POLICY: Oil Profits Under Fire

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Underlying the occasional demagoguery in Congress was the serious issue of how, if at all, oil prices and profits should be further controlled. Jackson has proposed that Congress roll back uncontrolled prices of "new oil" from a recent high of $10 a bbl. to $7, and Federal Energy Chief William Simon said that his office would not oppose some price reductions. Congress is also considering several bills aimed at depriving oil companies of any "excess profits" that might result from rising prices.

Punitive Tax. A bigger worry for oilmen is that Congress will hastily enact a punitive excess-profits tax without having any idea of what an excess profit is—or where the companies' great earnings came from. They did not come from price gouging in the U.S. but largely from big sales overseas, where demand is even higher than in America. Exxon, for example, reported an 83% increase in profits from oil that it bought, refined and sold in Europe and elsewhere in the Eastern Hemisphere v. only a 16% increase from its business in the U.S. Domestic operations have been relatively less lucrative, in part because the Federal Energy Office controls most prices for petroleum products. But rising worldwide prices of crude also have pushed up domestic prices. Imported oil is free from F.E.O. regulation, and the companies charge as much for it as the market will bear.

Despite their rich profits last year, the oilmen contend that their earnings have been modest over a longer period. "In seven of the last ten years," says Texaco Senior Vice President Annon Card, "the rate of return on investment in the petroleum industry was below that of all manufacturing companies." In 1972, Card notes, the oil companies' rate of return on investment was only 10.8%, compared with a 12.1% average for all manufacturing concerns. But if the profits are computed as a proportion of sales, the oil industry ranks far above the average for all U.S. manufacturing industries; in 1972 the margins were 6.6% v. 4.2%.

The oilmen argue persuasively that they need even richer earnings to finance the heavy costs of stepping up exploration, leasing new oil fields and building refineries—a point that they are emphasizing in a quickly mounted advertising barrage. The Chase Manhattan Bank estimates that by 1985 the industry will pump an awesome $800 billion into such ventures.

Investors are wary of sinking money into an industry whose most visible asset—access to foreign crude oil—is threatened with nationalization. They are reluctant to risk their savings in an industry that attracts heated criticism —and invites price rollbacks—when it rolls up an unusual profit. Moreover, the oil companies are falling deeper into debt. A top Manhattan banker reports that 37 of the largest U.S.-owned oil companies have been forced to finance an increasing portion of their capital expansions by going into long-term debt because of difficulty in raising funds through the preferred method of selling common stock. Texaco's Card estimates that, to get financing for its heavy capital needs between now and 1985, "the industry would have to achieve an annual growth rate in net earnings of 18%" —double the annual growth rate of the past decade.