First of three parts: A dozen antitrust facts

July 16, 2007
Energy initiatives of the 110th Congress should alarm learned observers of the oil and gas industry.

Energy initiatives of the 110th Congress should alarm learned observers of the oil and gas industry. Proceeding from false assumptions, peevish impulses, and historical disregard, lawmakers soon may enact a series of mistakes certain to damage US interests and hurt consumers. But learned observers are beginning to speak out.

Two former officials of the US Federal Trade Commission, both now affiliated with the Washington, DC, office of the O’Melveny & Myers LLP law firm, have written a monograph addressing antitrust misconceptions that seem to be guiding Congress. Their work, “A Dozen Facts You Should Know about Antitrust and the Oil Industry,” deserves wide attention.

One of the authors is Timothy J. Muris, chairman of the FTC during 2001-04. He’s now a professor at the George Mason University School of Law and of counsel to O’Melveny & Myers. The other author is Richard G. Parker, a partner in the law firm who served as director of the FTC’s Bureau of Competition in 1999-2001 and senior deputy director in 1998-99.

Muris and Parker are cochairs of the antitrust and competition practice at O’Melveny & Myers. They speak with authority and from the perspective of service to administrations from both major political parties. This space will summarize the facts they discuss in their monograph, four this week and four each July 23 and Aug. 6.

Fact 1: Economic learning and antitrust enforcement have evolved; we now know that big is no longer necessarily bad.

The prevalent notion of the 1970s that “big is bad” has given way to modern antitrust analysis, which combines sophisticated economic theory with careful analysis of complex factual issues that arise in individual investigations. Modern analysis considers, for example, the number and sizes of firms in an industry, their behavior toward one another, the extent to which new entry or expansion of existing facilities has occurred or will likely do so, and whether historical behavior of the industry has been anticompetitive.

By these and other criteria, the US petroleum industry is highly competitive. Companies are small in relation to the industry’s size, and many competitors populate each level of the business. Many firms have entered the business, particularly in refining and retailing. Mergers have lowered costs and increased innovation.

Fact 2: The antitrust authorities scrutinize the petroleum industry more closely than any other.

Since 1973, the FTC has conducted well over 100 investigations examining every facet of the oil industry. It reviews proposed mergers and has challenged many of them, leading to divestitures, court injunctions, abandoned transactions, and conditions on future conduct. The commission also has investigated price increases following the Gulf Coast hurricanes of 2005, Shell’s 2004 decision to close its Bakersfield, Calif., refinery, “zone pricing” and “red-lining” on the West Coast, and the 2000 gasoline price spike in the Midwest. It has found no evidence of collusion or market manipulation.

The FTC also reviews daily data on retail gasoline and diesel prices for 360 major cities and wholesale prices for 20 major urban areas. It has conducted several investigations of pricing anomalies but found no illegal conduct.

Fact 3: The American petroleum industry is not highly concentrated.

Oil companies hold very small shares of world crude oil production and reserves; world concentration in crude oil and gas liquids has fallen since 1985. Recent mergers have had little effect on concentration, which remains low domestically and globally, in exploration and production. A 2006 FTC investigation determined concentration of the refining industry to be low. In most states, gasoline retailing is unconcentrated or moderately so. Hypermarkets and independent retailers have entered the market and become strong competitors.

Concentration is lower in the oil industry than in many other US industries.

Fact 4: Refiners have expanded domestic and global capacity significantly.

Although grassroots construction of refineries has shifted to the Far East and Middle East, refining capacity has expanded at existing facilities in the US, where it grew by 12% during 1994-2004 while output of light products grew by 16%. More expansion is expected.

Next: Facts 5-8.