Oil Companies Accused of Multibillion Dollar Ripoff

What could be one of the greatest corporate economic crimes ever perpetrated against U.S. consumers is currently under investigation by the U.S. Department of Energy (DOE).

Mobil Oil, and seven other U.S.-based oil companies, are alleged to have participated in a vast and intricate scheme to defraud the DOE's oil price control system of billions of dollars over the last seven years.

One result of the scheme, according to two internal DOE documents, has been a big hike in the price of crude oil. "The American consumer has been really screwed," says one DOE official familiar with the case. "We're talking about a couple of billion dollars."

Many of the suspects mentioned in the DOE documents, however, may never be brought to justice, and their alleged overcharges may never be returned to American consumers.

The Making of A Swindle

The investigation covered the activities of oil producers-who are also refiners-and of oil resellers, or middlemen, during the period of oil price controls, 1973-1980.

The central alleged violation was miscertification' -describing cheap, domestic crude oil as foreign, or expensive domestic crude. The cheap domestic oil was subject to price controls, while the foreign or expensive domestic was not. In short, miscertification means lying.

The costs to the public may have been mind-boggling. On one pipeline alone, miscertification of oil "added an average of $5.00 to the cost of each barrel of crude oil made available for in-line transfers," in September, 1978, one of the DOE documents states. In total, the investigation estimated "the resulting added cost of the crude oil involved to be about $40,000,000 in that month, or $480,000,000 a year," for just that pipeline.

The DOE investigation alleges that the "miscertification" takes place at the hands of resellers, during "in-line transfers." These transfers-virtually unheard of before the shock of OPEC price rises in 1973-amount to a kind of collusion among producers and resellers, according to the investigation. The oil producer, before sending the domestic oil along the pipeline to the refiner-which the producer himself owns-will sell the oil to a middleman, who will then sell it to another middleman, and so on. These transactions allegedly occur-typically with a profit being made, and the price of oil being marked up, on each exchange-before the oil ever enters the pipeline, or before the oil has gone anywhere, for that matter. Somewhere amongst these "paper exchanges," DOE investigators have concluded that a reseller illegally alters the certification to one of the more expensive kinds of oil.

The role of the major oil companies, who are both producers and refiners in this scheme, is central to the DOE's investigation. Alleging a possible "conspiracy" by the major producers and resellers to falsify certifications, the DOE investigators suggest that some of the major companies devised the scheme, employed the resellers, and provided the certifications which were eventually falsely used. As one DOE official puts it, "the refiners put these people in business to do their dirty work for them."

The resellers and the producer-refiners profit handsomely from the "in-line transfer" game, DOE investigators claim. According to the scheme sketched by the DOE, the Teseller can make a small profit on each sale by raising the price a discrete increment, as a charge for supplying the alleged "counterfeit" oil to the major producer-refiner companies. The majors, according to the DOE, profit by purchasing counterfeit foreign or expensive domestic oil at a price below that of the genuine oil.

If the DOE's allegations prove true, U.S. consumers paid the costs for such in-line transfer frauds. DOE price standards are based on the source and the kind of oil refined. As more refiners certify their oil to be expensive domestic or foreign-rather than, cheap, domestic, controlled crude-the adjusted price to consumers increases accordingly.

The DOE's system of price controls, established in 1973, built in opportunities to cheat the very system it created. After the OPEC price hikes of 1973, the costs of refining among domestic firms varied greatly, as some refiners had access to cheap domestic oil, while others were forced to buy expensive, cartel-priced crude. The DOE devised an "entitlements program" to equalize these costs. Its operation was supposed to be simple: refiners of cheap domestic oil would pay a certain amount of money per barrel into the program; refiners of the foreign or expensive domestic oil would receive a per-barrel payment from the program. The entitlements system thus provides a second impetus to counterfeit oil certifications. Receiving counterfeit high cost crude at a discount would be the first benefit a producer-refiner engaged in miscertification would reap. In addition to that, under the entitlements program, the producer-refiner would actually receive a rebate for having "foreign" or "expensive domestic" crude, when in fact the participating producer-refiner actually possessed cheap domestic oil and owed a payment to the entitlements program.

Two firms figure most prominently in the investigation's documents: Mobil Oil and Carbonit Houston, a crude oil reselling company. "It appears that in September, 1978, Mobil made at least 1,200,000 barrels of West Texas sour crude oil available for in-line transfer and re-acquired 1,200,000 barrels with foreign certifications," the DOE document states. "These transactions netted Mobil about $390,532.84."

The Charges

Jerome Wiener, director of special investigations in the office of the DOE's special counsel, supervised the preparation of a DOE "draft referral" last summer. (A "referral" is the step an agency takes when it passes on to the Justice Department evidence relating to possible criminal violations.) The document, bearing Wiener's name, recommends "the convening of a Grand Jury to conduct a thorough criminal investigation" of companies involved in the September, 1978, in-line transfers.

The draft referral names three major producers as possible subjects for a criminal investigation: Mobil Oil Corporation, Tesoro Petroleum Company, and American Petrofina Company of Texas. It also names five crude oil resellers: Carbonit Houston, Carbonit International, Armada Petroleum Corporation; Uni Oil, Inc., and Derby Company.

Five possible criminal violations by these companies are listed in the draft. All eight companies are suspected of "willful violations of DOE regulations"; all five crude resellers are suspected of making "false certifications as to the regulatory categories of crude oil that they sold"; a number of resellers are suspected of mail and wire fraud for sending "false certifications" through U.S. mails and wires; and finally , all the companies are suspected of "conspiracy."

The conspiracy allegation splits the companies into three separate groups, each one engaged in possible conspiracy. The first involves Mobil, both Carbonit companies, Uni, Armada, and Derby. The second involves American Petrofina, both Carbonit companies, Uni, Armada, and Derby. And the third: Tesoro, Gulf States and Merit. The companies in each group "may have acted together to falsely certify crude oil and obtain excessive prices," alleges the referral.

Every company cited in the referral either denied any wrongdoing or was unavailable for comment. Mobil and Carbonit Houston were most emphatic. "Any charge that we participated in improper classification of crude is ludicrous," said John Flint, spokesperson for Mobil Oil. "The allegations are just incredible" exclaimed Bill Pakalka, a lawyer at Fulbright and Jaworski, and currently representing Carbonit Houston. "We're outraged,' he added.

Since the DOE's office of general counsel wrote the draft referral last summer, little has happened with the investigation. Why? Because the senior officials at the DOE's general counsel's office refuse to hand the referral over to the Justice Department. "I concluded we needed further information," Jerome Wiener told the House Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce on March 12. When approached by this reporter to elaborate on the reasons why the DOE still hasn't referred the documents to Justice, Wiener refused to comment.

Even if the DOE suddenly got the inclination to pass the investigation on to the Justice Department, it may no longer have the wherewithal to provide Justice the necessary legwork to bring the major companies involved in the alleged scandal to trial. DOE has been studying for almost three years. "Because of limitations on available resources, new enforcement actions will not be initiated even where substantial violations have been discovered," says a memo from the special counsel's office to the DOE budget office, dated February 26. "This will result in the litigation of less than three billion dollars of $10,186,000,000 in violations identified." In other words, more than seven billion dollars worth of alleged overcharges will never be recovered!

Unless Congress acts to reinstate these funds, consumers will continue to pay and oil companies will be less inhibited than ever in exploiting the "oil crisis."

As a result of these cuts, the case of the "in-line transfer" scandal may never be acted upon, and huge sums of money that DOE investigators believe to be unjustly taken from millions of consumers may never be recovered.