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What Big Oil Was Doing While You Were Fixing Your Solar Panel

           This coming fall, the U.S. Department of the Interior and the Environmental Protection Agency plan to spill 11,000 gallons of crude oil off the coast of Washington state's Olympic peninsula. EPA scientists, clad in full body condoms, will monitor the flow of the oil slick as it passes over a marine mammal sanctuary containing some of the best orca whale habitat in the Pacific. Then, hopefully before the goop fetches up on the shores of the Makah and Quinault Indian reservations, Coast Guard helicopters will swoop onto the scene to drop incendiary bombs to burn off the slick.

           Billed by proud government flacks as an enviro wargame, this mad exercise actually represents unconditional surrender to the oil industry. What we have here is taxpayer money underwriting industry efforts to persuade the public (which, despite trillions in PR campaigns, still maintains a healthy loathing for Big Oil) that drilling in the most ecologically sensitive areas is just fine, and that even the worst disaster can be cleaned up swiftly.

           In their domestic drilling program, the next big prize for the oil companies is an expansion of their explorations on the outer continental shelf of the Pacific Northwest. Right now the outer continental shelf is the property of the federal government and for leasing to begin, there would necessarily have to be some form of governmental/oil industry partnership, with the government acting as leasor and indeed guarantor of the oil companies' prospecting.

           For the past generation there's been a moratorium on such drilling, and the feds are rightfully fearful of outrage if the public senses that an environmentally dangerous sell-out to Big Oil has taken place. The memories of the battles in the 1960s over the Santa Barbara channel oil spills off the coast of southern California are still vivid in the minds of federal bureaucrats and oil company executives. Those oil spills from the first wells drilled on the outer continental shelf generated such public anger that even the most conservative politicians have opposed new drilling off the coast of northern California, Oregon, and Washington. But a new generation of federal bureaucrats and politicians are on the scene and the ever-patient oil companies feel that now may be their time to strike.

           There is, of course, every reason for the public to be skeptical. An independent counsel who investigated the Department of Interior's oil leasing practices put together a report in 1994 that was recently turned up by the Project on Government Oversight, a public-interest outfit based in Washington D.C.

           From this report it emerges that 10 companies extracting oil and gas from federal lands in California have underpaid the U.S. Treasury by at least $1.5 billion. The scam results from the underpayment of royalties and accumulated interest dating back to 1960. The companies are: Texaco, Shell, Mobil, ARCO, Chevron, Exxon, UNOCAL, Phillips, Santa Fe, and Oryx. By federal law, a quarter of this money should have been returned to the state of California's school system. The remainder should have been deposited in the Land and Water Conservation Fund, a federal account used to acquire public lands for parks and wildlife reserves.

           When confronted with this report, did the U.S. Interior Department, bastion of Babbitt the Magnificent, instantly threaten to bring down the full weight of the U.S. Justice Department on the defaulting oil companies? No. Babbitt's Interior Department did no such thing. Instead, the Department has proposed a simple write-off of the non-payment as an accounting loss, with a reform of the regulations to ensure that no oil company will ever again face the embarrassment of being called derelict in its payment practices.

           Along with the oil slick, Babbitt's boys are planning for the Olympic peninsula, this affair tells us everything we need to know about the untrammeled power of the oil industry today.

           The colossal theft from the California school system and the conservation fund was engineered by the big oil companies in the following fashion. Back in 1960, the companies joined together and submitted one bid for the outer continental shelf reserves on the southern California coast. Because the companies colluded on their bid, the price paid for these lucrative deposits was a pittance of their real value. Wells were developed, and the companies--acting as a cartel--prevented any independents from getting into the action.

           These big oil companies are all "vertically integrated" producers, meaning that they own the entire spectrum of oil-related production facilities: wells, pipelines, refineries, and pumping stations. Such absolute control gives the oil cartel a stranglehold on pricing. For example, the cartel can artificially depress the price of crude oil at the wellhead in order to drive independents out of the action and to reduce its own royalty payments to the federal government. Such royalty payments are based on the price of crude oil. But the cartel can easily recoup by simply running up the price of oil and gas at the refinery or at the pump. This explains why crude oil prices were low this last spring, while at the same time prices at the pump went through the roof. It's also how the theft of the $1.5 billion took place.

           By law, the federal government is supposed to assess royalties off the market value of crude oil. In practice, however, federal royalties have been assessed on the so-called "posted price" that the integrated companies charge themselves for their own crude oil. Thus, the companies are in the pleasant position of setting the price by which the royalties are calculated. The cartel has exploited this loophole with relish. Crude oil prices between 1960 and 1993 posted by the producers for oil they extracted from the outer continental shelf in California have been 20 percent lower than crude oil prices from the rest of the country. At the same time, however, refined oil products were sold in California at a rate that was marginally higher than the national one.

           The U.S. Department of the Interior has been fully aware of what was going on these 33 years, having been many times appraised of the fix by its own investigators. On the most recent occasion, Bob Berman of the Interior Department's Office of Policy Analysis reported that there had been huge underpayments, and urged that the Interior Department calculate "the exact amount of additional royalties due, including interest and criminal penalties, if any, and initiate collection procedures."

           Berman probably expected his recommendations to be acted upon, given the fact that the head of his section at Interior was no industry hack, but rather, an import from the green movement in the form of Brooks Yeagar, whose previous perch in Washington had been at the National Audubon Society.

           Alas for Berman's naivete. After Berman remitted his memo, 13 months of inactivity followed. The actionless period was so prolonged that even the Department of Commerce grew nervous and dispatched a memo to Babbitt, saying, "It seems that all we have seen to this point clearly establishes there is a problem. The companies themselves testified that posted values did not represent actual values. [The Department of the Interior's] Mineral Management Service needs to do something now to avoid creating the impression that these events have not occurred."

           Brooks and Babbitt quickly decided that the best way to ensure that the events had indeed "not occurred" was to make an administrative ruling that there was "no clear evidence" that the oil companies had underpaid their royalties. They also declared that there was "no convincing evidence" that the California oil market was non-competitive.

           Then Babbitt and Co. drafted an executive order for President Clinton's signature that would exempt the oil companies from ever being audited for underpayments occurring to 1990. The executive order rationalizes this extraordinary billion dollar gift to the oil companies by stating, "This will provide greater certainty to the minerals industry who are developing federal resources. They can now be assured that they can expect timely closure of audits. This also makes good business sense because royalty payers will have a clear time period beyond which they no longer need to maintain records or be subject to audits." To top it off, Babbitt wants the future valuation of crude oil prices to be left up to the oil companies to set.

           Babbitt's desire to have the oil companies police themselves came only a few weeks before the cartel managed to hike pump prices across the United States, and about the same time that Federal Judge H. Russell Holland of the U.S. District Court in Anchorage accused Exxon of being part of "an elaborate ruse" to manipulate a federal jury and avoid paying $5 billion in punitive damages resulting from the Exxon Valdez oil spill in Prince William Sound in 1989. "Public policy," Holland wrote in his savage decision, "will not allow Exxon to use a secret deal to undercut the jury system, the court's numerous orders upholding the punitive verdict, and society's goal in punishing Exxon's recklessness." When is the last time you heard a politician attack the oil cartel with such anger and disgust?

           The fox is on the loose, and there are no more gamekeepers in our government.


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