Gulf Oil Corp., the nation's fifth-largest oil company, last year earned $1.4 billion on revenues of $28.8 billion. It has about $2 billion in cash and is investing about $4 billion worth of capital this year in oil exploration, production and refining and other projects.

Nevertheless, like a number of oil companies, Gulf, once the second-largest producer of crude oil in the world, is being squeezed. Its holdings in Kuwait have long since been nationalized and its domestic oil production is falling steadily.

Because of competition in retail markets, it is losing several dollars on each of the 100,000 barrels of $39 Nigerian crude it buys and refines daily.

And with its stock selling well below the per share value of its assets, the company announced last week it would buy back more than 5 percent of its outstanding shares.

Recently, Wahsington Post Staff Writer John M. Berry asked Gulf Chairman Jerry McAfee about these and other issues in a wide-ranging, 90-minute interview at the company headquarters in Pittsburgh. Gulf President James E. Lee, who last week was named to succeed McAfee when he retires at the end of November, was present during the latter part of the interview.

Q: How are you doing these days, in a world in which you have a free market in oil products -- and a generally free market as far as crude is concerned -- with some countries like Nigeria free to insist on whatever price they want, and you free to accept that or walk away from them?

McAfee: First of all . . . it's a different world, a very different world, a much better world in my judgment. And one that we're going to be glad, eventually, that we've got. But it's also a very tough world and a lot of us in this business . . . a lot of the people in the industry, we have to remember, especially the front-line people, have never lived in a free-market world before in the oil industry; because we've had OPEC in a seller's market catbird seat, and we've had controls in this country and elsewhere which [became], in effect, as all controls do, floors and umbrellas instead of ceilings. [That was] a very comfortable world to live and work in.

Now . . . I think we're coping damned well and will continue to do so . . . but that doesn't mean that it's not a tough world out there and that it isn't hard to make a living in it -- because it is.

Q: In Nigeria, where you have considerable crude . . . close to 200,000 barrels a day?

McAfee: Something like that, potentially.

Q: . . . they have so far declined to lower their price officially, and they were not charging large premiums, like Kuwait, that could be dropped without changing official prices. What is the prospect there?

McAfee: Well, they too are living in a new world, and they've got some learning to do. . . . We're seeing a classic example of the operation of the free market, and it's wonderful. They've got the choice -- the Nigerians, Angolans and the others -- they've got the choice of being more realistic in their pricing or suffering the consequences [of] reduced oil take . . . .

We're fighting exactly the same battle in this country on our own product side. We've got to make the same decision every day, and we make it thousands of times in the course of a day in a thousand different locations. Do we drop the price and try to move more oil or do we maintain the price and hope to move enough to make up the difference?

Q: To what extent have you reduced your oil purchases in Nigeria?

McAfee: Considerably . . . my recollection is that we are down to about half that [200,000 barrels a day].

Q: What is your circumstance in Kuwait now?

McAfee: That contract has been renegotiated, and we have dropped from 500,000 [barrels a day] before . . . our previous contract ran out to 75,000, which went from April 1 of last year and was supposed to run for a 30-month period . . . But after a year's time, they unilaterally took steps to renegotiate it and that's now been cut down to 50,000 barrels. . . .

Q: Angola was your next largest foreign supplier?

McAfee: Yeah, and that's rocking along at a little under 100,000 barrels a day. Interestingly enough, for all the talk about Angola and the Russians and the Cubans and all the rest, that's been a pretty stable and a pretty responsible situation. . . Our relations with the government have been very good, at least as good as they had been with the Portuguese before. . .

Q: Will the Saudis succeed in reunifying OPEC prices?

McAfee: I think we've got the best chance of that being possible that we've had in a long, long time. . . . I think it's going to happen gradually over a period of time as the other producers realize they're fighting a losing battle and quietly without losing face. . . . rThey'll make concessions here and discounts there and what not, so that we'll have a de facto unified price probably long before we have an upfront high profile [cut]. . . .

Q: In your comments to the annual meeting you indicated that your refining and marketing division in the United States operated at a loss both in the last quarter of last year and the first quarter of this year. What happened in the second quarter?

McAfee: There was a change for the better, but we're not out of the woods yet. . . . It would appear that we'll still be under water but not as badly as we were in the first quarter.

Q: Are you better off if crude prices go down or are you better off if they go up, assuming product prices were not changed?

McAfee: We're better off if domestic crude prices go down. . . First, we're buying more crude than we're producing. And second, even on that portion we produce and refine ourselves, we're paying 50 cents on the dollar, more or less, tax-wise downstream [refining and marketing] and 85 cents on the dollar upstream [crude oil production]. So there's a very significant tax regime [encouraging us] to push as much of the profit downstream as we can, which is ridiculous, of course. . . .

Q: I have seen one or two reports that suggested as a matter of long-term strategy it might be in the interests of major oil companies to divest themselves of their refining and marketing operations and become crude producers. Typically, returns on refining and marketing have been very narrow. Would it make any sense at all for Gulf to decide not to be in refining and marketing?

McAfee: Not in my judgment. . . . We as a company are going to be well advised to stay both upstream and downstream in a very significant way, both in this country and abroad, and that's what we intend to do. Now, there's a great deal to be said for proper balance and for being in areas, geographical and functional, both upstream and downstream, where you have a competitive advantage and where you know what you're doing. And that is our strategy. . . . We've long since pulled out of the Midwest and the Northwest. More recently we have pulled out of marketing in southern California and western Arizona and New Mexico, and we've concentrated in the Sunbelt and in the Northeast where we're well supplied. . . . I think there may be some further pulling out of the peripheral areas. . . .

