On May 25, as the gasoline shortages continued to spread along the Eastern Seaboard, President Carter issued a strongly worded directive ordering the departments of Energy and Justice to begin a major investigation of the oil industry.
"You shall jointly conduct a comprehensive investigation of the apparent gas shortage situation, using all available and appropriate authority and resources at your disposal, to determine whether there is a reason to believe that the apparent shortfall is a result of concerted activity by firms at the refining and/or marketing level, or of excessive stockpiling or hoarding of supplies," the presidential order said.
Ten days later, in response to the presidential directive, Deputy Energy Secretary John O'Leary called a large group of DOE officials into his conference room in the Forrestal office building to discuss how to conduct the investigation.
But at that meeting in O'Leary's office and continuing at numerous other sessions at the department through June and July, energy officials ignored the specific orders in President Carter's directive, The Washington Post has found.
As a result, a 53-page DOE report released by the White House last week clearing the oil industry of charges of holding back fuel supplies was described by one top official who worked on it as "a propaganda exercise."
"If the report was taken to be a conclusive finding that there was no conspiracy by the oil companies to jack up prices, then I would say it was misleading," said another official, William Lane, director of the DOE Office of Competition.
Interviews with the officials who prepared the study also revealed:
The report's central conclusion, that there was no holding back by oil refiners, deliberately sidestepped what the officials said were more relevant allegations that the industry manipulated amounts of domestic oil production, foreign imports and reserves, thus intentionally creating a shortage.
Twenty-two of the 27 information sources cited in the appendix of the special report were not used in the report, according to Al Linden of the DOE's energy information administration. He said he did not know why the unused sources were listed in the appendix.
One data source listed in the appendix but not used in the report, for example, is a Bureau of Mines report containing "data on fuel oil stocks by sulfur content."
Five of the same 22 information sources cited in the appendix were considered as unverified by DOE officials and were stamped "not valid," Linden said.
The man who wrote the report, Carlyle Hystad of the DOE's policy branch, previously had written speeches, press statements and congressional testimony for then-energy secretary James R. Schlesinger Jr. and his assistants. In those statements, Hystad had drawn conclusions about the causes of the gasoline shortage.
Parts of Hystad's first draft of the special presidential report were almost verbatim versions of those earlier statements, several officials said.
DOE general counsel Lynn R. Coleman, who supervised the study, rejected suggestions to pursue key issues, such as whether the oil companies deliberately cut back on crude oil production and failed to import all of the foreign oil they could. Department officials also abandoned an early proposal to hold public hearings in which oil company executives would be subpoenaed.
The original draft of the report cleared the oil industry of all charges of wrongdoing. The wording of the report was changed after two officials argued that DOE had yet to investigate most of the serious allegations against the oil companies.
"This was not an investigation," Lane said. "It clearly has been a summary of what we already knew."
The special report was released by the White House last Monday. Coleman, who conceded that the Energy Department relied entirely on data supplied by the oil industry, strongly defended it. He called the report "an intensive effort to analyze and display facts that ordinarily show up as numbers on a computer printout."
The White House has had no comment on the report.
Interviews with Energy Department officials who prepared the report and an examination of DOE and White House records give this picture of how the special study developed:
On Friday, May 25, Carter signed a one-page memorandum to the attorney general and the secretary of energy ordering the "comprehensive investigation" of the oil industry.
He ordered that the probe should begin with an examination of the California gasoline shortage, and that an initial report of the findings should be sent to him within 30 days.
Although the directive was dated May 25, DOE officials said they did not receive the document until a week later.
"It went from the White House to the Justice Department, then back to the White House," one official said. "Then we finally got it. It was sort of kicking around the front office for a few days before anybody started focusing on it."
Ten days after the president ordered the probe, O'Leary called DOE officials into his conference room.
The session was short, Paul Bloom, the DOE's special counsel, told the group of the audits he had already begun of gasoline pricing and allocations.
Most of the remainder of the meeting was organizational, officials said. O'Leary said that DOE general counsel Coleman would supervise the investigation. Linden would supply the data from existing DOE files. Hystad would write the report.
"When we left the meeting there was a sort of feeling that what we were going to do was put together a systematic display of data which we already had, but which was never put together in any clear fashion," one official said.
Almost all meetings after that were held in Coleman's conference room. Although dozens of people were involved in the discussions, only six officials regularly attended most meetings.
