Sometime in 1981, perhaps as early as February, the oil industry in the United States will be free of price controls for the first time since 1971.
It will be a heady competitive experience that will drive a number of smaller refiners and marketers into bankruptcy. Even larger oil companies may find their refining and marketing profit margins squeezed, as they have this year, between rising crude oil costs and a temporarily glutted market.
On the other hand, those same oil companies that also are producers of crude oil will be able to sell all of their output for whatever the market will bear. Not even the existence of the windfall tax on crude will keep their balance sheets from taking on a new glow.
President-elect Ronald Reagan is getting conflicting advice from his energy advisors on whether to act immediately to end controls on gasoline and propane and on crude oil, or to continue the phased decontrol schedule begun in June 1979 by President Carter which would terminate them next Oct. 1. Immediate decontrol runs the risk of making inflation worse in the short run. Reagan himself late last month reaffirmed his commitment to immediate decontrol.
Meanwhile, a number of groups that will be directly affected by gasoline and crude oil decontrol are maneuvering to have either Congress or the Reagan administration keep in place some aspects of the present shceme, which also more or less freezes relationships between refiners and their direct customers. Some of the groups, such as very small refiners, have been getting large subsidies from the system which they stand to lose.
Since last spring, as a result of ample supplies of gasoline -- and relatively high profit margins for many refiners, wholesalers and retailers that could be trimmed in pursuit of more sales -- prices at the pump generally have fallen slightly. The average price for all grades fell from a peak of $1.23 a gallon in May to less than $1.21 last month, according to the Lundberg Letter which regularly surveys a large national sample of retail gasoline outlets.
But for 1981, consumers probably can count on a steady rise in gasoline, diesel fuel and home heating oil prices throughout 1981. Oil industry executives and experts outside the industry say profit margins have been cut to the point that refiners and marketers will be unwilling to absorb all [TEXT OMITTED FROM SOURCE] United States and probable hikes in official OPEC crude prices.
If OPEC prices go up only 15 percent or so in 1981, to an average of about $37 a barrel, some analysts expect gasoline prices to be at least $1.45 or more by the end of next year. Add in transportation, and imported oil would be costing U. S. refiners about $39 a barrel. Decontrol will boost average domestic crude cost essential to the same level, closing what is still about a $6 a barrel gap even though President Carter began phased decontrol in June, 1979.
Home heating oil prices, already unusually low compared to gasoline, may not go up as much, for both political and market reason, industry officials say. The bulk of heavy fuel oil, the type used by utilities, that is consumed in the United States is imported and therefore already sells at world market prices. It cost, therefore, should be little affected by decontrol.
Price controls have affected every level of operations in the oil industry. Some curde is still allowed to sell for only about $6.75 a barrel, while another portion can sell for only about $15. Refiners' margins have been more or less limited to what they were in the spring of 1973. Jobbers -- firms that buy from refiners and sell to retailers or perhaps through their own outlets -- had their margins frozen, too, for most of the controls period. Retailers, such as the corner service station, currently are allowed to mark up by a maximum of 16.8 cents a gallon the wholesale price they pay for gasoline.
With price controls also came allocation controls. Essentially the allocation regulations tied a refiner to its customers in a certain base period. The refiner had to supply the customers, even if it meant leaving its own company's dealers with less than they could sell. The same rules applied to larger companies that sold crude oil directly.
Now the National Oil Jobbers Council is trying to convince members of Reagan's energy transition team that refiners, should not be allowed to sever these relationships even if controls are dropped. A number of major oil companies including Texaco have said they will withdraw from some parts of the country -- particularly the northern tier of states stretching from New England to Idaho -- as soon as they are permitted to do so.
"Our biggest fear is that efficient marketers will be wiped out by a tidal wave of withdrawals," Michael T. Scanlon, vice president of the NOJC, said. His group is seeking legislation, or firm promises from the oil companies, that they will continue present supply relationships for two or three years. Most of the major oil companies apparently would go along with one year, but Texaco, Scanlon said, has made no promises at all. Department of Energy's Economic Regulatory Administration, which has responsibility for controls, wants to end them as soon as possible to eliminate what she calls the "antiquated system" of allocations tied to base periods several years old. If there were a new shortage say, as a result of a protracted supply disruption in the Middle East, use of the present base periods and the frozen refiner-customer relationships would be a disaster. However, she would not end crude oil controls before October.
Since controlling domestic crude oil prices meant that refiners would have different costs depending on whether they used cheaper U. S. crude or more expensive imports, an "entitlements" scheme was devised. Under it, refiners who used less costly crude had to pay an entitlement in order to have the right to refine it. Those who used more expensive crude than were paid an entitlement for each barrel.
This cost equalization scheme has never worked very well, mose energy experts say. But it did serve as a pool of cash from which various interest groups could get subsidies. The federal government, for instance, has given itself the right to entitlements on each barrel of oil it has bought to put into the Strategic Petroleum Reserve. This year Congress gave it the right to a sort of super entitlement that has lowered to about $7 the cost of each of the 100,000 barrels going into storage daily.
A small refiner bias was also built into the entitlements scheme. This outright subsidy was so large that a significant number of unneeded, unsophisticated refineries were built solely to take advantage of it. Some of these refineries have already gone out of business and others are sure to follow.
Whether controls end immediately after Reagan takes office, or in October, new legislation will be needed to give the government stand-by authority to deal with future shortages. No one cares much for the present stand-by gasoline rationing plan, and anyway authority for it also expires in October.
Meanwhile, the oil industry is bracing itself for dealing once again in an uncontrolled world.