Two former officials of the US Federal Trade Commission are trying to correct antitrust misperceptions about the oil and gas industry. Last week, this space summarized the first four points presented in their monograph, “A Dozen Facts You Should Know about the Oil Industry” (OGJ, July 16, 2007, p. 17). Four more appear this week.
The officials are Timothy J. Muris, who served as chairman of the Federal Trade Commission in the George W. Bush administration, and Richard G. Parker, who was director of the FTC’s Bureau of Competition in the Bill Clinton administration. They cochair the antitrust and competition practice in the Washington, DC, office of the O’Melveny & Myers LLP law firm, where Parker is a partner and Muris is of counsel.
Their facts presented here last week: 1. Economic learning and antitrust enforcement have evolved; we now know that big is no longer necessarily bad. 2. The antitrust authorities scrutinize the petroleum industry more closely than any other. 3. The American petroleum industry is not highly concentrated. 4. Refiners have expanded domestic and global capacity significantly.
The next four facts follow.
• Fact 5: Refineries operate at or near their practical maximum utilization rates.
Contrary to assertions that refiners limit operations to control supply and prices, US refineries ran at about 93% of capacity during 1994-2004, near maximum practical rates. Refiners have sustained high utilization rates while making modifications to comply with regulations, expanding capacity, and enduring disruptions.
• Fact 6: Inventory practices have reduced costs and benefited consumers.
At 2004 prices and volumes, inventory reductions between 1994 and 2004 reduced costs by about $1.9 billion/year, 33% of current inventory carrying and storage costs. Refiners achieved the savings without sacrificing reliability of supply.
In a 2006 report to Congress, the FTC rejected the assertion that oil companies had manipulated inventory levels to elevate prices during market disruptions. It said inventories declined because maintaining them is expensive and because reducing inventory costs is an important goal of modern manufacturing.
• Fact 7: The profitability of the petroleum industry is commensurate with other industries over the long run.
Between 1992 and 2006, the US oil industry invested more than $1.25 trillion in long-term energy initiatives, more than its net income of $900 billion. In 2006, new investment by the US oil industry exceeded $174 billion, and the industry plans $183 billion in new projects in 2007.
Between 1995 and 2005, the return on investment for refining was 10%, about 4.7% less than returns of the S&P Industrials. During 1977-2005, oil industry returns averaged less than 7%, compared with 9% for durable goods and more than 11.5% for the S&P Industrials. From 2002 to 2006, earnings per dollar of sales equaled 6.4¢ for all manufacturing industries and 7.4¢ for the oil industry. For 2006, all manufacturing industries averaged annual earnings of 8.2¢/$ of sales, while the oil industry averaged 9.5¢.
• Fact 8: The FTC applies tougher standards to mergers in the oil industry than to mergers elsewhere.
The agency applies the FTC-Department of Justice (DOJ) Horizontal Merger Guidelines more strictly to the oil industry than to others and requires divestitures in the petroleum industry at far lower levels of concentration.
More than 60% of petroleum merger enforcement takes place in markets involving five or more significant competitors, while substantially all merger enforcement in other industries occurs in markets with four or fewer competitors. Of all merger enforcement actions at concentrations below a Herfindahl-Hirshman Index (HHI) of 1,800, 97% involved the oil industry. The HHI, indicating concentration, can be as low as 0 (unconcentrated) or as high as 10,000 (monopolized). The oil industry accounted for 77% of merger enforcement actions at concentration levels below 2,400. Oil is the only industry in which the government undertakes significant enforcement actions at or below that level.
The average postmerger concentration level for mergers requiring divestitures is much higher in every other industry investigated by the government than for the petroleum industry. The FTC challenged 21 oil mergers during 1981-2007.
Next: Facts 9-12.