And of those six, only two, Coleman and Hystad, were considered by the others as the architects of the report. The other four, Lane, Bloom, Linden and Barton House, were consulted and asked to read drafts of the report as it was being written.
Hystad wrote five drafts before the group agreed on a final version.
After he wrote each draft, copies were circulated among the six officials and others in the Energy Department.
The officials often joined in informal sessions at Coleman's office. They were usually called in the morning for an afternoon meeting. The meeting would last for 30 minutes to two hours, officials said.
Usually, four of the officials would be satisfied with the Hystad drafts, with Lane and Bloom raising most of the objections or suggestions for major changes.
Despite the urgency of Carter's May 25 directive, most of the president's specific requests were set aside. For one, the Energy Department and Justice Department decided not to conduct a joint investigation, but to conduct separate probes, with each department reviewing and commenting on the work of the other.
The Justice Department had no hand in writing the DOE report, according to Donald Kaplan, chief of the energy section of the Justice Department's Antitrust Division.
Regarding the president's order on how the probe should be conducted, "using all available and appropriate authority and resources at your disposal," both the Energy and Justice departments chose not to subpoena any oil industry data or witnesses. Both had the authority to do so.
Regarding the first area of inquiry ordered by the president, whether there was "concerted activity by firms at the refining and/or marketing level," DOE officials conducted no audits or field investigations.
Early in the probe, Lane suggested, and at one point Schlesinger reportedly agreed, that the DOE hold public hearings. Top oil officials would be subpoenaed and asked "hard questions," officials said.
"Schlesinger felt that public hearings, much like Senate hearings, would give the investigation more credibility," one official said. "But by mid-July, as the lines began to fade, we felt the situation is cooling off. Why start things up again with hearings? So the idea just sort of faded out."
Energy officials also rejected suggestions to look into the question of whether oil companies bought all the foreign oil they could from countries with which they had contracts.
Officials said that Lane, who argued in favor of such a probe, was turned down by Coleman.
"Every time Lane raised the question, he was told, "Well, we can't check it, we don't have any data on it,"" one official said.
Two officials, who asked not to be identified, said they felt they were engaged in an exercise that would lead to foregone conclusions already publicly stated by the department. They pointed to the original drafts by Hystad, which appeared to have been taken verbatim from the statements he had previously written for Schlesinger and O'Leary.
Two officials complained that as the study progressed it became clear the focus was on areas that would not provide answers to the most fundamental questions arising from the gasoline shortage.
One official likened the investigation to a man who dropped a dollar on a dark street "and instead of looking for it where he dropped it, he looked for it under a street light."
Officials also said that the original wording of the report, which had cleared the oil industry of any wrongdoing, was changed because Bloom was still conducting audits of the oil companies.
Bloom reportedly argued that the exoneration was "grossly premature," because his findings could lead to civil or criminal charges. In addition, he said, a blanket finding by the DOE that oil companies did nothing wrong could later be used in court as a defense by an oil firm.
Linden, who was responsible for supplying all of the data used in the report, said he was relying on the honesty of the oil companies, since his data was derived from their reports.
He also said he did not offer conclusions for the study. Coleman and Hystad took that role, he said.
In reviewing the 27 sources of data listed in the report's appendix, Linden said that only five of them were used in the report.
Five others that were not used, he said, were considered unreliable because the information had not been verified. He said those reports were stamped with the words: "Not Valid," a label that did not appear in the appendix.
Asked why 22 sources of data that were not used in the report were included without written explanation in the report to the president, Linden said, "It's in the appendix, um...because the appendix was a document taken out of something else."
The content of the report was written, debated, rewritten and debated again over a period of about six weeks, energy department officials say. It was completed by mid-July.
On July 17, a summary of the findings of the report was leaked to The New York Times, which published an article on its financial page.
The report was delivered to the White House July 24, two months after Carter had ordered that he receive the report within 30 days.
On Aug. 5, the Los Angeles Times and The Washington Post published front-page articles reporting that a DOE investigation had cleared the oil industry of charges of hoarding. Both newspapers had been leaked copies of the report, which still had not been publicly released.
The following day, on Monday, at 4 p.m., the White House officially released the report. Carter made no statement that day, and he and his spokesmen refused to answer any questions about the report. CAPTION: Picture, JOHN F. O'LEARY, At the first meeting in O'Leary's office, and at numerous other sessions, energy officials ignored the specific orders in the president's directive.