A Federal Energy Administration economist has put together evidence that a break-up of the domestic operations of the 18 largest oil companies would save the public $6 billion to $8 billion annually - the equivalent of six to eight cents on a gallon of gasoline.
He contends that a break-up would achieve the savings by elimination or drastically curtailing waster in marketing expenses, such things as too many filling stations such and excessive expenses could be cut in half, he says.
The economist is John H. Phelps of the FEA's Division of Financial Analysis. Working on his own time over the past eight months, he assembled and analyzed data from numerous public sources, including several federal agencies.Particularly important were the income statments for 1972 provided by 60 firms for a Federal Power Commission natural-gas price proceeding.
His multibillion-dollar saving estimate; which is believed to be the first kind, is certain to be disputed. But at a Senate Judiciary Anti-trust and Monopoly Subcommittee hearing on June 23, FEA Administration John F. O'Leary expressed doubt that Phelps could prove his estimate correct but said, "It may, however, be true,
Phelps lays out his case in draft papers that he has circulated among other economists before offering them to professional journals for publication. The papers also have been circulated by the Energy Policy Task Force of the Consumer Federation of America.
A key element in PHelp's calculations is 1974 data showing that major oil companies marked up a gallon of gasoline 10 to 12 cents more than did "efficient independents."
For the majors, the marketing hike was 15 to 17 cents. For independents performing their own wholesale-retail functions, the average was 5 cents. Even so, one, Autotronics, earned a pre-tax return on invcestment of 16 percent. Each Autotronics' station sold between 100,000 and 200,000 gallons monthly - roughly four to seven times the national average.
Phelps says a normal competitive market - one that tends to eliminate firms that lag behind or don't adopt important officiencies innovated by rivals - wouldn't permit mark-ups by the majors three times higher than those by independents.
As Phelps sees it, the major clearly have market power incompatible with classical competition and use it manipulatively by taking "upstream profits," made on production to pay for huge outlays that prop up unprofitable operations "downstreams," particularly refining and marketing. They do this to provide assured outlets for their production and for tax advantages.
Phelps cites data showing that while the 18 majors, as a group, were reporting low or negative earnings in refining and marketing, independents averages - after taxes - returns of 7 to 17 per cent on the same activities.
In 1972, Phelps says, Exxon corp's pre-tax earnings on refining and marketing were 3 per cent, compared with about 30 per cent - double the average for all manufacturing - on production of oil and gas in the continental United States.
Phelps doesn't hold these views alone. On June 1, White House energy chief James R. Schlesinger made similar points in testimony before the House Commerce Energy and Power Subcommittee.
He says the majors demonstrate market power in another way: limiting supplies of refined products to independents with insufficient or no production, transportation and refining capacity of their own. Because this leaves the independents unable to meet the demand they would generate by selling at lower prices than at present, vigorous price competition is inhibited, he says.
If the majors could be stopped from subsidizing their downstream operations, including transportation, they would have to match the efficiencies of the independents or abandon those operations. Phelps argues.
He predicts this would make the 5-cent independents mark-up the norm. And with competition holding profits to reasonable levels, he says, consumer prices could drop $10 billion a year (10 cents a gallon). Allowing for factors such as the impracticality of high-volumed operations in some areas, Phelps figures the actual savings at $6 billion to $8 billion.
One way to achieve vertical divestiture is for Congress to pass a law. The closest it ever came to doing this was in October, 1975, when the Senate defeated, 50 to 40, a bill to restrict the 15 largest intergrated firms to crude production.
President Carter, in his April 20 energy speech, said the possible need for such legislation might be averted with individual' accounting. This, he said, should "be required from energy companies for production, refining, distribution and marketing - separately for domestic and foreign operations." Domestic operations generally account for the supply of nearly all natural gas and 40 per cent to 60 per cent of the oil.
At the June 23 Senate antitrust hearing, however, subcommittee chairman Edward M. Kennedy (D-Mass.) pointed out that the administration was witholding segmental datafrom the justice Department and the Federal Trade COmmision, the agencies responsible for enforcing the anttrust laws.
Phelps suggests that with enforced and publicized segmental reporting, market-induced divestiture might occur under stockholder pressure on the the integrated firms either to make each subsidiary individually profitable or to sell it.
He calculates that if the 18 majors had received normal profits on the money they invested in downstream operations, their reported net earnings in the five-year period 1970 through 1974 would have been about 50 per cent higher.
If in addition such refinery were to be required to sell at identical prices. Phelps believes, the most efficient firms would expand their market shares "and force the majors to either quickly change their efficiency or leave."
The majors have been vague and even contradictory about allegations that they have financed downstream operations with upstream profits. For example, Exxon controller A. L. Monroe, replying to a December, 1975, Senate antitrust subcommittee inquiry, said the company does not maintain financial records "on a functional or segment basis." The petroleum business, he asserted, "is unitary in nature."
Yet Exxon lawyer Thomas G. Ragatz told the Wisconsin State Tax Appeals Commission that "none of [Exxon's] functional departments are integral parts of a unitary business composed of all functions combined: rather it will show that each function is independent . . ." Expert company witnesses upheld him.
Ragatz "seems directly to contradict" Monroe although both spoke for Exxon, the late Sen. Philip A. Hart (D-Mich.) told the Senate in March. 1976.
For years, the majors have claimed they need more money for exploration and development. But Philps' study shows that the majors with the highest rates of return had the lowest rate of investment in these activities, while the 68 independents with the lowest profit rates had the highest.
In 1974-1975, he says, each dollar of oil and natural gas revenue generated 37 cents to 49 cents in spending on exploration and development if it went to a major, but about 96 cents if it went to an independent. The independents were able to invest at such a high rate because, in addition to using all available internal funds, they borrowed, he said.
Thus the majors had money left over - $4.9 billion in 1975 alone - to spend on unprofitable operations or on acquisitions unrelated to energy production. Phelps says.
Such findings contradict industry arguments. American Petroleum Institute President Frank N. Ikard told the antitrust committee tn 1975, for example, the divestiture "would inevitably cause every company, regardless of its degree of integration, to become less efficient than it is now."