Why decontrol will hurt less now
President Reagan has picked a good time to decontrol the price of oil. This is the opinion of Wall Street analysts and oil industry experts. They believe that a combination of stiff competition and the plentiful supplies of oil currently on the world markets may force the oil companies to absorb some of the price increase they would otherwise pass on to consumers. (The Carter administration had planned to end the controls Sept. 30.)
Even so, says John Lichtblau, head of the Petroleum Research Industry Foundation Inc., a nonprofit private research company, the price of gasoline at the gas pump could rise by as much as 10 to 12 cents a gallon. White House estimates place the impact at 5 to 10 cents a gallon. Decontrol is expected to drive up home heating oil prices, too, although by a smaller amount.
Charles Campbell, a vice-president at Gulf Oil Corporation, says that it's likely that the price of gasoline will only "inch up" at the pump even though the price of crude oil will rise. He notes that many of the US oil refiners are operating at only 75 to 80 percent of capacity -- probably the lowest rate in years. At the same time, conservation has continued and inventories are ample.
"You have a choice," he says, "of either reducing your refinery runs or operating on a smaller margin." Profit margins on a gallon of gasoline run about 2 cents a gallon, notes Mr. Campbell.
William Craig, vice-president of E. F. Hutton, agrees that the consumer probably won't get hit with the whole price increase right away. "What the oil companies are going to make in production profits," he says, "they well may lose in refining and marketing."
Adam Sieminski of the Washington Analysis Group, a division of Bache Halsey Stuart Shields Inc. figures that the oil companies will raise gasoline prices by only about 4 to 5 cents per gallon and the will absorb the rest of the price hike until they can pass along the increase gradually.
By eliminating price controls, the cost of crude oil for refiners will jump from about $33 to 34 a barrel to $37 to 38 a barrel. This is the equivalent of the world price of crude.
The increased prices will bolster oil company revenues, although their profits will not mushroom that much because of the windfall profits tax. Constantine Fliakos, oil analyst at Merrill Lynch, Pierce, Fenner & Smith Inc., estimates that the decontrol move will add 5 to 8 percent to the earnings of the oil companies. Since he was expecting oil company profits to rise by 10 to 15 percent this year anyway, this will result in an overall profit increase of about 15 to 20 percent.
However, the decontrol process will have a noticeable impact on the budget this year. According to Mr. Sieminski, decontrol could add $2 billion to $6 billion to the Treasury's coffers. He notes that there are several "unknowns" that make it difficult to calculate, including what the world price of oil will be, and how much "controlled" oil is being produced now. In recent months, producers have been pumping much less oil from price-controlled wells in anticipation of decontrol.
At the same time, the government will lose about $1 billion in revenues it was gaining from the entitlements program and was using to fill the Strategic Petroleum Reserve. The entitlements program was designed to equalize the cost difference between importers of foreign crude oil and those who use lower-cost price-controlled domestic oil. The program was designed to protect the smaller, independent refiner, and at the same time the government received a portion of the money that went into the program to fund the Strategic Petroleum Reserve. Thus, the final figure for the Treasury, says Sieminkski, is likely to be between $4 billion to $5 billion in new revenues.
The decontrol process will probably pose some problems for the small independent refiners since the entitlements program will no longer be in existence.
"Decontrol will make the small independents less competitive," says Mr. Fliakos, "unless they are bailed out in some form." Sieminkski hopes that Congress will hold off on any legislation to help the small refiner until "we see who gets hurt."
He notes that at least one major oil producer, Standard Oil of Indiana, said it would honor its commitments to its independent customers for at least one year before cutting anyone off. "If the others do the same," he states, "I don't think there will be any great rush for new legislation."
The Wall Street analysts all agree that Mr. Reagan's timing is excellent in decontrolling the price of oil. "At first I thought it would be inflationary," Mr. Craig says, "but now that I think about it, it's better to do it now with sloppy markets [an oversupply of crude] than when markets are tight." Fliakos agrees, adding, "This fall we could be looking at entirely different circumstances, including the possibility of gasoline shortages, so this is a good time to decontrol prices."