The FTC's price worries

Feb. 14, 2000
The oil consumer has returned to US politics. Concern about the possible effects on retail oil prices lies at the core of federal objections to BP Amoco PLC's proposed acquisition of Atlantic Richfield Co.

The oil consumer has returned to US politics. Concern about the possible effects on retail oil prices lies at the core of federal objections to BP Amoco PLC's proposed acquisition of Atlantic Richfield Co.

It is, of course, appropriate for the Federal Trade Commission to concern itself with the price effects of business consolidation. That is the essence of antitrust regulation.

It is important, however, for the FTC to base its decisions on proper assumptions about oil markets and the interests of consumers. In the rationale provided for resisting the acquisition of ARCO by BP Amoco, FTC's assumptions seem rigid.

A crimped view

Companies involved in the dispute will have to make their own case for the deal. The purpose here is to point to three concerns that the FTC's decision raises for the industry at large: 1) that a crimped view of oil markets can block a major merger, 2) that price is taken as the beginning and end of consumer interest where oil is concerned, and 3) that oil prices matter to the government when the question is a commercial initiative but not when it relates to environmental regulation.

FTC's expressed objections to the BP Amoco-ARCO merger deal with production and sale of Alaskan North Slope crude, competition in ANS leasing, and increased control over pipelines and tanks at Cushing, Okla.

The commission is worried that the merged company's large share of North Slope production would enable it to manipulate product prices on the West Coast, the market for most ANS crude. It further worries that concentrated ownership of oil-handling capacity at Cushing, settlement point for crude oil futures contracts traded on the New York Mercantile Exchange, would give the merged company undue influence over worldwide crude prices.

FTC says it will allege in court that BP "exercises market power by exporting ANS crude to the Far East at a lower price in order to restrict the supply of ANS on the West Coast and elevate prices to West Coast customers." At the center of that argument is FTC's assertion that the West Coast market is "narrower than a worldwide crude oil market."

The West Coast is a distinct market, to be sure. BP Amoco and ARCO are major players there and at Cushing. But prices elevated in the manner feared by FTC would attract supply from other sources. Nothing about the West Coast-not even California's air-quality regulation-annuls competition. FTC treats the West Coast as somehow isolated from external market forces. It is not.

Furthermore, BP Amoco and ARCO can legitimately argue that a combination would give the resulting company efficiencies essential to maximum production from the North Slope resource. It thus would extend life of an important and secure source of US crude. Continuity of supply from that source has served West Coast consumers well. FTC shouldn't ignore its importance. Price isn't everything where consumers are concerned.

While the FTC can't worry much about the broader government context of its antitrust actions, the oil and gas industry certainly should. In some areas, the retail price of oil products seems to matter little to federal regulators.

Inconsistent worry

Where is concern about consumer prices, for example, when the Environmental Protection Agency proposes the strictest possible standards for the composition and environmental performance of vehicle fuel? Where is price concern when the Department of Interior resists leasing of prospective federal land in the US West and anywhere offshore except the Central and Western Gulf of Mexico? Where is price concern when the presidency pushes the country toward a misguided international treaty on global warming?

The Age of Deregulation has shown that consumers need far less protection from the suspected abuses of competition than activist governments are perpetually inclined to offer. They need inconsistent protection and overly aggressive regulation least of all.