The combination of a recession and 18 months of escalating oil prices has sharply divided American manufacturers into the haves and have-nots this year.
The haves are the oil companies, whose net after-tax earnings rose 32 percent in the second quarter over the same period a year ago, compared with an 18 percent decline in profits for the rest of the manufacturing sector.
Some observers see the onset of a trend, with the oil companies taking a larger and larger share of manufacturing profits at the expense of other industries like autos or airlines that are hard hit by energy prices, creating a massive redistribution of wealth in the American economy.
"You have one sector -- oil -- that's vigorous and essentially the rest of the economy that is more or less stagnant. This will change the entire pattern of investment," said Paul Davidson of Rutgers University, interviewed in the current issue of Business Week magazine.
"If it's true, it's a very ominous trend," said John Lichtblau of Petroleum Industry Research Associates. Lichtblau, however, does not believe a trend exists.
There is no disputing the rich man-poor man disparity in earnings this year. Business Week reported that oil companies accounted for nearly $2 of every $5 of manufacturing profits in the first quarter of 1980, based on data in the Federal Trade Commission's Quarterly Financial Report, adjusted for inflation. Oil companies are earning 40 percent of all manufacturing profits so far this year, compared to 18 percent just two years ago.
If the oil companies are able to pass rising energy prices on to consumers more easily than other manufacturers, their comparative advantage will continue. And some analysts believe that may happen, noting the tough competition in the airline and trucking industries due to deregulation, the deep slump in the auto industry, and the shrinkage of basic, energy-intensive industries such as steel and rubber.
The flaw in the theory is the assumption that oil profits are going to continue to roll in at the record rates of the past six months, said Lichtblau. He sees signs of a sharp squeeze on major, integrated oil companies, which are paying higher and higher prices for crude oil, but are facing tough competition in petroleum product sales because of the current large stockpiles of crude oil and products.
"It is not a growth industry right now," said Lichtblau. The comparison between the oil industry and other manufacturers in the first quarter is distorted, he added. Everything broke well for the oil companies in the first three months of this year. The windfall profits tax did not take effect until March, giving the companies two months to collect the benefits of the oil price decontrol ordered by President Carter. Moreover, the price increases on imported oil imposed in 1979 still were working through domestic oil products. The rest of the manufacturing sector spent most of the first quarter mired in a recession.
"There is no way they can maintain the same high profits the rest of this year and 1981, Lichtblau said. "In 1974, there was a staggering increase in oil profits, but it melted away in 1975," he added. The American Petroleum Institute, reacting quickly to the Business Week article, emphasized the same point -- while oil company profits rose 27 percent between 1974 and 1978, earnings for the balance of American industry grew 160 percent.
Arnold Safer, an economist and energy analyst with Resources Planning Association agrees with Lichtblau. "The market is glutted with inventory," he said, and that means a squeeze on refining and marketing profits. Wholesale spot prices for bulk oil products have fallen below contract prices, a sign of price competition, with fuel oil bringing only 73 cents a gallon in New York City, and unleaded gasoline priced at 85 cents a gallon. Refiners won't get rich on these prices, Safer said.
An analysis by the Bache Halsey Stuart Shields brokerage firm estimates that the oil industry's 80 percent-plus increase in earnings per share during the first quarter is likely to average only about 30 percent for the full year.
Whether the glut of oil products continues into next year depends on how fast the economy recovers from the recession, and how successful the Organization of Petroleum Exporting Countries is in cutting back on production to tighten the worldwide demand. The current cushion in oil inventories could evaporate by next spring, assuming restrictive production policies by OPEC, Petroleum Intelligence Weekly has reported.
In any event, the oil industry's earnings will be huge, even with the windfall profits tax. If there is a flow of profits to oil from other manufacturing sectors, some of the oil companies -- particularly domestic producers -- could have more cash to invest than they know what to do with, some analysts believe.
This prospect could revive interest in Congress to restrict investments of oil companies. Lichtblau noted. However, he doubts that there will be much surplus cash lying around in the industry. Drilling activity has soared in the U.S. in response to higher prices, as has bidding for prospective new oil and gas tracts. Beyond this outlet for investment, there is the coming boom in synthetic fuels, which could absorb $1 trillion in industry investments in the 1980s. "I'm not sure the industry will have much more to invest," Lichtblau said.