PARACHUTE, COLO. -- Shale oil lives, but barely.

Envisioned a decade ago as the domestic resource that would protect the United States against skyrocketing prices set by the Organization of Petroleum Exporting Countries, the estimated 600 billion barrels of recoverable oil trapped in the shale rock of the western mountains remain largely undisturbed.

The reason is purely economic. It costs more than $40 a barrel to derive oil from the subterranean rock. With abundant natural crude oil available at less than $20 a barrel, as it was before Iraq invaded Kuwait Aug. 2, nobody has been willing to invest in shale development.

Nobody, that is, except Unocal Corp. of Los Angeles, which carries on here with the project sometimes known as Fred Hartley's Folly, after the former Unocal chairman who decided to go ahead with it. Sustained by a federal subsidy that could total $400 million by 1996, Unocal is producing 6,000 to 7,000 barrels of oil a day at its mountainside plant overlooking Parachute Creek.

In the early 1980s, when oil experts were predicting prices of $100 a barrel, most major oil companies were planning shale oil production facilities on land in Colorado, Utah and Wyoming that they owned or leased from the federal government. Workers rushed in from all over the country, and the region prepared for a long-term boom.

When crude oil prices fell instead of rising, the boom collapsed almost overnight. Unocal is the only company that completed a commercial shale oil production plant.

It was a mammoth undertaking that shows dramatically why shale oil cannot compete on the free market with conventional crude. Unocal has spent $1.2 billion, according to company officials, to excavate a shale mine with freeway-size tunnels, haul transportation and processing equipment up to an altitude of 8,000 feet, build heaters for the rock and construct a small refinery to upgrade the oil. It takes 450 Unocal employees and 150 maintenance contractors to operate the plant, all to produce less oil than a single well in Saudi Arabia.

Even with the federal subsidy, Unocal lost about $100 million on the operation in 1987, $50 million in 1988 and $30 million last year, according to Stephen C. Lipman, president of Unocal Energy Mining Division. Taking a long-term view, he finds those numbers encouraging.

"If we're successful in finding the right combination of technologies, we're unlocking a huge domestic resource," he said. "It will be a valuable asset if we're successful. Sooner or later our price will cross the crude oil price. It just takes a long time."

If that time ever comes, he said, Unocal, refining its technology as it gains experience with the process, will be in a strong position to produce shale oil on federal land to the north, where the oil seams are richer. The federal government owns an estimated 80 percent of all U.S. shale land.

The existence of oil deposits in certain types of rock and the basic technique for recovering it have been known since the 17th century, when a patent was issued in England for extracting "oyle from a kind of stone."

Thousands of claims were filed on federal lands in 1915 when the U.S. Geological Survey reported the presence of oil in the Rocky Mountain region, but development fizzled when large reserves of much cheaper crude oil were discovered in Texas. That episode was a preview of the boom and bust of the early 1980s.

The method used to extract oil from shale sounds simple. The rock is crushed and heated to about 900 degrees Fahrenheit. The oil trapped in the rock is freed by the heat and captured as it drips out. The waste rock is cooled, pulverized and spread on the ground, to be covered with topsoil and seeded.

But the reality of production is extremely complex. It takes about 10,000 tons of rock a day to produce Unocal's modest oil output. The rock is mined by blasting tunnels big enough for a bus deep into the recesses of the mountain. Huge ventilators pump fresh air into the miles of tunnels, where drillers and haulers work 12-hour days in perpetual blackness.

A fleet of 50-ton trucks rumbles through the tunnels to deliver the rock to a giant crushing machine, which then drops it onto a conveyor belt for delivery to the retort, or heater, just outside the mine. The shale oil is then piped to a mini-refinery at the base of the mountain where impurities are removed and the flow temperature is lowered so it will not congeal in cold weather. Then it is delivered to customers, mostly other oil companies that truck it to refineries in Utah.

U.S. crude-oil production in June was just over 7 million 42-gallon barrels a day. In that context, Unocal's output here is negligible. But Peter D. Nichols, administrative services manager of the plant, said the ability to produce the oil is more significant than the amount produced.

"We can't compete with the $16 oil on the world market," he said, "but this serves as a cap on OPEC. It puts a top on what the producers can get away with."

That is the theory behind the federal subsidy and behind the federal grants for research in shale and other forms of alternative fossil fuels. The National Research Council, an arm of the National Academy of Sciences, reported this year that "government involvement is essential to advance oil shale technologies to the next stage of development."

The current federal budget for fossil-fuel research and development is $416.5 million, including about $10 million for shale oil. The Reagan and Bush administrations have sought deep cuts in these programs, but Congress continues to support them. This year's budget is more than double what President Bush asked.

Unocal's problem is that its federal subsidy expires in 1996. If world oil prices are still lower than its production costs at that time, Lipman said, the company will face a difficult decision. "We'd like to come up with a solution that keeps us in business," he said.

Some help may be forthcoming from a proposal by Occidental Oil Shale Co., a unit of Occidental Petroleum, to enter the shale business. According to company President Ray Zahradnik, Occidental is planning a $200 million combined shale mine and power plant on leased federal land north of here.

Zahradnik said Occidental will burn some of the oil on site to generate 35 megawatts of electricity that it will sell to the local utility. Another 1,200 barrels would be processed through the Unocal facility and sold, he said, generating revenue for both companies.

He said development of the project is expected to cost about $20 million a year for 10 years, but Occidental is not planning to pay all that from its coffers. The state of Colorado and Rio Blanco County, which have agreed to contribute some planning money, will be asked to provide up to $2 million a year, and the company expects to spend $10 million. That leaves $8 million a year, which Occidental hopes to get from the federal government.

"We're seeking long-term commitment and support for a cooperative effort that addresses problems of cost, the environment and boom-or-bust cycle," he said. "There are all kinds of risks, but we hope we'll all trust each other for the next 10 years."

The House Appropriations energy subcommittee has agreed to provide the $8 million next year, but the parallel committee in the Senate has not acted, congressional sources said.

The Energy Department has awarded Occidental a $740,000 contract to plan the facility, but the Bush administration "opposes large demonstration projects" such as Occidental's, an Energy Department spokeswoman said. "The Occidental money was never requested by the administration. It was put in by the Colorado delegation."