Q: What about a balance between your refining and your marketing oeprations? I know you've closed one refinery.

McAfee: Two. One significant refinery in Toledo and then the refining part of our complex at Venice, La., but it was relatively small, 20,000 barrels a day or so. . . . We're studying very carefully at the moment whether or not on a long-term basis, as much refining capactiy as we now have, is justified.

Q: I'd like to turn to natural gas, which is, of course, almost completely regulated. Do you have any sense of what this administration is apt to do about deregulating gas?

McAfee: . . . Being an optimist, I think they eventually will take some steps to, under the present law, raise the price of gas step-wise to more realistic levels; so that when the end of the law comes in 1985 there will be an insignificant difference on a BTU basis between the price of gas and the price of oil. That's what I think they ought to do. And I'm encouraged, very encouraged by the good sense which this administration has shown so far and is showing in their handling of the nation's problems, of which energy is one. . . .

Q: Well, the administration's decontrol study suggests that decontrol next year of all gas could represent an increase in producer revenues of nearly $40 billion. Is there any argument to be made for capturing part of that in a windfall tax?

McAfee: If it were to come in one fell swoop. . . . That's why I think very strongly that we ought to move on a phased basis toward equating the price of gas and the price of oil. If that is done, if we start soon enough and do it sensibly enough, there will be time for the industry to absorb and utilize the additional revenues, their share of which, after all, will be less than half, with [existing] taxes. . . .

Q: One subject the administration has not addressed in a concrete way is what authority, if any, it needs for dealing with supply emergencies after the end of September [when some parts of the Emergency Petroleum Allocation Act expire]. What do you think ought to be in place after the end of September, if anything?

McAfee: . . . Our strong feeling [is] that the best way to deal with major supply interruptions in the future is to learn from our experience as to what has not worked and as to what has worked . . . The National Petroleum Council study, in which we concur, says basically that for relatively minor -- which could still be significant -- interruptions, the best things to do is to rely on the marketplace to make the adjustments. But when a really serious interruption occurs . . . the government [should] have the authority to step in, but with major, significant, meaningful industry involvement. . . .

What is needed now are three things: First, some resolution of the conflict-of-interest rules which, particularly in the case of DOE, make it almost impossible for anybody who has any knowledge of and experience in the industry to be involved. . . . Second, we think that some rationalization of the antitrust laws needs to be in place, in order for there to be significant and meaningful industry cooperation in dealing with the national problem. And thrid, one way or another, we think there needs to be a clear preemption of the national priority over state and local initiatives. . . . Now, with those things in place . . . we would have no really pressing problem for there to be anything else on the books immediately. . . .

Q: Again, considering your high praise of the administration, have they done all they ought to be doing to get U.S. energy companies back to an equal footing in Canada? [Gulf owns 60 percent of Gulf Canada.]

McAfee: . . . Basically I don't think this is an area for government intervention . . . I don't think the answer to that bad policy on Canada's part is for the United States tgo take some sort of retaliatory action. . . . p

Lee: . . . The Canadians . . . are not limitingour ownership in Canada.

We can stay there 100 percent if we want to. We just have to play it by the rules of their game. The rules are written such that I have trouble seeing how you can stay there in a competitive sense, frankly, if you don't have a pretty good Canadian [ownership share]. I would be concerned that to limit [to] 5 percent ownership [by Canadians in U.S. energy companies, which pendidng legislation would do] or some such thing as that, then you're inviting retaliation in some form it hasn't taken. It seems to me that what's called for here is really quiet diplomacy. . . . I would hope that at some point the administration could deal with this in a diplomatic channel, but at very high levels. . . .

Q: Could I go back to the world oil situation? A number of people are suggesting that the world has changed to the point that the outlook is for oil prices over the decade not to be very much changed in real terms. What's your view of this decade?

McAfee: Jimmy, I yield to you on this. Your crystal ball is so much better than mine. . . .

Lee: . . . When you stand back and look at our industry now, I think it says to me that price increases . . . finally reached the point where the producing countries forced what we had been trying to do by persuasion. It forced conservation. . . . The price finally got high enough that it impacted our whole economy and our lives, and it forces some changes on the demand side that we had not anticipated. . . .

I talked with the National Oil Jobbers Council last fall and I made the statement . . . that I thought . . . beginning in '73 we had gone through . . . a seller's market, and we had better get prepared because we were heading into the 80s, and I thought it was going to be a buyer's market, albeit [with a] higher price level than we had grown up with in the 1960s and the early 1970s . . . I thought there might be some dips caused by international political situations, but that those would probably be short lived, as they have been in the past . . .

If you spread the decade out, it probably [is] going to be a decade of ample supply [with the oil jobbers picking] their supplier as they wish, largely choosing on the basis of price. . . . Customers are not going to have to worry about picking out any particular service station afraid that they wouldn't get the products because there was a shortage of it . . . Everything that we are seeing now continues to substantiate this. . . .

Now, I feel sure that there are going to be some [price] increases in practices. But it may well be . . . that they do no more than reflect inflation. The OPEC planning, you know, [is for] maintaining the price at inflation plus 3 percent, to get some increase in real terms. Well, I don't know whether they'll make that stick or not. . . . They have been burned enough now by their previous actions . . . that they may well be willing to live for quite some time with just maintianing their buying power where it is today. . . . If they get to the point where they want to tighten up supply, they could . . . do it. . . . But . . . certainly the wiser heads in the producing countries are seeing what they brought on themselves today by their previous actions. They just got too greedy too fast, and I think that's going to be a restraining influence on them for quite some time into the future. . . ."