IT'S GROTESQUE. Some independent oil dealers in Ohio protest bitterly that they are being driven out of business by one of the big companies, Sohio, which -- under federal price regulations -- can't help it. Under one federal rule, Sohio's oil from Alaska is heavily subsidized. Under another federal rule, Sohio has to pass the subsidy on to the customer. The independents, who don't have Alaskan oil fields, are being killed.
And why, you might reasonably ask, is the federal government heavily subsidizing Alaskan oil? Echo answers.
The story is worthe recounting as a little example of the weirdly complicated maze that Congress, the regulators and the oil industry have woven. Each rule eventually creates bizarre anomalies, which then have to be patched with further rules. The whole structure is now creaking and swaying like a decrepit house in a high wind
When foreign oil got more expensive than price-controlled American oil, Congress invented an ingenious device to keep all the companies' oil costs roughly even. It was called the entitlement bank. Refiners using cheap domestic oil were to buy entitlements from those using expensive foreign oil. In fact, it is a multibillion-dollar subsidy of foreign oil. But you will never see it counted in any public budget, because it goes directly from one refiner to another.
When the Alaskan pipeline was built, as you may recall, it cost vastly more than anyone had expected. The federal government had to set high pipeline fees to cover that cost. With those high fees, the price-controlled Alaskan oil was not profitable to produce.To get the oil flowing, the federal government wrote still another rule, cutting the North Slope oil in on the entitlement subsidy.
With the huge increases in oil prices last year, the Alaskan oil got very profitable. But it still received the entitlement subsidy, which, because of the peculiar arithmetic of the thing, was suddenly worth three times as much as before. Nobody seems to know why the North Slope oil still gets the subsidy. But as the subsidy and the price controls play against each other, the North Slope oil is now the cheapest in the world. Sohio has a lot of it, and that's why Sohio's competitors are being destroyed.
Last week, in desperation, an Energy Department hearing officer told Sohio to raise it prices and send the increase to the U.S. Treasury. But that's a tax, and the Constitution does not best the taxing power in Energy Department gearing officers. The Energy Department hastily overruled him, and said that it would take another look at the whole situation this week.
As regulatory first aid, the immediate remedy is to revoke entitlement subsidies for all of the North Slope oil. The broader solution is to abandon the whole failing attempt at oil price controls. Under the present leisurely schedule, controls are to be gradually ended by October 1981. It can't happen too soon.