Can the American oil refining industry enjoy price decontrol and also be allowed to keep hundreds of millions of dollars in subsidies too?

That question has ignited a political battle on Capitol Hill certain to engulf the oil industry and Carter administration. As one Washington oil lobbyist sardonically observed: "We simply must protect the American consumer from cheap foreign oil products."

Such protection is already afforded the domestic refining industry under a sheltering network of Department of Energy regulations. This shelter would be stripped away under the decontrol plan by putting U.S. and foreign refiners on the same price footing.

Sen. J. Bennett Johnston (D-La.), a friend of the refiners and forceful member of the Senate Energy Committee, says he thinks that the domestic refiners need help from congress "so they don't have a competitive disadvantage." He is preparing legislation that would make up what he estimated to be a $2-a-barrel loss to the U.S. refiners if they are forced to compete openly with their foreign counterparts.

Johnston and major domestic refiners such as Ashland Oil, Sun Oil and Standard of Indiana, as well as most of the "small" refiners, make this argument: Because of stiff environmental laws, the Jones Act requirement to use higher-cost American tankers and other rules and regulations the domestic refiners need protective relief from the effects of decontrol.

Larry Goldstein, of the Petroleum Industry Research Foundation, agrees: "The current advantage they hand over foreign refiners will be eliminated under decontrol."

Northeast Petroleum's vice president John Buckley, offers a stronger view: "The combination of removing [import tariff] fees and ending the entitlements program [DOE's regulatory subsidy] wilnl leave the U.S. refiner naked-some capacity will be shut down."

Of 19.5 million barrels of oil consumed daily in the United States, 17 million barrels are refined domestically.

Johnston says that he soon will introduce legislation calling for $1.50 or so a barrel import tariff on refined products, such as heating or fuel oil, to shelter domestic refiners. "You need a pot of money from somewhere," he said.

At the center of the battle is the DOE's complex entitlements program, which Rep. John D. Dingell (D-Mich.) calls "the largest transfer system we have outside of welfare," and which President Carter assailed last week as an outright subsidy to import oil.

DOE's entitlements program equalizes the cost refiners pay for oil by, in effect, averaging the costs they pay for domestic oil-selling for as low as $5.90 a barrel-wit foreign oil that sells for $16.50 a barrel or more.

A recent DOE refining study concludes that under the entitlements program domestic refiners now enjoy a $1.36 to $3.36 a barrel subsidy, with the largest subsidy going to small refiners with less than 10,000 barrels a day capacity.

As President Carter phases out domestic oil price controls beginning this June, the entitlements subsidy the refiners receive will be reduced and eventually ended.

The domestic refiners' pleas come at a time when Carter has awarded the oil companies, at least in part, their longest held goal: oil price decontrol. Meanwhile, Carter has also eliminated a 63-cent-a-barrel tariff on imported refined products, which reduces domestic refiners' competitiveness with foreign product sellers.

The administration is sharply opposed to tariff or other schemes to protect domestic refiners en masse.

Stuart Eizenstat, Carter's domestic policy adviser, has told oilmen in recent weeks that the administration expects the refiners to absorb up to 33 percent of the added oil costs simply resulting from decontrol by cutting their profit margins on refining operations.

At the DOE, one senior official says, "We're waiting for the refiners to come in crying," and goes on to say any added protection for refiners "is going to be more inflationary." Asked which companies are pressing hardest to preserve their advantage, the official says, "Amoco [Standard Oil Co. of Indiana], Sun and Ashland are the most concerned about it, along with the little guys."

Under a 1978 request from Johnston and Dingell, DOE has undertaken a comprehensive study of the domestic refining industry.

One senior DOE policymaker summarized the findings of the study, saying, "We tried to look at the national security, competition and balance of payments issues, and we just couldn't find any justification for relief."

Beyond that, in the words of one senior administration official, "How can Jimmy Carter politically call for trade protection for domestic refiners after decontrolling oil?"

The refiners disagree.

"There absolutely is a national security argument, it is dangerous . . . It acts as a signal to foreign countries, and in particular the Arab OPEC [Organization of Petroleum Exporting Countries], to develop their own petrochemical and refining capacity rather than exporting crude oil," says Urvan Sternfels, of the National Petroleum Refiners Association.

Sternfels adds that ending the entitlements subsidy "will undercut the ability of domestic refiners to recapture profits."

DOE counters, saying that since the United States is already importing oil, what difference does it make to import product-particularly when the oil product imported is likely to come from oil refineries operated by some of the U.S. majors overseas.

Some of the refiners hope that Johnston will be able to hammer together a coalition with Sen. Edward M. Kennedy (D-Mass.) and House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.), exchanging tariff rebates to New England consumers for support for a refiners' relief program. Last year, some New England members of Congress indicated that they would go along with such a plan.

Since the president called for decontrol and canceled import fees, however, one DOE official says, "That marriage has been annulled."

As for the apparent inconsistencies between the oil industry appeals for unregulated free markets, as expoused by the Mobil Oil Corp, advertisements or the declarations issued by the American Petroleum Institute, a senior DOE official muses, "Interestingly enough, this is one issue where even the majors with world-wide refining are not speaking up for free trade in their normal fashion."