.62 for every barrel of crude you refine. You, Joe Small-guy, have to pay ARCO, a big, big company, before you can refine your own 6 The Texas Observer oil. You soon go broke and liquidate your business. But even the FEA wouldn’t dream up a system that pits all the little guys against all the big guys. What’s a horse race without handicaps? What’s “Monopoly” without Chance cards? Under the entitlements program, some big guys have to pay other big guys, some big guys have to pay little guys, and some little guys have to pay other little guys. There is only one for-certain-sure positive benefit to the entitlements program and that is that it keeps a lot of bureaucrats employed. This all started on May 15, 1973, when the Federal Energy Act went into effect. There was a problem. Domestic crude oil could be gotten up, out, and to the refinery for a certain price \(there was, and is, the difference in the price between your new domestic crude and your old domestic crude, but for the purpose of this story, that difference is, as they say in the Legislature, irrevedomestic crude was a sight lower than the price of imported crude, what .with the OPEC countries being tacky about the oil embargo. As Renal Rosson used to say, let’s take a hypothetic. Let’s say that domestic crude at $5 a barrel could fill 60 percent of the country’s oil needs. That left the remaining 40 , percent to OPEC-inflated oil at $13 a barrel. There were, and are, some American refineries completely dependent on imported oil. There are four or five on the East Coast, five or six in the Caribbean and one in Hawaii, all of which were built to handle imported crude. When the oil embargo hit, those refineries were in severe straits. They would have gone under if they hadn’t gotten help. It would have been a bad idea to let them go under. This country needs oil refineries. We already have a problem because environmentalists in some sections of the country, as our inimitable governor keeps reminding us, have forebade refineries upon their pristine shores. The Observer does not insist or even advocate that New England crud up its coastline a la Beaumont-Port Arthur, but it would be a bad idea to let extant refineries go under. Thus was born the concept of entitlements, a government program to bail out the embattled refineries. But rather than giving the affected refineries a straight-forward, to-the-point subsidy, in the shining tradition of Penn Central and Lockheed \(which didn’t even have OPEC to blame: they just messed up on their refineries subsidize the crippled refineries. And so the entitlements program started. You got comparatively cheap domestic crude and a refinery to funnel it to? O.K., you pay this refinery in the Caribbean that has to buy expensive imported crude before you can refine your own crude. Let’s take a case history. J. R. Parten of Madisonville is one of the state’s preeminent independent oilmen. Parten was a major mover in an outfit called the Pan American Sulphur Company, what sold sulphur mostly in Mexico. For reasons too complex to relate, there came a time when Pan American Sulphur had to get itself and its money invested into some new line of industry. Parten, who knew the oil “bidness,” having been in it about 50 years, convinced his associates to put their money in oil and gas. They bought some of the Sinclair divestiture propertywhen Sinclair merged with Atlantic-Richfield to form ARCO, the Justice Department forced the new agglomeration to get rid of certain properties. Parten and partners bought Sinclair properties in Wyoming and the middle west. This included seven fields of producing wells, an old but modernized refinery at Rawlins, Wyoming, a crude oil gathering system and marketing properties in 14 west and midwest states. “We paid a good price, we thought,” said Parten. On Dec. 31, 1972, Pan American Sulphur turned into PASCO and on Jan. 1, 1973, PASCO was in the oil business, refining 20,000 barrels of crude a day. “Here’s what entitlements did to PASCO,” said Parten. “Within three years time PASCO found itself in the impossible position of having to pay several dollars a barrel to its competitors in order to utilize the crude oil PASCO had bought and paid for less than three years before. One of the sellers of entitlements was AtlanticRichfield, from whom we had bought the refinery, and we were obliged to pay ARCO $8 a barrel to run our own crude oil. Of course it put us out of business. PASCO is in the process of liquidating that Sinclair property now. Another irony is that when we found we had to liquidate, the first thing we chose to sell was the crude production. The highest bidder was Standard of Indiana.” When a little company goes bust, a big company can be expected to buy it, but when the circumstances that forced the little company to go broke are a direct result of governmental action aimed against major oil companies, there is a certain poignancy involved. “What worries me,” said Parten, “is what the entitlements program is doing to competition. Undoubtedly there is a lot of ill feeling against the big oil companies, some of it they have brought on themselves. But I think there was a good deal of foolish spite and hatred in the institution of the entitlements. There is a wish to ‘get big oil,’ to spite the majors, but instead they are putting water on the wheels of these companies. I know some independents are strongly for entitlements: of course some of us independents profit too. But what it is doing to competition…. It is destroying the fabric of the industry, it is destroying competition, the genius of competition. I know many people don’t believe there is competition in the oil industry. But I tell you that the keenest competition has existed historically. I have been in the oil industry for 55 years and I have never had any difficulty competing against the majors anywhere, anytime. You know the people