Former Deputy Energy Secretary John O’Leary decides priorities. WIDE WORLD PHOTOS

WASHINGTON, DC -To motorists lined up at the pumps, the crisis of 1979 was easy enough to define: a gasoline shortage and soaring prices. But during most of the year, top officials in the White House and the Department of Energy devoted much of their efforts to managing another crisis -one that never happened.

In preparing for this phantom crisis, these officials were doing something that, at first glance, seemed eminently reasonable. The limited data available to the government showed unusually low heating oil stockpiles in the spring of 1979, and officials feared that a heating oil shortage could strike the next winter unless stocks were built up substantially. They felt that heating oil for the winter was more important than gasoline in the summer, and they adopted policies and carried out programs that deliberately favored heating oil production at the expense of gasoline supplies.

When all the concern over heating oil proved to have been unnecessary -the winter brought a glut of it, not a shortage -DOE officials defended their policy as a prudent, sensible response to an uncertain situation. After all, what could be more prudent, they argued, than making sure the country stayed warm?

Now, however, new information on the crisis raises the question of whether the policy was more misguided than prudent. Internal government and International Energy Agency records, research conducted at Harvard University and interviews with former federal officials show that the heating oil policy was decided on the basis of fragmentary, inadequate information, despite the millions of dollars spent by the government on gathering petroleum data since the first major oil crisis of 1973-74. The material also shows that political considerations heavily influenced the decision to concentrate on heating oil and that the policy was established despite strong objections from some senior officials who warned -correctly, as things turned out -that an over emphasis on heating oil would prolong the gasoline shortage and help drive up the world price of oil.

The evolution of the government's decision to focus its efforts almost exclusively on heating oil at a time when gasoline was the immediate problem suggests a couple of lessons for the managers of the country's next oil crisis. First, it illustrates that basing policies strictly on worst-case assumptions, as happened in 1979, may not always be as prudent as it seems. Second, it emphasizes a repeating theme in the history of government efforts to understand and control the oil industry -the importance of timely information on which to base policies.

The Reagan administration, however, following its free market, anti-regulation approach to oil matters, is cutting back on information collected from oil companies. During the confusion of 1979, some top energy officials realized that their planning efforts were hobbled by a lack of data on so-called secondary heating oil stockpiles: those held by wholesale distributors and independent terminal operators. DOE created a new data system on secondary stocks to fill that information void. Now, the Reagan administration has abolished the system. "The budget was cut and this was one of the things that had to go," a DOE spokesman said.

Pressure From Politicians

The Harvard research was done by Paul Starobin, a senior research assistant at the university's John F. Kennedy School of Government, under the supervision of William Hogan, director of the school's Energy and Environmental Policy Center. Starobin interviewed most of the key officials who developed the heating oil policies and put together one of the more comprehensive accounts to emerge so far of decision-making at DOE. The report, prepared as a case study for a public policy course, is written in a restrained style, avoiding broad judgments and sticking mainly to participants' accounts of who did and said what. The picture that emerges, however, is that of a confused and quarrelsome bureaucracy, divided into offices that generally distrusted each other, plagued at almost every step by a lack of reliable information on the oil market.

The report shows that pressure from liberal Democratic politicians in the Northeast played an important part in influencing the DOE's actions. Two of the most influential (and the most detested by some senior DOE officials) were Senator John Durkin of New Hampshire and Representative Anthony (Toby) Moffett of Connecticut, chairman of a House energy subcommittee. The legislators' concern over fuel supplies for their constituents coincided with the political interests of President Carter, who faced the first primary of his re-election campaign that winter in New Hampshire.

At a Senate hearing on March 12, Durkin chided Carter's energy secretary, James Schlesinger, over what Durkin felt was inaction on heating oil: "Next winter the home heating oil shortage will be severe in New England and I want to know what the administration is going to do, because there is a primary up there. If we can't get the attention of this administration any other way, we will get the attention of the administration in the presidential primary of February, 1980, in New Hampshire, mark my words." Independent heating oil dealers, who have an effective Washington lobby, also pressured DOE through the spring to concentrate on heating oil as the main problem.

By April, the study found, top officials in the Economic Regulatory Administration (ERA), the branch of DOE that worked most closely with industry, were convinced that the country faced a heating oil emergency. Deputy Energy Secretary John O'Leary decided that the department's top priority should be giving industry a specific numerical goal, later set at 240 million barrels, for building up heating oil stocks. The agency gave each of the big companies a heating oil quota and pressured the companies repeatedly through the spring and summer to operate refineries for maximum heating oil output, even though some companies, such as Atlantic Richfield, protested that the targets were unnecessarily high and that the policy was prolonging the gasoline shortage.

