Mixing Prices and Politics

After a rocketing rise over the past two years, the prices of gasoline, heating oil and other petroleum products appear likely to drop, substantially though temporarily, by federal order. Last week a House-Senate conference committee approved--and the Ford Administration seemed about to accept--a comprehensive energy bill that would force an immediate 12% rollback in the price of U.S.-produced oil. That, committee members say, would be enough to bring down the retail price of gasoline, which currently averages about 60-c- per gal., by 3 1/2-c-. Under the bill, price controls on oil would then be lifted gradually over a period of 40 months, allowing prices to rise once more. But not until late 1977, safely after next year's elections, would they get back to where they are now.

The President was at first prepared to signal his intention to sign the bill, but postponed any decision after running into vigorous opposition from Republican Congressmen. The odds are that the bill will become law, however, largely because Federal Energy Administrator Frank Zarb has recommended that Ford sign. FEA officials are concerned that otherwise Congress might take an even tougher stand, such as moving to split up the oil industry.

Rollback Bill. Ford's signature would end a ten-month White House-Congress deadlock over oil policy that has repeatedly turned into a cliffhanger. The conference-committee agreement came only days before controls were scheduled to expire, leaving prices free to start jumping sharply. To give itself time to pass the rollback bill, Congress last week rushed through a 30-day extension of controls. If the rollback bill then becomes law, it will represent a compromise--but one in which Ford yielded far more than his Democratic opponents in Congress.

Originally the President called for lifting all controls at once. Though Ford later backed away from that position, he continued to argue in favor of allowing oil prices to rise as a means of cutting consumption, boosting production and lessening U.S. dependence on risky foreign crude sources. Lately, though, the President seems to have shifted his stand again at the urging of his political advisers, who warn that whatever the economic merits, letting oil prices go up so close to a presidential election is no way to win votes. The Democrats, who have consistently opposed swift decontrol and high oil prices on the ground that the inflationary impact would threaten economic recovery, can now claim, with some justice, a major political victory.

At present, "old" oil--crude pumped in amounts equal to what was produced in 1972--accounts for two-thirds of domestic output and is price-controlled at $5.25 per bbl. "New" oil is uncontrolled and sells for about $14 per bbl. Thus the average price of all U.S.-produced oil is roughly $8.75. Under the proposed law, that average price would be rolled back immediately to $7.66 per bbl. and thereafter allowed to rise by 10% a year.

Subject to veto by either house of Congress, the President in April 1977 could partially exclude from the domestic price ceiling the oil that will begin by then to flow from Alaska. Such a move would raise overall domestic oil prices at a slightly faster rate. On the other hand, the bill would require Ford to jettison the $2 per bbl. tariff that he has imposed on imported oil, which now fetches about $15 per bbl. in the U.S. Other provisions of the bill would require both automakers and appliance manufacturers to improve the energy efficiency of their products, guarantee loans totaling up to $750 million to mine operators wanting to expand coal production, underwrite state efforts to develop fuel-saving programs and provide for the creation of an oil reserve of 500 million to 1 billion bbl. of oil as a hedge against another Arab oil embargo.

The measure's pricing provisions are another blow for the oil industry, which earlier this year was stripped by Congress of its depletion allowance. Oil company profits for the first nine months of this year ran, on an average, 31% below last year's spectacular highs. In the quarter ended Sept. 30, Exxon's profits were down 31.2% from a year earlier, Gulfs 36%, Texaco's 38% and Mobil's 17%. The slide in earnings, plus the new price rollback, is certain to dampen oilmen's enthusiasm for much needed exploration. U.S. production of crude is in its fifth consecutive year of decline. And though oil companies completed drilling a record 25,729 domestic wells in the first nine months of this year, they have not found enough new reserves to offset the drain on old fields.

The upshot is that the nation seems likely to wind up with an oil-price policy that has some potentially beneficial provisions and some serious flaws. Gradual decontrol is certainly preferable to abrupt decontrol. But the price rollback, while giving some temporary relief to inflation-pressed consumers, probably would boost oil consumption and depress production. And the bill contains no special tax incentives for pumping out hard-to-get oil. In short, Congress has only postponed the tough steps that must eventually be taken to free the nation from its growing dependence on foreign oil.

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