The Harvard study discloses that behind the scenes some senior DOE officials also argued against the idea. By that time, the Iranian revolution that precipitated the crisis was over. Iran had resumed exporting large volumes of oil, and other oil nations also had stepped up production. One official who tried to sway Schlesinger was Carlyle Hystad, a top official of DOE's policy and evaluation office, which had official responsibility for emergency planning. Hystad's office studied world oil production figures and concluded, accurately, that there was enough oil in the marketplace to assure safe heating oil supplies by winter.

"There was a great deal of emotion and mainly emotion about the heating oil situation at that time," Hystad told Sarobin, the Harvard researcher. "(Our) estimates were that we were not going to have a shortage, we would have ample supplies of distillate [an industry term for heating oil], we would probably have a glut of distillate, that there was no basis for the fears being expressed…We (concluded), ‘Well, there's a lot of oil out there and it's got to go somewhere and we think we're going to have imports essentially beyond what refiners say they now know they're going to get.' "

The study quotes another policy staffer as saying the policy office was "absolutely opposed" to the emphasis on heating oil. "It was a bad idea…Why? Because, then the attention of the whole industry is on distillate and the price gets bid up, and refiners have an incentive to keep the product themselves to make their targets and it doesn't filter down to where it's needed. It just wasn't necessary."

A Pessimistic Premise

But O'Leary, typically blunt, had little regard for the policy office, the study said: "They don't know the first goddamn thing about the business. I know a little about it, and the ERA people know quite a bit about it…Some of them are from the oil industry."

To O'Leary, the study said, the political arguments for focusing on heating oil were compelling. "I told Schlesinger that we were going to be in a politically exposed position, unless we were able to assure the Congress…and the media …and the public…that we were doing every goddamn thing in our power (to avert a shortage). Toby Moffett at this point was demagoguing the people, that we were going to be herded together in schools…Durkin was swearing up and down that people were going to go cold this winter. So I said, well you know, screw that. We'll take a series of actions that will damn well assure that these concerns, even if it is a very, very severe winter, that these concerns are met with fact…Schlesinger was very cautious and really didn't want to plunge ahead, and I persevered, and finally it became really the key element in what we were doing this spring."

The study also shows that O'Leary was operating from a highly pessimistic premise: "The policy assumption had to be that Iran would be out most of 1979." By April, however, Iran was pumping four million barrels a day, twice as much oil as the administration's original estimate of the total world shortage. But although the assumption behind the policy proved wrong early in the crisis, the policy remained the same.

The emphasis on heating oil troubled Paul Bloom, DOE's special counsel for enforcement of price controls. Bloom, who was not mentioned in the Harvard study, said in an interview he had argued that the administration lacked basic facts necessary for determining whether any real heating oil problem existed. The whole policy, Bloom said, rested on statistics showing that heating oil stocks were unusually low in the spring at the refinery level. The problem, he said, was that the government had no data on the millions of barrels of stocks held by wholesalers, independent terminals or major institutional consumers, such as hospitals, farm co-ops, utilities and universities.

Bloom said he suspected, and some "anecdotal evidence" gathered by his office tended to confirm, that speculators and oil buyers for businesses and institutions had reacted to news of turmoil in Iran and probable oil price increases by buying and storing substantial extra supplies during the winter of 1978-79. If true, that could mean that there never was a heating oil shortfall, that the oil had merely moved a step or two downstream in the distribution system.

"If you get five or six reports from the field that they're all shaking their heads in the Midwest over record amounts of farm storage absolutely bloated, and then you come to a meeting the next day and hear that the whole Midwest is drained dry, not a molecule left, you have to scratch your head," Bloom said. "I was an agnostic about the whole assumption of the pivotal importance of heating oil because it so critically ignored the gasoline problem that was right in front staring at us. It seemed so bizarre that the whole department was preoccupied with the presumed heating oil shortage while the whole world was wrapped in a supply and price crunch in gasoline. It seemed almost irrational, and the evidence for the heating oil crunch seemed so dubious."

Other officials, however, said Bloom's suggestions for gathering more information before deciding the policy were disregarded.

Confidential minutes of Carter's cabinet meetings show that by the time the gas lines arrived, the decision already had been made: Gasoline was a secondary priority. The minutes of the May 7 meeting quote Carter as saying "there is great concern in New Hampshire over home heating fuel supplies for next winter…"

"The President summarized his views on the gas supply problem by making the following points:

  • There is no easy short term answer to the problem. There will be less gasoline and it will cost more;
  • The public is not yet responding to repeated calls to conserve energy;
  • The Congress has not adopted the administration's recommendations to deal with the gas and oil supply and conservation needs of the nation;
  • Our priority will continue to be home heating, agriculture and emergency needs over highway driving."

How to Meet Your Quota

As a result, DOE took no action to counter the companies' admittedly highly conservative inventory policies, which allowed substantial amounts of crude oil and gasoline to build up in storage during the worst months of the gasoline crunch. Analysts said heating oil quotes that DOE urged upon companies kept spot market prices rising steadily through the summer and fall, encouraging OPEC to keep raising its own prices.

By early September, primary heating oil stocks (those at the refinery level) already had exceeded 220 million barrels, more than the previous year's level. Many outside experts agreed that that stock level would have been reached through normal industry operations without DOE's pressure and that DOE had overreacted in setting the 240 million barrel target. DOE spokesman, Ed Vilade, acknowledged at the time that preliminary studies were confirming what Bloom had suspected:

"We found that secondary and consumer stocks are higher than anticipated." The main result of the emphasis on the 240 target, analysts said, was to encourage big companies to hold on to their stocks longer than usual, keeping the market tight and prices rising.

Some big companies met their quotas through bulk purchases, further tightening the market. On October 4, Harold Bernstein, board chairman of Northville Industries, a large independent oil company, wrote to a DOE official, "The distillate spot market has been ‘thin' in terms of volumes offered. Every time the price dips significantly, large refinery suppliers have stepped in and bought up [available supplies], driving the price up again." One apparent reason: "buying to meet DOE inventory goals."

A lack of reliable information also plagued another DOE effort to boost heating oil supplies. In April officials grew upset over trade press reports that heating oil refined in major companies' Caribbean refineries was being "diverted" from the U.S. to Europe because of higher spot market prices there. Officials began considering a change in the complex "entitlements" program, under which refiners with cheap domestic oil paid subsidies to those who had to use expensive imports. The idea was to create a $5 subsidy on imported heating oil to attract more supplies from the Caribbean.

Europe Protests

But in trying to figure if that would work, the Harvard study found officials were handicapped by the absence of two crucial pieces of information: where those refineries' products normally went, and where they were going during the crisis. Some data was available from the major companies' chief lobbying group, the American Petroleum Institute. But according to the study, the API numbers combined hard data with outright guesses; one official, Douglas McIver, called the data "unbelievably bad."

Two other officials, Doris Dewton and Scott Bush, supervised what the study called "an 'intelligence' effort…aimed at obtaining data on oil operations from Caribbean refineries." Mainly, the effort consisted of asking for information from the companies that own the major Caribbean refineries Exxon, Texaco, Shell, Chevron and Amerada Hess. Dewton said in an interview that she and Bush didn't find out much. "The companies had to tell us about their U.S. refineries," she said, "but they didn't have to tell us anything about their offshore operations." The society that invented flight, won two world wars, cured polio and landed on the moon found itself unable to find out what was going on at five nearby oil refineries.

Over the objections of one senior official, DOE decided to go ahead with the subsidy. The decision provoked a storm of criticism from European countries, who accused the U.S. of trying to hog supplies. Spot market prices for heating oil shot up dramatically. At most the subsidy attracted, according to the best available evidence, only a small amount of additional oil.

Should We Forget About it?

The dissenter was John Treat of DOE's international affairs office, a close adviser to Schlesinger. Treat said in an interview that he told Schlesinger and O'Leary "it was a stupid idea. Then they excused me from the room and decided to do it anyway. And it was a stupid idea. It did drive up the price a bit. It did not result in our getting much additional heating oil. And besides the record shows we didn't need the heating oil anyway."

At the International Energy Agency, a 21-nation body created by Western nations to deal with oil crises, a top official, Joachim Koenig, called the U.S. action "a mistake" prompted by inadequate information, according to a classified memo. The memo says that Koenig told a meeting of IEA industry advisers on September 13, 1979, "that governments' efforts to pressure industry to increase heating oil stocks caused panic in both crude and product markets that could have been avoided."

Would the government have enough facts to avoid panic if a similar crisis struck today? Some congressmen say they doubt it, particularly if the administration keeps on relaxing reporting requirements. The data system for secondary heating oil stocks, created specifically to avoid a repeat of the 1979 confusion, already has been eliminated. Three congressmen, Rep. Tom Railsback (R-Ill.), Philip Sharp (D-Ind.) and Bob Edger (D-Pa.), recently wrote Budget Director David Stockman to oppose a proposal by the American Petroleum Institute to reorganize data gathering and eliminate what the congressmen called "basic information needed by state and federal governments."

"The oil industry," Railsback said, "would be in effect telling the American people: Don't bother about the information you need to make national energy policy, we'll take care of it."